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 ~~June 30,~~December 31, 2009


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 (State or other jurisdiction of incorporation or organization)		56-2248952 (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.

Yesþ Noo

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).

Yeso Noo

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

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

Yeso Noþ

As of ~~August 4, 2009,~~February 5, 2010, there were ~~19,641,519~~22,436,809 shares of $0.01 par value common stock outstanding.

PART I. FINANCIAL INFORMATION

Item 1. Unaudited Financial Statements

~~MEDCATH CORPORATION~~

MEDCATH CORPORATION
CONSOLIDATED BALANCE SHEETS

(In thousands, except per share data)

(Unaudited)


							December 31,			September 30,
	June 30,			September 30,			2009			2009
	2009			2008
Current assets:
Cash and cash equivalents	$	42,857		$	93,836		$	22,760		$	32,014
Restricted cash		3,166			3,154
Accounts receivable, net		76,205			83,875			72,596			70,410
Income tax receivable		3,940			3,091			1,037			—
Medical supplies		18,335			15,479			18,929			18,261
Deferred income tax assets		7,600			9,769			12,069			12,201
Prepaid expenses and other current assets		12,235			9,796			15,313			13,969
Current assets of discontinued operations		10,052			20,776			11,942			30,011

Total current assets		174,390			239,776			154,646			176,866
Property and equipment, net		370,418			323,729			383,850			385,926
Investments in affiliates		13,261			15,285			7,931			14,055
Goodwill		60,174			60,174
Other intangible assets, net		5,974			6,063
Other assets		13,167			8,378			11,658			13,601
Long-term assets of discontinued operations		—			51

Total assets	$	637,384		$	653,456		$	558,085		$	590,448


Current liabilities:
Accounts payable	$	40,613		$	41,642		$	39,562		$	40,979
Income tax payable								—			642
Accrued compensation and benefits		17,980			16,872			16,136			18,744
Other accrued liabilities		25,793			24,054			20,975			24,860
Current portion of long-term debt and obligations under capital leases		19,133			31,920			18,279			21,243
Current liabilities of discontinued operations		9,560			10,184			9,907			10,165

Total current liabilities		113,079			124,672			104,859			116,633
Long-term debt		104,683			115,628			99,058			101,871
Obligations under capital leases		4,111			2,087			4,861			4,647
Deferred income tax liabilities		12,267			12,352			14,069			13,874
Other long-term obligations		6,882			4,454			7,436			8,893

Total liabilities		241,022			259,193			230,283			245,918

Commitments and contingencies
Commitments and contingencies (See Note 7)

Minority interest in equity of consolidated subsidiaries		18,737			24,667
Redeemable noncontrolling interests in equity of consolidated subsidiaries								4,297			7,448

Stockholders’ equity:
Preferred stock, $0.01 par value, 10,000,000 shares authorized; none issued		—			—			—			—
Common stock, $0.01 par value, 50,000,000 shares authorized; 21,691,780 issued and 19,737,419 outstanding at June 30, 2009 21,553,054 issued and 19,598,693 outstanding at September 30, 2008		216			216
Common stock, $0.01 par value, 50,000,000 shares authorized; 22,436,809 issued and 20,482,448 outstanding at December 31, 2009 22,104,917 issued and 20,150,556 outstanding at September 30, 2009								216			216
Paid-in capital		455,346			455,494			455,273			455,259
Accumulated deficit		(32,814	)		(41,138	)		(94,076	)		(91,420	)
Accumulated other comprehensive loss		(326	)		(179	)		(304	)		(360	)
Treasury stock, at cost; 1,954,361 shares at June 30, 2009 1,954,361 shares at September 30, 2008		(44,797	)		(44,797	)
Treasury stock, at cost; 1,954,361 shares at December 31, 2009 1,945,361 shares at September 30, 2009								(44,797	)		(44,797	)

Total stockholders’ equity		377,625			369,596
Total MedCath Corporation stockholders’ equity								316,312			318,898
Noncontrolling interests								7,193			18,184

Total liabilities and stockholders’ equity	$	637,384		$	653,456
Total equity								323,505			337,082

Total liabilities and equity							$	558,085		$	590,448

~~MEDCATH CORPORATION~~

MEDCATH CORPORATION
CONSOLIDATED STATEMENTS OF ~~INCOME~~

OPERATIONS
(In thousands, except per share data)

(Unaudited)


													Three Months Ended December 31,
	Three Months Ended June 30,						Nine Months Ended June 30,						2009			2008
	2009			2008			2009			2008
Net revenue	$	150,904		$	154,273		$	462,874		$	455,168		$	147,260		$	150,245
Operating expenses:
Personnel expense		50,862			50,520			153,644			150,060			51,821			50,169
Medical supplies expense		44,995			42,757			131,457			123,155			41,859			41,642
Bad debt expense		12,547			10,235			34,558			31,852			11,925			11,429
Other operating expenses		31,441			29,555			96,022			88,996			34,452			31,902
Pre-opening expenses		754			149			1,340			643			866			207
Depreciation		7,858			7,505			23,258			22,535			9,035			7,801
Amortization		230			149			589			411			8			30
(Gain) loss on disposal of property, equipment and other assets		(26	)		225			138			391
Loss on disposal of property, equipment and other assets														137			73

Total operating expenses		148,661			141,095			441,006			418,043			150,103			143,253

Income from operations		2,243			13,178			21,868			37,125
(Loss) Income from operations														(2,843	)		6,992
Other income (expenses):
Interest expense		(1,151	)		(3,862	)		(5,339	)		(11,658	)		(1,813	)		(2,857	)
Loss on early extinguishment of debt		—			—			(6,702	)		—			—			(6,961	)
Interest and other income		52			284			218			1,930			74			101
Equity in net earnings of unconsolidated affiliates		2,265			2,636			7,044			6,842			1,516			2,065

Total other income (expense), net		1,166			(942	)		(4,779	)		(2,886	)
Total other expense, net														(223	)		(7,652	)

Income from continuing operations before minority interest and incomes taxes		3,409			12,236			17,089			34,239
Minority interest share of earnings of consolidated subsidiaries		(2,287	)		(3,865	)		(9,703	)		(12,644	)
Loss from continuing operations before income taxes														(3,066	)		(660	)
Income tax benefit														(1,539	)		(1,108	)

Income from continuing operations before income taxes		1,122			8,371			7,386			21,595
Income tax expense		536			3,469			2,998			8,917

Income from continuing operations		586			4,902			4,388			12,678
(Loss) income from continuing operations														(1,527	)		448
(Loss) income from discontinued operations, net of taxes		(90	)		6,870			3,936			7,843			(288	)		4,921

Net income	$	496		$	11,772		$	8,324		$	20,521
Net (loss) income														(1,815	)		5,369
Less: Net income attributable to noncontrolling interests														(841	)		(3,123	)

Net (loss) income attributable to MedCath Corporation													$	(2,656	)	$	2,246


Earnings per share, basic
Continuing operations	$	0.03		$	0.25		$	0.22		$	0.62
Discontinued operations		—			0.35			0.20			0.38
Amounts attributable to MedCath Corporation common stockholders:
Loss from continuing operations, net of taxes													$	(2,511	)	$	(1,915	)
(Loss) income from discontinued operations, net of taxes														(145	)		4,161

Earnings per share, basic	$	0.03		$	0.60		$	0.42		$	1.00
Net (loss) income													$	(2,656	)	$	2,246


Earnings per share, diluted
Continuing operations	$	0.03		$	0.25		$	0.22		$	0.62
Discontinued operations		—			0.35			0.20			0.38
(Loss) earnings per share, basic
Loss from continuing operations attributable to MedCath
Corporation common stockholders													$	(0.13	)	$	(0.10	)
Income from discontinued operations attributable to MedCath
Corporation common stockholders														—			0.21

Earnings per share, diluted	$	0.03		$	0.60		$	0.42		$	1.00
(Loss) earnings per share, basic													$	(0.13	)	$	0.11


(Loss) earnings per share, diluted
Loss from continuing operations attributable to MedCath
Corporation common stockholders													$	(0.13	)	$	(0.10	)
Income from discontinued operations attributable to MedCath
Corporation common stockholders														—			0.21

(Loss) earnings per share, diluted													$	(0.13	)	$	0.11


Weighted average number of shares, basic		19,733			19,524			19,665			20,415			19,743			19,599
Dilutive effect of stock options and restricted stock		—			107			56			89			—			—

Weighted average number of shares, diluted		19,733			19,631			19,721			20,504			19,743			19,599

~~MEDCATH CORPORATION~~

MEDCATH CORPORATION
CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY

(In thousands)

(Unaudited)

Accumulated
Other
Common Stock Paid-in Accumulated Comprehensive Treasury Stock
Shares Par Value Capital Deficit (Loss) Shares Amount Total
Balance, September 30, 2008 21,553 $ 216 $ 455,494 $ (41,138 ) $ (179 ) 1,954 $ (44,797 ) $ 369,596
Stock awards, including income tax benefit 139 — (2,216 ) — — — — (2,216 )
Share-based compensation expense — — 2,068 — — — — 2,068
Comprehensive income:
Net income — — — 8,324 — — — 8,324
Change in fair value of interest rate swap, net of income tax benefit — — — — (147 ) — — (147 )

Total comprehensive income 8,177

Balance, June 30, 2009 21,692 $ 216 $ 455,346 $ (32,814 ) $ (326 ) 1,954 $ (44,797 ) $ 377,625


																										Redeemable
												Accumulated														Noncontrolling
												Other											Total			Interests
	Common Stock					Paid-in			Accumulated			Comprehensive			Treasury Stock					Noncontrolling			Equity			(Temporary
	Shares			Par Value		Capital			Deficit			Loss			Shares		Amount			Interests			(Permanent)			Equity)

Balance, September 30, 2009		22,105		$	216	$	455,259		$	(91,420	)	$	(360	)		1,954	$	(44,797	)	$	18,184		$	337,082		$	7,448
Stock awards, including cancelations and income tax benefit		359			—		154			—			—			—		—			—			154			—
Tax withholdings for vested restricted stock awards		(27	)		—		(253	)		—			—			—		—			—			(253	)		—
Distributions to noncontrolling interests		—			—		—			—			—			—		—			(11,595	)		(11,595	)		(3,560	)
Acquisitions and other transactions impacting noncontrolling interests		—			—		—			—			—			—		—			119			119			26
Sale of equity interest		—			—		113			—			—			—		—			27			140			—
Comprehensive loss:
Net loss		—			—		—			(2,656	)		—			—		—			458			(2,198	)		383
Change in fair value of interest rate swap, net of income tax benefit (*)		—			—		—			—			56			—		—			—			56			—

Total comprehensive loss																								(2,142	)		383

Balance, December 31, 2009		22,437		$	216	$	455,273		$	(94,076	)	$	(304	)		1,954	$	(44,797	)	$	7,193		$	323,505		$	4,297


(*)		Tax benefits were $38 for the quarter ended December 31, 2009.

See notes to unaudited consolidated financial statements.

~~MEDCATH CORPORATION~~

MEDCATH CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)


	Nine Months Ended June 30,						Three Months Ended December 31,
	2009			2008			2009			2008
Net income	$	8,324		$	20,521
Net (loss) income							$	(1,815	)	$	5,369
Adjustments to reconcile net income to net cash provided by operating activities:
Income from discontinued operations, net of taxes		(3,936	)		(7,843	)
Loss (income) from discontinued operations, net of taxes								288			(4,921	)
Bad debt expense		34,558			31,852			11,925			11,429
Depreciation		23,258			22,535			9,035			7,801
Amortization		589			411			8			30
Excess income tax benefit on stock awards and options		—			(648	)
Loss on disposal of property, equipment and other assets		138			391			137			73
Share-based compensation expense		2,068			5,463			608			998
Loss on early extinguishment of debt		6,702			—			—			6,961
Amortization of loan acquisition costs		784			659			252			279
Equity in earnings of unconsolidated affiliates, net of distributions received		1,470			(536	)		6,217			4,018
Minority interest share of earnings of consolidated subsidiaries		9,703			12,644
Other		(34	)		—
Deferred income taxes		58			(1,846	)		(103	)		(75	)
Change in assets and liabilities that relate to operations:
Accounts receivable		(26,888	)		(37,238	)		(14,111	)		(13,498	)
Medical supplies		(2,856	)		(1,737	)		(668	)		(2,321	)
Prepaids and other assets		(2,252	)		1,188
Prepaid and other assets								(3,399	)		864
Accounts payable and accrued liabilities		3,040			(10,347	)		(4,496	)		1,847

Net cash provided by operating activities of continuing operations		54,726			35,469			3,878			18,854
Net cash (used in) provided by operating activities of discontinued operations		(1,205	)		521
Net cash used in operating activities of discontinued operations								(343	)		(1,729	)

Net cash provided by operating activities		53,521			35,990			3,535			17,125

Investing activities:
Purchases of property and equipment		(72,399	)		(38,127	)		(9,310	)		(30,056	)
Proceeds from sale of property and equipment		856			358			74			119
Investments in affiliates		—			(9,532	)
Return of investment in affiliates		307			—

Net cash used in investing activities of continuing operations		(71,236	)		(47,301	)		(9,236	)		(29,937	)
Net cash provided by investing activities of discontinued operations		6,895			76,225			—			6,909

Net cash (used in) provided by investing activities		(64,341	)		28,924
Net cash used in investing activities								(9,236	)		(23,028	)

Financing activities:
Proceeds from issuance of long-term debt		83,479			—			—			83,662
Repayments of long-term debt		(115,515	)		(2,144	)		(5,800	)		(108,194	)
Repayments of obligations under capital leases		(949	)		(1,024	)		(506	)		(264	)
Distributions to minority partners		(12,175	)		(14,813	)
Proceeds from exercised stock options		77			3,947
Purchase of treasury shares		—			(44,403	)
Excess income tax benefit on stock awards and options		—			648
Distributions to noncontrolling interests								(8,218	)		(9,424	)
Investment by noncontrolling interests								153			—
Sale of equity interest in subsidiary								140			—
Tax withholding of vested restricted stock awards								(253	)		—

Net cash used in financing activities of continuing operations		(45,083	)		(57,789	)		(14,484	)		(34,220	)
Net cash used in financing activities of discontinued operations		(3,256	)		(14,745	)		(6,937	)		(2,305	)

Net cash used in financing activities		(48,339	)		(72,534	)		(21,421	)		(36,525	)


Net (decrease) increase in cash and cash equivalents		(59,159	)		(7,620	)
Net decrease in cash and cash equivalents								(27,122	)		(42,428	)
Cash and cash equivalents:
Beginning of period		112,068			145,385			61,701			112,068

End of period	$	52,909		$	137,765		$	34,579		$	69,640


Cash and cash equivalents of continuing operations		42,857			120,735			22,760			56,912
Cash and cash equivalents of discontinued operations		10,052			17,030			11,819			12,728

~~MEDCATH CORPORATION~~

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

1. Business and Basis of Presentation

MedCath Corporation (the “Company”) primarily focuses on providing high acuity services, predominantly the diagnosis and treatment of cardiovascular disease. The Company owns and operates hospitals in partnership with physicians, most of whom are cardiologists and cardiovascular surgeons. While each of the Company’s majority-owned hospitals (collectively, the “Hospital Division”) is licensed as a general acute care hospital, the Company focuses on serving the unique needs of patients suffering from cardiovascular disease. As of ~~June 30,~~December 31, 2009, the Company and its physician partners have an ownership interest in and operate ~~nine~~ten hospitals in seven states, with a total of ~~755~~825 licensed beds.

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

The Company accounts for all but two of its owned and operated hospitals as consolidated subsidiaries. The Company owns a ~~minority interest~~noncontrolling interests in the Avera Heart Hospital of South Dakota and Harlingen Medical Center as of ~~June 30, 2009 and is not the primary beneficiary under the revised version of Financial Accounting Standards Board (“FASB”) Interpretation No. 46,~~~~Consolidation of Variable Interest Entities, an interpretation of ARB No. 51~~~~(“FIN No. 46-R”).~~December 31, 2009. Therefore, the Company is unable to consolidate these hospitals’ results of operations and financial position, but rather is required to account for its ~~minority ownership interest~~noncontrolling interests in these hospitals as an equity method ~~investment in accordance with Accounting Principles Board Opinion No. 18,~~~~The Equity Method of Accounting for Investments in Common Stock~~~~, see Note 5.~~investments.

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

Upon the occurrence of certain fundamental regulatory changes, the Company could be obligated, under the terms of certain of its investees’ operating agreements, to purchase some or all of the noncontrolling interests related to certain of the Company’s subsidiaries. While the Company believes that the likelihood of a change in current law that would trigger such purchases was remote as of December 31, 2009, the occurrence of such regulatory changes is outside the control of the Company. As a result, these noncontrolling interests that are subject to this redemption feature are not included as part of the Company’s equity and are carried as redeemable noncontrolling interests in equity of consolidated subsidiaries on the Company’s consolidated balance sheets.

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

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

Long-Lived Assets— Long-lived assets, which include finite lived intangible assets, are evaluated for impairment when events or changes in business circumstances indicate that the carrying amount of the assets may not be fully recoverable. An impairment loss would be recognized when estimated undiscounted future cash flows expected to result from the use of an asset and its eventual disposition are less than its carrying amount. The determination of whether or not long-lived assets have become impaired involves a significant level of judgment in the assumptions underlying the approach used to determine the estimated future cash flows expected to result from the use of those assets. Changes in the Company’s strategy, assumptions and/or market conditions could significantly impact these judgments and require adjustments to recorded amounts of long-lived assets. Due to a decline in operating performance at certain hospitals during 2009, the Company performed impairment tests as of September 30, 2009. The results of those tests indicated that no impairment existed as of that date. The Company will continue to monitor operating performance to determine if additional impairment tests are necessary in future periods. If impairment is determined to be present in such periods, the resulting impairment charges could be material to the Company’s consolidated financial statements.

The Company’s unaudited interim consolidated financial statements as of ~~June 30,~~December 31, 2009 and for the three ~~and nine~~ months ended ~~June 30,~~December 31, 2009 and 2008 have been prepared in accordance with accounting principles generally accepted in the United States of America hereafter, ~~(generally~~(“generally accepted accounting ~~principles)~~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, ~~2008.~~2009. During the ~~nine~~three months ended ~~June 30,~~December 31, 2009, 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, ~~2008.~~2009.

The Company has evaluated subsequent events through February 9, 2010, the date these consolidated financial statements were issued, as filed in Form 10-Q with the SEC.

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:

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

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

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

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

Effective the first quarter of fiscal 2009 the Company adopted a new accounting standard issued by the ~~provisions of Statement of Financial Accounting Standards No. 157,~~~~Fair Value Measures~~~~(“SFAS 157”). SFAS 157~~FASB that defines fair value, establishes a framework for measuring fair value and enhances disclosures about fair value measures required under other accounting pronouncements, but does not change existing guidance as to whether or not an instrument is carried at fair value. In February 2008, the ~~Financial Accounting Standards Board (“FASB”) issued~~ FASB ~~Staff Position (“FSP”) Financial Accounting Standard (“FAS”) 157-1,~~~~Application of FASB Statement No. 157 to FASB Statement No. 13 and Its Related Interpretive Accounting Pronouncements That Address Leasing Transactions~~~~, and FSP FAS 157-2,~~~~Effective Date of FASB Statement No. 157~~~~. FSP FAS 157-1 removes leasing from the scope of SFAS No. 157. FSP FAS 157-2 delays~~delayed the effective date of ~~SFAS No. 157~~this new standard for all nonfinancial assets and ~~nonfinancial~~ liabilities, except those that are recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually). ~~In accordance with the provisions of FSP FAS 157-2 the~~The Company ~~has~~ elected to defer implementation of ~~SFAS 157~~this standard until October 1, ~~2010~~2009 as it relates to the Company’s non-financial assets and non-financial liabilities that are not permitted or required to be measured at fair value on a recurring basis. The Company ~~is evaluating the impact, if any, SFAS 157 will have~~adopted this standard on those non-financial assets and liabilities. The adoption of SFAS 157, in regard to financial assets and liabilities, did not have any impact on the Company’s consolidated balance sheets, results of operations or cash flows, as the Company did not have any financial assets or liabilities that are required to be re-measured and reported at fair value as of and for the nine months ended June 30, 2009.

~~Effective~~ October 1, ~~2008 the Company adopted the provisions of Statements of Financial Accounting Standards No. 159,~~~~The Fair Value Option for Financial Assets and Financial Liabilities~~ ~~(“SFAS 159”). SFAS 159 permits entities~~2009 with no impact to choose to measure eligible items at fair value at specified election dates and report unrealized gains and losses on items for which the fair value option has been elected in earnings at each subsequent reporting date. The Company has elected not to apply the fair value option to any “eligible items”, as defined by SFAS 159.

~~MEDCATH CORPORATION~~
~~NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS — Continued~~

~~Effective June 30, 2009 the Company adopted the provisions of FSP SFAS 107-1 and APB 28-1,~~~~Interim Disclosures about Fair Value of Financial Instruments~~~~(“FSP SFAS No. 107-1 and APB 28-1”). FSP SFAS No. 107-1 and APB 28-1, amend SFAS No. 107,~~~~Disclosures about Fair Value of Financial Instruments~~~~and APB Opinion No. 28,~~~~Interim Financial Reporting~~~~to require disclosures of the fair value of~~its consolidated financial ~~instruments in interim financial~~ statements. ~~See Note 6 for further disclosures.~~

~~Effective June 30, 2009 the Company adopted the provisions of Statements of Financial Accounting Standards No. 165,~~~~Subsequent Events~~(“SFAS 165”). SFAS 165 establishes general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued or are available to be issued. In particular, SFAS No. 165 sets forth the following: (i) the period after the balance sheet date during which management of a reporting entity should evaluate events or transactions that may occur for potential recognition or disclosure in the financial statements; (ii) the circumstances under which an entity should recognize events or transactions occurring after the balance sheet date in its financial statements; and (iii) the disclosures that an entity should make about events or transactions that occurred after the balance sheet date. See Note 13 for further disclosures.

~~Effective June 30, 2009 the Company adopted the provisions of FSP SFAS 115-2 and SFAS 124-2~~~~Recognition and Presentation of Other-Than-Temporary Impairments~~(“FSP SFAS 115-2 and SFAS 124-2”), which modifies the existing other than temporary impairments (“OTTI”) model for investments in debt securities. Under FSP SFAS 115-2 and SFAS 124-2, the primary change to the OTTI model for debt securities is the change in focus from an entity’s intent and ability to hold a security until recovery. Instead, an OTTI is triggered if (1) an entity has the intent to sell the security, (2) it is more likely than not that it will be required to sell the security before recovery, or (3) it does not expect to recover the entire amortized cost basis of the security. In addition, FSP SFAS 115-2 and SFAS 124-2 changes the presentation of an OTTI in the income statement if the only reason for recognition is a credit loss (i.e., an entity does not expect to recover its entire amortized cost basis). The adoption of FSP SFAS 115-2 and SFAS 124-2 did not have an impact on the Company’s consolidated balance sheets, results of operations or cash flows.

~~Effective June 30, 2009 the Company adopted the provisions of FSP SFAS 157-4~~~~Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly~~(“FSP SFAS 157-4”), which provides guidance on (1) estimating the fair value of an asset or liability (financial and nonfinancial) when the volume and level of activity for the asset or liability have significantly decreased and (2) identifying transactions that are not orderly. The adoption of FSP SFAS 157-4 did not have an impact on the Company’s consolidated balance sheets, results of operations or cash flows.

~~Recently Issued~~Recent Accounting Pronouncements:

OnIn June ~~12,~~ 2009, the FASB issued ~~Statement of Financial Accounting Standards No. 167,~~~~Amendments to FASB Interpretation No, 46(R)~~~~(“SFAS 167”), which~~a new accounting standard that amends the consolidation guidance that applies to variable interest entities (“VIE”s)). The amendments will significantly affect the overall consolidation ~~analysis under FIN No. 46-R.~~analysis. The provisions of ~~SFAS 167~~this new accounting standard revise the definition and consideration of VIEs, primary beneficiary, and triggering events in which a company must re-evaluate its conclusions as to the consolidation of an ~~entity under the provisions of SFAS 167. SFAS 167~~entity. This new accounting standard is effective as of the beginning of the first fiscal year after November 15, 2009, fiscal 2011 for the Company. The Company is evaluating the potential impacts the adoption of ~~SFAS 167~~this new standard will have on its consolidated financial statements.

~~On June 29,~~3. Divestitures

During September 2009 the ~~FASB issued Statement~~MedCath Partners Division of ~~Financial Accounting Standards No. 168,~~~~The FASB Accounting Standards Codification and~~ the ~~Hierarchy~~Company sold the assets of ~~Generally Accepted Accounting Principles a replacement of FASB Statement No. 162~~~~(“SFAS 168”~~Sun City Cardiac Center Associates (“Sun City”). The ~~FASB Accounting Standards Codification (the “Codification”) will become~~Company has classified the ~~source~~results of ~~authoritative U.S. generally accepted accounting principles (“GAAP”) recognized by~~operations of Sun City within (loss) income from discontinued operations, net of taxes for the ~~FASB to be applied by nongovernmental entities. Rules~~three months ended December 31, 2009 and interpretive releases of the SEC under authority of federal securities laws are also sources of authoritative GAAP for SEC registrants, such as the Company. On the effective date of SFAS 168, the Codification will supersede all then-existing non-SEC accounting and reporting standards. All other nongrandfathered non-SEC accounting literature not included in the Codification will become nonauthoritative. SFAS 168 is effective for financial statements issued for interim and annual periods ending after September 15, 2009. The Company does not anticipate the adoption of SFAS 168 will have a material impact on its consolidated financial statements.

~~3. Divestitures~~2008.

During December 2008 the MedCath Partners Division of the Company sold its entire interest in Cape Cod Cardiology Services, LLC (“Cape Cod”) for $6.9 million, ~~resulting~~which resulted in a gain of $4.0 million, net of ~~tax, which~~taxes. The Company has ~~been included in~~classified the results of operations of Cape Cod within (loss) income from discontinued operations, net of taxes for the ~~nine~~three months ended ~~June 30, 2009.~~December 31, 2009 and 2008.

During May 2008, the Hospital Division of the Company sold the net assets of Dayton Heart Hospital (“DHH”). ~~In accordance with Statement of Financial Accounting Standards No. 144,~~~~Accounting for the Impairment or Disposal of Long-Lived Assets~~~~(“SFAS 144”) the~~The Company has classified the results of operations ~~and the impacts from the collections and payments of~~related to the remaining assets and liabilities associated with ~~the facilities divested, as~~DHH within (loss) income from discontinued operations, net of taxes for the three ~~and nine~~ months ended ~~June 30,~~December 31, 2009 and 2008.

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

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


										Three Months Ended December 31,
										2009			2008
	Three Months Ended June 30,					Nine Months Ended June 30,
	2009			2008		2009		2008
Net revenue	$	78		$	9,260	$	1,910	$	48,233	$	(44	)	$	4,725
Gain from sale of Cape Cod		—			—		6,640		—		—			6,640
(Loss) income before income taxes		(150	)		8,515		6,502		9,652		(379	)		7,641
Income tax (benefit) expense		(60	)		1,645		2,566		1,809		(91	)		2,720

Net (loss) income	$	(90	)	$	6,870	$	3,936	$	7,843		(288	)		4,921
Less: Net loss (income) attributable to noncontrolling interest											143			(760	)

Net (loss) income attributable to MedCath Corporation										$	(145	)	$	4,161


										December 31,			September 30,
										2009			2009

Cash and cash equivalents										$	11,819		$	29,687
Accounts receivable, net											65			324
Other current assets											58			—

Current assets of discontinued operations										$	11,942		$	30,011


Accounts payable										$	9,762		$	9,898
Accrued liabilities											145			267

Current liabilities of discontinued operations										$	9,907		$	10,165


4. Accounts Receivable

Accounts receivable, net, consists of the following:

										December 31,			September 30,
										2009			2009
Receivables, principally from patients and third-party payors										$	153,167		$	150,476
Receivables, principally from billings to hospitals for various cardiovascular procedures											1,744			1,494
Amounts due under management contracts											225			228
Other											7,189			6,094

											162,325			158,292
Less allowance for doubtful accounts											(89,729	)		(87,882	)

Accounts receivable, net										$	72,596		$	70,410

~~MEDCATH CORPORATION~~
~~NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS — Continued~~Credit Facility.

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

The entire $75.0 million outstanding under the Credit Facility at December 31, 2009 relates to the Term Loan. The maximum availability under the ~~revolver~~Revolver is $85.0 million which is reduced by ~~$5.0 million of outstanding borrowings and $3.5 million of~~ outstanding letters of ~~credit.~~credit totaling $2.4 million at December 31, 2009.

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

Debt Covenants—At ~~June~~December 31, 2009 and September 30, 2009, the Company was in violation of financial covenants under equipment loans at ~~Texsan~~its consolidated subsidiary TexSAn Heart Hospital. Accordingly, the total outstanding balance ~~of $6.8 million~~ for these loans of $5.3 million and $6.1 million, respectively, has been included in the current portion of long-term debt and obligations under capital leases on the Company’s consolidated balance ~~sheet.~~sheets. The covenant violations did not result in any other non-compliance related to the remaining covenants governing the Company’s outstanding debt; thereby the Company remained in compliance with all other covenants.

Fair Value of Financial Instruments—The Company considers the carrying ~~amount~~amounts of significant classes of financial instruments on the consolidated balance sheets including cash and cash equivalents; accounts receivable, net, accounts payable; income taxes payable; accrued liabilities; variable rate long-term debt; obligations under capital leases; and other long-term obligations 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 ~~June 30,~~December 31, 2009 and September 30, ~~2008.~~2009. The estimated fair value of long-term debt, including the current portion, at ~~June 30,~~December 31, 2009 iswas approximately ~~$40.0~~$120.8 million as compared to a carrying value of ~~approximately $42.1~~$115.6 million. At September 30, ~~2008,~~2009, the estimated fair value of long-term debt, including the current portion, was approximately ~~$152.8~~$127.6 million as compared to a carrying value of ~~approximately $146.4~~$121.4 million. Fair value of the Company’s fixed rate debt was estimated using discontinued cash flow analyses, based on the Company’s current incremental borrowing rates for similar types of arrangements and market information. The fair value of the Company’s variable rate debt was determined to approximate its carrying value, due to the underlying variable interest rates.

7. Contingencies and Commitments

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

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

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

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

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

~~MEDCATH CORPORATION~~
~~NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS — Continued~~

The Company is involved in various claims and legal actions in the ordinary course of business, including malpractice claims arising from services provided to patients that have been asserted by various claimants and additional claims that may be asserted for known incidents through ~~June 30,~~December 31, 2009. 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.

A joint venture in our MedCath Partners Division provides cardiac care services to a hospital pursuant to a management and services agreement. The joint venture and the hospital disagreed regarding the interpretation of certain provisions in the management and services agreement. During August 2008 the two parties reached an agreement as to settlement, resulting in the Company recording a liability of $0.7 million which is included within accrued liabilities in the consolidated balance sheet at September 30, 2008. During November 2008 the entire settlement amount was paid by the Company.

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

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

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

The Company has a ~~one year~~one-year claims-made policy providing coverage for medical malpractice claim amounts in excess of $2.0 million of retained liability per claim. The Company additionally has insurance to reduce the retained liability per claim to $250,000 for the MedCath Partners ~~division. Due to~~Division. Because of the Company’s self-insured retention levels, the Company is required to recognize an estimated expense/liability for the amount of retained liability applicable to each malpractice claim. As of ~~June 30,~~December 31, 2009 and September 30, ~~2008,~~2009, the total estimated liability for the Company’s self-insured retention on medical malpractice claims, including an estimated amount for incurred but not reported claims, was approximately ~~$5.4~~$4.3 million and ~~$4.6~~$4.9 million, respectively, which is included in other accrued liabilities in the consolidated balance sheets. The Company maintains this reserve based on actuarial estimates using the Company’s historical experience with claims and assumptions about future events.

In addition to reserves for medical malpractice, the Company also maintains reserves for self-insured workman’s compensation, healthcare and dental coverage. The total estimated reserve for self-insured liabilities for workman’s compensation, employee health and dental claims was ~~$3.2~~$4.2 million and $3.5 million as of ~~June 30,~~December 31, 2009 and September 30, ~~2008~~2009, respectively, which is included in other accrued liabilities in the consolidated balance sheets. The Company maintains this reserve based on historical experience with claims. The Company maintains commercial stop loss coverage for health and dental insurance program of $175,000 per plan participant.

Commitments —The Company’s consolidated subsidiary hospitals provide guarantees to certain physician groups for funds required to operate and maintain services for the benefit of the hospital’s patients including emergency care services and anesthesiology services, among other ~~services, which are accounted in accordance with Interpretation No. 45-3,~~~~Application~~services. These guarantees extend for the duration of ~~FASB Interpretation No. 45 to Minimum Revenue Guarantees Granted to a Business or Its Owners~~~~issued by~~ the ~~FASB.~~underlying service agreements. As of ~~June 30,~~December 31, 2009, the maximum potential future payments that the Company could be required to make under these guarantees ~~were~~was approximately ~~$26.5~~$31.5 million through ~~July~~October 2012. At ~~June 30,~~December 31, 2009 the Company had ~~a liability~~total liabilities of ~~$12.4~~$13.4 million for the fair value of these guarantees, of which ~~$6.0~~$7.0 million is in other accrued liabilities and $6.4 million is in other long term obligations. Additionally, the Company had ~~an asset~~assets of ~~$12.3~~$13.6 million representing the future services to be provided by the physicians, of which ~~$5.9~~$7.5 million is in prepaid expenses and other current assets and ~~$6.4~~$6.1 million is in other assets.

8. Per Share Data

~~The calculation of diluted earnings per share considers the potential dilutive effect of~~No options to purchase 1,205,587 and 1,810,614 shares of common stock at prices ranging from $4.75 to $33.05, which were outstanding at June 30, 2009 and 2008, respectively, as well as 487,335 and 145,430 shares ofor restricted stock ~~which~~ were ~~outstanding at June 30, 2009 and 2008, respectively. Of the outstanding stock options and restricted stock 1,692,922 and 1,501,000 have not been~~ included in the calculation of diluted earnings per share for the three months ended ~~June 30,~~December 31, 2009 and 2008 ~~respectively, and 1,637,260 and 786,000 have not been included in~~as the ~~calculation~~consideration of ~~diluted earnings per share for~~such shares would be anti-dilutive due to the ~~nine months ended June 30, 2009 and 2008, respectively, because the stock options and restricted stock were anti-dilutive.~~

~~MEDCATH CORPORATION~~
~~NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS — Continued~~loss from continuing operations, net of tax.

9. Stock Based Compensation

Compensation expense from the grant of equity awards made to employees and directors is recognized based on the estimated fair value of each award over each applicable awards vesting period. The Company ~~accounts for stock-based compensation under the provisions of SFAS No. 123(R),~~~~Share-Based Payment~~(“SFAS 123(R)”). SFAS 123(R) established accounting for stock-based awards exchanged for employee and certain nonemployee services. Accordingly, for employee awards, equity classified stock-based compensation cost is measured at the grant date, based onestimates the fair value of equity awards on the ~~award,~~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 ~~as expense~~on a straight-line basis over the requisite service ~~period.~~period for the awards that are ultimately expected to vest. Stock based compensation expense recorded during the three ~~and nine~~ months ended ~~June 30,~~December 31, 2009 and 2008 was ~~$0.2~~$0.6 million and ~~$2.1~~$1.0 million, respectively. ~~Tax~~The associated tax benefits ~~generated from stock based compensation expense was $0.1 million and $0.8 million for~~related to the ~~three and nine months ended June 30, 2009, respectively. Stock based~~ compensation expense recognized for the three ~~and nine~~ months ended ~~June 30,~~December 31, 2009 and 2008 was ~~$1.5~~$0.2 million and ~~$5.5~~$0.4 million, ~~respectively. Tax benefits generated from stock based compensation expense was $0.6 million and $2.2 million for the three and nine months ended June 30, 2008,~~ respectively.

Stock Options

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


	For the Three Months Ended										For the Three Months Ended
	June 30, 2009					June 30, 2008					December 31, 2009					December 31, 2008
				Weighted-					Weighted-					Weighted-					Weighted-
	Number of			Average		Number of			Average		Number of			Average		Number of			Average
	Stock Options			Exercise Price		Stock Options			Exercise Price		Stock Options			Exercise Price		Stock Options			Exercise Price
Outstanding stock options, beginning of period		1,302,587		$	21.60		1,802,112		$	22.03		1,027,387		$	22.25		1,776,837		$	22.15

Granted		—			—		149,000			19.92		—			—		82,000			17.46
Exercised		(7,000	)		10.95		(72,748	)		12.79
Cancelled		(90,000	)		21.60		(67,750	)		26.23		(40,750	)		22.94		(33,000	)		19.77


Outstanding stock options, end of period		1,205,587		$	21.66		1,810,614		$	22.07		986,637		$	22.23		1,825,837		$	21.98

For the Nine Months Ended
June 30, 2009 June 30, 2008
Weighted- Weighted-
Number of Average Number of Average
Stock Options Exercise Price Stock Options Exercise Price
Outstanding stock options, beginning of period 1,776,837 $ 22.15 1,727,112 $ 19.11

Granted 82,000 17.46 480,000 24.51
Exercised (7,000 ) 10.95 (252,748 ) 20.16
Cancelled (646,250 ) 22.59 (143,750 ) 27.02

Outstanding stock options, end of period 1,205,587 $ 21.66 1,810,614 $ 22.07

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

Restricted Stock Awards

During the three ~~and nine~~ months ended ~~June 30,~~December 31, 2009, the Company granted to employees ~~96,725 and 520,878~~369,164 shares of restricted ~~stock, respectively.~~stock. Restricted stock granted to employees, excluding executives of the Company, vest ~~in equal annual installments~~annually on December 31 over a three year period. Executives of the Company defined by the Company as vice president or higher, received two ~~separately~~ equal ~~grants.~~grants of restricted stock. The first grant ~~of restricted stock~~ vests ~~in equal annual installments~~annually on December 31 over a three year period. The second grant vests annually on December 31, over a three year period ~~the second grant of restricted stock vests over a three year period based on established~~if certain performance conditions. During the second quarter of this fiscal year, the Company granted 95,900 shares of restricted stock units to directors, which were fully vested at the date of grant but have certain sales restrictions. Compensation expense, derived from the market price of the Company’s stock at the date of grant, less estimated forfeitures, is recognized on a straight-line basis over the vesting period.conditions are met. At ~~June 30,~~December 31, 2009 the Company had ~~$2.8~~$4.0 million of unrecognized compensation expense associated with restricted stock awards.

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

11. Intangible Assets

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

December 31, 2009

September 30, 2009

Gross Carrying

Accumulated

Gross Carrying

Accumulated

Amount

Amortization

Amount

Amortization

Intangible Assets

555

(228

)

730

(352

)

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

12. Comprehensive Income

Three Months Ended June 30, Nine Months Ended June 30,
2009 2008 2009 2008
Net Income $ 496 $ 11,772 $ 8,324 $ 20,521
Changes in fair value of interest rate swaps, net of tax benefit 126 146 (147 ) (99 )

Comprehensive Income $ 622 $ 11,918 $ 8,177 $ 20,422

~~13. Subsequent Events~~

The Company has evaluated events subsequent to June 30, 2009 through August 7, 2009, the date the Company filed such unaudited consolidated financial statements on Form 10-Q with the SEC, and determined that no material subsequent events have occurred.


	Three Months Ended December 31,
	2009			2008
Net (loss) income	$	(1,815	)	$	5,369
Changes in fair value of interest rate swap, net of tax benefit		56			(448	)

Comprehensive (loss) income		(1,759	)		4,921
Less: Net income attributable to noncontrolling interests		(841	)		(3,123	)

Comprehensive (loss) income attributable to
MedCath Corporation common stockholders	$	(2,600	)	$	1,798

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 onForm 10-K for the fiscal year ended September 30, ~~2008.~~2009.

Overview

General. We are a healthcare provider focused primarily on providing high acuity services, predominantly the diagnosis and treatment of cardiovascular disease. We own and operate hospitals in partnership with physicians whom we believe have established reputations for clinical excellence. We have ownership interests in and operate ~~nine~~ten hospitals, with a total of ~~755~~825 licensed beds, of which ~~705~~735 are staffed and available, and are located predominately in high growth markets in seven states: Arizona, Arkansas, California, Louisiana, New Mexico, South Dakota, and Texas.~~We are currently in the process of developing~~ During May 2009, we completed our 79 licensed bed expansion at Louisiana Medical Center and Heart Hospital and built space for an additional 40 beds at that hospital. During October 2009, we opened a new acute care hospital, Hualapai Mountain Medical Center (“HMMC”), in Kingman, Arizona. ~~We expect this hospital to open in late 2009 or early 2010.~~ This hospital is designed to accommodate a total of 106 licensed beds, ~~and will initially open~~ with an initial opening of 70 of its licensed beds. We completed our 79 bed expansion at Louisiana Medical Center and Heart Hospital during May 2009, with remaining capacity for an additional 40 beds at that hospital. We also have plans to expand our Bakersfield Heart Hospital by 72 inpatient beds and 16 emergency department beds that will diversify the services offered by that hospital.

In addition to our hospitals, we currently own and/or manage 1916 cardiac diagnostic and therapeutic facilities. ~~Twelve~~Ten of these facilities are located at hospitals operated by other parties. These facilities offer invasive diagnostic and, in some cases, therapeutic procedures. The remaining ~~seven~~six facilities are not located at hospitals and offer only diagnostic procedures.

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

Revenue Sources by Division.The largest percentage of our net revenue is attributable to our ~~Hospital Division.~~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 June 30,						Nine Months Ended June 30,						Three Months Ended December 31,
Division	2009			2008			2009			2008			2009			2008
Hospital		95.0	%		94.4	%		95.0	%		94.2	%		97.3	%		96.7	%
MedCath Partners		4.9	%		5.2	%		4.9	%		5.4	%		2.6	%		3.2	%
Corporate and other		0.1	%		0.4	%		0.1	%		0.4	%		0.1	%		0.1	%

Net Revenue		100.0	%		100.0	%		100.0	%		100.0	%		100.0	%		100.0	%

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

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

Results of Operations

Three Months Ended ~~June 30,~~December 31, 2009 Compared to Three Months Ended ~~June 30,~~December 31, 2008

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


	Three Months Ended June 30,																		Three Months Ended December 31,
	(in thousands except percentages)																		(in thousands except percentages)
							Increase/Decrease						% of Net Revenue												Increase/(Decrease)						% of Net Revenue
	2009			2008			$			%			2009			2008			2009			2008			$			%			2009			2008
Net revenue	$	150,904		$	154,273		$	(3,369	)		(2.2	)%		100.0	%		100.0	%	$	147,260		$	150,245		$	(2,985	)		(2.0	)%		100.0	%		100.0	%
Operating expenses:
Personnel expense		50,862			50,520			342			0.7	%		33.7	%		32.8	%		51,821			50,169			1,652			3.3	%		35.2	%		33.4	%
Medical supplies expense		44,995			42,757			2,238			5.2	%		29.8	%		27.7	%		41,859			41,642			217			0.5	%		28.4	%		27.7	%
Bad debt expense		12,547			10,235			2,312			22.6	%		8.3	%		6.6	%		11,925			11,429			496			4.3	%		8.1	%		7.6	%
Other operating expenses		31,441			29,555			1,886			6.4	%		20.8	%		19.2	%		34,452			31,902			2,550			8.0	%		23.4	%		21.2	%
Pre-opening expenses		754			149			605			406.0	%		0.5	%		0.1	%		866			207			659			318.4	%		0.6	%		0.1	%
Depreciation		7,858			7,505			353			4.7	%		5.2	%		4.9	%		9,035			7,801			1,234			15.8	%		6.1	%		5.2	%
Amortization		230			149			81			54.4	%		0.2	%		0.1	%		8			30			(22	)		(73.3	)%		0.0	%		0.0	%
(Gain) loss on disposal of property, equipment and other assets		(26	)		225			(251	)		111.6	%		(0.0	)%		0.1	%
Loss on disposal of property, equipment and other assets																				137			73			64			87.7	%		0.1	%		0.1	%

Income from operations		2,243			13,178			(10,935	)		(83.0	)%		1.5	%		8.5	%
(Loss) income from operations																				(2,843	)		6,992			(9,835	)		(140.7	)%		(1.9	)%		4.7	%
Other income (expenses):
Interest expense		(1,151	)		(3,862	)		2,711			70.2	%		(0.8	)%		(2.5	)%		(1,813	)		(2,857	)		1,044			36.5	%		(1.2	)%		(1.9	)%
Loss on early extinguishment of debt																				—			(6,961	)		6,961			100.0	%		—			(4.6	)%
Interest and other income, net		52			284			(232	)		(81.7	)%		0.0	%		0.2	%		74			101			(27	)		(26.7	)%		0.1	%		0.1	%
Equity in net earnings of unconsolidated affiliates		2,265			2,636			(371	)		(14.1	)%		1.5	%		1.7	%		1,516			2,065			(549	)		(26.6	)%		1.0	%		1.3	%

Income from continuing operations before minority interest, income taxes and discontinued operations		3,409			12,236			(8,827	)		(72.1	)%		2.2	%		7.9	%
Minority interest share of earnings of consolidated subsidiaries		(2,287	)		(3,865	)		1,578			40.8	%		(1.5	)%		(2.5	)%
Loss from continuing operations before
income taxes																				(3,066	)		(660	)		(2,406	)		364.5	%		(2.0	)%		(0.4	)%
Income tax benefit																				(1,539	)		(1,108	)		(431	)		38.9	%		(1.0	)%		(0.7	)%

Income from continuing operations before income taxes and discontinued operations		1,122			8,371			(7,249	)		(86.6	)%		0.7	%		5.4	%
Income tax expense		536			3,469			(2,933	)		(84.5	)%		0.3	%		2.2	%

Income from continuing operations		586			4,902			(4,316	)		(88.0	)%		0.4	%		3.2	%
(Loss) income from continuing operations																				(1,527	)		448			(1,975	)		(440.8	)%		(1.0	)%		0.3	%
(Loss) income from discontinued operations, net of taxes		(90	)		6,870			(6,960	)		(101.3	)%		(0.1	)%		4.4	%		(288	)		4,921			(5,209	)		(105.9	)%		(0.2	)%		3.3	%

Net income	$	496		$	11,772		$	(11,276	)		(95.8	)%		0.3	%		7.6	%
Net (loss) income																				(1,815	)		5,369			(7,184	)		(133.8	)%		(1.2	)%		3.6	%
Less: Net income attributable to noncontrolling interest																				(841	)		(3,123	)		2,282			(73.1	)%		(0.6	)%		(2.1	)%

Net (loss) income attributable to MedCath Corporation																			$	(2,656	)	$	2,246		$	(4,902	)		(218.3	)%		(1.8	)%		1.5	%


Amounts attributable to MedCath Corporation common stockholders:
Loss from continuing operations, net of taxes																			$	(2,511	)	$	(1,915	)	$	(596	)		31.1	%		(1.7	)%		(1.3	)%
(Loss) income from discontinued operations, net of taxes																				(145	)		4,161			(4,306	)		(103.5	)%		(0.1	)%		2.8	%

Net (loss) income																			$	(2,656	)	$	2,246		$	(4,902	)		(218.3	)%		(1.8	)%		1.5	%

Same facility inpatient net revenue was 70% of the Hospital Division’s same facility net patient revenue for the first quarter of fiscal 2010 compared to approximately 72% for the first quarter of fiscal 2009. While our total same facility inpatient cases increased by 2%, total same facility hospital net patient revenue was down 4.7%, or $6.7 million, from $142.7 to $136.0. This decline is due primarily to an 8.3% reduction in inpatient open heart cases resulting in a $6.9 million reduction in total same facility net patient revenue offset by an increase in drug-eluting stents and other catheter procedures. We believe this decline is indicative that less invasive cardiac procedures, such as stents, and pharmaceutical treatments have been successful for our patients at our hospitals. This decline was offset by a 35%, or $6.1 million, increase in our inpatient non-cardiovascular cases. This increase is directly attributable to the expansion at several of our hospitals as well as seasonal illnesses.

Net revenue for the ~~third~~first quarter of fiscal ~~2008~~2010 included charity care deductions of ~~$4.2~~$2.6 million compared to charity care deductions of ~~$1.0~~$0.8 million for the first quarter of fiscal 2009. The ~~reduction~~increase is the result of ~~fewer~~more uninsured patients applying and qualifying for charity ~~discounts during~~care.

Personnel expense.Personnel expense increased 3.3% to $51.8 million for the ~~third~~first quarter of fiscal ~~2009~~2010 from $50.2 million for the first quarter of fiscal 2009. Personnel expense on a same facility basis was as follows:


	Three Months Ended December 31,
	(in thousands except percentages)
					Increase/(Decrease)						% of Net Revenue
	2009		2008		$			%			2009			2008
Personnel expense	$	48,360	$	50,169	$	(1,809	)		(3.6	)%		33.9	%		33.4	%

The $1.8 million reduction in same facility personnel expense was primarily due to a $1.5 million reduction in temporary contract labor, a $0.6 million reduction in bonus expense, a $0.4 million reduction in salaries and wages and a $0.4 million reduction in stock based compensation expense offset by increases in accrued paid time off expense and workers compensation expense. Temporary contract labor and salaries and wage expense were reduced by our efforts to better align our expenses with our revenue as well as several positions being vacant during the first quarter of fiscal 2010 compared to the same period of the prior year.

~~Net revenue for~~ Bonus expense is incurred as bonuses are accrued. Some of our facilities accrued less bonus expense during the ~~third~~first quarter of fiscal ~~2009 was reduced by $3.1 million as a result~~2010 compared to the same period of ~~a reduction in~~ the ~~estimated amount~~prior year due to the number of ~~Medicare Disproportionate Share Hospital (“DSH”) payments certain hospitals are eligible~~employees that qualified for ~~in prior periods. The primary method for a hospital to qualify for Medicare DSH reimbursement~~bonuses. Stock based compensation is recognized based on the number of equity awards granted. There was a ~~statutory formula that utilizes~~grant of restricted stock to employees during the percentage of inpatient days attributable to patients eligible for Medicaid, but not eligible for Medicare Part A, and a base formula called the Supplemental Security Income (“SSI”) percentage, which is released annually by the CMS. Based on the updated SSI percentage provided by CMS during June, 2009, we determined that four hospitals that we previously determined were eligible for DSH payments in fiscal 2007 and fiscal 2008 would either no longer be eligible for such payments or would be eligible for less payment than initially estimated.

~~Personnel expense.~~~~Personnel expense increased 0.7% to $50.9 million for the third~~first quarter of fiscal ~~2009 from $50.5 million~~2010 as well as the acceleration of expense upon the acceleration of vesting for grants issued during fiscal 2009. Paid time off expense is directly related to the ~~third~~hours earned and not taken by our employees. This expense will increase during any fiscal quarter in which wage increases were given to employees, which only applied to a few of our facilities. Workers compensation expense increased at one of our facilities due to a new claim incurred during the first quarter of fiscal 2008. The $0.4 million increase in personnel expense was due primarily to annual merit increases and a corresponding increase in benefits offset by a $1.3 million reduction in stock compensation expense. Stock based compensation expense was $0.2 million for the third quarter of fiscal 2009 compared to $1.5 million for the third quarter of fiscal 2008. The stock based compensation expense for the third quarter of fiscal 2009 was recorded based on a vesting schedule related to the issuance of restricted shares to certain employees which vest over a three year period or vest 50% over a three year period and 50% over the same three year period if certain performance criteria are satisfied. The stock based compensation expense for the third quarter of fiscal 2008 was based on the issuance of stock options which vested immediately.2010.

Medical supplies expense.Medical supplies expense increased ~~5.2%~~0.5% to ~~$45.0~~$41.9 million for the ~~third~~first quarter of fiscal ~~2009~~2010 from ~~$42.8~~$41.6 million for the ~~third~~first quarter of fiscal ~~2008.~~2009. Medical supplies expense on a same facility basis was as follows:


	Three Months Ended December 31,
	(in thousands except percentages)
					Increase/(Decrease)						% of Net Revenue
	2009		2008		$			%			2009			2008
Medical supplies expense	$	41,063	$	41,642	$	(579	)		(1.4	)%		28.8	%		27.7	%

The ~~$2.2~~$0.6 million ~~increase~~decrease in medical supplies expense is a result of a ~~4.1%~~5.0% decrease in net revenue on a same facility basis. Medical supplies expense as a percentage of net revenue increased 1.1% in the first fiscal quarter of fiscal 2010 compared to the same period in the prior year. The increase in medical supplies expense as a percentage of net revenue is due to the mix of procedures performed during the first quarter of fiscal 2010. We had an 8.3% reduction in open heart ~~cases,~~surgeries, which have high net revenue per case. With less open heart net revenue, the percentage of medical supplies will increase as a ~~32.1% increase in musculoskeletal cases and a 42.6% increase in the usage~~percentage of drug eluting stents offset by a 20.6% decrease in the usage of bare metal stents. In addition, our average length of stay increased 9.3%, which resulted in a 11.3% increase in non-chargeable supply expense.net revenue.

Bad debt expense.Bad debt expense increased ~~22.6%~~4.3% to ~~$12.5~~$11.9 million for the ~~third~~first quarter of fiscal ~~2009~~2010 from ~~$10.2~~$11.4 million for the ~~third~~first quarter of fiscal ~~2008.~~2009. As a percentage of net revenue, bad debt expense increased to ~~8.3%~~8.1% for the ~~third~~first quarter of fiscal ~~2009~~2010 as compared to ~~6.6%~~7.6% for the comparable period of fiscal ~~2008.~~2009. Bad debt expense on a same facility basis was as follows:


	Three Months Ended December 31,
	(in thousands except percentages)
					Increase/(Decrease)						% of Net Revenue
	2009		2008		$			%			2009			2008
Bad debt expense	$	10,905	$	11,429	$	(524	)		(4.6	)%		7.6	%		7.6	%

Our total same facility uncompensated care including charity care and bad debt expense was ~~9.5%~~9.6% of total same facility net patient hospital revenue for the ~~third~~first quarter of fiscal ~~2009~~2010 compared to ~~9.6%~~8.5% of total same facility net patient revenue for the ~~third~~first quarter of fiscal ~~2008.~~2009. The total number of patients which applied and qualified for charity care ~~reduced~~increased during ~~third~~first quarter of fiscal ~~2009~~2010 compared to the ~~third~~first quarter of fiscal ~~2008.~~2009. We reported ~~$3.2~~$1.8 million more charity deductions to net revenue during the ~~third~~first quarter of fiscal ~~2008~~2010 when compared to the ~~third~~first quarter of fiscal 2009. Bad debt expense alone (not including charity care) decreased $0.5 million for the first quarter of fiscal 2010 compared to the same period of the prior year. This is attributable to our improved collection experience over the past several quarters as well a reduction in self-pay net revenue for certain of our facilities during the first quarter of fiscal 2010 compared to the first quarter of fiscal 2009.

Other operating expenses.Other operating expenses increased ~~6.4%~~8.0% to ~~$31.4~~$34.5 million for the ~~third~~first quarter of fiscal ~~2009~~2010 from ~~$29.6~~$31.9 million for the ~~third~~first quarter of fiscal ~~2008. The increase is attributable~~2009. Other operating expense on a same facility basis was as follows:


	Three Months Ended December 31,
	(in thousands except percentages)
					Increase/(Decrease)				% of Net Revenue
	2009		2008		$		%		2009			2008
Other operating expense	$	31,911	$	31,902	$	9		—		22.4	%		21.2	%

While our total same facility other operating expense remained flat for the first quarter of fiscal 2010 compared to fiscal 2009, we did experience some fluctuations in certain of our operating expenses that offset each other in comparison to the ~~following:~~

~~$1.1~~prior year. Our purchased service expense for clinical and non-clinical contractors increased approximately $0.9 million during the first quarter of fiscal 2010 compared to the same period of the prior year to accommodate the slight increase in ~~professional fees associated with an internal assessment~~volume at certain of ~~certain controls and procedures completed during the quarter.~~

~~$0.8 million increase in penalty~~our hospitals. In addition, maintenance expense for our Hospital Division increased $0.4 million for the ~~anticipated settlement~~first quarter fiscal 2010 when compared to the same period of ~~regulatory claims at two of~~the prior year due to the fact that our hospitals ~~related to the identification, return~~are aging and ~~self-reporting~~in need of ~~$0.7 million in reimbursement for certain procedures performed at those hospitals in prior fiscal years.~~

~~$0.4 million increase in severance payments.~~

~~The above~~higher maintenance. These increases were offset by a ~~decrease~~$0.6 reduction in ~~our~~ medical malpractice ~~insurance~~ expense ~~of $0.6~~and a $0.9 million ~~for~~reduction in advertising expense. Medical malpractice expense was higher during the ~~third~~first quarter of fiscal 2009 ~~compared~~due to ~~the third~~a claim incurred during that quarter, which has since been paid. Advertising expense has decreased due a decline in specific marketing campaigns in certain of ~~fiscal 2008.~~our markets.

Interest expense.Interest expense decreased ~~$2.7~~$1.0 million or ~~70.2%~~36.5% to ~~$1.2~~$1.8 million for the ~~third~~first quarter of fiscal ~~2009~~2010 from ~~$3.9~~$2.8 million for the ~~third~~first quarter of fiscal ~~2008.~~2009. The ~~$2.7~~$1.0 million decrease in interest expense is primarily attributable to the overall reduction in our outstanding debt and interest rates on our outstanding ~~debt,~~debt.

Equity in net earnings of unconsolidated affiliates.The net earnings of unconsolidated affiliates are comprised of our share of earnings in two unconsolidated hospitals, a hospital realty investment and several ventures within our MedCath Partners Division.

Total combined net earnings of unconsolidated affiliates in which we have a noncontrolling interest, decreased during the ~~capitalization~~first quarter of ~~interest on our capital expansion projects. Capitalized interest was $0.8~~fiscal 2010 to $5.8 million from $13.0 million for the ~~third~~same period of the prior year. Approximately $6.2 million of the reduction in total combined net earnings of unconsolidated affiliates was from unconsolidated affiliates within our MedCath Partners Division, $0.6 million of the reduction in total combined net earnings of unconsolidated affiliates was from unconsolidated affiliates within our Hospital Division and the remaining $0.4 million reduction was due to a medical office venture within corporate and other. As a result of these total combined decreases from our equity investments in unconsolidated affiliates, our equity in net earnings of unconsolidated affiliates decreased $0.5 million for the first quarter of fiscal ~~2009~~2010 as compared to ~~$0.4 million for~~ the ~~third quarter~~comparable period of fiscal ~~2008.~~2009.

~~Interest and other income.~~Net income attributable to noncontrolling interest.Interest and other income decreased to $0.1 million for the third quarter of fiscal 2009 from $0.3 million for the third quarter of fiscal 2008. The decrease in interest and other income is a direct result of the approximately $77.9 million decrease in our cash and cash equivalent balance from June 30, 2008 to June 30, 2009, which resulted in a reduction in interest earned on cash balances.

~~Minority interest share of earnings of consolidated subsidiaries.~~~~Minority~~Noncontrolling interest share of earnings of consolidated subsidiaries decreased to ~~$2.3~~$0.8 million for the first ~~three months~~quarter of fiscal ~~2009~~2010 from ~~$3.9~~$3.1 million for the comparable period of fiscal ~~2008.~~2009. Net income attributable to noncontrolling interest on a same facility basis was as follows:


	Three Months Ended December 31,
	(in thousands except percentages)
							Increase/(Decrease)						% of Net Revenue
	2009			2008			$			%			2009			2008
Net income attributable to noncontrolling interest	$	(1,827	)	$	(3,123	)	$	(1,296	)		(41.5	)%		(1.3	)%		(2.1	)%

On a same facility basis, net income attributable to noncontrolling interest decreased $1.3 million due to a reduction in net income and an increase in our disproportionate share of losses from certain of our facilities.

We expect ~~our~~ earnings ~~allocated~~attributable to ~~minority~~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 ~~minority~~noncontrolling interests, including the basis for disproportionate allocation accounting, seeCritical Accounting Policiesin our Annual Report on Form 10-K for the fiscal year ended September 30, ~~2008.~~2009.

Income tax ~~expense.~~benefit.Income tax ~~expense~~benefit was ~~$0.5~~$1.5 million for the ~~third~~first quarter of fiscal 2010 compared to $1.1 million for the first quarter of fiscal 2009, ~~compared to $3.5 million for the third quarter of fiscal 2008,~~ which represents an effective tax rate of approximately ~~47.8%~~38.0% and ~~41.4%~~36.6% for the respective periods. The ~~47.8% rate for the third quarter of fiscal 2009 is the effective rate created due to permanent, non-recurring items during the reporting period. The~~lower income tax rate for the ~~third~~first quarter of fiscal ~~2008~~2009 was ~~negatively impacted by~~ the ~~write-off goodwill based on~~result of the ~~valuation~~impact of ~~one of our hospitals we subsequently sold.~~nondeductible permanent differences from incentive stock option grants. The ~~write-off of goodwill~~expense for incentive stock options is ~~a non-deductible~~not tax ~~expense in the period the write-off occurs.~~deductible.

(~~(Loss)~~Loss) income from discontinued operations, net of taxes.(Loss) income from discontinued operations, net of taxes, reflects the results of Dayton Heart Hospital, Cape Cod Cardiology, and ~~the Heart Hospital of Lafayette~~Sun City Cardiac Center Associates for the ~~third~~first quarter of fiscal ~~2009~~2010 and fiscal ~~2008. Income from discontinued~~2009. Discontinued operations decreased to a loss of $0.1 million, net of ~~tax,~~taxes for the ~~third~~first quarter of fiscal ~~2009~~2010 from income of ~~$6.9~~$4.2 million, net of ~~tax,~~taxes, for the comparable period of fiscal ~~2008. Loss~~2009. Losses from discontinued operations during the ~~third~~first quarter of fiscal ~~2009~~2010 related to continued ~~payments of liabilities associated~~activities with the divested facilities, primarily related to insurance liabilities, whereas the income from discontinued operations from same quarter of fiscal ~~2008 was related to~~2009 reflected the operating income from Sun City and the gain from the divestiture of Cape Cod, ~~Cardiology offset by losses at Dayton Heart Hospital.~~

~~Nine months ended June 30, 2009 Compared to Nine Months Ended June 30, 2008~~

~~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:~~

Nine Months Ended June 30,
(in thousands except percentages)
Increase/Decrease % of Net Revenue
2009 2008 $ % 2009 2008
Net revenue $ 462,874 $ 455,168 $ 7,706 1.7 % 100.0 % 100.0 %
Operating expenses:
Personnel expense 153,644 150,060 3,584 2.4 % 33.2 % 33.0 %
Medical supplies expense 131,457 123,155 8,302 6.7 % 28.4 % 27.0 %
Bad debt expense 34,558 31,852 2,706 8.5 % 7.5 % 7.0 %
Other operating expenses 96,022 88,996 7,026 7.9 % 20.8 % 19.5 %
Pre-opening expenses 1,340 643 697 108.4 % 0.3 % 0.1 %
Depreciation 23,258 22,535 723 3.2 % 5.0 % 5.0 %
Amortization 589 411 178 43.3 % 0.1 % 0.1 %
Loss on disposal of property, equipment and other assets 138 391 (253 ) 64.7 % 0.0 % 0.1 %

Income from operations 21,868 37,125 (15,257 ) (41.1 )% 4.7 % 8.2 %
Other income (expenses):
Interest expense (5,339 ) (11,658 ) 6,319 54.2 % (1.1 )% (2.6 )%
Loss on early extinguishment of debt (6,702 ) — (6,702 ) (100.0 )% (1.4 )% —
Interest and other income, net 218 1,930 (1,712 ) (88.7 )% — 0.4 %
Equity in net earnings of unconsolidated affiliates 7,044 6,842 202 3.0 % 1.5 % 1.5 %

Income from continuing operations before minority interest, income taxes and discontinued operations 17,089 34,239 (17,150 ) (50.1 )% 3.7 % 7.5 %
Minority interest share of earnings of consolidated subsidiaries (9,703 ) (12,644 ) 2,941 23.3 % (2.1 )% (2.8 )%

Income from continuing operations before income taxes and discontinued operations 7,386 21,595 (14,209 ) (65.8 )% 1.6 % 4.7 %
Income tax expense 2,998 8,917 (5,919 ) (66.4 )% 0.7 % 1.9 %

Income from continuing operations 4,388 12,678 (8,290 ) (65.4 )% 0.9 % 2.8 %
Income from discontinued operations, net of taxes 3,936 7,843 (3,907 ) 49.8 % 0.9 % 1.7 %

Net income $ 8,324 $ 20,521 (12,197 ) (59.4 )% 1.8 % 4.5 %

Nine Months Ended June 30,
2009 2008% %Change
Selected Operating Data (a):

Number of hospitals 7 7
Licensed beds ( b ) 588 449
Staffed and available beds ( c ) 542 449
Admissions ( d ) 20,152 22,380 (10.0 )%
Adjusted admissions ( e ) 30,714 30,979 (0.9 )%
Patient days ( f ) 78,681 81,853 (3.9 )%
Adjusted patient days ( g ) 120,106 113,790 5.6 %
Average length of stay (days) ( h ) 3.90 3.66 6.6 %
Occupancy ( i ) 53.2 % 66.5 %
Inpatients with a catheterization procedure (j) 10,069 12,244 (17.8 )%
Inpatient surgical procedures (k) 6,133 6,332 (3.1 )%
Hospital net revenue (in thousands except percentages) $ 436,457 $ 426,300 2.4 %


~~(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 computed 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 computed 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 computed 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 1.7% or $7.7 million to $462.9 million for the first nine months ended June 30, 2009 from $455.2 million for the nine months ended June 30, 2008. Hospital Division net revenue increased 2.4% for the first nine months of fiscal 2009 compared to the same period of fiscal 2008 offset by a decline in our MedCath Partners Division and Corporate and other.

We continue to experience a shift from inpatient to outpatient services as a result of certain of our payors requiring catheterization procedures to be performed on an outpatient basis. Our outpatient business continued to grow with the outpatient cases up 11.5% from 46,132 for the first nine months of fiscal 2008 to 51,452 for the first nine months of fiscal 2009.

~~Our Hospital division outpatient net revenue increased 28.9%~~which was sold during the first nine months of fiscal 2009 compared to the same period of fiscal 2008. We experienced an increase in outpatient revenue for all outpatient services with the exception of percutanerous transluminal coronary angioplasty (PTCA or angioplasty) procedures. Non-drug eluting and drug-eluting stent outpatient revenue increased $4.2 and $8.5 million, respectively for the first nine months of fiscal 2009 compared to the first nine months of fiscal 2008. Electrophysiology net outpatient revenue increased 35.6%, or $8.8 million.

Inpatient Hospital division net revenue decreased 6.5% during the first nine months of fiscal 2009 compared to the same period of fiscal 2008. The majority of our core inpatient procedures experienced a decline in net patient revenue as a result in the shift to providing services in an outpatient setting; however, we experienced a $4.3 million increase in our Hospital Division inpatient net revenue related to open heart procedures. Inpatient drug-eluting stent and non-drug eluting stent net revenue were down $1.0 million and $13.2 million, respectively for the first nine months of fiscal 2009 as compared the same period of fiscal 2008.

Our net revenue was favorably impacted by lower uncompensated care discounts, or charity care discounts, which are recorded as a reduction to gross revenue. The decrease in uncompensated care discounts reflects a decrease in the number of patients applying and qualifying for charity discounts. Charity care discounts were $3.8 million for the first nine months of fiscal 2009 compared to $11.4 million for the same period of fiscal 2008.

~~During the third~~ quarter of fiscal 2009, net revenue was reduced by $3.1 million as a result of a reduction in the estimated amount of DSH payments certain hospitals are eligible for in prior periods. The primary method for a hospital to qualify for Medicare DSH reimbursement is based on a statutory formula that utilizes the percentage of inpatient days attributable to patients eligible for Medicaid, but not eligible for Medicare Part A, and a base formula called the SSI percentage, which is released annually by the CMS. Based on the updated SSI percentage provided by CMS during June, 2009, we determined that four hospitals that we previously determined were eligible for DSH payments in fiscal 2007 and fiscal 2008 would either no longer be eligible for such payments or would be eligible for less payment than initially estimated.

~~Personnel expense.~~Personnel expense increased 2.4% to $153.6 million for the first nine months of fiscal 2009 from $150.1 million for the comparable period of fiscal 2008. The $3.5 million increase in personnel expense was due to the increase in clinical labor to support the increase in adjusted admissions and annual merit increases offset by a reduction in stock based compensation expense. Stock based compensation expense was $2.1 million for the first nine months of fiscal 2009 compared to $5.5 million for the same period of fiscal 2008. The stock based compensation expense recorded for the first nine months of fiscal 2009 is primarily based on a vesting schedule related to the issuance of restricted shares to certain employees which vest over a three year period or vest 50% over a three year period and 50% over the same three year period if certain performance criteria are satisfied. The stock based compensation expense for the comparable period of fiscal 2008 was based on the issuance of stock options which vested immediately.

~~Medical supplies expense.~~Medical supplies expense increased 6.7% to $131.5 million for the first nine months of fiscal 2009 from $123.2 million for the comparable period of fiscal 2008. The $8.3 million increase in medical supplies is a result of an increase in heart, drug eluting and non drug eluting stent cases for the first nine months of fiscal 2009 compared to the first nine months of fiscal 2008 as well as an increase in pharmacy costs related to a higher average length of stay for the first nine months of fiscal 2009 compared to the same period of fiscal 2008. As length of stay increases, the chargeable supplies and pharmacy costs increase accordingly.

~~Bad debt expense.~~Bad debt expense increased 8.5% to $34.6 million for the first nine months ended June 30, 2009 from $31.9 million for the comparable period of fiscal 2008. As a percentage of net revenue, bad debt expense increased to 7.5% for the first nine months of fiscal 2009 as compared to 7.0% for the comparable period of fiscal 2008. Total uncompensated care, which we define as bad debt expense plus charity care discounts, was 8.8% and 7.4% of net revenue for the first nine months of fiscal 2009 and 2008, respectively. The increase is the result of an overall increase in self-pay revenue.

~~Other operating expenses.~~Other operating expenses increased 7.9% to $96.0 million for the first nine months of fiscal 2009 from $89.0 million for the comparable period of fiscal 2008. In addition, the increase is the result of the following items recorded during the third quarter of fiscal 2009:

~~$1.1 million increase in professional fees associated with an internal assessment of certain controls and procedures completed during the quarter.~~

~~$0.8 million increase in penalty expense for the anticipated settlement of regulatory claims~~losses at ~~two of our hospitals related to the identification, return and self-reporting of $0.7 million in reimbursement for certain procedures performed at those hospitals in prior fiscal years.~~

~~$0.4 million increase in severance expense payments.~~

In addition to the above items, the increase is attributable to a $4.1 million increase in costs related to clinical and nonclinical purchased contract services, a $0.6 million increase in emergency department physician fees as a result of a 13.2% increase in emergency department visits, an increase in lab contract fees and $0.9 million increase in costs related to the start-up of a new primary care group at one of our hospitals and a $1.2 million increase in medical malpractice claim expense, the majority of which is attributable to one claim which settled during the third quarter of fiscal 2009.

~~The above increases were offset by a decline in our medical benefits expense of $1.3 million.~~

~~Interest expense.~~Interest expense decreased $6.3 million or 54.2% to $5.3 million for the first nine months of fiscal 2009 from $11.6 million for the comparable period of fiscal 2008. The $6.3 million decrease in interest expense is primarily attributable to the overall reduction in our outstanding debt, reduction in interest rates on our outstanding debt, and the capitalization of interest on our capital expansion projects. Capitalized interest was $2.3 million for the first nine months of fiscal 2009 compared to $0.6 million for the same period of fiscal 2008.

~~Loss on early extinguishment of debt.~~During December 2008, we redeemed all of our outstanding 9 7/8% Senior Notes for $111.2 million, which included the payment of a repurchase premium of $5.0 million and accrued interest of $4.2 million. The Senior Notes were redeemed through borrowings under the Senior Secured Credit Facility and available cash on hand. In addition, we incurred $2.0 million in expenses related to the write-off of previously incurred financing costs associated with the Senior Notes.

~~Interest and other income.~~Interest and other income decreased to $0.2 million for the first nine months of fiscal 2009 from $1.9 million for the comparable period of fiscal 2008. The decrease in interest and other income is a direct result of the approximately $77.9 million decrease in our cash and cash equivalents balance from June 30, 2008 to June 30, 2009 which resulted in a reduction in interest earned on those cash balances. Our cash balance decreased primarily as a result of the repurchase of our 9 7/8% Senior Notes during December 2008.

~~Minority interest share of earnings of consolidated subsidiaries.~~Minority interest share of earnings of consolidated subsidiaries decreased to $9.7 million for the first nine months of fiscal 2009 from $12.6 million for the comparable period of fiscal 2008. This $2.9 million decrease was primarily due to the overall net decrease in income before minority interest of certain of our established hospitals. We expect our earnings allocated to minority 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 minority interests, including the basis for disproportionate allocation accounting, see~~Critical Accounting Policiesin our Annual Report on Form 10-K for the fiscal year ended September 30, 2008.~~

~~Income tax expense.~~Income tax expense was $3.0 million for the first nine months of fiscal 2009 compared to $8.9 million for the comparable period of fiscal 2008, which represents an effective tax rate of approximately 40.6% and 41.3% for the respective periods.The lower effective tax rate for the first nine months of fiscal 2009 as compared to the same period of fiscal 2008 was a result of a decrease in non-deductible expenses for tax purposes primarily compensation expense associated with incentive stock option grants and the write-off of goodwill.

~~Income from discontinued operations, net of taxes.~~Income from discontinued operations, net of taxes, reflects the results of Dayton Heart Hospital, Cape Cod Cardiology, and the Heart Hospital of Lafayette for the first nine months of fiscal 2009 and 2008. Income from discontinued operations decreased to $3.9 million, net of tax, for the first nine months of fiscal 2009 from $7.8 million, net of tax, for the comparable period of fiscal 2008. The first nine months of fiscal 2008 includes the gain recorded as a result of the sale of certain assets of Dayton Heart Hospital and income from the operations of Cape Cod offset by a loss from operations of Dayton Heart Hospital; where as the first nine months of fiscal 2009 primarily includes the gain recorded as a result of the sale of Cape Cod and income from the operations of Cape Cod, offset by continued expenses related to Dayton Heart Hospital.

Liquidity and Capital Resources

Working Capital and Cash Flow Activities. Our consolidated working capital from continuing operations was ~~$61.3~~$47.8 million at ~~June 30,~~December 31, 2009 and ~~$115.1~~$40.4 million at September 30, ~~2008.~~2009. Consolidated working capital ~~decreased primarily~~from continuing operations increased $2.2 million due to the increase in patient accounts receivable and $1.7 million as a result of being in an income tax receivable position due to our ~~repayment~~net loss for the quarter versus an income tax payable position of ~~the 9 7/8% Senior Notes in December 2008,~~$0.7 million as ~~discussed in Note 6~~of September 30, 2009. We also received a $2.0 million distribution from one of our minority owned affiliates due to the ~~consolidated financial statements in this report.~~release of restrictions on collateralized cash.

At ~~June 30, 2009~~,$3.2 million of cash was restricted and held in escrow as required by the city of Kingman, Arizona in conjunction with the Company’s development of the Hualapai Mountain Medical Center. The escrowed funds are to be released upon our completion of common infrastructure construction projects affecting the city of Kingman. We anticipate the completion of the related projects and release of escrowed funds during late 2009 or early 2010.

~~At June 30,~~December 31, 2009, we continue to carry a reserve of ~~$9.5~~$9.7 million for outlier payments received in 2004, which is recorded in current liabilities of discontinued operations.

The cash provided by continuing operations from operating activities was ~~$54.7~~$3.9 million for the first ~~nine~~three months of fiscal ~~2009~~2010 compared to ~~$35.5~~$18.9 million for the comparable period of fiscal ~~2008.~~2009. The ~~increase~~decrease in cash provided by continuing operations is primarily athe result of ~~cash used~~$5.2 million increase in accounts receivable associated with the opening of HMMC, a $1.7 million increase in our income tax receivable due to our net loss for the quarter versus an income tax payable position as of September 30, 2009 with the remaining reduction due to the timing of payments for accounts payable and prepaid expenses. We also received a $2.0 million distribution from ~~continuing operations~~one of our minority owned affiliates due to the release of restrictions on collateralized cash during the first quarter of fiscal 2008 to pay income tax liabilities and accrued bonuses related to fiscal 2007 performance to our employees. We also paid a $5.8 million settlement to the United States Department of Justice in November 2007 as a result of an investigation of a clinical trial conducted at one of our hospitals. Our collections on accounts receivable increased during the first nine months of fiscal 2009 compared to the first nine months of fiscal 2008 which had a positive impact on our cash flow from operations.2010.

Our investing activities from continuing operations used net cash of ~~$71.2~~$9.2 million for the first ~~nine~~three months of fiscal ~~2009~~2010 compared to ~~$47.3~~$29.9 million for the comparable period of fiscal ~~2008.~~2009. The total cash used for capital expenditures ~~increased~~decreased by ~~$34.3~~$21.0 million during the first ~~nine~~three months of fiscal ~~2009~~2010 as compared to fiscal ~~2008, primarily~~2009, as a direct result of the completion of the expansion of our hospital facilities and the construction of ~~the~~our new acute care hospital in Kingman, Arizona.

Our financing activities from continuing operations used net cash of ~~$45.1~~$14.5 million for the first ~~nine~~three months of fiscal ~~2009~~2010 compared to ~~$57.8~~$34.2 million for the comparable period of fiscal ~~2008.~~2009. Cash used in financing activities decreased ~~by $12.7~~$19.7 million for the first ~~nine~~three months of fiscal ~~2009~~2010 as compared to the comparable period of fiscal ~~2008.~~2009. The ~~overall~~ decrease was due to the purchase of treasury stock during the first nine months of fiscal 2008 offset by an increase in cash used to pay long-term debt and capital leases of $30.0 million for the first nine months of fiscal 2009 as compared to the comparable period of fiscal 2008, primarily due to the repayment of ~~the~~our 9 7/8% Senior Notes during December ~~2008. The repayment included~~2008 offset by a $5.0 million ~~repurchase premium as discussed within Note 6 to~~payment on our senior secured credit facility during the ~~consolidated financial statements.~~first quarter of fiscal 2010.

Capital Expenditures.Cash paid for property and equipment was ~~$72.4~~$9.3 million and ~~$38.1~~$30.1 million for the first ~~nine~~three months of fiscal years 2010 and 2009, respectively. Of the $9.3 million of cash paid for property and ~~2008, respectively. During~~equipment during the first ~~nine~~three months ~~ended June 30,~~of fiscal 2010, $4.5 million related to maintenance capital expenditures. The $30.1 million cash paid for property and equipment during the first three months of fiscal 2009 ~~we continued~~primarily related to ~~develop~~the development of HMMC and the expansion projects of two of our existing hospitals, which began during fiscal 2007. All expansion projects were substantially complete during fiscal 2009, and our hospital in Kingman, Arizona ~~and various expansion projects at our existing hospitals. The amount of capital expenditures we incur~~opened in ~~future periods will depend largely on the type and size of strategic investments we make in future periods.~~October 2009.

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Obligations and Availability of Financing.At ~~June 30,~~December 31, 2009, we had ~~$127.9~~$122.2 million of outstanding long-term debt ~~$19.1 million~~and obligations under capital leases, of which $18.3 million was classified as current. ~~Of the~~Our Term Loan under our Credit Facility had an outstanding amount of $75.0 million. The remaining outstanding long-term debt ~~$80.0~~and obligations under capital leases of $47.2 million was ~~outstanding under our Senior Secured Credit Facility. See Note 6 to the consolidated financial statements in this report. $47.7 million was outstanding~~due to various lenders to our hospitals, and the remaining $0.2 million of debt was outstanding to lenders for MedCath Partners’ diagnostic services under capital leases and other miscellaneous indebtedness. Of the $80.0 millionhospitals. No amounts were outstanding under our ~~Senior Secured Credit Facility, $5.0 million was outstanding under the~~ Revolver. The maximum availability under ~~the~~our Revolver is $85.0 million which is reduced by ~~the aforementioned outstanding borrowings under the Revolver and~~ outstanding letters of credit totaling ~~$3.5 million.~~$2.4 million as of December 31, 2009.

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. At ~~June~~December 31, 2009 and September 30, 2009, ~~TexSan~~TexSAn Heart Hospital was in violation of financial covenants which govern its equipment loans outstanding. Accordingly, the total outstanding balance ~~of $6.8 million~~ for these loans of $5.3 million and $6.1 million, respectively, has been included in the current portion of long-term debt and obligations under capital leases ~~on the Company’s~~in our consolidated balance ~~sheet.~~sheets. The covenant violations did not result in any other non-compliance related to the ~~remaining~~ covenants governing ~~the Company’s~~our other outstanding ~~debt; thereby the Company remained in compliance with all other covenants.~~debt arrangements.

At ~~June 30,~~December 31, 2009, we guaranteed either all or a portion of the obligations of certain of our subsidiary hospitals for equipment and other notes payable. 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 Credit Faculty is dependent on the Company’s ability to maintain compliance with the financial covenants contained in the 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 and available borrowings under our ~~Senior Secured~~ Credit Facility will be sufficient to finance our business plan, capital expenditures and our working capital requirements for ~~at least~~ the next 12 to 18 months. ~~See Note 6 to the consolidated financial statements in this report.~~

Intercompany Financing Arrangements.We provide secured real estate, equipment and working capital financings to our majority-owned hospitals. The aggregate amount of the intercompany real estate, equipment and working capital and other loans outstanding as of ~~June 30,~~December 31, 2009 was ~~$295.2~~$316.3 million.

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 2 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 fixed rates ranging from ~~4.87%~~3.50% to 8.58% ~~or variable rates based on LIBOR plus an applicable margin.~~. The weighted average interest rate for the intercompany equipment loans at ~~June 30,~~December 31, 2009 was ~~7.77%~~6.41%.

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 certain 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. As of ~~June 30,~~December 31, 2009 and September 30, ~~2008,~~2009, we held ~~$31.7~~$36.3 million and ~~$19.8~~$25.7 million, respectively, of intercompany working capital and other notes receivable and related accrued interest, net of advances from our hospitals.

Disclosure About Critical Accounting Policies

Our accounting policies are disclosed in our Annual Report on Form 10-K for the year ended September 30, ~~2008.~~2009. During the first ~~nine~~three months of fiscal ~~2009~~2010 we adopted new accounting policies as discussed in Note 2 —Recent Accounting Pronouncementsto ~~the~~our consolidated financial statements. The adoption of these new accounting policies did not have a material impact on our consolidated ~~balance sheets, statements of operations or cash flows.~~

Goodwill represents acquisition costs in excess of the fair value of net identifiable tangible and intangible assets and all of the company’s goodwill is recorded within the Hospital Division segment. The company evaluates goodwill annually on September 30 or earlier if indicators of potential impairment exist. Due to market conditions during the first quarter of 2009 and the related decline in the company’s market capitalization, the company performed an interim impairment test as of December 31, 2008. The results of this interim test indicated that no impairment existed as of that date.financial statements.

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The determination of whether goodwill has become impaired involves a significant level of judgment in the assumptions underlying the approach used to determine the value of the Company’s reporting unit. Changes in the Company’s strategy, assumptions and/or market conditions could significantly impact these judgments. Additionally, certain legislation is currently pending which could potentially impact the Company. Management will continue to monitor market conditions as well as the pending legislation to determine if additional interim impairment tests are necessary in future periods. If impairment indicators are determined to be present in such periods, the resulting impairment charges could be material. There were no such indicators during the second or third quarters of this current fiscal year.

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 inItem 1A. Risk Factorsin this report and our Annual Report on Form 10-K for the year ended September 30, ~~2008,~~2009, before making an investment decision with respect to our ~~debt and~~ equity securities. A copy of this report, including exhibits, is available on the internet site of the SEC athttp://www.sec.govor through our website athttp://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. 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 ~~nine~~three months of ~~2009.~~2010. See Item 7A in the Company’s Annual Report on Form 10-K for the fiscal year ended September 30, ~~2008~~2009 for further discussions about market risk.

Interest Rate Risk

Our ~~Senior Secured~~ Credit Facility borrowings expose us to risks caused by fluctuations in the underlying interest rates. The total outstanding balance of our ~~Senior Secured~~ Credit Facility was ~~$80.0~~$75.0 million at ~~June 30,~~December 31, 2009. A change of 100 basis points in the underlying interest rate would have caused a change in interest expense of approximately ~~$0.5~~$0.2 million during the ~~nine~~three month period ended ~~June 30,~~December 31, 2009.

Item 4. Controls and Procedures

The President and Chief Executive Officer and the ~~Interim~~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 ~~June 30,~~December 31, 2009, that the Company’s disclosure controls and procedures were effective as of ~~June 30,~~December 31, 2009 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)~~“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 ~~the Interim~~ 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 Commitmentsto the consolidated financial ~~statements.~~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, ~~2008.~~2009. You should carefully consider these risks and uncertainties before making an investment decision with respect to our debt and equity securities. Such risks and uncertainties could materially adversely affect our business, financial condition or operating results.

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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, ~~2008~~2009 or filings subsequently made with the Securities and Exchange Commission, except for the addition of the following risk ~~factors:~~factor:

~~Declines in the market price~~Impairment of ~~our common stock~~Long-Lived Assets

Long-lived assets, which include finite lived intangible assets, are evaluated for impairment when events or changes in ~~other~~business circumstances indicate that the carrying amount of the assets may ~~indicate~~not be fully recoverable. An impairment loss would be recognized when estimated undiscounted future cash flows expected to result from the use of an ~~impairment~~asset and its eventual disposition are less than its carrying amount. The determination of ~~goodwill could adversely affect our financial position and results~~whether or not long-lived assets have become impaired involves a significant level of ~~operations.~~

~~It is possible that a change in circumstances such as the decline~~judgment in the assumptions underlying the approach used to determine the estimated future cash flows expected to result from the use of those assets. Changes in our strategy, assumptions and/or market ~~price~~conditions could significantly impact these judgments and require adjustments to recorded amounts of ~~our common stock or in~~long-lived assets. If impairment is determined to be present, the numerous variables associated with the judgments, assumptions and estimates made in assessing the appropriate valuation of our goodwill, could negatively impact the valuation and create the potential for a non-cash charge to recognize impairment losses on some or all of our goodwill. If we were required to write down a portion of our goodwill and record relatedresulting non-cash impairment charges ~~our financial position and results of operations~~ could be ~~adversely affected.~~

~~Medicare Recovery Audit Contractor~~

~~As discussed in Part I, Item 2. “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” herein, the outcome of future RAC audits may have a~~ material ~~adverse effect on~~to our ~~business,~~consolidated financial ~~position, results of operations, or cash flows.~~

The above risks and other risks described in our other filings with the SEC could have a material impact on our business, financial position, results of operations or cash flows. It is not possible to predict or identify all risk factors. Additional risks and uncertainties not presently known to us or that we currently believe to be immaterial may also impair our operations. Therefore, the risks identified are not intended to be a complete discussion of all potential risks or uncertainties.statements.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

On July 27, 2001, we completed an initial public offering of our common stock pursuant to our Registration Statement on Form S-1 (File No. 333-60278) that was declared effective by the SEC on July 23, 2001. We expect to use the remaining proceeds of approximately $13.8 million from the offering to fund development activities, working capital requirements and other corporate purposes. Although we have identified these intended uses of the remaining proceeds, we have broad discretion in the allocation of the net proceeds from the offering. Pending this application, we will continue to invest the net proceeds of the offering in cash and cash-equivalents, such as money market funds or short-term interest bearing, investment-grade securities.

The Board of Directors approved a stock repurchase program of up to $59.0 million in August 2007, which was announced November 2007. Stock purchases can be made from time to time in the open market or in privately negotiated transactions in accordance with applicable federal and state securities laws and regulations. The repurchase program may be discontinued at any time. Subsequent to the approval of the stock repurchase program, the Company has purchased 1,885,461 shares of common stock at a total cost of $44.4 million, with a remaining $14.6 million available to be repurchased per the approved stock repurchase program. No shares were repurchased during the ~~nine~~three month period ended ~~June 30,~~December 31, 2009.

See Note 6 to our annual financial statements in our Annual Report on Form 10-K for the year ended September 30, ~~2008~~2009 for a description of restrictions on payments of dividends.

Item 6. Exhibits


Exhibit No.		Description

	10.1	Employment agreement dated December 21, 2006 by and between MedCath Corporation and Blair W. Todt

	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

2523


									Three Months Ended December 31,
	Three Months Ended June 30,				Nine Months Ended June 30,				2009		2008
	2009		2008		2009		2008
Net revenue	$	56,904	$	56,304	$	173,794	$	163,560	$	53,326	$	68,162
Income from operations	$	12,031	$	16,059	$	37,199	$	35,640	$	8,073	$	15,028
Net income	$	9,716	$	11,327	$	30,389	$	28,789	$	5,777	$	12,907


					December 31,		September 30,
	June 30,		September 30,		2009		2009
	2009		2008
Current assets	$	62,139	$	70,921	$	50,309	$	68,675
Long-term assets	$	153,168	$	153,766	$	148,433	$	149,194
Current liabilities	$	30,589	$	28,958	$	23,866	$	25,967
Long-term liabilities	$	116,896	$	123,356	$	122,786	$	122,685


	For the Three Months Ended
	June 30, 2009					June 30, 2008
	Number of			Weighted-		Number of			Weighted-
	Restricted			Average		Restricted			Average
	Stock Units			Grant Price		Stock Units			Grant Price
Outstanding restricted stock units, beginning of period		559,116		$	9.74		154,508		$	19.52

Granted		96,725			9.42		—			—
Vested		—			—		(21,448	)		20.50
Cancelled		(72,606	)		9.40		(9,078	)		20.50


Outstanding restricted stock units, end of period		583,235		$	9.73		123,982		$	19.28


	For the Nine Months Ended
	June 30, 2009					June 30, 2008
	Number of			Weighted-		Number of			Weighted-
	Restricted			Average		Restricted			Average
	Stock Units			Grant Price		Stock Units			Grant Price
Outstanding restricted stock units, beginning of period		123,982		$	19.28		193,982		$	19.72

Granted		616,778			9.01		—			—
Vested		(52,106	)		20.50		(21,448	)		20.50
Cancelled		(105,419	)		11.42		(48,552	)		20.50


Outstanding restricted stock units, end of period		583,235		$	9.73		123,982		$	19.28


	For the Three Months Ended
	December 31, 2009					December 31, 2008
	Number of					Number of
	Restricted			Weighted-		Restricted			Weighted-
	Stock Awards			Average		Stock Awards			Average
	and Units			Grant Price		and Units			Grant Price
Outstanding restricted stock awards and units, beginning of period		654,327		$	9.64		123,982		$	19.28

Granted		369,164			6.99		—			—
Vested		(90,195	)		9.30		(52,106	)		20.50
Cancelled		(10,026	)		9.03		(32,813	)		15.88


Outstanding restricted stock awards and units, end of period		923,270		$	8.54		39,063		$	20.50


	Page
PART I. FINANCIAL INFORMATION		1
Item 1. Unaudited Financial Statements		1
Consolidated Balance Sheets as of ~~June 30,~~December 31, 2009 and September 30, ~~2008~~2009		1
Consolidated Statements of ~~Income~~Operations for the Three ~~and Nine~~ Months Ended ~~June 30,~~December 31, 2009 and 2008		2
Consolidated Statement of Stockholders’ Equity for the ~~Nine~~Three Months Ended ~~June 30,~~December 31, 2009		3
Consolidated Statements of Cash Flows for the ~~Nine~~Three Months Ended ~~June 30,~~December 31, 2009 and 2008		4
Notes to Unaudited Consolidated Financial Statements		5
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		15
Item 3. Quantitative and Qualitative Disclosures About Market Risk		2422
Item 4. Controls and Procedures		2422
PART II. OTHER INFORMATION		2422
Item 1. Legal Proceedings		2422
Item 1A. Risk Factors		2422
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds		2523
Item 6. Exhibits		2523
SIGNATURES		2624
EX-10.1
EX-31.1
EX-31.2
EX-32.1
EX-32.2


										Three Months Ended December 31,
	Three Months Ended June 30,																		2009 Same
	2009			2008%			Change			2009			2008			% Change			Facility			% Change
Selected Operating Data (a):
Number of hospitals		7			7						8			7						7
Licensed beds (b)		588			449						658			509						588
Staffed and available beds (c)		542			449						572			463						502
Admissions (d)		6,352			7,384			(14.0	)%		7,163			6,801			5.3	%		6,938			2.0	%
Adjusted admissions (e)		10,284			10,341			(0.6	)%		10,497			9,874			6.3	%		10,043			1.7	%
Patient days (f)		25,482			27,132			(6.1	)%		26,352			25,181			4.7	%		25,423			1.0	%
Adjusted patient days (g)		41,174			38,105			8.1	%		39,336			37,044			6.2	%		37,526			1.3	%
Average length of stay (days) (h)		4.01			3.67			9.3	%		3.68			3.70			(0.5	)%		3.66			(1.1	)%
Occupancy (i)		51.7	%		66.4	%					50.1	%		59.1	%					55.0	%
Inpatient catheterization procedures (j)		3,071			3,961			(22.5	)%		3,307			3,552			(6.9	)%		3,265			(8.1	)%
Inpatient surgical procedures (k)		2,045			2,260			(9.5	)%		1,949			2,001			(2.6	)%		1,909			(4.6	)%
Hospital net revenue (in thousands except percentages)	$	141,665		$	144,676			(2.1	)%	$	142,346		$	144,225			(1.3	)%	$	137,753			(4.5	)%


(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 ~~computed~~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 ~~computed~~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 ~~computed~~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.


	MEDCATH CORPORATION
Dated: ~~August 7, 2009~~February 9, 2010	By:	/s/ O. EDWIN FRENCH
		O. Edwin French
		President and Chief Executive Officer (principal executive officer)


	By:	/s/ JAMES A. PARKER
		James A. Parker
		~~Interim~~ Executive Vice President and Chief Financial Officer ~~Senior Vice President, Finance and Development~~ (principal financial officer)


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

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