10-Q

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

FORM 10-Q

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

For the quarterly period ended December 31, 2003

Commission File Number 000-33009

MEDCATH CORPORATION

(Exact name of registrant as specified in its charter)

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

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

(704) 708-6600
(Registrant’s telephone number, including area code)

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

Yes [X] No [  ]

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).

Yes [  ] No [X]

As of January 31, 2004, there were 17,985,644 shares of $0.01 par value common stock outstanding.

MEDCATH CORPORATION

FORM 10-Q

TABLE OF CONTENTS

			Page
PART I. FINANCIAL INFORMATION
	Item 1. Financial Statements
		Consolidated Balance Sheets as of December 31, 2003 and September 30, 2003		3
		Consolidated Statements of Operations for the Three Months Ended December 31, 2003 and 2002		4
		Consolidated Statement of Stockholders’ Equity for the Three Months Ended December 31, 2003		5
		Consolidated Statements of Cash Flows for the Three Months Ended December 31, 2003 and 2002		6
		Notes to Consolidated Financial Statements		7
	Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			15
	Item 3. Quantitative and Qualitative Disclosures About Market Risk			27
	Item 4. Controls and Procedures			28
PART II. OTHER INFORMATION
	Item 2. Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities			29
	Item 6. Exhibits and Reports on Form 8-K			29
SIGNATURES				30

2

PART I. FINANCIAL INFORMATION
Item 1. Financial Statements

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

			December 31,			September 30,
			2003			2003
			(Unaudited)
Current assets:
	Cash and cash equivalents		$	80,468		$	94,199
	Accounts receivable, net			91,180			86,306
	Medical supplies			17,767			16,424
	Due from affiliates			150			187
	Deferred income tax assets			3,225			3,145
	Prepaid expenses and other current assets			7,339			7,668
		Total current assets		200,129			207,929
Property and equipment, net				448,292			436,947
Investments in and advances to affiliates, net				3,269			5,486
Goodwill, net				75,000			75,000
Other intangible assets, net				16,512			17,095
Other assets				4,314			6,840
		Total assets	$	747,516		$	749,297
Current liabilities:
	Accounts payable		$	46,100		$	42,360
	Income tax payable			164			278
	Accrued compensation and benefits			19,560			20,356
	Accrued property taxes			3,595			4,723
	Accrued construction and development costs			6,241			15,340
	Other accrued liabilities			11,078			11,667
	Current portion of long-term debt and obligations under capital leases			52,885			49,287
		Total current liabilities		139,623			144,011
Long-term debt				307,179			300,884
Obligations under capital leases				10,318			10,814
Deferred income tax liabilities				3,489			3,951
Other long-term obligations				7,268			7,164
		Total liabilities		467,877			466,824
Minority interest in equity of consolidated subsidiaries				15,014			17,419
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; 18,011,520 issued and 17,980,332 outstanding at December 31, 2003; 18,011,520 issued and 17,942,620 outstanding at September 30, 2003			180			180
	Paid-in capital			357,965			357,707
	Accumulated deficit			(92,025	)		(91,092	)
	Accumulated other comprehensive loss			(1,101	)		(1,347	)
	Treasury stock, at cost, 68,900 shares held at December 31, 2003 and September 30, 2003			(394	)		(394	)
		Total stockholders’ equity		264,625			265,054
		Total liabilities, minority interest and stockholders’ equity	$	747,516		$	749,297

See notes to consolidated financial statements.

3

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

			Three Months Ended December 31,
			2003			2002
Net revenue			$	156,626		$	121,101
Operating expenses:
	Personnel expense			48,853			39,750
	Medical supplies expense			42,617			27,948
	Bad debt expense			13,859			5,234
	Other operating expenses			32,955			29,222
	Pre-opening expenses			3,444			2,406
	Depreciation			10,443			9,517
	Amortization			290			437
	Loss (gain) on disposal of property, equipment and other assets			(84	)		70
		Total operating expenses		152,377			114,584
Income from operations				4,249			6,517
Other income (expenses):
	Interest expense			(6,589	)		(6,206	)
	Interest income			233			452
	Other income, net			4			23
	Equity in net earnings of unconsolidated affiliates			577			754
		Total other expenses, net		(5,775	)		(4,977	)
Income (loss) before minority interest and income taxes				(1,526	)		1,540
Minority interest share of earnings of consolidated subsidiaries				(34	)		(891	)
Income (loss) income before income taxes				(1,560	)		649
Income tax benefit (expense)				627			(259	)
Net income (loss)			$	(933	)	$	390
Earnings (loss) per share, basic and diluted			$	(0.05	)	$	0.02
Weighted average number of shares, basic				17,949			18,012
	Dilutive effect of stock options			—			72
Weighted average number of shares, diluted				17,949			18,084

See notes to consolidated financial statements.

4

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

												Accumulated
			Common Stock									Other			Treasury Stock
							Paid-in		Accumulated			Comprehensive
			Shares		Par Value		Capital		Deficit			Loss			Shares		Amount			Total
Balance, September 30, 2003				17,943	$	180	$	357,707	$	(91,092	)	$	(1,347	)		69	$	(394	)		265,054
	Exercise of stock options			38		—		258		—			—			—		—			258
	Comprehensive income:
		Net loss		—		—		—		(933	)		—			—		—			(933	)
		Change in fair value of interest rate swaps, net of income tax expense		—		—		—		—			246			—		—			246
	Total comprehensive loss																				(687	)
Balance, December 31, 2003				17,981	$	180	$	357,965	$	(92,025	)	$	(1,101	)		69	$	(394	)	$	264,625

See notes to consolidated financial statements.

5

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

				Three Months Ended December 31,
				2003			2002
Net income (loss)				$	(933	)	$	390
Adjustments to reconcile net income to net cash provided by operating activities:
	Bad debt expense				13,859			5,234
	Depreciation and amortization				10,733			9,954
	Loss (gain) on disposal of property, equipment and other assets				(84	)		70
	Amortization of loan acquisition costs				436			373
	Equity in net earnings of unconsolidated affiliates				(577	)		(754	)
	Minority interest share of earnings of consolidated subsidiaries				34			891
	Deferred income taxes				(627	)		239
	Change in assets and liabilities that relate to operations:
		Accounts receivable, net			(17,635	)		(6,898	)
		Medical supplies			(1,343	)		(376	)
		Due from affiliates			37			6
		Prepaid expenses and other current assets			329			(2,004	)
		Other assets			2,461			(307	)
		Accounts payable and accrued liabilities			307			(5,695	)
			Net cash provided by operating activities		6,997			1,123
Investing activities:
	Purchases of property and equipment				(30,696	)		(26,432	)
	Proceeds from sale of property and equipment				1,214			225
	Repayments of loans under management agreements				43			40
	Investments in and advances to affiliates, net				—			1,044
	Dividends received from unconsolidated affiliates				2,849			—
	Other investing activities				—			136
			Net cash used in investing activities		(26,590	)		(24,987	)
Financing activities:
	Short-term debt repayments, net				—			(2,000	)
	Proceeds from issuance of long-term debt				36,804			27,903
	Repayments of long-term debt				(26,326	)		(6,335	)
	Repayments of obligations under capital leases				(1,054	)		(649	)
	Payment of loan acquisition costs				(223	)		(336	)
	Investments by minority partners				61			370
	Distributions to minority partners				(3,579	)		(3,755	)
	Proceeds from exercised stock options				179			—
			Net cash provided by financing activities		5,862			15,198
	Net decrease in cash and cash equivalents				(13,731	)		(8,666	)
	Cash and cash equivalents:
			Beginning of year		94,199			118,768
			End of year	$	80,468		$	110,102
Supplemental schedule of noncash investing and financing activities:
	Capital expenditures financed by capital leases			$	532		$	678
	Capital expenditures included in accrued construction and development costs				—			4,358
	Capital expenditures included in other accrued liabilities				1,786			—
	Deferred tax asset related to exercised stock options				79			—
	Notes received for sale of land				1,098			—
	Notes received from minority interest in development hospitals				400			364

See notes to consolidated financial statements.

6

MEDCATH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(All tables in thousands, except per share amounts)

1. Business and Organization

     MedCath Corporation (the Company) is a healthcare provider primarily focused on the diagnosis and treatment of cardiovascular disease. The Company designs, develops, owns and operates hospitals in partnership with physicians, whom it believes have established reputations for clinical excellence. Each of the Company’s majority-owned hospitals (collectively, the Hospital Division) is a freestanding licensed general acute care hospital, that provides a wide range of health services, and the medical staff at each hospital includes qualified physicians in various specialities. As of December 31, 2003, the Company owned and operated eleven hospitals, which include ten majority-owned hospitals and one in which the Company owns a minority interest. These hospitals have a total of 667 licensed beds, of which 587 were staffed and available, and are located in nine states: Arizona, Arkansas, California, Louisiana, New Mexico, Ohio, South Dakota, Texas and Wisconsin.

     On January 13, 2004, the Company opened its twelfth hospital, which is located in San Antonio, Texas. This hospital is designed to accommodate 120 inpatient beds and will initially open with 60 licensed beds that will be staffed and available as the hospital ramps up its operations. The Company is currently completing the development of its thirteenth hospital, which is located in Lafayette, Louisiana and will open with 32 licensed beds in March 2004.

     The Company accounts for all but one of its owned and operated hospitals as consolidated subsidiaries. The Company owns a minority interest in Heart Hospital of South Dakota and does not have substantive control over the hospital, and therefore is unable to consolidate the hospital’s results of operations and financial position, but rather is required to account for its minority ownership interest in the hospital as an equity investment. The Company is currently evaluating the accounting for its interest in this hospital under Financial Accounting Standards Board (FASB) Interpretation No. 46-R that was issued in December 2003 regarding consolidation of variable interest entities. See “Accounting Changes and Recent Accounting Pronouncements” in Note 2 below.

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

2. Summary of Significant Accounting Policies

     Basis of Presentation - The Company’s unaudited interim consolidated financial statements as of December 31, 2003 and for the three months ended December 31, 2003 and 2002 have been prepared in accordance with accounting principles generally accepted in the United States of America (hereafter, generally accepted accounting principles) and pursuant to the rules and regulations of the Securities and Exchange Commission (the SEC). These unaudited interim consolidated financial statements reflect, in the opinion of management, all material adjustments (consisting only of normal recurring adjustments) necessary to fairly state the results of operations and financial position for the periods presented. All intercompany transactions and balances have been eliminated. The results of operations for the three months ended December 31, 2003 are not necessarily indicative of the results expected for the full fiscal year ending September 30, 2004 or future fiscal periods.

     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 disclosure is adequate to make the information presented not misleading. The accompanying 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, 2003.

     Use of Estimates – The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect reported amounts of assets and liabilities, revenues and expenses and related disclosures of contingent assets and liabilities in the consolidated financial statements and accompanying notes. There is a reasonable possibility that actual results may vary significantly from those estimates.

     Pre-opening Expenses – Pre-opening expenses consist of operating expenses incurred during the development of a new venture and prior to its opening for business. Such costs specifically relate to ventures under development and are

7

MEDCATH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

expensed as incurred. The Company recognized pre-opening expenses of approximately $3.4 million and $2.4 million during the three months ended December 31, 2003 and 2002, respectively.

     Stock-Based Compensation – As of December 31, 2003, the Company has two stock-based compensation plans, including a stock option plan under which it may grant incentive stock options and nonqualified stock options to officers and other key employees and an outside director’s stock option plan under which it may grant nonqualified stock options to nonemployee directors. The Company accounts for stock options under both of these plans in accordance with Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to Employees, as permitted under Statement of Financial Accounting Standards (SFAS) No. 123, Accounting for Stock-Based Compensation. The Company also provides prominent disclosure of the information required by SFAS No. 148, Accounting for Stock-Based Compensation, in its annual and interim financial statements.

     Under APB Opinion No. 25, compensation cost is determined based on the intrinsic value of the equity instrument award. No stock-based employee compensation cost is reflected in net income for the three months ended December 31, 2003 and 2002, as all options granted during those periods under the Company’s stock option plans had an exercise price equal to the market value of the underlying shares of common stock at the date of grant.

     Had compensation expense for the Company’s stock options been recognized based on the fair value of the option award at the grant date under the methodology prescribed by SFAS No. 123, the Company’s net income (loss) for the three months ended December 31, 2003 and 2002 would have been impacted as follows:

		Three Months Ended December 31,
		2003			2002
Net income (loss), as reported		$	(933	)	$	390
	Deduct: Total stock-based employee compensation expense determined under fair value method, net of related income taxes	$	(454	)	$	(521	)
	Pro forma net loss	$	(1,387	)	$	(131	)
Earnings (loss) per share, basic and diluted:
	As reported	$	(0.05	)	$	0.02
	Pro forma	$	(0.08	)	$	(0.01	)

     Accounting Changes and Recent Accounting Pronouncements – In December 2003 the FASB released a revised version of Interpretation No. 46, Consolidation of Variable Interest Entities, an interpretation of ARB No. 51, (hereinafter, FIN 46-R). This Interpretation established the effective dates for public entities to apply FIN 46 and FIN 46-R based on the nature of the variable interest entity and the date upon which the public company became involved with the variable interest entity. In general, FIN 46-R provides that (i) for variable interest entities created before February 1, 2003, a public entity must apply this Interpretation at the end of the first interim or annual period ending after March 15, 2004, and may be required to apply this Interpretation at the end of the first interim or annual period ending after December 15, 2003 if the variable interest entity is a special purpose entity, and (ii) for variable interest entities created after January 31, 2003, a public entity must apply this Interpretation at the end of the first interim or annual period ending after December 15, 2003, as previously required, and then apply this Interpretation at the end of the first interim or annual period ending after March 15, 2004. The Company is currently evaluating the accounting for its equity investment in one of its hospitals and in a small number of equity investments in its diagnostic services division. FIN 46-R, which will be effective during the three months ended March 31, 2004, provides a new consolidation method of accounting and may require the Company to consolidate certain entities that are not currently consolidated under generally accepted accounting principles. While FIN 46-R may also require certain entities to be accounted for under the equity method of accounting that are currently consolidated, the Company does not expect any such impact on its current consolidated operations.

3. Goodwill and Other Intangible Assets

     As required by SFAS No. 142, Goodwill and Other Intangibles, the Company has designated September 30, its fiscal year end, as the date it will perform the annual goodwill impairment test for all of its reporting units. Goodwill of a reporting unit will also be tested between annual tests if an event occurs or circumstances change that indicate an

8

MEDCATH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

impairment may exist. During the three months ended December 31, 2003, no events or circumstances changed that indicated interim impairment testing was necessary and as such, no impairment was recognized during the three months ended December 31, 2003.

     As of December 31, 2003 and September 30, 2003, the Company’s other intangible assets, net, included the following:

			December 31, 2003					September 30, 2003
			Gross					Gross
			Carrying		Accumulated			Carrying		Accumulated
			Amount		Amortization			Amount		Amortization
Amortized other intangible assets:
	Management contracts		$	20,598	$	(9,998	)	$	20,598	$	(9,716	)
	Loan acquisition costs			12,532		(7,637	)		12,251		(7,063	)
	Other			1,446		(429	)		1,446		(421	)
		Total	$	34,576	$	(18,064	)	$	34,295	$	(17,200	)

     Amortization expense recognized for the management contracts and other intangible assets totaled $290,000 and $437,000 for the three months ended December 31, 2003 and 2002, respectively. The Company recognizes amortization expense for loan acquisition costs as a component of interest expense. For the three months ended December 31, 2003 and 2002, amortization expense for loan acquisition costs was $574,000 and $445,000, respectively.

4. Business Development and Changes in Operations

     New Hospital Development During the Three Months Ended December 31, 2003 – On January 13, 2004, the Company opened Texsan Heart Hospital in San Antonio, Texas, which focuses primarily on cardiovascular care. On January 22, 2004, Texsan Heart Hospital received its accreditation from Joint Commission Accreditation for Healthcare Organizations (JCAHO), which initiates the hospital’s patient billing. Texsan Heart Hospital is accounted for as a consolidated subsidiary since the Company, through its wholly-owned subsidiaries, owns an approximate 51% interest in the venture, with physician investors owning the remaining 49%, and the Company exercises substantive control over the hospital.

     On October 14, 2003, the Company opened The Heart Hospital of Milwaukee in Glendale, Wisconsin. This hospital focuses primarily on cardiovascular care. On October 24, 2003, The Heart Hospital of Milwaukee received its accreditation from JCAHO, which initiates the hospital’s patient billing. The Heart Hospital of Milwaukee is accounted for as a consolidated subsidiary because the Company, through its wholly-owned subsidiaries, owns an approximate 60.3% interest in the venture, with physician investors owning the remaining 39.7%, and the Company exercises substantive control over the hospital.

     As of December 31, 2003, the Company’s three most recently opened hospitals, and the one hospital remaining under development were committed (and had paid and accrued amounts) under their construction contracts as set forth in the table below:

	Amount		Amount		Amount
	Committed		Paid		Accrued
Louisiana Heart Hospital	$	22,398	$	21,589	$	1,005
Texsan Heart Hospital	$	27,744	$	26,918	$	1,073
The Heart Hospital of Milwaukee	$	15,811	$	15,229	$	401
Heart Hospital of Lafayette	$	13,457	$	8,448	$	2,137

     For the three months ended December 31, 2003 and 2002, the Company capitalized approximately $463,000 and $314,000, respectively of interest expense as part of the capitalized costs of its hospitals under development during those periods.

     Closure of Diagnostic and Therapeutic Facilities – Effective May 2003, the Company received notification from its hospital partner of its intent to exercise its option to require the dissolution of Gaston Cardiology Services, LLC, and to

9

MEDCATH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

terminate all agreements with the hospital, Gaston Cardiology Services, LLC and the Company. The effective date of the dissolution and the termination of the agreements was November 2003.

5. Long-Term Debt

     Long-term debt consists of the following:

	December 31,			September 30,
	2003			2003
Master credit facility and bank mortgage loans	$	179,179		$	172,460
Pre-existing bank mortgage loan		19,935			20,378
Real estate investment trust (REIT) loans		75,173			75,448
Revolving credit facility		—			—
Notes payable to various lenders		82,129			76,009
Other		—			2,201
		356,416			346,496
Less current portion		(49,237	)		(45,612	)
Long-term debt	$	307,179		$	300,884

     Master Credit Facility and Bank Mortgage Loans – In July 2001, the Company became a party to a $189.6 million master credit facility (the Master Credit Facility), which provided a source of capital to refinance approximately $79.6 million of the real estate indebtedness of three of the Company’s existing hospitals and provided the Company with $110.0 million of available debt capital to finance its hospital development program. In March 2003, the Master Credit Facility was amended to increase available borrowings by $35.0 million thereby providing a total of $145.0 million of available debt to finance the Company’s hospital development program.

     As of December 31, 2003, $130.3 million of the $145.0 million initially available to finance the Company’s hospital development program had been designated to finance the development of Harlingen Medical Center, Louisiana Heart Hospital, Texsan Heart Hospital, The Heart Hospital of Milwaukee and Heart Hospital of Lafayette (see Note 4). Of this $130.3 million of designated financing, $120.4 million had been borrowed as of December 31, 2003. The Company anticipates the $14.7 million of undesignated funds under the $145.0 million initially available will remain available to finance other future projects in the Company’s hospital development program. However, the Company may elect to terminate part or all of the undesignated funds if it deems that its development activity is unlikely to result in a need for the funds.

     Each loan under the Master Credit Facility is separately documented and secured by the assets of the borrowing hospital only. Each loan under the Master Credit Facility amortizes based on a 20-year term, matures on July 27, 2006, and accrues interest at variable rates on either a defined base rate plus an applicable margin, or Eurodollar Rate (LIBOR) plus an applicable margin. The weighted average interest rate for the loans under the Master Credit Facility was 4.5% and 4.4% at December 31, 2003 and September 30, 2003, respectively. The Company is required to pay a monthly unused commitment fee at a rate of 0.5%.

     In December 2003, the Company made a principal prepayment of $11.4 million to the mortgage lender for Bakersfield Heart Hospital. The bank mortgage lender agreed to accept this principal prepayment in exchange for amending certain financial ratio covenants and minimum financial performance covenants, which Bakersfield Heart Hospital was not in compliance with during the preceding fiscal year ended September 30, 2003. The Company had classified this amount as current portion of long-term debt at September 30, 2003.

     At December 31, 2003, the Company classified $16.6 million of real estate mortgage debt for Tucson Heart Hospital as current portion of long-term debt based on the debt’s scheduled maturity in November 2004.

     In accordance with the related hospital operating agreements and as required by the lenders, the Company has guaranteed 100% of the obligations of its subsidiary hospitals for bank mortgage loans made under the Master Credit Facility and REIT loans and 71% of the obligation for another bank mortgage loan at December 31, 2003. The Company receives a fee from the minority partners in the subsidiary hospitals as consideration for providing guarantees in excess of the Company’s ownership percentage in the subsidiary hospitals. These guarantees expire concurrent with the terms of the related real estate loans and would require the Company to perform under the guarantee in the event of the subsidiary hospitals failing to perform under the related loans. The total amount of this real estate debt is secured by the subsidiary hospitals’ underlying real estate, which was financed with the proceeds from the debt. At December 31, 2003, the total amount of real estate debt was approximately $274.3 million, of which $268.5 million was guaranteed by

10

MEDCATH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

the Company. Because the Company consolidates the subsidiary hospitals’ results of operations and financial position, both the assets and the accompanying liabilities are included in the assets and long-term debt on the Company’s consolidated balance sheets.

     Revolving Credit Facility – Separate from the Master Credit Facility, the Company has a revolving credit facility (the Revolver) that provides $100.0 million in available borrowings, $10.0 million of which is designated as short-term borrowings and $25.0 million of which is available to issue letters of credit. The Revolver expires on January 31, 2005. As of December 30, 2003, no amounts were outstanding under the Revolver, however, the Company had letters of credit outstanding of $24.5 million, which reduced its availability under the Revolver to $75.5 million, subject to limitations on the Company’s total indebtedness as stipulated under its other debt agreements.

     Notes Payable – The Company has acquired substantially all of the medical and other equipment for its hospitals and certain diagnostic and therapeutic facilities and mobile cardiac catheterization laboratories under installment notes payable to equipment lenders collateralized by the related equipment. Two facilities in the diagnostic division also have leasehold improvements funded through notes payable collateralized by real estate. Amounts borrowed under these notes are payable in monthly installments of principal and interest over 4 to 7 year terms. Interest is at fixed and variable rates ranging from 3.92% to 9.84%. The Company has guaranteed between 50% and 100% of certain of its subsidiary hospitals’ equipment loans. The Company receives a fee from the minority partners in the subsidiary hospitals as consideration for providing guarantees in excess of the Company’s ownership percentage in the subsidiary hospitals. These guarantees expire concurrent with the terms of the related equipment loans and would require the Company to perform under the guarantee in the event of the subsidiaries’ failure to perform under the related loan. At December 31, 2003, the total amount of notes payable was approximately $82.1 million, of which $56.6 million was guaranteed by the Company. Because the Company consolidates the subsidiary hospitals’ results of operations and financial position, both the assets and the accompanying liabilities are included in the assets and long-term debt on the Company’s consolidated balance sheets.

     In July 2003, Texsan Heart Hospital obtained a debt commitment of up to $20.0 million to finance its equipment purchases. Until March 2004, interest on borrowings made under this commitment shall accrue at Prime, plus a margin. Beginning in March 2004, borrowings shall bear interest at a fixed rate of interest equal to a specific Treasury Note yield, plus a margin. Principal shall be payable in 78 months beginning in September 2004. As of December 31, 2003, no borrowings were outstanding under the commitment.

     In November 2003, The Heart Hospital of Milwaukee, obtained a $15.0 million debt commitment to finance its equipment purchases. Amounts borrowed under this commitment shall accrue at a base rate, plus a margin, or LIBOR plus a margin (4.39% at December 31, 2003). Principal amounts borrowed under this commitment are due March 2004. As of December 31, 2003, The Heart Hospital of Milwaukee had borrowed $10.1 million of the $15.0 million available. In February 2004, The Heart Hospital of Milwaukee obtained a $15.0 million debt commitment to refinance borrowings owed under the above debt commitment, and finance other equipment purchases. Final documentation of the loan facility is anticipated to close in March 2004. The loan commitment shall be interest only for one year following the date of the loan’s final documentation, during which time interest shall accrue at 90-day LIBOR, plus a margin. Following the one year interest only period, the loan’s principal amount shall amortize based on a seven-year term, with interest fixed at a Treasury Yield, plus a margin. The loan will mature three years after the date of loan’s final documentation, with all principal plus accrued interest being due at that time.

     Debt Covenants – Covenants related to the Company’s long-term debt restrict the payment of dividends and require the maintenance of specific financial ratios and amounts and periodic financial reporting. At December 31, 2003, the Company was in violation of certain financial ratio covenants related to the equipment loans at Arizona Heart Hospital and the real estate mortgage loan at Heart Hospital of New Mexico. The Company was also not in compliance with certain guarantor financial ratio covenants related to the real estate mortgage loans at Heart Hospital of Austin and Heart Hospital of New Mexico. These guarantor covenants related to the Company’s maintenance of a minimum current ratio, which the Company failed to meet due to the classification of real estate mortgage debt at one its hospitals as a current obligation at December 31, 2003, as previously discussed. The equipment lender at Arizona Heart Hospital has not granted a waiver for the breach and the obligation of approximately $902,000 million has been classified as a current liability in the Company’s consolidated balance sheet at December 31, 2003. The real estate lender granted a waiver of the financial covenant violation at Heart Hospital of New Mexico and provided a waiver and amendment for the guarantor covenant violations at Heart Hospital of Austin and Heart Hospital of New Mexico. The guarantor financial ratio was amended through November 30, 2004, during which time the Company agreed to certain limitations of indebtedness. The Company was in compliance with all other covenants in the instruments governing its outstanding debt at December 31, 2003 except as noted above.

11

MEDCATH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

     Guarantees of Unconsolidated Affiliate’s Debt – The Company has guaranteed approximately 50% of the real estate debt and 40% of the equipment debt of the one affiliate hospital in which the Company has a minority ownership interest and therefore does not consolidate the hospital’s results of operations and financial position. The Company provides these guarantees in exchange for a fee from that affiliate hospital. At December 31, 2003, the affiliate hospital was in compliance with all covenants in the instruments governing its debt. The total amount of the affiliate hospital’s real estate and equipment debt was approximately $27.9 million and $10.7 million, respectively, at December 31, 2003. Accordingly, the real estate debt and the equipment debt guaranteed by the Company was approximately $13.9 million and $4.3 million, respectively, at December 31, 2003. These guarantees expire concurrent with the terms of the related estate and equipment loans and would require the Company to perform under the guarantee in the event of the affiliate hospital’s failure to perform under the related loans. The total amount of this affiliate hospital’s debt is secured by the hospital’s underlying real estate and equipment, which were financed with the proceeds from the debt. Because the Company does not consolidate the affiliate hospital’s results of operations and financial position, neither the assets nor the accompanying liabilities are included in the value of the assets and liabilities on the Company’s balance sheets.

6. Liability Insurance Coverage

     Since June 1, 2002, the Company has been partially self-insured under claims-made insurance policies that provide coverage for claim amounts in excess of specified amounts of retained liability per claim. These specified amounts of retained liability per claim range from $2.0 million to $5.0 million depending on the applicable policy year and hospital. As of December 31, 2003 and September 30, 2003, the total estimated liability for the Company’s self-insured retention on medical malpractice claims, including an estimated amount for incurred but not reported claims, was approximately $3.9 million and $3.7 million, respectively, which is included in current liabilities in the Company’s consolidated balance sheet.

7. Commitments and Contingencies

     Resolution of Contingency – CMS change in Medicare capital cost reimbursement - Medicare reimburses hospitals for capital-related costs using one of two alternative methodologies based upon whether the hospital is categorized as “new” under CMS regulations. As previously discussed in the Company’s Annual Report on Form 10-K for the fiscal year ended September 30, 2003, one of the Company’s Medicare fiscal intermediaries notified the Company on August 11, 2003 that it had been directed by CMS to change, on a retroactive and prospective basis, the capital cost reimbursement methodology applicable to four of its hospitals. This position was contrary to a previous written determination the Company had received from that fiscal intermediary on October 11, 2002 that confirmed the methodology being applied by those hospitals. Consistent with the belief that the position taken by the fiscal intermediary in October 2002 was based upon a correct interpretation of applicable CMS regulations, the Company began during the fourth quarter of fiscal 2003 to vigorously pursue its administrative, judicial and other remedies to challenge the matter with the fiscal intermediary and CMS.

     Since August 2003, the Company has been in active conversations with CMS regarding the change in interpretation as to how capital reimbursement is paid for new hospitals. In early-February 2004, the Company learned that CMS has determined that the change in capital reimbursement methodology would be effective August 11, 2003, and that the change would not be applied retroactively to any periods prior to that effective date. Accordingly, this change in methodology will not have any impact on a retroactive basis to the Company’s consolidated financial position, results of operations and cash flows, as the four affected hospitals will not be required to repay the Medicare program for the reimbursed capital costs prior to August 11, 2003.

     CMS’s recent determination did not result in any changes in accounting estimates to the Company’s previously reported financial position, results of operations and cash flows for the most recent fiscal year ended September 30, 2003. During fiscal 2003 and the first quarter of fiscal 2004, the Company accounted for the retroactive component as a contingency that did not meet the criteria for recognition under SFAS No. 5, Accounting for Contingencies, and recognized capital reimbursement subsequent to August 11, 2003 consistent with the payments received under that new methodology beginning on that date.

12

MEDCATH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

8. Income Taxes

     Income tax benefit was $627,000 million for the three months ended December 31, 2003 and income tax expense was $259,000 for the three months ended December 31, 2002, which represented an effective tax rate of approximately 40% for both periods. Because the Company continues to have federal and state net operating loss carryforwards available from prior periods to offset its current tax liabilities, it has no material current cash income tax liability and the majority of its income tax expense is deferred.

9. Per Share Data

     The calculation of diluted net income (loss) per share considers the potentially dilutive effect of options to purchase 3,049,266 and 2,705,095 shares of common stock outstanding at December 31, 2003 and 2002, respectively, at prices ranging from $4.75 to $25.00. Of these options, 3,049,266 and 2,573,623 were not included in the calculation of diluted earnings (loss) per share at December 31, 2003 and 2002, respectively, as such shares were anti-dilutive for the periods.

10. Comprehensive Income (Loss)

     The components of comprehensive income (loss) are as follows:

		Three Months Ended December 31,
		2003			2002
Net income (loss)		$	(933	)	$	390
Other comprehensive income (loss):
	Change in fair value of interest rate swaps, net of income taxes		246			(44	)
Comprehensive income (loss)		$	(687	)	$	346

11. Litigation

     Litigation – 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 against the Company by various claimants, and additional claims that may be asserted for known incidents through December 31, 2003. 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.

     Management believes, based on advice of counsel and the Company’s experience with past lawsuits and claims, that, taking into account the applicable liability insurance coverage and recorded reserves, the results of those lawsuits and potential lawsuits will not have a materially adverse effect on the Company’s financial position or future results of operations and cash flows.

13

MEDCATH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

12. Reportable Segment Information

     The Company’s reportable segments consist of the Hospital Division and the Diagnostics Division. Financial information concerning the Company’s operations by each of the reportable segments as of and for the periods indicated is as follows:

	Three months ended December 31,
	2003			2002
Net revenue:
Hospital Division	$	141,433		$	103,943
Diagnostics Division		13,361			11,986
Corporate and other		1,832			5,172
Consolidated totals	$	156,626		$	121,101
Income (loss) from operations:
Hospital Division	$	3,063		$	5,711
Diagnostics Division		2,703			2,795
Corporate and other		(1,517	)		(1,989	)
Consolidated totals	$	4,249		$	6,517
Interest expense	$	(6,589	)	$	(6,206	)
Interest income		233			452
Other income, net		4			23
Equity in net earnings of unconsolidated affiliates		577			754
Minority interest in earnings of consolidated subsidiaries		(34	)		(891	)
Consolidated income (loss) before income taxes	$	(1,560	)	$	649

	December 31,		September 30,
	2003		2003
Aggregate identifiable assets:
Hospital Division	$	611,353	$	602,007
Diagnostics Division		46,630		46,847
Corporate and other		89,533		100,443
Consolidated totals	$	747,516	$	749,297

     Substantially all of the Company’s net revenue in its Hospital Division and Diagnostics Division is derived directly or indirectly from patient services. The amounts presented for Corporate and other primarily include general overhead and administrative expenses, cash and cash equivalents, other assets and operations of the Company not subject to separate segment reporting.

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

     The following discussion and analysis of our results of operations and financial condition should be read in conjunction with the interim unaudited consolidated financial statements and related notes included elsewhere in this report, as well as the audited consolidated financial statements and related notes thereto and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in our Annual Report on Form 10-K for the fiscal year ended September 30, 2003.

Overview

     The Company. We are a healthcare provider primarily focused on the diagnosis and treatment of cardiovascular disease. We design, develop, own and operate hospitals in partnership with physicians whom we believe have established reputations for clinical excellence. Each of our majority-owned hospitals is a freestanding, licensed general acute care hospital that provides a wide range of health services, and the medical staff at each of our hospitals includes qualified physicians in various specialties. As of December 31, 2003, we owned and operated eleven hospitals, which include ten majority-own hospitals and one in which we own a minority interest. These hospitals have a total of 667 licensed beds, of which 587 were staffed and available, and are located in nine states: Arizona, Arkansas, California, Louisiana, New Mexico, Ohio, South Dakota, Texas and Wisconsin.

     On January 13, 2004, we opened our twelfth hospital in San Antonio, Texas, which obtained its accreditation from Joint Commission Accreditation for Healthcare Organizations (JCAHO) on January 22, 2004. This hospital is designed to accommodate 120 inpatient beds and opened initially with 60 licensed beds that will be staffed and available as the hospital ramps up its operations. We are currently in the process of completing the development of our thirteenth hospital, which is located in Lafayette, Louisiana and will open with 32 licensed beds in March 2004. The opening of this hospital will mark our fifth hospital opened since October 2002, during which time we will have increased our portfolio of owned and operated hospitals from eight hospitals having a total of 465 licensed beds in September 2002 to thirteen hospitals having a total of 759 licensed beds by March 2004.

     In addition to our hospitals, we provide cardiovascular care services in diagnostic and therapeutic facilities in various locations and through mobile cardiac catheterization laboratories. We also provide consulting and management services tailored primarily to cardiologists and cardiovascular surgeons.

     Basis of Consolidated Results of Operations. We have included in our consolidated financial statements hospitals over which we exercise substantive control, including all hospitals in which we own more than a 50% interest. We have used the equity method of accounting for hospitals in which we hold less than a 50% interest and over which we do not exercise substantive control. Accordingly, the one hospital in which we hold a minority interest at December 31, 2003, Heart Hospital of South Dakota, is excluded from the net revenue and operating expenses of our consolidated company and our consolidated hospital division. Our minority interest in this hospital’s results of operations for the periods discussed is recognized as part of the equity in net earnings of unconsolidated affiliates in our statements of operations in accordance with the equity method of accounting. We are currently evaluating the accounting for our interest in this hospital under the new accounting rules that were issued in December 2003 regarding consolidation of variable interest entities. In addition to this hospital, we are also evaluating the impact of these new accounting rules on a small number of equity investments in our diagnostic services division. These new rules, which will be effective during the three months ended March 31, 2004, provide a new consolidation method of accounting and may require us to consolidate certain entities that are not currently consolidated under the generally accepted accounting principles. While these new rules may also require certain entities to be accounted for under the equity method of accounting that are currently consolidated, we do not expect any such impact on our current consolidated operations.

     Same Facility Hospital Division. On a same facility basis for our consolidated hospital division, we exclude the results of operations of Louisiana Heart Hospital and The Heart Hospital of Milwaukee, which opened in February 2003 and October 2003, respectively.

     Revenue Sources. The largest percentage of our net revenue is attributable to our hospital division. Based on our recent investment in the development of hospitals, we believe our hospital division’s percentage of consolidated net revenue will continue to increase in future periods.

     The following table sets forth the percentage contribution of each of our consolidating divisions to consolidated net revenue in the periods indicated below.

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		Three Months Ended December 31,
Division		2003			2002
Hospital			90.3	%		85.8	%
Diagnostic services			8.5	%		9.9	%
Corporate and other			1.2	%		4.3	%
	Net Revenue		100.0	%		100.0	%

     We receive payments for services rendered to patients from the Medicare and Medicaid programs, commercial insurers, health maintenance organizations, and directly from our patients. The following table sets forth the percentage of consolidated net revenue we earned by category of payor in the periods indicated below.

		Consolidated
		Three Months Ended December 31,
Payor		2003			2002
Medicare and Medicaid			49.3	%		54.8	%
Commercial and other, including self-pay			50.7	%		45.2	%
	Total consolidated net revenue		100.0	%		100.0	%

     A significant portion of our net revenue is derived from federal and state governmental healthcare programs, including Medicare and Medicaid. Although Medicare and Medicaid remain a significant payor, we experienced a significant change in payor mix comparing the first quarter of fiscal 2004 with the first quarter of fiscal 2003, as illustrated in the above table. One reason for this change in payor mix was Harlingen Medical Center, which is a full-serviceversus the cardiovascular focus of our other hospitals. This hospital’s different payor mix stems from its focus on a number of specialties, rather than only cardiovascular, and a higher concentration of self-pay patients than our typical hospital which is consistent with trend in that hospital’s market demographics. A second reason for this change in payor mix is an overall higher percentage of self-pay patients in our other hospitals during the current fiscal quarter than in the prior year. We believe this change in self-pay patients is consistent with the industry trend. A third reason for this change in payor mix is recent changes in Medicare outlier payment and capital cost reimbursement formulas affecting several of our hospitals, as discussed more fully below. We expect the net revenue that we receive from the Medicare program as a percentage of total consolidated net revenue to remain significant in future periods because the percentage of our total consolidated net revenue generated by our hospital division will continue to increase as we open and ramp up the operations of our new hospitals. We also expect our payor mix may continue to fluctuate in future periods due to changes in reimbursement, market and industry trends with self-pay patients and other similar factors.

     Medicare Reimbursement Changes. In recent months, CMS has issued and enacted several new rules and changes that significantly affect our net revenue. First, CMS increased the payment rates for inpatient services by 3.4% in fiscal 2004, resulting in higher Medicare payments for most hospitals. As part of this increase, which went into effect on October 1, 2003, CMS expects to pay approximately $98 billion to 4,087 acute care hospitals in 2004, a $4.1 billion increase over payments in fiscal 2003. Second, CMS enacted a new rule governing the calculation of outlier payments to hospitals that included, among other things:

• reducing the threshold for outlier payments;

• requiring the use of the latest of either the most recently submitted or most recently filed cost report to calculate a hospital’s cost-to-charge ratio;

• eliminating the use of statewide average cost-to-charge ratios to determine a hospital’s cost when the hospital’s own cost-to-charge ratio falls below established parameters; and

• adjusting the Medicare wage index for several states where we have operations.

     We expect that the increase in payment rates and revised wage indexes in fiscal 2004 will increase our net revenue by approximately $12.0 million to $13.0 million; and we expect that the changes in the outlier payment formula will decrease our outlier payments in fiscal 2004 by approximately $10.0 and $11.0 million. Since the changes to the outlier formula became effective in August 2003, we have been recognizing net revenue from outlier payments at amounts determined under the new calculation formula. However one of our Medicare fiscal intermediaries has continued to pay us at amounts calculated under the historical formula. As such, our cash and cash equivalents at December 31, 2003 includes approximately $4.7 million, of which $2.9 million was received during the first quarter of fiscal year 2004, that we may have to repay to the Medicare program. This amount is also reflected as a reduction to our accounts receivable,

16

net at December 31, 2003, consistent with our other estimated reimbursement settlements. We expect our cash and cash equivalents and our cash flows from operations will be positively impacted in future periods in which we continue to receive and reserve these payments; and our cash and cash equivalents and our cash flows from operations will be negatively impacted in the future period in which we may be required to prepay these amounts. Any changes in these new rules or other regulations governing the Medicare and Medicaid programs, or the manner in which they are interpreted, may result in a material change in our net revenue in the near future.

     Medicare reimburses hospitals for capital-related costs using one of two alternative methodologies based upon whether the hospital is categorized as “new” under CMS regulations. As we previously discussed in our Annual Report on Form 10-K for the fiscal year ended September 30, 2003, one of our Medicare fiscal intermediaries notified us on August 11, 2003 that it had been directed by CMS to change, on a retroactive and prospective basis, the capital cost reimbursement methodology applicable to four of our hospitals. This position was contrary to a previous written determination we had received from that fiscal intermediary on October 11, 2002 that confirmed the methodology being applied by those hospitals. Consistent with our belief that the position taken by the fiscal intermediary in October 2002 was based upon a correct interpretation of applicable CMS regulations, we began during the fourth quarter of fiscal 2003 to vigorously pursue our administrative, judicial and other remedies to challenge the matter with the fiscal intermediary and CMS.

     Since August 2003, we have been in active conversations with CMS regarding the change in interpretation as to how capital reimbursement is paid for new hospitals. In early-February 2004, we learned that CMS had determined that the change in capital reimbursement methodology would be effective August 11, 2003, and that the change would not be applied retroactively to any periods prior to that effective date. Accordingly, this change in methodology will not have any impact on a retroactive basis to our consolidated financial position, results of operations and cash flows, as our four affected hospitals will not be required to repay the Medicare program for the reimbursed capital costs prior to August 11, 2003. On a prospective basis, the fiscal intermediary began making payments for capital cost reimbursement under the new methodology for all claims submitted after August 11, 2003. The impact of this change for fiscal 2003 was a $1.2 million reduction in our net revenue, and for the first quarter of fiscal 2004 was a $1.7 million reduction in our net revenue from the amount that would have been recognized under the previous reimbursement method. In addition, we estimate the impact of this change in reimbursement will be approximately $7.2 million for the full fiscal year 2004. The impact will diminish rapidly in future years, based on how reimbursement is calculated, and we estimate that the cumulative negative impact for fiscal years 2004 through 2009 will be from $15.0 million to $16.0 million.

     CMS’s recent determination did not result in any changes in accounting estimates to our previously reported financial position, results of operations and cash flows for our most recent fiscal year ended September 30, 2003. During fiscal 2003 and the first quarter of fiscal 2004, we accounted for the retroactive component as a contingency that did not meet the criteria for recognition under SFAS No. 5, Accounting for Contingencies, and we recognized capital reimbursement subsequent to August 11, 2003 consistent with the payments received under that new methodology beginning on that date.

     Strategic Outlook and Operational Focus. The United States Congress recently passed and President Bush signed into law the Medicare Modernization Act, which imposes an 18-month moratorium on the development of new physician-owned “specialty hospitals,” as such hospitals are defined in the statute, and in regulations we expect to be issued by the Department of Health and Human Services. Although the Medicare Modernization Act will not affect our ability to open the hospital we currently have under development, it is expected to prohibit our hospital development activities as currently configured through June 18, 2005, the expiration date of the moratorium. We believe the short-term impact of the Medicare Modernization Act on our business is negligible as all of our hospitals, including the one remaining under development, are grandfathered under the legislation, and we have not planned any new hospital projects during this period as our focus is on opening and ramping up our new hospitals. We cannot predict the long-term impact of this legislation, or future legislation, on our business given the uncertainty involved with regulatory changes.

     Management is currently conducting an in-depth strategic review of the Company’s business model and development program. We are performing this strategic review partly in response to the temporary moratorium imposed by the Medicare Modernization Act and partly to address less than acceptable financial performance in certain areas of our business. Management will present this strategic review to the board of directors at the end of February 2004. We will provide additional information in future periods as decisions are made that will affect our business outlook. Currently, we do not anticipate an overhaul of our business model. In fact, in many of our markets, our hospital model has proven quite successful in producing favorable clinical outcomes and acceptable financial returns, and in gaining market share. However, we are aggressively reviewing our hospital portfolio and potentially may divest hospitals that we conclude have limited growth potential. If we divest any of our hospitals, we will then seek ways to redeploy the capital generated from such divestitures into new investments that meet the following criteria:

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• provide a return on capital consistent with our business objectives;

• involve healthcare services that build on our core competencies of involving physicians and other healthcare providers in the governance and strategic decision making processes;

• include partners that share our commitment to delivering superior quality care; and

• are done on a more collaborative, and less confrontational, manner.

     One area in which we have already begun to focus our business development efforts in fiscal 2004 is our diagnostics division. Our business model in this division involves joint ventures with physicians and hospitals to own and operate catheterization labs and facilities that provide other outpatient cardiovascular services. These new business ventures are generally expected to produce acceptable financial returns and require limited capital investment, which we believe makes them attractive new business opportunities.

     Operationally, management has been, and will continue to be, focused on several key objectives during fiscal 2004, including:

• ramping up the operations of our newest hospitals;

• improving quality outcomes in our facilities;

• aggressively managing our controllable costs;

• working to ensure operating fundamentals are being met; and

• making sure that the systems and policies are positioned for long-term growth.

Results of Operations

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

			Three Months Ended December 31,
									Increase / (Decrease)						% of Net Revenue
			2003			2002			$			%			2003			2002
			(in millions)
Net revenue			$	156.6		$	121.1		$	35.5			29.3	%		100.0	%		100.0	%
Operating expenses:
	Personnel expense			48.9			39.8			9.1			22.9	%		31.2	%		32.9	%
	Medical supplies expense			42.6			27.9			14.7			52.7	%		27.2	%		23.0	%
	Bad debt expense			13.9			5.2			8.7			167.3	%		8.9	%		4.3	%
	Other operating expenses			33.0			29.2			3.8			13.0	%		21.1	%		24.1	%
	Pre-opening expenses			3.4			2.4			1.0			41.7	%		2.2	%		2.0	%
	Depreciation			10.4			9.5			0.9			9.5	%		6.6	%		7.8	%
	Amortization			0.3			0.4			(0.1	)		(25.0	)%		0.2	%		0.3	%
	Loss (gain) on disposal of property, equipment and other assets			(0.1	)		0.1			(0.2	)		(200.0	)%		(0.1	)%		0.1	%
		Total operating expenses		152.4			114.6			37.8			33.0	%		97.3	%		94.6	%
Income (loss) from operations				4.2			6.5			(2.3	)		(35.4	)%		2.7	%		5.4	%
Other income (expenses):
	Interest expense			(6.6	)		(6.2	)		(0.4	)		6.5	%		(4.2	)%		(5.1	)%
	Interest income			0.2			0.5			(0.3	)		(60.0	)%		0.1	%		0.4	%
	Other income (expense), net			—			—			—			—			—			—
	Equity in net earnings of unconsolidated affiliates			0.6			0.8			(0.2	)		(25.0	)%		0.4	%		0.7	%
		Total other expenses, net		(5.8	)		(5.0	)		(0.8	)		16.0	%		(3.7	)%		(4.1	)%
Income (loss) before minority interest and income taxes				(1.5	)		1.5			(3.0	)		(200.0	)%		(1.0	)%		1.2	%
Minority interest share of earnings of consolidated subsidiaries				—			(0.9	)		0.9			(100.0	)%		—			(0.7	)%
Income (loss) income before income taxes				(1.6	)		0.6			(2.2	)		(366.7	)%		(1.0	)%		0.5	%
Income tax benefit (expense)				0.6			(0.3	)		0.9			(300.0	)%		0.4	%		(0.2	)%
Net income (loss)			$	(0.9	)	$	0.4		$	(1.3	)		(325.0	)%		(0.6	)%		0.3	%

     The following tables present, for the periods indicated, selected operating data on a consolidated basis and same facility basis.

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	Three Months Ended December 31,
	2003			2002			% Change
Selected Operating Data (consolidated):
Number of hospitals		10			8
Licensed beds (a)		612			522
Staffed and available beds (b)		532			437
Admissions (c)		9,657			6,775			42.5	%
Adjusted admissions (d)		12,184			8,384			45.3	%
Patient days (e)		34,294			24,739			38.6	%
Average length of stay (days) (f)		3.55			3.65			(2.7	)%
Occupancy (g)		70.1	%		61.5	%
Inpatient catheterization procedures		4,697			3,833			22.5	%
Inpatient surgical procedures		2,345			1,892			23.9	%
Hospital division revenue	$	141,433		$	103,943			36.1	%

	Three Months Ended December 31,
	2003			2002			% Change
Selected Operating Data (same facility):
Number of hospitals		8			8
Licensed beds (a)		522			522
Staffed and available beds (b)		488			437
Admissions (c)		9,202			6,775			35.8	%
Adjusted admissions (d)		11,560			8,384			37.9	%
Patient days (e)		32,976			24,739			33.3	%
Average length of stay (days) (f)		3.58			3.65			(1.9	)%
Occupancy (g)		73.4	%		61.5	%
Inpatient catheterization procedures		4,413			3,833			15.1	%
Inpatient surgical procedures		2,189			1,892			15.7	%
Hospital division revenue	$	130,411		$	103,943			25.5	%

(a)	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.
(b)	Staffed and available beds represent the weighted average number of beds that are readily available for patient use during the period.
(c)	Admissions represent the number of patients admitted for inpatient treatment.
(d)	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 mulitplying the quotient by admissions.
(e)	Patient days represent the total number of days of care provided to inpatients.
(f)	Average length of stay (days) represents the average number of days inpatients stay in our hospital.
(g)	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.

     Net Revenue. Net revenue increased 29.3% to $156.6 million for the three months ended December 31, 2003, the first quarter of our fiscal year 2004, from $121.1 million for the three months ended December 31, 2002, the first quarter of our fiscal year 2003. Of this $35.5 million increase in net revenue, our hospital division generated a $37.5 million increase and our diagnostic services division generated a $1.4 million increase, which were offset in part by a $3.3 million decrease in our corporate and other division. Our corporate and other division includes the results of operations of our cardiology consulting and management business.

     The $37.5 million increase in our hospital division’s net revenue was attributable to $11.0 million of net revenue growth from our new hospitals, including Louisiana Heart Hospital which opened on February 28, 2003 and The Heart Hospital of Milwaukee which opened on October 14, 2003 and growth among our same facility hospitals, which accounted for the remaining $26.5 million. On a consolidated basis, our hospital admissions increased 42.5% and adjusted admissions increased 45.3% for the first quarter of fiscal 2003 compared to the first quarter of fiscal 2002. Also on a consolidated basis, inpatient catheterization procedures increased 22.5% and inpatient surgical procedures increased 23.9% for the first quarter of fiscal 2004 compared to the first quarter of fiscal 2003, while our average length of stay decreased 2.7% to 3.55 days for the current fiscal quarter compared to 3.65 days for the same prior fiscal quarter.

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     The $26.5 million increase in net revenue contributed by our same facility hospitals, along with the increases in admissions of 35.8%, adjusted admissions of 37.9%, inpatient catheterization procedures of 15.1%, and inpatient surgical procedures of 15.7% within our same facility hospitals was largely due to the following factors:

• the growth in operations of Harlingen Medical Center, which was newly opened during the first quarter of fiscal 2002;

• the reopening of Bakersfield Heart Hospital’s emergency department in February 2003 after it was closed in the third quarter of fiscal 2002; and

• the return to use of beds at one of our hospitals that were out of service during the prior year quarter.

     Excluding these three hospitals from our same facility comparison, our adjusted admissions increased 11.5%. This increase in adjusted admissions, and the related increase in net revenue, was primarily due to an increase in the number of winter visitors in the market for healthcare in certain of our hospitals’ markets and an increase in managed care volume resulting from several new contracts in our hospitals for the first quarter of fiscal 2004 compared to the first quarter of fiscal 2003. Lastly, the increased reimbursement under the Medicare program associated with procedures utilizing drug-eluting sent contributed approximately $1.0 million to the increase in our net revenue during the first quarter of fiscal 2004.

     The $1.4 million increase in our diagnostic services division’s net revenue was the net result of several key changes in this division. Of the $1.4 million increase in net revenue, new diagnostic and therapeutic businesses developed and opened since the first quarter of our fiscal 2003 contributed an increase of $500,000, and same facility diagnostic services contributed the remaining $900,000. This $900,000 increase in our same facility diagnostic services’ net revenue was the net result of numerous factors. Several of our diagnostic services’ joint ventures experienced growth in the number of procedures performed, including new services added at one of our joint ventures, during the first quarter of fiscal 2004 compared to the first quarter of fiscal 2003. These increases in net revenue of our same facility diagnostic services were offset in part by decreases to our net revenue attributable to a decline in the number of procedures performed in our mobile cardiac catheterization laboratories during the first quarter of fiscal 2004 compared to the prior year quarter. Our mobile cardiac catheterization business has generally been declining in recent periods as a result of a maturing market for such mobile services. In response to this trend we have been, and will continue to be, focused on transitioning certain of our mobile business relationships into other businesses, such as interim leases or fixed-site joint ventures. Our same facility diagnostic services net revenue for the first quarter of fiscal 2004 was also negatively impacted by the dissolution of one of our hospital-based cardiac diagnostic and therapeutic facilities, Gaston Cardiology Services, LLC, in November 2003. As previously discussed, our diagnostic services division is one area in which we have already begun to focus our business development efforts in fiscal 2004. Accordingly, we expect this business may become more significant to our net revenue and results of operations in future periods.

     The $3.3 million decrease in our corporate and other division’s net revenue during the first quarter of fiscal 2004 compared to the first quarter of fiscal 2003 was primarily due to a decrease in our cardiology consulting and management operations attributable to two key changes in that business. In the third quarter of fiscal 2003, we restructured one of our two physician management contracts, which reduced management fee revenue, but more significantly eliminated the cost reimbursement arrangement whereby we were previously reimbursed for costs on a pass-through basis. In the first quarter of fiscal 2004, we changed certain vendor relationships associated with our second physician management contract whereby we also eliminated a substantial amount of our pass-through cost reimbursement revenue. The cost reimbursement changes under both of these contracts reduced both our net revenue and certain of our operating expenses by corresponding amounts, and therefore had no impact on our consolidated income from operations or our consolidated net loss for the first quarter of fiscal 2004. While we continue to have pass-through cost reimbursement of certain personnel expenses under the terms of the second physician management contract, we may restructure this contract in the future, which could result in a similar decline in our net revenue and operating expenses in our corporate and other division in future periods.

     Personnel expense. Personnel expense increased 22.9% to $48.9 million for the first quarter of fiscal 2004 from $39.8 million for the first quarter of fiscal 2003. This $9.1 million increase in personnel expense was primarily due to a $10.3 million increase generated by our hospital division, offset in part by a $1.2 million decrease in our corporate and other division. Of the $10.3 million increase in our hospital division’s personnel expense, our two new hospitals accounted for $4.8 million and our same facility hospitals accounted for the remaining $5.5 million. This increase in our same facility hospitals’ personnel expense was primarily attributable to the increase in admissions, inpatient catheterization and surgical procedures and net revenue for the first quarter of fiscal 2004 compared to the first quarter of fiscal 2003, as previously discussed. The $1.2 million decrease in our corporate and other division’s personnel expense was due to the change in the physician management contracts in our cardiology consulting and management

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operations whereby certain reimbursed costs are not longer being passed through our operations, as previously discussed. As a percentage of net revenue, personnel expense decreased to 31.2% for the first quarter of fiscal 2004 from 32.9% for the first quarter of fiscal 2003. This decrease was primarily attributable to higher same facility hospital net revenue and the continued ramp up of Harlingen Medical Center, which opened in the first quarter of fiscal 2003, offset in part by the high personnel costs relative to net revenue associated with the ramp up of The Heart Hospital of Milwaukee, which opened in the first quarter of fiscal 2004. Also on an adjusted patient day basis, which is another trend we monitor for this expense category, our hospital division’s personnel expense declined by 11.2% to $1,052 per adjusted patient day for the first quarter of fiscal 2004 from $1,184 per adjusted patient day for the first quarter of fiscal 2003.

     Medical supplies expense. Medical supplies expense increased 52.7% to $42.6 million for the first quarter of fiscal 2004 from $27.9 million for the first quarter of fiscal 2003. This $14.7 million increase in medical supplies expense was due to a $13.3 million increase in our hospital division and a $1.4 million increase in our diagnostic services division. Of the $13.3 million increase in our hospital division’s medical supplies expense, our two new hospitals accounted for $3.6 million and our same facility hospitals accounted for the remaining $9.7 million. This increase in our same facility hospitals’ medical supplies expense was attributable to the increases in catheterization and surgical procedures performed during the first quarter of fiscal 2004 compared to the first quarter of fiscal 2003. In addition, the increase in surgical procedures during 2004 was disproportionately comprised of cardiac procedures that use high-cost medical devices and supplies, such as automatic interior cardiac devices (AICD) and pacemaker procedures. During the first quarter of fiscal 2004, we experienced a 73% increase in the number of AICD procedures compared to the first quarter of fiscal 2003. We have experienced a general trend over the past few fiscal quarters in which the number of surgical procedures involving AICD and other higher cost medical devices and supplies has increased as a component of our mix of procedures. In addition, the introduction of drug-eluting stents in April 2003 contributed to higher medical supplies expense during the first quarter of fiscal 2004 compared to the first quarter of fiscal 2003. We estimate in our hospital division that during the first quarter of fiscal 2004, approximately 34% of our cardiac procedures involving stents utilized drug-eluting stents and that on average our utilization rate for drug-eluting stents was 1.1 stents per case. The $1.4 million increase in our diagnostic services division’s medical supplies expense was primarily attributable to the net revenue growth in its operations and the increased costs associated with drug-eluting stents during the first quarter of fiscal 2004 compared to the first quarter of fiscal 2003. As a percentage of net revenue, medical supplies expense increased to 27.2% for the first quarter of fiscal 2004 from 23.0% for the first quarter of fiscal 2003.

     We expect our same facilities’ medical supplies expense to continue to increase in future periods as new technologies are introduced into the cardiovascular care market and as we continue to experience increased utilization of AICD and pacemaker procedures that use high-cost devices. The amount of increase in our medical supplies expense, and the relationship to net revenue, in future periods will depend on many factors such as the introduction, availability, cost and utilization of the specific new technology by physicians in providing patient care, as well as any changes in reimbursement amounts we may receive from Medicare and other payors. We also expect our medical supplies expense in future periods will remain sensitive to changes in case mix of procedures at our hospitals as surgical procedures typically involve higher cost medical supplies than catheterization procedures. Given the significance of our medical supplies expense and the recent trends facing our business, management is very focused on this expense category. We are currently in the process of reviewing our supply chain and expect to execute a new group purchasing contract in the near future. We are seeking opportunities to work with our group purchasing supplier to assist in us in our supply chain logistics, optimization, information technology related to supplies and product sourcing. Our goals include improving our purchasing economics and optimizing our inventory costs by improving our purchasing logistics.

     Bad debt expense. Bad debt expense increased 167.3% to $13.9 million for the first quarter of fiscal 2004 from $5.2 million for the first quarter of fiscal 2003. This $8.7 million increase in bad debt expense was primarily incurred in our same facilities hospitals, which accounted for $8.0 million of the increase, and our two new hospitals, which accounted for the remaining $700,000 increase for the first quarter of fiscal 2004 compared to the first quarter of fiscal 2003. The $8.0 million increase in our same facility hospitals’ bad debt expense was primarily attributable to an increase in the number of self-pay patients in several of our markets this fiscal quarter, and the fact that our Harlingen Medical Center, which continues to ramp up, operates in a market with a historically higher percentage of self-pay patients than our typical hospital. Our same facility hospital’s days of net revenue in accounts receivable, based on first fiscal quarter net revenue, was 54 days as of December 31, 2003, which was consistent with the 55 days as of December 31, 2002. While we continue to focus efforts on our receivables collection procedures and other processes in our business offices, we do not expect to realize significant decreases in our days of net revenue in accounts receivable in future periods as we may have realized in prior periods. We also expect our bad debt expense to increase in fiscal 2004 compared to fiscal 2003 due to an increase in operating activity related to the opening and ramp up of our new hospitals. As a percentage of net revenue, bad debt expense increased to 8.9% for the first quarter of fiscal 2004 from 4.3% for the first quarter of fiscal 2003. Given the recent trends we are experiencing with self-pay revenues as previously discussed,

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we expect our bad debt expense as a percentage of net revenue will, on average, range between 7.5 % and 8.5% during the remainder of fiscal 2004.

     Other operating expenses. Other operating expenses increased 13.0% to $33.0 million for the first quarter of fiscal 2004 from $29.2 million for the first quarter of fiscal 2003. This $3.8 million increase in other operating expense was primarily due to a $6.1 million increase generated by our hospital division, offset in part by a $2.4 million decrease in our corporate and other division. Of the $6.1 million increase in our hospital division’s other operating expense, our two new hospitals accounted for $3.4 million and our same facility hospitals accounted for the remaining $2.7 million. This increase in our same facility hospitals’ other operating expense was primarily attributable to the growth in our same facility hospitals’ operations, including Harlingen Medical Center that was newly opened during the first quarter of fiscal 2003, and an overall increase in our insurance costs, including our medical malpractice insurance. These increases in other operating expenses were offset in part by decreases in certain controllable costs resulting from company-wide cost control initiatives. The $2.4 million decrease in our corporate and other division’s other operating expense was due to the change in the physician management contracts in our cardiology consulting and management operations whereby certain reimbursed costs are not longer being passed through our operations, as previously discussed. As a percentage of net revenue, other operating expenses decreased to 21.1% for the first quarter of fiscal 2004 from 24.1% for the first quarter of fiscal 2003. This decrease was primarily attributable to higher same facility hospital net revenue and the certain economies of scale achieved on the fixed cost components of our other operating expenses combined with the benefits realized from our company-wide cost control initiatives.

     Pre-opening expenses. Pre-opening expenses increased 41.7% to $3.4 million for the first quarter of fiscal 2004 from $2.4 million for the first quarter of fiscal 2003. Pre-opening expenses represent expenses specifically related to projects under development, primarily new hospitals. As of December 31, 2003, we had two hospitals under development, including Texsan Heart Hospital and Heart Hospital of Lafayette. Total pre-opening expenses for Texsan Heart Hospital, which we opened on January 13, 2004, were approximately $5.3 million, and total projected pre-opening expenses for Heart Hospital of Lafayette, which we expect to open in March 2004, will range from approximately $4.4 million to $5.0 million. Accordingly, we expect pre-opening expenses for these two hospitals will be approximately $1.6 million for the second quarter of fiscal 2004. While we incur pre-opening expenses throughout the development process, we expect to incur the majority of these expenses during the six to eight month period immediately prior to the opening of a hospital. We expect pre-opening expenses to decrease during fiscal 2004 compared to fiscal 2003 due to the decrease in our hospital development activity, as previously discussed.

     Depreciation. Depreciation increased 9.5% to $10.4 million for the first quarter of fiscal 2004 from $9.5 million for the first quarter of fiscal 2003. This increase in depreciation primarily occurred in our hospital division and was due to the depreciation of assets placed in service upon the opening of our two new hospitals, offset in part by a decrease related to equipment that became fully depreciated during fiscal 2003 in certain of our same facility hospitals. We expect depreciation expense to increase for future periods in fiscal 2004 compared to fiscal 2003 due to our new hospitals opened during fiscal 2003 and the opening of our hospitals under development during fiscal 2004.

     Interest expense. Interest expense increased 6.5% to $6.6 million for the first quarter of fiscal 2004 compared to $6.2 million for the first quarter of fiscal 2003. This slight increase in interest expense was primarily attributable to an approximately $800,000 increase from our two new hospitals, offset in part by a $400,000 decrease in our same facility hospitals. This decrease in interest expense in our same facility hospitals resulted from a decrease in outstanding debt through scheduled principal payment and prepayment reductions and lower interest rates on our variable rate debt during the first quarter of fiscal 2004 compared to the first quarter of fiscal 2003. In addition, we capitalized approximately $463,000 and $314,000 of interest expense as part of the capitalized construction costs of our hospitals currently under development, which was not included in interest expense recognized for the first quarter of fiscal 2004 and 2003, respectively. We expect the total amount of our outstanding indebtedness will increase in future periods as a result of the debt we will incur to finance our development of new businesses, including our two hospitals under development at December 31, 2003 and other projects we may begin as part of our business development efforts in fiscal 2004. Accordingly, we expect our interest expense to increase in future periods consistent with any increases in our indebtedness and changes in market interest rates.

     Equity in earnings of unconsolidated affiliates. Equity in earnings of unconsolidated affiliates decreased $177,000 to $577,000 for the first quarter of fiscal 2004 from $754,000 for the first quarter of fiscal 2003. This $177,000 decrease was attributable to a decline in the operating results from our unconsolidated affiliate hospital, which was primarily due to the reduction in that hospital’s capital cost reimbursement under the Medicare program as the hospital transitioned to the hold harmless payment methodology following its second full year of operations. We have only one hospital in which we hold less than a 50.0% equity interest and which we were required to account for as an equity investment during the first quarter of fiscal 2004 and 2003. We also continue to hold a small number of

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additional equity investments in our diagnostic services division, our corporate and other division, and in one of our hospitals.

     Earnings allocated to minority interests. Earnings allocated to minority interests decreased $857,000 to $34,000 for the first quarter of fiscal 2004 from $891,000 for the first quarter of fiscal 2003. This $857,000 decrease was primarily due to the ramp up losses incurred by our new hospitals, the increase in pre-opening expenses for our hospitals under development and a decline in the operating results of certain of our same facility hospitals, offset in part by a change from pro rata to disproportionate recognition at Harlingen Medical Center. During the first quarter of fiscal 2003, we shared losses at Harlingen Medical Center with our minority partners on a pro rata basis, however during the first quarter of fiscal 2004, we were required to recognize a disproportionate 100% of the hospitals losses such that no amounts were allocated to our minority partners. See “Critical Accounting Policies” in our Annual Report on Form 10-K for the fiscal year ended September 30, 2003 for a discussion of our accounting for minority interests, including the bases for the disproportionate allocation accounting. During the first quarter of fiscal 2004, our reported earnings allocated to minority interests of $34,000 would have been a loss allocation of $735,000 had we not recognized disproportionate allocations in our hospitals during the quarter. Therefore, our reported loss before income taxes of $1.6 million would have been a loss of $800,000 for the first quarter of fiscal 2004.

     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. As of December 31, 2003, we had remaining cumulative disproportionate loss allocations of approximately $22.1 million that we may recover in future periods. However, we may be required to recognize additional disproportionate losses, depending on the results of operations of each of our hospitals. We could also be required to recognize disproportionate losses at our other hospitals not currently in disproportionate allocation depending on their results of operations in future periods.

     Income taxes. Income tax benefit was $627,000 for the first quarter of fiscal 2004 compared to income tax expense of $259,000 for the first quarter of fiscal 2003, which represented an effective tax rate of approximately 40% for both periods. Because we continue to have federal and state net operating loss carryforwards available from prior periods to offset our current tax liability, we have no material current income tax liability and the majority of our income tax expenses and benefits are deferred.

Liquidity and Capital Resources

     Working Capital and Cash Flow Activities. Our consolidated working capital was $60.5 million at December 31, 2003 and $63.9 million at September 30, 2003. The decrease of $3.4 million in working capital resulted primarily from a decrease in cash and cash equivalents combined with increases in accounts payable and current portion of long-term debt, offset in part by increases in accounts receivable, net, and medical supplies and decreases in accrued compensation and benefits, accrued property taxes and accrued construction and developments costs.

     The decrease in cash and cash equivalents primarily resulted from repayments of long-term debt, distributions to minority partners at two of our hospitals and three of our diagnostic facilities and capital expenditures during the first quarter of fiscal 2004. Our repayments of long-term debt included a principal prepayment related to amended loan terms of the mortgage debt at one of our hospitals of $11.4 million, which had been classified as a current obligation at September 30, 2003. Our capital expenditures during the quarter principally related to Louisiana Heart Hospital, The Heart Hospital of Milwaukee, our two hospitals under development and software licenses and development cost related to information systems for our hospitals. These decreases to cash and cash equivalents were partially offset by cash flows provided by operations, dividends received from unconsolidated affiliates and net proceeds from borrowings to fund the capital expenditures for Louisiana Heart Hospital, The Heart Hospital of Milwaukee and our two hospitals under development.

     As discussed under the above caption “Overview –Medicare Reimbursement Changes,” our cash and cash equivalents at December 31, 2003 includes approximately $4.7 million that we have received in outlier payments from one of our Medicare intermediaries that we may have to repay to the Medicare program in the future. Of this $4.7 million, $2.9 million was received during the first quarter of fiscal 2004. We have reflected these amounts as a reduction to our accounts receivable, net at December 31, 2003, consistent with our other estimated reimbursement settlements, and we have not recognized them as net revenue. However, our cash and cash equivalents and our cash flows from operations were positively impacted in the current period by the amounts. We expect any such amounts we may continue to receive in future periods will have a positive impact on our cash and cash equivalents and cash flows from operations in those periods. We also expect that if we are required to repay these amounts, then that repayment will have a negative impact on our cash and cash equivalents and cash flows from operations in that applicable future period.

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     The increase in accounts payable was primarily due to the timing of our payment cycle at several of our same facility hospitals, which resulted in an increase in unpaid vendor invoices as of December 31, 2003 compared to September 30, 2003, and an increase in activity at Texsan Heart Hospital during the first quarter of fiscal 2004 in preparation for its January 2004 opening. The increase in current portion of long-term debt during the first quarter of fiscal 2004 was primarily due to reclassifying Tucson Heart Hospital’s real estate mortgage loan, which is due in November 2004, to current portion of long-term debt, offset in part by the principal prepayment of mortgage debt at Bakersfield Heart Hospital, as previously discussed.

     The increase in accounts receivable, net, was primarily attributable to the growth in our net revenue during the first quarter of fiscal 2004 compared to the fourth quarter of fiscal 2003, including the ramp up of our two new hospitals, Louisiana Heart Hospital and The Heart Hospital of Milwaukee, and the growth in our same facility hospitals. These increases in accounts receivable, net, were offset in part by the estimated reimbursement settlements accrued during the first quarter of 2004 related to outlier payments as previously discussed. The increase in medical supplies was primarily due to increases at Harlingen Medical Center, the ramp up of our two new hospitals and an increase at Texsan Heart Hospital in preparation of its January 2004 opening. The decrease in accrued compensation and benefits was primarily due to the timing of our payroll cycles, which resulted in a decrease in the number of payroll days accrued as of December 31, 2003 compared to the number of payroll days accrued as of September 30, 2003, offset in part by increases related to the ramp up of our two new hospitals and the increased staffing for Texsan Heart Hospital. The decrease in accrued construction and development costs resulted from the financing of equipment purchases that were accrued at September 30, 2003 with borrowings under equipment notes payable during the first quarter of fiscal 2004 at The Heart Hospital of Milwaukee and decreased construction activity at our two hospitals remaining under development at December 31, 2003.

     A significant portion of our change in working capital was due to the opening and subsequent operating activities of our two new hospitals, Louisiana Heart Hospital and The Milwaukee Heart Hospital and the continued ramp-up of Harlingen Medical Center. Consistent with this trend from September 30, 2003 to December 31, 2003, we expect our working capital to fluctuate as our new hospitals and our hospitals under development progress through the development period and ramp-up period. Specifically, we expect our working capital to decrease as accounts payable and accrued liabilities increase as each hospital nears its opening and working capital to increase subsequent to each hospital’s opening as accounts receivable, net, increase from its operating activities.

     Our operating activities provided net cash of $7.0 million for the first quarter of fiscal 2004 compared to net cash provided of $1.1 million for the first quarter of fiscal 2003. The $7.0 million net cash provided by operating activities for the first quarter of fiscal 2004 was the result of cash flow provided by our operations offset in part by the net changes in our working capital as discussed above. The $1.1 million of net cash provided by operating activities for the first quarter of fiscal 2003 was primarily the result of cash flow provided by our operations offset in part by increases in accounts receivable, net, medical supplies inventory and prepaid expenses and other current assets combined with decreases in accounts payable and other accrued liabilities.

     Our investing activities used net cash of $26.6 million for the first quarter of fiscal 2004 compared to net cash used of $25.0 million for the first quarter of fiscal 2003. The $26.6 million of net cash used by investing activities in the first quarter of fiscal 2004 was primarily due to our capital expenditures during the period, offset in part by dividends received from our unconsolidated affiliates. The $25.0 million of net cash used by investing activities for the first quarter of fiscal 2003 was also primarily due to our capital expenditures, related mostly to our hospitals under development, and partially offset by a net decrease in investments in and advances to our unconsolidated affiliate hospital. Although we expect to open the last of our hospitals currently under development in March 2004, we do expect to continue to use cash in investing activities in future periods. The amount will depend largely on the type and size of investments we make as part of our strategic plans. See “Overview – Strategic Outlook and Operational Focus.”

     Our financing activities provided net cash of $5.9 million for the first quarter of fiscal 2004 compared to net cash provided of $15.2 million for the first quarter of fiscal 2003. The $5.9 million of net cash provided by financing activities for the first quarter of fiscal 2004 was primarily the result of proceeds from the issuance of long-term debt, net of loan acquisition costs, of $36.6 million, offset in part by repayments of short-term borrowings, long-term debt and capital lease obligations of $27.4 million and distributions to, net of investments by, minority partners of $3.5 million. The $15.2 million of net cash provided by financing activities for the first quarter of fiscal 2003 was primarily the result of proceeds from the issuance of long-term debt, net of loan acquisition costs of $27.6 million offset in part by repayments of short-term borrowings, long-term debt and capital lease obligations of $9.0 million and distributions to, net of investments by, minority partners of $3.4 million.

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     Capital Expenditures. Expenditures for property and equipment for the first quarter of fiscal years 2004 and 2003 were $30.7 million and $26.4 million, respectively. The $30.7 million of capital expenditures for the first quarter of fiscal 2004 included $15.5 million for Harlingen Medical Center, Louisiana Heart Hospital, The Milwaukee Heart Hospital and our two hospitals under development at December 31, 2003. The $26.4 million of capital expenditures for the first quarter of fiscal 2003 included $21.7 million for Harlingen Medical Center, Louisiana Heart Hospital, The Milwaukee Heart Hospital and our hospitals under development at that time. In addition, we incurred $532,000 and $678,000 of capital lease obligations during the first quarter of fiscal 2004 and first quarter of fiscal 2003, respectively, and we had accrued $1.8 and $4.4 million, respectively of capital expenditures primarily related to new hospital development at December 31, 2003 and 2002. We expect our capital expenditures for our hospitals under development will decrease for fiscal 2004 and future periods compared to fiscal 2003 as we open the last of our hospitals currently under development in March 2004. The amount of capital expenditures we incur in future periods will depend largely on the type and size of investments we make as part of our strategic plans. See “Overview-Strategic Outlook and Operational Focus.”

     Obligations, Commitments and Availability of Financing. At December 31, 2003, we had $370.4 million of outstanding debt, $52.9 million of which was classified as current. Of the $370.4 million of outstanding debt, $362.2 million was outstanding to lenders to our hospitals and included $6.3 million outstanding under capital leases. The remaining $8.2 million of debt was outstanding to lenders to our diagnostic services and corporate and other divisions under capital leases and other miscellaneous indebtedness, primarily equipment notes payable. No amounts were outstanding under our $100.0 million revolving credit facility at December 31, 2003. At the same date, however, we had letters of credit outstanding of $24.5 million, which reduced our availability under this facility to $75.5 million, subject to limitations on our total indebtedness as stipulated under other debt agreements.

     In addition to the $370.4 million of outstanding debt at December 31, 2003, we had $4.6 million of a working capital note due to a hospital investor partner at one of our hospitals that will be repaid as funds are available and is included in other long-term obligations.

     Our master credit facility provides a total of $145.0 million of available debt to finance our hospital development program. As of December 31, 2003, $130.3 million of the initial $145.0 million had been designated, of which $120.4 million had been borrowed to finance the development of Harlingen Medical Center, Louisiana Heart Hospital, Texsan Heart Hospital, The Heart Hospital of Milwaukee and Heart Hospital of Lafayette. The remaining $14.7 million of undesignated borrowings remains available to finance other hospital projects that we may begin in future periods. However, the Company may elect to terminate part or all of these undesignated funds if it deems that its future hospital development activity is unlikely to result in a need for the funds.

     In addition to the master credit facility described above, The Heart Hospital of Milwaukee and Texsan Heart Hospital have $15.0 million and $20.0 million, respectively, of debt commitments to finance the purchases of equipment. As of December 31, 2003, The Heart Hospital of Milwaukee had borrowed $10.1 million of the $15.0 million available and Texsan Heart Hospital had no borrowings outstanding under its commitment.

     As of December 31, 2003, Louisiana Heart Hospital, The Heart Hospital of Milwaukee and the two hospitals under development were committed (and had paid and accrued amounts) under their construction contracts as set forth in the table below (in millions):

	Amount		Amount		Amount
	Committed		Paid		Accrued
Louisiana Heart Hospital	$	22.4	$	21.6	$	1.0
Texsan Heart Hospital	$	27.7	$	26.9	$	1.1
The Heart Hospital of Milwaukee	$	15.8	$	15.2	$	0.4
Heart Hospital of Lafayette	$	13.5	$	8.4	$	2.1

     In addition to the debt described above and our cash obligations under operating leases, we anticipate incurring additional long-term debt of between $40.0 and $50.0 million during the next six to nine months. We expect $8.0 million of this will be mortgage debt, all of which is available from designated, but unused, commitments and remaining undesignated borrowing available under the master credit facility as of December 31, 2003. We expect approximately $37.0 million of additional long-term debt will be equipment debt primarily financed through a combination of notes payable and capital leases provided by lenders affiliated with the equipment vendors.

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     At December 31, 2003, we were in violation of certain financial ratio covenants related to the equipment loans at Arizona Heart Hospital and the real estate mortgage loan at Heart Hospital of New Mexico. We were also not in compliance with certain guarantor financial ratio covenants related to the real estate mortgage loans at Heart Hospital of Austin and Heart Hospital of New Mexico. The equipment lender at Arizona Heart Hospital has not granted a waiver for the breach and the obligation of approximately $902,000 has been classified as current in the accompanying balance sheet at December 31, 2003. The real estate lender granted a waiver of the financial covenant violation at Heart Hospital of New Mexico and provided a waiver and amendment for the guarantor covenant violations at Heart Hospital of Austin and Heart Hospital of New Mexico. The guarantor financial ratio was amended through November 30, 2004, during which time we agreed to certain limitations of indebtedness. Except as noted above, we were compliance with all other covenants in the instruments governing our outstanding debt at December 31, 2003.

     We guarantee either all or a portion of the obligations of our subsidiary hospitals for bank mortgage loans. We also guarantee a portion of the obligations 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 the hospitals or the physician investors.

     We also guarantee approximately 50% of the real estate and 40% of the equipment debt of Heart Hospital of South Dakota, the one hospital in which we owned a minority interest at December 31, 2003, and therefore do not consolidate the hospital’s results of operation and financial position. We provide such guarantee in exchange for a fee from the hospital.

     We believe that internally generated cash flows and available borrowings under our revolving credit facility of $75.5 million, subject to limitations on our total indebtedness as stipulated under other debt agreements, together with the remaining net proceeds of our initial public offering of $49.9 million, borrowings available under the master credit facility not yet designated for a development hospital of $14.7 million, borrowings available under equipment debt commitments of $24.9 million, cash balances in our development hospitals of $2.0 million, and other long-term debt and capital leases we expect to incur will be sufficient to finance our hospital development program, other capital expenditures and our working capital requirements for the next 12 to 18 months. While we believe the aforementioned capital resources are sufficient to fund our hospital development program, other capital expenditures and working capital requirements for the specified period, we periodically may evaluate and pursue other financing alternatives, including amending or replacing our bank debt or issuing additional equity or debt securities, to supplement or replace our current sources of capital.

     Intercompany Financing Arrangements. MedCath uses intercompany financing arrangements to provide cash support to individual hospitals for their working capital needs, including the needs of our new hospitals during the ramp-up period and any periodic or on-going needs of our hospitals. 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 MedCath on outstanding balances. These intercompany loans are subordinated to each hospital’s mortgage and equipment debt outstanding, but are senior to the equity interests of MedCath and our partners in the hospital venture, and are secured in each instance by a pledge of the borrowing hospital’s accounts receivable. Also as part of our intercompany financing and cash management structure, MedCath sweeps cash from individual hospitals as amounts are available in excess of the individual hospital’s working capital needs. These funds are advanced pursuant to cash management agreements with the individual hospital that establish the terms of the advances and provide for a rate of interest to be paid consistent with the market rate earned by MedCath on the investment of its funds. These cash advances are due back to the individual hospital on demand and are subordinate to the equity investment of MedCath in the hospital venture. As of December 31, 2003, we held $106.2 million of intercompany notes, net of advances from our hospitals. The aggregate amount of these intercompany loans and cash advances outstanding fluctuates from time to time depending upon our hospitals’ needs for capital resources.

Forward-Looking Statements

     Some of the statements and matters discussed in our Annual Report on Form 10-K for the year ended September 30, 2003, in this report and in exhibits to theses reports 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. The forward-looking statements contained in this report and its exhibits include, among others, statements about the following:

26

• the impact of the Medicare Prescription Drug Improvement and Modernization Act of 2003 and other healthcare reform initiatives,

• the availability and terms of capital to fund our development strategy,

• changes in Medicare and Medicaid payment levels,

• our ability to successfully develop additional hospitals, open them according to plan and gain significant market share in the market,

• our relationships with physicians who use our hospitals,

• competition from other hospitals,

• our ability to attract and retain nurses and other qualified personnel to provide quality services to patients in our hospitals,

• our information systems,

• existing governmental regulations and changes in, or failure to comply with, governmental regulations,

• liability and other claims asserted against us,

• changes in medical or other technology and reimbursement rates for new technologies,

• demographic changes,

• changes in accounting principles generally accepted in the United States and

• our ability, when appropriate, to enter into managed care provider arrangements and the terms of those arrangements.

     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 exhibits might not occur. Our forward-looking statements speak only as of the date of this report or the date they were otherwise made. Other than as may be required by federal securities laws to disclose material developments related to previously disclosed information, 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 the discussion of risk factors filed as Exhibit 99.1 to our Annual Report on Form 10-K filed with the SEC, before making an investment decision with respect to our common stock. A copy of this annual report, including exhibits, is available on the internet site of the SEC at http://www.sec.gov or through our website at http://www.medcath.com.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

     We maintain a policy for managing risk related to exposure to variability in interest rates, foreign currency exchange rates, commodity prices, and other relevant market rates and prices, which includes considering entering into derivative instruments or contracts or instruments containing features or terms that behave in a manner similar to derivative instruments 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. To date, we have only entered into the fixed interest rate swaps as discussed below.

     As required by their mortgage loans, three of our consolidated hospitals entered into fixed interest rate swaps during the fourth quarter of fiscal year 2001. These fixed interest rate swaps effectively fixed the interest rate on the hedged portion of the related debt at 4.92% plus the applicable margin for two of the hospitals and at 4.6% plus the applicable margin for the other hospital. Both the new mortgage loans and the fixed interest rate swaps mature in July 2006. At December 31, 2003, the average variable rate on the new mortgage loans was 3.95%. The fair value of the interest rate

27

swaps at December 31, 2003 was an obligation of approximately $2.0 million, resulting in an unrealized gain, net of income taxes, of $246,000 for the first quarter of fiscal 2004 which is included in comprehensive income in our consolidated statement of stockholders’ equity in accordance with accounting principles generally accepted in the United States of America.

     Our primary market risk exposure relates to interest rate risk exposure through that portion of our borrowings that bear interest based on variable rates. Our debt obligations at December 31, 2003 included approximately $196.9 million of variable rate debt at an approximate average interest rate of 4.55%. A one hundred basis point change in interest rates on our variable rate debt would have resulted in interest expense fluctuating approximately $495,000 for the three months ended December 31, 2003.

Item 4. Controls and Procedures

     The president and chief executive officer and the executive vice president and chief financial officer of the Company (its principal executive officer and principal financial officer, respectively) have concluded, based on their evaluation as of the end of the period covered by this quarterly report on Form 10-Q, that the Company’s disclosure controls and procedures are effective to ensure that information required to be disclosed by the Company in the reports filed or submitted by it under the Securities Exchange Act of 1934, as amended (the Exchange Act), is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and include 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 president and chief executive officer and executive vice president and chief financial officer, as appropriate to allow timely decisions regarding required disclosure.

     No change in the Company’s internal control over financial reporting was made during the most recent fiscal quarter that materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

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PART II. OTHER INFORMATION

Item 2. Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities

(c)	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. All 6,000,000 shares of common stock offered in the final prospectus were sold at a price of $25.00 per share for gross proceeds of $150.0 million. The net proceeds that we received from the offering after deducting the underwriting discounts and commissions and the other offering expenses were approximately $137.0 million. During the first quarter of fiscal year 2004, we used $11.4 million of the net proceeds from the offering for the repayment of principal related to the mortgage debt at Bakersfield Heart Hospital. There were no other changes in the application of the net proceeds from the offering previously disclosed in our Annual Reports on Forms 10-K for the fiscal years ended September 30, 2003, 2002 and 2001, our Forms 10-Q for the quarterly periods ended June 30, 2003, 2002 and 2001, March 31, 2003 and 2002, and December 31, 2002 and 2001.
	We expect to use the remaining approximate $49.9 million of proceeds from the offering to develop additional hospitals and for working capital and other corporate purposes, including the possible acquisition of additional interests in our existing hospitals. 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 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.
	During the quarter ended December 31, 2003, no shares of common stock were repurchased by the Company.

Item 6. Exhibits and Reports on Form 8-K

(a) Exhibits

Exhibit
No.	Description
10.1	Employment agreement, dated August 28, 1995, by and between Joan McCanless and MedCath Incorporated.
10.2	Employment, Confidentiality and Non-Compete Agreement, dated December 3, 1999, by and between Thomas K. Hearn and MedCath Incorporated.
10.3	Amendment to Employment, Confidentiality and Non-Compete Agreement, by and between Thomas K. Hearn and MedCath Incorporated, dated December 21, 2001.
31.1	Rule 13a-14(a) Certification of Chief Executive Officer
31.2	Rule 13a-14(a) Certification of Chief Financial Officer
32.1	Certifications of Chief Executive Officer and Chief Financial Officer pursuant to Rule 13a-14(a) or Rule 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.2	Certifications of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

(b) Reports on Form 8-K

The following reports on Form 8-K were filed by the Company during the quarter ended December 31, 2003.

• Current Report on Form 8-K filed on November 20, 2003 announcing the filing of the earnings release for the fiscal quarter and fiscal year ended September 30, 2003.

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SIGNATURES

     Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

MEDCATH CORPORATION

Dated: February 17, 2004	By:	/s/ JOHN T. CASEY
			John T. Casey
			President, Chief Executive Officer and Director
			(principal executive officer)

By:	/s/ JAMES E. HARRIS
	James E. Harris
	Executive Vice President and Chief Financial
	Officer
	(principal financial officer)

By:	/s/ DAVID W. PERRY
	David W. Perry
	Vice President and Chief Accounting Officer
	(principal accounting officer)

30 EX-10.1 3 g87228exv10w1.htm EX-10.1

Exhibit 10.1

EMPLOYMENT AGREEMENT

     THIS EMPLOYMENT AGREEMENT dated as of August 28, 1995 and by and between MEDCATH, INC., a North Carolina corporation (the “Corporation”); and Joan McCanless (“McCanless”), a resident of North Carolina (the “Agreement”).

     WHEREAS, the Corporation desires to employ McCanless as a full-time employee and McCanless desires to accept that position in accordance with the terms hereof;

     NOW, THEREFORE, it is agreed as follows:

     1.    Employment. For new and very valuable consideration described herein, the Corporation shall employ McCanless and McCanless accepts employment upon the terms and conditions hereinafter set forth.

     2.    Duties. As an employee, McCanless shall be employed as Vice President — Disease Management (Title to be revised upon commencement of employment.) As such she shall be responsible for developing clinical pathways at all of MedCath’s heart Hospitals, working with the physicians and Hospital Presidents to install pathways and train clinical personnel, develop MedCath’s data bases for caturing clinical outcomes and any and all other areas of Disease Management or clinical analysis as may be identified by Officers of the Corporation. She may also potentially have duties relating to the development and operation of freestanding cardiac catheterization centers, cardiac imaging centers, heart hospitals, mobile cardiac catheterization unit routes, cardiology related programs, or such other duties as shall be assigned to her from time to time by the Officers of the Corporation.

     During the term of employment hereunder, McCanless shall not be engaged in any other business activity whether or not such business activity is pursued for gain, profit, or other pecuniary advantage unless agreed on by the President of the Corporation. It is understood that McCanless is currently an Officer and principle shareholder in Decision Support Systems, a privately held Corporation. McCanless and the Corporation agree that she will, prior to joining MedCath engage personnel to replace her on a day-to-day operating basis at Decision Support Systems and that her involvement will continue on a Director level only. If at any time in the future, in the sole discretion of the Corporation, McCanless’s ownership interest in Decision Support Systems detracts from her performance at MedCath, or in any way causes a conflict with MedCath’s interests, then McCanless agrees to divest herself of that ownership interest in a timely fashion.

     3.    Compensation. For and in consideration of the services to be rendered by McCanless hereunder, the Corporation shall pay to McCanless an annual salary of One Hundred Thousand Dollars ($100,000.00) and continue during the term of this agreement and which shall be paid on a monthly basis unless otherwise agreed to by the parties hereto. McCanless shall also participate in an annual bonus compensation plan each year of her employment. The initial bonus plan will be $30,000 relating to goals and objectives pertaining to the management of the

Diagnostic Division. McCanless’s salary shall be reviewed by the Chief Operating Officer of the Corporation on an annual basis. McCanless will only be eligible for the bonus award if she is employed by the Corporation on the last day of the year for which the bonus applies. During McCanless’s initial year of employment she will be guaranteed a minimum bonus of $10,000.

     4.    Miscellaneous Benefits. During her employment, the Corporation shall provide McCanless with additional benefits substantially equivalent to those which are generally provided to other similar employees of the Corporation. The Corporation shall reimburse McCanless for reasonable expenses incurred by her in the course of her employment with the Corporation provided those expenses are consistent with reasonable policies provided from time to time by the Corporation’s Board of Directors.

     5.    Termination of Employment.

             (a)    By the Corporation for Cause. The Corporation shall have the right to terminate McCanless’s employment for cause as provided herein by giving written notice thereof. “Cause” shall mean that McCanless commits a willful act of fraud, dishonesty or disloyalty toward the company; is convicted of criminal conduct resulting in a jail sentence (whether or not such sentence is suspended); engages in conduct significantly injurious to the Corporation monetarily; violates a material term of this Agreement including, but not limited to, failure to fulfill the duties assigned to McCanless by the Corporation; becomes disabled; or submits a notice of resignation to the Corporation. McCanless shall be deemed disabled if she has been unable, by reason of physical or mental infirmity, to perform on a full-time basis her assigned responsibilities. The existence of disability shall be reasonably determined by the Board of Directors of the Corporation.

             (b)    By the Corporation Without Cause. Subject to (d) below, the Corporation may terminate McCanless’s employment at any time without cause by giving McCanless written notice thereof.

             (c)    By McCanless. McCanless may terminate her employment upon at least (45) days’ written notice.

             (d)    Salary and Benefits.    (i) If the Corporation terminates McCanless’s employment under this Agreement for any reason other than cause, the Corporation will continue to be liable for her salary and all accrued bonuses to be paid on a monthly basis for a period of six (6) months following the date of termination, as long as and only if McCanless is not otherwise in default hereunder during that period; provided, however, that her salary shall not be payable once McCanless becomes employed substantially full-time or otherwise earns, on a monthly basis, at least 75% of her monthly salary hereunder. (ii) Upon any termination of McCanless’s employment for cause, McCanless shall not be entitled to any further salary, bonuses or benefits following the date of termination of her employment. (iii) Upon termination of McCanless’s employment for any reason, McCanless shall be entitled to receive only such additional benefits which have accrued or become payable to her prior to the end of her actual employment. (iv) Upon termination, McCanless shall not be entitled to any additional salary or benefits other than those accrued prior to the date of termination. Notwithstanding anything in

this Agreement to the contrary, no further salary or benefits shall be due to McCanless once she begins to receive the proceeds of any disability insurance policy.

     6.    Confidentiality, Non-Disclosure and Non-Competition. During the course of McCanless’s employment, McCanless has been and will be exposed and have access to substantial quantities of information and technology (the “Confidential Information”) relating to the Corporation’s business that are valuable trade secrets or confidential information, including information concerning customers, operations, pricing, technology and marketing strategies.

     The Confidential Information was developed, compiled and/or tested by the Corporation at considerable amounts of money in building upon and expanding that Confidential Information. The Confidential Information enables the Corporation to conduct is business with success and with a competitive advantage as long as the Confidential Information remains not generally known to others, whether those others operate in direct competition with the company or its customers or begin operations in geographical areas which are of interest to the Corporation, specifically within the United States.

     McCanless, by reason of her role as an employee of the company, is familiar with and has access to the Corporation’s customers and their needs and to the marketing and pricing pursued by the Corporation with respect to those customers and the Corporation’s products and services.

     This Paragraph is designed to prohibit McCanless from using the Confidential Information and knowledge and relationships developed as an insider of the Corporation for her own benefit or for the benefit of parties other than the Corporation. The Corporation would not give McCanless access to the Confidential Information and authority without McCanless’s execution of this Agreement and McCanless willingly signs this Agreement because she has received additional consideration to do so and because she believes her relationship with the Corporation is and will be in her own best interest. Both parties agree that this Paragraph’s provisions should be construed broadly in favor of the Corporation.

     In light of the foregoing, the parties agree as follows:

(a)    Confidential Information.

McCanless promises that:

       (i)     During or after termination of her relationship with the Corporation, she will not, directly or indirectly, use, or disclose or make available to anyone outside the Corporation, any Confidential Information.

       (ii)    she will safeguard all Confidential Information at all times so that it is not exposed to, or taken by, unauthorized persons, and, when entrusted to her, will exercise her best efforts to assure to safekeeping.

(b)    Competition.

McCanless agrees that:

       (i)     she will not, during the period of her relationship with the Corporation, engage or be interested, directly or indirectly, in any manner, as a partner, officer, director, advisor, employee or in any other capacity in any business similar to business to the Corporation.

       (ii)    The Corporation’s business is unusual and that by virtue of her relationship with the Corporation she is, and will become more, familiar with and close to the Confidential Information and the Company’s business and Customers. In the event her relationship with the Corporation ceases for any reason, she will not engage in, for a period of eighteen (18) months after that termination, in any manner directly or indirectly, whether as an employee, officer, owner, partner, shareholder, consultant or otherwise, in any business or other activity similar in business to and in competition with the company within seventy-five (75) miles of any location which the Corporation has (x) provided cardiology services of any type whatsoever during her employment with the Corporation, or (y) made a written proposal to provide such services, which proposal was made at least in part as a result of the efforts of McCanless.

     7.    Enforcement. If there is a breach or threatened breach of the provisions of Paragraph 6 of this Agreement, in addition to other remedies at law or equity, the Corporation shall be entitled to injunctive relief. The parties desire and intend that the provisions of Paragraph 6 shall be enforced to the fullest extent permissible under the law and public policies applied, but the unenforceability or modification of any particular paragraph, subparagraph, sentence, clause, phrase, word, or figure be adjudicated to be wholly invalid or unenforceable, the balance of Paragraph 6 shall thereupon be modified in order to render the same valid and enforceable.

     8.    Notices. Any notice required or permitted to be given under this Agreement shall be in writing and shall be sent by registered mail, by other reasonable means of delivery providing overnight service, or by hand to McCanless at__________________; to the Corporation at 7621 Little Avenue, Suite 106, Charlotte, NC 28226. Notice shall be deemed to have been given when deposited with the Postal Service or other delivery service or, if delivered by hand, when received by the addressee. A party may change the address to which notice to it must be given by advising the other parties in writing of the new address.

     9.    Waiver of Breach. The waiver by either party of a breach of any provision of this Agreement by the other party shall not operate or be construed as a waiver of any subsequent breach by the waiving party.

     10.   Assignment. The rights and obligations of the Corporation under this Agreement shall insure to the benefit of and shall be binding upon the successors and assigns of the

Corporation. As a personal service contract the rights and obligations of McCanless under this agreement may not be assigned by her.

     11.    Entire Agreement. This instrument may not be changed orally but only by an agreement in writing signed by the party against whom enforcement of any waiver, change, modification, extension or discharge is sought.

     12.    Applicable Law. This Agreement shall be construed in accordance with the laws of the State of North Carolina Applicable to contracts made and to be performed in this State, without reference to choice of laws principles, and that law shall be applied in connection with its enforcement in other states and jurisdictions to the fullest extent possible.

     IN WITNESS WHEREOF, the parties have signed and sealed this Agreement as of the date first above written.

	MEDCATH INCORPORATED
By:	/s/ David Crane                         David Crane                         Chief Operating Officer

/s/ Joan McCanless        
Joan McCanless

Attachment A:

     Confidential information shall not include information that is in the public domain or is available or shall become available to McCanless by means other than her employment with the company.

Attachment B:

     For purposes of this agreement, confidential information shall not include information related to the development, implementation, and automation of clinical paths, which was previously known or in the public domain.

                    /s/ Joan McCanless  8/7/95

EX-10.2 4 g87228exv10w2.htm EX-10.2

Exhibit 10.2

EMPLOYMENT, CONFIDENTIALITY AND NON-COMPETE AGREEMENT

     This EMPLOYMENT, CONFIDENTIALITY AND NON-COMPETE AGREEMENT (the “Agreement”) is made and entered into by and between MEDCATH INCORPORATED, a North Carolina corporation (the “Company”) and THOMAS K. HEARN (“Employee”), a resident of North Carolina, and is effective the 3rd day of December 1999 (the “Effective Date”).

     WHEREAS, the Company and the Employee desire to continue Employee’s employment in accordance with the terms hereof, which provides to Employee new and additional consideration which was not previously provided to the Employee by the Company;

     NOW, THEREFORE, it is agreed as follows:

     1.     Employment. Employee shall continue to be employed as President, Diagnostics Division for the Company.

     2.     Duties. Employee shall be a full-time employee of the Company and, accordingly, shall devote a commensurate amount of time and effort in the performance of Employee’s duties as assigned by the Company.

     While employed by the Company, Employee shall not be engaged in any other business activity whether or not such business activity is pursued for gain, profit, or other pecuniary advantage.

     3.     Compensation. For and in consideration of the services to be rendered by Employee hereunder, the Company shall pay to Employee an annual salary of One Hundred Eighty-Five Thousand Dollars ($185,000.00), which shall be paid on a bi-weekly basis unless otherwise agreed to by the parties hereto. While Employee remains employed by the Company, Employee’s salary shall be reviewed by the Company on an annual basis.

     Employee shall be eligible to participate in an annual bonus compensation plan each year of employment under the terms, conditions and guidelines established for eligible employees’ participation. The bonus plan will be based on factors relating to the success of the Company and the Employee’s performance. Performance includes the accomplishment of certain objectives outlined by the Company at the beginning of the annual bonus compensation plan year. Employee understands that in order to be eligible for any bonus, Employee must be actively employed by the Company at the time the bonus is paid and/or satisfy all eligibility criteria imposed by applicable state law.

     4.     Miscellaneous Benefits. During Employee’s employment with the Company, Employee shall be eligible for additional benefits, including life insurance, medical insurance, paid time off, etc., under the same terms and conditions as those which apply to similar employees of the Company, as they may be changed from time to time.

     With regard to business expenses, the Company shall reimburse Employee for reasonable business related expenses incurred in the course of Employee’s employment with the Company, provided those expenses are consistent with the policies established from time to time by the Company. Employee must submit acceptable documentation of the expenses in order to receive reimbursement.

     5.     Termination of Employment.

     (a)     By the Company for Cause. The Company shall have the right to terminate Employee’s employment immediately and without prior notice in the event that the Company believes it has cause to terminate employment. “Cause” includes, but is not limited to, fraud; dishonesty; disloyalty; conviction of criminal conduct; conduct which is or threatens significant injury to the Company monetarily; conduct which may have a significant or threatened negative impact upon the image of the Company; failure to fulfill the duties assigned to Employee by the Company; violation of this Agreement; submission of a notice of resignation to the Company; engaging in or condoning sexual harassment; failure to abide by applicable laws, rules, regulations and work rules; or actions or omissions which the Company considers to be of a similar nature or degree.

     In the event that Employee is terminated for cause, Employee shall not be entitled to receive any further salary, bonus or benefit following the date of termination of the Employee’s employment, except as provided by applicable law or company policy.

     (b)     By the Company Without Cause. The Company may terminate Employee’s employment at any time without cause by giving Employee written notice thereof.

     In the event the Company terminates Employee’s employment without cause, the Company will continue to pay Employee his/her current bi-weekly salary, less applicable lawful deductions, for a period of nine (9) months following the date of notice of termination of employment, or until Employee secures other substantially full-time employment or earns, on a monthly basis, at least 75% of Employee’s monthly salary hereunder, whichever occurs first. Employee shall be entitled to receive pro-rata vacation if terminated without cause, plus other benefits as provided by applicable law or by Company policy.

     (c)     By Employee. Employee may terminate Employee’s employment with the Company at any time by providing the Company with thirty (30) days written notice. In the event of such termination, Employee shall not be entitled to receive any further salary, bonus or benefit following Employee’s actual termination, except as provided either by applicable law or Company. The Company reserves the right to elect to provide pay in lieu of allowing Employee to work during the notice period.

     6.     Confidentiality and Non-Disclosure Agreements. During the course of Employee’s employment with the Company, it is understood that Employee will be exposed and/or have access to substantial quantities of confidential information relating to the Company’s business (including the business of all affiliates and operations of the Company), such as customer information, vendors, operations and operating procedures, pricing, financial

2

information, technology, marketing strategies, design of facilities, employment practices, contractual agreements, and possibly trade secrets (the “Confidential Information”).

     Employee agrees that both while employed by the Company and following termination of Employee’s employment with the Company at any time in the future.

     (i)      Employee will take all reasonable precautions to safeguard all Confidential Information at all times so that it is not comm     ed to, exposed to, available to, or taken by any unauthorized person and will personally use or disclose such information; and

     (ii)      Employee will exercise Employee’s best efforts to assure the safekeeping of the Company’s Confidential Information.

     Upon termination of Employee’s employment with the Company, Employee agrees to immediately return to the Company all Confidential Information and other Company property, including without limitation all originals copies, computer data, or other records or information. It is understood and agreed that Confidential Information and other property of the Company shall remain at all times the property of the Company.

     7.     Non-Competition Agreement. Recognizing the fact that Employee will be given or have access to the Confidential Information described in Section 6 above, and that the employee owes a duty of full loyalty to the Company and it’s name, reputation and operational interests, Employee agrees that during the period of Employee’s employment with the Company, Employee will not engage in or have an interest in, either directly or indirectly, in any manner, whether as a partner, owner, investor, officer, director, advisor, employee, consultant, or in any other capacity, any Competitive Business.

     Employee further agrees that in the event that Employee’s employment with the Company is terminated for any reason by either party, for a period of eighteen (18) months from the date of termination of employment. Employee will not seek, accept, or engage in any employment or work of a similar or related nature to the work Employee performed for the Company where the employment or work will be with a Competitive Business which is located or operates within seventy-five (75) miles of:

     (i)       any one of the Company or its affiliates’ facilities or a location where the Company or one of its affiliates has provided services during the term of Employee’s employment with the Company, or

     (ii)      any location where the Company was derively developing a facility or service before the termination of Employee’s employment with the Company.

     For purposes of this section, “Competitive Business” shall be defined as a hospital or any other health care employer, facility, or service providing primarily cardiology related facilities or services.

3

     8.     Non-Solicitation Agreement. Employee acknowledges and agrees that during the course of Employee’s employment with the Company, Employee will become familiar with many of the Company’s employees, their knowledge, skills, abilities, compensation, benefits, and other matters with respect to such employees not generally known to the public. Employee further acknowledges and agrees that any solicitation, luring away or hiring of the employees of the Company, or other direct or indirect participation in such activities, would be highly detrimental to the business of the Company and would cause the Company great and irreparable harm. Consequently, Employee agrees that for a period of one (1) year following the end of Employee’s employment with the Company, Employee will not, directly or indirectly, solicit, lure, or hire any employees of the Company or assist or aid in any such activity.

     9.     Enforcement. In the event that there is a breach of this Agreement by either party, it is understood and agreed that the other party can seek damages and other remedies available to it at law or in equity. In addition to those remedies, however, in the event that Employee breaches Section 6, Section 7 or Section 8 of this Agreement, or in the event that there is a threat of such a breach of either of those sections, the Company shall have the right to seek and shall be entitled to injunctive relief and attorney’s fees and court costs. The parties desire and intend that the provisions of Sections 6, 7, and 8 be enforced to the fullest extent permissible under the law.

     In the event that any provision of Section 6, Section 7 or Section 8 of this Agreement is found by any applicable authority to be invalid or unenforceable, the parties agree that either:

     (i)       the court shall at the time the provision is declared invalid or unenforceable, if permissible by law, modify the invalid or unenforceable provision to reflect, in a lawful manner, the objectives of the parties in entering into these agreements in Section 6, Section 7 and Section 8 or, in the alternative.

     (ii)      the parties or their representatives shall meet within one (1) week of the applicable decision and shall agree to modify that provision which was found to be invalid or unenforceable in order to allow the Company to obtain the objectives, to the extent allowed by law, of the provisions found to be invalid or unenforceable. Should Employee fail or refuse to meet within the one (1) week period, or should no agreement be reached by the parties during the meeting, Employee agrees that the Company may unilaterally modify the provision(s) declared to be invalid or unenforceable to comply with the law, provided that the Company notifies Employee of the change in the language of the Agreement within three (3) weeks of the decision of the Court and pays to Employee the sum of One Hundred Dollars ($100.00). In no event may language unilaterally selected by the Company expand the scope of the Confidentiality, the Non-Competition, or the Non-Solicitation Agreement beyond that originally agreed upon.

     10.     Notices. Any written notice required or permitted to be given under this Agreement shall be given to the Company by hand-delivering said notice directly to Employee’s supervisor or by mailing by registered mail or by other reasonable means of delivery providing overnight service, such notice to the Company at the following address:

4

Mr. Roger Simpson
Vice President Human Resources
MedCath Incorporated
7621 Little Avenue, Suite 106
Charlotte, North Carolina 28226

     Notice to Employee may be given by hand delivering said notice or by mailing such notice to the last address Employee provided the Company in writing. Notice shall be deemed to have been given one day after depositing said notice with the postal service or other delivery service or, if hand-delivered, when received by the addressee.

     11.     Waiver of Breach. The waiver by either party of a breach of any provision of this Agreement by the other party shall not operate or be construed as a waiver of any subsequent breach by the waiving party.

     12.     Assignment. The rights and obligations of the Company under this Agreement shall insure to the benefit of and shall be binding upon the successors and assigns of the Company. As a personal service contract the rights and obligations of Employee under this agreement may not be assigned by him/her.

     13.     Entire Agreement. This Agreement sets forth the entire understanding between the parties with respect to the subject matter hereof and cannot be amended orally, but may only be amended by a writing signed by Employee and either the individual executing the Agreement on behalf of the Company or an individual in a higher position with the Company.

     14.     Applicable Law. This Agreement shall be construed in accordance with the laws of the State of North Carolina applicable to contracts made and to be performed in North Carolina, without reference to choice of laws principles, and that law shall be applied in connection with its enforcement in other states and jurisdictions to the fullest extent possible.

     15.     Counterpart, Executions; Facsimiles. This Agreement may be executed in any number of counterparts with the same effect as if all of the parties had signed the same document. Such executions may be transmitted to the parties by facsimile and such facsimile execution shall have the full force and effect of an original signature. All fully executed counterparts, whether original executions or facsimile executions or a combination, shall be construed together and shall constitute one and the same agreement.

     16.     It is understood and agreed that Employee will not disclose or release the existence or the terms of this Agreement.

5

     IN WITNESS WHEREOF, the parties herein execute this Agreement.

COMPANY: MEDCATH INCORPORATED
By:	/s/ Joan McCanless
Title:	CVP
Date:	12/7/99
EMPLOYEE:	/s/ Thomas K. Hearn
Date:	12/7/99

6 EX-10.3 5 g87228exv10w3.htm EX-10.3

AMENDMENT TO EMPLOYMENT, CONFIDENTIALITY AND NON-COMPETE
AGREEMENT BY AND BETWEEN MEDCATH INCORPORATED
AND THOMAS K. HEARN
(EFFECTIVE DATE DECEMBER 3, 1999)

     This Amendment to the Employment, Confidentiality and Non-Compete Agreement by and between MedCath Incorporated and Thomas K. Hearn (Effective Date December 3, 1999) (“Amendment”) is made as of December 21, 2001 by and between MEDCATH INCORPORATED, a North Carolina corporation (the “Company”), and THOMAS K. HEARN (“Employee”).

RECITALS

     1.     Employee has been employed by the Company prior to the date hereof;

     2.     Employee and Company desire to continue Employee’s employment as President of the Diagnostics Division of the Company in accordance with the terms of Employee’s Employment, Confidentiality and Non-Compete Agreement (Effective Date December 3, 1999 (“Employment Agreement”) and in accordance with the terms of this Amendment, which provides new and additional consideration not previously provided to Employee by the Company;

     NOW, THEREFORE, for good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, Employee and Company hereby agree as follows:

     1.     Paragraph 5(b) of Employee’s Employment Agreement is amended to read as follows:

"(b)  By the Company Without Cause. The Company may terminate Employee’s employment at any time without cause by giving Employee written notice thereof.

In the event the Company terminates Employee’s employment without cause, the Company will continue to pay Employee his current bi-weekly salary, less applicable lawful deductions, for a period of twelve (12) months following the date of notice of termination of employment, or until Employee secures other substantially full-time employment or earns, on a monthly basis, at least 75% of Employee’s monthly salary hereunder, whichever occurs first. Employee shall be entitled to receive pro-rata vacation if terminated without cause, plus other benefits as provided by applicable law or by Company policy.

     If the Company terminates Employee’s employment under this Agreement for any reason other than Cause, and such termination occurs at the time of and in connection with a Change of Control (as defined in Employee’s Incentive Stock Option Agreement and Non-Qualified Stock Option Agreement both dated as of July 31, 1998; and Employee’s Incentive Stock Option Agreement and Non-Qualified Stock Option Agreement both dated as of October 1, 1999), then Company will be liable to Employee for an amount equal to his current bi-weekly salary, less applicable lawful deductions, for a period of twenty four (24) months, to be paid over the twelve (12) month period following the date of termination in substantially equal installment payments and in accordance with the normal payroll practices of the Company, as long as and only if Employee is not otherwise in default hereunder during that period; provided, however, that Employee’s salary shall not be payable once Employee secures other substantially full-time employment or earns, on a monthly basis, at least 75% of Employee’s monthly salary hereunder, whichever occurs first.”

     Except as provided in this Amendment, all other provisions, terms, and conditions in Employee’s Employment Agreement, a copy of which is attached hereto, shall remain in full force and effect.

2

Exhibit 10.3

     IN WITNESS WHEREOF, the parties hereto have executed this Amendment effective as of the day and year first written above.

MEDCATH INCORPORATED

By:    /s/ Michael Servais
         Name:   Michael Servais
         Title:     Senior Vice President, COO

/s/    Thomas K. Hearn
        Thomas K. Hearn

EX-31.1 6 g87228exv31w1.htm EX-31.1

Exhibit 31.1

CERTIFICATION

I, John T. Casey, certify that:

1.	I have reviewed this Quarterly Report on Form 10-Q of MedCath Corporation;
2.	Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.	Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.	The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:

(a)	Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b)	Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(c)	Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

(a)	All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
(b)	Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date:	February 17, 2004
By:	/s/ John T. Casey
	John T. Casey
	President and Chief Executive Officer

EX-31.2 7 g87228exv31w2.htm EX-31.2

Exhibit 31.2

CERTIFICATION

I, James E. Harris, certify that:

1.	I have reviewed this quarterly report on Form 10-Q of MedCath Corporation;
2.	Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.	Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.	The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:

(a)	Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b)	Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(c)	Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

(a)	All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
(b)	Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date:	February 17, 2004
By:	/s/ James E. Harris
	James E. Harris
	Executive Vice President and Chief Financial Officer

EX-32.1 8 g87228exv32w1.htm EX-32.1

Exhibit 32.1

CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Annual Report of MedCath Corporation (the “Company”) on Form 10-Q for the period ended December 31, 2003 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, John T. Casey, President and Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. section 1350, as adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002, that to the best of my knowledge:

(1)	The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2)	The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

Date:    February 17, 2004
	/s/ John T. Casey
	John T. Casey
	President and Chief Executive Officer

EX-32.2 9 g87228exv32w2.htm EX-32.2

Exhibit 32.2

CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Annual Report of MedCath Corporation (the “Company”) on Form 10-Q for the quarter ended December 31, 2003 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, James E. Harris, Executive Vice President and Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. section 1350, as adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002, that to the best of my knowledge:

(1)	The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2)	The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

Date:    February 17, 2004
	/s/ James E. Harris
	James E. Harris
	Executive Vice President and Chief Financial Officer

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