MEDCATH CORP - FORM 10-Q - February 9, 2011

Attached files

file	filename
EX-31.2 - EX-31.2 - MEDCATH CORP	g26053exv31w2.htm
EX-10.2 - EX-10.2 - MEDCATH CORP	g26053exv10w2.htm
EX-10.3 - EX-10.3 - MEDCATH CORP	g26053exv10w3.htm
EX-31.1 - EX-31.1 - MEDCATH CORP	g26053exv31w1.htm
EX-32.2 - EX-32.2 - MEDCATH CORP	g26053exv32w2.htm
EX-10.4 - EX-10.4 - MEDCATH CORP	g26053exv10w4.htm
EX-32.1 - EX-32.1 - MEDCATH CORP	g26053exv32w1.htm
EX-10.1 - EX-10.1 - MEDCATH CORP	g26053exv10w1.htm

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.

For the quarterly period ended December 31, 2010


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

Commission File Number 000-33009

MEDCATH CORPORATION

(Exact name of registrant as specified in its charter)


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

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

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

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

Yes þ No o

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

Yes o No þ

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 February 4, 2011, there were 20,308,070 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 Financial Statements		3
Consolidated Balance Sheets as of December 31, 2010 and September 30, 2010		3
Consolidated Statements of Operations for the Three Months Ended December 31, 2010 and 2009		4
Consolidated Statement of Stockholders’ Equity for the Three Months Ended December 31, 2010		5
Consolidated Statements of Cash Flows for the Three Months Ended December 31, 2010 and 2009		6
Notes to Unaudited Consolidated Financial Statements		7
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		18
Item 3. Quantitative and Qualitative Disclosures About Market Risk		26
Item 4. Controls and Procedures		26
PART II. OTHER INFORMATION		26
Item 1. Legal Proceedings		26
Item 1A. Risk Factors		26
Item 6. Exhibits		26
SIGNATURES		28
EX-10.1
EX-10.2
EX-10.3
EX-10.4
EX-31.1
EX-31.2
EX-32.1
EX-32.2

PART I. FINANCIAL INFORMATION

Item 1. Unaudited Financial Statements

MEDCATH CORPORATION

CONSOLIDATED BALANCE SHEETS

(In thousands, except per share data)

(Unaudited)


	December 31,			September 30,
	2010			2010

Current assets:
Cash and cash equivalents	$	158,475		$	33,141
Accounts receivable, net		44,795			43,811
Income tax receivable		—			6,188
Medical supplies		10,644			10,550
Deferred income tax assets		7,815			13,247
Prepaid expenses and other current assets		12,902			13,453
Current assets of discontinued operations		57,345			47,920

Total current assets		291,976			168,310
Property and equipment, net		176,885			182,222
Other assets		11,652			24,716
Non-current assets of discontinued operations		1,232			119,290

Total assets	$	481,745		$	494,538


Current liabilities:
Accounts payable	$	19,957		$	15,716
Income tax payable		14,316			—
Accrued compensation and benefits		11,705			16,418
Other accrued liabilities		21,073			16,663
Current portion of long-term debt and obligations under capital leases		61,573			16,672
Current liabilities of discontinued operations		17,014			35,044

Total current liabilities		145,638			100,513
Long-term debt		—			52,500
Obligations under capital leases		5,822			6,500
Other long-term obligations		3,883			5,053
Long-term liabilities of discontinued operations		—			35,968

Total liabilities		155,343			200,534

Commitments and contingencies (See Note 7)

Redeemable noncontrolling interest in equity of consolidated subsidiaries		5,812			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; 22,262,431 issued and 20,308,070 outstanding at December 31, 2010 22,423,666 issued and 20,469,305 outstanding at September 30, 2010		216			216
Paid-in capital		457,952			457,725
Accumulated deficit		(102,752	)		(139,791	)
Accumulated other comprehensive loss		—			(444	)
Treasury stock, at cost; 1,945,361 shares at December 31, 2010 and September 30, 2010		(44,797	)		(44,797	)

Total MedCath Corporation stockholders’ equity		310,619			272,909
Noncontrolling interest		9,971			9,561

Total equity		320,590			282,470

Total liabilities and equity	$	481,745		$	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 December 31,
	2010			2009

Net revenue	$	88,900		$	87,830
Operating expenses:
Personnel expense		32,454			31,636
Medical supplies expense		19,222			22,107
Bad debt expense		9,709			7,506
Other operating expenses		24,116			22,344
Pre-opening expenses		—			866
Depreciation		4,887			5,938
Loss on disposal of property, equipment and other assets		93			96

Total operating expenses		90,481			90,493

Loss from operations		(1,581	)		(2,663	)
Other income (expenses):
Interest expense		(1,082	)		(945	)
Interest and other income		489			70
Gain on sale of unconsolidated investees		15,391			—
Equity in net earnings of unconsolidated affiliates		602			1,516

Total other income (expense), net		15,400			641

Income (loss) from continuing operations before income taxes		13,819			(2,022	)
Income tax expense (benefit)		4,482			(1,337	)

Income (loss) from continuing operations		9,337			(685	)
Income (loss) from discontinued operations, net of taxes		39,128			(1,130	)

Net income (loss)		48,465			(1,815	)
Less: Net income attributable to noncontrolling interest		(11,426	)		(841	)

Net income (loss) attributable to MedCath Corporation	$	37,039		$	(2,656	)


Amounts attributable to MedCath Corporation common stockholders:
Income (loss) from continuing operations, net of taxes	$	7,162		$	(1,902	)
Income (loss) from discontinued operations, net of taxes		29,877			(754	)

Net income (loss)	$	37,039		$	(2,656	)


Earnings (loss) per share, basic
Income (loss) from continuing operations attributable to MedCath Corporation common stockholders	$	0.36		$	(0.09	)
Income (loss) from discontinued operations attributable to MedCath Corporation common stockholders		1.50			(0.04	)

Earnings (loss) per share, basic	$	1.86		$	(0.13	)


Earnings (loss) per share, diluted
Income (loss) from continuing operations attributable to MedCath Corporation common stockholders	$	0.36		$	(0.09	)
Income (loss) from discontinued operations attributable to MedCath Corporation common stockholders		1.50			(0.04	)

Earnings (loss) per share, diluted	$	1.86		$	(0.13	)


Weighted average number of shares, basic		19,943			19,743
Dilutive effect of stock options and restricted stock		4			—

Weighted average number of shares, diluted		19,947			19,743

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
Share based compensation		—			—		1,932			—			—			—		—			—			1,932			—
Tax withholdings for vested restricted stock awards		(162	)		—		(1,705	)		—			—			—		—			—			(1,705	)		—
Distributions to noncontrolling interest		—			—		—			—			—			—		—			(7,568	)		(7,568	)		(3,560	)
Other transactions impacting noncontrolling interest					—		—			—			—			—		—			45			45			45
Exercise of call of noncontrolling interest		—			—		—			—			—			—		—			—			—			(5,700	)
Comprehensive loss:
Net income		—			—		—			37,039			—			—		—			7,933			44,972			3,493
Reclassification of amounts included in net income, net of tax benefit (*)		—			—		—			—			444			—		—			—			444			—

Total comprehensive income																								45,416			3,493

Balance, December 31, 2010		22,262		$	216	$	457,952		$	(102,752	)	$	—			1,954	$	(44,797	)	$	9,971		$	320,590		$	5,812


(*)		Tax expense was $286 for the quarter ended December 31, 2010.

See notes to unaudited consolidated financial statements.

MEDCATH CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)


	Three Months Ended December 31,
	2010			2009
Net income (loss)	$	48,465		$	(1,815	)
Adjustments to reconcile net income to net cash provided by operating activities:
(Income) loss from discontinued operations, net of taxes		(39,128	)		1,130
Bad debt expense		9,709			7,506
Depreciation		4,887			5,938
Gain on sale of unconsolidated investees		(15,391	)		—
Loss on disposal of property, equipment and other assets		93			96
Share-based compensation expense		1,932			608
Amortization of loan acquisition costs		313			252
Equity in earnings of unconsolidated affiliates, net of distributions received		(84	)		6,217
Deferred income taxes		1,085			(103	)
Change in assets and liabilities that relate to operations:
Accounts receivable		(10,693	)		(12,106	)
Medical supplies		(94	)		(73	)
Prepaid and other assets		2,266			(3,088	)
Accounts payable and accrued liabilities		(2,825	)		(2,523	)

Net cash provided by operating activities of continuing operations		535			2,039
Net cash (used in) provided by operating activities of discontinued operations		(5,131	)		1,496

Net cash (used in) provided by operating activities		(4,596	)		3,535

Investing activities:
Purchases of property and equipment		(157	)		(7,532	)
Proceeds from sale of property and equipment		418			70
Proceeds from sale of unconsolidated affiliates		31,851			—

Net cash provided by (used in) investing activities of continuing operations		32,112			(7,462	)
Net cash provided by (used in) investing activities of discontinued operations		194,616			(1,774	)

Net cash provided by (used in) investing activities		226,728			(9,236	)

Financing activities:
Repayments of long-term debt		(7,662	)		(5,000	)
Repayments of obligations under capital leases		(614	)		(454	)
Distributions to noncontrolling interest		(4,504	)		(6,924	)
Investment by noncontrolling interest		—			153
Sale of equity interest in subsidiary		—			140
Tax withholding of vested restricted stock awards		(153	)		(253	)

Net cash used in financing activities of continuing operations		(12,933	)		(12,338	)
Net cash provided by financing activities of discontinued operations		(52,327	)		(9,083	)

Net cash used in financing activities		(65,260	)		(21,421	)


Net increase (decrease) in cash and cash equivalents		156,872			(27,122	)
Cash and cash equivalents:
Beginning of period		47,030			61,701

End of period	$	203,902		$	34,579


Cash and cash equivalents of continuing operations		158,475			20,249
Cash and cash equivalents of discontinued operations		45,427			14,330

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 December 31, 2010, 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, the Company currently owns interests in six hospitals. Each of the Company’s majority-owned 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 currently comprise continuing operations have 533 licensed beds and are located in five states: Arkansas, California, Louisiana, New Mexico, and Texas.

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 December 31, 2010. 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, the Company currently owns and/or manages seven cardiac diagnostic and therapeutic facilities. Six of these facilities are located at hospitals operated by other parties. These facilities offer invasive diagnostic and, in some cases, therapeutic procedures. The Company also operates two mobile cardiac catheterization laboratories which operate on set routes and offer only diagnostic procedures. The Company refers to its diagnostics division 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”) whose assets, liabilities, and operations are included within discontinued operations. AzHH, HHA and TexSan were sold on October 1, 2010, November 1, 2010 and December 31, 2010, 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.

	•		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.

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

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

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

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 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.

3. Discontinued Operations

As required under accounting principles generally accepted in the United States (“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.

During November 2010, the Company entered into an agreement to sell substantially all of the assets of TexSan for $76.25 million, plus an adjustment for 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 from this sale of $34.3 million has been included in income (loss) from discontinued operations for the three months ended December 31, 2010.

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.

MEDCATH CORPORATION
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

(All tables in thousands, except percentages and per share data)

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 three months ended December 31, 2010.

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, which resulted in a gain of $35.7 million. The transaction closed on November 1, 2010.

During May 2008, the Hospital Division of the Company sold the net assets of Dayton Heart Hospital (“DHH”) to Good Samaritan Hospital pursuant to a definitive agreement. As of December 31, 2010 and September 30, 2010, the Company had reserved $10.0 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.

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 December 31,
	2010			2009

Net revenue	$	22,004		$	59,386
Gain (loss) from dispositions, net		69,903			—
Loss on early termination of debt		(11,130	)		—
Income (loss) before income taxes		57,762			(1,423	)
Income tax (benefit) expense		18,634			(293	)

Net income (loss)		39,128			(1,130	)
Less: Net (income) loss attributable to noncontrolling interest		(9,251	)		376

Net income (loss) attributable to MedCath Corporation	$	29,877		$	(754	)


	December 31,		September 30,
	2010		2010

Cash and cash equivalents	$	45,427	$	13,889
Accounts receivable, net		11,478		23,597
Other current assets		440		10,434

Current assets of discontinued operations	$	57,345	$	47,920


Property and equipment, net	$	—	$	115,670
Other assets		1,232		3,620

Long-term assets of discontinued operations	$	1,232	$	119,290


Accounts payable	$	14,003	$	25,379
Accrued liabilities and current portion of obligations under capital leases		3,011		9,665

Current liabilities of discontinued operations	$	17,014	$	35,044


Long-term debt and obligations under capital leases	$	—	$	35,302
Other long-term obligations		—		666

Long-term liabilities of discontinued operations	$	—	$	35,968

MEDCATH CORPORATION
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

(All tables in thousands, except percentages and per share data)

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 December 31, 2010 and September 30, 2010.

4. Accounts Receivable

Accounts receivable, net, consists of the following:


	December 31,			September 30,
	2010			2010
Receivables, principally from patients and third-party payors	$	106,804		$	103,314
Receivables, principally from billings to hospitals for various cardiovascular procedures		1,428			1,027
Other		2,975			2,555

		111,207			106,896
Less allowance for doubtful accounts		(66,412	)		(63,085	)

Accounts receivable, net	$	44,795		$	43,811

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 December 31, 2010, all of the Company’s investments in unconsolidated affiliates are accounted for using the equity method. At December 31, 2010, the Company owns a noncontrolling interest in Harlingen Medical Center and certain diagnostic ventures and partnerships, for which the Company neither has substantive control over the ventures nor is the primary beneficiary. These investments are included in Other Assets on the consolidated balance sheets.

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 and which held management rights in Avera Heart Hospital of South Dakota. 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.

On November 1, 2010, the Company sold its equity interest in Southwest Arizona Heart and Vascular Center, LLC for $7.0 million. The Company recognized a 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. Prior to its disposition, the Company had accounted for its investment in Southwest Arizona Heart and Vascular Center, LLC using the equity method of accounting.

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

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 December 31,
	2010		2009

Net revenue	$	35,968	$	53,326
Income from operations	$	6,425	$	8,073
Net income	$	4,440	$	5,777


	December 31,		September 30,
	2010		2010

Current assets	$	33,063	$	58,690
Long-term assets	$	79,092	$	144,402
Current liabilities	$	14,325	$	23,922
Long-term liabilities	$	98,848	$	121,524

6. Long-Term Debt

Long-term debt consists of the following:


	December 31,			September 30,
	2010			2010

Amended Credit Facility		58,901			66,563
Less current portion		(58,901	)		(14,063	)

Long-term debt	$	—		$	52,500

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 provides for a three-year term loan facility in the amount of $75.0 million (the “Term Loan”) and a revolving credit facility in the amount of $85.0 million (the “Revolver”), which includes a $25.0 million sub-limit for the issuance of stand-by and commercial letters of credit (of which $1.7 million were outstanding as of December 31, 2010 and September 30, 2010) and a $10.0 million sub-limit for swing-line loans. At the request of the Company and approval from its lenders, the aggregate amount available under the Amended Credit Facility may be increased by an amount up to $50.0 million. Borrowings under the Amended Credit Facility, excluding swing-line loans, bear 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. At December 31, 2010 the Term Loan bore interest at 3.26%. The $58.9 million and $66.6 million outstanding under the Amended Credit Facility at December 31, 2010 and September 30, 2010, respectively, related to the Term Loan. No amounts were outstanding under the Revolver as of December 31, 2010 and September 30, 2010.

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

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

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

MEDCATH CORPORATION
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

(All tables in thousands, except percentages and per share data)

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

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 contains 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 will also reduce the revolving credit commitment by a corresponding amount.

In addition to the quarterly installment, during the three months ended December 31, 2010, the Company paid $4.8 million using net cash proceeds from asset dispositions. The Revolver including letters of credit will not be permitted to remain outstanding after the full repayment of the Term Loan. The First Amendment also provides for a reduction in amount of the Revolver from $85 million to $59.5 million as of the date of the First Amendment. As noted under the terms of the First Amendment, the Revolver was further reduced to $54.4 million at December 31, 2010 for mandatory repayment of principal using net cash proceeds from asset dispositions. Under terms of the First Amendment, the fixed charge coverage ratio is not tested at September 30, 2010 or December 31, 2010, and will be retested at the fiscal quarter ending March 31, 2011 and subsequent fiscal quarters.

As further noted in Note 14, the Company made an additional $20.6 million repayment of outstanding principal in January 2011.

Debt Covenants —As of December 31, 2010 and 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.

7. Contingencies and Commitments

Put and Call Options — During August 2010, the Company entered into a put/call agreement with the minority shareholders 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, which is included in other accrued liabilities as of December 31, 2010.

During September 2010, the Company entered into a call agreement with the minority 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 ($2.7 million at December 31, 2010 and September 30, 2010).

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

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.

In 2005, CMS began using 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 December 31, 2010. These claims and legal actions are in various stages, and some may ultimately be brought to trial. Moreover, additional claims arising from services provided to patients in the past and other legal actions may be asserted in the future. The Company is protecting its interests in all such claims and actions and does not expect the ultimate resolution of these matters to have a material adverse impact on the Company’s consolidated financial position, results of operations or cash flows.

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 consolidated subsidiary hospitals. The U.S. Department of Justice (“DOJ”) initiated an investigation related to the Company’s return of these reimbursements. As a result of the DOJ’s investigation, the Company began negotiating settlement agreements during the second quarter of fiscal 2009 with the DOJ whereby the Company was expected to pay $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. During the quarter ended December 31, 2009, the Company paid $0.6 million and the remaining $0.2 million was paid prior to September 30, 2010. Both settlement agreements were executed during fiscal 2010.

In March 2010, the DOJ issued a civil investigative demand (“CID”) pursuant to the federal False Claims Act to one of our hospitals. The CID requested information regarding Medicare claims submitted by our hospital in connection with the implantation of implantable cardioverter defibrillators (“ICDs”) during the period 2002 to the present. The Company has complied with all information requested by the DOJ for this hospital. The Company is unable to evaluate the outcome of this investigation at this time; however ICD revenue is a material component of total net revenue for this hospital and this investigation could have a material adverse effect on the Company’s financial condition and results of operations.

In September 2010, the Company received a letter from the DOJ advising it that an investigation is being conducted to determine whether certain of the Company’s other hospitals have submitted claims excluded from coverage. The period of time covered by the investigation is 2003 to the present. The letter states that the DOJ’s data indicates that many of the Company’s hospitals have claims for the implantation of ICD’s which were not medically indicated and/or otherwise violated Medicare payment policy. Management understands that the DOJ has submitted similar requests to many other hospitals and hospital systems across the country as well as to the ICD manufacturers themselves. The Company is fully cooperating and has entered into a tolling agreement with the government in this investigation. To date, the DOJ has not asserted any claim against the Company’s other hospitals. Because the Company is in the early stages of this investigation, the Company is unable to estimate the outcome of this investigation. The Company’s total ICD net revenue is a material component of total net patient revenue and this investigation could have a material adverse effect on the Company’s financial condition and results of operations.

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.

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 December 31, 2010 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 $2.7 million which is included in other accrued liabilities in the consolidated balance sheets. The Company maintains this reserve based on actuarial estimates using the Company’s historical experience with claims and assumptions about future events.

In addition to reserves for medical malpractice, the Company also maintains reserves for self-insured workman’s compensation, healthcare and dental coverage. The total estimated reserve for self-insured liabilities for workman’s compensation, employee health and dental claims was $3.0 million and $3.3 million as of December 31, 2010 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 program of $175,000 per plan participant.

Commitments — The Company’s consolidated subsidiary hospitals provide guarantees to certain physician groups for funds required to operate and maintain services for the benefit of the hospital’s patients including emergency care and anesthesiology services, among other services. These guarantees extend for the duration of the underlying service agreements. As of December 31, 2010, the maximum potential future payments that the Company could be required to make under these guarantees was $25.9 million through June 2013. At December 31, 2010 the Company had total liabilities of $9.8 million for the fair value of these guarantees, of which $6.6 million is in other accrued liabilities and $3.2 million is in other long term obligations. Additionally, the Company had assets of $10.2 million representing the future services to be provided by the physicians, of which $6.5 million is in prepaid expenses and other current assets and $3.7 million is in other assets.

8. Per Share Data

Basic — The calculation of basic earnings per share includes 150,900 and 101,500 of restricted stock units that have vested but as of December 31, 2010 and 2009, respectively, have not been converted into common stock.

Diluted — The calculation of diluted earnings per share considers the potential dilutive effect of options to purchase 913,812, and 986,637 shares of common stock at prices ranging from $9.95 to $33.05, which were outstanding at December 31, 2010 and 2009, respectively, as well as 309,405 and 782,707 shares of restricted stock which were outstanding at December 31, 2010 and 2009, respectively. Dilutive options of 3,941 have been included in the calculation of diluted earnings (loss) per share at December 31, 2010. Of the outstanding stock options, 897,500 options have not been included in the calculation of diluted earnings per share at December 31, 2010 because these options were anti-dilutive. No options or restricted stock were included in the calculation of diluted earnings per share at December 31, 2009, as the consideration of such shares would be anti-dilutive due to the loss from continuing operations, net of tax.

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

9. Stock Based Compensation

Compensation expense from the grant of equity awards made to employees and directors 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 months ended December 31, 2010 and 2009 was $1.9 million and $0.6 million, respectively. The associated tax benefits related to the compensation expense recognized for the three months ended December 31, 2010 and 2009 was $0.8 million and $0.2 million, respectively.

Stock Options

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


	For the Three Months Ended
	December 31, 2010					December 31, 2009
				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

Granted		—			—		—			—
Cancelled		(18,325	)		21.81		(40,750	)		22.94


Outstanding stock options, end of period		913,812		$	21.89		986,637		$	22.23

Restricted Stock Awards

There were no grants of restricted stock during the three months ended December 31, 2010. During the three months ended December 31, 2009, the Company granted to employees 369,164 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 December of each year over a three year period. The second grant vests annually in December of each year, 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. At December 31, 2010 the Company had $1.8 million of unrecognized compensation expense associated with restricted stock awards.

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


	For the Three Months Ended
	December 31, 2010					December 31, 2009
	Number of					Number of
	Restricted			Weighted-		Restricted			Weighted-
	Stock Awards			Average		Stock Awards			Average
	and Units			Grant Price		and Units			Grant Price
Outstanding restricted stock awards and units, beginning of period		884,285		$	8.67		654,327		$	9.64

Granted		—			—		369,164			6.99
Vested		(423,980	)		9.42		(90,195	)		9.30
Cancelled		—			—		(10,026	)		9.03


Outstanding restricted stock awards and units, end of period		460,305		$	7.99		923,270		$	8.54

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

10. Reportable Segment Information

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

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


	Three Months Ended December 31,
	2010			2009

Net revenue:
Hospital Division	$	86,618		$	84,382
MedCath Partners Division		2,228			3,336
Corporate and other		54			112

Consolidated totals	$	88,900		$	87,830


Income (loss) from operations:
Hospital Division	$	4,005		$	(16	)
MedCath Partners Division		44			(175	)
Corporate and other		(5,630	)		(2,472	)

Consolidated totals	$	(1,581	)	$	(2,663	)


	December 31,			September 30,
	2010			2010
Aggregate identifiable assets:
Hospital Division	$	296,226		$	414,656
MedCath Partners Division		11,401			20,210
Corporate and other		174,118			59,672

Consolidated totals	$	481,745		$	494,538

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

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. Property and Equipment


	December 31,			September 30,
	2010			2010

Land	$	17,635		$	17,635
Buildings		149,901			149,897
Equipment		155,972			163,746
Construction in progress		29			25

Total, at cost		323,537			331,303
Less accumulated depreciation		(146,652	)		(149,081	)

Property and equipment, net	$	176,885		$	182,222

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

13. 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.

The Company considers the carrying amounts of significant classes of financial instruments on the consolidated balance sheets to be reasonable estimates of fair value due either to their length to maturity or the existence of variable interest rates underlying such financial instruments that approximate prevailing market rates at December 31, 2010 and September 30, 2010. Based on Level 3 inputs, the fair value of long-term debt, including the current portion, at December 31, 2010 approximates the carrying value. Based on Level 3 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 or Level 2 inputs.

14. Subsequent Events

On January 1, 2011, MedCath Partners sold its investment in one of its investments accounted for under the equity method for $0.6 million.

On January 5, 2011, the Company made a principal repayment of $20.6 million using the proceeds from asset dispositions, thereby reducing the outstanding balance under the Amended Credit Facility to $38.3 million at that date.

In January 2011, the Company obtained from its noncontrolling members of one of its hospitals, the right to sell all or substantially all of the assets of that hospital. Concurrent with the granting of such right 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 ($3.0 million at December 31, 2010) adjusted upward for any proportionate share of additional proceeds upon a disposition transaction.

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

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the interim unaudited consolidated financial statements and related notes included elsewhere in this report, as well as the audited consolidated financial statements and related notes thereto and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in our Annual Report on Form 10-K for the fiscal year ended September 30, 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 December 31, 2010, we currently own interests in six hospitals, with a total of 533 licensed beds, of which 489 are staffed and available, and that are located in five states: Arkansas, California, Louisiana, New Mexico and Texas. Each of our majority-owned 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.

In addition to our hospitals, we currently own and/or manage seven cardiac diagnostic and therapeutic facilities. Six of these facilities are located at hospitals operated by other parties. These facilities offer invasive diagnostic and, in some cases, therapeutic procedures. The remaining facility is not located at a hospital and offers only diagnostic procedures. The Company also operates two mobile cardiac catheterization laboratories which operate on set routes and offer only diagnostic procedures. We refer to our diagnostics division as “MedCath Partners.”

Pursuant to a favorable regulatory settlement (“Settlement Agreement”) that MedCath entered into on August 14, 1995 with the State of North Carolina Department of Human Resources (now known as the Division of Health Service Regulation (“DHSR”)), MedCath obtained authority to operate nine cardiac catheterization laboratories within the state of North Carolina. The rights under the Settlement Agreement were subsequently assigned to MedCath Partners in connection with a reorganization by MedCath. The Settlement Agreement allows MedCath Partners to operate these catheterization labs anywhere in North Carolina without a need for further state review, with some exceptions. No certificate of need (“CON”) is required for MedCath Partners to operate any one of these nine diagnostic or interventional laboratories in the state. MedCath Partners is required to comply with certain notice requirements for replacement of any equipment in these laboratories and has historically notified the DHSR when MedCath Partners is changing the location of any laboratories located within the State. However, the DHSR takes the position that MedCath Partners must own and provide the services of the equipment which comprises each laboratory — the CON exemption applies only when MedCath Partners is operating one of these specific nine laboratories.

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 (Phoenix, AZ) in which we 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. We anticipate that we will receive final net proceeds of approximately $31.5 million from the transaction after payment of retained known liabilities, payment of taxes related to the transaction and collection of the hospital’s accounts receivable. The $31.5 million in estimated net proceeds is prior to any reserves, if any, required in management’s judgment to address any potential contingent liabilities.

	•		The disposition of our 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. We estimate that we will receive final net proceeds from the transaction of approximately $16.0 million, after payment of estimated taxes related to the transaction and prior to reserves, if any, required in management’s judgment to address any potential contingent liabilities.

	•		The disposition of Heart Hospital of Austin (Texas) in which we and our 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. We anticipate that we will receive final net proceeds of approximately $24.1 million from the transaction after repayment of third party debt and a related prepayment fee, payment of all known retained liabilities of the partnership, payment of taxes related to the transaction, collection of the partnerships accounts receivable, and distributions to the hospital’s minority partners. The $24.1 million in estimated net proceeds is prior to reserves, if any, required in management’s judgment to address any potential contingent liabilities.

	•		The disposition of our 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. We estimate that final net proceeds from the transaction will total approximately $6.9 million, after closing costs and income tax benefit related to a tax loss on the transaction, but prior to reserves, if any, required in management’s judgment to address any potential contingent liabilities.

	•		The disposition of TexSan Heart Hospital (San Antonio, Texas) in which we and our physician owners sold substantially all of the hospital’s assets to Methodist Healthcare System of San Antonio for $76.25 million, plus retained working capital. The transaction was completed on December 31, 2010. We estimate that final net proceeds from the transaction will total approximately $60.8 million, after closing costs and income taxes on the transaction, but prior to reserves, if any, required in management’s judgment to address any potential contingent liabilities.

We cannot assure our investors that our continuing efforts to enhance stockholder value will be successful, or whether future transactions will involve a sale of the Company, a sale of our individual hospitals or other assets, or a combination of these alternatives. We continue to consider all practicable alternatives to maximize stockholder value. Although the strategic options process is on-going and expected to continue throughout fiscal 2011 and potentially beyond, we have begun to consider a number of scenarios for distributing available cash to our stockholders, such as special cash dividends and/or distributions to stockholders following future sales of individual hospitals or other assets or in the context of a dissolution, and following repayment of all bank debt and termination of our credit facility. If our common equity is sold in a merger or other similar transaction, then stockholders would receive consideration in exchange for their shares in accordance with the terms of that transaction.

Many unknown variables, including those related to seeking any approvals which may be required, will affect the amount, timing and mechanics of any potential distributions to stockholders. Until further progress is made in the strategic options process, we are unable to determine the approach that best meets the interests of our stockholders. Final amounts available to stockholders will be diminished by asset and corporate wind-down related operating and other expenses, continued debt service obligations, tax treatment, inability to collect all amounts owed and any required reserves to address liabilities, including retained and contingent liabilities and/or other unforeseen events.

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


	Three Months Ended December 31,
Division	2010			2009
Hospital		97.4	%		96.1	%
MedCath Partners		2.5	%		3.8	%
Corporate and other		0.1	%		0.1	%

Net Revenue		100.0	%		100.0	%

Revenue Sources by Payor. We receive payments for our services rendered to patients from the Medicare and Medicaid programs, commercial insurers, health maintenance organizations and our patients directly. 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.


	Three Months Ended December 31,
Payor	2010			2009
Medicare		50.8	%		53.9	%
Medicaid		4.3	%		3.9	%
Commercial and other, including self-pay		44.9	%		42.2	%

Total consolidated net revenue		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 December 31, 2010 Compared to Three Months Ended December 31, 2009

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


				Three Months Ended December 31,
	(in thousands except percentages)
							Increase/
							(Decrease)			% of Net Revenue
	2010			2009			%			2010			2009
Net revenue	$	88,900		$	87,830			1.2	%		100.0	%		100.0	%
Operating expenses:
Personnel expense		32,454			31,636			2.6	%		36.5	%		36.0	%
Medical supplies expense		19,222			22,107			(13.1	)%		21.6	%		25.2	%
Bad debt expense		9,709			7,506			29.3	%		10.9	%		8.5	%
Other operating expenses		24,116			22,344			7.9	%		27.1	%		25.4	%
Pre-opening expenses		—			866			(100.0	)%		—			1.0	%
Depreciation		4,887			5,938			(17.7	)%		5.5	%		6.8	%
Loss on disposal of property, equipment and other assets		93			96			(3.1	)%		0.1	%		0.2	%

Loss from operations		(1,581	)		(2,663	)		(40.6	)%		(1.8	)%		(3.0	)%
Other income (expenses):
Interest expense		(1,082	)		(945	)		(14.5	)%		(1.2	)%		(1.1	)%
Interest and other income, net		489			70			(598.6	)%		0.6	%		0.1	%
Gain on sale of unconsolidated affiliates		15,391			—			N/M			17.3	%		—
Equity in net earnings of unconsolidated affiliates		602			1,516			(60.3	)%		0.7	%		1.6	%

Income (loss) from continuing operations before income taxes		13,819			(2,022	)		(783.4	)%		15.6	%		(2.3	)%
Income tax expense (benefit)		4,482			(1,337	)		(435.2	)%		5.0	%		(1.5	)%

Income (loss) from continuing operations		9,337			(685	)		(1463.1	)%		10.5	%		(0.8	)%
Income (loss) from discontinued operations, net of taxes		39,128			(1,130	)		(3562.7	)%		44.0	%		(1.3	)%

Net income (loss)		48,465			(1,815	)		(2770.2	)%		54.5	%		(2.1	)%
Less: Net income attributable to noncontrolling interest		(11,426	)		(841	)		1258.6	%		(12.9	)%		(1.0	)%

Net income (loss) attributable to MedCath Corporation	$	37,039		$	(2,656	)		(1494.5	)%		41.7	%		(3.0	)%


Amounts attributable to MedCath Corporation common stockholders:
Income (loss) from continuing operations, net of taxes	$	7,162		$	(1,902	)		(476.6	)%		8.1	%		(2.2	)%
Income (loss) from discontinued operations, net of taxes		29,877			(754	)		(4062.5	)%		33.6	%		(0.9	)%

Net income (loss)	$	37,039		$	(2,656	)		(1494.5	)%		41.7	%		(3.0	)%

The following table presents selected operating data on a consolidated basis for the periods indicated:


	Three Months Ended December 31,
	2010			2009			% Change

Selected Operating Data (a):
Number of hospitals		5			5
Licensed beds (b)		421			421
Staffed and available beds (c)		380			380
Admissions (d)		4,438			4,482			(1.0	)%
Adjusted admissions (e)		6,841			6,485			5.5	%
Patient days (f)		16,254			16,672			(2.5	)%
Adjusted patient days (g)		25,143			24,324			3.4	%
Average length of stay (days) (h)		3.66			3.72			(1.4	)%
Occupancy (i)		46.5	%		47.7	%
Inpatient catheterization procedures (j)		1,792			1,964			(8.8	)%
Inpatient surgical procedures (k)		1,032			1,085			(4.9	)%
Hospital net revenue (in thousands except percentages)	$	86,618		$	84,382			2.6	%


(a)		Selected operating data includes consolidated hospitals in operation as of the end of the period reported in continuing operations but does not include hospitals which are accounted for using the equity method or as discontinued operations in our consolidated financial statements.

(b)		Licensed beds represent the number of beds for which the appropriate state agency licenses a facility regardless of whether the beds are actually available for patient use.

(c)		Staffed and available beds represent the number of beds that are readily available for patient use at the end of the period.

(d)		Admissions represent the number of patients admitted for inpatient treatment.

(e)		Adjusted admissions is a general measure of combined inpatient and outpatient volume. We compute adjusted admissions by dividing gross patient revenue by gross inpatient revenue and then multiplying the quotient by admissions.

(f)		Patient days represent the total number of days of care provided to inpatients.

(g)		Adjusted patient days is a general measure of combined inpatient and outpatient volume. We compute adjusted patient days by dividing gross patient revenue by gross inpatient revenue and then multiplying the quotient by patient days.

(h)		Average length of stay (days) represents the average number of days inpatients stay in our hospitals.

(i)		We compute occupancy by dividing patient days by the number of days in the period and then dividing the quotient by the number of staffed and available beds.

(j)		Inpatient catheterization procedures represent the number of inpatients with a procedure performed in one of the hospitals’ catheterization labs during the period.

(k)		Inpatient surgical procedures represent the number of surgical procedures performed on inpatients during the period.

Net Revenue. Our consolidated net revenue increased 1.2% or $1.1 million to $88.9 million for the first quarter of fiscal 2011 from $87.8 million for the first quarter of fiscal 2010. Hospital Division net revenue increased 2.6%, or $2.2 million, for the first quarter of fiscal 2011 compared to the same period of fiscal 2010. There was a $1.1 million decrease in net revenue in our MedCath Partners Division.

Inpatient net revenue was 69% of the Hospital Division’s net patient revenue for the first quarter of fiscal 2011 compared to 71% for the first quarter of fiscal 2010. Our total inpatient net revenue and cases decreased 3.4% and 2.0%, respectively during the first quarter of fiscal 2011 compared to the first quarter of fiscal 2010, whereas outpatient net revenue and cases increased 9.3% and 31.5%, respectively during the same period.

The decrease in inpatient net revenue is due to a 6.5% decline in our core cardiovascular cases offset by an 8.0% increase in our non-cardiovascular cases. Hualapai Mountain Medical Center, (“HMMC”), our newest hospital which began operations during the first quarter of fiscal 2010, is a general acute care facility so it contributed to the increase in our non-cardiovascular procedures for the first quarter of fiscal 2011 compared to the same period of the prior year. HMMC’s inpatient cases increased 106% due to the ramp up of the facility. HMMC also contributed to the increase in outpatient cases and net revenue, particularly related to emergency department cases.

Excluding HMMC from both the first quarter of fiscal 2011 and 2010 (“same facility” basis), inpatient net revenue decreased $2.4 million, or 4.1%, and outpatient net revenue increased $1.1 million, or 5.0%, for the first quarter of fiscal 2011 compared to the first quarter of fiscal 2010. Our same facility inpatient net revenue decrease is due to the mix of procedures performed. We performed fewer procedures with higher reimbursement during the first quarter of fiscal 2011 compared to the same period of the prior year. Our same facility outpatient revenue increase is due to a 7.1% increase in same facility outpatient cases, particularly emergency department cases, due to the expansion at several of our facilities and more procedures being performed in an outpatient setting.

Net revenue for the first quarter of fiscal 2011 included charity care deductions of $2.1 million compared to charity care deductions of $1.9 million for the first quarter of fiscal 2010. The increase is the result of more uninsured patients applying and qualifying for charity care.

Personnel expense. Personnel expense increased 2.6%, or $0.9 million, to $32.5 million for the first quarter of fiscal 2011 from $31.6 million for the first quarter of fiscal 2010.

The increase in personnel expense was primarily due to a $1.3 million increase in stock based compensation expense. As part of the strategic options process, the compensation committee of our Board of Directors waived the performance vesting criteria for certain executive management’s restricted stock shares during the first quarter of fiscal 2011 to ensure the deductibility of the compensation expense for federal corporate income tax purposes. The waiver caused all future stock based compensation expense related to the shares that would have vested over time as performance criteria were met to be recognized during the first quarter of fiscal 2011. The shares subject to the waiver of vesting criteria contain transfer restrictions that will remain in place until a change in control of the Company. In addition, management updated the estimate on the restricted share forfeiture rate since it is anticipated that the rate of employee turnover will decline as we continue to progress with our strategic options process. We experienced a $0.5 million increase in expense related to hospital employee healthcare claims. This expense is directly attributed to the number of claims reported during the period. These increases were offset by a $0.9 million decline in salaries and wages and related benefits as we continue to monitor costs to better align these costs with net revenues and as the result of a reduction in management positions within hospital division as we sell our hospital assets.

Medical supplies expense. Medical supplies expense decreased 13.1%, or $2.9 million, to $19.2 million for the first quarter of fiscal 2011 from $22.1 million for the first quarter of fiscal 2010. This decline is due to $2.9 million in sales tax refunds at two of our hospitals. Absent the refunds, medical supplies expense was flat year over year. Medical supplies expense increased $0.7 million at HMMC which began operations in the second month of the first quarter of fiscal 2010 resulting in higher supply expense for the first quarter of fiscal 2011. This increase was offset by a decline in ICD expense as the result of a 7.6% decline in ICD procedures for the first quarter of fiscal 2011 compared to the same period of the prior year.

Bad debt expense. Bad debt expense increased 29.3%, or $2.2 million, to $9.7 million for the first quarter of fiscal 2011 from $7.5 million for the first quarter of fiscal 2010. As a percentage of net revenue, bad debt expense increased to 10.9% for the first quarter of fiscal 2011 as compared to 8.5% for the comparable period of fiscal 2010. This increase is due to a 68.8%, or $3.2 million, increase in self-pay net revenue for the first quarter of fiscal 2011 compared to the first quarter of fiscal 2010. We reserve for the estimated bad debt on self-pay net revenue at the time of recognition based on our historical collection experience related to self-pay patients. This increase was offset by lower bad debt expense in certain markets due to lower net revenue for the first quarter of fiscal 2011 compared to the first quarter of fiscal 2010.

Other operating expenses. Other operating expenses increased 7.9%, or $1.8 million, to $24.1 million for the first quarter of fiscal 2011 from $22.3 million for the first quarter of fiscal 2010. The material and notable increases (decreases) in operating expenses were as reflected below (in millions):


Professional fees	$	1.2
Purchased services — nonclinical	$	0.7
Corporate division medical benefits	$	0.4
Repairs and maintenance	$	0.3
Temporary labor	$	0.3
Insurance expense	$	0.2
Bonus expense	$	0.2
Physician practice expenses	$	(0.3	)
Recruiting, relocation and travel expense	$	(0.4	)
Salaries and wages	$	(0.6	)

Our professional fees have increased $1.2 million as the direct result of our strategic options process, which included the sale of several of our assets and the exploration of alternatives for the sale of our remaining assets or our equity. We will continue to incur professional fees during fiscal 2011 as our strategic options process continues.

Our purchased services — nonclinical expense includes $1.3 million in third party consulting fees to obtain sales tax refunds on medical supplies at certain of our hospitals. As noted above under medical supplies expense, we filed sales tax refund claims of $2.9 million during the first quarter of fiscal 2011. The increase related to the consulting fees was offset by declines in non-clinical services as we control costs to better align with our net revenues.

Our corporate division medical benefits expense increases as medical claims increase. The claims increase during the first quarter of fiscal 2011 compared to the first quarter of fiscal 2010 is the direct cause for the $0.4 million increase.

Repairs and maintenance costs have increased as our facilities age and also as a result of the addition of our newest hospital HMMC, which began operations in the second month of the first quarter of fiscal 2010. HMMC contributed $0.2 million of the total increase during the first quarter of fiscal 2011 compared to the first quarter of fiscal 2010 as maintenance costs were incurred on the new facility.

Temporary labor has increased at our corporate division to support our hospitals during the strategic options process as full-time employed positions within the corporate division have declined. As discussed below, although our temporary labor has increased for the first quarter of fiscal 2011 compared to the first quarter of fiscal 2010, our salaries and wages for full-time employees declined by approximately $2.0 million year over year.

Our insurance premiums increased during the first quarter of fiscal 2011 compared to the first quarter of fiscal 2011. This increase is the result of changing the structure of some of our insurance programs to account for our overall strategic environment.

Our bonus expense is recognized as bonuses are earned. The bonus expense for the first quarter of fiscal 2011 increased $0.2 million as we anticipate more of our hospitals will meet the fiscal 2011 bonus targets based on the first quarter of fiscal 2011 results compared to the estimate for the first quarter of fiscal 2010. We evaluate the progress of our bonus programs on a quarterly basis and adjust quarterly as deemed necessary.

Our relocation, recruiting and travel expense declined $0.4 million during the first quarter of fiscal 2011 compared to the first quarter of fiscal 2010 due to our strategic options process. We hired several key executives during the first quarter of fiscal 2010, which contributed to a higher expense in the prior year compared to the first quarter of fiscal 2011. In addition, we have incurred less travel expense as assets are sold.

Our physician practice expenses have declined $0.3 million during the first quarter of fiscal 2011 compared to the first quarter of fiscal 2010 as our primary care practice at one of our hospitals has decreased the total number of physicians within the practice. Conversely, there was a $0.4 million decline in revenues related to the primary care practice.

Salaries and wage expense declined $0.6 million for the first quarter of fiscal 2011 compared to the first quarter of fiscal 2011 due to our strategic options process. We recognized approximately $1.0 million in severance expense and $0.4 million in retention bonus expense during the first quarter of fiscal 2011. The increase in severance and retention expense was offset by a $2.0 million decline in salaries and wages expense as corporate positions have been eliminated and/or consolidated as we align our costs with our revenues and as we sell assets that we support.

Depreciation expense. Depreciation expense decreased $1.0 million to $4.9 million for the first quarter of fiscal 2011 from $5.9 million for the first quarter of fiscal 2010. The decrease in depreciation expense is primarily attributable to the decrease in fixed asset depreciable base due to impairments on long-lived assets recorded in the second and fourth quarters of fiscal 2010.

Interest expense. Interest expense increased $0.2 million to $1.1 million for the first quarter of fiscal 2011 from $0.9 million for the first quarter of fiscal 2010. The increase in interest expense is attributable to a slight increase in the rate charged on outstanding debt and an increase in the amount of assets under capital leases.

Gain on sale of equity interests. The gain on sale of equity interests of $15.4 million for the first quarter of fiscal 2011 is related to the sale of our interest in Avera Heart Hospital of South Dakota (“AHHSD”) partially offset by a nominal loss on the sale of the Company’s interest in Southwest Arizona Heart and Vascular Center, LLC. Such sales occurred on October 1, 2010 and November 1, 2010, respectively.

Equity in net earnings of unconsolidated affiliates. The net earnings of unconsolidated affiliates are comprised of our share of earnings in unconsolidated hospitals, a hospital realty investment and several ventures within our MedCath Partners Division. The Company owned two unconsolidated hospitals until the disposition of its interest in AHHSD on October 1, 2010.

Equity in net earnings of unconsolidated affiliates decreased during the first quarter of fiscal 2011 to $0.6 million from $1.5 million for the same period of fiscal 2010. AHHSD contributed $1.0 million of net earnings during the first quarter of fiscal 2010 and was disposed on October 1, 2010 resulting in the noted decrease in such equity in net earnings. The Company expects continued decreases due to the disposition of its interest in Southwest Arizona Heart and Vascular Center, LLC on November 1, 2010.

Net income attributable to noncontrolling interest. Noncontrolling interest share of earnings of consolidated subsidiaries increased to $11.4 million for the first quarter of fiscal 2011 from $0.8 million for the comparable period of fiscal 2010.

Net income attributable to noncontrolling interest increased $7.1 million and $2.2 million due to the noncontrolling shareholders’ interest in the gains recognized in fiscal 2011 upon the disposition of the majority of the assets of HHA and TexSan Heart Hospital, respectively. In addition, the Company recognized an increase of $0.5 million due to the losses recognized at AzHH in the first quarter of fiscal 2010 and the Company’s sale of its interest in AzHH on October 1, 2010.

We expect earnings attributable to noncontrolling interests to fluctuate in future periods as we either recognize disproportionate losses and/or recoveries thereof through disproportionate profit recognition. For a more complete discussion of our accounting for noncontrolling interests, including the basis for disproportionate allocation accounting, see Critical Accounting Policies in our Annual Report on Form 10-K for the fiscal year ended September 30, 2010.

Income tax expense (benefit). Income tax expense (benefit) was an expense of $4.5 million for the first quarter of fiscal 2011 compared to a benefit of $(1.3) million for the first quarter of fiscal 2010, which represents an effective tax rate of 32.4% and (66.1)% for the respective periods. The first quarter fiscal 2011 effective rate is below our federal statutory rate of 35.0% primarily due to the effect of income allocable to our noncontrolling interests. The first quarter fiscal 2010 effective rate is above our federal statutory rate of 35.0% due to the recognition of a disproportionate share of the losses at certain of our hospitals, partially offset by the allocation of income allocable to our noncontrolling interests. The Company has recognized a disproportionate share of losses at certain of our hospitals due to cumulative losses in excess of initial capitalization and committed capital of the Company’s partners or members.

(Loss) income from discontinued operations, net of taxes. (Loss) income from discontinued operations, net of taxes increased to income of $26.1 million, net of taxes for the first quarter of fiscal 2011 from a loss of $1.1 million, net of taxes, for the comparable period of fiscal 2010. During the first quarter of fiscal 2011, the Company recognized pre-tax gains upon disposition of assets of discontinued operations of $69.9 million, partially offset by an $11.1 million loss on early termination of debt at one of the facilities. The significant components of the gains recognized are a $35.7 million gain and a $34.3 million gain on the sale of the assets of HHA and TexSan Heart Hospital, respectively. In addition, pretax loss from operating activities of the discontinued businesses decreased $1.0 million.

Liquidity and Capital Resources

The cash provided by continuing operations from operating activities was $0.5 million for the first three months of fiscal 2011 compared to $2.0 million for the comparable period of fiscal 2010.

Our investing activities from continuing operations provided net cash of $32.1 million for the first three months of fiscal 2011 compared to a use of cash of $7.5 million for the comparable period of fiscal 2010. Such increase is primarily due to the net proceeds of $31.9 million for the disposition of the Company’s interest in Avera Heart Hospital of South Dakota and Southwest Arizona Heart and Vascular LLC during the first quarter of fiscal 2011. In addition, the Company experienced a decrease of $7.4 million in cash paid for property and equipment in the first quarter of fiscal 2011 as compared to the same period in fiscal 2010. This decrease is primarily related to the capital expenditures in fiscal 2010 related to the development of Hualapai Mountain Medical Center, which opened in October 2009.

Our financing activities from continuing operations used net cash of $12.9 million for the first three months of fiscal 2011 compared to $12.3 million for the comparable period of fiscal 2010. Cash used to repay long-term debt and obligations under capital leases increased $2.8 million for the first three months of fiscal 2011 as compared to the comparable period of fiscal 2010. This increase was partially offset by a decrease of $2.4 million in distributions to noncontrolling shareholders. Subsequent to the end of the first quarter of fiscal 2011, the Company made an additional $20.6 million prepayment of its outstanding balance under the Amended Credit Facility.

Capital Expenditures. Cash paid for property and equipment was $0.2 million and $7.5 million for the first three months of fiscal years 2011 and 2010, respectively. Of the $7.5 million of cash paid for property and equipment during the first three months of fiscal 2010, $3.7 million related to Hualapai Mountain Medical Center, which opened in October 2009.

Obligations and Availability of Financing. At December 31, 2010, we had $67.4 million of outstanding long-term debt and obligations under capital leases, of which $61.6 million was classified as current. Our Term Loan under our Amended Credit Facility had an outstanding amount of $58.9 million. The remaining outstanding obligation under capital leases of $8.5 million was due to various lenders to our hospitals. No amounts were outstanding under our Revolver. The maximum availability under our Revolver is $59.5 million which is reduced by outstanding letters of credit totaling $1.7 million as of December 31, 2010. As previously noted, on January 5, 2011 the Company made a principal prepayment of $20.6 million of the amounts outstanding under the Amended Credit Facility.

Covenants related to our long-term debt restrict the payment of dividends and require the maintenance of specific financial ratios and amounts and periodic financial reporting. However, as noted in Liquidity and Capital Resources in our Annual Report on Form 10-K for the fiscal year ended September 30, 2010, the Company was not required to test the fixed charge coverage ratio at December 31, 2010 and will retest such compliance at the fiscal quarter ended March 31, 2011 and subsequent fiscal quarters.

At December 31, 2010, we guaranteed either all or a portion of the obligations of our subsidiary hospitals for equipment. We provide these guarantees in accordance with the related hospital operating agreements, and we receive a fee for providing these guarantees from either the hospitals or the physician investors. Access to available borrowings under our Amended Credit Facility is dependent on the Company’s ability to maintain compliance with the financial covenants contained in the Amended Credit Facility. Deterioration in the Company’s operating results could result in failure to maintain compliance with these covenants, which would restrict or eliminate access to available funds.

We believe that internally generated cash flows from operations and asset sales will be sufficient to finance our strategic plans, capital expenditures and our working capital requirements for the next 12 to 18 months. Repayment of the outstanding balance under our Amended Credit Facility prior to its November 2011 maturity date will be dependent on existing cash, cash flow from operations and cash from asset sales. On January 5, 2011, the Company prepaid $20.6 million of the outstanding balance using the proceeds from asset dispositions, thereby reducing the outstanding balance under the Amended Credit Facility to $38.3 million at that date.

Intercompany Financing Arrangements. We provide secured real estate, equipment and working capital financings to our majority-owned hospitals. Each intercompany real estate loan is separately documented and secured with a lien on the borrowing hospital’s real estate, building and equipment and certain other assets. Each intercompany real estate loan typically matures in 7 to 10 years and accrues interest at variable rates based on LIBOR plus an applicable margin or a fixed rate similar to terms commercially available.

Each intercompany equipment loan is separately documented and secured with a lien on the borrowing hospital’s equipment and certain other assets. Amounts borrowed under the intercompany equipment loans are payable in monthly installments of principal and interest over terms that range from 5 to 7 years. The intercompany equipment loans accrue interest at rates ranging from 4.87% to 8.43%. The weighted average interest rate for the intercompany equipment loans at December 31, 2010 was 7.09%.

We typically receive a fee from the minority partners in the subsidiary hospitals as further consideration for providing these intercompany real estate and equipment loans.

We also use intercompany financing arrangements to provide cash support to individual hospitals for their working capital and other corporate needs. We provide these working capital loans pursuant to the terms of the operating agreements between our physician and hospital investor partners and us at each of our hospitals. These intercompany loans are evidenced by promissory notes that establish borrowing limits and provide for a market rate of interest to be paid to us on outstanding balances. These intercompany loans are subordinate to each hospital’s mortgage and equipment debt outstanding, but are senior to our equity interests and our partners’ equity interests in the hospital venture and are secured, subject to the prior rights of the senior lenders, in each instance by a pledge of certain of the borrowing hospital’s assets. Also as part of our intercompany financing and cash management structure, we sweep cash from individual hospitals as amounts are available in excess of the individual hospital’s working capital needs. These funds are advanced pursuant to cash management agreements with the individual hospital that establish the terms of the advances and provide for a rate of interest to be paid consistent with the market rate earned by us on the investment of its funds. These cash advances are due back to the individual hospital on demand and are subordinate to our equity investment in the hospital venture.

The estimated net realizable value of intercompany notes outstanding with the Company’s subsidiaries in continuing operations was $153.2 million and $149.8 million as of September 30, 2010 and December 31, 2010, respectively. All intercompany notes are eliminated in consolidation and are not reflected on the Company’s consolidated balance sheet.

Retained Obligations Subsequent to Disposition. Included in discontinued operations are certain liabilities that the Company has retained upon the disposition of the related entity. As 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 December 31, 2010 and September 30, 2010. However, as the ultimate resolution of the outstanding payables and obligations may take in excess of one year, our estimates may prove incorrect and result in the Company paying amounts in excess of those recorded at the respective balance sheet date.

Retained Cash Balance. At December 31, 2010 the Company had $158.5 million in cash related to continuing operations and $45.4 million in cash related to discontinued operations. The Company expects to retain approximately $156.4 million of the $158.5 million cash in continuing operations after it distributes cash from certain hospital partnerships to itself and the minority owners of those partnerships. As of December 31, 2010 the Company’s estimate of total potential cash distributions to the Company from discontinued operations after it distributes cash from the respective hospital partnerships is approximately $25.7 million after taking into account distributions to minority owners, the liquidation of all assets and the settlement of all known liabilities, but does not take into account any unknown contingent liabilities related to the discontinued operations. The estimate of total cash distributions to the Company may change as it updates its estimates. There can be no assurance when the distributions to the Company from discontinued operations may take place, but it may be over an extended period of time. Any cash retained will be used to fund working capital and repay outstanding debt, which is due in full in November 2011.

Disclosure About Critical Accounting Policies

Our accounting policies are disclosed in our Annual Report on Form 10-K for the year ended September 30, 2010. During the first three months of fiscal 2011 we adopted a new accounting policy as discussed in Note 2 — Recent Accounting Pronouncements to our consolidated financial statements. The adoption of this new accounting policy did not have a material impact on our consolidated financial statements.

Forward-Looking Statements

Some of the statements and matters discussed in this report and in exhibits to this report constitute forward-looking statements. Words such as “expects,” “anticipates,” “approximates,” “believes,” “estimates,” “intends” and “hopes” and variations of such words and similar expressions are intended to identify such forward-looking statements. We have based these statements on our current expectations and projections about future events. These forward-looking statements are not guarantees of future performance and are subject to risks and uncertainties that could cause actual results to differ materially from those projected in these statements. Although we believe that these statements are based upon reasonable assumptions, we cannot assure you that we will achieve our goals. In light

of these risks, uncertainties and assumptions, the forward-looking events discussed in this report and its exhibits might not occur. Our forward-looking statements speak only as of the date of this report or the date they were otherwise made. We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. We urge you to review carefully all of the information in this report and our other filings with the SEC, including the discussion of risk factors in Item 1A. Risk Factors in this report and our Annual Report on Form 10-K for the year ended September 30, 2010, before making an investment decision with respect to our equity securities. A copy of this report, including exhibits, is available on the internet site of the SEC at http://www.sec.gov or through our website at http://www.medcath.com.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

We maintain a policy for managing risk related to exposure to variability in interest rates, commodity prices, and other relevant market rates and prices which includes considering entering into derivative instruments (freestanding derivatives), or contracts or instruments containing features or terms that behave in a manner similar to derivative instruments (embedded derivatives) in order to mitigate our risks. In addition, we may be required to hedge some or all of our market risk exposure, especially to interest rates, by creditors who provide debt funding to us. The Company disposed of its minority interest in a hospital that maintained a cash flow hedge on October 1, 2010. As a result, the Company does not have outstanding any derivatives at December 31, 2010. There was no material change in our policy for managing risk related to variability in interest rates, commodity prices, other relevant market rates and prices during the first three months of 2011. See Item 7A in the Company’s Annual Report on Form 10-K for the fiscal year ended September 30, 2010 for further discussions about market risk.

Interest Rate Risk

Our Amended Credit Facility borrowings expose us to risks caused by fluctuations in the underlying interest rates. The total outstanding balance of our Credit Facility was $58.9 million at December 31, 2010. A change of 100 basis points in the underlying interest rate would have caused a change in interest expense of approximately $0.1 million during the three month period ended December 31, 2011.

Item 4. Controls and Procedures

The President and Chief Executive Officer and the Executive Vice President and Chief Financial Officer of the Company (its principal executive officer and principal financial officer, respectively) have concluded, based on their evaluation of the Company’s disclosure controls and procedures as of December 31, 2010, that the Company’s disclosure controls and procedures were effective as of December 31, 2010 to ensure that information required to be disclosed by the Company in the reports filed or submitted by it under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), is recorded, processed, summarized and reported in a timely manner, and includes controls and procedures designed to ensure that information required to be disclosed by the Company in the reports that it files under the Exchange Act is accumulated and communicated to the Company’s management, including the Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.

PART II. OTHER INFORMATION

Item 1. Legal Proceedings

We are occasionally involved in legal proceedings and other claims arising out of our operations in the normal course of business. See Note 7 — Contingencies and Commitments to the consolidated financial statements included in this report.

Item 1A. Risk Factors

Information concerning certain risks and uncertainties appears under the heading “Forward-Looking Statements” in Part I, Item 2 of this report and Part I, Item 1A of our Annual Report on Form 10-K for the year ended September 30, 2010. You should carefully consider these risks and uncertainties before making an investment decision with respect to our securities. Such risks and uncertainties could materially adversely affect our business, financial condition or operating results.

During the period covered by this report, there have been no material changes from the risk factors previously disclosed in our Annual Report on Form 10-K for the year ended September 30, 2010 or filings subsequently made with the Securities and Exchange Commission.

Item 6. Exhibits


Exhibit No.		Description

2.1		Membership Interest Purchase Agreement effective as of November 1, 2010 by and among Southwest Arizona Heart and Vascular Center, LLC and MedCath Partners, LLC(1)

2.2		Amendment to the Asset Purchase Agreement dated as of October 29, 2010 by and between St. David’s Healthcare Partnership, L.P., LLC and Heart Hospital IV, L.P. (1)


Exhibit No.		Description

2.3		Asset Purchase Agreement dated as of November 5, 2010 by and between Methodist Healthcare System of San Antonio, LTD., L.L.P. and Heart Hospital of San Antonio, LP(2)

3.1		Amended and Restated Bylaws of MedCath Corporation(3)

10.1*		Amendment to Employment Agreement dated and effective December 30, 2010 by and between MedCath Corporation and O. Edwin French

10.2*		Amendment to Employment, Confidentiality and Non-Compete Agreement dated April 29, 2010 by and between MedCath Corporation and James A. Parker

10.3*		Amendment to Employment, Confidentiality and Non-Compete Agreement dated and effective December 30, 2010 by and between MedCath Corporation and James A. Parker

10.4*		Employment, Confidentiality and Non-Compete Agreement effective October 29, 2009 by and between MedCath Incorporated and Daniel Perritt

10.5*		Form of Indemnification Agreement entered into by MedCath with each of its directors and officers(4)

10.6		Call Agreement dated as of October 4, 2010 by and among Hualapai Mountain Medical Center Management, Inc. and the undersigned Investor Members of Hualapai Mountain Medical Center, LLC.(3)

10.7*		Release and Separation Agreement dated as of November 11, 2010 by and between David Bussone and MedCath Corporation(5)

31.1		Certification of Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

31.2		Certification of Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

32.1		Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

32.2		Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002


*		Indicates a management contract or compensatory plan or agreement.

(1)		Incorporated by reference from the Company’s Current Report on Form 8-K filed November 4, 2010.

(2)		Incorporated by reference from the Company’s Current Report on Form 8-K filed November 9, 2010.

(3)		Incorporated by reference from the Company’s Annual Report on Form 10-K for the fiscal year ended September 30, 2010.

(4)		Incorporated by reference from the Company’s Current Report on Form 8-K filed November 26, 2010.

(5)		Incorporated by reference from the Company’s Current Report on Form 8-K filed November 15, 2010.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.


	MEDCATH CORPORATION
Dated: February 9, 2011	By:	/s/ O. EDWIN FRENCH
		O. Edwin French
		President and Chief Executive Officer (principal executive officer)


	By:	/s/ JAMES A. PARKER
		James A. Parker
		Executive Vice President and Chief Financial Officer (principal financial officer)


	By:	/s/ LORA RAMSEY
		Lora Ramsey
		Vice President and Controller (principal accounting officer)

INDEX TO EXHIBITS


Exhibit No.		Description

2.1		Membership Interest Purchase Agreement effective as of November 1, 2010 by and among Southwest Arizona Heart and Vascular Center, LLC and MedCath Partners, LLC(1)

2.2		Amendment to the Asset Purchase Agreement dated as of October 29, 2010 by and between St. David’s Healthcare Partnership, L.P., LLC and Heart Hospital IV, L.P. (1)

2.3		Asset Purchase Agreement dated as of November 5, 2010 by and between Methodist Healthcare System of San Antonio, LTD., L.L.P. and Heart Hospital of San Antonio, LP(2)

3.1		Amended and Restated Bylaws of MedCath Corporation(3)

10.1*		Amendment to Employment Agreement dated and effective December 30, 2010 by and between MedCath Corporation and O. Edwin French

10.2*		Amendment to Employment, Confidentiality and Non-Compete Agreement dated April 29, 2010 by and between MedCath Corporation and James A. Parker

10.3*		Amendment to Employment, Confidentiality and Non-Compete Agreement dated and effective December 30, 2010 by and between MedCath Corporation and James A. Parker

10.4*		Employment, Confidentiality and Non-Compete Agreement effective October 29, 2009 by and between MedCath Incorporated and Daniel Perritt

10.5*		Form of Indemnification Agreement entered into by MedCath with each of its directors and officers(4)

10.6		Call Agreement dated as of October 4, 2010 by and among Hualapai Mountain Medical Center Management, Inc. and the undersigned Investor Members of Hualapai Mountain Medical Center, LLC.(3)

10.7*		Release and Separation Agreement dated as of November 11, 2010 by and between David Bussone and MedCath Corporation(5)

31.1		Certification of Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

31.2		Certification of Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

32.1		Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

32.2		Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002


*		Indicates a management contract or compensatory plan or agreement.

(1)		Incorporated by reference from the Company’s Current Report on Form 8-K filed November 4, 2010.

(2)		Incorporated by reference from the Company’s Current Report on Form 8-K filed November 9, 2010.

(3)		Incorporated by reference from the Company’s Annual Report on Form 10-K for the fiscal year ended September 30, 2010.

(4)		Incorporated by reference from the Company’s Current Report on Form 8-K filed November 26, 2010.

(5)		Incorporated by reference from the Company’s Current Report on Form 8-K filed November 15, 2010.

Attached files

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Stock widget

Investing forum

MEDCATH CORP Reports

Also read