LifePoint Hospitals, Inc.
UNITED
STATES
SECURITIES AND EXCHANGE
COMMISSION
Washington, D.C.
20549
Form 10-Q
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(Mark One)
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þ
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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For the quarterly period ended
March 31, 2007
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Or
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o
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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For the transition period
from to
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Commission file number:
000-51251
(Exact name of registrant as
specified in its charter)
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Delaware
(State or Other
Jurisdiction of
Incorporation or Organization)
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20-1538254
(I.R.S. Employer
Identification No.)
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103 Powell Court,
Suite 200
Brentwood, Tennessee
(Address of Principal
Executive Offices)
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37027
(Zip
Code)
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(615) 372-8500
(Registrants
Telephone Number, Including Area Code)
Not
Applicable
(Former
name, former address and former fiscal year, if changed since
last report)
Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of
the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been
subject to such filing requirements for the past
90 days. Yes þ No o
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, or a non-accelerated
filer. See definition of accelerated filer and large
accelerated filer in
Rule 12b-2
of the Exchange Act. (Check one):
Large accelerated
filer þ Accelerated
filer o Non-accelerated
filer o
Indicate by check mark whether the registrant is a shell company
(as defined in the
Rule 12b-2
of the Exchange
Act). Yes o No þ
As of March 31, 2007, the number of outstanding shares of
Common Stock of LifePoint Hospitals, Inc. was 57,734,795.
PART I
FINANCIAL INFORMATION
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Item 1.
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Financial
Statements.
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LIFEPOINT
HOSPITALS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
Unaudited
(In millions, except per share amounts)
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Three Months Ended
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March 31,
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2006
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2007
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Revenues
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$
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586.6
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$
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669.3
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Salaries and benefits
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229.8
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260.0
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Supplies
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82.5
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93.0
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Other operating expenses
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94.9
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116.7
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Provision for doubtful accounts
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67.8
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75.6
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Depreciation and amortization
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31.5
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33.3
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Interest expense, net
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23.1
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26.7
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529.6
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605.3
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Income from continuing operations
before minority interests and income taxes
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57.0
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64.0
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Minority interests in earnings of
consolidated entities
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0.3
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0.3
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Income from continuing operations
before income taxes
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56.7
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63.7
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Provision for income taxes
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22.7
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25.9
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Income from continuing operations
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34.0
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37.8
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Discontinued operations, net of
income taxes:
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Loss from discontinued operations
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(0.4
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)
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Impairment of assets
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(7.9
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)
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Gain (loss) on sale of hospitals
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3.8
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(0.1
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)
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Income (loss) from discontinued
operations
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3.4
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(8.0
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)
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Cumulative effect of change in
accounting principle, net of income taxes
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0.7
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|
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Net income
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$
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38.1
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$
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29.8
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Basic earnings (loss) per share:
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Continuing operations
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$
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0.62
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$
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0.67
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Discontinued operations
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0.06
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(0.14
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)
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Cumulative effect of change in
accounting principle
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0.01
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Net income
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$
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0.69
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$
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0.53
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Diluted earnings (loss) per share:
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Continuing operations
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$
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0.61
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$
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0.67
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Discontinued operations
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0.06
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(0.14
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)
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Cumulative effect of change in
accounting principle
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0.01
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Net income
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$
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0.68
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$
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0.53
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Weighted average shares and
dilutive securities outstanding:
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Basic
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55.5
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55.8
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Diluted
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56.1
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56.8
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See accompanying notes.
3
LIFEPOINT
HOSPITALS, INC.
CONDENSED
CONSOLIDATED BALANCE SHEETS
(Dollars
in millions, except per share amounts)
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December 31,
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March 31,
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2006(1)
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2007
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(Unaudited)
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ASSETS
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Current assets:
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Cash and cash equivalents
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$
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12.2
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$
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32.9
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Accounts receivable, less
allowances for doubtful accounts of $326.2 and $381.0 at
December 31, 2006 and March 31, 2007, respectively
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321.8
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318.7
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Inventories
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66.6
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67.4
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Assets held for sale
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124.7
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73.4
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Prepaid expenses
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13.0
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13.3
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Income taxes receivable
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11.2
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Deferred tax assets
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49.2
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118.4
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Other current assets
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20.6
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29.1
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619.3
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653.2
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Property and equipment:
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Land
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79.5
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78.4
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Buildings and improvements
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1,080.8
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1,098.6
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Equipment
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609.0
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619.6
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Construction in progress (estimated
cost to complete and equip after March 31, 2007 is $96.3)
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72.1
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66.6
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1,841.4
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1,863.2
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Accumulated depreciation
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(472.9
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)
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(501.5
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)
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1,368.5
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1,361.7
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Deferred loan costs, net
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31.1
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29.8
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Intangible assets, net
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33.7
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36.3
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Other
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4.5
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4.5
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Goodwill
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1,581.3
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1,586.8
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$
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3,638.4
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$
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3,672.3
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LIABILITIES AND
STOCKHOLDERS EQUITY
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Current liabilities:
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Accounts payable
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$
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108.4
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$
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87.9
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|
Accrued salaries
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|
68.7
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61.6
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|
Income taxes payable
|
|
|
|
|
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27.4
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Other current liabilities
|
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|
126.7
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85.1
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Current maturities of long-term debt
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0.5
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0.5
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304.3
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262.5
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Long-term debt
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1,668.4
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1,655.7
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|
Deferred income taxes
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|
120.5
|
|
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|
118.3
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Professional and general liability
claims and other liabilities
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|
82.3
|
|
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83.9
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Long-term income tax liability
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|
|
|
|
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53.0
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|
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|
|
|
|
|
|
|
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Minority interests in equity of
consolidated entities
|
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12.9
|
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13.0
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Stockholders equity:
|
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Preferred stock, $0.01 par
value; 10,000,000 shares authorized; no shares issued
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Common stock, $0.01 par value;
90,000,000 shares authorized; 57,365,018 and
57,734,795 shares issued and outstanding at
December 31, 2006 and March 31, 2007, respectively
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0.6
|
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|
|
0.6
|
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Capital in excess of par value
|
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1,044.4
|
|
|
|
1,051.3
|
|
Unearned ESOP compensation
|
|
|
(6.4
|
)
|
|
|
(5.6
|
)
|
Accumulated other comprehensive loss
|
|
|
(9.6
|
)
|
|
|
(11.0
|
)
|
Retained earnings
|
|
|
421.0
|
|
|
|
450.6
|
|
|
|
|
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1,450.0
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1,485.9
|
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|
|
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|
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$
|
3,638.4
|
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$
|
3,672.3
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(1) |
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Derived from audited financial statements. |
See accompanying notes.
4
LIFEPOINT
HOSPITALS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Unaudited
(In millions)
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Three Months Ended
|
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March 31,
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2006
|
|
|
2007
|
|
|
Cash flows from operating
activities:
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
38.1
|
|
|
$
|
29.8
|
|
Adjustments to reconcile net income
to net cash provided by operating activities:
|
|
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|
|
|
|
|
|
(Income) loss from discontinued
operations
|
|
|
(3.4
|
)
|
|
|
8.0
|
|
Cumulative effect of change in
accounting principle, net of income taxes
|
|
|
(0.7
|
)
|
|
|
|
|
Stock-based compensation
|
|
|
3.2
|
|
|
|
3.6
|
|
ESOP expense (non-cash portion)
|
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|
2.4
|
|
|
|
2.2
|
|
Depreciation and amortization
|
|
|
31.5
|
|
|
|
33.3
|
|
Amortization of deferred loan costs
|
|
|
1.3
|
|
|
|
1.3
|
|
Minority interests in earnings of
consolidated entities
|
|
|
0.3
|
|
|
|
0.3
|
|
Deferred income taxes
|
|
|
(3.1
|
)
|
|
|
(18.4
|
)
|
Reserve for professional and
general liability claims, net
|
|
|
1.8
|
|
|
|
(0.5
|
)
|
Increase (decrease) in cash from
operating assets and liabilities, net of effects from
acquisitions and divestitures:
|
|
|
|
|
|
|
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Accounts receivable
|
|
|
(9.5
|
)
|
|
|
(4.1
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)
|
Inventories and other current assets
|
|
|
(3.2
|
)
|
|
|
(11.4
|
)
|
Accounts payable and accrued
expenses
|
|
|
(16.9
|
)
|
|
|
(33.2
|
)
|
Income taxes payable/receivable
|
|
|
12.9
|
|
|
|
41.7
|
|
Other
|
|
|
0.6
|
|
|
|
1.1
|
|
|
|
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|
|
|
|
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Net cash provided by operating
activities continuing operations
|
|
|
55.3
|
|
|
|
53.7
|
|
Net cash (used in) provided by
operating activities discontinued operations
|
|
|
(0.1
|
)
|
|
|
10.1
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating
activities
|
|
|
55.2
|
|
|
|
63.8
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing
activities:
|
|
|
|
|
|
|
|
|
Purchase of property and equipment
|
|
|
(50.1
|
)
|
|
|
(32.0
|
)
|
Acquisitions, net of cash acquired
|
|
|
(3.5
|
)
|
|
|
|
|
Other
|
|
|
(0.3
|
)
|
|
|
(0.2
|
)
|
|
|
|
|
|
|
|
|
|
Net cash used in investing
activities continuing operations
|
|
|
(53.9
|
)
|
|
|
(32.2
|
)
|
Net cash provided by investing
activities discontinued operations
|
|
|
19.9
|
|
|
|
0.1
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing
activities
|
|
|
(34.0
|
)
|
|
|
(32.1
|
)
|
|
|
|
|
|
|
|
|
|
Cash flows from financing
activities:
|
|
|
|
|
|
|
|
|
Proceeds from borrowings
|
|
|
10.0
|
|
|
|
40.0
|
|
Payments of borrowings
|
|
|
(10.0
|
)
|
|
|
(52.4
|
)
|
Proceeds from exercise of stock
options
|
|
|
0.3
|
|
|
|
1.0
|
|
Proceeds from employee stock
purchase plans
|
|
|
1.7
|
|
|
|
0.7
|
|
Other
|
|
|
(0.5
|
)
|
|
|
(0.3
|
)
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in)
financing activities
|
|
|
1.5
|
|
|
|
(11.0
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in cash and cash equivalents
|
|
|
22.7
|
|
|
|
20.7
|
|
Cash and cash equivalents at
beginning of period
|
|
|
30.4
|
|
|
|
12.2
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of
period
|
|
$
|
53.1
|
|
|
$
|
32.9
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure of cash
flow information:
|
|
|
|
|
|
|
|
|
Interest payments
|
|
$
|
25.1
|
|
|
$
|
28.8
|
|
|
|
|
|
|
|
|
|
|
Capitalized interest
|
|
$
|
0.1
|
|
|
$
|
0.7
|
|
|
|
|
|
|
|
|
|
|
Income taxes paid, net
|
|
$
|
12.7
|
|
|
$
|
2.4
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes.
5
LIFEPOINT
HOSPITALS, INC.
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS EQUITY
For the Three Months Ended March 31, 2007
Unaudited
(In millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
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|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital in
|
|
|
Unearned
|
|
|
Other
|
|
|
|
|
|
|
|
|
|
Common Stock
|
|
|
Excess of
|
|
|
ESOP
|
|
|
Comprehensive
|
|
|
Retained
|
|
|
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Par Value
|
|
|
Compensation
|
|
|
Loss
|
|
|
Earnings
|
|
|
Total
|
|
|
Balance at December 31, 2006
|
|
|
57.4
|
|
|
$
|
0.6
|
|
|
$
|
1,044.4
|
|
|
$
|
(6.4
|
)
|
|
$
|
(9.6
|
)
|
|
$
|
421.0
|
|
|
$
|
1,450.0
|
|
Comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
29.8
|
|
|
|
29.8
|
|
Net change in fair value of
interest rate swap, net of tax benefit of $0.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1.4
|
)
|
|
|
|
|
|
|
(1.4
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
28.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative impact of change in
accounting for uncertainty in income taxes (FIN 48)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(0.2
|
)
|
|
|
(0.2
|
)
|
Non-cash ESOP compensation earned
|
|
|
|
|
|
|
|
|
|
|
1.6
|
|
|
|
0.8
|
|
|
|
|
|
|
|
|
|
|
|
2.4
|
|
Exercise of stock options,
including tax benefits and other
|
|
|
|
|
|
|
|
|
|
|
1.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1.0
|
|
Stock activity in connection with
employee stock purchase plans
|
|
|
|
|
|
|
|
|
|
|
0.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0.7
|
|
Stock-based
compensation nonvested stock
|
|
|
|
|
|
|
|
|
|
|
2.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2.2
|
|
Stock-based
compensation stock options
|
|
|
|
|
|
|
|
|
|
|
1.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1.4
|
|
Nonvested stock issued to key
employees, net of forfeitures
|
|
|
0.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at March 31, 2007
|
|
|
57.7
|
|
|
$
|
0.6
|
|
|
$
|
1,051.3
|
|
|
$
|
(5.6
|
)
|
|
$
|
(11.0
|
)
|
|
$
|
450.6
|
|
|
$
|
1,485.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes.
6
LIFEPOINT
HOSPITALS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2007
Unaudited
|
|
Note 1.
|
Basis of
Presentation
|
LifePoint Hospitals, Inc. is a holding company that is one of
the largest owners and operators of general acute care hospitals
in non-urban communities in the United States. Its subsidiaries
own or lease their respective facilities and other assets.
Unless the context otherwise indicates, references in this
report to LifePoint, the Company,
we, our or us are references
to LifePoint Hospitals, Inc.
and/or its
wholly-owned and majority-owned subsidiaries. Any reference
herein to its hospitals, facilities or employees refers to the
hospitals, facilities or employees of subsidiaries of LifePoint
Hospitals, Inc.
At March 31, 2007, the Company operated 51 hospitals,
including two hospitals that are being held for disposal. In all
but four of the communities in which its hospitals are located,
LifePoint is the only provider of acute care hospital services.
The Companys hospitals are geographically diversified
across 19 states: Alabama; Arizona; California; Colorado;
Florida; Indiana; Kansas; Kentucky; Louisiana; Mississippi;
Nevada; New Mexico; South Carolina; Tennessee; Texas; Utah;
Virginia; West Virginia and Wyoming.
The accompanying unaudited condensed consolidated financial
statements have been prepared in accordance with
U.S. generally accepted accounting principles
(GAAP) for interim financial information and with
the instructions to
Form 10-Q
and Article 10 of
Regulation S-X.
Accordingly, they do not include all of the information and
notes required by GAAP for complete financial statements. In the
opinion of management, all adjustments (consisting of normal
recurring adjustments) and disclosures considered necessary for
a fair presentation have been included. Operating results for
the three months ended March 31, 2007 are not necessarily
indicative of the results that may be expected for the year
ending December 31, 2007. For further information, refer to
the consolidated financial statements and notes thereto included
in the Companys Annual Report on
Form 10-K
for the year ended December 31, 2006, filed by the Company.
The majority of the Companys expenses are cost of
revenue items. Costs that could be classified as
general and administrative by the Company would
include LifePoint corporate overhead costs, which were
$16.6 million and $20.8 million for the three months
ended March 31, 2006 and 2007, respectively.
Certain prior year amounts have been reclassified to conform to
the current year presentation for discontinued operations. This
reclassification has no impact on the Companys total
assets, liabilities, stockholders equity, net income or
cash flows. Unless noted otherwise, discussions in these notes
pertain to the Companys continuing operations.
Four
HCA Hospitals
Effective July 1, 2006, the Company completed its
acquisition of four hospitals from HCA Inc. (HCA)
for a purchase price of $239.0 million plus specific
working capital and capital expenditures as set forth in the
purchase agreement. The four facilities that the Company
acquired were 200-bed Clinch Valley Medical Center, Richlands,
Virginia; 325-bed St. Josephs Hospital, Parkersburg, West
Virginia (St. Josephs); 155-bed Saint Francis
Hospital, Charleston, West Virginia (Saint Francis);
and 369-bed Raleigh General Hospital, Beckley, West Virginia.
The Company borrowed $250.0 million under its Credit
Agreement to pay for this acquisition.
Under the purchase method of accounting, in accordance with
Statement of Financial Accounting Standards (SFAS)
No. 141 Business Combinations, the total
purchase price was allocated to the net tangible and intangible
assets based upon their estimated fair values as of July 1,
2006. The excess of the purchase price over the estimated fair
value of the net tangible and intangible assets was recorded as
goodwill.
7
LIFEPOINT
HOSPITALS, INC.
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The results of operations of these facilities are included in
LifePoints results of operations beginning July 1,
2006.
The purchase price allocation for the four former HCA facilities
has been prepared on a preliminary basis and is subject to
changes as new facts and circumstances emerge. The Company has
engaged a third-party valuation firm to complete a valuation of
certain acquired assets and liabilities, primarily real
property, equipment and certain intangible assets. After the
valuation study is complete, the Company will adjust the
purchase price allocation to reflect the final values, which the
Company expects to occur during the second quarter of 2007.
The preliminary fair values of assets acquired and liabilities
assumed at the date of acquisition were as follows (in millions):
|
|
|
|
|
Inventories
|
|
$
|
13.0
|
|
Prepaid expenses
|
|
|
1.6
|
|
Other current assets
|
|
|
0.7
|
|
Property and equipment
|
|
|
143.1
|
|
Other long-term assets
|
|
|
0.1
|
|
Goodwill
|
|
|
107.4
|
|
|
|
|
|
|
Total assets acquired, excluding
cash
|
|
|
265.9
|
|
|
|
|
|
|
Accounts payable
|
|
|
0.4
|
|
Accrued salaries
|
|
|
5.6
|
|
Other current liabilities
|
|
|
2.2
|
|
|
|
|
|
|
Total liabilities assumed
|
|
|
8.2
|
|
|
|
|
|
|
Net assets acquired
|
|
$
|
257.7
|
|
|
|
|
|
|
The Company classified St. Josephs and Saint Francis as
assets held for sale/discontinued operations, in accordance with
the provisions of SFAS No. 144, Accounting for
the Impairment or Disposal of Long-Lived Assets
(SFAS No. 144) effective as of the
acquisition date of July 1, 2006 and sold Saint Francis
effective January 1, 2007, as further discussed in
Note 3.
8
LIFEPOINT
HOSPITALS, INC.
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
Note 3.
|
Discontinued
Operations
|
Colorado
River Medical Center
On March 28, 2007, the Company, through its indirect
wholly-owned subsidiary, Principal-Needles, Inc.
(PNI), signed a letter of intent with the Board of
Trustees of Needles Desert Communities Hospital (the Board
of Trustees) to transfer substantially all of the
operating assets and net working capital of Colorado River
Medical Center (Colorado River) to the Board of
Trustees and $1.5 million in cash, which approximates the
net present value of future lease payments due under the lease
agreement between PNI and the Board of Trustees in consideration
for the termination of the operating lease agreement. In
connection with the signing of the letter of intent, the Company
recognized an impairment charge of $7.9 million, net of
income taxes, or $0.14 loss per diluted share, in discontinued
operations for the three-month period ended March 31, 2007.
The impairment charge relates to the property and equipment and
net working capital items of Colorado River to be transferred to
the Board of Trustees for which the Company anticipates
receiving no consideration and goodwill impairment. The
following table sets forth the components of the impairment
charge (in millions):
|
|
|
|
|
Net working capital
|
|
$
|
3.4
|
|
Property and equipment
|
|
|
4.9
|
|
Goodwill
|
|
|
3.1
|
|
|
|
|
|
|
|
|
|
11.4
|
|
Income tax benefit
|
|
|
(3.5
|
)
|
|
|
|
|
|
|
|
$
|
7.9
|
|
|
|
|
|
|
Two
Former HCA Hospitals
In connection with the acquisition of four hospitals from HCA
effective July 1, 2006, the Companys management
committed to a plan to divest two of the acquired hospitals, St.
Josephs and Saint Francis. In September 2006, the Company
announced the signing of two separate definitive agreements for
the sale of these two hospitals, subject to customary closing
conditions. The Company sold Saint Francis effective
January 1, 2007 to Herbert J. Thomas Memorial Hospital and
it anticipates selling St. Josephs during the second
quarter of 2007. The Company recognized a loss of approximately
$0.1 million in connection with the disposal of Saint
Francis, primarily relating to transaction costs associated with
the sale.
Smith
County Memorial Hospital
In February 2006, the Company announced that it had entered into
a definitive agreement to sell Smith County Memorial Hospital,
Carthage, Tennessee (Smith County), to Sumner
Regional Health System. The Company completed the sale of Smith
County effective March 31, 2006 and recognized a gain on
the sale of approximately $3.8 million, net of income taxes
($0.07 per diluted share) during the three months ended
March 31, 2006.
Medical
Center of Southern Indiana and Ashland Regional Medical
Center
During the second quarter of 2005, the Companys management
committed to a plan to divest two hospitals, Medical Center of
Southern Indiana, Charlestown, Indiana (MCSI) and
Ashland Regional Medical Center, Ashland, Pennsylvania
(Ashland). The Company completed the sale of both
MCSI and Ashland to Saint Catherine Healthcare effective
May 1, 2006.
9
LIFEPOINT
HOSPITALS, INC.
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Impact
of Discontinued Operations
The results of operations, net of income taxes, of Colorado
River, St. Josephs, Saint Francis, Smith County, MCSI and
Ashland are reflected in the accompanying condensed consolidated
financial statements as discontinued operations in accordance
with SFAS No. 144.
The Company allocated $0.2 million and $1.4 million
for the three months ended March 31, 2006 and 2007,
respectively, of interest expense to discontinued operations.
For those assets being disposed of that were part of an
acquisition group for which specifically identifiable debt was
incurred, the allocation of interest expense to discontinued
operations is based on the ratio of the net assets being
disposed of to the sum of total net assets of the acquisition
group plus the debt that was incurred. For those asset
acquisitions for which specifically identifiable debt was not
incurred, the allocation of interest expense to discontinued
operations is based on the ratio of net assets to be disposed of
to the sum of total net assets of the Company plus the
Companys total outstanding debt.
The revenues and income (loss) before income taxes, excluding
impairment and gain (loss) on sale of hospitals, of discontinued
operations for the three months ended March 31, 2006 and
2007 were as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
March 31,
|
|
|
|
2006
|
|
|
2007
|
|
|
Revenues
|
|
$
|
13.8
|
|
|
$
|
29.5
|
|
Income (loss) before income taxes
|
|
|
(0.6
|
)
|
|
|
0.4
|
|
The following table presents the changes in the Companys
assets held for sale for the three months ended March 31,
2007 (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
|
|
|
Property and
|
|
|
Intangible
|
|
|
|
|
|
|
Assets
|
|
|
Equipment
|
|
|
Assets, Net
|
|
|
Total
|
|
|
Balance at December 31, 2006
|
|
$
|
12.7
|
|
|
$
|
111.6
|
|
|
$
|
0.4
|
|
|
$
|
124.7
|
|
Sale of Saint Francis
|
|
|
(3.7
|
)
|
|
|
(38.0
|
)
|
|
|
(0.2
|
)
|
|
|
(41.9
|
)
|
Impairment of Colorado River
|
|
|
(3.8
|
)
|
|
|
(4.9
|
)
|
|
|
|
|
|
|
(8.7
|
)
|
Other adjustments
|
|
|
(0.7
|
)
|
|
|
|
|
|
|
|
|
|
|
(0.7
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at March 31, 2007
|
|
$
|
4.5
|
|
|
$
|
68.7
|
|
|
$
|
0.2
|
|
|
$
|
73.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note 4.
|
Goodwill
and Intangible Assets
|
The Company performed its most recent goodwill annual impairment
test as of October 1, 2006 and did not incur an impairment
charge. In connection with the signing of a letter of intent for
Colorado River, as discussed in Note 3, the Company
recognized an impairment charge for goodwill of approximately
$3.1 million. The following table presents the changes in
the carrying amount of goodwill for the three months ended
March 31, 2007 (in millions):
|
|
|
|
|
Balance at December 31, 2006
|
|
$
|
1,581.3
|
|
Impairment of Colorado River
|
|
|
(3.1
|
)
|
Consideration adjustments and
purchase price allocations for recent acquisitions
|
|
|
8.6
|
|
|
|
|
|
|
Balance at March 31, 2007
|
|
$
|
1,586.8
|
|
|
|
|
|
|
10
LIFEPOINT
HOSPITALS, INC.
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The following table provides information regarding the
Companys intangible assets, which are included in the
accompanying condensed consolidated balance sheets (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
|
|
|
|
|
|
|
|
|
|
Carrying
|
|
|
Accumulated
|
|
|
Net
|
|
Class of Intangible Asset
|
|
Amount
|
|
|
Amortization
|
|
|
Total
|
|
|
Amortized intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Contract-based physician minimum
revenue guarantees:
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2006
|
|
$
|
21.0
|
|
|
$
|
(1.7
|
)
|
|
$
|
19.3
|
|
Additions
|
|
|
4.1
|
|
|
|
|
|
|
|
4.1
|
|
Amortization expense
|
|
|
|
|
|
|
(1.1
|
)
|
|
|
(1.1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at March 31, 2007
|
|
$
|
25.1
|
|
|
$
|
(2.8
|
)
|
|
$
|
22.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-competition agreements:
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2006
|
|
$
|
16.6
|
|
|
$
|
(4.8
|
)
|
|
$
|
11.8
|
|
Additions
|
|
|
0.3
|
|
|
|
|
|
|
|
0.3
|
|
Amortization expense
|
|
|
|
|
|
|
(0.7
|
)
|
|
|
(0.7
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at March 31, 2007
|
|
$
|
16.9
|
|
|
$
|
(5.5
|
)
|
|
$
|
11.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Indefinite-lived intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Certificates of need:
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2006
and March 31, 2007
|
|
$
|
2.6
|
|
|
$
|
|
|
|
$
|
2.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2006
|
|
$
|
40.2
|
|
|
$
|
(6.5
|
)
|
|
$
|
33.7
|
|
Additions
|
|
|
4.4
|
|
|
|
|
|
|
|
4.4
|
|
Amortization expense
|
|
|
|
|
|
|
(1.8
|
)
|
|
|
(1.8
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at March 31, 2007
|
|
$
|
44.6
|
|
|
$
|
(8.3
|
)
|
|
$
|
36.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contract-Based
Physician Minimum Revenue Guarantees
The Company accounts for contract-based physician minimum
revenue guarantees in accordance with Financial Accounting
Standards Board (the FASB) Staff Position
No. 45-3,
Application of FASB Interpretation No. 45 to Minimum
Revenue Guarantees Granted to a Business or Its Owners
(FSP
FIN 45-3).
Under FSP
FIN 45-3,
the Company records a contract-based intangible asset and
related guarantee liability at the inception of a physician
minimum revenue guarantee. The contract-based intangible assets
are amortized into other operating expenses over the period of
the physician contract, which is typically five years. As of
March 31, 2007, the Companys liability balance for
contract-based physician minimum revenue guarantees was
$10.7 million, which is included in other current
liabilities in the Companys accompanying condensed
consolidated balance sheets.
Non-Competition
Agreements
The Company has entered into non-competition agreements with
certain physicians. These non-competition agreements are
amortized on a straight-line basis over the term of the
agreements.
Certificates
of Need
The construction of new facilities, the acquisition or expansion
of existing facilities and the addition of new services and
certain equipment at the Companys facilities may be
subject to state laws that require prior approval by state
regulatory agencies. These certificates of need laws generally
require that a state agency
11
LIFEPOINT
HOSPITALS, INC.
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
determine the public need and give approval prior to the
construction or acquisition of facilities or the addition of new
services. The Company operates hospitals in certain states that
have adopted certificate of need laws. If the Company fails to
obtain necessary state approval, the Company will not be able to
expand its facilities, complete acquisitions or add new services
at its facilities in these states. An independent appraiser
values each certificate of need when the Company acquires a
hospital. These intangible assets have been determined to have
indefinite lives and, accordingly, are not amortized.
|
|
Note 5.
|
Accounting
for Uncertainty in Income Taxes
|
Effective January 1, 2007, the Company adopted the
provisions of FASB Interpretation No. 48, Accounting
for Uncertainty in Income Taxes An Interpretation of
FASB Statement No. 109 (FIN 48). In
connection with the adoption of FIN 48, the Company
recorded a $52.0 million net liability for unrecognized tax
benefits, accrued interest and penalties which was comprised of
the following (in millions):
|
|
|
|
|
Reclass from current deferred tax
assets
|
|
$
|
14.4
|
|
Increase to current deferred tax
assets
|
|
|
36.9
|
|
Increase in goodwill
|
|
|
0.5
|
|
Cumulative impact of change
recorded in retained earnings
|
|
|
0.2
|
|
|
|
|
|
|
|
|
$
|
52.0
|
|
|
|
|
|
|
The provisions of FIN 48 allow for the classification
election of interest on an underpayment of income taxes, when
the tax law requires interest to be paid, and penalties, when a
tax position does not meet the minimum statutory threshold to
avoid payment of penalties, in income taxes, interest expense or
another appropriate expense classification, based on the
accounting policy election of the company. The Company has
elected to continue its historical practice of classifying
interest and penalties as a component of income tax expense.
During the three months ended March 31, 2007, subsequent to
the adoption of FIN 48, the Company recorded an increase of
$1.0 million to its long-term income tax liability for the
potential payment of additional interest. The Companys
long-term income tax liability was comprised of the following at
January 1, 2007 and March 31, 2007 (in millions):
|
|
|
|
|
|
|
|
|
|
|
January 1,
|
|
|
March 31,
|
|
|
|
2007
|
|
|
2007
|
|
|
Unrecognized tax benefits
|
|
$
|
45.8
|
|
|
$
|
45.8
|
|
Accrued interest and penalties
|
|
|
6.2
|
|
|
|
7.2
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
52.0
|
|
|
$
|
53.0
|
|
|
|
|
|
|
|
|
|
|
Of the $45.8 million unrecognized tax benefits,
approximately $7.5 million, if recognized, would affect the
effective tax rate.
The Companys U.S. federal income tax returns for tax
years 1999 and beyond remain subject to examination by the
Internal Revenue Service (IRS). During 2003, the IRS
notified the Company regarding its findings relating to the
examination of the Companys tax returns for the years
ended December 31, 1999, 2000, and 2001. The Company
reached a partial settlement with the IRS on all issues except
for the Companys method of determining its bad debt
deduction, for which the IRS has proposed an additional
assessment of $7.4 million. All of the adjustments proposed
by the IRS are temporary differences. The IRS has delayed final
settlement of this assessment until resolution of certain
pending court proceedings related to the use of this bad debt
deduction method by HCA. On October 4, 2004, HCA was denied
certiorari on its appeal of this matter to the United States
Supreme Court. The Company intends to reach resolution of its
IRS examination after the final settlement of HCAs tax
years preceding the spin-off of the Company from HCA.
12
LIFEPOINT
HOSPITALS, INC.
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Because of the complexity of the computations involved, neither
the Company nor HCA is able to estimate when the final
settlement of these tax years will occur. The Company applied
its 2002 federal income tax refund in the amount of
$6.6 million as a deposit against any potential settlement
to forestall the tolling of interest on such settlement beyond
the March 15, 2003 deposit date. The Company has extended
the statutes of limitation for the federal tax returns for tax
years ended December 31, 1999, 2000, and 2001 through
December 31, 2007 and will likely extend the statutes of
limitation further.
In addition in 2005, the IRS commenced an examination of the
Companys federal income tax return for the year ended
December 31, 2003. Furthermore, during the second quarter
of 2006, the IRS commenced an examination of select items within
the Companys federal income tax return for the year ended
December 31, 2002, thereby allowing the IRS to incorporate
any carry forward adjustments from the examination of the 1999
through 2001 federal income tax returns. The Company anticipates
that the examination for its tax year ended December 31,
2002 will be concluded by the end of 2007. The Company has
extended the statute of limitation for this return through
September 15, 2007 and will likely extend the statute of
limitation further at that time.
Finally, the IRS commenced an examination of the federal income
tax return of Province Healthcare Company and Subsidiaries
(Province), which the Company merged with effective
April 15, 2005, for the year ended December 31, 2003
in 2005. The Company anticipates that the examination will be
concluded by the end of 2007. Provinces U.S. federal
income tax returns for tax years 2003 through April 15,
2005 remain subject to examination by the IRS.
Based on the outcome of these examinations or as a result of the
expiration of statutes of limitation for specific taxing
jurisdictions, it is reasonably possible that unrecognized tax
positions could change within the next twelve months. However,
the Company cannot currently estimate the range of any possible
change.
13
LIFEPOINT
HOSPITALS, INC.
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
Note 6.
|
Earnings
(Loss) Per Share
|
The following table sets forth the computation of basic and
diluted earnings (loss) per share (in millions, except per share
amounts):
|
|
|
|
|
|
|
|
|
|
|
Three Months
|
|
|
|
Ended
|
|
|
|
March 31,
|
|
|
|
2006
|
|
|
2007
|
|
|
Numerator:
|
|
|
|
|
|
|
|
|
Numerator for basic and diluted
earnings (loss) per share income from continuing
operations
|
|
$
|
34.0
|
|
|
$
|
37.8
|
|
Income (loss) from discontinued
operations, net of income taxes
|
|
|
3.4
|
|
|
|
(8.0
|
)
|
Cumulative effect of change in
accounting principle
|
|
|
0.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
38.1
|
|
|
$
|
29.8
|
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
Denominator for basic earnings
(loss) per share weighted average shares outstanding
|
|
|
55.5
|
|
|
|
55.8
|
|
Effect of dilutive securities:
|
|
|
|
|
|
|
|
|
Employee stock benefit plans
|
|
|
0.6
|
|
|
|
1.0
|
|
|
|
|
|
|
|
|
|
|
Denominator for diluted earnings
(loss) per share weighted average shares
|
|
|
56.1
|
|
|
|
56.8
|
|
|
|
|
|
|
|
|
|
|
Basic earnings (loss) per share:
|
|
|
|
|
|
|
|
|
Continuing operations
|
|
$
|
0.62
|
|
|
$
|
0.67
|
|
Discontinued operations
|
|
|
0.06
|
|
|
|
(0.14
|
)
|
Cumulative effect of change in
accounting principle
|
|
|
0.01
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
0.69
|
|
|
$
|
0.53
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings (loss) per share:
|
|
|
|
|
|
|
|
|
Continuing operations
|
|
$
|
0.61
|
|
|
$
|
0.67
|
|
Discontinued operations
|
|
|
0.06
|
|
|
|
(0.14
|
)
|
Cumulative effect of change in
accounting principle
|
|
|
0.01
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
0.68
|
|
|
$
|
0.53
|
|
|
|
|
|
|
|
|
|
|
|
|
Note 7.
|
Recently
Issued Accounting Pronouncements
|
In September 2006, the FASB issued SFAS No. 157,
Fair Value Measurements
(SFAS No. 157). SFAS No. 157
defines fair value, establishes a framework for measuring fair
value and expands disclosures about fair value measurements.
SFAS No. 157 is effective for fiscal years beginning
after November 15, 2007 and interim periods within those
fiscal years. The provisions for SFAS 157 are to be applied
prospectively as of the beginning of the fiscal year in which it
is initially applied, except in limited circumstances including
certain positions in financial instruments that trade in active
markets as well as certain financial and hybrid financial
instruments initially measured under SFAS No. 133
Accounting for Derivative Instruments and Hedging
Activities (SFAS No. 133) using the
transaction price method. In these circumstances, the transition
adjustment, measured as the difference between the carrying
amounts and the fair values of those financial instruments at
the date SFAS No. 157 is initially applied, shall be
recognized as a cumulative-effect adjustment to the opening
balance of retained earnings for the fiscal year in which
SFAS No. 157 is initially
14
LIFEPOINT
HOSPITALS, INC.
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
applied. The Company does not anticipate that the adoption of
SFAS No. 157 will have a material impact on the
Companys results of operations or financial position.
In February 2007, the FASB issued SFAS No. 159,
The Fair Value Option for Financial Assets and Financial
Liabilities Including an Amendment of FASB Statement
No. 115, (SFAS No. 159).
SFAS No. 159 permits a company to choose to measure
many financial instruments and certain other items at fair value
at specified election dates. Most of the provisions in
SFAS No. 159 are elective; however, it applies to all
companies with
available-for-sale
and trading securities. A company will report unrealized gains
and losses on items for which the fair value option has been
elected in earnings (or another performance indicator if the
company does not report earnings) at each subsequent reporting
date. The fair value option: (a) may be applied instrument
by instrument, with a few exceptions, such as investments
otherwise accounted for by the equity method; (b) is
irrevocable (unless a new election date occurs); and (c) is
applied only to entire instruments and not to portions of
instruments. SFAS No. 159 is effective as of the
beginning of a companys first fiscal year beginning after
November 15, 2007. The Companys management is
currently evaluating this statement and has not yet determined
the impact of such on the Companys results of operations
or financial position.
|
|
Note 8.
|
Stock-Based
Compensation
|
The Company issues stock options and other stock-based awards to
key employees and directors under various stockholder-approved
stock-based compensation plans. The Company currently has the
following four types of stock-based awards outstanding under
these plans: stock options; nonvested stock; restricted stock
units; and deferred stock units. The Company accounts for its
stock-based awards in accordance with the provisions of
SFAS No. 123(R), Share-Based Payment
(SFAS No. 123(R)). Under
SFAS No. 123(R) the Company recognizes compensation
expense based on the grant date fair value estimated in
accordance with the standard.
Stock
Options
The Company estimated the fair value of stock options granted
during the three months ended March 31, 2006 and 2007 using
the Hull-White II lattice option Valuation Model
(HW-II) and a single option award approach. The
Company is amortizing the fair value on a straight-line basis
over the requisite service periods of the awards, which are the
vesting periods of three years. The Company granted stock
options to purchase 809,495 and 492,375 shares of the
Companys common stock to certain key employees during the
three months ended March 31, 2006 and 2007, respectively.
The stock options that were granted during the three months
ended March 31, 2006 and 2007 vest 33.3% on each grant
anniversary date over three years of continued employment.
In addition, during the three months ended March 31, 2007,
the Company granted performance-based stock options to certain
senior executives to acquire up to an aggregate of
760,000 shares of the Companys common stock. These
stock options are subject to forfeiture unless certain targeted
levels of diluted earnings per share are achieved for the year
ending December 31, 2007. Depending on what level of
diluted earnings per share is achieved for the current fiscal
year, the senior executives will forfeit zero to 100% of these
stock options. The stock options that are not forfeited at year
end will vest ratably beginning one year from the date of the
grant to three years after the date of the grant. For purposes
of accounting for the stock compensation expense of these stock
options, the Company has assumed a target level of diluted
earnings per share that will result in earned options to acquire
an aggregate of 380,000 shares and forfeited options for
the remaining 380,000 shares; to the extent any of the
stock options assumed earned and therefore expensed are
subsequently forfeited, the Company will reverse the recognized
stock compensation expense. If the target levels achieved exceed
the Companys expectations, then the Company will recognize
an additional stock compensation expense up to the maximum
760,000 share level.
15
LIFEPOINT
HOSPITALS, INC.
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The following table shows the weighted average assumptions the
Company used to develop the fair value estimates under its HW-II
option valuation model and the resulting estimates of
weighted-average fair value per share of stock options granted
during the three months ended March 31, 2006 and 2007:
|
|
|
|
|
|
|
Three Months Ended
|
|
|
March 31,
|
|
|
2006
|
|
2007
|
|
Expected volatility
|
|
33.0%
|
|
25.5%
|
Risk free interest rate (range)
|
|
4.38% - 4.69%
|
|
4.48% - 5.21%
|
Expected dividends
|
|
|
|
|
Average expected term (years)
|
|
5.4
|
|
5.1
|
Fair value per share of stock
options granted
|
|
$11.11
|
|
$10.21
|
The Company received $0.3 million and $1.0 million in
cash from stock option exercises for the three months ended
March 31, 2006 and 2007, respectively. There was a nominal
amount of actual tax benefits realized for the tax deductions
from stock option exercises for the three months ended
March 31, 2006 and 2007.
As of March 31, 2007, there was $15.8 million of total
unrecognized compensation cost related to stock option
compensation arrangements. Total unrecognized compensation cost
will be adjusted for future changes in estimated forfeitures.
The Company expects to recognize that cost over a weighted
average period of 2.3 years.
Nonvested
Stock
The fair value of nonvested stock is determined based on the
closing price of the Companys common stock on the day
prior to the grant date. The nonvested stock requires no payment
from employees and directors, and stock-based compensation
expense is recorded equally over the vesting periods (three to
five years).
The Company granted 348,324 and 364,960 shares of nonvested
stock awards to certain key employees during the three months
ended March 31, 2006 and 2007, respectively. These
nonvested stock awards cliff-vest three years from the grant
date. The fair market value at the date of grant of the 348,324
and 364,960 shares of nonvested stock awards was $33.02 and
$36.60 per share, respectively.
Of the 364,960 shares of nonvested stock awards granted
during the three months ended March 31, 2007, 190,000
shares are performance-based. In addition to requiring
continuing service of an employee, the vesting of these
nonvested stock awards is contingent upon the satisfaction of
certain financial goals, specifically related to the achievement
of budgeted annual revenues and earnings targets. If these goals
are achieved, the nonvested stock awards will cliff-vest three
years after the grant date. The fair value for each of these
nonvested stock awards was determined based on the closing price
of the Companys common stock on the day prior to the grant
date and assumes that the performance goals will be achieved. If
these performance goals are not met, no compensation expense
will be recognized and any recognized compensation expense will
be reversed.
As of March 31, 2007, there was $28.3 million of total
unrecognized compensation cost related to nonvested stock
compensation arrangements. Total unrecognized compensation cost
will be adjusted for future changes in estimated forfeitures.
The Company expects to recognize that cost over a weighted
average period of 2.6 years.
16
LIFEPOINT
HOSPITALS, INC.
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The following table summarizes the Companys total
stock-based compensation expense as well as the total recognized
tax benefits related thereto for the three months ended
March 31, 2006 and 2007 (in millions):
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
2007
|
|
|
Nonvested stock
|
|
$
|
1.9
|
|
|
$
|
2.2
|
|
Stock options
|
|
|
1.3
|
|
|
|
1.4
|
|
|
|
|
|
|
|
|
|
|
Total stock-based compensation
expense
|
|
$
|
3.2
|
|
|
$
|
3.6
|
|
|
|
|
|
|
|
|
|
|
Tax benefits on stock-based
compensation expense
|
|
$
|
1.2
|
|
|
$
|
1.4
|
|
|
|
|
|
|
|
|
|
|
The Company did not capitalize any stockbased compensation
cost for the three months ended March 31, 2006 and 2007. As
of March 31, 2007, there was $44.1 million of total
unrecognized compensation cost related to all of the
Companys stock compensation arrangements. Total
unrecognized compensation cost may be adjusted for future
changes in estimated forfeitures. The Company expects to
recognize that cost over a weighted-average period of
2.4 years.
Note 9. Long-Term
Debt
Long-term debt consists of the following at December 31,
2006 and March 31, 2007 (in millions):
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
March 31,
|
|
|
|
2006
|
|
|
2007
|
|
|
Senior Borrowings:
|
|
|
|
|
|
|
|
|
Credit Agreement:
|
|
|
|
|
|
|
|
|
Term B Loans
|
|
$
|
1,321.9
|
|
|
$
|
1,289.4
|
|
Revolving Loans
|
|
|
110.0
|
|
|
|
130.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,431.9
|
|
|
|
1,419.4
|
|
|
|
|
|
|
|
|
|
|
Subordinated Borrowings:
|
|
|
|
|
|
|
|
|
Province
71/2% Senior
Subordinated Notes
|
|
|
6.1
|
|
|
|
6.1
|
|
Province
41/4% Convertible
Subordinated Notes, due 2008
|
|
|
0.1
|
|
|
|
0.1
|
|
31/4% Convertible
Senior Subordinated Debentures, due 2025
|
|
|
225.0
|
|
|
|
225.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
231.2
|
|
|
|
231.2
|
|
Capital leases/other
|
|
|
5.8
|
|
|
|
5.6
|
|
|
|
|
|
|
|
|
|
|
Total long-term debt
|
|
|
1,668.9
|
|
|
|
1,656.2
|
|
Less: current portion
|
|
|
0.5
|
|
|
|
0.5
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,668.4
|
|
|
$
|
1,655.7
|
|
|
|
|
|
|
|
|
|
|
During January 2007, the Company borrowed $40.0 million
under its Credit Agreement in the form of Revolving Loans and
repaid $32.5 million of its outstanding borrowings under
the Credit Agreement for Term B Loans. Additionally, during the
first quarter of 2007 and subsequently in April 2007, the
Company repaid $20.0 million and $25.0 million,
respectively, on its Revolving Loans.
|
|
Note 10.
|
Interest
Rate Swap
|
On June 1, 2006, the Company entered into an interest rate
swap agreement with Citibank N.A., New York (the
Counterparty). The interest swap agreement, as
amended, was effective as of November 30, 2006 and has a
maturity date of May 30, 2011. The Company entered into the
interest rate swap agreement to mitigate the floating interest
rate risk on a portion of its outstanding variable rate
borrowings. The interest rate swap
17
LIFEPOINT
HOSPITALS, INC.
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
agreement requires the Company to make quarterly fixed rate
payments to the Counterparty calculated on a notional amount as
set forth in the schedule below at a fixed rate of 5.585% while
the Counterparty will be obligated to make quarterly floating
payments to the Company based on the three-month London
Interbank Offered Rate on the same referenced notional amount.
Notwithstanding the terms of the interest rate swap transaction,
the Company is ultimately obligated for all amounts due and
payable under the Credit Agreement.
Notional
Schedule
|
|
|
|
|
Date Range
|
|
Notional Amount
|
|
|
November 30, 2006 to
November 30, 2007
|
|
$
|
900.0 million
|
|
November 30, 2007 to
November 30, 2008
|
|
$
|
750.0 million
|
|
November 30, 2008 to
November 30, 2009
|
|
$
|
600.0 million
|
|
November 30, 2009 to
November 30, 2010
|
|
$
|
450.0 million
|
|
November 30, 2010 to
May 30, 2011
|
|
$
|
300.0 million
|
|
The fair value of the interest rate swap agreement is the amount
at which it could be settled, based on estimates obtained from
the Counterparty. The Company has designated the interest rate
swap as a cash flow hedge instrument, which is recorded in the
Companys accompanying condensed consolidated balance
sheets at its fair value.
The Company assesses the effectiveness of its cash flow hedge
instrument on a quarterly basis. For the three months ended
March 31, 2007, the Company completed an assessment of the
cash flow hedge instrument and determined the hedge to be highly
effective in accordance with SFAS No. 133. The
interest rate swap agreement exposes the Company to credit risk
in the event of non-performance by the Counterparty. However,
the Company does not anticipate non-performance by the
Counterparty. The Company does not hold or issue derivative
financial instruments for trading purposes. The fair value of
the Companys interest rate swap at December 31, 2006
and March 31, 2007 reflected a liability of approximately
$14.7 million and $16.7 million, respectively, and is
included in professional and general liability claims and other
liabilities in the Companys accompanying condensed
consolidated balance sheets. The interest rate swap reflects a
liability balance as of December 31, 2006 and
March 31, 2007 because of a decrease in market interest
rates since inception.
Americans
with Disabilities Act Claim
The Americans with Disabilities Act (ADA) generally
requires that public accommodations be made accessible to
disabled persons. On January 12, 2001, Access Now, Inc., a
disability rights organization, filed a class action lawsuit
against each of the Companys existing hospitals alleging
non-compliance with the accessibility guidelines under the ADA.
On April 20, 2007, the plaintiff amended the lawsuit to add
hospitals subsequently acquired by the Company, including the
former Province facilities, Wythe County Community Hospital
(WCCH) and Danville Regional Medical Center,
(DRMC) and dismiss divested facilities. The lawsuit
does not seek any monetary damages, but seeks injunctive relief
requiring facility modification, where necessary, to meet the
ADA guidelines, in addition to attorneys fees and costs.
The Company is currently unable to estimate the costs that could
be associated with modifying these facilities because these
costs are negotiated and determined on a
facility-by-facility
basis and, therefore, have varied and will continue to vary
significantly among facilities. The Company may be required to
expend significant capital expenditures at one or more of its
facilities in order to comply with the ADA, and the
Companys business, financial condition or results of
operations could be adversely affected as a result.
In January 2002, the United States District Court for the
Eastern District of Tennessee (the District Court)
certified the class action and issued a scheduling order that
requires the parties to complete discovery and inspection for
approximately six facilities per year. The Company is vigorously
defending the lawsuit,
18
LIFEPOINT
HOSPITALS, INC.
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
recognizing the Companys obligation to correct any
deficiencies in order to comply with the ADA. Noncompliance with
the requirements of the ADA could result in the imposition of
fines against the Company by the federal government or the
payment of damages by the Company. As of April 23, 2007,
the plaintiffs have conducted inspections at 27 of the
Companys hospitals, including the now divested Smith
County and recently closed Guyan Valley Hospital. To date, the
District Court has approved the settlement agreements between
the parties relating to 13 of the Companys facilities. The
Company is now moving forward in implementing facility
modifications in accordance with the terms of the settlement.
The Company has completed remedial work on three facilities for
a cost of $1.0 million. The Company currently anticipates
that the costs associated with the ten other facilities that are
subject to court approved settlement arrangements will range
from $5.1 million to $7.0 million.
Legal
Proceedings and General Liability Claims
The Company is, from time to time, subject to claims and suits
arising in the ordinary course of business, including claims for
damages for personal injuries, medical malpractice, breach of
contracts, wrongful restriction of or interference with
physicians staff privileges and employment related claims.
In certain of these actions, plaintiffs request payment for
damages, including punitive damages that may not be covered by
insurance. The Company is currently not a party to any
proceeding which, in managements opinion, would have a
material adverse effect on the Companys business,
financial condition or results of operations.
Physician
Commitments
The Company has committed to provide certain financial
assistance pursuant to recruiting agreements with various
physicians practicing in the communities it serves. In
consideration for a physician relocating to one of its
communities and agreeing to engage in private practice for the
benefit of the respective community, the Company may advance
certain amounts of money to a physician, normally over a period
of one year, to assist in establishing the physicians
practice. The Company has committed to advance a maximum amount
of approximately $51.2 million at March 31, 2007. The
actual amount of such commitments to be subsequently advanced to
physicians is estimated at $10.7 million and often depends
upon the financial results of a physicians private
practice during the guarantee period. Generally, amounts
advanced under the recruiting agreements may be forgiven pro
rata over a period of 48 months contingent upon the
physician continuing to practice in the respective community.
Pursuant to the Companys standard physician recruiting
agreement, any breach or non-fulfillment by a physician under
the physician recruiting agreement gives the Company the right
to recover any payments made to the physician under the
agreement. The Company accounts for advances to physicians in
accordance with FSP
FIN 45-3,
as further discussed in Note 4.
Capital
Expenditure Commitments
The Company is reconfiguring some of its facilities to more
effectively accommodate patient services and restructuring
existing surgical capacity in some of its hospitals to permit
additional patient volume and a greater variety of services. The
Company has incurred approximately $66.6 million in
uncompleted projects at March 31, 2007, which is included
in construction in progress in the Companys accompanying
condensed consolidated balance sheets. At March 31, 2007,
the Company had projects under construction with an estimated
cost to complete and equip of approximately $96.3 million.
Pursuant to the asset purchase agreement for DRMC, the Company
has agreed to expend at least $11.3 million for capital
expenditures and improvements before July 1, 2008. The
Company has incurred approximately $5.3 million of the
required capital expenditures and improvements as of
March 31, 2007.
The Company agreed in connection with the lease of WCCH to make
capital expenditures or improvements to the hospital of a value
not less than $10.3 million prior to June 1, 2008, and
an additional
19
LIFEPOINT
HOSPITALS, INC.
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
$4.2 million, for an aggregate total of $14.5 million,
before June 1, 2013. The Company has incurred approximately
$2.4 million of the required capital expenditures and
improvements as of March 31, 2007.
The Company currently leases a 45-bed hospital in Ennis, Texas.
The City of Ennis has approved the construction of a new
facility to replace Ennis Regional Medical Center at an
estimated cost of $35.0 million. The City of Ennis has
agreed to fund $15.0 million of this cost. The project
calls for the Company to fund the $20.0 million difference
in exchange for a
40-year
prepaid lease. The construction began during the first quarter
of 2006 and the Company anticipates the replacement facility
will be completed in the second quarter of 2007.
There are required annual capital expenditure commitments in
connection with several of the Companys other facilities.
In accordance with the purchase agreements for the Memorial
Hospital of Martinsville and Henry County, Martinsville,
Virginia; Memorial Medical Center of Las Cruces, Las Cruces, New
Mexico; and Los Alamos Medical Center, Los Alamos, New Mexico
facilities, the Company is obligated to make ongoing annual
expenditures based on a percentage of net revenues.
Acquisitions
The Company has historically acquired businesses with prior
operating histories. Acquired companies may have unknown or
contingent liabilities, including liabilities for failure to
comply with healthcare laws and regulations, medical and general
professional liabilities, workers compensation liabilities,
previous tax liabilities and unacceptable business practices.
Although the Company institutes policies designed to conform
practices to its standards following completion of acquisitions,
there can be no assurance that the Company will not become
liable for past activities that may later be asserted to be
improper by private plaintiffs or government agencies. Although
the Company generally seeks to obtain indemnification from
prospective sellers covering such matters, there can be no
assurance that any such matter will be covered by
indemnification, or if covered, that such indemnification will
be adequate to cover potential losses and fines. The Company was
not indemnified by Province in connection with the Province
business combination.
Note
12. Subsequent Event
On April 26, 2007, the Company announced that Michael J. Culotta
tendered his resignation as Chief Financial Officer of the
Company.
20
|
|
Item 2.
|
Managements
Discussion and Analysis of Financial Condition and Results of
Operations.
|
We recommend that you read this discussion together with our
unaudited condensed consolidated financial statements and
related notes included elsewhere in this report, as well as our
2006 Annual Report on
Form 10-K.
Unless otherwise indicated, all relevant financial and
statistical information included herein relates to our
continuing operations.
Overview
During the three months ended March 31, 2007, we have
focused on managing our hospitals, integrating our 2006 hospital
acquisitions, recruiting and retaining physicians and
appropriately investing capital in our hospitals. The following
table reflects our summarized operating results for the periods
presented (in millions, except per share amounts):
|
|
|
|
|
|
|
|
|
|
|
Three Months
|
|
|
|
Ended
|
|
|
|
March 31,
|
|
|
|
2006
|
|
|
2007
|
|
|
Revenues
|
|
$
|
586.6
|
|
|
$
|
669.3
|
|
Income from continuing operations
|
|
$
|
34.0
|
|
|
$
|
37.8
|
|
Diluted earnings per share from
continuing operations
|
|
$
|
0.61
|
|
|
$
|
0.67
|
|
Hospital
Acquisitions
We seek to identify and acquire selected hospitals in non-urban
communities. Our July 1, 2006 acquisition of two of the
hospitals from HCA fits into our plan of pursuing a strategy for
acquiring hospitals that are the sole or significant market
provider of healthcare services in their communities. In
evaluating a hospital for acquisition, we focus on a variety of
factors. One factor we consider is the number of patients that
are traveling outside of the community for healthcare services.
Another factor we consider is the hospitals prior
operating history and our ability to implement new healthcare
services. In addition, we review the local demographics and
expected future trends. Upon acquiring a facility, we work to
integrate the hospital quickly into our operating practices. The
Business Strategy section in Part I,
Item 1. Business, in our 2006 Annual Report on
Form 10-K
contains a table of our hospital acquisitions since our
inception in 1999. Please refer to Note 2 to our
consolidated financial statements included in our 2006 Annual
Report on
Form 10-K
for further discussion of acquisitions that we have made in
recent years.
Discontinued
Operations
From time to time, we may evaluate our facilities and sell
assets which we believe may no longer fit with our long-term
strategy for various reasons. On March 28, 2007, we signed
a letter of intent with the Board of Trustees of Needles Desert
Communities Hospital to transfer substantially all of the
operating assets and net working capital of Colorado River to
the Board of Trustees and $1.5 million in cash, which
approximates the net present value of future lease payments due
under the lease agreement between the Board of Trustees and us
in consideration for the termination of the operating lease
agreement. In connection with the signing of the letter of
intent, we recognized an impairment charge of $7.9 million,
net of income taxes, or $0.14 loss per diluted share, in
discontinued operations for the three-month period ended
March 31, 2007. The impairment charge relates to the
property and equipment and net working capital items of Colorado
River to be transferred to the Board of Trustees for which we
anticipate receiving no consideration and goodwill impairment.
The following table sets forth the components of the impairment
charge (in millions):
|
|
|
|
|
Net working capital
|
|
$
|
3.4
|
|
Property and equipment
|
|
|
4.9
|
|
Goodwill
|
|
|
3.1
|
|
|
|
|
|
|
|
|
|
11.4
|
|
Income tax benefit
|
|
|
(3.5
|
)
|
|
|
|
|
|
|
|
$
|
7.9
|
|
|
|
|
|
|
21
In connection with the acquisition of four facilities from HCA
effective July 1, 2006, we entered into a plan to divest
two hospitals, St. Josephs and Saint Francis. We sold
Saint Francis effective January 1, 2007 and anticipate
selling St. Josephs during the second quarter of 2007.
During the second quarter of 2005, we committed to a plan to
divest two hospitals MCSI and Ashland. We completed
the sale of both MCSI and Ashland to Saint Catherine Healthcare
effective May 1, 2006. On March 31, 2006, we sold
Smith County to Sumner Regional Health System. Please refer to
Note 3 of our condensed consolidated financial statements
included elsewhere in this report for more information on our
discontinued operations.
The following table reflects our summarized operating results of
discontinued operations for the periods presented (in millions,
except per share amounts):
|
|
|
|
|
|
|
|
|
|
|
Three Months
|
|
|
|
Ended
|
|
|
|
March 31,
|
|
|
|
2006
|
|
|
2007
|
|
|
Revenues
|
|
$
|
13.8
|
|
|
$
|
29.5
|
|
|
|
|
|
|
|
|
|
|
Loss from discontinued operations
|
|
$
|
(0.4
|
)
|
|
$
|
|
|
Impairment of assets
|
|
|
|
|
|
|
(7.9
|
)
|
Gain (loss) on sale of hospitals
|
|
|
3.8
|
|
|
|
(0.1
|
)
|
|
|
|
|
|
|
|
|
|
Income (loss) from discontinued
operations
|
|
$
|
3.4
|
|
|
$
|
(8.0
|
)
|
|
|
|
|
|
|
|
|
|
Diluted earnings (loss) per share
from discontinued operations
|
|
$
|
0.06
|
|
|
$
|
(0.14
|
)
|
|
|
|
|
|
|
|
|
|
Key
Challenges
We anticipate increasing our revenues and profitability on both
a long-term and short-term basis. However, we have the following
internal and external key challenges to overcome:
|
|
|
|
|
Increases in Provision for Doubtful
Accounts. We have experienced an increase in our
provision for doubtful accounts during recent years. These
increases were the result of an increased number of uninsured
patients and an increase in co-payments and deductibles from
healthcare plan design changes. These changes increase
collection costs and reduce overall cash collections.
|
Our quarterly provision for
doubtful accounts for consolidated operations was as follows for
the periods presented (in millions):
|
|
|
|
|
|
|
|
|
|
|
Provision for
|
|
|
|
Doubtful Accounts
|
|
|
|
2006
|
|
|
2007
|
|
|
First Quarter
|
|
$
|
68.6
|
|
|
$
|
77.7
|
|
Second Quarter
|
|
|
60.2
|
|
|
|
N/A
|
|
Third Quarter
|
|
|
73.9
|
|
|
|
N/A
|
|
Fourth Quarter
|
|
|
71.2
|
|
|
|
N/A
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
273.9
|
|
|
$
|
77.7
|
|
|
|
|
|
|
|
|
|
|
Our revenues decrease when we
write-off patient accounts identified as charity and indigent
care. Our hospitals write-off a portion of a patients
account upon the determination that the patient qualifies under
the hospitals charity/indigent care policy. In the event
that a patient account was previously classified as self-pay
when the determination of charity/indigent status is made, a
corresponding reduction in the provision for doubtful accounts
may occur.
22
The following table reflects our
quarterly consolidated charity and indigent care write-offs for
the periods presented (in millions):
|
|
|
|
|
|
|
|
|
|
|
Charity and
|
|
|
|
Indigent Care
|
|
|
|
Write-Offs
|
|
|
|
2006
|
|
|
2007
|
|
|
First Quarter
|
|
$
|
6.0
|
|
|
$
|
16.2
|
|
Second Quarter
|
|
|
12.2
|
|
|
|
N/A
|
|
Third Quarter
|
|
|
11.6
|
|
|
|
N/A
|
|
Fourth Quarter
|
|
|
16.6
|
|
|
|
N/A
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
46.4
|
|
|
$
|
16.2
|
|
|
|
|
|
|
|
|
|
|
The provision for doubtful
accounts, as well as charity and indigent care write-offs,
relate primarily to self-pay revenues. The following table
reflects our quarterly consolidated self-pay revenues, net of
charity and indigent care write-offs, for the periods presented
(in millions):
|
|
|
|
|
|
|
|
|
|
|
Self-Pay Revenues
|
|
|
|
2006
|
|
|
2007
|
|
|
First Quarter
|
|
$
|
73.8
|
|
|
$
|
80.3
|
|
Second Quarter
|
|
|
73.3
|
|
|
|
N/A
|
|
Third Quarter
|
|
|
88.3
|
|
|
|
N/A
|
|
Fourth Quarter
|
|
|
75.1
|
|
|
|
N/A
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
310.5
|
|
|
$
|
80.3
|
|
|
|
|
|
|
|
|
|
|
The following table shows our
consolidated revenue days outstanding reflected in our
consolidated net accounts receivable as of the dates indicated:
|
|
|
|
|
|
|
|
|
|
|
Revenue Days
|
|
|
|
Outstanding
|
|
|
|
in Accounts
|
|
|
|
Receivable
|
|
|
|
2006
|
|
|
2007
|
|
|
March 31
|
|
|
39.6
|
|
|
|
40.8
|
|
June 30
|
|
|
40.7
|
|
|
|
N/A
|
|
September 30
|
|
|
45.1
|
|
|
|
N/A
|
|
December 31
|
|
|
43.1
|
|
|
|
N/A
|
|
The following table shows our
adjusted consolidated revenue days outstanding reflected in our
consolidated net accounts receivable as of the dates indicated.
Revenues are adjusted by subtracting the provision for doubtful
accounts during the periods indicated.
|
|
|
|
|
|
|
|
|
|
|
Adjusted
|
|
|
|
Revenue Days
|
|
|
|
Outstanding
|
|
|
|
in Accounts Receivable
|
|
|
|
2006
|
|
|
2007
|
|
|
March 31
|
|
|
44.7
|
|
|
|
45.9
|
|
June 30
|
|
|
45.5
|
|
|
|
N/A
|
|
September 30
|
|
|
50.5
|
|
|
|
N/A
|
|
December 31
|
|
|
48.1
|
|
|
|
N/A
|
|
23
The approximate percentages of
billed hospital receivables (which is a component of total
accounts receivable) are summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
March 31,
|
|
|
|
2006
|
|
|
2007
|
|
|
Insured receivables
|
|
|
37.1
|
%
|
|
|
33.8
|
%
|
Uninsured receivables (including
copayments and deductibles)
|
|
|
62.9
|
|
|
|
66.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
The approximate percentages of
billed hospital receivables in summarized aging categories are
as follows:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
March 31,
|
|
|
|
2006
|
|
|
2007
|
|
|
0 to 60 days
|
|
|
49.3
|
%
|
|
|
47.9
|
%
|
61 to 150 days
|
|
|
21.3
|
|
|
|
18.2
|
|
Over 150 days
|
|
|
29.4
|
|
|
|
33.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
We continue to implement a number
of operating strategies as they relate to cash collections.
However, if the trend of increasing self-pay revenues continues,
our results of operations and financial position in the future
could be materially adversely affected.
|
|
|
|
|
Physician Recruitment and
Retention. Recruiting and retaining both primary
care physicians and specialists for our non-urban communities is
a key to increasing revenues, patient volumes and the value that
the communities place on our hospitals. The medical staffs at
our hospitals are typically small and our revenues are
negatively affected by the loss of physicians. Our management
believes that continuing to add specialists should help our
hospitals increase volumes by offering new services. For the
three months ended March 31, 2007, we recruited 82 new
admitting physicians, and spent $6.8 million in cash on
physician recruitment, including physician minimum revenue
guarantee payments. We plan to recruit approximately 173 new
admitting physicians during 2007.
|
A summary of activity related to
our admitting physicians during the three months ended
March 31, 2007 is as follows:
|
|
|
|
|
|
|
Admitting
|
|
|
|
Physicians
|
|
|
December 31, 2006
|
|
|
2,064
|
|
Recruited and started
|
|
|
24
|
|
Departed
|
|
|
(21
|
)
|
|
|
|
|
|
March 31, 2007
|
|
|
2,067
|
|
|
|
|
|
|
|
|
|
|
|
Substantial Indebtedness. Our consolidated
debt was $1,656.2 million as of March 31, 2007, and we
incurred $26.7 million of net interest expense during the
three months ended March 31, 2007. Our substantial
indebtedness increases our cost of capital, decreases our net
income and reduces the amount of funds available for operations,
capital expenditures and future acquisitions. We are in
compliance with our financial debt covenants as of
March 31, 2007 and believe we will be in compliance with
them throughout 2007. It is not our intent to maintain large
cash balances and we will focus on reducing our indebtedness
throughout 2007.
|
|
|
|
Joint Commission Accreditation. Our hospitals
are subject to periodic accreditation surveys by the Joint
Commission. Recently, the Joint Commission has revised some of
the standards and scoring guidelines it uses in determining
accreditation status. The Joint Commission recently inspected
DRMC and identified a number of requirements for improvement,
which could result in a denial of accreditation if not
addressed. We are working collaboratively with the Joint
Commission to address the requirements for improvement. The
Joint Commission has indicated that it will issue a final
determination reflecting DRMCs ultimate accreditation
status. Until that time, DRMC remains accredited.
|
24
|
|
|
|
|
Medicare Changes. We have experienced changes
with respect to governmental reimbursement that are affecting
our growth. Effective October 1, 2005, Centers for Medicare
and Medicaid Services (CMS) expanded the post-acute
transfer policy from 30 diagnosis related groups
(DRGs) to 182 DRGs resulting in an approximate
$6.0 million reduction in our Medicare inpatient
prospective payments for federal fiscal year 2006. CMS
further expanded the list to 192 DRGS during FFY 2007; however,
we do not anticipate any material increase in payment reductions
for 2007. On April 13, 2007, CMS issued its hospital
inpatient prospective payment system proposed rule for federal
fiscal year 2008. Among other items, CMS is proposing the
creation of 745 new Medicare severity DRGs, to replace the
current 538 DRGs. If this rule is adopted as proposed, we may
incur significant payment reductions to our Medicare acute
inpatient hospital reimbursement. Part I, Item 1.
Business, Sources of Revenue in our
2006 Annual Report on
Form 10-K
contains a detailed discussion of provisions that affect our
Medicare reimbursement.
|
|
|
|
Shortage of Clinical Personnel and Increased Contract Labor
Usage. In recent years, many hospitals, including
some of the hospitals we own, have encountered difficulty in
recruiting and retaining nursing and other clinical personnel.
When we are unable to staff our nursing and other clinical
positions, we are required to use contract labor to ensure
adequate patient care. Contract labor generally costs more per
hour than employed labor. Additionally, we have incurred an
increase in professional fees for anesthesiology, radiology and
emergency room services. We have adopted a number of human
resources strategies in an attempt to improve our ability to
recruit and retain nursing and other clinical personnel.
However, we expect that staffing issues related to nurses and
other clinical personnel will continue in the future.
|
|
|
|
Challenges in Professional and General Liability
Costs. Professional and general liability costs
remain a challenge to us, and we expect this pressure to
continue in the future. In recent years, we have incurred
favorable loss experience, as reflected in our external
actuarial reports. We have implemented enhanced risk management
processes for monitoring professional and general liability
claims and managing in high-risk areas.
|
|
|
|
Increases in Supply Costs. During the past few
years, we have experienced an increase in supply costs per
equivalent admission, especially in the areas of pharmaceutical,
orthopedic, oncology and cardiac supplies. We participate in a
group purchasing organization in an attempt to achieve lower
supply costs from our vendors. Because of the fixed
reimbursement nature of most governmental and commercial payor
arrangements, we may not be able to recover supply cost
increases through increased revenues.
|
|
|
|
Increases in Information Technology Costs and Costs of
Integration. Our acquisition activity requires
transitions from, and the integration of, various information
systems that are used by hospitals we acquire. We rely heavily
on HCA-IT for information systems integration pursuant to our
contractual arrangement for information technology services.
|
Summary
Each of our challenges is intensified by our inability to
control related trends and the associated risks. Therefore, our
actual results may differ from our expectations. To maintain or
improve operating margins in the future, we must, among other
things, increase patient volumes through physician recruiting,
relationships and retention while controlling the costs of
providing services.
Revenue
Sources
Our hospitals generate revenues by providing healthcare services
to our patients. The majority of these healthcare services are
directed by physicians. We are paid for these healthcare
services from a number of different sources, depending upon the
patients medical insurance coverage. Primarily, we are
paid by governmental Medicare and Medicaid programs, commercial
insurance, including managed care organizations, and directly by
the patient. The amounts we are paid for providing healthcare
services to our patients vary depending upon the payor.
Governmental payors generally pay significantly less than the
hospitals customary charges for the services provided.
Part I, Item 1. Business, Sources of
Revenue in our 2006 Annual Report on
Form 10-K
contains a detailed discussion of our revenue sources.
25
Revenues from governmental payors, such as Medicare and
Medicaid, are controlled by complex rules and regulations that
stipulate the amount a hospital is paid for providing healthcare
services. Our compliance with these rules and regulations
requires an extensive effort to ensure we remain eligible to
participate in these governmental programs. In addition, these
rules and regulations are subject to frequent changes as a
result of legislative and administrative action on both the
federal and state level. For these reasons, revenues from
governmental programs change frequently and require us to
monitor regularly the environment in which these governmental
programs operate.
Revenues from HMOs, PPOs and other private insurers are subject
to contracts and other arrangements that require us to discount
the amounts we customarily charge for healthcare services. These
discounted arrangements often limit our ability to increase
charges in response to increasing costs. We actively negotiate
with these payors to seek to maintain or increase the pricing of
our healthcare services. Insured patients are generally not
responsible for any difference between customary hospital
charges and the amounts received from commercial insurance
payors. However, insured patients are responsible for payments
not covered by insurance, such as exclusions, deductibles and
co-payments.
Self-pay revenues are primarily generated through the treatment
of uninsured patients. Our hospitals have experienced an
increase in self-pay revenues during the past few years.
Critical
Accounting Estimates
The preparation of financial statements in accordance with
U.S. generally accepted accounting principles requires us
to make estimates and assumptions that affect reported amounts
and related disclosures. We consider an accounting estimate to
be critical if:
|
|
|
|
|
it requires assumptions to be made that were uncertain at the
time the estimate was made; and
|
|
|
|
changes in the estimate or different estimates that could have
been made could have a material impact on our consolidated
results of operations or financial condition.
|
Our critical accounting estimates are more fully described in
our 2006 Annual Report on
Form 10-K
and continue to include the following areas:
|
|
|
|
|
Allowance for doubtful accounts and provision for doubtful
accounts;
|
|
|
|
Revenue recognition/Allowance for contractual discounts;
|
|
|
|
Accounting for stock-based compensation;
|
|
|
|
Goodwill and accounting for business combinations;
|
|
|
|
Professional and general liability claims; and
|
|
|
|
Accounting for income taxes.
|
Critical
Accounting Estimate Update
Accounting
for Income Taxes
Our critical accounting estimate for income taxes was recently
modified due to our adoption of FIN 48 effective
January 1, 2007. In June 2006, the FASB issued FIN 48.
FIN 48 clarifies the accounting for uncertainty in income
taxes recognized in an enterprises financial statements in
accordance with SFAS No. 109, Accounting for
Income Taxes. This interpretation prescribes a recognition
threshold and measurement attribute for the financial statement
recognition and measurement of a tax position or expected to be
taken in a tax return. FIN 48 also provides guidance on
derecognition of tax benefits, classification on the balance
sheet, interest and penalties, accounting in interim periods,
disclosure and transition. FIN 48 requires significant
judgment in determining what constitutes an individual tax
position as well as assessing the outcome of each tax position.
Changes in judgment as to recognition or measurement of tax
positions can materially affect the estimate of the effective
tax rate and, consequently, affect our operating results. Please
refer to Note 5 in this report for further discussion of
our adoption of FIN 48.
26
Subsequent
Event
On April 26, 2007, we announced that Michael J. Culotta tendered
his resignation as Chief Financial Officer of the Company.
Results
of Operations
The following definitions apply throughout the remaining portion
of Managements Discussion and Analysis of Financial
Condition and Results of Operations:
Admissions. Represents the total number of
patients admitted (in the facility for a period in excess of
23 hours) to our hospitals and used by management and
investors as a general measure of inpatient volume.
bps. Basis point change.
Continuing operations. Continuing operations
information excludes the operations of hospitals that are
classified as discontinued operations.
Emergency room visits. Represents the total
number of hospital-based emergency room visits.
Equivalent admissions. Management and
investors use equivalent admissions as a general measure of
combined inpatient and outpatient volume. We compute equivalent
admissions by multiplying admissions (inpatient volume) by the
outpatient factor (the sum of gross inpatient revenue and gross
outpatient revenue and then dividing the resulting amount by
gross inpatient revenue). The equivalent admissions computation
equates outpatient revenue to the volume measure
(admissions) used to measure inpatient volume resulting in a
general measure of combined inpatient and outpatient volume.
ESOP. Employee stock ownership plan. The ESOP
is a defined contribution retirement plan that covers
substantially all of our employees.
Medicare case mix index. Refers to the acuity
or severity of illness of an average Medicare patient at our
hospitals.
N/A. Not applicable.
N/M. Not meaningful.
Outpatient surgeries. Outpatient surgeries are
those surgeries that do not require admission to our hospitals.
Same-hospital. Same-hospital information
includes 48 and 47 hospitals operated during the three months
ended March 31, 2006 and 2007, respectively. Same-hospital
information for the three months ended March 31, 2006
includes the operations of Guyan Valley Hospital, which we
voluntarily closed and ceased operations effective
December 29, 2006. The costs of corporate overhead and
discontinued operations are excluded from same-hospital
information.
27
Operating
Results Summary
The following tables present summaries of results of operations
for the three months ended March 31, 2006 and 2007 (dollars
in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
|
|
2006
|
|
|
2007
|
|
|
|
|
|
|
% of
|
|
|
|
|
|
% of
|
|
|
|
Amount
|
|
|
Revenues
|
|
|
Amount
|
|
|
Revenues
|
|
|
Revenues
|
|
$
|
586.6
|
|
|
|
100.0
|
%
|
|
$
|
669.3
|
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries and benefits
|
|
|
229.8
|
|
|
|
39.2
|
|
|
|
260.0
|
|
|
|
38.8
|
|
Supplies
|
|
|
82.5
|
|
|
|
14.1
|
|
|
|
93.0
|
|
|
|
13.9
|
|
Other operating expenses
|
|
|
94.9
|
|
|
|
16.1
|
|
|
|
116.7
|
|
|
|
17.5
|
|
Provision for doubtful accounts
|
|
|
67.8
|
|
|
|
11.6
|
|
|
|
75.6
|
|
|
|
11.3
|
|
Depreciation and amortization
|
|
|
31.5
|
|
|
|
5.4
|
|
|
|
33.3
|
|
|
|
4.9
|
|
Interest expense, net
|
|
|
23.1
|
|
|
|
3.9
|
|
|
|
26.7
|
|
|
|
4.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
529.6
|
|
|
|
90.3
|
|
|
|
605.3
|
|
|
|
90.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations
before minority interests and income taxes
|
|
|
57.0
|
|
|
|
9.7
|
|
|
|
64.0
|
|
|
|
9.6
|
|
Minority interests in earnings of
consolidated entities
|
|
|
0.3
|
|
|
|
|
|
|
|
0.3
|
|
|
|
0.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations
before income taxes
|
|
|
56.7
|
|
|
|
9.7
|
|
|
|
63.7
|
|
|
|
9.5
|
|
Provision for income taxes
|
|
|
22.7
|
|
|
|
3.9
|
|
|
|
25.9
|
|
|
|
3.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations
|
|
$
|
34.0
|
|
|
|
5.8
|
%
|
|
$
|
37.8
|
|
|
|
5.7
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For
the Quarters Ended March 31, 2006 and 2007
Revenues
The increase in revenues for the quarter ended March 31,
2007 compared to the quarter ended March 31, 2006 was
primarily the result of the third quarter 2006 acquisition of
two facilities from HCA and an increase in equivalent admissions
and revenues per equivalent admissions on a same-hospital basis.
Adjustments to estimated reimbursement amounts increased our
revenues by $2.2 million and $1.0 million for the
quarters ended March 31, 2006 and 2007, respectively.
The following table shows the sources of our revenues for the
three months ended March 31, 2006 and 2007 (dollars in
millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
|
|
%
|
|
|
|
March 31,
|
|
|
Increase
|
|
|
Increase
|
|
|
|
2006
|
|
|
2007
|
|
|
(Decrease)
|
|
|
(Decrease)
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Same-hospital
|
|
$
|
586.6
|
|
|
$
|
620.9
|
|
|
$
|
34.3
|
|
|
|
5.9
|
%
|
Two former HCA facilities
|
|
|
|
|
|
|
47.6
|
|
|
|
47.6
|
|
|
|
N/M
|
|
Other
|
|
|
|
|
|
|
0.8
|
|
|
|
0.8
|
|
|
|
N/M
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
586.6
|
|
|
$
|
669.3
|
|
|
$
|
82.7
|
|
|
|
14.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
28
The following table shows the sources of our revenues by payor
for the three months ended March 31, 2006 and 2007,
expressed as percentages of total revenues, including
adjustments to estimated reimbursement amounts:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing
|
|
|
|
|
|
|
Operations
|
|
|
Same-Hospital
|
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
Medicare
|
|
|
36.5
|
%
|
|
|
34.1
|
%
|
|
|
36.5
|
%
|
|
|
33.9
|
%
|
Medicaid
|
|
|
9.3
|
|
|
|
9.5
|
|
|
|
9.3
|
|
|
|
9.6
|
|
HMOs, PPOs and other private
insurers
|
|
|
37.3
|
|
|
|
41.6
|
|
|
|
37.3
|
|
|
|
41.1
|
|
Self-Pay
|
|
|
12.9
|
|
|
|
11.9
|
|
|
|
12.9
|
|
|
|
12.4
|
|
Other
|
|
|
4.0
|
|
|
|
2.9
|
|
|
|
4.0
|
|
|
|
3.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table shows the key drivers of our revenues for
the three months ended March 31, 2006 and 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
%
|
|
|
|
Three Months Ended March 31,
|
|
|
Increase
|
|
|
Increase
|
|
|
|
2006
|
|
|
2007
|
|
|
(Decrease)
|
|
|
(Decrease)
|
|
|
Admissions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Same-hospital
|
|
|
47,664
|
|
|
|
47,864
|
|
|
|
200
|
|
|
|
0.4
|
%
|
Continuing operations
|
|
|
47,664
|
|
|
|
52,601
|
|
|
|
4,937
|
|
|
|
10.4
|
|
Equivalent admissions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Same-hospital
|
|
|
90,752
|
|
|
|
92,425
|
|
|
|
1,673
|
|
|
|
1.8
|
|
Continuing operations
|
|
|
90,752
|
|
|
|
100,521
|
|
|
|
9,769
|
|
|
|
10.8
|
|
Revenues per equivalent admission:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Same-hospital
|
|
$
|
6,463
|
|
|
$
|
6,718
|
|
|
$
|
255
|
|
|
|
3.9
|
|
Continuing operations
|
|
$
|
6,463
|
|
|
$
|
6,658
|
|
|
$
|
195
|
|
|
|
3.0
|
|
Medicare case mix index:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Same-hospital
|
|
|
1.25
|
|
|
|
1.26
|
|
|
|
0.01
|
|
|
|
0.8
|
|
Continuing operations
|
|
|
1.25
|
|
|
|
1.24
|
|
|
|
(0.01
|
)
|
|
|
(0.8
|
)
|
Average length of stay (days):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Same-hospital
|
|
|
4.3
|
|
|
|
4.3
|
|
|
|
|
|
|
|
|
|
Continuing operations
|
|
|
4.3
|
|
|
|
4.3
|
|
|
|
|
|
|
|
|
|
Inpatient surgeries:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Same-hospital
|
|
|
13,534
|
|
|
|
13,709
|
|
|
|
175
|
|
|
|
1.3
|
|
Continuing operations
|
|
|
13,534
|
|
|
|
15,086
|
|
|
|
1,552
|
|
|
|
11.5
|
|
Outpatient surgeries:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Same-hospital
|
|
|
34,010
|
|
|
|
34,450
|
|
|
|
440
|
|
|
|
1.3
|
|
Continuing operations
|
|
|
34,010
|
|
|
|
37,262
|
|
|
|
3,252
|
|
|
|
9.6
|
|
Emergency room visits:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Same-hospital
|
|
|
202,416
|
|
|
|
210,319
|
|
|
|
7,903
|
|
|
|
3.9
|
|
Continuing operations
|
|
|
202,416
|
|
|
|
226,124
|
|
|
|
23,708
|
|
|
|
11.7
|
|
Outpatient factor:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Same-hospital
|
|
|
1.90
|
|
|
|
1.93
|
|
|
|
0.03
|
|
|
|
1.6
|
|
Continuing operations
|
|
|
1.90
|
|
|
|
1.91
|
|
|
|
0.01
|
|
|
|
0.5
|
|
29
Expenses
Salaries
and Benefits
The following table summarizes our salaries and benefits
expenses for the three months ended March 31, 2006 and 2007
(dollars in millions, except for salaries and benefits per
equivalent admission):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
|
|
|
|
|
|
|
|
|
|
|
% of
|
|
|
|
|
|
% of
|
|
|
Increase
|
|
|
% Increase
|
|
|
|
2006
|
|
|
Revenues
|
|
|
2007
|
|
|
Revenues
|
|
|
(Decrease)
|
|
|
(Decrease)
|
|
|
Salaries and benefits:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries and wages
|
|
$
|
173.1
|
|
|
|
29.5
|
%
|
|
$
|
198.7
|
|
|
|
29.7
|
%
|
|
$
|
25.6
|
|
|
|
14.8
|
%
|
Stock-based compensation
|
|
|
3.2
|
|
|
|
0.5
|
|
|
|
3.6
|
|
|
|
0.5
|
|
|
|
0.4
|
|
|
|
12.4
|
|
Employee benefits
|
|
|
38.4
|
|
|
|
6.6
|
|
|
|
40.4
|
|
|
|
6.0
|
|
|
|
2.0
|
|
|
|
5.3
|
|
Contract labor
|
|
|
10.8
|
|
|
|
1.9
|
|
|
|
13.4
|
|
|
|
2.0
|
|
|
|
2.6
|
|
|
|
24.3
|
|
ESOP expense
|
|
|
4.3
|
|
|
|
0.7
|
|
|
|
3.9
|
|
|
|
0.6
|
|
|
|
(0.4
|
)
|
|
|
(8.8
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
229.8
|
|
|
|
39.2
|
%
|
|
$
|
260.0
|
|
|
|
38.8
|
%
|
|
$
|
30.2
|
|
|
|
13.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Man-hours
per equivalent admission
|
|
|
88.4
|
|
|
|
N/A
|
|
|
|
87.5
|
|
|
|
N/A
|
|
|
|
(0.9
|
)
|
|
|
(1.0
|
)
|
Salaries and benefits per
equivalent admission
|
|
$
|
2,388
|
|
|
|
N/A
|
|
|
$
|
2,462
|
|
|
|
N/A
|
|
|
$
|
74
|
|
|
|
3.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate office salaries and
benefits
|
|
$
|
10.3
|
|
|
|
1.8
|
%
|
|
$
|
11.5
|
|
|
|
1.7
|
%
|
|
$
|
1.2
|
|
|
|
11.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Same-hospital:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries and wages
|
|
$
|
166.3
|
|
|
|
28.4
|
%
|
|
$
|
176.0
|
|
|
|
28.3
|
%
|
|
$
|
9.7
|
|
|
|
5.8
|
|
Stock-based compensation
|
|
|
0.9
|
|
|
|
0.1
|
|
|
|
0.9
|
|
|
|
0.1
|
|
|
|
|
|
|
|
4.7
|
|
Employee benefits
|
|
|
37.5
|
|
|
|
6.4
|
|
|
|
36.4
|
|
|
|
5.9
|
|
|
|
(1.1
|
)
|
|
|
(2.9
|
)
|
Contract labor
|
|
|
10.7
|
|
|
|
1.8
|
|
|
|
13.3
|
|
|
|
2.1
|
|
|
|
2.6
|
|
|
|
23.9
|
|
ESOP expense
|
|
|
4.1
|
|
|
|
0.7
|
|
|
|
3.4
|
|
|
|
0.6
|
|
|
|
(0.7
|
)
|
|
|
(16.3
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
219.5
|
|
|
|
37.4
|
%
|
|
$
|
230.0
|
|
|
|
37.0
|
%
|
|
$
|
10.5
|
|
|
|
4.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Same-hospital:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Man-hours
per equivalent admission
|
|
|
88.4
|
|
|
|
N/A
|
|
|
|
87.2
|
|
|
|
N/A
|
|
|
|
(1.2
|
)
|
|
|
(1.4
|
)
|
Salaries and benefits per
equivalent admission
|
|
$
|
2,388
|
|
|
|
N/A
|
|
|
$
|
2,477
|
|
|
|
N/A
|
|
|
$
|
89
|
|
|
|
3.7
|
|
Our salaries and benefits increased for the quarter ended
March 31, 2007 compared to the quarter ended March 31,
2006, primarily as a result of the third quarter 2006
acquisition of two facilities from HCA. Salaries and benefits as
a percentage of revenues decreased for continuing operations and
on a same-hospital basis as a result of effective management of
our salary costs and changes in our employee health benefits.
Contract labor as a percentage of revenues increased primarily
because of a higher utilization of contract nurses. We are
implementing strategies to reduce contract labor by recruiting
and retaining nurses and other clinical personnel.
Our ESOP expense has two components: (1) common stock and
(2) cash. Shares of our common stock are allocated ratably
to employee accounts based on a percent of salaries and wages,
which approximated 2.5% and 2.0% during the quarter ended
March 31, 2006 and 2007, respectively. The cash component
is discretionary and is impacted by the amount of forfeitures in
the ESOP. We made $2.0 million and $1.6 million of discretionary
cash contributions to the ESOP during the quarters ended
March 31, 2006 and 2007, respectively.
30
Supplies
The following table summarizes our supplies expense for the
three months ended March 31, 2006 and 2007 (dollars in
millions, except for supplies per equivalent admission):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months
|
|
|
|
|
|
|
|
|
|
Ended
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
Increase
|
|
|
% Increase
|
|
|
|
2006
|
|
|
2007
|
|
|
(Decrease)
|
|
|
(Decrease)
|
|
|
Continuing operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplies
|
|
$
|
82.5
|
|
|
$
|
93.0
|
|
|
$
|
10.5
|
|
|
|
12.7
|
%
|
Supplies as a percentage of
revenues
|
|
|
14.1
|
%
|
|
|
13.9
|
%
|
|
|
(20)bps
|
|
|
|
N/M
|
|
Supplies per equivalent admission
|
|
$
|
907
|
|
|
$
|
928
|
|
|
$
|
21
|
|
|
|
2.3
|
%
|
Same-hospital:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplies
|
|
$
|
82.5
|
|
|
$
|
85.1
|
|
|
$
|
2.6
|
|
|
|
3.2
|
%
|
Supplies as a percentage of
revenues
|
|
|
14.1
|
%
|
|
|
13.7
|
%
|
|
|
(40)bps
|
|
|
|
N/M
|
|
Supplies per equivalent admission
|
|
$
|
907
|
|
|
$
|
925
|
|
|
$
|
18
|
|
|
|
2.0
|
%
|
Our supplies expense increased for the quarter ended
March 31, 2007 compared to the quarter ended March 31,
2006, primarily as a result of the third quarter 2006
acquisition of two facilities from HCA. Supplies as a percentage
of revenues decreased for continuing operations and on a
same-hospital basis as a result of effective management of our
supply costs and increased synergies as a result of our
participation in a group purchasing organization. Supplies per
equivalent admission for continuing operations and on a
same-hospital basis increased as a result of rising supply costs
particularly related to cardiology, orthopaedic implants and
other surgical-related supplies.
31
Other
Operating Expenses
The following table summarizes our other operating expenses for
the three months ended March 31, 2006 and 2007 (dollars in
millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
|
|
|
|
|
|
|
|
|
|
|
% of
|
|
|
|
|
|
% of
|
|
|
Increase
|
|
|
% Increase
|
|
|
|
2006
|
|
|
Revenues
|
|
|
2007
|
|
|
Revenues
|
|
|
(Decrease)
|
|
|
(Decrease)
|
|
|
Other operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Professional fees
|
|
$
|
9.6
|
|
|
|
1.6
|
%
|
|
$
|
15.1
|
|
|
|
2.3
|
%
|
|
$
|
5.5
|
|
|
|
57.2
|
%
|
Utilities
|
|
|
11.9
|
|
|
|
2.0
|
|
|
|
12.0
|
|
|
|
1.8
|
|
|
|
0.1
|
|
|
|
0.5
|
|
Repairs and maintenance
|
|
|
11.0
|
|
|
|
1.9
|
|
|
|
13.4
|
|
|
|
2.0
|
|
|
|
2.4
|
|
|
|
21.6
|
|
Rents and leases
|
|
|
5.8
|
|
|
|
1.0
|
|
|
|
6.9
|
|
|
|
1.0
|
|
|
|
1.1
|
|
|
|
18.4
|
|
Insurance
|
|
|
6.5
|
|
|
|
1.1
|
|
|
|
5.8
|
|
|
|
0.9
|
|
|
|
(0.7
|
)
|
|
|
(9.4
|
)
|
Physician recruiting
|
|
|
5.0
|
|
|
|
0.9
|
|
|
|
3.8
|
|
|
|
0.6
|
|
|
|
(1.2
|
)
|
|
|
(23.7
|
)
|
Contract services
|
|
|
26.9
|
|
|
|
4.6
|
|
|
|
36.5
|
|
|
|
5.5
|
|
|
|
9.6
|
|
|
|
35.7
|
|
Non-income taxes
|
|
|
7.6
|
|
|
|
1.3
|
|
|
|
9.9
|
|
|
|
1.5
|
|
|
|
2.3
|
|
|
|
30.0
|
|
Other
|
|
|
10.6
|
|
|
|
1.7
|
|
|
|
13.3
|
|
|
|
1.9
|
|
|
|
2.7
|
|
|
|
25.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
94.9
|
|
|
|
16.1
|
%
|
|
$
|
116.7
|
|
|
|
17.5
|
%
|
|
$
|
21.8
|
|
|
|
23.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate office other operating
expenses
|
|
$
|
5.7
|
|
|
|
1.0
|
%
|
|
$
|
7.5
|
|
|
|
1.1
|
%
|
|
$
|
1.8
|
|
|
|
33.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Same-hospital other operating
expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Professional fees
|
|
$
|
9.5
|
|
|
|
1.6
|
%
|
|
$
|
13.9
|
|
|
|
2.2
|
%
|
|
|
4.4
|
|
|
|
46.6
|
|
Utilities
|
|
|
11.7
|
|
|
|
2.0
|
|
|
|
11.1
|
|
|
|
1.8
|
|
|
|
(0.6
|
)
|
|
|
(5.2
|
)
|
Repairs and maintenance
|
|
|
10.9
|
|
|
|
1.9
|
|
|
|
12.3
|
|
|
|
2.0
|
|
|
|
1.4
|
|
|
|
12.4
|
|
Rents and leases
|
|
|
5.2
|
|
|
|
0.9
|
|
|
|
5.9
|
|
|
|
0.9
|
|
|
|
0.7
|
|
|
|
13.9
|
|
Insurance
|
|
|
5.8
|
|
|
|
0.9
|
|
|
|
5.3
|
|
|
|
0.9
|
|
|
|
(0.5
|
)
|
|
|
(8.4
|
)
|
Physician recruiting
|
|
|
5.0
|
|
|
|
0.9
|
|
|
|
3.7
|
|
|
|
0.6
|
|
|
|
(1.3
|
)
|
|
|
(26.6
|
)
|
Contract services
|
|
|
25.6
|
|
|
|
4.4
|
|
|
|
30.9
|
|
|
|
5.0
|
|
|
|
5.3
|
|
|
|
20.9
|
|
Non-income taxes
|
|
|
7.5
|
|
|
|
1.2
|
|
|
|
8.4
|
|
|
|
1.4
|
|
|
|
0.9
|
|
|
|
11.7
|
|
Other
|
|
|
8.0
|
|
|
|
1.3
|
|
|
|
9.3
|
|
|
|
1.5
|
|
|
|
1.3
|
|
|
|
15.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
89.2
|
|
|
|
15.1
|
%
|
|
$
|
100.8
|
|
|
|
16.3
|
%
|
|
$
|
11.6
|
|
|
|
12.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Our other operating expenses are generally not volume driven.
The increase in other operating expenses for the quarter ended
March 31, 2007 compared to the quarter ended March 31,
2006 was primarily a result of the third quarter 2006
acquisition of two facilities from HCA. Additionally, we have
incurred an increase in professional fees for anesthesiology,
radiology and emergency room services. Furthermore, we incurred
added professional and contract service fees related to our
conversions of the clinical and patient accounting information
system applications at our recently converted facilities.
32
Provision
for Doubtful Accounts
The following table summarizes our provision for doubtful
accounts for the three months ended March 31, 2006 and 2007
(dollars in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months
|
|
|
|
|
|
|
|
|
|
Ended
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
Increase
|
|
|
% Increase
|
|
|
|
2006
|
|
|
2007
|
|
|
(Decrease)
|
|
|
(Decrease)
|
|
|
Continuing operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for doubtful accounts
|
|
$
|
67.8
|
|
|
$
|
75.6
|
|
|
$
|
7.8
|
|
|
|
11.4
|
%
|
Percentage of revenues
|
|
|
11.6
|
%
|
|
|
11.3
|
%
|
|
|
(30)bps
|
|
|
|
N/M
|
|
Charity care write-offs
|
|
$
|
6.0
|
|
|
$
|
14.9
|
|
|
$
|
8.9
|
|
|
|
148.7
|
%
|
Same-hospital:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for doubtful accounts
|
|
$
|
67.8
|
|
|
$
|
70.4
|
|
|
$
|
2.6
|
|
|
|
3.8
|
%
|
Percentage of revenues
|
|
|
11.6
|
%
|
|
|
11.3
|
%
|
|
|
(30)bps
|
|
|
|
N/M
|
|
Charity care write-offs
|
|
$
|
6.0
|
|
|
$
|
12.5
|
|
|
$
|
6.5
|
|
|
|
107.5
|
%
|
The increase in the provision for doubtful accounts and charity
care write-offs for the quarter ended March 31, 2007
compared to the quarter ended March 31, 2006 was primarily
as a result of the third quarter 2006 acquisition of two
facilities from HCA and self-pay revenue growth. As a percentage
of revenues from continuing operations and on a same-hospital
basis, the provision for doubtful accounts decreased for the
quarter ended March 31, 2007 compared with the quarter
ended March 31, 2006. The provision for doubtful accounts
relates principally to self-pay amounts due from patients. The
provision and allowance for doubtful accounts are critical
accounting estimates and are further discussed in Part II,
Item 7. Managements Discussion and Analysis of
Financial Condition and Results of Operations,
Critical Accounting Estimates, in our 2006 Annual
Report on
Form 10-K.
Depreciation
and Amortization
The following table sets forth our depreciation and amortization
expense for the three months ended March 31, 2006 and 2007
(dollars in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months
|
|
|
|
|
|
|
|
|
|
Ended
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
Increase
|
|
|
% Increase
|
|
|
|
2006
|
|
|
2007
|
|
|
(Decrease)
|
|
|
(Decrease)
|
|
|
Same-hospital
|
|
$
|
30.9
|
|
|
$
|
29.8
|
|
|
$
|
(1.1
|
)
|
|
|
(3.3
|
)%
|
Two former HCA facilities
|
|
|
|
|
|
|
1.7
|
|
|
|
1.7
|
|
|
|
N/A
|
|
Corporate office
|
|
|
0.6
|
|
|
|
1.8
|
|
|
|
1.2
|
|
|
|
214.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
31.5
|
|
|
$
|
33.3
|
|
|
$
|
1.8
|
|
|
|
5.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization expense increased for the quarter
ended March 31, 2007 compared to the quarter ended
March 31, 2006, primarily as a result of the third quarter
2006 acquisition of two facilities from HCA and certain capital
projects completed at the corporate office.
33
Interest
Expense
The following table summarizes our interest expense for the
three months ended March 31, 2006 and 2007 (dollars in
millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months
|
|
|
|
|
|
|
Ended
|
|
|
|
|
|
|
March 31,
|
|
|
Increase
|
|
|
|
2006
|
|
|
2007
|
|
|
(Decrease)
|
|
|
Interest expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
Senior credit facility, including
commitment fees
|
|
$
|
20.3
|
|
|
$
|
25.3
|
|
|
$
|
5.0
|
|
Province
71/2% senior
subordinated notes
|
|
|
0.1
|
|
|
|
0.1
|
|
|
|
|
|
31/4% convertible
senior subordinated debentures
|
|
|
1.8
|
|
|
|
1.8
|
|
|
|
|
|
Other
|
|
|
0.1
|
|
|
|
0.6
|
|
|
|
0.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
22.3
|
|
|
|
27.8
|
|
|
|
5.5
|
|
Amortization of deferred loan costs
|
|
|
1.3
|
|
|
|
1.3
|
|
|
|
|
|
Less:
|
|
|
|
|
|
|
|
|
|
|
|
|
Discontinued operations interest
expense allocation
|
|
|
(0.1
|
)
|
|
|
(1.4
|
)
|
|
|
(1.3
|
)
|
Interest income
|
|
|
(0.3
|
)
|
|
|
(0.3
|
)
|
|
|
|
|
Capitalized interest
|
|
|
(0.1
|
)
|
|
|
(0.7
|
)
|
|
|
(0.6
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
23.1
|
|
|
$
|
26.7
|
|
|
$
|
3.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The increase in interest expense during the quarter ended
March 31, 2007 compared to the quarter ended March 31,
2006 was a direct result of the increases in debt associated
with the acquisition of four facilities from HCA (two of which
are included as discontinued operations) and increases in
interest rates on our variable rate debt. Our weighted-average
monthly interest-bearing debt balance increased from
$1,516.2 million during the three months ended
March 31, 2006 to $1,661.7 million during the same
period in 2007. For a further discussion, see Liquidity
and Capital Resources Debt.
Provision
for Income Taxes
The following table summarizes our provision for income taxes
for the three months ended March 31, 2006 and 2007 (dollars
in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months
|
|
|
|
|
|
|
Ended
|
|
|
|
|
|
|
March 31,
|
|
|
Increase
|
|
|
|
2006
|
|
|
2007
|
|
|
(Decrease)
|
|
|
Provision for income taxes
|
|
$
|
22.7
|
|
|
$
|
25.9
|
|
|
$
|
3.2
|
|
Effective income tax rate
|
|
|
40.0
|
%
|
|
|
40.7
|
%
|
|
|
70bps
|
|
The increase in our provision for income taxes was primarily a
result of higher income from continuing operations during the
quarter ended March 31, 2007 compared to the quarter ended
March 31, 2006 and higher interest expense on unrecognized
tax benefits.
Liquidity
and Capital Resources
Liquidity
Our primary sources of liquidity are cash flows provided by our
operations and our borrowings. We believe that our internally
generated cash flows and amounts available under our debt
agreements will be adequate to service existing debt, finance
internal growth, expend funds on capital expenditures and fund
certain small to mid-size acquisitions.
The following table presents our summarized cash flow
information for the three months ended March 31, 2006 and
2007 and reconciles the non-GAAP metric of free operating cash
flow to the net increase in cash
34
and cash equivalents, as stated in our accompanying condensed
consolidated statements of cash flows (in millions):
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
March 31,
|
|
|
|
2006
|
|
|
2007
|
|
|
Net cash flows provided by
continuing operating activities
|
|
$
|
55.3
|
|
|
$
|
53.7
|
|
Less: Purchase of property and
equipment
|
|
|
(50.1
|
)
|
|
|
(32.0
|
)
|
|
|
|
|
|
|
|
|
|
Free operating cash flow
|
|
|
5.2
|
|
|
|
21.7
|
|
Acquisitions
|
|
|
(3.5
|
)
|
|
|
|
|
Proceeds from sale of hospitals
|
|
|
19.9
|
|
|
|
0.1
|
|
Proceeds from borrowings
|
|
|
10.0
|
|
|
|
40.0
|
|
Payments on borrowings
|
|
|
(10.0
|
)
|
|
|
(52.4
|
)
|
Proceeds from exercise of stock
options
|
|
|
0.3
|
|
|
|
1.0
|
|
Other
|
|
|
0.9
|
|
|
|
0.2
|
|
Cash flows from operations (used
in) provided by discontinued operations
|
|
|
(0.1
|
)
|
|
|
10.1
|
|
|
|
|
|
|
|
|
|
|
Net increase in cash and cash
equivalents
|
|
$
|
22.7
|
|
|
$
|
20.7
|
|
|
|
|
|
|
|
|
|
|
The non-GAAP metric of free operating cash flow is an important
liquidity measure for us. Our computation of free operating cash
flow consists of net cash flows provided by continuing
operations less cash flows used for purchases of property and
equipment. Our net cash flow provided by continuing operating
activities for the quarter ended March 31, 2007 was
negatively impacted by an $8.5 million over-funding of our
employee 401(k) plan. Excluding this payment, which was refunded
during April 2007, our net cash provided by continuing operating
activities would have been $62.2 million. We believe that
free operating cash flow is useful to investors and management
as a measure of the ability of our business to generate cash and
also utilized for debt repayments. Computations of free
operating cash flow may differ from company to company.
Therefore, our free operating cash flow should be used as a
complement to, and in conjunction with, our accompanying
condensed consolidated statements of cash flows presented in our
condensed consolidated financial statements included elsewhere
in this report.
Working
Capital
Net working capital is summarized as follows (dollars in
millions):
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
March 31,
|
|
|
|
2006
|
|
|
2007
|
|
|
Total current assets
|
|
$
|
619.3
|
|
|
$
|
653.2
|
|
Total current liabilities
|
|
|
304.3
|
|
|
|
262.5
|
|
|
|
|
|
|
|
|
|
|
Net working capital
|
|
$
|
315.0
|
|
|
$
|
390.7
|
|
|
|
|
|
|
|
|
|
|
Current ratio
|
|
|
2.04
|
|
|
|
2.49
|
|
|
|
|
|
|
|
|
|
|
Capital
Expenditures
Our management believes that capital expenditures in key areas
at our hospitals should increase our local market share and help
persuade patients to obtain healthcare services within their
communities.
35
The following table reflects our capital expenditures for the
three months ended March 31, 2006 and 2007 (in millions):
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
March 31,
|
|
|
|
2006
|
|
|
2007
|
|
|
Capital projects
|
|
$
|
30.8
|
|
|
$
|
22.2
|
|
Routine
|
|
|
13.7
|
|
|
|
8.4
|
|
Information systems
|
|
|
5.6
|
|
|
|
1.4
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
50.1
|
|
|
$
|
32.0
|
|
|
|
|
|
|
|
|
|
|
Depreciation expense
|
|
$
|
31.1
|
|
|
$
|
32.6
|
|
|
|
|
|
|
|
|
|
|
Ratio of capital expenditures to
depreciation expense
|
|
|
161.1
|
%
|
|
|
98.2
|
%
|
|
|
|
|
|
|
|
|
|
We have a formal and intensive review procedure for the
authorization of capital expenditures. The most important
financial measure of acceptability for a discretionary capital
project is whether its projected discounted cash flow return on
investment exceeds our cost of capital. We will continue to
invest in modern technologies, emergency rooms and operating
rooms expansions, the construction of medical office buildings
for physician expansion and reconfiguring the flow of patient
care.
Debt
An analysis and roll-forward of our long-term debt is as follows
(in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
Proceeds from
|
|
|
Payments of
|
|
|
March 31,
|
|
|
|
2006
|
|
|
Debt Borrowings
|
|
|
Borrowings
|
|
|
2007
|
|
|
Senior Credit Facility:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Term B Loans
|
|
$
|
1,321.9
|
|
|
$
|
|
|
|
$
|
(32.5
|
)
|
|
$
|
1,289.4
|
|
Revolving Loans
|
|
|
110.0
|
|
|
|
40.0
|
|
|
|
(20.0
|
)
|
|
|
130.0
|
|
Provinces
71/2% Senior
Subordinated Notes
|
|
|
6.1
|
|
|
|
|
|
|
|
|
|
|
|
6.1
|
|
Provinces
41/4% Convertible
Subordinated Notes
|
|
|
0.1
|
|
|
|
|
|
|
|
|
|
|
|
0.1
|
|
31/4% Convertible
Senior Subordinated Debentures
|
|
|
225.0
|
|
|
|
|
|
|
|
|
|
|
|
225.0
|
|
Other, including capital leases
|
|
|
5.8
|
|
|
|
|
|
|
|
(0.2
|
)
|
|
|
5.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,668.9
|
|
|
$
|
40.0
|
|
|
$
|
(52.7
|
)
|
|
$
|
1,656.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
36
We use leverage or our debt to total capitalization ratio to
make financing decisions. The following table illustrates our
financial statement leverage and the classification of our debt
(dollars in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
March 31,
|
|
|
Increase
|
|
|
|
2006
|
|
|
2007
|
|
|
(Decrease)
|
|
|
Current portion of long-term debt
|
|
$
|
0.5
|
|
|
$
|
0.5
|
|
|
$
|
|
|
Long-term debt
|
|
|
1,668.4
|
|
|
|
1,655.7
|
|
|
|
(12.7
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total debt
|
|
|
1,668.9
|
|
|
|
1,656.2
|
|
|
|
(12.7
|
)
|
Total stockholders equity
|
|
|
1,450.0
|
|
|
|
1,485.9
|
|
|
|
35.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total capitalization
|
|
$
|
3,118.9
|
|
|
$
|
3,142.1
|
|
|
$
|
23.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total debt to total capitalization
|
|
|
53.5
|
%
|
|
|
52.7
|
%
|
|
|
(80)bps
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage of:
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed rate debt
|
|
|
14.2
|
%
|
|
|
14.3
|
%
|
|
|
|
|
Variable rate debt(a)
|
|
|
85.8
|
|
|
|
85.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage of:
|
|
|
|
|
|
|
|
|
|
|
|
|
Senior debt
|
|
|
86.1
|
%
|
|
|
86.0
|
%
|
|
|
|
|
Subordinated debt
|
|
|
13.9
|
|
|
|
14.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
Effective November 30, 2006, we entered into an interest
swap agreement to mitigate our floating rate risk on a portion
of our outstanding variable rate borrowings which has the effect
of converting $900.0 million of our variable rate debt to
an annual fixed rate of 5.585%. The above calculation does not
consider the effect of our interest rate swap. Our interest rate
swap has the effect of decreasing our variable rate debt as a
percentage of our outstanding debt from 85.8% to 31.9% as of
December 31, 2006 and from 85.7% to 31.4% as of
March 31, 2007. Please refer to the Capital
Resources Interest Rate Swap section below for
a discussion of our interest rate swap agreement. |
Capital
Resources
Senior
Secured Credit Facilities
On April 15, 2005, in connection with the Province business
combination, we entered into a Credit Agreement with Citicorp
North America, Inc. (CITI), as administrative agent
and the lenders party thereto, Bank of America, N.A., CIBC World
Markets Corp., SunTrust Bank and UBS Securities LLC, as
co-syndication agents and Citigroup Global Markets Inc., as sole
lead arranger and sole book runner, as amended and restated,
supplemented or otherwise modified from time to time (the
Credit Agreement). The Credit Agreement provides for
secured term B loans up to $1,250.0 million maturing on
April 15, 2012 (the Term B Loans) and revolving
loans of up to $350.0 million maturing on April 15,
2012 (the Revolving Loans). In addition, the Credit
Agreement, as amended, provides that we may request additional
tranches of Term B Loans up to $400.0 million and
additional tranches of Revolving Loans up to $50.0 million.
The Credit Agreement is guaranteed on a senior secured basis by
our subsidiaries with certain limited exceptions. The Term B
Loans are subject to additional mandatory prepayments with a
certain percentage of excess cash flow as specifically defined
in the Credit Agreement. As amended, the Credit Agreement
provides for letters of credit up to $75.0 million.
37
Borrowings
and Payments
We have made early installment payments under the Term B Loans
totaling in the aggregate $160.5 million during 2005, 2006
and the first quarter of 2007. These installment payments
extinguished our required repayments through March 31,
2011. The remaining balances of the Term B Loans are scheduled
to be repaid in 2011 and 2012 in four equal installments
totaling in the aggregate $1,289.5 million.
On June 30, 2006, we borrowed $50.0 million in the
form of Term B Loans and $200.0 million in Revolving Loans
to finance the acquisition of the four hospitals from HCA.
During the fourth quarter of 2006, we repaid $90.0 million
on our outstanding Revolving Loans, which included a repayment
of $40.4 million from the proceeds of the sale of Saint
Francis, as discussed in Note 3 to our condensed
consolidated financial statements included elsewhere in this
report.
During January 2007, we borrowed $40.0 million under our
Credit Agreement in the form of Revolving Loans and repaid
$32.5 million of our outstanding borrowings under the
Credit Agreement for Term B Loans. Additionally, during the
first quarter of 2007 and subsequently in April 2007, we repaid
$20.0 million and $25.0 million, respectively, on our
Revolving Loans.
Letters
of Credit and Availability
As of March 31, 2007, we had $30.7 million in letters
of credit outstanding under the Revolving Loans that were
related to the self-insured retention level of our general and
professional liability insurance and workers compensation
programs as security for payment of claims. Under the terms of
the Credit Agreement, Revolving Loans available for borrowing
were $239.3 million as of March 31, 2007 including the
$50.0 million available under the additional tranche. Under
the terms of the Credit Agreement, Term B Loans available for
borrowing were $200.0 million as of March 31, 2007,
all of which is available under the additional tranche.
Interest
Rates
Interest on the outstanding balances of the Term B Loans is
payable, at our option, at CITIs base rate (the alternate
base rate or ABR) plus a margin of 0.625%
and/or at an
adjusted London Interbank Offered Rate (Adjusted LIBO
rate) plus a margin of 1.625%. Interest on the Revolving
Loans is payable at ABR plus a margin for ABR Revolving Loans or
Adjusted LIBO rate plus a margin for eurodollar Revolving Loans.
The margin on ABR Revolving Loans ranges from 0.25% to 1.25%
based on the total leverage ratio being less than 2.00:1.00 to
greater than 4.50:1.00. The margin on the Eurodollar Revolving
Loans ranges from 1.25% to 2.25% based on the total leverage
ratio being less than 2.00:1.00 to greater than 4.50:1.00.
As of March 31, 2007, the applicable annual interest rates
under the Term B Loans and Revolving Loans were 6.985% and
7.110%, respectively, which were based on the 90 - day
Adjusted LIBO rate plus the applicable margin. The 90 - day
Adjusted LIBO rate was 5.360% at March 31, 2007. The
weighted-average applicable annual interest rate for the three
month period ended March 31, 2007 under the Term B Loans
was 6.97%.
Covenants
The Credit Agreement requires us to satisfy certain financial
covenants, including a minimum interest coverage ratio and a
maximum total leverage ratio, as set forth in the Credit
Agreement. The minimum interest coverage ratio can be no less
than 3.50:1.00 for all periods ending after December 31,
2005. These calculations are based on the trailing four
quarters. The maximum total leverage ratios cannot exceed
4.50:1.00 for the periods ending on March 31, 2007 through
December 31, 2007; 4.25:1.00 for the periods ending on
March 31, 2008 through December 31, 2008; 4.00:1.00
for the periods ending on March 31, 2009 through
December 31, 2009; and 3.75:1.00 for the periods ending
thereafter. In addition, on an annualized basis, we are also
limited with respect to amounts we may spend on capital
expenditures. Such amounts cannot exceed 10% of revenues for the
year ending December 31, 2007.
38
The financial covenant requirements and ratios are as follows:
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Level at
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March 31,
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|
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Requirement
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2007
|
|
|
Minimum Interest Coverage Ratio
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³3.50:1.00
|
|
|
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4.46
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|
Maximum Total Leverage Coverage
Ratio
|
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£4.50:1.00
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3.36
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|
In addition, the Credit Agreement contains customary affirmative
and negative covenants, which among other things, limit our
ability to incur additional debt, create liens, pay dividends,
effect transactions with our affiliates, sell assets, pay
subordinated debt, merge, consolidate, enter into acquisitions
and effect sale leaseback transactions.
Our Credit Agreement does not contain provisions that would
accelerate the maturity date of the loans under the Credit
Agreement upon a downgrade in our credit rating. However, a
downgrade in our credit rating could adversely affect our
ability to obtain other capital sources in the future and could
increase our costs of borrowings.
31/4% Convertible
Senior Subordinated Debentures due August 15,
2025
On August 10, 2005, we sold $225.0 million of our
31/4% Convertible
Senior Subordinated Debentures due 2025
(31/4% Debentures).
The net proceeds were approximately $218.4 million and were
used to repay indebtedness and for working capital and general
corporate purposes. The
31/4% Debentures
bear interest at the rate of
31/4% per
year, payable semi-annually on February 15 and August 15.
The
31/4% Debentures
are convertible (subject to certain limitations imposed by the
Credit Agreement) under the following circumstances: (1) if
the price of our common stock reaches a specified threshold
during the specified periods; (2) if the trading price of
the
31/4% Debentures
has been called for redemption; or (3) if specified
corporate transactions or other specified events occur. Subject
to certain exceptions, we will deliver cash and shares of our
common stock, as follows: (i) an amount in cash (the
principal return) equal to the lesser of
(a) the principal amount of the
31/4% Debentures
surrendered for conversion and (b) the product of the
conversion rate and the average price of our common stock, as
set forth in the indenture governing the securities (the
conversion value); and (ii) if the conversion value
is greater than the principal return, an amount in shares of our
common stock. Our ability to pay the principal return in cash is
subject to important limitations imposed by the Credit Agreement
and other indebtedness we may incur in the future. Based on the
terms of the Credit Agreement, in certain circumstances, even if
any of the foregoing conditions to conversion have occurred, the
31/4% Debentures
will not be convertible and holders of the
31/4% Debentures
will not be able to declare an event of default under the
31/4% Debentures.
The conversion rate for the
31/4% Debentures
is initially 16.3345 shares of our common stock per $1,000
principal amount of
31/4% Debentures
(subject to adjustment in certain events). This is equivalent to
a conversion price of $61.22 per share of common stock. In
addition, if certain corporate transactions that constitute a
change of control occur on or prior to February 20, 2013,
we will increase the conversion rate in certain circumstances,
unless such transaction constitutes a public acquirer change of
control and we elect to modify the conversion rate into public
acquirer common stock. Because the principal portion of the
31/4% Debentures
is payable only in cash and our common stock price during the
three months ended March 31, 2006 and 2007 was trading
below the conversion price of $61.22 per share, there are
no potential common shares related to the
31/4% Debentures
included in our earnings per share calculations.
On or after February 20, 2013, we may redeem for cash some
or all of the
31/4% Debentures
at any time at a price equal to 100% of the principal amount of
the
31/4% Debentures
to be purchased, plus any accrued and unpaid interest. Holders
may require us to purchase for cash some or all of the
31/4% Debentures
on February 15, 2013, February 15, 2015 and
February 15, 2020 or upon the occurrence of a fundamental
change, at 100% of the principal amount of the
31/4%
Debentures to be purchased, plus any accrued and unpaid interest.
39
The indenture for the
31/4% Debentures
does not contain any financial covenants or any restrictions on
the payment of dividends, the incurrence of senior or secured
debt or other indebtedness, or the issuance or repurchase of
securities by us. The indenture contains no covenants or other
provisions to protect holders of the
31/4% Debentures
in the event of a highly leveraged transaction or fundamental
change.
Province
71/2% Senior
Subordinated Notes
The $6.1 million outstanding principal amount of
Provinces
71/2%
Senior Subordinated Notes due 2013 (the
71/2% Notes)
bears interest at the rate of
71/2%
payable semi-annually on June 1 and December 1. We may
redeem all or a portion of the
71/2% Notes
on or after June 1, 2008, at the then current redemption
prices, plus accrued and unpaid interest. The
71/2% Notes
are unsecured and subordinated to our existing and future senior
indebtedness. The supplemental indenture contains no material
covenants or restrictions.
Province
41/4% Convertible
Subordinated Notes
In connection with the Province business combination,
approximately $172.4 million of the $172.5 million
outstanding principal amount of Provinces
41/4%
Convertible Subordinated Notes due 2008 was purchased and
subsequently retired. The fair value assigned to the Province
41/4% Convertible
Subordinated Notes due 2008 in the Province purchase price
allocation included tender premiums of $12.1 million paid
in connection with the debt retirement.
Interest
Rate Swap
On June 1, 2006, we entered into an interest rate swap
agreement with CITI as counterparty. The interest rate swap
agreement, as amended, was effective as of November 30,
2006 and has a maturity date of May 30, 2011. We entered
into the interest rate swap agreement to mitigate the floating
interest rate risk on a portion of our outstanding variable rate
borrowings. The interest rate swap agreement requires us to make
quarterly fixed rate payments to CITI calculated on a notional
amount as set forth in the schedule below at an annual fixed
rate of 5.585% while CITI will be obligated to make quarterly
floating payments to us based on the three-month LIBO rate on
the same referenced notional amount. Notwithstanding the terms
of the interest rate swap transaction, we are ultimately
obligated for all amounts due and payable under the Credit
Agreement.
Notional
Schedule
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Date Range
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Notional Amount
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November 30, 2006 to
November 30, 2007
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$
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900.0 million
|
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November 30, 2007 to
November 28, 2008
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$
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750.0 million
|
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November 28, 2008 to
November 30, 2009
|
|
$
|
600.0 million
|
|
November 30, 2009 to
November 30, 2010
|
|
$
|
450.0 million
|
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November 30, 2010 to
May 30, 2011
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$
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300.0 million
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The fair value of the interest rate swap agreement is the amount
at which it could be settled, based on estimates obtained from
CITI. We have designated the interest rate swap as a cash flow
hedge instrument, which is recorded in our accompanying balance
sheet at its fair value.
We assess the effectiveness of our cash flow hedge instrument on
a quarterly basis. We completed an assessment of the cash flow
hedge instrument at March 31, 2007, and determined the
hedge to be highly effective in accordance with
SFAS No. 133. The interest rate swap agreement exposes
us to credit risk in the event of non-performance by CITI.
However, we do not anticipate non-performance by CITI. We do not
hold or issue derivative financial instruments for trading
purposes. The fair value of our interest rate swap at
March 31, 2007, reflected a liability of approximately
$16.7 million and is included in professional and general
liability claims and other liabilities in our accompanying
condensed consolidated balance sheets. The interest rate swap
reflects a liability balance as of March 31, 2007 because
of a decrease in market interest rates since inception.
40
Debt
Ratings
Our debt is rated by three credit rating agencies designated as
Nationally Recognized Statistically Rating Organizations by the
SEC:
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Moodys Investors Service, Inc. (Moodys);
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Standard & Poors Rating Services
(S&P); and
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Fitch Ratings.
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A credit rating reflects an assessment by the rating agency of
the credit risk associated with particular securities we issue,
based on information provided by us and other sources. Credit
ratings are not recommendations to buy, sell or hold securities
and are subject to revision or withdrawal at any time by the
assigning rating agency. Each rating agency may have different
criteria for evaluating company risk and, therefore, ratings
should be evaluated independently for each rating agency. Lower
credit ratings generally result in higher borrowing costs and
reduced access to capital markets. Our recent ratings are
primarily a reflection of the rating agencies concern
regarding our high leverage and activity in acquisitions.
The following chart summarizes our credit ratings history and
the outlooks assigned since our inception in 1999:
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Moodys
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Senior
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S&P
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Fitch Ratings
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Unsecured
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Senior Implied
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Issuer
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Issuer
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Date
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Issuer Rating
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Issuer Rating
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Outlook
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Rating
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Outlook
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Rating
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Outlook
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April 1999
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B+
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Stable
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October 1999
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B1
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Stable
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B+
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Stable
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February 2001
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B1
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Positive
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B+
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Stable
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May 2001
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Ba3
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|
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Stable
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|
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B+
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|
|
Stable
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|
June 2001
|
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B2
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Ba3
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|
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Stable
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|
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BB( −
|
)
|
|
|
Stable
|
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|
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|
|
June 2002
|
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B2
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Ba3
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Stable
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BB( −
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)
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Stable
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December 2003
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B2
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Ba3
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Stable
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|
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BB
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Stable
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August 2004
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B2
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Ba3
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Negative
|
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BB
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Negative
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March 2005
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B2
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Ba3
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Stable
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BB
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Stable
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July 2005
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B2
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Ba3
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Stable
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BB
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Negative
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May 2006
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B2
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Ba3
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Stable
|
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|
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BB
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Negative
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|
|
BB( −
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)
|
|
|
Stable
|
|
January 2007
|
|
|
B2
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|
|
|
Ba3
|
|
|
|
Stable
|
|
|
|
BB( −
|
)
|
|
|
Stable
|
|
|
|
BB( −
|
)
|
|
|
Stable
|
|
Liquidity
and Capital Resources Outlook
We expect the level of capital expenditures during the period
April 1, 2007 to December 31, 2007, to be in a range
of $150.0 million to $170.0 million. We have large
capital projects in process at a number of our facilities. We
are reconfiguring some of our hospitals to more effectively
accommodate patient services and restructuring existing surgical
capacity in some of our hospitals to permit additional patient
volume and a greater variety of services. At March 31,
2007, we had projects under construction with an estimated cost
to complete and equip of approximately $96.3 million. See
Note 11 to the accompanying condensed consolidated
financial statements included elsewhere in this report for a
discussion of required capital expenditures for certain
facilities. We anticipate funding these expenditures through
cash provided by operating activities, available cash and
borrowings under our borrowing arrangements.
Our business strategy contemplates the selective acquisition of
additional hospitals and other healthcare service providers, and
we regularly review these potential acquisitions. These
acquisitions may, however, require additional financing. We
regularly evaluate opportunities to sell additional equity or
debt securities, obtain credit facilities from lenders or
restructure our long-term debt or equity for strategic reasons
or to
41
further strengthen our financial position. The sale of
additional equity or convertible debt securities could result in
additional dilution to our stockholders.
We have never declared or paid cash dividends on our common
stock. We intend to retain future earnings to finance the growth
and development of our business and, accordingly, do not
currently intend to declare or pay any cash dividends on our
common stock. Our Board of Directors will evaluate our future
earnings, results of operations, financial condition and capital
requirements in determining whether to declare or pay cash
dividends. Delaware law prohibits us from paying any dividends
unless we have capital surplus or net profits available for this
purpose. In addition, our credit facilities impose restrictions
on our ability to pay dividends.
We believe that cash flows from operations, amounts available
under our credit facility and our anticipated access to capital
markets are sufficient to fund the purchase prices for any
potential acquisitions, meet expected liquidity needs, including
repayment of our debt obligations, planned capital expenditures
and other expected operating needs over the next three years.
Contractual
Obligations
We have various contractual obligations, which are recorded as
liabilities in our consolidated financial statements. Other
items, such as certain purchase commitments and other executory
contracts, are not recognized as liabilities in our consolidated
financial statements but are required to be disclosed. For
example, we are required to make certain minimum lease payments
for the use of property under certain of our operating lease
agreements. During the three months ended March 31, 2007,
there were no material changes in our contractual obligations
presented in our 2006 Annual Report on
Form 10-K.
However, as of March 31, 2007, we have a $53.0 million
long-term income tax liability as a result of our adoption of
FIN 48 on January 1, 2007. Because of the uncertainty
of the amounts to be ultimately paid as well as the timing of
such payments, these liabilities will be excluded from our
contractual obligations table.
Off-Balance
Sheet Arrangements
We had standby letters of credit outstanding of approximately
$30.7 million as of March 31, 2007, all of which
relate to the self-insured retention levels of our professional
and general liability insurance and workers compensation
programs as security for the payment of claims.
Recently
Issued Accounting Pronouncements
Please refer to Note 7 of our accompanying condensed
consolidated financial statements included elsewhere in this
report for a discussion of the impact of recently issued
accounting pronouncements.
Contingencies
Please refer to Note 11 of our condensed consolidated
financial statements included elsewhere in this report for a
discussion of our material financial contingencies, including:
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Americans with Disabilities Act claim;
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|
Legal proceedings and general liability claims;
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|
Physician commitments;
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|
Capital expenditure commitments; and
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Acquisitions.
|
42
Forward-Looking
Statements
We make forward-looking statements in this report and in other
reports and proxy statements we file with the SEC. In addition,
our senior management makes forward-looking statements orally to
analysts, investors, the media and others. Broadly speaking,
forward-looking statements include:
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|
|
projections of our revenues, net income, earnings per share,
capital expenditures, cash flows, debt repayments, interest
rates, certain operating statistics and data or other financial
items;
|
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|
|
descriptions of plans or objectives of our management for future
operations or services, including pending acquisitions and
divestitures;
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|
|
interpretations of Medicare and Medicaid law and their effects
on our business; and
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|
|
|
descriptions of assumptions underlying or relating to any of the
foregoing.
|
In this report, for example, we make forward-looking statements
discussing our expectations about:
|
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|
|
investment in and integration of our recent acquisitions;
|
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|
|
liabilities associated with and other effects resulting from our
recent acquisitions;
|
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|
|
future financial performance and condition;
|
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|
future liquidity and capital resources;
|
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|
future cash flows;
|
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|
existing and future debt and equity structure;
|
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|
our strategic goals;
|
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|
our business strategy and operating philosophy;
|
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|
competition with other hospitals companies and other healthcare
service providers;
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|
our compliance with federal, state and local regulations;
|
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|
our stock compensation arrangements;
|
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|
executive compensation;
|
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|
our hedging arrangements;
|
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|
supply and information technology costs;
|
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|
changes in interest rates;
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|
our plans as to the payment of dividends;
|
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|
|
future acquisitions, dispositions and joint ventures;
|
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|
|
tax-related liabilities;
|
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|
|
industry trends;
|
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|
|
the efforts of insurers and other payors, healthcare providers
and other to contain healthcare costs;
|
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|
reimbursement changes;
|
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|
|
patient volumes and related revenues;
|
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|
|
risk management and insurance;
|
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|
|
recruiting and retention of clinical personnel;
|
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|
|
future capital expenditures;
|
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|
|
expected changes in certain expenses;
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43
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our contractual obligations;
|
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|
|
the completion of projects under construction;
|
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|
|
the impact of changes in our critical accounting estimates;
|
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|
|
claims and legal actions relating to professional liabilities
and other matters;
|
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|
non-GAAP measures;
|
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|
the impact and applicability of new accounting
standards; and
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|
physician recruiting and retention.
|
There are a number of factors, many beyond our control, that
could cause results to differ significantly from our
expectations. Part I, Item 1A. Risk Factors of
our 2006 Annual Report on
Form 10-K
contains a summary of these factors. Any factor described in our
2006 Annual Report on
Form 10-K
could by itself, or together with one or more factors, adversely
affect our business, results of operations
and/or
financial condition. There may be factors not described in our
2006 Annual Report on
Form 10-K
that could also cause results to differ from our expectations.
Forward-looking statements discuss matters that are not
historical facts. Because they discuss future events or
conditions, forward-looking statements often include words such
as can, could, may,
should, believe, will,
would, expect, project,
estimate, anticipate, plan,
intend, target, continue or
similar expressions. Do not unduly rely on forward-looking
statements, which give our expectations about the future and are
not guarantees. Forward-looking statements speak only as of the
date they are made. We do not undertake any obligation to update
our forward-looking statements to reflect events or
circumstances after the date they are made or to reflect the
occurrence of unanticipated events. The following are some of
the factors that could cause our actual results to differ
materially from the expected results described in or underlying
our forward-looking statements:
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|
|
reduction in payments to healthcare providers by government and
commercial third-party payors, as well as changes in the manner
in which employers provide healthcare coverage to their
employees including high deductible plans;
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|
|
the possibility of adverse changes in, and requirements of,
applicable laws, regulations, policies and procedures;
|
|
|
|
our ability to manage healthcare risks, including malpractice
litigation, and the lack of state and federal tort reform;
|
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|
|
the availability, cost and terms of insurance coverage;
|
|
|
|
the highly competitive nature of the healthcare business,
including the competition to recruit and retain physicians and
other healthcare professionals;
|
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|
|
the ability to attract and retain qualified management and
personnel;
|
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|
|
the geographic concentration of our operations;
|
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|
|
changes in our operating or expansion strategy;
|
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|
|
the ability to operate and integrate newly acquired facilities
successfully;
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|
the availability and terms of capital to fund our business
strategy;
|
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|
|
changes in our liquidity or the amount or terms of our
indebtedness and in our debt credit ratings;
|
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|
|
the potential adverse impact of government investigations and
litigation involving the business practices of healthcare
providers, including whistleblowers investigations;
|
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|
|
changes in generally accepted accounting principles or practices;
|
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|
|
volatility in the market value of our common stock;
|
44
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|
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|
|
changes in general economic conditions in the markets we serve;
|
|
|
|
our reliance on information technology systems maintained by
HCA-IT;
|
|
|
|
the costs of complying with the Americans with Disabilities Act;
|
|
|
|
possible adverse rulings, judgments, settlements and other
outcomes of pending litigation; and
|
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|
|
those risks and uncertainties described from time to time in our
filings with the SEC.
|
|
|
Item 3.
|
Quantitative
and Qualitative Disclosures about Market Risk.
|
Interest
Rates
The following discussion relates to our exposure to market risk
based on changes in interest rates:
As of March 31, 2007, we had outstanding debt of
$1,656.2 million, 85.7% or $1,419.5 million of which
was subject to variable rates of interest. As of March 31,
2007, the fair value of our outstanding variable rate debt
approximates its carrying value, and the fair value of our
$225.0 million
31/4% Debentures
was approximately $213.8 million, based on the quoted
market prices at March 31, 2007.
Based on a hypothetical 100 basis point increase in
interest rates, the potential annualized decrease in our future
pre-tax earnings would be approximately $14.2 million as of
March 31, 2007. The estimated change to our interest
expense is determined considering the impact of hypothetical
interest rates on our borrowing cost and debt balances. These
analyses do not consider the effects, if any, of the potential
changes in our credit ratings or the overall level of economic
activity. Further, in the event of a change of significant
magnitude, our management would expect to take actions intended
to further mitigate its exposure to such change. We have an
interest rate swap agreement in place to mitigate our floating
interest rate risk on a portion of our outstanding variable rate
borrowings with a decreasing notional amount starting at
$900.0 million. Please refer to Note 10 of our
accompanying condensed consolidated financial statements
included elsewhere in this report for more information regarding
the interest rate swap.
Item 4. Controls
and Procedures.
We carried out an evaluation, under the supervision and with the
participation of management, including our Chief Executive
Officer and Chief Accounting Officer, of the effectiveness of
the design and operation of our disclosure controls and
procedures as of the end of the period covered by this report
pursuant to Exchange Act
Rule 13a-15.
Based upon that evaluation, our Chief Executive Officer and
Chief Accounting Officer concluded that our disclosure controls
and procedures were effective in ensuring that information
required to be disclosed by us (including our consolidated
subsidiaries) in reports that we file or submit under the
Exchange Act is recorded, processed, summarized and reported on
a timely basis.
There has been no change in our internal control over financial
reporting during the three months ended March 31, 2007 that
has materially affected, or is reasonably likely to materially
affect, our internal control over financial reporting.
PART II
OTHER INFORMATION
|
|
Item 1.
|
Legal
Proceedings.
|
General. We are, from time to time, subject to
claims and suits arising in the ordinary course of business,
including claims for damages for personal injuries, medical
malpractice, breach of contracts, wrongful restriction of or
interference with physicians staff privileges and
employment related claims. In certain of these actions,
plaintiffs request payment for damages, including punitive
damages that may not be covered by insurance. We are currently
not a party to any pending or threatened proceeding, which, in
managements opinion, would have a material adverse effect
on our business, financial condition or results of operations.
45
Americans with Disabilities Act Claims. The
Americans with Disabilities Act, or the ADA, generally requires
that public accommodations be made accessible to disabled
persons. On January 12, 2001, a class action lawsuit was
filed in the United States District Court for the Eastern
District of Tennessee against each of our existing hospitals
alleging non-compliance with the accessibility guidelines of the
ADA. On April 20, 2007, the plaintiff amended the lawsuit
to add hospitals we subsequently acquired, including the former
Province Facilities, WCCH and DRMC and dismiss divested
facilities. The lawsuit does not seek any monetary damages, but
seeks injunctive relief requiring facility modification, where
necessary, to meet ADA guidelines, in addition to
attorneys fees and costs. We are currently unable to
estimate the costs that could be associated with modifying these
facilities because these costs are negotiated and determined on
a
facility-by-facility
basis and, therefore, have varied and will continue to vary
significantly among facilities. We may be required to expend
significant capital expenditures at one or more of our
facilities in order to comply with the ADA, and our business,
financial condition or results of operations could be adversely
affected as a result.
In January 2002, the United States District Court certified the
class action and issued a scheduling order that requires the
parties to complete discovery and inspection for approximately
six facilities per year. We are vigorously defending the
lawsuit, recognizing our obligation to correct any deficiencies
in order to comply with the ADA. Noncompliance with the
requirements of the ADA could result in the imposition of fines
against us by the federal government or the payment of damages.
As of April 23, 2007, the plaintiffs have conducted
inspections at 27 of our hospitals including the now divested
Smith County and recently closed Guyan Valley Hospital. To date,
the District Court has approved the settlement agreements
between the parties relating to 13 of our facilities. We are now
moving forward in implementing facility modifications in
accordance with the terms of the settlement. We have completed
corrective work on three facilities for a cost of
$1.0 million. We currently anticipate that the costs
associated with the ten other facilities that have court
approved settlement agreements will range from $5.1 million
to $7.0 million.
There have been no material changes in our risk factors from
those disclosed in our 2006 Annual Report on
Form 10-K.
|
|
|
|
|
Exhibit
|
|
|
Number
|
|
Description
|
|
|
3
|
.1
|
|
Amended and Restated Certificate
of Incorporation of LifePoint Hospitals, Inc. (incorporated by
reference from exhibits to the Registration Statement on
Form S-8
filed by Historic LifePoint Hospitals, Inc. on April 15,
2005, File
No. 333-124093)
|
|
3
|
.2
|
|
Second Amended and Restated Bylaws
of LifePoint Hospitals, Inc. (incorporated by reference from
exhibits to the LifePoint Hospitals, Inc. Current Report on
Form 8-K
dated October 16, 2006, File
No. 000-51251)
|
|
4
|
.1
|
|
Form of Specimen Stock Certificate
(incorporated by reference from exhibits to the Registration
Statement on
Form S-4,
as amended, filed by Historic LifePoint Hospitals, Inc. on
October 25, 2004, File
No. 333-119929)
|
|
4
|
.2
|
|
Form of
31/4%
Convertible Senior Subordinated Debenture due 2025 (included as
part of Exhibit 4.8 hereto) (incorporated by reference from
exhibits to LifePoint Hospitals Current Report on
Form 8-K
dated August 10, 2005, File
No. 000-51251
|
|
4
|
.3
|
|
Registration Rights Agreement,
dated August 10, 2005, between LifePoint Hospitals, Inc.
and Citigroup Global Markets Inc. as Representatives of the
Initial Purchasers (incorporated by reference from exhibits to
LifePoint Hospitals Current Report on
Form 8-K
dated August 10, 2005, File
No. 000-51251
|
|
4
|
.4
|
|
Rights Agreement, dated as of
April 15, 2005, by and between LifePoint Hospitals, Inc.
and National City Bank, as Rights Agent (incorporated by
reference from exhibits to the Registration Statement on
Form S-8
filed by Historic LifePoint Hospitals, Inc. on April 15,
2005, File
No. 333-124093
|
46
|
|
|
|
|
Exhibit
|
|
|
Number
|
|
Description
|
|
|
4
|
.5
|
|
Subordinated Indenture, dated as
of May 27, 2003, between Province Healthcare Company and
U.S. Bank Trust National Association, as Trustee
(incorporated by reference from exhibits to Province Healthcare
Companys Quarterly Report on
Form 10-Q
for the quarter ended June 30, 2003, File
No. 001-31320)
|
|
4
|
.6
|
|
First Supplemental Indenture to
Subordinated Indenture, dated as of May 27, 2003, by and
among Province Healthcare Company and U.S. Bank National
Association, as Trustee, relating to Province Healthcare
Companys
71/2%
Senior Subordinated Notes due 2013 (incorporated by reference
from exhibits to Province Healthcare Companys Quarterly
Report on
Form 10-Q
for the quarter ended June 30, 2003, File
No. 001-31320
|
|
4
|
.7
|
|
Second Supplemental Indenture to
Subordinated Indenture, dated as of April 1, 2005, by and
among Province Healthcare Company and U.S. Bank National
Association, as Trustee (incorporated by reference from exhibits
to Province Healthcare Companys Current Report on
Form 8-K
dated April 5, 2005, File
No. 001-31320
|
|
4
|
.8
|
|
Indenture, dated as of
October 10, 2001, between Province Healthcare Company and
National City Bank, including the forms of Province Healthcare
Companys
41/4%
Convertible Subordinated Notes due 2008 (incorporated by
reference from exhibits to the Registration Statement on
Form S-3,
filed by Province Healthcare Company on December 20, 2001,
File
No. 333-75646
|
|
4
|
.9
|
|
First Supplemental Indenture,
dated as of April 15, 2005, by and among Province
Healthcare Company, LifePoint Hospitals, Inc. and U.S. Bank
National Association (as successor in interest to National City
Bank), as trustee to the Indenture dated as of October 10,
2001, relating to Province Healthcare Companys
41/4%
Convertible Subordinated Notes due 2008 (incorporated by
reference from exhibits to the Historic LifePoint Hospitals,
Inc. Current Report on
Form 8-K
dated April 15, 2005, File
No. 000-29818
|
|
4
|
.10
|
|
Indenture, dated August 10,
2005, between LifePoint Hospitals, Inc. and Citibank, N.A., as
Trustee (incorporated by reference from exhibits to LifePoint
Hospitals Current Report on
Form 8-K
dated August 10, 2005, File
No. 000-51251
|
|
10
|
.1
|
|
Form of LifePoint Hospitals, Inc.
Nonqualified Stock Option Agreement
|
|
31
|
.1
|
|
Certification of the Chief
Executive Officer of LifePoint Hospitals, Inc. Pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.
|
|
31
|
.2
|
|
Certification of the Chief
Accounting Officer of LifePoint Hospitals, Inc. Pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.
|
|
32
|
.1
|
|
Certification of the Chief
Executive Officer of LifePoint Hospitals, Inc. Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
|
|
32
|
.2
|
|
Certification of the Chief
Accounting Officer of LifePoint Hospitals, Inc. Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
|
47
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
LifePoint Hospitals, Inc.
Gary D. Willis
Chief Accounting Officer
(Principal Financial and Accounting Officer)
Date: April 26, 2007
48
EXHIBIT INDEX
|
|
|
|
|
Exhibit
|
|
|
Number
|
|
Description
|
|
|
3
|
.1
|
|
Amended and Restated Certificate
of Incorporation of LifePoint Hospitals, Inc. (incorporated by
reference from exhibits to the Registration Statement on
Form S-8
filed by Historic LifePoint Hospitals, Inc. on April 15,
2005, File
No. 333-124093)
|
|
3
|
.2
|
|
Second Amended and Restated Bylaws
of LifePoint Hospitals, Inc. (incorporated by reference from
exhibits to the LifePoint Hospitals, Inc. Current Report on
Form 8-K
dated October 16, 2006, File
No. 000-51251)
|
|
4
|
.1
|
|
Form of Specimen Stock Certificate
(incorporated by reference from exhibits to the Registration
Statement on
Form S-4,
as amended, filed by Historic LifePoint Hospitals, Inc. on
October 25, 2004, File
No. 333-119929)
|
|
4
|
.2
|
|
Form of
31/4%
Convertible Senior Subordinated Debenture due 2025 (included as
part of Exhibit 4.8 hereto) (incorporated by reference from
exhibits to LifePoint Hospitals Current Report on
Form 8-K
dated August 10, 2005, File
No. 000-51251
|
|
4
|
.3
|
|
Registration Rights Agreement,
dated August 10, 2005, between LifePoint Hospitals, Inc.
and Citigroup Global Markets Inc. as Representatives of the
Initial Purchasers (incorporated by reference from exhibits to
LifePoint Hospitals Current Report on
Form 8-K
dated August 10, 2005, File
No. 000-51251
|
|
4
|
.4
|
|
Rights Agreement, dated as of
April 15, 2005, by and between LifePoint Hospitals, Inc.
and National City Bank, as Rights Agent (incorporated by
reference from exhibits to the Registration Statement on
Form S-8
filed by Historic LifePoint Hospitals, Inc. on April 15,
2005, File
No. 333-124093
|
|
4
|
.5
|
|
Subordinated Indenture, dated as
of May 27, 2003, between Province Healthcare Company and
U.S. Bank Trust National Association, as Trustee
(incorporated by reference from exhibits to Province Healthcare
Companys Quarterly Report on
Form 10-Q
for the quarter ended June 30, 2003, File
No. 001-31320)
|
|
4
|
.6
|
|
First Supplemental Indenture to
Subordinated Indenture, dated as of May 27, 2003, by and
among Province Healthcare Company and U.S. Bank National
Association, as Trustee, relating to Province Healthcare
Companys
71/2%
Senior Subordinated Notes due 2013 (incorporated by reference
from exhibits to Province Healthcare Companys Quarterly
Report on
Form 10-Q
for the quarter ended June 30, 2003, File
No. 001-31320
|
|
4
|
.7
|
|
Second Supplemental Indenture to
Subordinated Indenture, dated as of April 1, 2005, by and
among Province Healthcare Company and U.S. Bank National
Association, as Trustee (incorporated by reference from exhibits
to Province Healthcare Companys Current Report on
Form 8-K
dated April 5, 2005, File
No. 001-31320
|
|
4
|
.8
|
|
Indenture, dated as of
October 10, 2001, between Province Healthcare Company and
National City Bank, including the forms of Province Healthcare
Companys
41/4%
Convertible Subordinated Notes due 2008 (incorporated by
reference from exhibits to the Registration Statement on
Form S-3,
filed by Province Healthcare Company on December 20, 2001,
File
No. 333-75646
|
|
4
|
.9
|
|
First Supplemental Indenture,
dated as of April 15, 2005, by and among Province
Healthcare Company, LifePoint Hospitals, Inc. and U.S. Bank
National Association (as successor in interest to National City
Bank), as trustee to the Indenture dated as of October 10,
2001, relating to Province Healthcare Companys
41/4%
Convertible Subordinated Notes due 2008 (incorporated by
reference from exhibits to the Historic LifePoint Hospitals,
Inc. Current Report on
Form 8-K
dated April 15, 2005, File
No. 000-29818
|
|
|
|
|
|
Exhibit
|
|
|
Number
|
|
Description
|
|
|
4
|
.10
|
|
Indenture, dated August 10,
2005, between LifePoint Hospitals, Inc. and Citibank, N.A., as
Trustee (incorporated by reference from exhibits to LifePoint
Hospitals Current Report on
Form 8-K
dated August 10, 2005, File
No. 000-51251
|
|
10
|
.1
|
|
Form of LifePoint Hospitals, Inc.
Nonqualified Stock Option Agreement
|
|
31
|
.1
|
|
Certification of the Chief
Executive Officer of LifePoint Hospitals, Inc. Pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.
|
|
31
|
.2
|
|
Certification of the Chief
Accounting Officer of LifePoint Hospitals, Inc. Pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.
|
|
32
|
.1
|
|
Certification of the Chief
Executive Officer of LifePoint Hospitals, Inc. Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
|
|
32
|
.2
|
|
Certification of the Chief
Accounting Officer of LifePoint Hospitals, Inc. Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
|