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 200
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):

Large accelerated filer o		Accelerated filer þ		Non-accelerated filer o		Smaller reporting company o
				(Do not check if a smaller reporting company)

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 August 5, 2011, there were 20,436,291 shares of $0.01 par value common stock outstanding.

 

 

MEDCATH CORPORATION

FORM 10-Q

TABLE OF CONTENTS

		Page
PART I. FINANCIAL INFORMATION			3
Item 1. Unaudited Consolidated Financial Statements			3
Consolidated Balance Sheets as of June 30, 2011 and September 30, 2010			3
Consolidated Statements of Operations for the Three and Nine Months Ended June 30, 2011 and 2010			4
Consolidated Statement of Stockholders’ Equity for the Nine Months Ended June 30, 2011			5
Consolidated Statements of Cash Flows for the Nine Months Ended June 30, 2011 and 2010			6
Notes to Unaudited Consolidated Financial Statements			7
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			24
Item 3. Quantitative and Qualitative Disclosures About Market Risk			35
Item 4. Controls and Procedures			35
PART II. OTHER INFORMATION			35
Item 1. Legal Proceedings			35
Item 1A. Risk Factors			36
Item 6. Exhibits			36
SIGNATURES			37
EX-31.1
EX-31.2
EX-32.1
EX-32.2
EX-101 INSTANCE DOCUMENT
EX-101 SCHEMA DOCUMENT
EX-101 CALCULATION LINKBASE DOCUMENT
EX-101 LABELS LINKBASE DOCUMENT
EX-101 PRESENTATION LINKBASE DOCUMENT
EX-101 DEFINITION LINKBASE DOCUMENT

PART I. FINANCIAL INFORMATION

Item 1.		Unaudited Consolidated Financial Statements

MEDCATH CORPORATION

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

		June 30,				September 30,
		2011				2010
Current assets:
Cash and cash equivalents		$	113,669			$	32,892
Accounts receivable, net			44,423				42,141
Income tax receivable			—				6,188
Medical supplies			10,338				10,540
Deferred income tax assets			8,678				13,247
Prepaid expenses and other current assets			12,259				13,339
Current assets of discontinued operations			45,495				49,963
Total current assets			234,862				168,310
Property and equipment, net			143,815				174,287
Other assets			22,416				15,983
Non-current assets of discontinued operations			3,083				135,958
Total assets		$	404,176			$	494,538
Current liabilities:
Accounts payable		$	17,088			$	15,550
Income tax payable			7,158				—
Accrued compensation and benefits			12,662				15,951
Other accrued liabilities			16,126				16,155
Current portion of long-term debt and obligations under capital leases			2,339				16,566
Current liabilities of discontinued operations			13,533				36,291
Total current liabilities			68,906				100,513
Long-term debt			—				52,500
Obligations under capital leases			4,295				5,999
Other long-term obligations			3,062				5,053
Long-term liabilities of discontinued operations			—				36,469
Total liabilities			76,263				200,534
Commitments and contingencies (See Note 7)
Redeemable noncontrolling interest			8,280				11,534
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; 22,270,012 issued and 20,315,651 outstanding at June 30, 2011 22,423,666 issued and 20,469,305 outstanding at September 30, 2010			216				216
Paid-in capital			458,729				457,725
Accumulated deficit			(103,916	)			(139,791	)
Accumulated other comprehensive loss			—				(444	)
Treasury stock, at cost; 1,954,361 shares at June 30, 2011 and September 30, 2010			(44,797	)			(44,797	)
Total MedCath Corporation stockholders’ equity			310,232				272,909
Noncontrolling interest			9,401				9,561
Total equity			319,633				282,470
Total liabilities and equity		$	404,176			$	494,538

See notes to unaudited consolidated financial statements.

MEDCATH CORPORATION

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

		Three Months Ended June 30,								Nine Months Ended June 30,
		2011				2010				2011				2010
Net revenue		$	91,839			$	93,139			$	273,617			$	271,625
Operating expenses:
Personnel expense			31,514				31,090				96,490				93,950
Medical supplies expense			24,219				23,559				66,573				68,938
Bad debt expense			10,767				10,782				30,483				28,196
Other operating expenses			23,919				21,915				69,476				64,005
Pre-opening expenses			—				—				—				866
Depreciation			3,745				5,389				12,092				15,773
Impairment of property and equipment			810				22,813				20,358				37,513
(Gain) loss on disposal of property, equipment and other assets			(212	)			12				(141	)			43
Total operating expenses			94,762				115,560				295,331				309,284
Loss from operations			(2,923	)			(22,421	)			(21,714	)			(37,659	)
Other income (expenses):
Interest expense			(556	)			(1,050	)			(2,605	)			(3,046	)
Interest and other income			76				56				615				141
Loss on note receiveable			—				—				—				(1,507	)
Gain on sale of unconsolidated affiliates			—				—				15,391				—
Equity in net earnings of unconsolidated affiliates			303				1,391				1,679				3,984
Total other income (expense), net			(177	)			397				15,080				(428	)
Loss from continuing operations before income taxes			(3,100	)			(22,024	)			(6,634	)			(38,087	)
Income tax benefit			(1,862	)			(8,818	)			(5,370	)			(15,840	)
Loss from continuing operations			(1,238	)			(13,206	)			(1,264	)			(22,247	)
Income from discontinued operations, net of taxes			15,260				2,745				53,475				1,283
Net income (loss)			14,022				(10,461	)			52,211				(20,964	)
Less: Net income attributable to noncontrolling interest			(1,691	)			(2,355	)			(16,336	)			(5,718	)
Net income (loss) attributable to MedCath Corporation		$	12,331			$	(12,816	)		$	35,875			$	(26,682	)
Amounts attributable to MedCath Corporation common stockholders:
Loss from continuing operations, net of taxes		$	(3,088	)		$	(14,823	)		$	(8,754	)		$	(27,298	)
Income from discontinued operations, net of taxes			15,419				2,007				44,629				616
Net income (loss)		$	12,331			$	(12,816	)		$	35,875			$	(26,682	)
(Loss) earnings per share, basic
Loss from continuing operations attributable to MedCath
Corporation common stockholders		$	(0.15	)		$	(0.74	)		$	(0.43	)		$	(1.38	)
Income from discontinued operations attributable to MedCath
Corporation common stockholders			0.76				0.10				2.21				0.03
(Loss) earnings per share, basic		$	0.61			$	(0.64	)		$	1.78			$	(1.35	)
(Loss) earnings per share, diluted
Loss from continuing operations attributable to MedCath
Corporation common stockholders		$	(0.15	)		$	(0.74	)		$	(0.43	)		$	(1.38	)
Income from discontinued operations attributable to MedCath
Corporation common stockholders			0.76				0.10				2.21				0.03
(Loss) earnings per share, diluted		$	0.61			$	(0.64	)		$	1.78			$	(1.35	)
Weighted average number of shares, basic			20,245				19,897				20,132				19,823
Dilutive effect of stock options and restricted stock			7				—				6				—
Weighted average number of shares, diluted			20,252				19,897				20,138				19,823

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, 2010			22,424			$	216			$	457,725			$	(139,791	)		$	(444	)			1,954			$	(44,797	)		$	9,561			$	282,470			$	11,534
Stock awards, including cancelations and income tax benefit			18				—				3,282				—				—				—				—				—				3,282				—
Tax withholdings for vested restricted stock awards			(172	)			—				(2,278	)			—				—				—				—				—				(2,278	)			—
Distributions to noncontrolling interest			—				—				—				—				—				—				—				(10,444	)			(10,444	)			(3,560	)
Other transactions impacting noncontrolling interest			—				—				—				—				—				—				—				(64	)			(64	)			18
Exercise of call of noncontrolling interest			—				—				—				—				—				—				—				—				—				(5,700	)
Comprehensive income:
Net income			—				—				—				35,875				—				—				—				10,348				46,223				5,988
Reclassification of amounts included in net income, net of tax benefit (*)			—				—				—				—				444				—				—				—				444				—
Total comprehensive income																																			46,667				5,988
Balance, June 30, 2011			22,270			$	216			$	458,729			$	(103,916	)		$	—				1,954			$	(44,797	)		$	9,401			$	319,633			$	8,280

See notes to unaudited consolidated financial statements.

MEDCATH CORPORATION

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

		Nine Months Ended June 30,
		2011				2010
Net income (loss)		$	52,211			$	(20,964	)
Adjustments to reconcile net income to net cash provided by operating activities:
Income from discontinued operations, net of taxes			(53,475	)			(1,283	)
Bad debt expense			30,483				28,196
Depreciation			12,092				15,773
(Gain) loss on disposal of property, equipment and other assets			(141	)			43
Share-based compensation expense			3,282				2,380
Gain on sale of unconsolidated affiliates			(15,391	)			—
Amortization of loan acquisition costs			1,104				745
Impairment of long-lived assets			20,358				37,513
Equity in earnings of unconsolidated affiliates, net of distributions received			(583	)			3,397
Deferred income taxes			(11,586	)			(14,966	)
Change in assets and liabilities that relate to operations:
Accounts receivable			(32,765	)			(33,174	)
Medical supplies			202				(1,455	)
Prepaid and other assets			5,062				(1,422	)
Accounts payable and accrued liabilities			(7,221	)			1,082
Net cash provided by operating activities of continuing operations			3,632				15,865
Net cash (used in) provided by operating activities of discontinued operations			(16,633	)			15,316
Net cash (used in) provided by operating activities			(13,001	)			31,181
Investing activities:
Purchases of property and equipment			(2,295	)			(15,275	)
Proceeds from sale of property and equipment			281				103
Changes in restricted cash			(1,772	)			—
Proceeds from sale of unconsolidated afffiliates			24,851				—
Net cash provided by (used in) investing activities of continuing operations			21,065				(15,172	)
Net cash provided by (used in) investing activities of discontinued operations			232,469				(2,168	)
Net cash provided by (used in) investing activities			253,534				(17,340	)
Financing activities:
Repayments of long-term debt			(66,563	)			(10,625	)
Repayments of obligations under capital leases			(1,869	)			(1,173	)
Distributions to noncontrolling interest			(7,380	)			(9,334	)
Investment by noncontrolling interest			—				109
Sale of equity interest in subsidiary			—				140
Tax withholding of vested restricted stock awards			(2,494	)			(293	)
Net cash used in financing activities of continuing operations			(78,306	)			(21,176	)
Net cash used in financing activities of discontinued operations			(52,387	)			(15,324	)
Net cash used in financing activities			(130,693	)			(36,500	)
Net increase (decrease) in cash and cash equivalents			109,840				(22,659	)
Cash and cash equivalents:
Beginning of period			47,030				61,701
End of period		$	156,870			$	39,042
Cash and cash equivalents of continuing operations			113,669				24,203
Cash and cash equivalents of discontinued operations			43,201				14,839

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, including the diagnosis and treatment of cardiovascular disease. The Company owns and operates hospitals in partnership with physicians. As of June 30, 2011, the Company had ownership interests in and operated six hospitals, including five in which the Company owned a majority interest.

As noted below under “Our Strategic Options Review Process” during the quarter ended December 31, 2010, the Company sold three of its majority owned hospitals that were classified as discontinued operations and its equity interest in one of its minority owned hospitals. As a result, at June 30, 2011, the Company owned interests in six hospitals. Each of the Company’s hospitals is a freestanding, licensed general acute care hospital that provides a wide range of health services with a majority focus on cardiovascular care. Each of the Company’s hospitals has a 24-hour emergency room staffed by emergency department physicians. The Company’s six hospitals that comprise continuing operations have 533 licensed beds and are located in: Arizona, Arkansas, California, Louisiana, New Mexico, and Texas. Subsequent to June 30, 2011, the Company disposed of its interest in two hospitals located in Arkansas and New Mexico that had 167 licensed beds in total. See Note 16.

The Company accounts for all but one of its owned and operated hospitals as consolidated subsidiaries. The Company owns a noncontrolling interest in Harlingen Medical Center as of June 30, 2011. Therefore, the Company is unable to consolidate this hospital’s results of operations and financial position, but rather is required to account for its noncontrolling interest in this hospital as an equity-method investment.

In addition to the hospitals, through May 4, 2011 the Company owned or managed seven cardiac diagnostic and therapeutic facilities. On that date, the Company disposed of its interest in ownership and/or management of these cardiac diagnostic and therapeutic facilities. Six of these facilities were located at hospitals operated by other parties. These facilities offered invasive diagnostic and, in some cases, therapeutic procedures. The Company also operated two mobile cardiac catheterization laboratories which operated on set routes and offered only diagnostic procedures. The Company refers to the diagnostics division that was disposed as “MedCath Partners.”

During fiscal 2010 and fiscal 2011, the Company entered into definitive agreements to sell its interests in Arizona Heart Hospital (“AzHH”), Heart Hospital of Austin (“HHA”) and TexSan Heart Hospital (“TexSan”) and MedCath Partners whose assets, liabilities, and operations are included within discontinued operations. AzHH, HHA, TexSan and MedCath Partners were sold on October 1, 2010, November 1, 2010, December 31, 2010 and May 4, 2011, respectively. The results of operations of these entities are reported as discontinued operations for all periods presented. See Note 3.

Our Strategic Options Review Process

On March 1, 2010, the Company announced that its Board of Directors had formed a Strategic Options Committee to consider the sale either of the Company’s equity or the sale of its individual hospitals and other assets. The Company retained Navigant Capital Advisors as its financial advisor to assist in this process. Since announcing the exploration of strategic alternatives on March 1, 2010, the Company has completed several transactions, including:

•

The disposition of AzHH in which the Company sold the majority of the hospital’s assets to Vanguard Health Systems for $32.0 million, plus retained working capital. The transaction was completed effective October 1, 2010.

•

The disposition of the Company’s wholly owned subsidiary that held 33.3% ownership of Avera Heart Hospital of South Dakota (Sioux Falls, SD) to Avera McKennan for $20.0 million, plus a percentage of the hospital’s available cash. The transaction was completed October 1, 2010.

•

The disposition of HHA in which the Company and the physician owners sold substantially all of the hospital’s assets to St. David’s Healthcare Partnership L.P. for approximately $83.8 million, plus retained working capital. The transaction was completed effective November 1, 2010.

•

The disposition of the Company’s approximate 27.0% ownership interest in Southwest Arizona Heart and Vascular, LLC (Yuma, AZ) to the joint venture’s physician partners for $7.0 million. The transaction was completed effective November 1, 2010.

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

•

The disposition of TexSan in which the Company sold the majority of the hospital’s assets to Methodist Healthcare System of San Antonio for $76.25 million, plus an adjustment for retained working capital. The transaction was completed effective December 31, 2010.

•

The disposition of MedCath Partners in which the Company sold the majority of the division’s assets to DLP Healthcare, a joint venture of Lifepoint Hospitals, Inc. and Duke University Health System for $25.0 million. The transaction was completed effective May 4, 2011.

•

The disposition of the Company’s 9.2% ownership interest in Coastal Carolina Heart to New Hanover Regional Medical Center for $5.0 million. The transaction was completed in May 2011.

Basis of Presentation — The Company’s unaudited interim consolidated financial statements as of June 30, 2011 and for the three and nine months ended June 30, 2011 and 2010 have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) 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 for the fiscal year ended September 30, 2010. During the nine months ended June 30, 2011, 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, 2010.

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. 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. 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, which could change by material amounts in subsequent periods. 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.

Due to a decline in operating performance at certain hospitals during the first nine 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 June 30, 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 recorded $37.5 million and $5.2 million of impairment charges to continuing operations and discontinued operations, respectively during the nine months ended June 30, 2010. In addition, during the second quarter of fiscal 2010, as discussed previously, the Board of Directors formed a Strategic Options Committee to consider the sale either of the Company’s equity or the sale of its individual hospitals and other assets. In addition, the Company retained Navigant Capital Advisors as its financial advisor to assist in this process.

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

Throughout the remainder of fiscal 2010 and ongoing, the Company continuously evaluates the operating performance of the various hospitals and also evaluates the expressions of interest received for its ownership interests in the various hospitals. As a result of such period evaluations, the Company recorded an additional $29.4 million in impairment charges during the fourth quarter of fiscal 2010 through continuing and discontinued operations. To date, some of these assets have been sold at their carrying value. The impairment charges were recognized in the period that new or updated information pertaining to clear market indications of fair value became available. Such information included valid indications of interest, or signed letters of intent from interested buyers of the underlying assets, or based on updated discounted cash flow models using the Company’s long-term forecasts for the underlying assets. The short-term impact to the Company’s forecasts have been negatively impacted in some markets by the strategic options process as physician recruitment and the ability to implement growth strategies has become increasingly more difficult due to the uncertainty surrounding the process.

Due to a decline in operating performance at two hospitals during the first six months of fiscal 2011 and the uncertainty created at those hospitals as a result of the Company’s strategic options process, the Company performed impairment tests using undiscounted cash flows to determine if the carrying value of these hospital’s long-lived assets were recoverable as of March 31, 2011. The results indicated the 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 at that date. In addition, the Company received an indicator of value for certain land during the third quarter of fiscal 2011 that was below the Company’s carrying value. Accordingly, the Company recorded $0.8 million and $19.5 million of impairment charges to continuing operations during the three and nine months ended June 30, 2011, respectively.

See Note 14 for further discussions as to the Company’s determination of fair value.

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

On October 1, 2010, the Company adopted a new accounting standard that amends the consolidation guidance that applies to variable interest entities (“VIE”). The amendments significantly affect the overall consolidation analysis. The provisions of this 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. The adoption of this standard did not have an impact on the Company’s consolidated financial statements.

Recent Accounting Pronouncements

In August 2010, the Financial Accounting Standards Board (the “FASB”) issued Accounting Standard Updates (“ASU”) 2010-24, “Health Care Entities (Topic 954): Presentation of Insurance Claims and Related Insurance Recoveries,” which clarifies that a health care entity should not net insurance recoveries against a related claim liability. The guidance provided in this ASU is effective as of the beginning of the first fiscal year beginning after December 15, 2010, fiscal 2012 for the Company. The Company is evaluating the potential impacts the adoption of this ASU will have on our consolidated financial statements.

In August 2010, the FASB issued ASU 2010-23, “Health Care Entities (Topic 954): Measuring Charity Care for Disclosure,” which requires a company in the healthcare industry to use its direct and indirect costs of providing charity care as the measurement basis for charity care disclosures. This ASU also requires additional disclosures of the method used to identify such costs. The guidance provided in this ASU is effective for fiscal years beginning after December 15, 2010, fiscal 2012 for the Company. The adoption of this ASU is not expected to have any impact on our consolidated financial position or results of operations.

In May 2011, the FASB issued ASU 2011-04, “Fair Value Measurement (Topic 820) Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs” regarding requirements for measuring fair value and for disclosing information about fair value measurements. The amendments in this ASU explain how to measure fair value. They do not require additional fair value measurements and are not intended to establish valuation standards or affect valuation practices outside of financial reporting. The amendments in this ASU are to be applied prospectively and are effective during interim and annual periods beginning after December 15, 2011, the second quarter of fiscal 2012 for the Company. It is not yet known what impact this ASU will have on the Company’s financial statements.

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

In June 2011, the FASB issued ASU 2011-05, “Comprehensive Income (Topic 220): Presentation of Comprehensive Income” to improve the comparability, consistency, and transparency of financial reporting and to increase the prominence of items reported in other comprehensive income. To increase the prominence of items reported in other comprehensive income, the FASB decided to eliminate the option to present components of other comprehensive income as part of the statement of changes in stockholders’ equity, among other amendments in this ASU. The amendments require that all nonowner changes in stockholders’ equity be presented either in a single continuous statement of comprehensive income or in two separate but consecutive statements. In the two-statement approach, the first statement should present total net income and its components followed consecutively by a second statement that should present total other comprehensive income, the components of other comprehensive income, and the total of comprehensive income. The amendments in this ASU do not change the items that must be reported in other comprehensive income or when an item of other comprehensive income must be reclassified to net income. The amendments do not change the option for an entity to present components of other comprehensive income either net of related tax effects or before related tax effects, with one amount shown for the aggregate income tax expense or benefit related to the total of other comprehensive income items. In both cases, the tax effect for each component must be disclosed in the notes to the financial statements or presented in the statement in which other comprehensive income is presented. The amendments in this ASU should be applied retrospectively and are effective for fiscal years, and interim periods within those years, beginning after December 15, 2011, fiscal 2013 for the Company, with early adoption permitted. The amendments do not require any transition disclosures.

In July 2011, the FASB issued ASU 2011-07, “Presentation and Disclosure of Patient Service Revenue, Provision for Bad Debts, and the Allowance for Doubtful Accounts for Certain Health Care Entities,” whereby a health care entity is required to present the provision for bad debts as a component of net revenues within the revenue section of the statement of operations. A health care entity that recognizes significant amounts of patient services revenue at the time the services are rendered even though it does not assess the patient’s ability to pay will be required to disclose the following:

a.

Its policy for assessing the timing and amount of uncollectible patient service revenue recognized as bad debts by major payor source of revenue; and

b.

Qualitative and quantitative information about significant changes in the allowance for doubtful accounts related to patient accounts receivable.

Public entities will be required to provide these disclosures and statement of operations presentation for fiscal years and interim periods within those years beginning after December 15, 2011, fiscal 2013 for the Company, with early adoption permitted. It is not yet known what impact this ASU will have on the Company’s financial statements.

3. Discontinued Operations

As required under GAAP, the Company has classified the results of operations of the following entities within income from discontinued operations, net of taxes and the assets and liabilities of these entities have been classified within current and non-current assets and current and long-term liabilities of discontinued operations on the consolidated balance sheets.

Effective May 4, 2011 the Company sold the majority of the assets of its MedCath Partners division to DLP Healthcare, a joint venture of LifePoint Hospitals, Inc. and Duke University Health System. The transaction valued the assets sold at $25.0 million and involved the sale of certain North Carolina-based assets related to the operation of cardiac catheterization laboratories in North Carolina. MedCath has retained working capital related to the assets sold and also retained assets related to cath labs leased to two health care systems outside of North Carolina as well as its minority ownership in Coastal Carolina Heart. Further, MedCath retained certain assets and liabilities arising from this business that arose before closing. The transaction was completed effective May 4, 2011 with a gain of $21.3 million included in income (loss) from discontinued operations for the nine months ended June 30, 2011. As the MedCath Partners division met the criteria for classification as a discontinued operation, the previously reported gains and losses on sale of its equity interests have also been reclassified to discontinued operations. Such transactions are as follows:

•

Effective May 5, 2011, MedCath Partners sold its 9.2% ownership interest in Coastal Carolina Heart to New Hanover Regional Medical Center for $5.0 million and recognized a gain of $4.6 million.

•

On January 1, 2011, MedCath Partners sold its 14.8% equity interest in Central New Jersey Heart Services, LLC for $0.6 million and recognized a gain of $0.2 million.

•

On November 1, 2010, MedCath Partners sold its equity interest in Southwest Arizona Heart and Vascular Center, LLC for $7.0 million. The Company recognized a $1.8 million write down of its investment in the fourth quarter of fiscal 2010 to record the Company’s investment in such business at its net realizable value expected from the sale proceeds.

•

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

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

During November 2010, the Company entered into an agreement to sell substantially all of the assets of TexSan for $76.25 million, plus retained working capital. The transaction closed on December 31, 2010 with the Company retaining all accounts receivable and the hospital’s remaining liabilities. In addition, the Company acquired the partnership’s minority investors’ ownership in accordance with the terms of a call option agreement. See Note 7 for further discussion. The gain of $34.3 million has been included in income (loss) from discontinued operations for the nine months ended June 30, 2011.

During September 2010, the Company entered into an agreement to sell its subsidiary that provided consulting and management services tailored primarily to cardiologists and cardiovascular surgeons. Such subsidiary’s operations had historically been included in the Corporate and other division. Such subsidiary was sold in October 2010 for an immaterial loss.

During August 2010, the Company entered into a definitive agreement to sell certain of the hospital assets and liabilities, plus certain net working capital of AzHH for $32.0 million and the assumption of capital leases of $0.3 million. The transaction closed on October 1, 2010 with the limited liability company which owned AzHH retaining all accounts receivable and the hospital’s remaining liabilities. As part of its assessment of long-lived assets in June 2010, the Company recognized an impairment charge of $5.2 million based on its potential sales value of AzHH. Accordingly, the Company recognized a nominal gain on the sale for the nine months ended June 30, 2011.

During February 2010, the Company entered into an agreement to sell substantially all of the assets of HHA for $83.8 million plus retention of working capital to St. David’s Healthcare Partnership, L.P. The transaction closed on November 1, 2010. The gain of $35.7 million has been included in income (loss) from discontinued operations for the nine months ended June 30, 2011.

During May 2008, the Company sold the net assets of Dayton Heart Hospital (“DHH”) to Good Samaritan Hospital pursuant to a definitive agreement. As of June 30, 2011 and September 30, 2010, the Company had reserved $10.4 million and $9.8 million, respectively, for Medicare outlier payments received by DHH during the year ended September 30, 2004, which are included in current liabilities of discontinued operations in the consolidated balance sheets.

The Company has entered into transition services agreements with the buyers of certain of its sold assets that extend into fiscal 2011. As a result, the Company entered into a Managed Services Agreement with McKesson Technologies, Inc. (“McKesson”) whereby McKesson would employ the majority of the Company’s information technology employees effective November 1, 2010. In addition, to facilitate collection of outstanding accounts receivable at such entities, on February 11, 2011 the Company entered into a Master Agreement for Revenue Cycle Outsourcing with Dell Marketing L.P. (“Dell”) whereby Dell would assume the responsibility for collection of outstanding accounts receivable for our current and disposed of entities. Furthermore, Dell retained the services of certain employees that had been employed by the Company on or before March 7, 2011 and effective March 1, 2011, Dell has sublet certain space that had been previously utilized by Company personnel involved in the collection of accounts receivable.

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 June 30,								Nine Months Ended June 30,
		2011				2010				2011				2010
Net revenue		$	103			$	62,123			$	25,140			$	190,672
Gain from dispositions, net			25,947				—				95,850				—
Loss on early termination of debt			—				—				(11,130	)			—
Income before income taxes			24,808				3,828				81,232				866
Income tax (benefit) expense			9,548				1,083				27,757				(417	)
Net income			15,260				2,745				53,475				1,283
Less: Net loss (income) attributable to noncontrolling interest			159				(738	)			(8,846	)			(667	)
Net income attributable to MedCath Corporation		$	15,419			$	2,007			$	44,629			$	616

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

		June 30,				September 30,
		2011				2010
Cash and cash equivalents		$	43,201			$	14,137
Accounts receivable, net			1,936				25,267
Other current assets			358				10,559
Current assets of discontinued operations		$	45,495			$	49,963
Property and equipment, net		$	2,011			$	123,605
Other assets			1,072				12,353
Long-term assets of discontinued operations		$	3,083			$	135,958
Accounts payable		$	11,514			$	25,545
Accrued liabilities and current portion of obligations under capital leases			2,019				10,746
Current liabilities of discontinued operations		$	13,533			$	36,291
Long-term debt		$	—			$	35,803
Other long-term obligations			—				666
Long-term liabilities of discontinued operations		$	—			$	36,469

Included in the Company’s discontinued liabilities as of September 30, 2010 is a Real Estate Investment Trust Loan (the “REIT Loan”) aggregating $34.6 million. Borrowings under this REIT Loan were collateralized by a pledge of the Company’s interest in the related hospital’s property, equipment and certain other assets. The REIT Loan required monthly, interest-only payments for ten years, at which time the loan was due in full, maturing January 2016. The interest rate on this loan was 8 1/2%. Upon the disposition of the Company’s interest in the related hospital, the REIT Loan was repaid in full in November 2010 and the Company incurred an $11.1 million prepayment penalty, which is included in income (loss) from discontinued operations.

Included in discontinued operations are certain liabilities that the Company has retained upon the disposition of the related entity. Because the Company’s hospitals are organized as partnerships, upon disposition of the related operations, assets and certain liabilities, the partnerships are responsible for the resolution of outstanding payables, remaining obligations, including those related to cost reports, medical malpractice and other obligations and wind down of the respective tax filings of the partnership. The partnerships are also responsible for any unknown liabilities that may arise. The Company has reported all known obligations in its consolidated balance sheets as of June 30, 2011 and September 30, 2010.

4. Accounts Receivable

Accounts receivable, net, consists of the following:

		June 30,				September 30,
		2011				2010
Receivables, principally from patients and third-party payors		$	119,893			$	103,314
Other			2,311				1,912
			122,204				105,226
Less allowance for doubtful accounts			(77,781	)			(63,085	)
Accounts receivable, net		$	44,423			$	42,141

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

5. Investments in Affiliates

The Company’s determination of the appropriate consolidation method to follow with respect to investments in affiliates is based on the amount of control the Company has and the ownership level in the underlying entity. Investments in entities that the Company does not control, but over whose operations the Company has the ability to exercise significant influence (including investments where the Company has a less than 20% ownership) are accounted for under the equity method. The Company additionally considers if it is the primary beneficiary of (and therefore should consolidate) any entity whose operations the Company does not control. At June 30, 2011, all of the Company’s investments in unconsolidated affiliates are accounted for using the equity method. At June 30, 2011, the Company owns a noncontrolling interest in Harlingen Medical Center and certain other partnerships, for which the Company neither has substantive control over the ventures nor is the primary beneficiary. These investments are included in Other Assets on the consolidated balance sheets. In addition to these investments, the Company’s MedCath Partners division, which is presented as a discontinued operation, owned and/or disposed of certain investments prior to its disposition. Such investments and the gains/losses on dispositions are reflected in the assets and activities of discontinued operations.

On October 1, 2010, the Company sold its interest in Avera Heart Hospital of South Dakota for $25.1 million to Avera McKennan whereby Avera McKennan purchased a MedCath subsidiary which was the indirect owner of a one-third ownership interest. Prior to its disposition, the Company had accounted for its investment in Avera Heart Hospital of South Dakota using the equity method of accounting. The Company recognized a gain on the disposition of $15.4 million. The Company’s investment in Avera Heart Hospital of South Dakota reflected its proportionate share of an interest rate swap that the hospital had entered into. The cumulative unrealized loss of $0.5 million (net of taxes) was reclassified from Other Comprehensive Income as part of the gain in connection with the sale of the Company’s ownership interest.

The following tables represent summarized combined financial information of the Company’s unconsolidated affiliates accounted for under the equity method (for those entities in which the Company has disposed of its interest, the operating activities have been included through their respective date of disposition):

		Three Months Ended June 30,								Nine Months Ended June 30,
		2011				2010				2011				2010
Net revenue		$	27,437			$	44,877			$	84,787			$	130,775
Income from operations		$	2,719			$	6,391			$	10,503			$	18,551
Net income		$	812			$	4,130			$	4,677			$	11,825

		June 30,				September 30,
		2011				2010
Current assets		$	23,578			$	46,079
Long-term assets		$	75,710			$	111,262
Current liabilities		$	11,995			$	21,437
Long-term liabilities		$	96,337			$	120,451

6. Long-Term Debt

Long-term debt consists of the following:

		June 30,				September 30,
		2011				2010
Amended Credit Facility		$	—			$	66,563
Less current portion			—				(14,063	)
Long-term debt		$	—			$	52,500

On May 9, 2011 the Company used the net proceeds from the sale of MedCath Partners assets, along with available cash, to repay the $30.2 million then outstanding under its credit facility and also terminated the facility on that date.

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

Senior Secured Credit Facility — During November 2008, the Company amended and restated its then outstanding senior secured credit facility (the “Amended Credit Facility”). The Amended Credit Facility provided 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 included a $25.0 million sub-limit for the issuance of stand-by and commercial letters of credit (of which $1.7 million were outstanding as of September 30, 2010) and a $10.0 million sub-limit for swing-line loans. Borrowings under the Amended Credit Facility, excluding swing-line loans, bore interest per annum at a rate equal to the sum of LIBOR plus the applicable margin or the alternate base rate plus the applicable margin. The $66.6 million outstanding under the Amended Credit Facility at September 30, 2010 related to the Term Loan. No amounts were outstanding under the Revolver as of September 30, 2010. As noted above, the Amended Credit Facility was terminated in May 2011.

The Amended Credit Facility required 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 Amended Credit Facility also contained 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 Amended Credit Facility contained events of default, including cross-defaults to certain indebtedness, change of control events, and other events of default customary for syndicated commercial credit facilities.

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

On August 13, 2010, the Company and its lenders amended and restated the Senior Secured Credit Facility (the “First Amendment”). The Company entered into the First Amendment to provide additional financial and liquidity flexibility in connection with its previously announced effort to explore strategic alternatives. The First Amendment contained modifications of certain financial covenants and other requirements of the Amended Credit Facility; including, but not limited to: modifications to certain definitions contained in the Amended Credit Facility, including the definitions of certain financial terms to permit additional add backs (such as an add back for charges and professional expenses incurred in connection with asset dispositions), subject to maximum amounts in certain cases, and to the multiple applied to certain of the financial metrics derived in accordance with such definitions, for certain financial covenant calculations; increasing the amount of permitted guarantees of indebtedness by $10 million; amending the asset dispositions covenant to permit additional asset dispositions subject to no events of default and require that any net cash proceeds from an asset disposition or series of dispositions in excess of $50 million from the date of the First Amendment be applied 50% to repay the outstanding Term Loan amounts under the Amended Credit Facility and 50% to repay amounts outstanding under the Revolver or cash collateralize letters of credit to the extent outstanding and permanently reduce the Revolver by 50% of the net cash proceeds, which could shorten the term of the Revolver based on the amount of such permanent commitment reductions. In addition, any mandatory prepayments of the Revolver also reduced the revolving credit commitment by a corresponding amount.

The letters of credit were not permitted to remain outstanding after the full repayment of the Term Loan in May 2011. Accordingly, effective May 2011, the Company cash collateralized the outstanding letters of credit such that they could remain outstanding. Accordingly, the Company has included $1.8 million of cash that is restricted by the outstanding letters of credit as an other noncurrent asset.

Debt Covenants —As of September 30, 2010, the Company was in compliance with all covenants governing its outstanding debt.

Interest Rate Swap — During the year ended September 30, 2006 one of the hospitals in which the Company had a noncontrolling interest and accounted for under the equity method, entered into an interest rate swap for purposes of hedging variable interest payments on long term debt outstanding for that hospital. The interest rate swap is accounted for as a cash flow hedge by the hospital whereby changes in the fair value of the interest rate swap flow through comprehensive income of the hospital. The Company recorded its proportionate share of comprehensive income within stockholders’ equity in the consolidated balance sheets based on the Company’s ownership interest in that hospital. However, as noted in Note 5, the cumulative unrealized loss of $0.5 million (net of taxes) was reclassified from Other Comprehensive Income as part of the gain in connection with the sale of the Company’s ownership interest on October 1, 2010.

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

7. Contingencies and Commitments

Put and Call Options — During August 2010, the Company entered into a put/call agreement with the minority shareholders of one of its hospitals, whereby call and put options were added relative to the Company’s noncontrolling interest in the hospital. The call allowed the Company to acquire all of the noncontrolling interest in the hospital owned by physician investors for the net amount of the physician investors’ unreturned capital contributions adjusted upward for any proportionate share of additional proceeds upon a disposition transaction. The put allowed the Company’s noncontrolling shareholders in the hospital to put their shares to the Company for the net amount of the physician investors’ unreturned capital contributions. The noncontrolling shareholders’ recorded basis in their partnership interest was zero prior to the amendment of this agreement. Accordingly, the Company recognized a redeemable noncontrolling interest of $4.5 million ($2.9 million net of taxes) as of September 30, 2010. During December 2010, the Company exercised its call right and recognized additional redeemable noncontrolling interest of $2.2 million. Furthermore, upon exercise, the Company converted the outstanding balance of the noncontrolling interest in this partnership together with amounts due from the noncontrolling shareholders into a net obligation of $5.7 million, of which $4.6 million was paid during the nine months ended June 30, 2011 and $1.1 million remains in other accrued liabilities as of June 30, 2011.

During September 2010, the Company entered into a call agreement with other shareholders of one of its hospitals whereby the Company may exercise the call right to purchase the noncontrolling interest owned by physician investors for an amount equal to the net amount of the physician investors unreturned capital contributions ($2.6 million and $2.7 million at June 30, 2011 and September 30, 2010, respectively).

In January 2011, the Company entered into an agreement with the noncontrolling shareholders of one of its hospitals whereby the Company obtained the right to sell all or substantially all of the assets of that hospital. Concurrent with such amendment and as a condition thereto, an approval, consent and proxy were obtained from the Company’s noncontrolling members in the hospital. The approval, consent and proxy allows the Company to sell all or substantially all of the assets of that hospital and the Company will pay to the noncontrolling members the net amount of their unreturned capital contributions ($3.5 million at June 30, 2011) adjusted upward for any proportionate share of additional proceeds upon a disposition transaction.

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 commercial payors as well as the contractors who administer the Medicare program for 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.

CMS uses recovery audit contractors (“RAC”) to detect Medicare overpayments not identified through existing claims review mechanisms. 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 Health Care Reform Laws expanded the RAC program’s scope to include Medicaid claims by requiring all states to enter into contracts with RACs by December 31, 2010. The Company believes the claims for reimbursement submitted to the Medicare and Medicaid programs 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 June 30, 2011. 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 fiscal years 2008 and 2007, the Company refunded certain reimbursements to CMS related to carotid artery stent procedures performed during prior fiscal years at two of the Company’s 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 negotiated settlement agreements with the DOJ whereby the Company paid $0.8 million to settle and obtain releases from any federal civil false claims liability related to the DOJ’s investigation. The DOJ allegations did not involve patient care, and related solely to whether the procedures were properly reimbursable by Medicare. The settlement did not include any finding of wrong-doing or any admission of liability. Both settlement agreements were executed during fiscal 2010.

On March 12, 2010, the United States Department of Justice (“DOJ”) issued a Civil Investigative Demand (“CID”) to one of the Company’s hospitals regarding implantable cardioverter defibrillators (“ICD”) implantations. The CID was issued in connection with an ongoing, national investigation relating to ICDs and Medicare coverage requirements for these devices. The CID requested certain documents and patient medical records regarding the implantation of ICDs for the period 2002 to the present. The Company has provided materials responsive to the CID.

On September 17, 2010, consistent with letters received by other hospitals and hospital systems, DOJ sent a letter notifying the Company of DOJ’s investigation of eight Company hospitals regarding ICD implantations. In its letter, DOJ stated that its review was preliminary and its data suggests that Company hospitals may have submitted claims for ICDs and related services that were inconsistent with Medicare policy.

Based upon the Company’s legal advisors’ discussions and meetings with DOJ, the primary focus of the investigations involves ICDs implanted since October 1, 2003 within prohibited timeframes (i.e., timeframe violations). A “timeframe violation” involves an ICD implanted for “primary prevention” (i.e., prevention of sudden cardiac death in patients without a history of induced or spontaneous arrhythmias) within 30 days of a myocardial infarction, or within 90 days of a coronary artery bypass graft or percutaneous transluminal coronary angioplasty. The timeframes do not apply to ICDs implanted for “secondary prevention” (i.e., prevention of sudden cardiac death in patients who have survived a prior cardiac arrest or sustained ventricular tachyarrhythmia).

On November 19, 2010, DOJ provided the Company a spreadsheet detailing instances (based upon DOJ’s data) in which an ICD was implanted at the eight Company hospitals in potential violation of the applicable timeframes. The data provided by DOJ is “raw,” and the Company understands that, as of this date, such data had not been analyzed by DOJ. Additionally, DOJ confirmed that some of the ICDs identified in its data as alleged timeframe violations were in fact appropriately implanted and billed to Medicare, including those implanted for secondary prevention.

On February 17, 2011, legal counsel for the Company met with representatives of DOJ to discuss the agency’s review of the patient medical records provided in response to the CID. In addition to discussing DOJ’s review process, DOJ reconfirmed that certain ICD implantations were not being examined by the agency. As noted above, these include implantations prior to October 1, 2003 and implantations for secondary (rather than primary) prevention. With respect to primary prevention implantations, the Company discussed clinical comments supporting the implantations and agreed to additional meetings and presentations regarding those implantations for other Company hospitals. In that regard, the Company has engaged a physician-expert to assist with patient medical record reviews.

During the period March 2011 through July 2011, legal counsel for the Company has met on multiple occasions with representatives of DOJ to discuss the investigation and present preliminary findings regarding an internal review of a Company hospital other. These preliminary findings were submitted to DOJ, reviewed by its experts, and continue to be discussed by the parties. The Company intends to similarly present and submit findings for its other hospitals under investigation.

As discussed above, the Company has complied with all requests from DOJ for information, is actively engaged in discussions with DOJ regarding the issues involved in the investigation, and continues developing and presenting arguments supporting the ICD implantations. Pursuant to DOJ’s request, the Company has entered into a tolling agreement that tolls the statute of limitations for allegations related to ICDs until October 2011. To date, DOJ has not asserted any claims against the Company and the Company expects to continue to have input into the investigation. Because the investigation is in its early stages, however, the Company is unable to evaluate the outcome of the investigations. The Company’s total ICD net revenue is a material component of total net patient revenue and the results of this investigation could have a material adverse effect on the Company’s financial condition, results of operations and cash flows and a material adverse effect on the amount the Company is able to distribute to its stockholders in connection with the proposed liquidation and dissolution (see note 16).

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

On January 8, 2009, the California Supreme Court ruled in Prospect Medical Group, Inc., et al. v. Northridge Emergency Medical Group, et al. (2009) 45 Cal. 4^th 497, that under California’s Knox-Keene statute healthcare providers may not bill patients for covered emergency out-patient services for which health plans or capitated payors are invoiced by the provider but fail to pay the provider. The California Supreme Court held that the only recourse for healthcare providers is to pursue the payors directly. The Prospect decision does not apply to amounts that the health plan or capitated payor is not obligated to pay under the terms of the insured’s policy or plan. Although the decision only considered emergency providers and referred to HMOs and capitated payors, future court decisions on how the so-called “balance billing” statute is interpreted does pose a risk to healthcare providers that perform emergency or other out-patient services in the state of California.

During October, 2009, a purported class action law suit was filed by an individual against the Bakersfield Heart Hospital, a consolidated subsidiary of the Company. In the complaint the plaintiff alleges that under California law, and 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. On November 24, 2010, the court granted the Bakersfield Heart Hospital’s motion to strike plaintiff’s class allegations, which the plaintiff appealed. Thereafter, the parties discussed settlement and the matter settled in February 2011. The parties executed a Settlement and Release Agreement, and plaintiff dismissed his Complaint with prejudice and his pending appeal. Local counsel has advised that plaintiff’s counsel could locate another class representative to reinstitute the case, but the possibility became more remote as time passes due to the statute of limitations.

During June 2010 and 2009, the Company entered into 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 also purchased additional insurance to reduce the retained liability per claim to $250,000 for the MedCath Partners Division, for each respective fiscal year. 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 June 30 2011 and September 30, 2010, 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 $2.4 million and $2.5 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. As of October 9, 2010, the Company entered into a guaranteed cost plan for workman’s compensation. The Company was also covered by a guaranteed cost program up to September 2007. From October 2007 through 2010, the Company was self-insured with loss limitations of $250,000 per occurrence with no annual aggregate limits. The total estimated reserve for self-insured liabilities for workman’s compensation, employee health and dental claims was $2.2 million and $3.3 million as of June 30, 2011 and September 30, 2010, 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 programs 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 and anesthesiology services, among other services. These guarantees extend for the duration of the underlying service agreements. As of June 30, 2011, the maximum potential future payments that the Company could be required to make under these guarantees was $25.6 million through May 2014. At June 30, 2011 the Company had total liabilities of $10.0 million for the fair value of these guarantees, of which $7.5 million is in other accrued liabilities and $2.5 million is in other long term obligations. Additionally, the Company had assets of $10.5 million representing the future services to be provided by the physicians, of which $7.5 million is in prepaid expenses and other current assets and $3.0 million is in other assets.

8. Earnings per Share Data

Basic — The calculation of basic earnings per share includes 194,100 and 150,900 of restricted stock units that have vested but as of June 30, 2011 and 2010, respectively, have not been converted into common stock.

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

Diluted — The calculation of diluted earnings per share considers the potential dilutive effect of options to purchase 782,562, and 971,637 shares of common stock at prices ranging from $9.95 to $33.05, which were outstanding at June 30, 2011 and 2010, respectively. Dilutive options of 6,607 have been included in the calculation of diluted earnings (loss) per share for the three months ended June 30, 2011. Dilutive options of 6,146 have been included in the calculation of diluted earnings (loss) per share for the nine months ended June 30, 2011. Of the outstanding stock options, 758,750 options have not been included in the calculation of diluted earnings per share for the three and nine months ended June 30, 2011, because the options were anti-dilutive. No options or restricted stock were included in the calculation of diluted earnings per share for the three and nine months ended June 30, 2010, as the consideration of such shares would be anti-dilutive due to the loss from continuing operations, net of tax.

9. Stock Based Compensation

Compensation expense from the grant of equity awards made to employees and directors are 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 nine months ended June 30, 2011 was $0.4 million and $3.3 million, respectively. The associated tax benefits related to the compensation expense recognized for the three and nine months ended June 30, 2011 was $0.2 million and $1.3 million, respectively. Stock based compensation expense recorded during the three and nine months ended June 30, 2010 was $0.6 million and $2.4 million, respectively. The associated tax benefits related to the compensation expense recognized for the three and nine months ended June 30, 2010 was $0.2 million and $1.0 million, respectively.

Stock Options

The following tables summarize the Company’s stock option activity:

		For the Three Months Ended
		June 30, 2011								June 30, 2010
						Weighted-								Weighted-
		Number of				Average				Number of				Average
		Stock Options				Exercise Price				Stock Options				Exercise Price
Outstanding stock options, beginning of period			854,812			$	21.86				975,637			$	22.14
Cancelled			(72,250	)			23.58				(4,000	)			16.91
Outstanding stock options, end of period			782,562			$	21.70				971,637			$	22.17

		For the Nine Months Ended
		June 30, 2011								June 30, 2010
						Weighted-								Weighted-
		Number of				Average				Number of				Average
		Stock Options				Exercise Price				Stock Options				Exercise Price
Outstanding stock options, beginning of period			932,137			$	21.89				1,027,387			$	22.25
Cancelled			(149,575	)			22.84				(55,750	)			23.80
Outstanding stock options, end of period			782,562			$	21.70				971,637			$	22.17

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

Restricted Stock Awards

During the three and nine months ended June 30, 2011 and the three months ended June 30, 2010, the Company did not grant any shares of restricted stock to employees. During the nine months ended June 30, 2010, the Company granted to employees 401,399 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. All unvested restricted stock granted to employees becomes fully vested upon a change in control of the Company as defined in the Company’s 2006 Stock Option and Award Plan. During the nine months ended June 30, 2011 and 2010, the Company granted 43,200 and 89,600 shares of restricted stock units to directors, respectively. No restricted stock units were granted during the three months ended June 30, 2011 and 2010. The restricted stock units granted to directors were fully vested at the date of grant. The Compensation Committee approved the termination of the restricted stock unit plan under which the restricted stock units were granted to directors and the units were paid to the directors in shares of common stock on August 1, 2011. At June 30, 2011, the Company had $1.0 million of unrecognized compensation expense associated with restricted stock awards.

The following tables summarize the Company’s restricted stock award activity:

		For the Three Months Ended
		June 30, 2011								June 30, 2010
		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			476,012			$	8.53				1,025,700			$	8.49
Vested			(17,062	)			7.98				(37,800	)			7.56
Cancelled			(5,850	)			7.40				(52,870	)			8.04
Outstanding restricted stock awards and units, end of period			453,100			$	8.57				935,030			$	8.63

		For the Nine Months Ended
		June 30, 2011								June 30, 2010
		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			884,285			$	8.67				654,327			$	9.64
Granted			43,200				13.89				490,999				7.24
Vested			(452,234	)			9.33				(141,695	)			8.65
Cancelled			(22,151	)			7.68				(68,601	)			8.28
Outstanding restricted stock awards and units, end of period			453,100			$	8.57				935,030			$	8.63

10. Reportable Segment Information

Through March 31, 2011, the Company’s reportable segments consisted of the Hospital Division and the MedCath Partners Division. However, during the third quarter of fiscal 2011, the Company disposed of its interest in the Partners Division. Accordingly, the Company has recast the presentation of the Partners Division as a discontinued operation (see Note 3). As a result, the Company’s sole reporting segment is the Hospital Division.

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

Financial information concerning the Company’s operations by the reportable segment and Corporate and other as of and for the periods indicated is as follows:

		Three Months Ended June 30,								Nine Months Ended June 30,
		2011				2010				2011				2010
Net revenue:
Hospital Division		$	91,766			$	93,030			$	273,379			$	271,293
Corporate and other			73				109				238				332
Consolidated totals		$	91,839			$	93,139			$	273,617			$	271,625
(Loss) income from operations:
Hospital Division		$	2,663			$	(18,188	)		$	(6,953	)		$	(27,569	)
Corporate and other			(5,586	)			(4,233	)			(14,761	)			(10,090	)
Consolidated totals		$	(2,923	)		$	(22,421	)		$	(21,714	)		$	(37,659	)

		June 30,				September 30,
		2011				2010
Aggregate identifiable assets:
Hospital Division		$	257,508			$	417,656
Corporate and other			146,668				76,882
Consolidated totals		$	404,176			$	494,538

Substantially all of the Company’s net revenue in its Hospital 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 $44.3 million and $165.7 million of assets related to discontinued operations as of June 30, 2011 and September 30, 2010, respectively. The Corporate and other assets include $4.2 million and $20.2 million of assets related to discontinued operations as of June 30, 2011 and September 30, 2010, respectively.

11. Business Ownership Changes

Change in Ownership Due to Cancellation of Stock Subscription Receivable — Upon the formation of Hualapai Mountain Medical Center the minority owners entered into stock subscription agreements whereby they paid for their ownership in two installments. At the date of formation, the amount due from the minority owners was recorded as a stock subscription receivable. During the fourth quarter of fiscal 2010, several minority owners did not submit the final installment. As a result, and per the partnership operating agreement, the proportionate ownership was transferred to the Company and the stock subscription receivable was reduced accordingly. As a result, the Company’s ownership in HMMC increased from 79.00% to 82.49%.

12. Comprehensive (Loss) Income

		Three Months Ended June 30,								Nine Months Ended June 30,
		2011				2010				2011				2010
Net income (loss)		$	14,022			$	(10,461	)		$	52,211			$	(20,964	)
Changes in fair value of interest rate swap, net of tax benefit			—				(67	)			—				(35	)
Reclassification of amounts included in net income, net of tax expense			—				—				444				—
Comprehensive income (loss)			14,022				(10,528	)			52,655				(20,999	)
Less: Net income attributable to noncontrolling interest			(1,691	)			(2,355	)			(16,336	)			(5,718	)
Comprehensive income (loss) attributable to MedCath Corporation common stockholders		$	12,331			$	(12,883	)		$	36,319			$	(26,717	)

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

13. Property and Equipment

		June 30,				September 30,
		2011				2010
Land		$	15,412			$	17,635
Buildings			134,483				149,704
Equipment			128,333				131,581
Construction in progress			545				25
Total, at cost			278,773				298,945
Less accumulated depreciation			(134,958	)			(124,658	)
Property and equipment, net		$	143,815			$	174,287

The Company recorded $0.8 million and $20.4 million of impairment charges to the consolidated statement of operations during the three and nine months ended June 30, 2011. See Note 1 for further discussion related to these impairment charges.

14. Fair Value Measurements

The Company’s non-financial assets and liabilities not permitted or required to be measured at fair value on a recurring basis typically relate to long-lived assets held and used and long-lived assets held for sale (including investments in affiliates). Fair values are determined as follows:

•

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.

•

Level 2 inputs utilize data points that are observable, such as independent third party market offers.

•

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 discounted cash flows or third party appraisals.

Impairment for

Quoted

Significant

the three

Market

Significant Other

Unobservable

month period

Price

Observable Inputs

Inputs

ended June 30,

(Level 1)

(Level 2)

(Level 3)

2011

Long-lived assets held and used

$

—

$

—

$

4,045

$

810

Quoted

Significant

Impairment for

Market

Significant Other

Unobservable

the nine month

Price

Observable Inputs

Inputs

period ended

(Level 1)

(Level 2)

(Level 3)

June 30, 2011

Long-lived assets held and used

$

—

$

—

$

48,745

$

20,358

As described in Note 1, the Company recorded an impairment charge of $19.5 million for the write-down of buildings and equipment in the Hospital Division. The charge relates to two of the Company’s hospitals in which there was a decline in the fair value of equipment based on discounted cash flows. In addition, the Company recorded an impairment charge of $0.8 million for the write-down of land in the Corporate and other segment.

Based on Level 2 inputs, the fair value of long-term debt, including the current portion, at September 30, 2010 was $108.1 million ($41.5 million related to discontinued operations) as compared to carrying values of $101.2 million ($34.6 million related to discontinued operations). The fair value of the Company’s variable rate debt was determined to approximate its carrying value due to the underlying variable interest rates.

The Company’s cash equivalents are measured utilizing Level 1 inputs.

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

15. Section 382 Rights Plan

On June 13, 2011, the Company entered into the Section 382 Rights Plan (the “Rights Plan”), between the Company and American Stock Transfer & Trust Company, LLC as rights agent. In connection with the adoption of the Rights Plan, on June 13, 2011, the Board of Directors of the Company declared a dividend of one preferred share purchase right (the “Rights”) for each outstanding share of common stock of the Company under the terms of the Plan. The dividend was paid on June 29, 2011 to the stockholders of record as of the close of business on June 29, 2011 (the “Record Date”). Each Right entitles the registered holder to purchase from the Company one one-thousandths of a share of Series A Junior Participating Preferred Stock, par value $0.01 per share, of the Company (the “Preferred Stock”) at a price of $20.00 per one one-thousandths of a share of Preferred Stock, subject to adjustment.

By adopting the Plan, the Board is seeking to preserve for the Company’s stockholders the value or availability of certain of the Company’s tax attributes (the “Tax Attributes”). The Company currently has Tax Attributes which may entitle the Company to either reduce income taxes that may otherwise become due or to seek a refund of income taxes due with respect to the Company’s current fiscal 2011 tax year totaling up to as much as $40.0 million of tax reductions. These Tax Attributes may be materially reduced or eliminated by a “change of ownership” of the Company under Section 382 of the Internal Revenue Code (a “change of ownership”). If a change of ownership were to occur, the actual amount of Tax Attributes that could be materially reduced or eliminated would depend upon various factors, which among others include: (i) when the change of ownership occurred, (ii) the order in which certain hospitals owned by the Company are sold, (iii) the final sale price of certain hospitals owned by the Company and (iv) the timing of the liquidation of certain of the Company’s subsidiary limited liability companies or limited partnerships which have already sold their hospitals. Generally, a change of ownership will occur if the percentage of the Company’s stock owned by one or more “five percent stockholders” increases by more than fifty percentage points over the lowest percentage of stock owned by such stockholders at any time during the prior three-year period or, if sooner, since the last change of ownership experienced by the Company.

The Plan is intended to act as a deterrent to any person acquiring 4.99% or more of the outstanding shares of the Company’s Common Stock or any existing 4.99% or greater holder from acquiring any additional shares without the approval of the Board. This would mitigate the threat that share ownership changes present to the Company’s Tax Attributes because changes in ownership by a person owning less than 4.99% of the Common Stock are not included in the calculation of “change of ownership” for purposes of Section 382 of the Internal Revenue Code. The Plan includes a procedure whereby the Board may consider requests to exempt certain proposed acquisitions of Common Stock from the applicable ownership trigger if the Board determines that the requested acquisition will not limit or impair the value or availability of the Tax Attributes to the Company.

The Rights will cause substantial dilution to a person or group that acquires 4.99% or more of the Common Stock on terms not approved by the Company’s Board of Directors. The Rights should not interfere with any merger or other business combination approved by the Board at any time prior to the first date that a person or group has become an Acquiring Person.

16. Subsequent Events

At the annual shareholder’s meeting on July 26, 2011, the majority of the Company’s shareholders approved the disposition of the Company’s equity in Arkansas Heart Hospital and, along with the Company’s physician partners, to sell certain assets and liabilities of Heart Hospital of New Mexico (the “Transactions”). Accordingly, the Company closed on the Transactions on August 1, 2011.

As the entities disposed of pursuant to the above Transactions did not qualify for discontinued operations treatment as of June 30, 2011, their assets and liabilities and results of operations are included in continuing operations. Accordingly, the Company has presented the supplementary results of operations and the assets and liabilities of these businesses as follows:

		Three Months Ended June 30,								Nine Months Ended June 30,
		2011				2010				2011				2010
Net revenue		$	49,759			$	50,811			$	148,798			$	146,628
Income before income taxes		$	4,431			$	6,183			$	19,897			$	17,389
Net income attributable to noncontrolling interest		$	(1,101	)		$	(1,491	)		$	(5,108	)		$	(4,111	)

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

		June 30,				September 30,
		2011				2010
Cash and cash equivalents		$	9,793			$	9,684
Accounts receivable, net			22,034				21,156
Other current assets			8,730				9,898
Current assets		$	40,557			$	40,738
Property and equipment, net		$	64,270			$	69,390
Other assets			1,259				2,091
Long-term assets		$	65,529			$	71,481
Accounts payable		$	9,279			$	7,013
Accrued liabilities and current portion of obligations under capital leases			11,677				14,863
Current liabilities		$	20,956			$	21,876
Obligations under capital leases, less current portion		$	3,641			$	5,044
Other long-term obligations			1,003				1,798
Long-term liabilities		$	4,644			$	6,842

On August 5, 2011 the Company filed a proxy statement seeking (a) shareholder approval to sell all or substantially all of the remaining assets of the Company prior to filing a certificate of dissolution and approval of a series of distributions in complete liquidation of the Company (as defined in Section 346(a) of the Internal Revenue code of 1986, as amended), and (b) shareholder approval to dissolve the Company and the Plan of Complete Liquidation and Dissolution pursuant to which the Company will be dissolved. If shareholder approval to dissolve the Company is obtained and the Board of Directors adopts a plan of dissolution then the Company will change its basis of accounting from the going-concern basis to the liquidation basis of accounting.

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” for the fiscal year ended September 30, 2010.

Overview

General. We are a healthcare provider focused primarily on providing high acuity services, including 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. As noted below, during the first quarter of fiscal 2011, we sold three of our majority owned hospitals and our equity interest in one of our minority owned hospitals. As a result, at June 30, 2011, we owned interests in six hospitals, with a total of 533 licensed beds, of which 489 are staffed and available, and that are located in: Arizona, Arkansas, California, Louisiana, New Mexico and Texas. Each of our hospitals is a freestanding, licensed general acute care hospital that provides a wide range of health services with a majority focus on cardiovascular care. Each of our hospitals has a 24-hour emergency room staffed by emergency department physicians. Subsequent to June 30, 2011, we disposed of our interest in two hospitals located in Arkansas and New Mexico that had 167 licensed beds.

In addition to our hospitals, through May 4, 2011, we owned and/or managed seven cardiac diagnostic and therapeutic facilities. On that date, we disposed of our interest in these facilities. Six of these facilities were located at hospitals operated by other parties. These facilities offered invasive diagnostic and, in some cases, therapeutic procedures. The remaining facility was not located at a hospital and offered only diagnostic procedures. The Company also operated two mobile cardiac catheterization laboratories which operate on set routes and offer only diagnostic procedures. We refer to our diagnostics division as “MedCath Partners.”

On March 1, 2010, we announced that our Board of Directors had formed a Strategic Options Committee to consider the sale either of the Company or the sale of our individual hospitals and other assets. We retained Navigant Capital Advisors as our financial advisor to assist in this process. Since announcing the exploration of strategic alternatives on March 1, 2010, we have completed several transactions, including the disposition of Arizona Heart Hospital, the disposition of our wholly owned subsidiary that held 33.3% ownership of Avera Heart Hospital of South Dakota, the disposition of Heart Hospital of Austin, the disposition of our approximate 27.0% ownership interest in Southwest Arizona Heart and Vascular, LLC, the disposition of TexSan Heart Hospital and the disposition of our MedCath Partners division. Since the completion of these sales (occurring before June 30, 2011), we have received $143.6 million in total cash proceeds, net of partner distributions and currently estimate that we may receive an additional $27.0 million to $28.0 million after we complete the liquidation of any remaining working capital and the estimated payment of income taxes for the legal entities we continue to own, but prior to any estimate for any unknown liabilities and contingencies. This estimate will be updated periodically during the wind-down of these entities.

Since March 1, 2010, we have incurred approximately $14.9 million in expenses directly related to the strategic options process. These costs include legal, consulting, board fees, retention bonuses and closing costs related to transactions. Our strategic options costs will continue to be material and we may incur material costs related to contingencies that are currently unknown.

We cannot assure our investors that our continuing efforts to enhance stockholder value as part of our strategic options process will be successful. We do not know whether our stockholders will approve the proposals included in the August proxy which was filed on August 5, 2011 as part of our strategic options process. If those proposals are approved, we do not know whether we will be able to successfully sell our interests in our remaining hospitals and our other remaining assets. Although the strategic options process is on-going and expected to continue throughout fiscal 2012 and possibly beyond, we have begun to consider a number of scenarios for distributing available cash to our stockholders such as liquidating distributions as part of a plan of complete liquidation and as part of the dissolution of the Company as described in the August Proxy. However, many other unknown variables will affect the amount, timing and mechanics of any potential liquidating distributions to stockholders. Final amounts available to stockholders will be diminished or affected by the payment or establishment of reserves to satisfy any liabilities arising out of the ICD investigation (see Note 7), other currently unknown or unanticipated liabilities and the establishment of a reserve of such additional amount as the Board of Directors determines to be necessary or appropriate under the applicable law with respect to additional liabilities that may arise or be identified in connection with and after the dissolution of the Company which is described in the August Proxy, asset and corporate wind-down related operating and other expenses (all of which liabilities and reserves may be material), as well as the realization of certain tax attributes, approvals that may be required to sell our remaining assets, the inability to collect all amounts owed to us and other unforeseen events.

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 impacted 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.

		Consolidated								Consolidated
		Three Months Ended June 30,								Nine Months Ended June 30,
Payor		2011				2010				2011				2010
Medicare			50.9	%			51.8	%			51.6	%			52.4	%
Medicaid			4.1	%			6.1	%			4.5	%			5.1	%
Commercial and other, including self-pay			45.0	%			42.1	%			43.9	%			42.5	%
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 will 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, retroactive and prospective rate adjustments, administrative rulings, court decisions, audits, investigations, executive orders and freezes and funding reductions, all of which may significantly affect our business. In addition, reimbursement is generally subject to adjustment and possible recoupment following audit by all third party payors, including commercial payors and the contractors who administer the Medicare program for the Center for Medicare and Medicaid Services (“CMS’) as well as the Office of Inspector General. 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 June 30, 2011 Compared to Three Months Ended June 30, 2010

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 June 30,
		(in thousands except percentages)
										Increase/
										(Decrease)				% of Net Revenue
		2011				2010				%				2011				2010
Net revenue		$	91,839			$	93,139				(1.4	)%			100.0	%			100.0	%
Operating expenses:
Personnel expense			31,514				31,090				1.4	%			34.3	%			33.4	%
Medical supplies expense			24,219				23,559				2.8	%			26.4	%			25.3	%
Bad debt expense			10,767				10,782				(0.1	)%			11.7	%			11.5	%
Other operating expenses			23,919				21,915				9.1	%			26.0	%			23.5	%
Depreciation			3,745				5,389				(30.5	)%			4.1	%			5.8	%
Impairment of property and equipment			810				22,813				100.0	%			0.9	%			24.5	%
(Gain) loss on disposal of property, equipment and other assets			(212	)			12				1866.7	%			—				—
Loss from operations			(2,923	)			(22,421	)			(87.0	)%			(3.2	)%			(24.1	)%
Other income (expenses):
Interest expense			(556	)			(1,050	)			(47.0	)%			(0.5	)%			(1.1	)%
Interest and other income			76				56				35.7	%			—				—
Equity in net earnings of unconsolidated affiliates			303				1,391				(78.2	)%			0.3	%			1.5	%
Loss from continuing operations before income taxes			(3,100	)			(22,024	)			(85.9	)%			(3.4	)%			(23.7	)%
Income tax benefit			(1,862	)			(8,818	)			(78.9	)%			(2.0	)%			(9.5	)%
Loss from continuing operations			(1,238	)			(13,206	)			(90.6	)%			(1.2	)%			(14.2	)%
Income from discontinued operations, net of taxes			15,260				2,745				455.9	%			16.6	%			2.9	%
Net income (loss)			14,022				(10,461	)			(234.0	)%			15.3	%			(11.2	)%
Less: Net income attributable to noncontrolling interest			(1,691	)			(2,355	)			(28.2	)%			(1.8	)%			(2.5	)%
Net income (loss) attributable to MedCath Corporation		$	12,331			$	(12,816	)			(196.2	)%			13.4	%			(13.8	)%
Amounts attributable to MedCath Corporation common stockholders:
Loss from continuing operations, net of taxes		$	(3,088	)		$	(14,823	)			(79.2	)%			(3.4	)%			(15.9	)%
Income from discontinued operations, net of taxes			15,419				2,007				668.3	%			16.8	%			2.2	%
Net income (loss)		$	12,331			$	(12,816	)			(196.2	)%			13.4	%			(13.8	)%