UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

FORM 10-Q

(Mark One)

þ		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.

o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission File Number 000-33009

MEDCATH CORPORATION

(Exact name of registrant as specified in its charter)

Delaware		56-2248952
(State or other jurisdiction of		(IRS Employer Identification No.)
incorporation or organization)

10720 Sikes Place, Suite 300
Charlotte, North Carolina 28277
(Address of principal executive offices, including zip code)

(704) 815-7700
(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes þ          No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes o          No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes o          No þ

As of May 6, 2010, there were 20,522,678 shares of $0.01 par value common stock outstanding.

 

 

MEDCATH CORPORATION

FORM 10-Q
TABLE OF CONTENTS

		Page
PART I. FINANCIAL INFORMATION			1
Item 1. Unaudited Consolidated Financial Statements			1
Consolidated Balance Sheets as of March 31, 2010 and September 30, 2009			1
Consolidated Statements of Operations for the Three and Six Months Ended March 31, 2010 and 2009			2
Consolidated Statement of Stockholders’ Equity for the Six Months Ended March 31, 2010			3
Consolidated Statements of Cash Flows for the Six Months Ended March 31, 2010 and 2009			4
Notes to Unaudited Consolidated Financial Statements			5
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			18
Item 3. Quantitative and Qualitative Disclosures About Market Risk			31
Item 4. Controls and Procedures			31
PART II. OTHER INFORMATION			31
Item 1. Legal Proceedings			31
Item 1A. Risk Factors			31
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			32
Item 6. Exhibits			33
SIGNATURES			33
EX-10.1
EX-31.1
EX-31.2
EX-32.1
EX-32.2
EX-10.1
EX-31.1
EX-31.2
EX-32.1
EX-32.2

PART I. FINANCIAL INFORMATION

Item 1. Unaudited Consolidated Financial Statements

MEDCATH CORPORATION
CONSOLIDATED BALANCE SHEETS
(In thousands, except per share data)
(Unaudited)

		March 31,				September 30,
		2010				2009
Current assets:
Cash and cash equivalents		$	26,113			$	31,883
Accounts receivable, net (See Note 4)			64,375				58,913
Income tax receivable			699				—
Medical supplies			15,779				15,459
Deferred income tax assets			11,783				12,161
Prepaid expenses and other current assets			15,016				13,471
Current assets of discontinued operations			25,071				44,978
Total current assets			158,836				176,865
Property and equipment, net (See Note 13)			320,366				341,394
Investments in affiliates			9,773				14,055
Other assets			7,449				10,785
Non-current assets of discontinued operations			46,762				47,349
Total assets		$	543,186			$	590,448
Current liabilities:
Accounts payable		$	36,221			$	35,920
Income tax payable			—				297
Accrued compensation and benefits			18,505				16,118
Other accrued liabilities			17,253				23,277
Current portion of long-term debt and obligations under capital leases			18,081				21,187
Current liabilities of discontinued operations			17,498				19,832
Total current liabilities			107,558				116,631
Long-term debt			60,000				66,563
Obligations under capital leases			8,527				4,596
Deferred income tax liabilities			6,239				13,874
Other long-term obligations			5,660				8,533
Long-term liabilities of discontinued operations			36,020				35,721
Total liabilities			224,004				245,918
Commitments and contingencies (See Note 7)
Redeemable noncontrolling interest (See Note 1)			5,162				7,448
Stockholders’ equity:
Preferred stock, $0.01 par value, 10,000,000 shares authorized; none issued			—				—
Common stock, $0.01 par value, 50,000,000 shares authorized; 22,477,039 issued and 20,522,678 outstanding at March 31, 2010 22,104,917 issued and 20,150,556 outstanding at September 30, 2009			216				216
Paid-in capital			456,523				455,259
Accumulated deficit			(105,286	)			(91,420	)
Accumulated other comprehensive loss			(328	)			(360	)
Treasury stock, at cost; 1,954,361 shares at March 31, 2010 1,954,361 shares at September 30, 2009			(44,797	)			(44,797	)
Total MedCath Corporation stockholders’ equity			306,328				318,898
Noncontrolling interest			7,692				18,184
Total equity			314,020				337,082
Total liabilities and equity		$	543,186			$	590,448

See notes to unaudited consolidated financial statements.

MEDCATH CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
(Unaudited)

		Three Months Ended March 31,								Six Months Ended March 31,
		2010				2009				2010				2009
Net revenue		$	134,909			$	130,767			$	258,967			$	256,822
Operating expenses:
Personnel expense			46,444				44,662				91,508				88,029
Medical supplies expense			36,849				35,120				71,747				69,357
Bad debt expense			11,918				8,798				22,599				18,392
Other operating expenses			29,743				27,342				59,355				54,502
Pre-opening expenses			—				380				866				587
Depreciation			7,768				6,217				15,418				12,713
Amortization			8				8				16				16
Impairment of property and equipment			19,948				—				19,948				—
(Gain) loss on disposal of property, equipment and other assets			(76	)			108				19				181
Total operating expenses			152,602				122,635				281,476				243,777
(Loss) Income from operations			(17,693	)			8,132				(22,509	)			13,045
Other income (expenses):
Interest expense			(1,149	)			(581	)			(2,207	)			(2,678	)
Loss on early extinguishment of debt			—				259				—				(6,702	)
Interest and other income			23				73				93				172
Loss on note receiveable			(1,507	)			—				(1,507	)			—
Equity in net earnings of unconsolidated affiliates			3,092				2,714				4,608				4,779
Total other income (expense), net			459				2,465				987				(4,429	)
(Loss) income from continuing operations before income taxes			(17,234	)			10,597				(21,522	)			8,616
Income tax (benefit) expense			(7,386	)			2,610				(9,287	)			1,115
(Loss) income from continuing operations			(9,848	)			7,987				(12,235	)			7,501
Income from discontinued operations, net of taxes			1,163				2,060				1,733				7,915
Net (loss) income			(8,685	)			10,047				(10,502	)			15,416
Less: Net income attributable to noncontrolling interest			(2,524	)			(4,465	)			(3,364	)			(7,588	)
Net (loss) income attributable to MedCath Corporation		$	(11,209	)		$	5,582			$	(13,866	)		$	7,828
Amounts attributable to MedCath Corporation common stockholders:
(Loss) income from continuing operations, net of taxes		$	(11,999	)		$	4,220			$	(15,091	)		$	1,685
Income from discontinued operations, net of taxes			790				1,362				1,225				6,143
Net (loss) income		$	(11,209	)		$	5,582			$	(13,866	)		$	7,828
(Loss) earnings per share, basic
(Loss) income from continuing operations attributable to MedCath
Corporation common stockholders		$	(0.61	)		$	0.21			$	(0.76	)		$	0.09
Income from discontinued operations attributable to MedCath
Corporation common stockholders			0.04				0.07				0.06				0.31
(Loss) earnings per share, basic		$	(0.57	)		$	0.28			$	(0.70	)		$	0.40
(Loss) earnings per share, diluted
(Loss) income from continuing operations attributable to MedCath
Corporation common stockholders		$	(0.61	)		$	0.21			$	(0.76	)		$	0.09
Income from discontinued operations attributable to MedCath
Corporation common stockholders			0.04				0.07				0.06				0.31
(Loss) earnings per share, diluted		$	(0.57	)		$	0.28			$	(0.70	)		$	0.40
Weighted average number of shares, basic			19,829				19,664				19,786				19,631
Dilutive effect of stock options and restricted stock			—				26				—				—
Weighted average number of shares, diluted			19,829				19,690				19,786				19,631

See notes to unaudited consolidated financial statements.

MEDCATH CORPORATION
CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY
(In thousands)
(Unaudited)

																																						Redeemable
																		Accumulated																				Noncontrolling
																		Other																Total				Interest
		Common Stock								Paid-in				Accumulated				Comprehensive				Treasury Stock								Noncontrolling				Equity				(Temporary
		Shares				Par Value				Capital				Deficit				Loss				Shares				Amount				Interest				(Permanent)				Equity)
Balance, September 30, 2009			22,105			$	216			$	455,259			$	(91,420	)		$	(360	)			1,954			$	(44,797	)		$	18,184			$	337,082			$	7,448
Stock awards, including cancelations and income tax benefit			399				—				1,404				—				—				—				—				—				1,404				—
Tax withholdings for vested restricted stock awards			(27	)			—				(253	)			—				—				—				—				—				(253	)			—
Distributions to noncontrolling interest			—				—				—				—				—				—				—				(12,641	)			(12,641	)			(3,560	)
Acquisitions and other transactions impacting noncontrolling interest			—				—				—				—				—				—				—				40				40				(8	)
Sale of equity interest			—				—				113				—				—				—				—				27				140				—
Comprehensive loss:
Net loss			—				—				—				(13,866	)			—				—				—				2,082				(11,784	)			1,282
Change in fair value of interest rate swap, net of income tax benefit (*)			—				—				—				—				32				—				—				—				32				—
Total comprehensive loss																																			(11,752	)			1,282
Balance, March 31, 2010			22,477			$	216			$	456,523			$	(105,286	)		$	(328	)			1,954			$	(44,797	)		$	7,692			$	314,020			$	5,162

See notes to unaudited consolidated financial statements.

MEDCATH CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)

		Six Months Ended March 31,
		2010				2009
Net (loss) income		$	(10,502	)		$	15,416
Adjustments to reconcile net income to net cash provided by operating activities:
Income from discontinued operations, net of taxes			(1,733	)			(7,915	)
Bad debt expense			22,599				18,392
Depreciation			15,418				12,713
Amortization			16				16
Loss on disposal of property, equipment and other assets			19				181
Share-based compensation expense			1,826				1,837
Loss on early extinguishment of debt			—				6,702
Amortization of loan acquisition costs			498				525
Impairment of property and equipment			19,948				—
Impairment of equity method investment			114				—
Equity in earnings of unconsolidated affiliates, net of distributions received			3,785				2,176
Deferred income taxes			(7,701	)			(1	)
Change in assets and liabilities that relate to operations:
Accounts receivable			(28,061	)			(23,528	)
Medical supplies			(320	)			(1,970	)
Prepaid and other assets			(1,902	)			1,720
Accounts payable and accrued liabilities			1,125				5,545
Net cash provided by operating activities of continuing operations			15,129				31,809
Net cash provided by operating activities of discontinued operations			3,779				2,986
Net cash provided by operating activities			18,908				34,795
Investing activities:
Purchases of property and equipment			(14,858	)			(50,052	)
Proceeds from sale of property and equipment			93				511
Sale of interest in equity method investment			436				—
Net cash used in investing activities of continuing operations			(14,329	)			(49,541	)
Net cash (used in) provided by investing activities of discontinued operations			(1,015	)			3,123
Net cash used in investing activities			(15,344	)			(46,418	)
Financing activities:
Proceeds from issuance of long-term debt			—				83,242
Repayments of long-term debt			(9,429	)			(114,710	)
Repayments of obligations under capital leases			(953	)			(442	)
Distributions to noncontrolling interest			(7,970	)			(9,685	)
Investment by noncontrolling interest			109				—
Sale of equity interest in subsidiary			140				—
Tax withholding of vested restricted stock awards			(253	)			—
Net cash used in financing activities of continuing operations			(18,356	)			(41,595	)
Net cash used in financing activities of discontinued operations			(9,025	)			(3,436	)
Net cash used in financing activities			(27,381	)			(45,031	)
Net decrease in cash and cash equivalents			(23,817	)			(56,654	)
Cash and cash equivalents:
Beginning of period			61,701				112,068
End of period		$	37,884			$	55,414
Cash and cash equivalents of continuing operations		$	26,113			$	42,772
Cash and cash equivalents of discontinued operations		$	11,771			$	12,642

See notes to unaudited consolidated financial statements

MEDCATH CORPORATION
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(All tables in thousands, except percentages and per share data)

1. Business and Basis of Presentation

     MedCath Corporation (the “Company”) primarily focuses on providing high acuity services, predominantly the diagnosis and treatment of cardiovascular disease. The Company owns and operates hospitals in partnership with physicians, most of whom are cardiologists and cardiovascular surgeons. While each of the Company’s majority-owned hospitals (collectively, the “Hospital Division”) is licensed as a general acute care hospital, the Company focuses on serving the unique needs of patients suffering from cardiovascular disease. As of March 31, 2010, the Company and its physician partners have an ownership interest in and currently operate ten hospitals in seven states, with a total of 825 licensed beds, 58 of the licensed beds are related to the Heart Hospital of Austin (“HHA”), whose assets, liabilities, and operations are included within discontinued operations. See Note 3 for further discussion related to the divestiture of HHA.

     In addition to its hospitals, the Company provides cardiovascular care services in diagnostic and therapeutic facilities in various locations and through mobile cardiac catheterization laboratories and also provides management services to non owned facilities (the “MedCath Partners Division”). The Company also provides consulting and management services tailored primarily to cardiologists and cardiovascular surgeons, which is included in corporate and other.

     The Company accounts for all but two of its owned and operated hospitals as consolidated subsidiaries. The Company owns a noncontrolling interest in the Avera Heart Hospital of South Dakota and Harlingen Medical Center as of March 31, 2010. Therefore, the Company is unable to consolidate these hospitals’ results of operations and financial position, but rather is required to account for its noncontrolling interests in these hospitals as equity method investments.

     On March 1, 2010 the Company announced that its Board of Directors formed a Strategic Options Committee composed solely of independent directors to consider the sale of the Company, the sale of its individual hospitals and other assets, or the sale of its interest in those assets.

     Basis of Presentation — Effective October 1, 2009, the Company adopted a new accounting standard which establishes accounting and reporting standards pertaining to ownership interests in subsidiaries held by parties other than the parent, the amount of net income attributable to the parent and to the noncontrolling interests, changes in a parent’s ownership interest and the valuation of any retained noncontrolling equity investment when a subsidiary is deconsolidated. This new accounting standard also establishes disclosure requirements that clearly identify and distinguish between the interests of the parent and the interests of the noncontrolling owners. This new accounting standard generally requires the Company to clearly identify and present ownership interests in subsidiaries held by parties other than the Company in the consolidated financial statements within the equity section but separate from the Company’s equity. However, in instances in which certain redemption features that are not solely within the control of the issuer are present, classification of noncontrolling interests outside of permanent equity is required. It also requires the amounts of consolidated net income attributable to the Company and to the noncontrolling interests to be clearly identified and presented on the face of the consolidated statements of operations; changes in ownership interests to be accounted for as equity transactions; and when a subsidiary is deconsolidated, any retained noncontrolling equity investment in the former subsidiary and the gain or loss on the deconsolidation of the subsidiary to be measured at fair value. The implementation of this accounting standard results in the cash flow impact of certain transactions with noncontrolling interests being classified within financing activities. Such treatment is consistent with the view that under this new accounting standard, transactions between the Company and noncontrolling interests are considered to be equity transactions. The adoption of this new accounting standard has been applied retrospectively for all periods presented.

     Upon the occurrence of certain fundamental regulatory changes, the Company could be obligated, under the terms of certain of its investees’ operating agreements, to purchase some or all of the noncontrolling interests related to certain of the Company’s subsidiaries. While the Company believes that the likelihood of a change in current law that would trigger such purchases was remote as of March 31, 2010, the occurrence of such regulatory changes is outside the control of the Company. As a result, these noncontrolling interests that are subject to this redemption feature are not included as part of the Company’s equity and are carried as redeemable noncontrolling interests in equity of consolidated subsidiaries on the Company’s consolidated balance sheets.

     Profits and losses are allocated to the noncontrolling interest in the Company’s subsidiaries in proportion to their ownership percentages and reflected in the aggregate as net income attributable to noncontrolling interests. The physician partners of the Company’s subsidiaries typically are organized as general partnerships, limited partnerships or limited liability companies that are not subject to federal income tax. Each physician partner shares in the pre-tax earnings of the subsidiary in which it is a partner. Accordingly, the income or loss attributable to noncontrolling interests in each of the Company’s subsidiaries are generally determined on a pre-tax basis. In accordance with this new accounting standard, total net income attributable to noncontrolling interests are presented after net (loss) income.

MEDCATH CORPORATION
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(All tables in thousands, except percentages and per share data)

     The Company’s unaudited interim consolidated financial statements as of March 31, 2010 and for the three and six months ended March 31, 2010 and 2009 have been prepared in accordance with accounting principles generally accepted in the United States of America hereafter, (“generally accepted accounting principles”) and pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”). These unaudited interim consolidated financial statements reflect, in the opinion of management, all material adjustments necessary to fairly state the results of operations and financial position for the periods presented. All intercompany transactions and balances have been eliminated.

     Certain information and disclosures normally included in the notes to consolidated financial statements have been condensed or omitted as permitted by the rules and regulations of the SEC, although the Company believes the disclosures are adequate to make the information presented not misleading. The unaudited interim consolidated financial statements and notes thereto should be read in conjunction with the Company’s audited consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended September 30, 2009. During the six months ended March 31, 2010, the Company has not made any material changes in the selection or application of its critical accounting policies that were set forth in its Annual Report on Form 10-K for the fiscal year ended September 30, 2009.

     The Company has evaluated the provisions of the Health Care and Education Reconciliation Act of 2010 (collectively the “Health Reform Laws”) which was enacted into law during March 2010. The Company is unable to predict at this time the full impact of the Health Reform Laws on the Company and its consolidated financial statements.

     Long-Lived Assets — Long-lived assets, such as property, and equipment, and purchased intangible assets subject to amortization, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. If circumstances require a long-lived asset be tested for possible impairment, the Company first compares undiscounted cash flows expected to be generated by an asset to the carrying value of the asset. If the carrying value of the long-lived asset is not recoverable on an undiscounted cash flow basis, impairment is recognized to the extent that the carrying value exceeds its fair value. Fair value is determined through various valuation techniques including, but not limited to, discounted cash flow models, quoted market values and third-party independent appraisals. The determination of whether or not long-lived assets have become impaired involves a significant level of judgment in the assumptions underlying the approach used to determine the estimated future cash flows expected to result from the use of those assets. Changes in the Company’s strategy, assumptions and/or market conditions could significantly impact these judgments and require adjustments to recorded amounts of long-lived assets.

     Due to a decline in operating performance at certain hospitals during fiscal 2009, the Company performed impairment tests as of September 30, 2009. The results of those tests indicated that no impairment existed as of that date. Due to continued declines in the operating performance of those hospitals during the first six months of fiscal 2010, the Company performed impairment tests using undiscounted cash flows to determine if the carrying value of each hospital’s long-lived assets were recoverable as of March 31, 2010. The results indicated the current carrying value of the assets at those hospitals were not recoverable. The Company compared the fair value of those assets to their respective carrying values in order to determine the amount of impairment. The Company recognized impairment charges based on the amount each group of assets’ carrying value exceeded its fair value. The Company’s fair value estimates were derived from appraisals, established market values of comparable assets and internal estimates of future net cash flows. These fair value estimates could change by material amounts in subsequent periods. Many factors and assumptions can impact the estimates, including the future financial results of these hospitals, how the hospitals are operated in the future, changes in health care industry trends and regulations, and the nature and timing of the ultimate disposition of the assets. The impairments recognized do not include the costs of closing the hospitals or other future operating costs, which could be substantial. Accordingly, the ultimate net cash realized from the hospitals could be significantly less than their impaired value. See Note 13 for the impairment charges recorded to property and equipment and Note 15 for further discussions as to the Company’s determination of fair value.

MEDCATH CORPORATION
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(All tables in thousands, except percentages and per share data)

2. Recent Accounting Pronouncements

     The following is a summary of new accounting pronouncements that have been adopted or that may apply to the Company.

     Recently Adopted Accounting Pronouncements:

     In December 2007, the Financial Accounting Standards Board (“FASB”) issued a new accounting standard that addresses the recognition and accounting for identifiable assets acquired, liabilities assumed, and noncontrolling interests in business combinations. This standard will require more assets and liabilities to be recorded at fair value and will require expense recognition (rather than capitalization) of certain pre-acquisition costs. This standard also will require any adjustments to acquired deferred tax assets and liabilities occurring after the related allocation period to be made through earnings. Furthermore, this standard requires this treatment of acquired deferred tax assets and liabilities also be applied to acquisitions occurring prior to the effective date of this standard. The Company adopted this new standard on October 1, 2009 and we expect this statement will have an impact on our consolidated financial statements for acquisitions consummated after October 1, 2009, but the nature and magnitude of the specific effects will depend upon the terms and size of the acquisitions consummated.

     In December 2007, the FASB issued a new accounting standard that establishes accounting and reporting standards pertaining to ownership interests in subsidiaries held by parties other than the parent, the amount of net income attributable to the parent and to the noncontrolling interests, changes in a parent’s ownership interest, and the valuation of any retained noncontrolling equity investment when a subsidiary is deconsolidated. This new accounting standard also establishes disclosure requirements that clearly identify and distinguish between the interests of the parent and the interests of the noncontrolling owners. The Company adopted this new standard on October 1, 2009. Upon adoption, a portion of noncontrolling interests was reclassified to a separate component of total equity within our consolidated balance sheets. See Note 1 Business and Basis of Presentation above for a more detailed discussion regarding the adoption of this new standard.

     In April 2008, the FASB issued a new accounting standard which amends the list of factors an entity should consider in developing renewal or extension assumptions used in determining the useful life of recognized intangible assets. The new accounting standard applies to intangible assets that are acquired individually or with a group of other assets and intangible assets acquired in both business combinations and asset acquisitions. The Company adopted this new standard on October 1, 2009 with no impact to its consolidated financial statements.

     Effective the first quarter of fiscal 2009, the Company adopted a new accounting standard issued by the FASB that defines fair value, establishes a framework for measuring fair value and enhances disclosures about fair value measures required under other accounting pronouncements, but does not change existing guidance as to whether or not an instrument is carried at fair value. In February 2008, the FASB delayed the effective date of this new standard for all nonfinancial assets and liabilities, except those that are recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually). The Company elected to defer implementation of this standard until October 1, 2009 as it relates to the Company’s non-financial assets and non-financial liabilities that are not permitted or required to be measured at fair value on a recurring basis. The Company adopted this standard on October 1, 2009 with no impact to its consolidated financial statements. See Note 14.

     Recent Accounting Pronouncements:

     In June 2009, the FASB issued a new accounting standard that amends the consolidation guidance that applies to variable interest entities (“VIE”). The amendments will significantly affect the overall consolidation analysis. The provisions of this new accounting standard revise the definition and consideration of VIEs, primary beneficiary, and triggering events in which a company must re-evaluate its conclusions as to the consolidation of an entity. This new accounting standard is effective as of the beginning of the first fiscal year after November 15, 2009, fiscal 2011 for the Company. The Company is evaluating the potential impacts the adoption of this new standard will have on its consolidated financial statements.

3. Divestitures

     During February 2010, the Company entered into an agreement to sell certain assets and liabilities of HHA for approximately $83.6 million. The sale is currently expected to close during the Company’s fourth quarter ending September 30, 2010. The Company has classified the results of operations of HHA within income from discontinued operations, net of taxes for the three and six months ended March 31, 2010 and 2009. The assets and liabilities of HHA have been classified within the current and non-current assets and current and long-term liabilities of discontinued operations on the consolidated balance sheets as of March 31, 2010 and September 30, 2009.

     During September 2009, the MedCath Partners Division of the Company sold the assets of Sun City Cardiac Center Associates (“Sun City”) for $16.9 million which resulted in a gain of $3.2 million, net of taxes. The Company has classified the results of operations of Sun City within income from discontinued operations, net of taxes for the three and six months ended March 31, 2010 and 2009.

MEDCATH CORPORATION
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(All tables in thousands, except percentages and per share data)

     During December 2008, the MedCath Partners Division of the Company sold its entire interest in Cape Cod Cardiology Services, LLC (“Cape Cod”) for $6.9 million, which resulted in a gain of $4.0 million, net of taxes. The Company has classified the results of operations of Cape Cod within income from discontinued operations, net of taxes for the three and six months ended March 31, 2009.

     During May 2008, the Hospital Division of the Company sold the net assets of Dayton Heart Hospital (“DHH”). The Company has classified the results of operations related to the remaining assets and liabilities associated with DHH within income from discontinued operations, net of taxes for the three and six months ended March 31, 2010 and 2009.

     The results of operations and the assets and liabilities of discontinued operations included in the consolidated statements of operations and consolidated balance sheets are as follows:

		Three Months Ended March 31,								Six Months Ended March 31,
		2010				2009				2010				2009
Net revenue		$	24,911			$	28,273			$	48,070			$	57,837
Gain from sale of Cape Cod			—				—				—				6,640
Income before income taxes			1,655				2,927				2,498				11,889
Income tax expense			492				867				765				3,974
Net income before income taxes			1,163				2,060				1,733				7,915
Less: Net income attributable to noncontrolling interest			(373	)			(698	)			(508	)			(1,772	)
Net income attributable to MedCath Corporation		$	790			$	1,362			$	1,225			$	6,143

		March 31,				September 30,
		2010				2009
Cash and cash equivalents		$	11,771			$	29,818
Accounts receivable, net			9,758				11,821
Other current assets			3,542				3,339
Current assets of discontinued operations		$	25,071			$	44,978
Property and equipment, net		$	43,555			$	44,532
Other assets			3,207				2,817
Long-term assets of discontinued operations		$	46,762			$	47,349
Accounts payable		$	13,392			$	14,956
Accrued liabilities			3,907				4,820
Current portion of long-term debt and obligations under capital leases			199				56
Current liabilities of discontinued operations		$	17,498			$	19,832
Long-term debt		$	35,165			$	35,359
Other long-term obligations			855				362
Long-term liabilities of discontinued operations		$	36,020			$	35,721

MEDCATH CORPORATION
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(All tables in thousands, except percentages and per share data)

4. Accounts Receivable

Accounts receivable, net, consists of the following:

		March 31,				September 30,
		2010				2009
Receivables, principally from patients and third-party payors		$	136,588			$	126,577
Receivables, principally from billings to hospitals for various cardiovascular procedures			1,711				1,494
Amounts due under management contracts			193				228
Other			3,949				5,503
			142,441				133,802
Less allowance for doubtful accounts			(78,066	)			(74,889	)
Accounts receivable, net		$	64,375			$	58,913

5. Equity Investments

     The Company owns noncontrolling interests in the Avera Heart Hospital of South Dakota, Harlingen Medical Center, and certain diagnostic ventures and partnerships, for which the Company neither has substantive control over the ventures nor is the primary beneficiary. Therefore, the Company does not consolidate the results of operations and financial position of these entities, but rather accounts for its noncontrolling ownership interest in the hospitals and other ventures as equity method investments.

     During February 2010, MedCath Partners Division of the Company sold its entire 15.0% interest in Wilmington Heart Services, LLC for $0.4 million, resulting in an immaterial loss.

     The Company’s MedCath Partners Division currently expects to sell its entire 33.3% interest in Tri-County Heart New Jersey, LLC (“Tri- County”) for approximately $0.4 million during the Company’s third quarter ending June 30, 2010. The approximate sales price for its interest in Tri-County is $0.1 million less than the Company’s carrying value of its investment in Tri-County as of March 31, 2010. As a result of this anticipated sale, the Company recorded a $0.1 million impairment charge to equity in net earnings of unconsolidated affiliates in the consolidated statement of operations related to its investment in Tri-County during the second quarter ended March 31, 2010.

     The following tables represent summarized combined financial information of the Company’s unconsolidated affiliates accounted for under the equity method:

		Three Months Ended March 31,								Six Months Ended March 31,
		2010				2009				2010				2009
Net revenue		$	59,390			$	56,489			$	115,173			$	115,209
Income from operations		$	15,116			$	11,806			$	23,666			$	25,048
Net income		$	12,885			$	9,486			$	18,979			$	20,577

		March 31,				September 30,
		2010				2009
Current assets		$	54,508			$	68,174
Long-term assets		$	147,333			$	148,993
Current liabilities		$	23,867			$	25,770
Long-term liabilities		$	122,652			$	122,629

MEDCATH CORPORATION
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(All tables in thousands, except percentages and per share data)

6. Long-Term Debt

     Long-term debt consists of the following:

		March 31,				September 30,
		2010				2009
Credit Facility		$	72,188			$	80,000
Notes payable to various lenders			4,437				6,054
			76,625				86,054
Less current portion			(16,625	)			(19,491	)
Long-term debt		$	60,000			$	66,563

     During November 2008, the Company amended and restated its senior secured credit facility (the “Credit Facility”). The Credit Facility provides for a three-year term loan facility in the amount of $75.0 million (the “Term Loan”) and a revolving credit facility in the amount of $85.0 million (the “Revolver”), which includes a $25.0 million sub-limit for the issuance of stand-by and commercial letters of credit and a $10.0 million sub-limit for swing-line loans. At the request of the Company and approval from its lenders, the aggregate amount available under the Credit Facility may be increased by an amount up to $50.0 million. Borrowings under the Credit Facility, excluding swing-line loans, bear interest per annum at a rate equal to the sum of LIBOR plus an applicable margin or the alternate base rate plus an applicable margin. At March 31, 2010 the Term Loan bore interest at 3.23%.

     The Credit Facility is guaranteed jointly and severally by the Company and certain of the Company’s existing and future, direct and indirect, wholly owned subsidiaries and is secured by a first priority perfected security interest in all of the capital stock or other ownership interests owned by the Company and subsidiary guarantors in each of their subsidiaries, and, subject to certain exceptions in the Credit Facility, all other present and future assets and properties of the Company and the subsidiary guarantors and all intercompany notes.

     The Credit Facility requires compliance with certain financial covenants including a consolidated senior secured leverage ratio test, a consolidated fixed charge coverage ratio test and a consolidated total leverage ratio test. The Credit Facility also contains customary restrictions on, among other things, the Company and subsidiaries’ ability to incur liens; engage in mergers, consolidations and sales of assets; incur debt; declare dividends; redeem stock and repurchase, redeem and/or repay other debt; make loans, advances and investments and acquisitions; and enter into transactions with affiliates.

     The Credit Facility contains events of default, including cross-defaults to certain indebtedness, change of control events, and other events of default customary for syndicated commercial credit facilities. Upon the occurrence of an event of default, the Company could be required to immediately repay all outstanding amounts under the Credit Facility.

     The Company is required to make mandatory prepayments of principal in specified amounts upon the occurrence of certain events identified in the Credit Facility and is permitted to make voluntary prepayments of principal under the Credit Facility. The Term Loan is subject to amortization of principal in quarterly installments which began March 31, 2010. The maturity date of both the Term Loan and the Revolver is November 10, 2011.

     The entire $72.2 million outstanding under the Credit Facility at March 31, 2010 relates to the Term Loan. The maximum availability under the Revolver is $85.0 million which was reduced by outstanding letters of credit totaling $1.7 million at March 31, 2010.

     During December 2008, the Company redeemed its outstanding 9 7/8% senior notes (the “Senior Notes”) issued by MedCath Holdings Corp., a wholly owned subsidiary of the Company, for $111.2 million, which included the payment of a repurchase premium of $5.0 million and accrued interest of $4.2 million. The Senior Notes were redeemed through borrowings under the Credit Facility and available cash on hand. In addition to the aforementioned repurchase premium, the Company incurred $2.0 million in expense related to the write-off of previously incurred financing costs associated with the Senior Notes. The repurchase premium and write off of previously incurred financing costs have been included in the consolidated statements of operations as loss on early extinguishment of debt for the six months ended March 31, 2009.

MEDCATH CORPORATION
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(All tables in thousands, except percentages and per share data)

     Debt Covenants—At March 31, 2010 and September 30, 2009, the Company was in violation of financial covenants under equipment loans at its consolidated subsidiary TexSAn Heart Hospital. Accordingly, the total outstanding balance for these loans of $4.4 million and $6.1 million, respectively, has been included in the current portion of long-term debt and obligations under capital leases on the Company’s consolidated balance sheets. The covenant violations did not result in any other non-compliance related to the remaining covenants governing the Company’s outstanding debt; thereby the Company remained in compliance with all other covenants.

     Fair Value of Financial Instruments—The Company considers the carrying amounts of significant classes of financial instruments on the consolidated balance sheets to be reasonable estimates of fair value due either to their length to maturity or the existence of variable interest rates underlying such financial instruments that approximate prevailing market rates at March 31, 2010 and September 30, 2009. The estimated fair value of long-term debt, including the current portion, at March 31, 2010 was approximately $116.4 million ($39.6 million related to discontinued operations) as compared to a carrying value of $111.2 million ($34.6 million related to discontinued operations). At September 30, 2009, the estimated fair value of long-term debt, including the current portion, was approximately $127.6 million ($41.4 million related to discontinued operations) as compared to a carrying value of $121.4 million ($39.6 million related to discontinued operations). Fair value of the Company’s fixed rate debt was estimated using discontinued cash flow analyses, based on the Company’s current incremental borrowing rates for similar types of arrangements and market information. The fair value of the Company’s variable rate debt was determined to approximate its carrying value due to the underlying variable interest rates.

7. Contingencies and Commitments

     Contingencies — The Medicare and Medicaid programs are subject to statutory and regulatory changes, retroactive and prospective rate adjustments, administrative rulings, court decisions, executive orders and freezes and funding reductions, all of which may significantly affect the Company. In addition, reimbursement is generally subject to adjustment following audit by third party payors, including the fiscal intermediaries who administer the Medicare program, the Centers for Medicare and Medicaid Services (“CMS”).

     Final determination of amounts due providers under the Medicare program often takes several years because of such audits, as well as resulting provider appeals and the application of technical reimbursement provisions. The Company believes that adequate provisions have been made for any adjustments that might result from these programs; however, due to the complexity of laws and regulations governing the Medicare and Medicaid programs, the manner in which they are interpreted and the other complexities involved in estimating net revenue, there is a possibility that recorded estimates will change by a material amount in the future.

     In 2005, CMS began using recovery audit contractors (“RAC”) to detect Medicare overpayments not identified through existing claims review mechanisms. The RAC program relies on private auditing firms to examine Medicare claims filed by healthcare providers. Fees to the RACs are paid on a contingency basis. The RAC program began as a demonstration project in 2005 in three states (New York, California and Florida) which was expanded into the three additional states of Arizona, Massachusetts and South Carolina in July 2007. No RAC audits, however, were initiated at the Company’s Arizona or California hospitals during the demonstration project. The program was made permanent by the Tax Relief and Health Care Act of 2006 enacted in December 2006. CMS announced in March 2008 the end of the demonstration project and the commencement of the permanent program by the expansion of the RAC program to additional states beginning in the summer and fall 2008 and its plans to have RACs in place in all 50 states by 2010.

     RACs perform post-discharge audits of medical records to identify Medicare overpayments resulting from incorrect payment amounts, non-covered services, incorrectly coded services, and duplicate services. CMS has given RACs the authority to look back at claims up to three years old, provided that the claim was paid on or after October 1, 2007. Claims identified as overpayments will be subject to the Medicare appeals process.

     The Company believes the claims for reimbursement submitted to the Medicare program by the Company’s facilities have been accurate, however the Company is unable to reasonably estimate what the potential result of future RAC audits or other reimbursement matters could be.

     The Company is involved in various claims and legal actions in the ordinary course of business, including malpractice claims arising from services provided to patients that have been asserted by various claimants and additional claims that may be asserted for known incidents through March 31, 2010. These claims and legal actions are in various stages, and some may ultimately be brought to trial. Moreover, additional claims arising from services provided to patients in the past and other legal actions may be asserted in the future. The Company is protecting its interests in all such claims and actions and does not expect the ultimate resolution of these matters to have a material adverse impact on the Company’s consolidated financial position, results of operations or cash flows.

MEDCATH CORPORATION
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(All tables in thousands, except percentages and per share data)

     During the prior fiscal year, the Company refunded certain reimbursements to CMS related to carotid artery stent procedures performed during prior fiscal years at two of the Company’s consolidated subsidiary hospitals. The U.S. Department of Justice (“DOJ”) initiated an investigation related to the Company’s return of these reimbursements. As a result of the DOJ’s investigation, the Company began negotiating a settlement agreement during the third quarter of fiscal 2009 with the DOJ whereby the Company is expected to pay approximately $0.8 million to settle and obtain a release from any federal civil false claims liability related to the DOJ’s investigation. The DOJ allegations do not involve patient care, and relate solely to whether the procedures were properly reimbursable by Medicare. The settlement would not include any finding of wrong-doing or any admission of liability. As part of the settlement, the Company is also negotiating with the Department of Health and Human Services, Office of Inspector General (“OIG”), to obtain a release from any federal health care program permissive exclusion actions to be instituted by the OIG. During the quarter ended December 31, 2009 the Company paid $0.6 million of the $0.8 million initially accrued within other accrued liabilities on the consolidated balance sheet as of September 30, 2009. As of March 31, 2010 $0.2 million remained accrued within other accrued liabilities on the consolidated balance sheet.

     During October 2009, a purported class action law suit was filed against the Bakersfield Heart Hospital, a consolidated subsidiary of the Company. In the complaint the plaintiff alleges that under California law, specifically under the Knox-Keene Healthcare Service Plan Act of 1975 and under the Health and Safety Code of California, California prohibits the practice of “balance billing” for patients who are provided emergency services. A class has not been certified by the court in this case. Currently the Company is unable to predict with certainty the outcome of this case or if the plaintiff prevails whether the amount due to the plaintiff could be material.

     The Company has a one-year claims-made policy providing coverage for medical malpractice claim amounts in excess of $2.0 million of retained liability per claim. The Company additionally has insurance to reduce the retained liability per claim to $250,000 for the MedCath Partners Division. Because of the Company’s self-insured retention levels, the Company is required to recognize an estimated expense/liability for the amount of retained liability applicable to each malpractice claim. As of March 31, 2010 and September 30, 2009, the total estimated liability for the Company’s self-insured retention on medical malpractice claims, including an estimated amount for incurred but not reported claims, was approximately $3.1 million and $4.5 million, respectively, which is included in other accrued liabilities in the consolidated balance sheets. The Company maintains this reserve based on actuarial estimates using the Company’s historical experience with claims and assumptions about future events.

     In addition to reserves for medical malpractice, the Company also maintains reserves for self-insured workman’s compensation, healthcare and dental coverage. The total estimated reserve for self-insured liabilities for workman’s compensation, employee health and dental claims was $4.5 million and $3.5 million as of March 31, 2010 and September 30, 2009, respectively, which is included in other accrued liabilities in the consolidated balance sheets. The Company maintains this reserve based on historical experience with claims. The Company maintains commercial stop loss coverage for health and dental insurance program of $175,000 per plan participant.

     Commitments — The Company’s consolidated subsidiary hospitals provide guarantees to certain physician groups for funds required to operate and maintain services for the benefit of the hospital’s patients including emergency care services and anesthesiology services, among other services. These guarantees extend for the duration of the underlying service agreements. As of March 31, 2010, the maximum potential future payments that the Company could be required to make under these guarantees was approximately $30.8 million through October 2012. At March 31, 2010 the Company had total liabilities of $13.1 million for the fair value of these guarantees, of which $8.3 million is in other accrued liabilities and $4.8 million is in other long term obligations. Additionally, the Company had assets of $13.1 million representing the future services to be provided by the physicians, of which $8.2 million is in prepaid expenses and other current assets and $4.9 million is in other assets.

8. Earnings per Share Data

     Basic — The calculation of basic earnings per share includes 177,400 and 95,900 of restricted stock units that have vested but as of March 31, 2010 and 2009, respectively, have not been converted into common stock. See Note 9 as it relates to restricted stock units granted to directors of the Company.

     Diluted — The calculation of diluted earnings per share considers the potential dilutive effect of options to purchase 1,302,587 shares of common stock at prices ranging from $4.75 to $33.05, which were outstanding at March 31, 2009, as well as 463,216 shares of restricted stock which were outstanding at March 31, 2009. Of the outstanding stock options and restricted stock 1,739,328 and 1,765,803 have not been included in the calculation of diluted earnings per share for the three and six months ended March 31, 2009, respectively, because the stock options and restricted stock were anti-dilutive. No options or restricted stock were included in the calculation of diluted earnings per share for the three and six months ended March 31, 2010, as the consideration of such shares would be anti-dilutive due to the loss from continuing operations, net of tax.

MEDCATH CORPORATION
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(All tables in thousands, except percentages and per share data)

9. Stock Based Compensation

     Compensation expense from the grant of equity awards made to employees and directors is recognized based on the estimated fair value of each award over each applicable awards vesting period. The Company estimates the fair value of equity awards on the date of grant using, either an option-pricing model for stock options or the closing market price of the Company’s stock for restricted stock and restricted stock units. Stock based compensation expense is recognized on a straight-line basis over the requisite service period for the awards that are ultimately expected to vest. Stock based compensation expense recorded during the three and six months ended March 31, 2010 was $1.2 million and $1.8 million, respectively. The associated tax benefits related to the compensation expense recognized for the three and six months ended March 31, 2010 was $0.5 million and $0.7 million, respectively. Stock based compensation expense recorded during the three and six months ended March 31, 2009 was $0.8 million and $1.8 million, respectively. The associated tax benefits related to the compensation expense recognized for the three and six months ended March 31, 2009 was $0.3 million and $0.7 million, respectively.

     Stock Options

     The following table summarizes the Company’s stock option activity:

		For the Three Months Ended
		March 31, 2010								March 31, 2009
						Weighted-								Weighted-
		Number of				Average				Number of				Average
		Stock Options				Exercise Price				Stock Options				Exercise Price
Outstanding stock options, beginning of period			986,637			$	22.23				1,825,837			$	21.98
Cancelled			(11,000	)			29.49				(523,250	)			22.93
Outstanding stock options, end of period			975,637			$	22.14				1,302,587			$	21.60

		For the Six Months Ended
		March 31, 2010								March 31, 2009
						Weighted-								Weighted-
		Number of				Average				Number of				Average
		Stock Options				Exercise Price				Stock Options				Exercise Price
Outstanding stock options, beginning of period			1,027,387			$	22.25				1,776,837			$	22.15
Granted			—				—				82,000				17.46
Cancelled			(51,750	)			24.33				(556,250	)			22.74
Outstanding stock options, end of period			975,637			$	22.14				1,302,587			$	21.60

     Restricted Stock Awards

     During the three and six months ended March 31, 2010, the Company granted to employees 32,235 and 401,399 shares of restricted stock, respectively. During the three and six months ended March 31, 2009, the Company granted to employees 424,153 shares of restricted stock. Restricted stock granted to employees, excluding executives of the Company, vest annually on December 31 over a three year period. Executives of the Company (defined by the Company as vice president or higher) received two equal grants of restricted stock. The first grant vests annually in equal installments on December 31 over a three year period. The second grant vests annually on December 31 over a three year period if certain performance conditions are met. During the three and six months ended March 31, 2010, the Company granted 89,600 shares of restricted stock units to directors. During the three and six months ended March 31, 2009, the Company granted 95,900 shares of restricted stock units to directors. Restricted stock units granted to directors are fully vested at the date of grant and are paid in shares of common stock upon each applicable director’s termination of service on the board. At March 31, 2010, the Company had $4.8 million of unrecognized compensation expense associated with restricted stock awards.

MEDCATH CORPORATION
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(All tables in thousands, except percentages and per share data)

     The following table summarizes the Company’s restricted stock award activity:

		For the Three Months Ended
		March 31, 2010								March 31, 2009
		Number of								Number of
		Restricted				Weighted-				Restricted				Weighted-
		Stock Awards				Average				Stock Awards				Average
		and Units				Grant Price				and Units				Grant Price
Outstanding restricted stock awards and units, beginning of period			923,270			$	8.54				39,063			$	20.50
Granted			121,835				8.01				520,053				8.94
Vested			(13,700	)			7.33				—				—
Cancelled			(5,705	)			9.21				—				—
Outstanding restricted stock awards and units, end of period			1,025,700			$	8.49				559,116			$	9.74

		For the Six Months Ended
		March 31, 2010								March 31, 2009
		Number of								Number of
		Restricted				Weighted-				Restricted				Weighted-
		Stock Awards				Average				Stock Awards				Average
		and Units				Grant Price				and Units				Grant Price
Outstanding restricted stock awards and units, beginning of period			654,327			$	9.64				123,982			$	19.28
Granted			490,999				7.24				520,053				8.94
Vested			(103,895	)			9.04				(52,106	)			20.50
Cancelled			(15,731	)			9.10				(32,813	)			15.88
Outstanding restricted stock awards and units, end of period			1,025,700			$	8.49				559,116			$	9.74

MEDCATH CORPORATION
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(All tables in thousands, except percentages and per share data)

10. Reportable Segment Information

     The Company’s reportable segments consist of the Hospital Division and the MedCath Partners Division.

     Financial information concerning the Company’s operations by each of the reportable segments as of and for the periods indicated is as follows:

		Three Months Ended March 31,								Six Months Ended March 31,
		2010				2009				2010				2009
Net revenue:
Hospital Division		$	131,619			$	126,045			$	251,752			$	247,131
MedCath Partners Division			3,180				4,619				6,993				9,490
Corporate and other			110				103				222				201
Consolidated totals		$	134,909			$	130,767			$	258,967			$	256,822
(Loss) income from operations:
Hospital Division		$	(13,985	)		$	10,855			$	(16,078	)		$	18,575
MedCath Partners Division			(322	)			(380	)			(575	)			(484	)
Corporate and other			(3,386	)			(2,343	)			(5,856	)			(5,046	)
Consolidated totals		$	(17,693	)		$	8,132			$	(22,509	)		$	13,045

		March 31,				September 30,
		2010				2009
Aggregate identifiable assets:
Hospital Division		$	476,611			$	517,849
MedCath Partners Division			26,736				27,205
Corporate and other			39,839				45,394
Consolidated totals		$	543,186			$	590,448

     Substantially all of the Company’s net revenue in its Hospital Division and MedCath Partners Division is derived directly or indirectly from patient services. The amounts presented for corporate and other primarily include general overhead and administrative expenses and financing activities as components of (loss) income from operations and certain cash and cash equivalents, prepaid expenses, other assets and operations of the business not subject to separate segment reporting within identifiable assets.

     The Hospital Division assets include $70.1 million and $72.4 million of assets related to discontinued operations as of March 31, 2010 and September 30, 2009, respectively. The MedCath Partners Division assets included $1.7 million and $19.9 million of assets related to discontinued operations as of March 31, 2010 and September 30, 2009, respectively.

11. Intangible Assets

     As of March 31, 2010 and September 30, 2009, the Company’s intangible assets, which are included in other assets on the consolidated balance sheets, are detailed in the following table:

		March 31, 2010								September 30, 2009
		Gross Carrying				Accumulated				Gross Carrying				Accumulated
		Amount				Amortization				Amount				Amortization
Intangible Assets		$	555			$	(242	)		$	730			$	(352	)

     The estimated aggregate amortization expense for each of the next five year periods ending March 31 are $57 for fiscal 2010, $51 for fiscal 2011, and $32 for fiscal 2012, 2013, and 2014.

MEDCATH CORPORATION
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(All tables in thousands, except percentages and per share data)

12. Comprehensive Income

		Three Months Ended March 31,								Six Months Ended March 31,
		2010				2009				2010				2009
Net (loss) income		$	(8,685	)		$	10,047			$	(10,502	)		$	15,416
Changes in fair value of interest rate swap, net of tax benefit			(24	)			175				32				(273	)
Comprehensive (loss) income			(8,709	)			10,222				(10,470	)			15,143
Less: Net income attributable to noncontrolling interest			(2,524	)			(4,465	)			(3,364	)			(7,588	)
Comprehensive (loss) income attributable to MedCath Corporation common stockholders		$	(11,233	)		$	5,757			$	(13,834	)		$	7,555

13. Property and Equipment

		March 31,				September 30,
		2010				2009
Land		$	33,705			$	32,629
Buildings			251,620				263,796
Equipment			227,675				217,362
Construction in progress			6,723				17,434
Total, at cost			519,723				531,221
Less accumulated depreciation			(199,357	)			(189,827	)
Property and equipment, net		$	320,366			$	341,394

     The Company recorded $19.9 million of impairment charges to the consolidated statement of operations during the second quarter ended March 31, 2010. See Note 1 for further discussion related to these impairment charges.

14. Other Assets

     The Company’s corporate and other division entered into a note receivable agreement with a third party during 2008. The note receivable was deemed uncollectable and a loss of $1.5 million was recorded due to the Company’s determination of the third party’s inability to repay the note and the insufficiency of the value of the collateral securing the note.

MEDCATH CORPORATION
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(All tables in thousands, except percentages and per share data)

15. Fair Value Measurements

     As described in Note 2 Recent Accounting Pronouncements the Company adopted the accounting standard issued by the FASB that defines fair value, establishes a framework for measuring fair value and enhances disclosures about fair value measures required under other accounting pronouncements. The FASB delayed the effective date of this new standard for all nonfinancial assets and liabilities whose fair values are measured on a nonrecurring basis, typically relate to long-lived assets. The Company is now required to provide additional disclosures about fair value measurements for each major category of assets and liabilities measured at fair value on a non-recurring basis. The following table presents this information as of March 31, 2010 and indicates the fair value hierarchy of the valuation techniques utilized to determine such fair values. Fair values determined by Level 1 inputs utilize quoted prices (unadjusted) in active markets for identical assets or liabilities, which generally are not applicable to non-financial assets and liabilities. Fair values determined by Level 2 inputs utilize data points that are observable, such as appraisals or established market values of comparable assets. Fair values determined by Level 3 inputs are unobservable data points for the asset or liability and include situations where there is little, if any, market activity for the asset or liability, such as internal estimates of future cash flows.

										Significant
						Significant Other				Unobservable
		March 31,				Observable Inputs				Inputs				Total
		2010				(Level 2)				(Level 3)				Impairments
Long-lived assets held and used (1)		$	78,899			$	32,000			$	46,899			$	(19,948	)
Investment in Affiliates (2)			400				400				—				(114	)
		$	79,299			$	32,400			$	46,899			$	(20,062	)

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

     The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the interim unaudited consolidated financial statements and related notes included elsewhere in this report, as well as the audited consolidated financial statements and related notes thereto and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in our Annual Report on Form 10-K for the fiscal year ended September 30, 2009.

Overview

     General. We are a healthcare provider focused primarily on providing high acuity services, predominantly the diagnosis and treatment of cardiovascular disease. We own and operate hospitals in partnership with physicians whom we believe have established reputations for clinical excellence. We have ownership interests in and operate ten hospitals, with a total of 825 licensed beds, 58 of which are related to HHA, whose assets, liabilities, and operations are included within discontinued operations. Our nine hospitals, which currently comprise our continuing operations, have 767 licensed beds, of which 677 are staffed and available, and are located predominately in high growth markets in seven states: Arizona, Arkansas, California, Louisiana, New Mexico, South Dakota, and Texas. During May 2009, we completed our 79 licensed bed expansion at Louisiana Medical Center and Heart Hospital and built space for an additional 40 beds at that hospital. During October 2009, we opened a new acute care hospital, Hualapai Mountain Medical Center (“HMMC”), in Kingman, Arizona. This hospital is designed to accommodate a total of 106 licensed beds, with an initial opening of 70 of its licensed beds.

     In addition to our hospitals, we currently own and/or manage 14 cardiac diagnostic and therapeutic facilities. Nine of these facilities are located at hospitals operated by other parties. These facilities offer invasive diagnostic and, in some cases, therapeutic procedures. The remaining five facilities are not located at hospitals and offer only diagnostic procedures.

     On March 1, 2010, the Company announced that its Board of Directors formed a Strategic Options Committee composed solely of independent directors to consider the sale of the Company, the sale of its individual hospitals and other assets, or the sale of its interest in those assets.

     Same Facility Hospitals. Our policy is to include, on a same facility basis, only those facilities that were open and operational during the full current and prior fiscal year comparable periods. For example, on a same facility basis for our consolidated hospital division for the three and six months ended March 31, 2010, we exclude the results of operations of Hualapai Mountain Medical Center, which opened in October 2009.

     Revenue Sources by Division. The largest percentage of our net revenue is attributable to our Hospital Division. The following table sets forth the percentage contribution of each of our consolidating divisions to consolidated net revenue in the periods indicated below.

		Three Months Ended March 31,								Six Months Ended March 31,
Division		2010				2009				2010				2009
Hospital			97.6	%			96.4	%			97.2	%			96.2	%
MedCath Partners			2.3	%			3.5	%			2.7	%			3.7	%
Corporate and other			0.1	%			0.1	%			0.1	%			0.1	%
Net Revenue			100.0	%			100.0	%			100.0	%			100.0	%

     Revenue Sources by Payor. We receive payments for our services rendered to patients from the Medicare and Medicaid programs, commercial insurers, health maintenance organizations and our patients directly. Generally, our net revenue is determined by a number of factors, including the payor mix, the number and nature of procedures performed and the rate of payment for the procedures. Since cardiovascular disease disproportionately affects those age 55 and older, the proportion of net revenue we derive from the Medicare program is higher than that of most general acute care hospitals. The following table sets forth the percentage of consolidated net revenue we earned by category of admitting payor in the periods indicated.

		Three Months Ended March 31,								Six Months Ended March 31,
Payor		2010				2009				2010				2009
Medicare			55.4	%			57.5	%			54.2	%			53.3	%
Medicaid			4.2	%			5.2	%			4.2	%			3.9	%
Commercial and other, including self-pay			40.4	%			37.3	%			41.6	%			42.8	%
Total consolidated net revenue			100.0	%			100.0	%			100.0	%			100.0	%

     A significant portion of our net revenue is derived from federal and state governmental healthcare programs, including Medicare and Medicaid, and we expect the net revenue that we receive from the Medicare program as a percentage of total consolidated net revenue to remain significant in future periods. Our payor mix may fluctuate in future periods due to changes in reimbursement, market and industry trends with self-pay patients, and other similar factors.

     The Medicare and Medicaid programs are subject to statutory and regulatory changes (such as the recent Health Reform Laws), retroactive and prospective rate adjustments, administrative rulings, court decisions, executive orders and freezes and funding reductions, all of which may significantly affect our business. In addition, reimbursement is generally subject to adjustment following audit by third party payors, including the fiscal intermediaries who administer the Medicare program, i.e., the CMS. Final determination of amounts due providers under the Medicare program often takes several years because of such audits, as well as resulting provider appeals and the application of technical reimbursement provisions. We believe that adequate provision has been made for any adjustments that might result from these programs; however, due to the complexity of laws and regulations governing the Medicare and Medicaid programs, the manner in which they are interpreted and the other complexities involved in estimating our net revenue, there is a possibility that recorded estimates will change by a material amount in the future.

Results of Operations

Three Months Ended March 31, 2010 Compared to Three Months Ended March 31, 2009

     Statement of Operations Data. The following table presents our results of operations in dollars and as a percentage of net revenue for the periods indicated:

		Three Months Ended March 31,
		(in thousands except percentages)
										Increase/(Decrease)								% of Net Revenue
		2010				2009				$				%				2010				2009
Net revenue		$	134,909			$	130,767			$	4,142				3.2	%			100.0	%			100.0	%
Operating expenses:
Personnel expense			46,444				44,662				1,782				4.0	%			34.4	%			34.2	%
Medical supplies expense			36,849				35,120				1,729				4.9	%			27.3	%			26.9	%
Bad debt expense			11,918				8,798				3,120				35.5	%			8.9	%			6.7	%
Other operating expenses			29,743				27,342				2,401				8.8	%			22.0	%			20.9	%
Pre-opening expenses			—				380				(380	)			(100.0	)%			—				0.3	%
Depreciation			7,768				6,217				1,551				24.9	%			5.8	%			4.7	%
Amortization			8				8				—				—				—				0.0	%
Impairment of property and equipment			19,948				—				19,948				100.0	%			14.8	%			—
(Gain) loss on disposal of property, equipment and other assets			(76	)			108				(184	)			(170.4	)%			—				0.1	%
(Loss) income from operations			(17,693	)			8,132				(25,825	)			(317.6	)%			(13.2	)%			6.2	%
Other income (expenses):
Interest expense			(1,149	)			(581	)			568				97.8	%			(0.8	)%			(0.4	)%
Loss on early extinguishment of debt			—				259				(259	)			(100.0	)%			—				0.2	%
Interest and other income			23				73				(50	)			(68.5	)%			0.0	%			0.1	%
Loss on note receiveable			(1,507	)			—				(1,507	)			(100.0	)%			(1.1	)%			—
Equity in net earnings of unconsolidated affiliates			3,092				2,714				378				13.9	%			2.3	%			2.1	%
(Loss) income from continuing operations before income taxes			(17,234	)			10,597				(27,831	)			(262.6	)%			(12.8	)%			8.1	%
Income tax (benefit) expense			(7,386	)			2,610				(9,996	)			(383.0	)%			(5.5	)%			2.0	%
(Loss) income from continuing operations			(9,848	)			7,987				(17,835	)			(223.3	)%			(7.3	)%			6.1	%
Income from discontinued operations, net of taxes			1,163				2,060				(897	)			(43.5	)%			0.9	%			1.6	%
Net (loss) income			(8,685	)			10,047				(18,732	)			(186.4	)%			(6.4	)%			7.7	%
Less: Net income attributable to noncontrolling interest			(2,524	)			(4,465	)			(1,941	)			(43.5	)%			(1.9	)%			(3.4	)%
Net (loss) income attributable to MedCath Corporation		$	(11,209	)		$	5,582			$	(16,791	)			(300.8	)%			(8.3	)%			4.3	%
Amounts attributable to MedCath Corporation common stockholders:
(Loss) income from continuing operations, net of taxes		$	(11,999	)		$	4,220			$	(16,219	)			(384.3	)%			(8.9	)%			3.2	%
Income from discontinued operations, net of taxes			790				1,362				(572	)			(42.0	)%			0.6	%			1.1	%
Net (loss) income		$	(11,209	)		$	5,582			$	(16,791	)			(300.8	)%			(8.3	)%			4.3	%