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
September 30, 2006
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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
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20-1538254
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(State or other jurisdiction
of
incorporation or organization)
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(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):
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Large
accelerated filer þ
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Accelerated
filer o
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Non-accelerated
filer
o
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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 September 30, 2006, the number of outstanding shares
of Common Stock of LifePoint Hospitals, Inc. was 57,364,259.
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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Nine Months Ended
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September 30,
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September 30,
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2005
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2006
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2005
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2006
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Revenues
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$
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548.9
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$
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640.3
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$
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1,285.3
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$
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1,799.1
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Salaries and benefits
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221.0
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252.3
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515.0
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712.2
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Supplies
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76.4
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88.9
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172.4
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249.5
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Other operating expenses
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90.5
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111.5
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214.1
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309.0
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Provision for doubtful accounts
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63.5
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70.1
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127.5
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197.5
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Depreciation and amortization
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28.0
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30.4
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67.8
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78.3
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Interest expense, net
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20.4
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28.5
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38.2
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76.2
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Debt retirement costs
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2.1
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12.1
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Transaction costs
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(1.4
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)
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43.2
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500.5
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581.7
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1,190.3
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1,622.7
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Income from continuing operations
before minority interests and income taxes
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48.4
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58.6
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95.0
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176.4
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Minority interests in earnings of
consolidated entities
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0.3
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0.4
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0.8
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1.1
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Income from continuing operations
before income taxes
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48.1
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58.2
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94.2
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175.3
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Provision for income taxes
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17.8
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23.7
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41.2
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70.6
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Income from continuing operations
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30.3
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34.5
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53.0
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104.7
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Discontinued operations, net of
income taxes:
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Income (loss) from discontinued
operations
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(0.5
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)
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(0.2
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)
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0.9
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(1.7
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)
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Impairment of assets
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(0.2
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)
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(4.9
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)
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Gain (loss) on sale of hospitals
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0.6
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(0.7
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)
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4.1
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Income (loss) from discontinued
operations
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(0.7
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)
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0.4
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(4.7
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)
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2.4
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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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Net income
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$
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29.6
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$
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34.9
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$
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48.3
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$
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107.8
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Basic earnings (loss) per share:
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Continuing operations
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$
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0.55
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$
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0.62
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$
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1.09
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$
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1.88
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Discontinued operations
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(0.01
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)
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0.01
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(0.10
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)
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0.05
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Cumulative effect of change in
accounting principle
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0.01
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|
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|
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Net income
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$
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0.54
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$
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0.63
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$
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0.99
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$
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1.94
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Diluted earnings (loss) per share:
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Continuing operations
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$
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0.54
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$
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0.61
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$
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1.08
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$
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1.86
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Discontinued operations
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(0.01
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)
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0.01
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(0.10
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)
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0.05
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Cumulative effect of change in
accounting principle
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|
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|
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0.01
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|
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Net income
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$
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0.53
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$
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0.62
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$
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0.98
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$
|
1.92
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Weighted average shares and
dilutive securities outstanding:
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Basic
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55.3
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55.7
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48.4
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55.6
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Diluted
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56.2
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56.4
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49.3
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56.2
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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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September 30,
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2005(1)
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|
2006
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(Unaudited)
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ASSETS
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Current assets:
|
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|
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Cash and cash equivalents
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$
|
30.4
|
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$
|
47.2
|
|
Accounts receivable, less
allowances for doubtful accounts of $252.9 at December 31,
2005 and $304.8 at September 30, 2006
|
|
|
256.8
|
|
|
|
336.5
|
|
Inventories
|
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56.9
|
|
|
|
64.9
|
|
Assets held for sale
|
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22.0
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90.4
|
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Prepaid expenses
|
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|
12.0
|
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17.3
|
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Deferred tax assets
|
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44.2
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|
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55.7
|
|
Other current assets
|
|
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11.0
|
|
|
|
22.1
|
|
|
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|
|
|
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433.3
|
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634.1
|
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Property and equipment:
|
|
|
|
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Land
|
|
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64.4
|
|
|
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80.0
|
|
Buildings and improvements
|
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986.9
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1,067.7
|
|
Equipment
|
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540.3
|
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580.5
|
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Construction in progress (estimated
cost to complete and equip after September 30, 2006 is
$110.3)
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77.8
|
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60.2
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|
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|
|
|
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|
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1,669.4
|
|
|
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1,788.4
|
|
Accumulated depreciation
|
|
|
(373.1
|
)
|
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|
(445.7
|
)
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|
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1,296.3
|
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|
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1,342.7
|
|
|
|
|
|
|
|
|
|
|
Deferred loan costs, net
|
|
|
35.4
|
|
|
|
32.4
|
|
Intangible assets, net
|
|
|
4.2
|
|
|
|
33.2
|
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Other
|
|
|
5.5
|
|
|
|
4.5
|
|
Goodwill
|
|
|
1,449.9
|
|
|
|
1,601.4
|
|
|
|
|
|
|
|
|
|
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$
|
3,224.6
|
|
|
$
|
3,648.3
|
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|
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LIABILITIES AND
STOCKHOLDERS EQUITY
|
Current liabilities:
|
|
|
|
|
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Accounts payable
|
|
$
|
85.6
|
|
|
$
|
102.0
|
|
Accrued salaries
|
|
|
58.7
|
|
|
|
68.3
|
|
Other current liabilities
|
|
|
85.3
|
|
|
|
139.7
|
|
Current maturities of long-term debt
|
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|
0.5
|
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|
|
0.9
|
|
|
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230.1
|
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310.9
|
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|
|
|
|
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Long-term debt
|
|
|
1,515.8
|
|
|
|
1,759.8
|
|
Deferred income taxes
|
|
|
124.0
|
|
|
|
73.5
|
|
Professional and general liability
claims and other liabilities
|
|
|
60.3
|
|
|
|
84.9
|
|
|
|
|
|
|
|
|
|
|
Minority interests in equity of
consolidated entities
|
|
|
6.6
|
|
|
|
15.0
|
|
|
|
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|
|
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|
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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; 57,102,882 and
57,364,259 shares issued and outstanding at
December 31, 2005 and September 30, 2006, respectively
|
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|
0.6
|
|
|
|
0.6
|
|
Capital in excess of par value
|
|
|
1,053.1
|
|
|
|
1,038.8
|
|
Unearned ESOP compensation
|
|
|
(9.7
|
)
|
|
|
(7.2
|
)
|
Unearned compensation on nonvested
stock
|
|
|
(31.0
|
)
|
|
|
|
|
Accumulated other comprehensive loss
|
|
|
|
|
|
|
(10.6
|
)
|
Retained earnings
|
|
|
274.8
|
|
|
|
382.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,287.8
|
|
|
|
1,404.2
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
3,224.6
|
|
|
$
|
3,648.3
|
|
|
|
|
|
|
|
|
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|
|
|
|
(1) |
|
Derived from audited financial statements. |
See accompanying notes.
4
LIFEPOINT
HOSPITALS, INC.
CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS
Unaudited
(In millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2005
|
|
|
2006
|
|
|
2005
|
|
|
2006
|
|
|
Cash flows from operating
activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
29.6
|
|
|
$
|
34.9
|
|
|
$
|
48.3
|
|
|
$
|
107.8
|
|
Adjustments to reconcile net income
to net cash provided by operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss (income) from discontinued
operations
|
|
|
0.7
|
|
|
|
(0.4
|
)
|
|
|
4.7
|
|
|
|
(2.4
|
)
|
Cumulative effect of change in
accounting principle, net of income taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(0.7
|
)
|
Stock-based compensation
|
|
|
2.0
|
|
|
|
3.7
|
|
|
|
4.2
|
|
|
|
9.5
|
|
ESOP expense (non-cash portion)
|
|
|
4.5
|
|
|
|
2.1
|
|
|
|
11.0
|
|
|
|
7.1
|
|
Depreciation and amortization
|
|
|
28.0
|
|
|
|
30.4
|
|
|
|
67.8
|
|
|
|
78.3
|
|
Amortization of deferred loan costs
|
|
|
1.1
|
|
|
|
1.3
|
|
|
|
2.7
|
|
|
|
4.0
|
|
Debt retirement costs
|
|
|
2.1
|
|
|
|
|
|
|
|
12.1
|
|
|
|
|
|
Transaction costs
|
|
|
(1.4
|
)
|
|
|
|
|
|
|
43.2
|
|
|
|
|
|
Minority interests in earnings of
consolidated entities
|
|
|
0.3
|
|
|
|
0.4
|
|
|
|
0.8
|
|
|
|
1.1
|
|
Deferred income taxes (benefit)
|
|
|
(14.7
|
)
|
|
|
(5.2
|
)
|
|
|
9.7
|
|
|
|
(5.4
|
)
|
Reserve for professional and
general liability claims, net
|
|
|
(0.2
|
)
|
|
|
3.2
|
|
|
|
1.8
|
|
|
|
7.3
|
|
Excess tax benefits from employee
stock plans
|
|
|
0.7
|
|
|
|
|
|
|
|
8.9
|
|
|
|
|
|
Increase (decrease) in cash from
operating assets and liabilities, net of effects from
acquisitions and divestitures:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
(12.7
|
)
|
|
|
(60.6
|
)
|
|
|
(18.6
|
)
|
|
|
(64.5
|
)
|
Inventories and other current assets
|
|
|
5.3
|
|
|
|
(9.9
|
)
|
|
|
8.7
|
|
|
|
(15.7
|
)
|
Accounts payable and accrued
expenses
|
|
|
5.3
|
|
|
|
38.4
|
|
|
|
2.8
|
|
|
|
34.1
|
|
Income taxes payable
|
|
|
16.0
|
|
|
|
21.6
|
|
|
|
(12.3
|
)
|
|
|
12.6
|
|
Other
|
|
|
1.1
|
|
|
|
2.1
|
|
|
|
1.1
|
|
|
|
2.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating
activities continuing operations
|
|
|
67.7
|
|
|
|
62.0
|
|
|
|
196.9
|
|
|
|
175.7
|
|
Net cash provided by (used in)
operating activities discontinued operations
|
|
|
5.3
|
|
|
|
(12.6
|
)
|
|
|
8.5
|
|
|
|
(12.8
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating
activities
|
|
|
73.0
|
|
|
|
49.4
|
|
|
|
205.4
|
|
|
|
162.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing
activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase of property and equipment
|
|
|
(47.6
|
)
|
|
|
(39.5
|
)
|
|
|
(108.0
|
)
|
|
|
(134.5
|
)
|
Acquisitions, net of cash acquired
|
|
|
(3.6
|
)
|
|
|
(20.4
|
)
|
|
|
(963.3
|
)
|
|
|
(281.0
|
)
|
Other
|
|
|
(0.2
|
)
|
|
|
(0.1
|
)
|
|
|
(0.8
|
)
|
|
|
(0.7
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing
activities continuing operations
|
|
|
(51.4
|
)
|
|
|
(60.0
|
)
|
|
|
(1,072.1
|
)
|
|
|
(416.2
|
)
|
Net cash (used in) provided by
investing activities discontinued operations
|
|
|
(0.8
|
)
|
|
|
1.0
|
|
|
|
31.7
|
|
|
|
28.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing
activities
|
|
|
(52.2
|
)
|
|
|
(59.0
|
)
|
|
|
(1,040.4
|
)
|
|
|
(387.6
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing
activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from borrowings
|
|
|
375.0
|
|
|
|
|
|
|
|
1,967.0
|
|
|
|
260.0
|
|
Payments of borrowings
|
|
|
(402.6
|
)
|
|
|
|
|
|
|
(1,111.8
|
)
|
|
|
(20.0
|
)
|
Proceeds from exercise of stock
options
|
|
|
1.7
|
|
|
|
|
|
|
|
43.3
|
|
|
|
0.3
|
|
Proceeds from employee stock
purchase plans
|
|
|
0.3
|
|
|
|
1.3
|
|
|
|
1.4
|
|
|
|
3.0
|
|
Payment of debt issue costs
|
|
|
(8.9
|
)
|
|
|
(0.6
|
)
|
|
|
(40.7
|
)
|
|
|
(1.0
|
)
|
Other
|
|
|
(0.1
|
)
|
|
|
(0.2
|
)
|
|
|
(3.6
|
)
|
|
|
(0.8
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash (used in) provided by
financing activities
|
|
|
(34.6
|
)
|
|
|
0.5
|
|
|
|
855.6
|
|
|
|
241.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in cash and cash equivalents
|
|
|
(13.8
|
)
|
|
|
(9.1
|
)
|
|
|
20.6
|
|
|
|
16.8
|
|
Cash and cash equivalents at
beginning of period
|
|
|
53.0
|
|
|
|
56.3
|
|
|
|
18.6
|
|
|
|
30.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of
period
|
|
$
|
39.2
|
|
|
$
|
47.2
|
|
|
$
|
39.2
|
|
|
$
|
47.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure of cash
flow information:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest payments
|
|
$
|
19.8
|
|
|
$
|
19.0
|
|
|
$
|
43.3
|
|
|
$
|
64.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capitalized interest
|
|
$
|
1.1
|
|
|
$
|
0.5
|
|
|
$
|
2.3
|
|
|
$
|
0.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income taxes paid, net
|
|
$
|
15.7
|
|
|
$
|
7.1
|
|
|
$
|
35.7
|
|
|
$
|
63.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes.
5
LIFEPOINT
HOSPITALS, INC.
CONDENSED
CONSOLIDATED STATEMENT OF STOCKHOLDERS EQUITY
For the
Nine Months Ended September 30, 2006
Unaudited
(Amounts in millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unearned
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital in
|
|
|
Unearned
|
|
|
Compensation
|
|
|
Other
|
|
|
|
|
|
|
|
|
|
Common Stock
|
|
|
Excess of
|
|
|
ESOP
|
|
|
on Nonvested
|
|
|
Comprehensive
|
|
|
Retained
|
|
|
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Par Value
|
|
|
Compensation
|
|
|
Stock
|
|
|
Loss
|
|
|
Earnings
|
|
|
Total
|
|
|
Balance at December 31, 2005
|
|
|
57.1
|
|
|
$
|
0.6
|
|
|
$
|
1,053.1
|
|
|
$
|
(9.7
|
)
|
|
$
|
(31.0
|
)
|
|
$
|
|
|
|
$
|
274.8
|
|
|
$
|
1,287.8
|
|
Comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
107.8
|
|
|
|
107.8
|
|
Net change in fair value of
interest rate swap, net of tax expense of $5.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(10.6
|
)
|
|
|
|
|
|
|
(10.6
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
97.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reclassification of unearned
compensation on nonvested stock balance upon adoption of
SFAS No. 123(R)
|
|
|
|
|
|
|
|
|
|
|
(31.0
|
)
|
|
|
|
|
|
|
31.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-cash ESOP compensation earned
|
|
|
|
|
|
|
|
|
|
|
4.9
|
|
|
|
2.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7.4
|
|
Exercise of stock options,
including tax benefits and other
|
|
|
|
|
|
|
|
|
|
|
0.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0.3
|
|
Stock activity in connection with
employee stock purchase plans
|
|
|
|
|
|
|
|
|
|
|
3.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3.0
|
|
Stock-based
compensation nonvested stock
|
|
|
|
|
|
|
|
|
|
|
4.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4.2
|
|
Stock-based
compensation stock options
|
|
|
|
|
|
|
|
|
|
|
4.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4.3
|
|
Nonvested stock issued to key
employees
|
|
|
0.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at September 30, 2006
|
|
|
57.4
|
|
|
$
|
0.6
|
|
|
$
|
1,038.8
|
|
|
$
|
(7.2
|
)
|
|
$
|
|
|
|
$
|
(10.6
|
)
|
|
$
|
382.6
|
|
|
$
|
1,404.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes.
6
LIFEPOINT
HOSPITALS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2006
Unaudited
|
|
Note 1.
|
Basis of
Presentation
|
LifePoint Hospitals, Inc. is a holding company that owns, leases
and operates general acute care hospitals in non-urban
communities in the United States. Its subsidiaries own, lease
and operate 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 September 30, 2006, the Company operated 53 hospitals,
including two hospitals that are held for sale. 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 for interim
financial information and with the instructions to
Form 10-Q
and to Article 10 of
Regulation S-X.
Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles
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 and nine months
ended September 30, 2006 are not necessarily indicative of
the results that may be expected for the year ending
December 31, 2006. For further information, refer to the
consolidated financial statements and footnotes thereto included
in the Companys Annual Report on
Form 10-K
for the year ended December 31, 2005, 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 the LifePoint corporate overhead costs, which were
$12.4 million and $19.2 million for the three months
ended September 30, 2005 and 2006, respectively, and
$36.8 million and $58.4 million for the nine months
ended September 30, 2005 and 2006, respectively.
Certain prior year amounts have been reclassified to conform to
the current year presentation. Effective January 1, 2006,
the Company reclassified its ESOP expense into its salaries and
benefits expense as its ESOP expense now consists partially of
cash payments. ESOP expense for all prior periods has been
reclassified to conform to the 2006 presentation. These
reclassifications, along with the Companys discontinued
operations, have no impact on its total assets, liabilities,
stockholders equity, net income or cash flows. Unless
noted otherwise, discussions in these notes pertain to the
Companys continuing operations.
Havasu
Joint Venture
Effective September 1, 2006, Havasu Surgery Center, Inc.,
an Arizona S corporation owned by physicians and other
individuals (HSC), transferred substantially all of
its assets to Havasu Regional Medical Center, LLC, a
newly-formed Delaware limited liability company (the
Havasu LLC), in exchange for all of the Class A
units in the Havasu LLC, plus cash. Also effective
September 1, 2006, PHC-Lake Havasu, Inc., a wholly owned
subsidiary of the Company which operated Havasu Regional Medical
Center (HRMC), contributed to the Havasu LLC
substantially all of the assets used in the operation of HRMC
(except for real estate and home health assets), plus cash, in
exchange for all of the Class B units in the Havasu LLC
(the Class B Units). The Class B Units
represent approximately a 96% equity interest in the Havasu LLC.
The Company acquired HSC through the Havasu LLC for
approximately $27.0 million, which consisted of
7
LIFEPOINT
HOSPITALS, INC.
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
$18.9 million in cash and a non-cash $8.1 million
capital contribution from the minority physician partners.
Goodwill recognized in connection with the acquisition of the
HSC totaled $8.7 million. The purchase price allocation for
the HSC has been prepared on a preliminary basis and is subject
to change as new facts and circumstances emerge.
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 defined in the
purchase agreement. The four facilities acquired include 200-bed
Clinch Valley Medical Center, Richlands, Virginia; 325-bed St.
Josephs Hospital, Parkersburg, West Virginia; 155-bed
Saint Francis Hospital, Charleston, West Virginia; and 369-bed
Raleigh General Hospital, Beckley, West Virginia. The Company
borrowed $250.0 million under its Credit Agreement to pay
for this acquisition, as further discussed in Note 9 herein.
Under the purchase method of accounting, 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 is recorded as
goodwill. 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 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 property and
equipment and certain intangible assets. Once the valuation is
completed, the Company will adjust the purchase price allocation
to reflect the final values.
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
|
|
|
128.2
|
|
Other long-term assets
|
|
|
0.1
|
|
Goodwill
|
|
|
122.3
|
|
|
|
|
|
|
Total assets acquired, excluding
cash
|
|
|
265.9
|
|
|
|
|
|
|
Accounts payable
|
|
|
0.4
|
|
Accrued salaries
|
|
|
5.7
|
|
Other current liabilities
|
|
|
2.2
|
|
|
|
|
|
|
Total liabilities assumed
|
|
|
8.3
|
|
|
|
|
|
|
Net assets acquired
|
|
$
|
257.6
|
|
|
|
|
|
|
The Company has classified St. Josephs Hospital and Saint
Francis Hospital as assets held for
sale/discontinued
operations, consistent with the provisions of Statement of
Financial Accounting Standards (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 as further
discussed in Note 3.
8
LIFEPOINT
HOSPITALS, INC.
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Business
Combination with Province Healthcare Company
On April 15, 2005 (the Effective Date),
pursuant to the Agreement and Plan of Merger, dated as of
August 15, 2004, by and among Historic LifePoint Hospitals,
Inc. (formerly LifePoint Hospitals, Inc.) (Historic
LifePoint), the Company, Lakers Acquisition Corp.
(LifePoint Merger Sub),
Pacers Acquisition Corp. (Province Merger
Sub) and Province Healthcare Company
(Province), as amended by Amendment No. 1 to
Agreement and Plan of Merger, dated as of January 25, 2005,
and Amendment No. 2 to Agreement and Plan of Merger, dated
as of March 15, 2005 (as amended, the Merger
Agreement), the Company acquired all of the outstanding
capital stock of each of Historic LifePoint and Province through
the merger of LifePoint Merger Sub with and into Historic
LifePoint, with Historic LifePoint continuing as the surviving
corporation of such merger (the LifePoint Merger),
and the merger of Province Merger Sub with and into Province,
with Province continuing as the surviving corporation of such
merger, (the Province Merger, and together with the
LifePoint Merger, the Province Business
Combination). As a result of the Province Business
Combination, each of Historic LifePoint and Province is now a
wholly owned subsidiary of the Company.
Pursuant to the Merger Agreement, on the Effective Date, the
shares of common stock, par value $0.01 per share, of
Historic LifePoint (Historic LifePoint Common Stock)
outstanding as of the Effective Date were deemed to be converted
into shares of common stock, par value $0.01 per share, of
the Company (Company Common Stock) on a
one-for-one
basis without any action required to be taken by the holders of
such shares of Historic LifePoint Common Stock. Each share of
common stock, par value $0.01 per share, of Province
outstanding as of the Effective Date (other than any shares with
respect to which appraisal rights had been perfected) was
converted into the right to receive $11.375 in cash and 0.2917
of a share of Company Common Stock. The Company issued
15.0 million shares of Company Common Stock and
$586.3 million of cash to the existing stockholders and
option holders of Province.
As a result of the Province Business Combination, the Company
became the successor issuer to Historic LifePoint under the
Securities Exchange Act of 1934, as amended (the Exchange
Act), and succeeded to Historic LifePoints reporting
obligations thereunder. Pursuant to
Rule 12g-3(c)
promulgated under the Exchange Act, the outstanding shares of
Company Common Stock, together with the associated rights to
purchase preferred stock issued pursuant to the Rights
Agreement, dated as of April 15, 2005 (as it may be amended
and supplemented from time to time, the Rights
Agreement), between the Company and National City Bank, as
Rights Agent, are deemed to be registered under
paragraph (g) of Section 12 of the Exchange Act.
As a result of the Province Business Combination, the Company
retired the Historic LifePoint treasury stock of
$28.9 million as of April 15, 2005.
In connection with the closing of the Province Business
Combination, shares of Historic LifePoint Common Stock, which
had been listed and traded on the Nasdaq National Market under
the ticker symbol LPNT, ceased to be listed and
traded on the Nasdaq National Market. However, shares of Company
Common Stock are now listed and traded on the Nasdaq National
Market under the ticker symbol LPNT.
Management of the Company believes that the Province Business
Combination provides and will continue to provide efficiencies
and enhance LifePoints ability to compete effectively in
complementary markets. As a result of the Province Business
Combination, the Company is more geographically and financially
diversified in its asset base. Management of the Company
believes that the Company has greater resources and increased
opportunities for growth and margin expansion. The results of
operations of Province are included in LifePoints results
of operations beginning April 16, 2005.
Based on $42.79, the
20-day
weighted average Historic LifePoint stock price as of
April 12, 2005, and the number of shares of Province common
stock outstanding on such date, LifePoint issued an aggregate of
15.0 million shares of Company Common Stock to Province
stockholders and paid Province stockholders an aggregate of
$586.3 million in cash, pursuant to the terms of the Merger
Agreement.
9
LIFEPOINT
HOSPITALS, INC.
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The total purchase price of the Province Business Combination
was as follows (in millions):
|
|
|
|
|
Fair value of Company Common Stock
issued
|
|
$
|
596.0
|
|
Cash
|
|
|
586.3
|
|
Fair value of assumed Province
debt obligations
|
|
|
511.6
|
|
Severance and Province stock
option costs
|
|
|
73.8
|
|
Direct transaction costs
|
|
|
30.5
|
|
|
|
|
|
|
|
|
$
|
1,798.2
|
|
|
|
|
|
|
Under the purchase method of accounting, the total purchase
price as shown in the table above was allocated to
Provinces net tangible and intangible assets based upon
their estimated fair values as of April 15, 2005. The
excess of the purchase price over the estimated fair value of
the net tangible and intangible assets is recorded as goodwill.
The estimated fair value of Company Common Stock issued was
based on the $39.63 Historic LifePoint average share price as of
February 22, 2005, which is in accordance with Emerging
Issues Task Force Issue Number 99-12, Determination of the
Measurement Date for the Market Price of Acquirer Securities
Issued in a Purchase Business Combination (EITF
No. 99-12).
As stated in paragraph 7 in EITF
No. 99-12,
the measurement date is the earliest date, from the date the
terms of the acquisition are agreed to and announced to the date
of final application of the formula pursuant to the acquisition
agreement, on which subsequent applications of the formula do
not result in a change in the number of shares or the amount of
other consideration.
The purchase price allocation for the Province Business
Combination was finalized during the second quarter of 2006. The
Company engaged a third-party valuation firm that completed a
valuation of acquired assets and assumed liabilities of the
Province Business Combination.
The fair values of assets acquired and liabilities assumed at
the date of acquisition were as follows (in millions):
|
|
|
|
|
Cash
|
|
$
|
2.7
|
|
Accounts receivable, net
|
|
|
122.1
|
|
Inventories
|
|
|
21.0
|
|
Prepaid expenses
|
|
|
4.6
|
|
Other current assets
|
|
|
15.6
|
|
Property and equipment
|
|
|
575.6
|
|
Other long-term assets
|
|
|
15.8
|
|
Goodwill
|
|
|
1,175.2
|
|
|
|
|
|
|
Total assets acquired
|
|
|
1,932.6
|
|
|
|
|
|
|
Accounts payable
|
|
|
33.0
|
|
Accrued salaries
|
|
|
28.1
|
|
Other current liabilities
|
|
|
41.2
|
|
Long-term debt
|
|
|
511.6
|
|
Professional and general liability
claims and other liabilities
|
|
|
30.1
|
|
Minority interests in equity of
consolidated entities
|
|
|
2.0
|
|
|
|
|
|
|
Total liabilities assumed
|
|
|
646.0
|
|
|
|
|
|
|
Net assets acquired
|
|
$
|
1,286.6
|
|
|
|
|
|
|
10
LIFEPOINT
HOSPITALS, INC.
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
A significant amount of the goodwill will not be deductible for
income tax purposes because of the structure of the Province
Business Combination. Subsequent to the Province Business
Combination, the Company committed to a disposal plan related to
three of the hospitals acquired from Province as further
discussed in Note 3.
In connection with the finalization of the purchase price
allocation, the Company reduced the net deferred tax liabilities
recorded in the preliminary purchase price allocation by
$49.0 million, in accordance with SFAS No. 109,
Accounting for Income Taxes, to remove the
tax-deductible goodwill cumulative temporary difference and to
account for adjustments made to the fair value of assets
acquired and liabilities assumed in purchase accounting.
Other
2005 Acquisitions
On June 1, 2005, the Company consummated its agreement with
Wythe County Community Hospital (WCCH) to lease the
104-bed facility located in Wytheville, Virginia for a term of
30 years. Included in the transaction were certain working
capital and major moveable equipment purchased as part of the
lease agreement. The lease was finalized with a payment of
$49.8 million, including working capital, to WCCH. Goodwill
totaled $20.4 million, all of which is expected to be
deductible for tax purposes.
Effective July 1, 2005, the Company acquired 350-bed
Danville Regional Medical Center (DRMC) and related
assets in Danville, Virginia for $210.0 million. Goodwill
totaled $137.6 million, all of which is expected to be
deductible for tax purposes.
The acquisitions of WCCH and DRMC (the 2005
Acquisitions) were accounted for using the purchase method
of accounting. The purchase prices of the 2005 Acquisitions were
allocated to the assets acquired and liabilities assumed based
upon their respective fair values as determined by a third-party
valuation firm.
Impact
of Final Valuations of Fixed Assets
In connection with the finalization of the purchase price
allocations of both DRMC and Province, the Company recognized a
reduction in depreciation expense of approximately
$13.5 million ($8.1 million, net of income taxes), or
$0.14 per diluted share during the three months ended
June 30, 2006. This decreased depreciation expense was the
result of lower fair values of certain property and equipment
established by the third-party valuation firm than originally
anticipated in the preliminary purchase price allocations.
|
|
Note 3.
|
Discontinued
Operations
|
Two
HCA Hospitals
In connection with the acquisition of four facilities from HCA,
effective July 1, 2006, the Companys management
committed to a plan to divest two hospitals acquired in the
acquisition. These two hospitals are St. Josephs Hospital
(St. Josephs) located in Parkersburg, West
Virginia, and Saint Francis Hospital (Saint Francis)
located in Charleston, West Virginia. On September 15,
2006, the Company announced the signing of definitive agreements
for the sale of these two hospitals, subject to customary
closing conditions.
Three
Former Province Hospitals
During the second quarter of 2005, subsequent to the Province
Business Combination, the Companys management committed to
a plan to divest three hospitals acquired in the Province
Business Combination. These three hospitals are Medical Center
of Southern Indiana (MCSI) located in Charlestown,
Indiana; Ashland Regional Medical Center (Ashland)
located in Ashland, Pennsylvania; and Palo Verde Hospital
(Palo Verde) located in Blythe, California. The
Company divested Palo Verde on December 31, 2005 by
terminating the lease of that hospital and returning it to the
Hospital District of Palo Verde. During the three
11
LIFEPOINT
HOSPITALS, INC.
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
months ended September 30, 2006, the Company received
$1.0 million in cash from the Hospital District of Palo
Verde to settle the amounts owed to the Company. The Company
completed the sale of both MCSI and Ashland to Saint Catherine
Healthcare effective May 1, 2006.
Smith
County Memorial Hospital
On February 3, 2006, the Company announced that it entered
into a definitive agreement to sell Smith County Memorial
Hospital (Smith County), which is located in
Carthage, Tennessee, 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.
Bartow
Memorial Hospital
During the third quarter of 2004, the Company committed to a
plan to divest its 56-bed Bartow Memorial Hospital
(Bartow) located in Bartow, Florida. On
March 31, 2005, the Company sold Bartow to Health
Management Associates, Inc. The Company recognized a net loss on
the sale of Bartow of approximately $0.8 million during the
three months ended March 31, 2005, most of which related to
tax expense attributable to non-deductible goodwill originating
from the tax basis of assets received at the spin-off of
LifePoint from HCA in 1999.
The results of operations, net of income taxes, of Bartow, Smith
County, MCSI, Ashland, Palo Verde, St. Josephs and
Saint Francis are reflected in the accompanying condensed
consolidated financial statements as discontinued operations in
accordance with SFAS No. 144. All prior periods, where
appropriate, have been reclassified to conform to this
presentation for all periods presented. These required
reclassifications, where appropriate, to the prior period
condensed consolidated financial statements did not impact total
assets, liabilities, stockholders equity, net income or
cash flows.
Impact
of Discontinued Operations
The revenues and income (loss) before income taxes of
discontinued operations for the three and nine months ended
September 30, 2005 and 2006 were as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2005
|
|
|
2006
|
|
|
2005
|
|
|
2006
|
|
|
Revenues
|
|
$
|
15.8
|
|
|
$
|
47.3
|
|
|
$
|
45.4
|
|
|
$
|
60.7
|
|
Income (loss) before income taxes
|
|
|
(0.9
|
)
|
|
|
|
|
|
|
1.5
|
|
|
|
(2.4
|
)
|
The assets of the facilities sold or to be sold are reported as
assets held for sale in the accompanying condensed consolidated
balance sheets prior to their disposal and are primarily
comprised of property and equipment. The Company allocated
$0.3 million and $2.0 million for the three-month
periods ended September 30, 2005 and 2006, respectively,
and $0.4 million and $2.1 million for the nine months
ended September 30, 2005 and 2006, respectively, of
interest expense to discontinued operations. Prior to the
acquisition of four HCA hospitals effective July 1, 2006,
the Company calculated the allocation of interest based on the
ratio of net assets to be sold to the sum of total net assets of
the Company plus the Companys debt. Subsequently, the
Company has calculated the allocation of interest based
specifically on the debt that was incurred in connection with
the HCA acquisition.
12
LIFEPOINT
HOSPITALS, INC.
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The table below presents the changes in the Companys
assets held for sale for the nine months ended
September 30, 2006 (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
|
|
|
Property and
|
|
|
|
|
|
|
|
|
|
Assets
|
|
|
Equipment
|
|
|
Goodwill
|
|
|
Total
|
|
|
Balance at December 31, 2005
|
|
$
|
1.6
|
|
|
$
|
14.7
|
|
|
$
|
5.7
|
|
|
$
|
22.0
|
|
Sale of Smith County
|
|
|
(0.3
|
)
|
|
|
(6.0
|
)
|
|
|
(5.7
|
)
|
|
|
(12.0
|
)
|
Sale of MCSI and Ashland
|
|
|
(1.3
|
)
|
|
|
(8.7
|
)
|
|
|
|
|
|
|
(10.0
|
)
|
Inclusion of two HCA facilities
|
|
|
7.9
|
|
|
|
82.5
|
|
|
|
|
|
|
|
90.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at September 30, 2006
|
|
$
|
7.9
|
|
|
$
|
82.5
|
|
|
$
|
|
|
|
$
|
90.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note 4.
|
Goodwill
and Intangible Assets
|
The Company performed its most recent goodwill annual impairment
test as of October 1, 2005 and did not incur an impairment
charge.
The following table presents the changes in the carrying amount
of goodwill for the nine months ended September 30, 2006
(in millions):
|
|
|
|
|
Balance at December 31, 2005
|
|
$
|
1,449.9
|
|
Goodwill acquired as part of
acquisitions during 2006
|
|
|
130.9
|
|
Consideration adjustments and
adjustments to purchase price allocations for 2005 acquisitions
|
|
|
20.6
|
|
|
|
|
|
|
Balance at September 30, 2006
|
|
$
|
1,601.4
|
|
|
|
|
|
|
13
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
|
|
|
|
Amount
|
|
|
Amortization
|
|
|
Total
|
|
|
Contract-based physician
minimum revenue guarantees:
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2005
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
Additions
|
|
|
19.0
|
|
|
|
|
|
|
|
19.0
|
|
Amortization expense
|
|
|
|
|
|
|
(0.8
|
)
|
|
|
(0.8
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at September 30, 2006
|
|
$
|
19.0
|
|
|
$
|
(0.8
|
)
|
|
$
|
18.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Certificates of need:
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2005
|
|
$
|
1.4
|
|
|
$
|
|
|
|
$
|
1.4
|
|
Additions
|
|
|
1.2
|
|
|
|
|
|
|
|
1.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at September 30, 2006
|
|
$
|
2.6
|
|
|
$
|
|
|
|
$
|
2.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-competition
agreements:
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2005
|
|
$
|
5.9
|
|
|
$
|
(3.1
|
)
|
|
$
|
2.8
|
|
Additions
|
|
|
10.8
|
|
|
|
|
|
|
|
10.8
|
|
Adjustments
|
|
|
(0.1
|
)
|
|
|
|
|
|
|
(0.1
|
)
|
Amortization expense
|
|
|
|
|
|
|
(1.1
|
)
|
|
|
(1.1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at September 30, 2006
|
|
$
|
16.6
|
|
|
$
|
(4.2
|
)
|
|
$
|
12.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total intangible
assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2005
|
|
$
|
7.3
|
|
|
$
|
(3.1
|
)
|
|
$
|
4.2
|
|
Additions/Adjustments
|
|
|
30.9
|
|
|
|
|
|
|
|
30.9
|
|
Amortization expense
|
|
|
|
|
|
|
(1.9
|
)
|
|
|
(1.9
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at September 30, 2006
|
|
$
|
38.2
|
|
|
$
|
(5.0
|
)
|
|
$
|
33.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contract-based
Physician Minimum Revenue Guarantees
In November 2005, the Financial Accounting Standards Board (the
FASB) issued 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),
which served as an amendment to FASB Interpretation No. 45,
Guarantors Accounting and Disclosure Requirements
for Guarantees, Including Indirect Guarantees of Indebtedness of
Others (FIN 45), by adding minimum
revenue guarantees to the list of example contracts to which
FIN 45 applies. Under FSP
FIN 45-3,
a guarantor is required to recognize, at the inception of a
guarantee, a liability for the fair value of the obligation
undertaken in issuing the guarantee. One example cited in FSP
FIN 45-3
involves a guarantee provided by a healthcare entity to a
non-employed physician in order to recruit such physician to
move to the entitys geographical area and establish a
private practice. In the example, the healthcare entity also
agreed to make payments to the relocated physician if the gross
revenue or gross receipts generated by the physicians new
practice during a specified time period did not equal or exceed
predetermined monetary thresholds. Because this example and
another one in FSP
FIN 45-3
are similar to certain of the Companys physician
recruiting commitments, the Company believes it falls under the
accounting guidance of the interpretation.
FSP
FIN 45-3
is effective for new physician minimum revenue guarantees issued
or modified on or after January 1, 2006. The Company
adopted FSP
FIN 45-3
effective January 1, 2006. For physician minimum
14
LIFEPOINT
HOSPITALS, INC.
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
revenue guarantees issued before January 1, 2006, the
Company expensed the advances as they were paid to the
physicians, which was typically over a period of one year. Under
FSP
FIN 45-3,
the Company records a contract-based intangible asset and
related guarantee liability for new physician minimum revenue
guarantees entered into after January 1, 2006 and amortizes
the contract-based intangible asset to physician recruiting
expense over the period of the physician contract, which is
typically five years. As of September 30, 2006, the
Companys liability balance for contract-based physician
minimum revenue guarantees was $12.4 million, which is
included in other current liabilities on the Companys
condensed consolidated balance sheet.
The following table summarizes the impact of adopting FSP
FIN 45-3
(in millions, except per share amounts):
|
|
|
|
|
|
|
|
|
|
|
Three Months
|
|
|
Nine Months
|
|
|
|
Ended
|
|
|
Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2006
|
|
|
2006
|
|
|
Increase of income from continuing
operations before income taxes (included in other operating
expenses)
|
|
$
|
3.3
|
|
|
$
|
5.7
|
|
Provision for income taxes
|
|
|
(1.3
|
)
|
|
|
(2.3
|
)
|
|
|
|
|
|
|
|
|
|
Increase of income from continuing
operations
|
|
$
|
2.0
|
|
|
$
|
3.4
|
|
|
|
|
|
|
|
|
|
|
Increase of income per share from
continuing operations:
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.03
|
|
|
$
|
0.06
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
$
|
0.03
|
|
|
$
|
0.06
|
|
|
|
|
|
|
|
|
|
|
Certificates
of Need and Non-Competition Agreements
Certificates of need are issued by certain state governments to
the hospitals owned by the Company located in such states. An
independent appraiser valued each certificate of need when the
Company acquired the corresponding hospital. In addition, these
intangible assets were determined to have indefinite lives and,
accordingly, are not amortized. The non-competition agreements,
also valued by an independent appraiser, are amortized on a
straight-line basis over the term of the agreements. In
connection with the acquisition of HSC on September 1,
2006, the Company entered into non-competition agreements with
the physician-owners of this facility. These non-competition
agreements were valued at approximately $10.8 million in
the aggregate by an independent appraiser. The remaining
$1.1 million net increase in these intangible assets during
the nine months ended September 30, 2006 relates to the
finalization of the DRMC, WCCH and Province purchase price
allocations.
15
LIFEPOINT
HOSPITALS, INC.
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
Note 5.
|
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
|
|
|
Nine Months
|
|
|
|
Ended September 30,
|
|
|
Ended September 30,
|
|
|
|
2005
|
|
|
2006
|
|
|
2005(a)
|
|
|
2006
|
|
|
Numerator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Numerator for basic and diluted
earnings per share income from continuing operations
|
|
$
|
30.3
|
|
|
$
|
34.5
|
|
|
$
|
53.0
|
|
|
$
|
104.7
|
|
Income (loss) from discontinued
operations
|
|
|
(0.7
|
)
|
|
|
0.4
|
|
|
|
(4.7
|
)
|
|
|
2.4
|
|
Cumulative effect of change in
accounting principle
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
29.6
|
|
|
$
|
34.9
|
|
|
$
|
48.3
|
|
|
$
|
107.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator for basic earnings per
share weighted average shares outstanding
|
|
|
55.3
|
|
|
|
55.7
|
|
|
|
48.4
|
|
|
|
55.6
|
|
Effect of dilutive securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee stock benefit plans
|
|
|
0.9
|
|
|
|
0.7
|
|
|
|
0.9
|
|
|
|
0.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator for diluted earnings
per share weighted average shares
|
|
|
56.2
|
|
|
|
56.4
|
|
|
|
49.3
|
|
|
|
56.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations
|
|
$
|
0.55
|
|
|
$
|
0.62
|
|
|
$
|
1.09
|
|
|
$
|
1.88
|
|
Discontinued operations
|
|
|
(0.01
|
)
|
|
|
0.01
|
|
|
|
(0.10
|
)
|
|
|
0.05
|
|
Cumulative effect of change in
accounting principle
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0.01
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
0.54
|
|
|
$
|
0.63
|
|
|
$
|
0.99
|
|
|
$
|
1.94
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations
|
|
$
|
0.54
|
|
|
$
|
0.61
|
|
|
$
|
1.08
|
|
|
$
|
1.86
|
|
Discontinued operations
|
|
|
(0.01
|
)
|
|
|
0.01
|
|
|
|
(0.10
|
)
|
|
|
0.05
|
|
Cumulative effect of change in
accounting principle
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0.01
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
0.53
|
|
|
$
|
0.62
|
|
|
$
|
0.98
|
|
|
$
|
1.92
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
The impact of 2.9 million potential weighted average shares
of common stock, if converted, and interest expense related to
convertible notes was not included in the computation of diluted
earnings per share for the nine months ended September 30,
2005, because the effect would have been anti-dilutive. |
|
|
Note 6.
|
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
16
LIFEPOINT
HOSPITALS, INC.
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
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 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.
On July 13, 2006, the FASB issued FASB Interpretation
No. 48, Accounting for Uncertainty in Income
Taxes An Interpretation of FASB Statement
No. 109 (FIN 48). FIN 48
clarifies the accounting for uncertainty in income taxes
recognized in an enterprises financial statements in
accordance with FASB Statement No. 109, Accounting
for Income Taxes. FIN 48 also prescribes a
recognition threshold and measurement attribute for the
financial statement recognition and measurement of a tax
position taken or expected to be taken in a tax return. In
addition, FIN 48 provides guidance on derecognition,
classification, interest and penalties, accounting in interim
periods, disclosure and transition.
The provisions of FIN 48 are effective for fiscal years
beginning after December 15, 2006. Earlier application is
permitted as long as the enterprise has not yet issued financial
statements, including interim financial statements, in the
period of adoption. The provisions of FIN 48 are to be
applied to all tax positions upon initial adoption of this
standard. Only tax positions that meet the more-likely-than-not
recognition threshold at the effective date may be recognized or
continue to be recognized upon adoption of FIN 48. The
cumulative effect of applying the provisions of FIN 48
should be reported as an adjustment to the opening balance of
retained earnings for that fiscal year. The Company has not yet
determined the potential financial impact of adopting
FIN 48.
In February 2006, the FASB issued SFAS No. 155,
Accounting for Certain Hybrid Instruments,
(SFAS No. 155), which amends
SFAS No. 133 and SFAS No. 140,
Accounting for Transfers and Servicing of Financial Assets
and Extinguishments of Liabilities. SFAS No. 155
allows financial instruments that have embedded derivatives to
be accounted for as a whole (eliminating the need to bifurcate
the derivative from its host) if the holder elects to account
for the whole instrument on a fair value basis.
SFAS No. 155 also clarifies and amends certain other
provisions of SFAS No. 133 and SFAS No. 140.
This statement is effective for all financial instruments
acquired or issued in fiscal years beginning after
September 15, 2006. The Company does not expect the
adoption of this new standard to have a material impact on its
financial position, results of operations or cash flows.
|
|
Note 7.
|
Change in
the Companys Chief Executive Officer and
Chairman
|
Effective June 26, 2006, Executive Vice President William
F. (Bill) Carpenter III, age 51, was named President
and Chief Executive Officer of the Company. Mr. Carpenter
replaced Kenneth C. Donahey, who retired after serving five
years as the Companys Chairman, President and Chief
Executive Officer. In addition, on June 25, 2006,
Mr. Donahey resigned from the Companys board of
directors and Mr. Carpenter was elected by the
Companys board of directors to fill the vacancy resulting
from Mr. Donaheys resignation. In addition, the
Companys Lead Director, Owen G. Shell, Jr., has been
elected as the Companys Chairman of the Board.
Effective June 25, 2006, LifePoint CSGP, LLC, a subsidiary
of the Company entered into a Separation Agreement with
Mr. Donahey. Effective June 25, 2006, the Separation
Agreement terminates the employment agreement between LifePoint
CSGP, LLC and Mr. Donahey, effective June 25, 2001, as
amended and restated, effective as of December 31, 2004
(the Employment Agreement). Mr. Donahey will
receive $3.5 million in two equal installments, on
December 27, 2006 and June 27, 2007, together with a
payment to cover any liability for federal excise tax he may
incur as a result of the receipt of such payments. The
confidentiality provisions of the Employment Agreement remain in
effect for 36 months. In accordance with the terms of his
pre-existing option agreements, Mr. Donahey may exercise
his stock options that were vested at the time of his
17
LIFEPOINT
HOSPITALS, INC.
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
retirement over a period of three years after his retirement
date. He will receive insurance benefits comparable to those
available to Company executives for a period of two years. The
Company and Mr. Donahey also agreed to a mutual release of
claims, except for any indemnity claims to which
Mr. Donahey may be entitled and for breaches of the
Separation Agreement. Mr. Donahey agreed not to compete
with the Company for a period of one year in non-urban
hospitals, diagnostic/imaging or surgery centers, and the
physician recruitment business, subject to certain limitations,
and he agreed not to induce or encourage the departure of
Company employees for a period of one year.
As a result of Mr. Donaheys retirement, the Company
incurred additional net pre-tax compensation expense of
approximately $2.0 million ($1.2 million net of income
taxes), or a decrease in diluted earnings per share of $0.02,
for the nine months ended September 30, 2006. This
compensation expense consists of the $3.5 million in cash
payments, as described above, offset by a $1.5 million
pre-tax reversal of stock compensation expense resulting from
the termination of his unvested stock options and nonvested
stock.
|
|
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. Prior to January 1, 2006,
the Company accounted for its stock-based employee compensation
plans under the measurement and recognition provisions of
Accounting Principles Board Opinion No. 25,
Accounting for Stock Issued to Employees (APB
No. 25), and related Interpretations, as permitted by
SFAS No. 123, Accounting for Stock-Based
Compensation (SFAS No. 123). The
Company did not record any stock-based employee compensation
expense for options granted under its stock-based incentive
plans prior to January 1, 2006, as all options granted
under those plans had exercise prices equal to the fair market
value of the Companys common stock on the date of grant.
The Company also did not record any compensation expense in
connection with its Employee Stock Purchase Plan
(ESPP) prior to January 1, 2006, as the
purchase price of the stock was not less than 85% of the lower
of the fair market value of its common stock at the beginning of
each offering period or at the end of each purchase period. In
accordance with SFAS No. 123 and
SFAS No. 148, Accounting for Stock-Based
Compensation Transition and Disclosure, prior
to January 1, 2006, the Company disclosed its pro forma net
income or loss and pro forma net income or loss per share as if
it had applied the fair value-based method in measuring
compensation expense for its stock-based incentive programs.
Effective January 1, 2006, the Company adopted the fair
value recognition provisions of SFAS No. 123(R),
Share-Based Payment
(SFAS No. 123(R)), using the modified
prospective transition method. Under that transition method,
compensation expense that the Company recognizes beginning on
that date includes: (i) compensation expense for all
stock-based payments granted prior to, but not yet vested as of,
January 1, 2006, based on the grant date fair value
estimated in accordance with the original provisions of
SFAS No. 123; and (ii) compensation expense for
all stock-based payments granted on or after January 1,
2006, based on the grant date fair value estimated in accordance
with the provisions of SFAS No. 123(R). Because the
Company elected to use the modified prospective transition
method, results for prior periods have not been restated. In
March 2005, the U.S. Securities and Exchange Commission
(the SEC) issued Staff Accounting
Bulletin No. 107 (SAB 107), which
provides supplemental implementation guidance for
SFAS No. 123(R). The Company has applied the
provisions of SAB 107 in its adoption of
SFAS No. 123(R).
18
LIFEPOINT
HOSPITALS, INC.
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Impact
of the Adoption of SFAS No. 123(R)
The table below summarizes the compensation expense for stock
options that the Company recorded for continuing operations in
accordance with SFAS No. 123(R) for the three and nine
months ended September 30, 2006 (in millions, except for
per share amounts). The impact of the adoption of
SFAS No. 123(R) on discontinued operations was nominal
for this period.
|
|
|
|
|
|
|
|
|
|
|
Three Months
|
|
|
Nine Months
|
|
|
|
Ended
|
|
|
Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2006
|
|
|
2006
|
|
|
Reduction of income from
continuing operations before income taxes (included in salaries
and benefits)
|
|
$
|
1.5
|
|
|
$
|
4.3
|
|
Income tax benefit
|
|
|
(0.5
|
)
|
|
|
(1.6
|
)
|
|
|
|
|
|
|
|
|
|
Reduction of income from
continuing operations
|
|
$
|
1.0
|
|
|
$
|
2.7
|
|
|
|
|
|
|
|
|
|
|
Reduction of income per share from
continuing operations:
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.02
|
|
|
$
|
0.05
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
$
|
0.02
|
|
|
$
|
0.05
|
|
|
|
|
|
|
|
|
|
|
The Company recorded $3.8 million and $9.5 million in
stock-based compensation expense for the three and nine months
ended September 30, 2006, respectively. For the three
months ended September 30, 2006, the $3.8 million
amount consists of $1.5 million in compensation expense for
stock options and $2.3 million in compensation expense for
nonvested stock. For the nine months ended September 30,
2006, the $9.5 million amount consists of $4.3 million
in compensation expense for stock options and $5.2 million
in compensation expense for nonvested stock. The Company
recorded $2.1 million and $4.2 million in stock-based
compensation expense for nonvested stock for the three and nine
months ended September 30, 2005, respectively. This
excludes the $4.0 million of compensation expense the
Company recognized during the nine months ended
September 30, 2005 that was the result of the accelerated
vesting of nonvested stock due to the Province Business
Combination. The Company did not capitalize any stock-based
compensation cost for the three and nine months ended
September 30, 2005 and 2006. The total tax benefits related
to stock-based compensation expense were $0.9 million and
$1.5 million for the three months ended September 30,
2005 and 2006, respectively. The total tax benefits related to
stock-based compensation expense were $1.6 million and
$3.9 million for the nine months ended September 30,
2005 and 2006, respectively. As of September 30, 2006,
there was $34.8 million of total unrecognized compensation
cost related to all of the Companys 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 2.5 years.
Companies were required to make an accounting policy decision
under SFAS No. 123 about whether to use a
forfeiture-rate assumption or to begin accruing compensation
cost for all awards granted (i.e., assume no forfeitures) and
then subsequently reverse compensation costs for forfeitures
when they occurred. Under SFAS No. 123(R), companies
are required to: (i) estimate the number of awards for
which it is probable that the requisite service will be
rendered; and (ii) update that estimate as new information
becomes available through the vesting date. The Company has
historically recognized its pro-forma stock option expense using
an estimated forfeiture rate. However, the Company also had a
policy (prior to January 1, 2006) of recognizing the
effect of forfeitures as they occurred for its nonvested stock.
Under SFAS No. 123(R), the Company was required to
make a one-time cumulative adjustment that increased income by
$1.1 million, or $0.7 million net of income taxes
($0.01 net income per share, basic and diluted) as of
January 1, 2006, to adjust its compensation cost for those
nonvested awards that are not expected to vest. This adjustment
is reported in the condensed consolidated statement of
operations as a cumulative effect of change in accounting
principle, net of income taxes, for the nine months ended
September 30, 2006.
19
LIFEPOINT
HOSPITALS, INC.
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Prior to the adoption of SFAS No. 123(R), the Company
presented unearned compensation on nonvested stock as a separate
component of stockholders equity. In accordance with the
provisions of SFAS No. 123(R), on January 1,
2006, the Company reclassified the balance in unearned
compensation on nonvested stock to capital in excess of par
value on its balance sheet.
Prior to the adoption of SFAS No. 123(R), the Company
presented all tax benefits for tax deductions resulting from the
exercise of stock options as operating cash flows on its
statements of cash flows. SFAS No. 123(R) requires
that the cash flows resulting from the tax benefits for tax
deductions in excess of the compensation expense recorded for
those options (excess tax benefits) be classified as financing
cash flows. Accordingly, the Company classified a nominal amount
in excess tax benefits as financing cash inflows rather than as
operating cash inflows on its statement of cash flows for the
three and nine months ended September 30, 2006.
SFAS No. 123(R) also requires companies to calculate
an initial pool of excess tax benefits available at
the adoption date to absorb any unused deferred tax assets that
may be recognized under SFAS No. 123(R). The pool
includes the net excess tax benefits that would have been
recognized if the Company had adopted SFAS No. 123 for
recognition purposes on its effective date. The Company has
elected to calculate the pool of excess tax benefits under the
alternative transition method described in FASB Staff Position
(FSP) No. FAS 123(R)-3, Transition
Election Related to Accounting for Tax Effects of Share-Based
Payment Awards, which also specifies the method the
Company must use to calculate excess tax benefits reported on
the statement of cash flows.
Description
of Stock-Based Compensation Plans
1998
Long-Term Incentive Plan
The Companys 1998 Long-Term Incentive Plan
(LTIP), as amended, authorizes
13,625,000 shares of the Companys common stock for
issuance as of September 30, 2006. The LTIP authorizes the
grant of stock options, stock appreciation rights and other
stock-based awards to officers and employees of the Company.
Options to purchase shares granted to the Companys
employees under this plan were granted with an exercise price
equal to the fair market value on the date of grant. These
options become ratably exercisable beginning one year from the
date of grant to three years after the date of grant. All
options granted under this plan expire ten years from the date
of grant. Options to purchase 79,875 and 904,745 shares
were granted to the Companys employees during the three
and nine months ended September 30, 2006, respectively,
under this plan with an exercise price equal to the fair market
value on the date of grant.
The Companys outstanding nonvested stock awards have a
vesting period of three to five years from the grant date and
contain no vesting requirements other than continued employment
of the employee. There are certain nonvested stock awards that
require the vesting be contingent upon the satisfaction of
certain financial goals in addition to continued employment of
the employee. The Company granted 36,270 and 389,719 shares
of nonvested stock awards to certain key employees under the
LTIP during the three and nine months ended September 30,
2006, respectively, which will cliff-vest three years after the
grant date.
Vesting of awards granted under the LTIP may be accelerated in
the event of disability or death of a participant or change of
control of the Company. As of April 15, 2005, all of the
outstanding options, except for those granted in December 2004,
and all of the outstanding nonvested stock awards under the LTIP
were fully vested as a result of the Province Business
Combination, as further discussed in Note 2.
Outside
Directors Stock and Incentive Compensation Plan
The Company also has an Outside Directors Stock and Incentive
Compensation Plan (ODSIP) for which
375,000 shares of the Companys common stock have been
reserved for issuance. There were no options granted under this
plan during either 2005 or 2006. The outstanding options under
this plan become
20
LIFEPOINT
HOSPITALS, INC.
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
exercisable beginning in part from the date of grant to three
years after the date of grant and expire ten years after grant.
The ODSIP further provides that non-employee directors may elect
to receive, in lieu of any portion of their annual retainer (in
multiples of 25%), a deferred stock unit award. A deferred stock
unit represents the right to receive a specified number of
shares of the Companys common stock. The shares are paid,
subject to the election of the non-employee director, either two
years following the date of the award or at the end of the
directors service on the board of directors. The number of
shares of the Companys common stock to be paid under a
deferred stock unit award is equal to the value of the cash
retainer that the non-employee director has elected to forego,
divided by the fair market value of the Companys common
stock on the date of the award. The Company recognizes a nominal
stock-based compensation expense amount under this plan. As of
September 30, 2006, there were 16,624 deferred stock units
outstanding under the ODSIP.
The outstanding nonvested stock awards granted under the ODSIP
vest three years from the grant date and contain no vesting
requirements other than continued service of the director.
Vesting may be accelerated in the event of disability or death
of a participant or change of control of the Company. As of
April 15, 2005, all outstanding options and nonvested stock
awards under the ODSIP were fully vested as a result of the
Province Business Combination, as further discussed in
Note 2.
On May 9, 2006, pursuant to the ODSIP, the Companys
board of directors, upon recommendation of the compensation
committee of the board of directors, approved the grant of 3,500
restricted stock unit awards to each of the seven members of the
board of directors who are not employees of the Company or any
of its subsidiaries. This award will be fully vested and no
longer subject to forfeiture upon the earliest of any of the
following conditions to occur: (i) the date that is
immediately prior to the date of the 2007 Annual Meeting of
Stockholders of the Company; (ii) the death or disability
of the non-employee director; or (iii) events described in
Section 7.1 of the ODSIP. Generally, such shares will be
forfeited in their entirety unless the individual continues to
serve as a director of the Company on the day prior to the 2007
Annual Meeting of Stockholders. The non-employee directors
receipt of shares of common stock pursuant to the restricted
stock unit award is deferred until the first business day
following the earliest to occur of (i) the third
anniversary of the date of grant, or (ii) the date the
non-employee director ceases to be a member of the
Companys board of directors.
ESPP
The Company sponsors an employee stock purchase plan which
allows employees to purchase shares of the Companys common
stock at a discount. There were 300,000 shares of the
Companys common stock reserved for issuance under this
plan at September 30, 2006. Prior to January 1, 2006
the ESPP provided for employees to purchase shares of the
Companys common stock at a price equal to 85% of the lower
of the closing price on the first day or last day of a six month
interval. Effective January 1, 2006, the plan was amended
to be in compliance with the safe harbor rules of
SFAS No. 123(R) so that the plan is not compensatory
under the new standard and no expense is recognized. The Company
received $0.8 million and $2.2 million for the
issuance of common stock under this plan during the nine months
ended September 30, 2005 and 2006, respectively.
MSPP
The Company has a Management Stock Purchase Plan
(MSPP) which provides to certain designated
employees an opportunity to purchase restricted shares of the
Companys common stock at a 25% discount through payroll
deductions over six-month intervals. There were
250,000 shares of the Companys common stock reserved
for issuance under this plan at September 30, 2006. Such
shares are subject to a three-year cliff-vesting period. As of
April 15, 2005, all of the outstanding unvested shares of
MSPP restricted stock were fully vested as a result of the
Province Business Combination, as further discussed in
Note 2. The Company redeems shares from employees upon
vesting of the MSPP restricted stock for minimum statutory
21
LIFEPOINT
HOSPITALS, INC.
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
tax withholding purposes. The Company recognizes a nominal
stock-based compensation expense amount under this plan as a
result of the relatively small number of participants in the
MSPP. The Company received $0.6 million and
$0.8 million for the issuance of stock under this plan
during the nine months ended September 30, 2005 and 2006,
respectively. As of September 30, 2006, there were 39,745
restricted shares outstanding under the MSPP.
Stock
Options
Change in
Stock Option Valuation Model
In January 2006, the Company changed from the
Black-Scholes-Merton option valuation model (BSM) to
a lattice-based option valuation model, the Hull-White II
Valuation Model (HW-II). The Company prefers the
HW-II over the BSM because the HW-II considers characteristics
of fair value option pricing, such as an options
contractual term and the probability of exercise before the end
of the contractual term, that are not available under the BSM.
In addition, the complications surrounding the expected term of
an option are material, as clarified by the SECs focus on
the matter in SAB 107. Given the reasonably large pool of
the Companys unexercised options, the Company believes a
lattice model that specifically addresses this fact and models a
full term of exercises is the most appropriate and reliable
means of valuing its stock options. The Company used a third
party to assist in developing the assumptions used in estimating
the fair values of stock options granted for the three and nine
months ended September 30, 2006.
Valuation
The Company estimated the fair value of stock options granted
during the nine months ended September 30, 2006 using the
HW-II lattice option valuation model 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 stock
options that were granted during the nine months ended
September 30, 2006 vest 33.3% on each grant anniversary
date over three years of continued employment.
The following table below shows the weighted average assumptions
the Company used to develop the fair value estimates under its
option valuation model:
|
|
|
|
|
|
|
Nine Months Ended
|
|
|
September 30,
|
|
|
2005
|
|
2006
|
|
Expected volatility
|
|
56.0%
|
|
32.8%
|
Risk free interest rate (range)
|
|
3.76 - 4.10%
|
|
4.38 - 5.17%
|
Expected dividends
|
|
|
|
|
Average expected term (years)
|
|
4.0
|
|
5.4
|
Population
Stratification
Under SFAS No. 123(R), a company should aggregate
individual awards into relatively homogeneous groups with
respect to exercise and post-vesting employment behaviors for
the purpose of refining the expected term assumption, regardless
of the valuation technique used to estimate the fair value. In
addition, SAB 107 clarifies that a company may generally
make a reasonable fair value estimate with as few as one or two
groupings. The Company has stratified its employee population
into two groups: (i) Insiders, who are the
Section 16 filers under SEC rules; and
(ii) Non-insiders, who are the rest of the
employee population. The Company derived this stratification
based on the analysis of its historical exercise patterns,
excluding certain extraordinary events.
22
LIFEPOINT
HOSPITALS, INC.
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Expected
Volatility
Volatility is a measure of the tendency of investment returns to
vary around a long-term average rate. Historical volatility is
an appropriate starting point for setting this assumption under
SFAS No. 123(R). According to
SFAS No. 123(R), companies should also consider how
future experience may differ from the past. This may require
using other factors to adjust historical volatility, such as
implied volatility, peer-group volatility and the range and
mean-reversion of volatility estimates over various historical
periods. SFAS No. 123(R) and SAB 107 acknowledge
that there is likely to be a range of reasonable estimates for
volatility. In addition, SFAS No. 123(R) requires that
if a best estimate cannot be made, management should use the
mid-point in the range of reasonable estimates for volatility.
Effective January 1, 2006, the Company estimates the
volatility of its common stock at the date of grant based on
both historical volatility and implied volatility from traded
options on the Companys common stock, consistent with
SFAS No. 123(R) and SAB 107.
Risk-Free
Interest Rate
Lattice models require risk-free interest rates for all
potential times of exercise obtained by using a grant-date yield
curve. A lattice model would, therefore, require the yield curve
for the entire time period during which employees might exercise
their options. The Company bases the risk-free rate on the
implied yield in effect at the time of option grant on
U.S. Treasury zero-coupon issues with equivalent remaining
terms.
Expected
Dividends
The Company has never paid any cash dividends on its common
stock and does not anticipate paying any cash dividends in the
foreseeable future. Consequently, it uses an expected dividend
yield of zero.
Pre-Vesting
Forfeitures
Pre-vesting forfeitures do not affect the fair value
calculation, but they affect the expense calculation.
SFAS No. 123(R) requires the Company to estimate
pre-vesting forfeitures at the time of grant and revise those
estimates in subsequent periods if actual forfeitures differ
from those estimates. The Company has used historical data to
estimate pre-vesting option forfeitures and record share-based
compensation expense only for those awards that are expected to
vest. For purposes of calculating pro forma information under
SFAS No. 123 for periods prior to January 1,
2006, the Company also used an estimated forfeiture rate.
Post-Vesting
Cancellations
Post-vesting cancellations include vested options that are
cancelled, exercised or expire unexercised. Lattice models treat
post-vesting cancellations and voluntary early exercise behavior
as two separate assumptions. The Company used historical data to
estimate post-vesting cancellations.
Expected
Term
SFAS No. 123(R) calls for an
extinguishment calculation, dependent upon how long
a granted option remains outstanding before it is fully
extinguished. While extinguishment may result from exercise, it
can also result from cancellation (post-vesting) or expiration
at the contractual term. Expected term is an output in lattice
models so the Company does not have to determine this amount.
23
LIFEPOINT
HOSPITALS, INC.
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Stock
Option Activity
A summary of stock option activity under both the LTIP and ODSIP
during the nine months ended September 30, 2006 is as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
Weighted
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
Average
|
|
|
Average
|
|
|
|
|
|
Aggregate
|
|
|
Remaining
|
|
|
|
Number
|
|
|
Exercise
|
|
|
Fair
|
|
|
Total
|
|
|
Intrinsic
|
|
|
Contractual
|
|
Stock Options
|
|
of Shares
|
|
|
Price
|
|
|
Value
|
|
|
Fair Value
|
|
|
Value(b)
|
|
|
Term
|
|
|
|
|
|
|
|
|
|
|
|
|
(In millions)
|
|
|
(In millions)
|
|
|
(In years)
|
|
|
Outstanding at December 31,
2005(a)
|
|
|
3,554,804
|
|
|
$
|
30.01
|
|
|
$
|
12.26
|
|
|
$
|
43.6
|
|
|
$
|
32.3
|
|
|
|
7.17
|
|
Exercisable at December 31,
2005(a)
|
|
|
2,784,822
|
|
|
$
|
26.61
|
|
|
$
|
10.27
|
|
|
$
|
28.6
|
|
|
$
|
32.3
|
|
|
|
N/A
|
|
Granted
|
|
|
904,745
|
|
|
|
33.23
|
|
|
|
11.18
|
|
|
|
10.1
|
|
|
|
N/A
|
|
|
|
N/A
|
|
Forfeited (pre-vest cancellation)
|
|
|
277,975
|
|
|
|
37.83
|
|
|
|
15.75
|
|
|
|
4.4
|
|
|
|
N/A
|
|
|
|
N/A
|
|
Exercised
|
|
|
20,048
|
|
|
|
17.32
|
|
|
|
6.24
|
|
|
|
0.1
|
|
|
|
0.3
|
|
|
|
N/A
|
|
Expired (post-vest cancellation)
|
|
|
15,790
|
|
|
|
34.76
|
|
|
|
14.04
|
|
|
|
0.2
|
|
|
|
N/A
|
|
|
|
N/A
|
|
Vested
|
|
|
224,310
|
|
|
|
42.62
|
|
|
|
19.79
|
|
|
|
4.4
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at September 30,
2006
|
|
|
4,145,736
|
|
|
$
|
30.23
|
|
|
$
|
11.81
|
|
|
$
|
49.0
|
|
|
$
|
28.8
|
|
|
|
6.41
|
|
Exercisable at September 30,
2006
|
|
|
2,973,294
|
|
|
$
|
27.84
|
|
|
$
|
11.00
|
|
|
$
|
32.7
|
|
|
$
|
27.2
|
|
|
|
5.32
|
|
|
|
|
(a) |
|
Certain prior period adjustments were made to the amounts at
December 31, 2005. |
|
(b) |
|
The aggregate intrinsic value represents the difference between
the underlying stocks market price and the stock
options exercise price. |
The Company received $43.3 million and $0.4 million in
cash from stock option exercises for the nine months ended
September 30, 2005 and 2006, respectively. The actual tax
benefit realized for the tax deductions from stock option
exercises of the stock-based payment arrangements totaled
$8.9 million for the nine months ended September 30,
2005. There was a nominal amount of actual tax benefits realized
for the tax deductions from stock option exercises for the nine
months ended September 30, 2006.
As of September 30, 2006, there was $11.6 million of
total unrecognized compensation cost related to stock option
compensation arrangements under the LTIP. 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 2.1 years.
Nonvested
Stock
The fair value of nonvested stock is determined based on the
closing price of the Companys common stock on 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).
24
LIFEPOINT
HOSPITALS, INC.
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
A summary of nonvested stock activity under both the LTIP and
ODSIP, including 24,500 restricted stock units under the ODSIP,
during the nine months ended September 30, 2006 is as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
Total
|
|
|
|
|
|
|
Number
|
|
|
Average
|
|
|
Fair
|
|
|
Aggregate
|
|
Nonvested Shares
|
|
of Shares
|
|
|
Fair Value
|
|
|
Value
|
|
|
Intrinsic Value
|
|
|
|
|
|
|
|
|
|
(In millions)
|
|
|
(In millions)
|
|
|
Outstanding at December 31,
2005(a)
|
|
|
865,034
|
|
|
$
|
42.76
|
|
|
$
|
37.0
|
|
|
$
|
32.4
|
|
Granted
|
|
|
414,219
|
|
|
|
33.22
|
|
|
|
13.8
|
|
|
|
N/A
|
|
Vested
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Forfeited (pre-vest cancellation)
|
|
|
253,674
|
|
|
|
40.37
|
|
|
|
10.3
|
|
|
|
N/A
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at September 30,
2006
|
|
|
1,025,579
|
|
|
$
|
39.50
|
|
|
$
|
40.5
|
|
|
$
|
36.2
|
|
|
|
|
(a) |
|
Certain prior period adjustments were made to the outstanding
amounts at December 31, 2005. |
During the nine months ended September 30, 2006, the
Company granted 135,500 shares of nonvested stock awards
under the LTIP to certain senior executives, 50,000 of which
were forfeited when Mr. Donahey retired during June 2006.
These nonvested stock awards are included in the above table. 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
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 September 30, 2006, there was $23.2 million of
total unrecognized compensation cost related to nonvested stock
compensation arrangements granted under both the LTIP and ODSIP.
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
2.7 years.
25
LIFEPOINT
HOSPITALS, INC.
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Comparable
Disclosures
As discussed above, the Company accounted for stock-based
compensation under the fair value method of
SFAS No. 123(R) during the nine months ended
September 30, 2006. Prior to January 1, 2006, the
Company accounted for stock-based compensation under the
provisions of APB No. 25. Accordingly, the Company recorded
stock-based compensation expense for its nonvested stock and did
not record stock-based compensation expense for its stock
options and ESPP for the nine months ended September 30,
2005. The following table illustrates the effect on the
Companys net income and net income per share for the three
and nine months ended September 30, 2005 and 2006 if it had
applied the fair value recognition provisions of
SFAS No. 123 to stock-based compensation using the BSM
valuation model (in millions, except per share amounts):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months
|
|
|
|
Three Months Ended
|
|
|
Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2005(d)
|
|
|
2006
|
|
|
2005(d)
|
|
|
2006
|
|
|
Net income, as reported in prior
period(a)
|
|
$
|
29.6
|
|
|
|
|
|
|
$
|
48.3
|
|
|
|
|
|
Add: Stock-based compensation
expense included in reported net income, net of income taxes
|
|
|
1.4
|
|
|
|
|
|
|
|
6.8
|
|
|
|
|
|
Less: Stock-based compensation
expense determined under fair value based method for all awards,
net of income taxes(b)
|
|
|
(2.1
|
)
|
|
|
|
|
|
|
(15.6
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income, including stock-based
compensation(c)
|
|
$
|
28.9
|
|
|
$
|
34.9
|
|
|
$
|
39.5
|
|
|
$
|
107.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic as reported in
prior period(a)
|
|
$
|
0.54
|
|
|
|
|
|
|
$
|
0.99
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic including
stock-based compensation(c)
|
|
$
|
0.52
|
|
|
$
|
0.63
|
|
|
$
|
0.82
|
|
|
$
|
1.94
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted as reported in
prior period(a)
|
|
$
|
0.53
|
|
|
|
|
|
|
$
|
0.98
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted including
stock-based compensation(c)
|
|
$
|
0.51
|
|
|
$
|
0.62
|
|
|
$
|
0.80
|
|
|
$
|
1.92
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
Net income and net income per share as reported for periods
prior to January 1, 2006 did not include stock-based
compensation expense for stock options and the Companys
ESPP because it did not adopt the recognition provisions of
SFAS No. 123. |
|
(b) |
|
Stock-based compensation expense for periods prior to
January 1, 2006 is calculated based on the pro forma
application of SFAS No. 123. |
|
(c) |
|
Net income and net income per share including stock-based
compensation for periods prior to January 1, 2006 are based
on the pro forma application of SFAS No. 123. |
|
(d) |
|
All outstanding stock options as of April 15, 2005, except
for 28,500 stock options granted in December 2004, and all
outstanding nonvested stock awards became fully vested on
April 15, 2005, as a result of the Province Business
Combination and the change of control provisions in the
Companys stock-based compensation plans. The estimated pro
forma after-tax charge the Company would have incurred during
the nine months ended September 30, 2005 as a result of the
accelerated vesting of stock options was $4.9 million. In
addition, as a result of the accelerated vesting of nonvested
stock awards, the Company recognized an after-tax charge of
$2.5 million for the nine months ended September 30,
2005. |
26
LIFEPOINT
HOSPITALS, INC.
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Long-term debt consists of the following at December 31,
2005 and September 30, 2006 (in millions):
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
September 30,
|
|
|
|
2005
|
|
|
2006
|
|
|
Senior Borrowings:
|
|
|
|
|
|
|
|
|
Credit Agreement:
|
|
|
|
|
|
|
|
|
Term B Loans
|
|
$
|
1,281.9
|
|
|
$
|
1,321.9
|
|
Revolving Credit Loans
|
|
|
|
|
|
|
200.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,281.9
|
|
|
|
1,521.9
|
|
|
|
|
|
|
|
|
|
|
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
|
|
|
3.2
|
|
|
|
7.6
|
|
|
|
|
|
|
|
|
|
|
Total long-term debt
|
|
|
1,516.3
|
|
|
|
1,760.7
|
|
Less: current portion
|
|
|
0.5
|
|
|
|
0.9
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,515.8
|
|
|
$
|
1,759.8
|
|
|
|
|
|
|
|
|
|
|
Amendments
to Senior Secured Credit Facilities
On September 8, 2006, the Company amended its Credit
Agreement to increase the aggregate amount available for
Incremental Revolving Loans under the Credit Agreement by
$50.0 million. On June 30, 2006, the Company entered
into an incremental facility amendment to increase the
availability of Term B Loans under its Credit Agreement by $50.0
million. The Company borrowed $50.0 million in the form of
the incremental Term B Loans thereunder. The proceeds of these
incremental Term B Loans have been used to finance the
acquisition of the four hospitals from HCA.
Revolving
Credit Loans
In connection with the acquisition of the four hospitals from
HCA, the Company borrowed $200.0 million in Revolving
Credit Loans under the Credit Agreement.
|
|
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 rate swap agreement is
effective as of November 15, 2006 and has a maturity date
of May 15, 2011. The Counterparty is one of the lenders
under the Credit Agreement. 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 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 LIBO 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.
27
LIFEPOINT
HOSPITALS, INC.
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Notional
Schedule
|
|
|
|
|
Date Range
|
|
Notional Amount
|
|
|
November 15, 2006 to
November 15, 2007
|
|
$
|
900.0 million
|
|
November 15, 2007 to
November 15, 2008
|
|
$
|
750.0 million
|
|
November 15, 2008 to
November 15, 2009
|
|
$
|
600.0 million
|
|
November 15, 2009 to
November 15, 2010
|
|
$
|
450.0 million
|
|
November 15, 2010 to
May 15, 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 condensed consolidated balance sheet at its fair
value.
The Company assesses the effectiveness of its cash flow hedge
instrument on a quarterly basis. For the three months ended
September 30, 2006, 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
Counterparty on the interest rate swap agreement exposes the
Company to credit risk in the event of non-performance. 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 September 30, 2006
reflected a liability of approximately $16.3 million
($10.6 million net of income taxes) and is included in
professional and general liability claims and other liabilities
and accumulated other comprehensive loss on the Companys
condensed consolidated balance sheet. The interest rate swap
reflects a liability balance as of September 30, 2006
because of a recent decrease in market interest rates. If the
interest rate swap does not remain highly effective as a cash
flow hedge, the derivatives gain or loss reported through
other comprehensive loss will be reclassified into earnings.
Americans
with Disabilities Act Claim
On January 12, 2001, Access Now, Inc., a disability rights
organization, filed a class action lawsuit against each of the
Companys hospitals alleging non-compliance with the
accessibility guidelines under the Americans with Disabilities
Act (the ADA). The lawsuit, filed in the
U.S. District Court for the Eastern District of Tennessee
(District Court), seeks injunctive relief requiring
facility modification, where necessary, to meet the ADA
guidelines, along with 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. In January 2002, 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 intends
to vigorously defend the lawsuit, recognizing the Companys
obligation to correct any deficiencies in order to comply with
the ADA. As of September 30, 2006, the plaintiffs have
conducted inspections at 27 of the Companys hospitals,
including the now divested Smith County. To date, the District
Court has approved the settlement agreements between the parties
relating to 13 of the Companys facilities. The Company is
moving forward in implementing facility modifications in
accordance with the terms of the settlement. The Company has
completed corrective work on three facilities for a cost of
$1.0 million. The Company currently anticipates that the
costs associated with ten other facilities that have court
approved settlement agreements will range from $5.1 million
to $7.0 million.
While the former Province facilities, DRMC and WCCH are not
parties to this lawsuit, if these facilities become subject to
the class action lawsuit, the Company may be required to expend
significant capital expenditures at one or more of these
facilities in order to comply with the ADA, and the
Companys financial position and results of operations
could be adversely affected as a result. The plaintiff in this
lawsuit has
28
LIFEPOINT
HOSPITALS, INC.
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
represented to the District Court that it will amend the lawsuit
to add the Companys acquired facilities and dismiss the
divested facilities. Alternatively, noncompliance with the
requirements of the ADA could result in the imposition of fines
against the Company by the federal government, or the award of
damages from the Company to individuals.
Corporate
Integrity Agreement
In December 2000, the Company entered into a five-year corporate
integrity agreement (the Corporate Integrity
Agreement) with the Office of Inspector General of the
Department of Health and Human Services and agreed to maintain
its compliance program in accordance with the Corporate
Integrity Agreement. The Corporate Integrity Agreement expired
on December 31, 2005. The Companys final report under
the Corporate Integrity Agreement was completed on May 1,
2006.
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
management contracts, wrongful restriction of or interference
with physicians staff privileges and employment-related
claims. In some instances, plaintiffs request punitive or other
damages against the Company which 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.
Shareholder
Lawsuit
On April 10, 2006, Accipiter Life Sciences Fund, L.P.
(Accipiter) filed an action against the Company and
its directors in the Delaware Court of Chancery. The complaint
alleges, among other things, that the Companys directors
breached their fiduciary duties by enforcing the Companys
advance notification bylaw in connection with Accipiters
attempt to nominate members to the Companys board of
directors. Accipiter originally sought, among other things, to
enjoin the Company from proceeding with its 2006 Annual Meeting
of Stockholders without first waiving the advance notification
bylaw and permitting Accipiter to solicit proxies on behalf of
its nominees. On April 25, 2006, the court denied
Accipiters motion for a preliminary injunction in
connection with the Companys 2006 Annual Meeting of
Stockholders, and the meeting (and attendant election of
directors) proceeded on May 8, 2006 as scheduled.
On May 26, 2006, the Company moved for summary judgment
dismissing each of Accipiters claims. In its answering
brief dated June 7, 2006, Accipiter requested that the
court instead enter summary judgment in its favor and order a
new election of directors, at which time Accipiters
proposed nominees would be considered. On August 2, 2006,
the Delaware Chancery Court granted a summary judgment in the
Companys favor, dismissing Accipiters lawsuit.
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 $52.9 million at September 30, 2006.
The actual amount of such commitments to be subsequently
advanced to physicians is estimated at $21.2 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
29
LIFEPOINT
HOSPITALS, INC.
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
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
adopted FSP
FIN 45-3
effective January 1, 2006, which affects the accounting for
advances to physicians, 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 had incurred approximately $60.2 million in
uncompleted projects at September 30, 2006, which is
included in construction in progress in the Companys
accompanying condensed consolidated balance sheet. At
September 30, 2006, the Company had projects under
construction with an estimated cost to complete and equip of
approximately $110.3 million.
Pursuant to the asset purchase agreement for DRMC, the Company
has agreed to expend at least $18.5 million for capital
expenditures and improvements before July 1, 2008. The
Company has incurred approximately $1.9 million of the
required capital expenditures and improvements as of
September 30, 2006.
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 $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 September 30, 2006.
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 former Province facilities. In
accordance with the purchase agreements for the Martinsville,
Virginia; Las Cruces, New Mexico; and Los Alamos, New Mexico
facilities, the Company is obligated to make ongoing annual
expenditures based on a percentage of net revenues.
Tax
Matters
During 2003, the Internal Revenue Service (IRS)
notified the Company regarding its findings related 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 expects to reach resolution of its IRS examination
after the final settlement of HCAs tax years preceding the
spin-off of the Company from HCA. 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.
On April 7, 2005, Province received notification from the
IRS of its intention to examine Provinces federal income
tax return for the year ended December 31, 2003. The
Companys management believes that
30
LIFEPOINT
HOSPITALS, INC.
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
adequate provisions have been reflected in its consolidated
financial statements to satisfy any issues that may arise in the
audit of the 2003 tax return.
On April 15, 2005, the Company received notification from
the IRS of its intention to examine the Companys federal
income tax return for the year ended December 31, 2003. In
addition, during the second quarter of 2006, the IRS notified
the Company of its intention to examine 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 Companys
management believes that adequate provisions have been reflected
in its consolidated financial statements to satisfy final
resolution of the remaining disputed issue on the 1999 through
2001 audits as well as any issues that may arise in the audit of
the 2002 and 2003 tax returns based upon current facts and
circumstances.
Acquisitions
The Company has historically acquired businesses with prior
operating histories. Acquired companies, including the former
Province hospitals, 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.
31
|
|
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
2005 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 nine months ended September 30, 2006, we have
focused on managing our hospitals in an environment of lower
admissions, integrating our 2005 and 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):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months
|
|
|
|
Three Months
|
|
|
Ended
|
|
|
|
Ended September 30,
|
|
|
September 30,
|
|
|
|
2005
|
|
|
2006
|
|
|
2005
|
|
|
2006
|
|
|
Revenues
|
|
$
|
548.9
|
|
|
$
|
640.3
|
|
|
$
|
1,285.3
|
|
|
$
|
1,799.1
|
|
Income from continuing operations
|
|
$
|
30.3
|
|
|
$
|
34.5
|
|
|
$
|
53.0
|
|
|
$
|
104.7
|
|
Diluted earnings per share from
continuing operations
|
|
$
|
0.54
|
|
|
$
|
0.61
|
|
|
$
|
1.08
|
|
|
$
|
1.86
|
|
Change
in the Companys Chief Executive Officer and
Chairman
Effective June 26, 2006, Executive Vice President William
F. (Bill) Carpenter III, age 51, was named our
President and Chief Executive Officer. Mr. Carpenter
replaced Kenneth C. Donahey, who retired after serving five
years as our Chairman, President and Chief Executive Officer. In
addition, on June 25, 2006, Mr. Donahey resigned from
our board of directors and Mr. Carpenter was elected by our
board of directors to fill the vacancy resulting from
Mr. Donaheys resignation. Furthermore, our current
lead Director, Owen G. Shell, Jr., has been elected as our
Chairman of the Board.
Effective June 25, 2006, we entered into a Separation
Agreement with Mr. Donahey. Effective June 25, 2006,
the Separation Agreement terminates the Employment Agreement
between us and Mr. Donahey, effective June 25, 2001,
as amended and restated effective as of December 31, 2004.
Mr. Donahey will receive $3.5 million in two equal
installments, on December 27, 2006 and June 27, 2007,
together with a payment to cover any liability for federal
excise tax he may incur as a result of the receipt of such
payments. The confidentiality provisions of the Employment
Agreement remain in effect for 36 months. Mr. Donahey
may exercise his stock options that were vested at the time of
his retirement over a period of three years after his retirement
date. He will receive insurance benefits comparable to those
available to our executives for a period of two years. We also
agreed to a mutual release of claims, except for any indemnity
claims to which Mr. Donahey may be entitled and for
breaches of the Separation Agreement. Mr. Donahey agreed
not to compete with us for a period of one year in non-urban
hospitals, diagnostic/imaging or surgery centers, and the
physician recruitment business, subject to certain limitations,
and he agreed not to induce or encourage the departure of our
employees for a period of one year.
As a result of Mr. Donaheys retirement, we incurred
an additional net pre-tax compensation expense of approximately
$2.0 million ($1.2 million net of income taxes), or a
decrease in diluted earnings per share of $0.02, for the nine
months ended September 30, 2006. This compensation expense
consists of the $3.5 million of installment payments, as
described above, offset by a $1.5 million pre-tax reversal
of stock compensation expense resulting from the termination of
his unvested stock options and nonvested stock.
Hospital
Acquisitions
The Province business combination in April 2005 provided a
unique opportunity for us to acquire 21 hospitals in
non-urban communities, while diversifying our economic and
geographic reach. Additionally, our July 1, 2006
acquisition of two hospitals from HCA and our 2005 acquisitions
of WCCH and DRMC fit into our plan of pursuing a strategy for
acquiring hospitals that are the sole or significant market
provider of
32
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 2005 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 2005 Annual
Report on
Form 10-K
for further discussion of acquisitions that we made in recent
years.
Havasu
Joint Venture
Effective September 1, 2006, HSC transferred substantially
all of its assets to Havasu LLC, in exchange for all of the
Class A units in the Havasu LLC, plus cash. Also effective
September 1, 2006, PHC-Lake Havasu, Inc., our wholly owned
subsidiary which operated HRMC, contributed to the Havasu LLC
substantially all of the assets used in the operation of HRMC
(except for real estate and home health assets), plus cash, in
exchange for all of the Class B Units. The Class B
Units represent approximately a 96% equity interest in the
Havasu LLC. We acquired the HSC through the Havasu LLC for
approximately $27.0 million, which consisted of
$18.9 million in cash and a non-cash $8.1 million
capital contribution from the minority physician partners.
Goodwill recognized in connection with the acquisition of the
HSC ASC totaled $8.7 million.
Business
Combination with Province Healthcare Company
On April 15, 2005, we announced the completion of the
business combination with Province Healthcare Company. As a
result of the Province business combination, each of Historic
LifePoint and Province is now a wholly owned subsidiary of
LifePoint Hospitals, Inc., a new public company formed in
connection with the Province business combination. We believe
that the Province business combination has provided and will
continue to provide efficiencies for our operations and enhance
our ability to compete effectively. As a result of the Province
business combination, we are more geographically and financially
diversified in our asset base, increasing our operations from
nine states to 19 states. We continue to invest in and
integrate the former Province hospitals into our operations
during 2006. Please refer to Note 2 of our condensed
consolidated financial statements included elsewhere in this
report for more information regarding the Province business
combination. Our results of operations include the operations of
the former hospitals of Province beginning April 16, 2005.
Impact
of Final Valuations of Fixed Assets
In connection with the finalization of the purchase price
allocations of both DRMC and Province, we recognized a reduction
in depreciation expense of approximately $13.5 million
($8.1 million net of income taxes), or $0.14 per
diluted share during the second quarter of 2006. This decreased
depreciation expense was the result of lower fair values of
certain property and equipment established by the third-party
valuation firm than originally anticipated in the preliminary
purchase price allocations.
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. 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
Hospital located in Parkersburg, West Virginia, and Saint
Francis Hospital located in Charleston, West Virginia. On
September 15, 2006, we announced the signing of definitive
agreements for the sale of these two hospitals, subject to
customary closing conditions. During the second quarter of 2005,
subsequent to the Province business combination, we committed to
a plan to divest three hospitals acquired from Province. These
three hospitals were: Medical Center of Southern Indiana located
in Charlestown, Indiana; Ashland Regional Medical Center located
in Ashland, Pennsylvania; and Palo Verde Hospital located in
Blythe, California. We divested Palo
33
Verde Hospital on December 31, 2005 by terminating our
lease of that hospital and returning the hospital to the
Hospital District of Palo Verde. We completed the sale of both
Medical Center of Southern Indiana and Ashland Regional Medical
Center to Saint Catherine Healthcare effective May 1, 2006.
On March 31, 2006, we sold Smith County Memorial Hospital
to Sumner Regional Health System. On March 31, 2005, we
sold Bartow Memorial Hospital to Health Management Associates,
Inc. 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
|
|
|
Nine Months
|
|
|
|
Ended September 30,
|
|
|
Ended September 30,
|
|
|
|
2005
|
|
|
2006
|
|
|
2005
|
|
|
2006
|
|
|
Revenues
|
|
$
|
15.8
|
|
|
$
|
47.3
|
|
|
$
|
45.4
|
|
|
$
|
60.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from discontinued
operations
|
|
$
|
(0.5
|
)
|
|
$
|
(0.2
|
)
|
|
$
|
0.9
|
|
|
$
|
(1.7
|
)
|
Impairment of assets
|
|
|
(0.2
|
)
|
|
|
|
|
|
|
(4.9
|
)
|
|
|
|
|
Gain (loss) on sale of hospitals
|
|
|
|
|
|
|
0.6
|
|
|
|
(0.7
|
)
|
|
|
4.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from discontinued
operations
|
|
$
|
(0.7
|
)
|
|
$
|
0.4
|
|
|
$
|
(4.7
|
)
|
|
$
|
2.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings (loss) per share
from discontinued operations
|
|
$
|
(0.01
|
)
|
|
$
|
0.01
|
|
|
$
|
(0.10
|
)
|
|
$
|
0.05
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Key
Challenges
|
|
|
|
|
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 provision for doubtful
accounts on a consolidated basis was as follows for the periods
presented (in millions):
|
|
|
|
|
|
|
|
|
|
|
Provision for
|
|
|
|
Doubtful Accounts
|
|
|
|
2005
|
|
|
2006
|
|
|
First Quarter
|
|
$
|
25.2
|
|
|
$
|
68.5
|
|
Second Quarter
|
|
|
45.2
|
|
|
|
59.9
|
|
Third Quarter
|
|
|
63.1
|
|
|
|
74.0
|
|
Fourth Quarter
|
|
|
63.8
|
|
|
|
N/A
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
197.3
|
|
|
$
|
202.4
|
|
|
|
|
|
|
|
|
|
|
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.
34
The following table reflects our
consolidated charity and indigent care write-offs for the
periods presented (in millions):
|
|
|
|
|
|
|
|
|
|
|
Charity and
|
|
|
|
Indigent Care
|
|
|
|
Write-Offs
|
|
|
|
2005
|
|
|
2006
|
|
|
First Quarter
|
|
$
|
1.8
|
|
|
$
|
6.1
|
|
Second Quarter
|
|
|
6.2
|
|
|
|
12.1
|
|
Third Quarter
|
|
|
8.3
|
|
|
|
11.6
|
|
Fourth Quarter
|
|
|
9.5
|
|
|
|
N/A
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
25.8
|
|
|
$
|
29.8
|
|
|
|
|
|
|
|
|
|
|
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
|
|
|
|
2005
|
|
|
2006
|
|
|
First Quarter
|
|
$
|
26.9
|
|
|
$
|
74.6
|
|
Second Quarter
|
|
|
48.4
|
|
|
|
73.5
|
|
Third Quarter
|
|
|
72.3
|
|
|
|
88.3
|
|
Fourth Quarter
|
|
|
67.6
|
|
|
|
N/A
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
215.2
|
|
|
$
|
236.4
|
|
|
|
|
|
|
|
|
|
|
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
|
|
|
|
2005
|
|
|
2006
|
|
|
March 31
|
|
|
37.2
|
|
|
|
39.6
|
|
June 30
|
|
|
41.0
|
|
|
|
40.7
|
|
September 30
|
|
|
42.0
|
|
|
|
45.1
|
|
December 31
|
|
|
40.5
|
|
|
|
N/A
|
|
Our consolidated revenue days
outstanding in accounts receivable increased in the quarter
ended September 30, 2006 over the prior quarters primarily
as a result of approximately $21.0 million of payments that
were withheld by Centers for Medicare and Medicaid Services
(CMS) during the last nine days of September 2006
and approximately $41.6 million of net patient accounts
receivable
build-up in
the four hospitals acquired from HCA on July 1, 2006.
The approximate percentages of
billed hospital receivables (which is a component of total
accounts receivable) are summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
March 31,
|
|
|
June 30,
|
|
|
September 30,
|
|
|
|
2005
|
|
|
2006
|
|
|
2006
|
|
|
2006
|
|
|
Insured receivables
|
|
|
40.6
|
%
|
|
|
40.1
|
%
|
|
|
36.1
|
%
|
|
|
40.7
|
%
|
Uninsured receivables (including
copayments and deductibles)
|
|
|
59.4
|
|
|
|
59.9
|
|
|
|
63.9
|
|
|
|
59.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
35
The approximate percentages of
billed hospital receivables in summarized aging categories are
as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
March 31,
|
|
|
June 30,
|
|
|
September 30,
|
|
|
|
2005
|
|
|
2006
|
|
|
2006
|
|
|
2006
|
|
|
0 to 60 days
|
|
|
51.4
|
%
|
|
|
51.5
|
%
|
|
|
48.0
|
%
|
|
|
53.2
|
%
|
61 to 150 days
|
|
|
20.9
|
|
|
|
20.7
|
|
|
|
21.5
|
|
|
|
19.4
|
|
Over 150 days
|
|
|
27.7
|
|
|
|
27.8
|
|
|
|
30.5
|
|
|
|
27.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
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,
it could have a material adverse effect on our results of
operations and financial position in the future.
|
|
|
|
|
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 the
community places 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 nine months ended
September 30, 2006, we recruited 174 new admitting
physicians, including physicians who have not yet started, and
spent $19.0 million in cash on physician recruitment.
|
A summary of activity related to
our admitting physicians during the nine months ended
September 30, 2006 is as follows:
|
|
|
|
|
|
|
Admitting
|
|
|
|
Physicians
|
|
|
December 31, 2005
|
|
|
1,832
|
|
Recruited and started
|
|
|
120
|
|
Departed
|
|
|
(55
|
)
|
Additions from two HCA hospitals
(acquired effective July 1, 2006)
|
|
|
132
|
|
|
|
|
|
|
September 30, 2006
|
|
|
2,029
|
|
|
|
|
|
|
|
|
|
|
|
Substantial Indebtedness. Our consolidated
debt was $1,760.7 million as of September 30, 2006,
and we incurred $76.2 million of net interest expense
during the nine months ended September 30, 2006. On
June 1, 2006, we entered into an interest rate swap
agreement effective as of November 15, 2006 with a maturity
date of May 15, 2011. The interest rate swap converts a
portion of our indebtedness to a fixed rate with a decreasing
notional amount starting at $900.0 million at 5.585%. 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 September 30, 2006 and believe we will be
in compliance with them for the fourth quarter of 2006.
|
|
|
|
Medicare Changes. We are experiencing changes
with respect to governmental reimbursement that are affecting
our growth. Effective October 1, 2005, CMS expanded the
post-acute transfer policy from 30 diagnosis related groups
(DRGs) to 182 DRGs. We estimate the expansion in the
post-acute transfer policy results in a quarterly reduction of
approximately $1.5 million to $2.0 million in our
Medicare inpatient Prospective Payment System payments. On
February 8, 2006, President Bush signed the Deficit
Reduction Act of 2005 (DRA) into law. This law
includes measures related to quality reporting and
pay-for-performance,
the inpatient rehabilitation facility 75% rule and Medicaid
cuts. Part I, Item 1. Business, Sources
of Revenue in our 2005 Annual Report on
Form 10-K
contains a detailed discussion of provisions that affect our
Medicare reimbursement.
|
|
|
|
Integration of Recently Acquired
Hospitals. During 2005 and 2006, we acquired
numerous hospitals in separate transactions. The process of
integrating the operations of these hospitals could cause an
|
36
|
|
|
|
|
interruption of, or loss of momentum in, the activities of our
business. However, we are dedicated to devoting significant
management attention and resources to integrating the business
practices and operations of our recently acquired hospitals.
|
|
|
|
|
|
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 clinical positions,
we are required to use contract labor to ensure adequate patient
care. Contract labor generally costs more per hour than employed
labor. 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. 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. Professional and general
liability costs remain a challenge to us, and we expect this
pressure to continue in the future.
|
|
|
|
Increases in Supply Costs. During the past few
years, we have experienced an increase in supply costs as a
percentage of revenues, 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.
|
|
|
|
Start-up
Costs at Our Two De Novo Hospitals. Each of our
two newly-constructed hospitals, Valley View Medical Center
in Fort Mohave, Arizona and Coastal Carolina Medical Center
in Hardeeville, South Carolina, has incurred significant
start-up
costs and will attempt to build market share over time. In
addition, we did not receive Medicare certification at Valley
View Medical Center until April 28, 2006. We could not bill
Medicare and Medicaid for most services provided at this
facility for periods prior to the Medicare certification.
|
|
|
|
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-Information and Technology Systems, Inc.
(HCA-IT) for information systems integration
pursuant to our contractual arrangement for information
technology services. Recently, the number of hospitals we
operated increased significantly. This resulted in significant
increases in information technology costs and we expect that
such costs will continue to increase significantly as we
integrate our recent acquisitions onto the HCA-IT systems.
|
Outlook
We expect to increase our revenues and net income by improving
the operating results of the hospitals we currently own and
operate. We intend to continue to invest in additional
healthcare services in our facilities and implement our
operating strategies. Our recent acquisitions require
significant attention from our management to integrate the
business practices and operations of these newly acquired
hospitals.
By successfully focusing on each of the above-mentioned key
challenges, we anticipate increasing our revenues and
profitability on both a short-term and long-term basis. Each of
these 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 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
37
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 2005 Annual Report on
Form 10-K
contains a detailed discussion of our revenue sources.
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 ensure we are appropriately pricing 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 experienced an increase in
self-pay revenues during the past three 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 2005 Annual Report on
Form 10-K
and continue to include the following areas:
|
|
|
|
|
Allowance for doubtful accounts and provision for doubtful
accounts;
|
|
|
|
Revenue recognition and allowance for contractual discounts;
|
|
|
|
Goodwill and accounting for business combinations;
|
|
|
|
Professional and general liability claims; and
|
|
|
|
Accounting for income taxes.
|
New
Critical Accounting Estimate
Accounting
for Stock-based Compensation
We issue stock options and other stock-based awards to our key
employees and directors under various stockholder-approved
stock-based compensation plans. We currently have four types of
stock-based awards outstanding under these plans: stock options;
nonvested stock; restricted stock units; and deferred stock
units. Prior to January 1, 2006, we accounted for our
stock-based employee compensation plans under the measurement
and recognition provisions of APB No. 25, as permitted by
SFAS No. 123. We did not record any stock-based
employee compensation expense for options granted under our
stock-based incentive plans
38
prior to January 1, 2006, as all options granted under
those plans had exercise prices equal to the fair market value
of our common stock on the date of grant. We also did not record
any compensation expense in connection with our ESPP prior to
January 1, 2006, as the purchase price of the stock was not
less than 85% of the lower of the fair market value of our
common stock at the beginning of each offering period or at the
end of each purchase period. In accordance with
SFAS No. 123 and SFAS No. 148, prior to
January 1, 2006, we disclosed our pro forma net income or
loss and pro forma net income or loss per share as if we had
applied the fair value-based method in measuring compensation
expense for our stock-based incentive programs.
Effective January 1, 2006, we adopted the fair value
recognition provisions of SFAS No. 123(R), using the
modified prospective transition method. Under that transition
method, compensation expense that we recognize beginning on that
date includes: (i) compensation expense for all stock-based
payments granted prior to, but not yet vested as of,
January 1, 2006, based on the grant date fair value
estimated in accordance with the original provisions of
SFAS No. 123; and (ii) compensation expense for
all stock-based payments granted on or after January 1,
2006, based on the grant date fair value estimated in accordance
with the provisions of SFAS No. 123(R). Because we
elected to use the modified prospective transition method,
results for prior periods have not been restated. In March 2005,
the SEC issued SAB 107, which provides supplemental
implementation guidance for SFAS No. 123(R). We have
applied the provisions of SAB 107 in our adoption of
SFAS No. 123(R).
Impact of
the Adoption of SFAS No. 123(R)
The table below summarizes the compensation expense for stock
options that we recorded for continuing operations in accordance
with SFAS No. 123(R) for the three and nine months
ended September 30, 2006 (in millions, except for per share
amounts). The impact of the adoption of
SFAS No. 123(R) on discontinued operations was nominal
for this period.
|
|
|
|
|
|
|
|
|
|
|
Three Months
|
|
|
Nine Months
|
|
|
|
Ended
|
|
|
Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2006
|
|
|
2006
|
|
|
Reduction of income from
continuing operations before income taxes (included in salaries
and benefits)
|
|
$
|
1.5
|
|
|
$
|
4.3
|
|
Income tax benefit
|
|
|
(0.5
|
)
|
|
|
(1.6
|
)
|
|
|
|
|
|
|
|
|
|
Reduction of income from
continuing operations
|
|
$
|
1.0
|
|
|
$
|
2.7
|
|
|
|
|
|
|
|
|
|
|
Reduction of income per share from
continuing operations:
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.02
|
|
|
$
|
0.05
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
$
|
0.02
|
|
|
$
|
0.05
|
|
|
|
|
|
|
|
|
|
|
We recorded $3.8 million and $9.5 million in
stock-based compensation expense for the three and nine months
ended September 30, 2006, respectively. For the three
months ended September 30, 2006, the $3.8 million
amount consists of $1.5 million in compensation expense for
stock options and $2.3 million in compensation expense for
nonvested stock. For the nine months ended September 30,
2006, the $9.5 million amount consists of $4.3 million
in compensation expense for stock options and $5.2 million
in compensation expense for nonvested stock. We recorded
$2.1 million and $4.2 million in stock-based
compensation expense for nonvested stock for the three and nine
months ended September 30, 2005, respectively. This
excludes the $4.0 million of compensation expense we
recognized during the nine months ended September 30, 2005
that was the result of the accelerated vesting of nonvested
stock due to the Province Business Combination. We did not
capitalize any stock-based compensation cost for the three and
nine months ended September 30, 2005 and 2006. The total
tax benefits related to stock-based compensation expense were
$0.9 million and $1.5 million for the three months
ended September 30, 2005 and 2006, respectively. The total
tax benefits related to stock-based compensation expense were
$1.6 million and $3.9 million for the nine months
ended September 30, 2005 and 2006, respectively. As of
September 30, 2006, there was $34.8 million of total
unrecognized compensation cost related to all of our stock
compensation arrangements. Total unrecognized compensation
39
cost will be adjusted for future changes in estimated
forfeitures. We expect to recognize that cost over a weighted
average period of 2.5 years.
Companies were required to make an accounting policy decision
under SFAS No. 123 about whether to use a
forfeiture-rate assumption or to begin accruing compensation
cost for all awards granted (i.e., assume no forfeitures) and
then subsequently reverse compensation costs for forfeitures
when they occurred. Under SFAS No. 123(R), companies
are required to: (i) estimate the number of awards for
which it is probable that the requisite service will be
rendered; and (ii) update that estimate as new information
becomes available through the vesting date. We have historically
recognized our pro-forma stock option expense using an estimated
forfeiture rate. However, we also had a policy (prior to
January 1, 2006) of recognizing the effect of
forfeitures as they occurred for our nonvested stock. Under
SFAS No. 123(R), we were required to make a one-time
cumulative adjustment that increased income by $1.1 million, or
$0.7 million net of income taxes ($0.01 net income per
share, basic and diluted) as of January 1, 2006, to adjust
our compensation cost for those nonvested awards that are not
expected to vest. This adjustment is reported in our condensed
consolidated statement of operations as a cumulative effect of
change in accounting principle, net of income taxes, for the
nine months ended September 30, 2006.
Prior to the adoption of SFAS No. 123(R), we presented
unearned compensation on nonvested stock as a separate component
of stockholders equity. In accordance with the provisions
of SFAS No. 123(R), on January 1, 2006, we
reclassified the balance in unearned compensation on nonvested
stock to capital in excess of par value on our balance sheet.
Prior to the adoption of SFAS No. 123(R), we presented
all tax benefits for tax deductions resulting from the exercise
of stock options as operating cash flows on our statements of
cash flows. SFAS No. 123(R) requires that the cash
flows resulting from the tax benefits for tax deductions in
excess of the compensation expense recorded for those options
(excess tax benefits) be classified as financing cash flows.
Accordingly, we classified a nominal amount in excess tax
benefits as financing cash inflows rather than as operating cash
inflows on our statement of cash flows for the three and nine
months ended September 30, 2006.
SFAS No. 123(R) also requires companies to calculate
an initial pool of excess tax benefits available at
the adoption date to absorb any unused deferred tax assets that
may be recognized under SFAS No. 123(R). The pool
includes the net excess tax benefits that would have been
recognized if we had adopted SFAS No. 123 for
recognition purposes on the effective date. We have elected to
calculate the pool of excess tax benefits under the alternative
transition method described in FSP No. FAS 123(R)-3,
Transition Election Related to Accounting for Tax Effects
of Share-Based Payment Awards, which also specifies the
method we must use to calculate excess tax benefits reported on
the statement of cash flows.
Change in
Stock Option Valuation Model
In January 2006, we changed from the BSM option valuation model
to a lattice-based option valuation model, the HW-II. We prefer
the HW-II over the BSM because the HW-II considers
characteristics of fair value option pricing, such as an
options contractual term and the probability of exercise
before the end of the contractual term, that are not available
under the BSM. In addition, the complications surrounding the
expected term of an option are material, as clarified by the
SECs focus on the matter in SAB 107. Given the
reasonably large pool of our unexercised options, we believe a
lattice model that specifically addresses this fact and models a
full term of exercises is the most appropriate and reliable
means of valuing our stock options. We used a third party to
assist in developing the assumptions used in estimating the fair
values of stock options granted for the three and nine months
ended September 30, 2006.
As of September 30, 2006, there was $11.6 million of
total unrecognized compensation cost related to stock option
compensation arrangements under both the LTIP and ODSIP. Total
unrecognized compensation cost will be adjusted for future
changes in estimated forfeitures. We expect to recognize that
cost over a weighted average period of 2.1 years.
40
Valuation
We estimated the fair value of stock options granted during the
nine months ended September 30, 2006 using the HW-II
lattice option valuation model and a single option award
approach. We are 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 stock options that
were granted during the nine months ended September 30,
2006 vest 33.3% on each grant anniversary date over three years
of continued employment.
The following table shows the weighted average assumptions we
used to develop the fair value estimates under our option
valuation model:
|
|
|
|
|
|
|
Nine Months Ended
|
|
|
September 30,
|
|
|
2005
|
|
2006
|
|
Expected volatility
|
|
56.0%
|
|
32.8%
|
Risk free interest rate (range)
|
|
3.76% - 4.10%
|
|
4.38% - 5.17%
|
Expected dividends
|
|
|
|
|
Average expected term (years)
|
|
4.0
|
|
5.4
|
Population
Stratification
Under SFAS No. 123(R), a company should aggregate
individual awards into relatively homogeneous groups with
respect to exercise and post-vesting employment behaviors for
the purpose of refining the expected term assumption, regardless
of the valuation technique used to estimate the fair value. In
addition, SAB 107 clarifies that a company may generally
make a reasonable fair value estimate with as few as one or two
groupings. We have stratified our employee population into two
groups: (i) Insiders, who are the
Section 16 filers under SEC rules; and
(ii) Non-insiders, who are the rest of the
employee population. We derived this stratification based on the
analysis of our historical exercise patterns, excluding certain
extraordinary events.
Expected
Volatility
Volatility is a measure of the tendency of investment returns to
vary around a long-term average rate. Historical volatility is
still an appropriate starting point for setting this assumption
under SFAS No. 123(R). According to
SFAS No. 123(R), companies should also consider how
future experience may differ from the past. This may require
using other factors to adjust historical volatility, such as
implied volatility, peer-group volatility and the range and
mean-reversion of volatility estimates over various historical
periods. SFAS No. 123(R) and SAB 107 acknowledge
that there is likely to be a range of reasonable estimates for
volatility. In addition, SFAS No. 123(R) requires that
if a best estimate cannot be made, management should use the
mid-point in the range of reasonable estimates for volatility.
Effective January 1, 2006 we estimate the volatility of our
common stock at the date of grant based on both historical
volatility and implied volatility from traded options on our
common stock, consistent with SFAS No. 123(R) and
SAB 107.
Risk-Free
Interest Rate
Lattice models require risk-free interest rates for all
potential times of exercise obtained by using a grant-date yield
curve. A lattice model would therefore require the yield curve
for the entire time period during which employees might exercise
their options. We base the risk-free rate on the implied yield
in effect at the time of option grant on U.S. Treasury
zero-coupon issues with equivalent remaining terms.
Expected
Dividends
We have never paid any cash dividends on our common stock and do
not anticipate paying any cash dividends in the foreseeable
future. Consequently, we use an expected dividend yield of zero.
41
Pre-Vesting
Forfeitures
Pre-vesting forfeitures do not affect the fair value
calculation, but they affect the expense calculation.
SFAS No. 123(R) requires us to estimate pre-vesting
forfeitures at the time of grant and revise those estimates in
subsequent periods if actual forfeitures differ from those
estimates. We have used historical data to estimate pre-vesting
option forfeitures and record share-based compensation expense
only for those awards that are expected to vest. For purposes of
calculating pro forma information under SFAS No. 123
for periods prior to January 1, 2006, we also used an
estimated forfeiture rate.
Post-Vesting
Cancellations
Post-vesting cancellations include vested options that are
cancelled, exercised or expire unexercised. Lattice models treat
post-vesting cancellations and voluntary early exercise behavior
as two separate assumptions. We used historical data to estimate
post-vesting cancellations.
Expected
Term
SFAS No. 123(R) calls for an
extinguishment calculation, dependent upon how long
a granted option remains outstanding before it is fully
extinguished. While extinguishment may result from exercise, it
can also result from cancellation (post-vesting) or expiration
at the contractual term. Expected term is an output in lattice
models so we do not have to determine this amount.
Nonvested
Stock
The fair value of nonvested stock is determined based on the
closing price of our common stock on 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).
During the nine months ended September 30, 2006, we granted
135,500 shares of nonvested stock awards under the LTIP to
certain senior executives, 50,000 of which were forfeited when
Mr. Donahey retired during June 2006. 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 our common stock on 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 September 30, 2006, there was $23.2 million of
total unrecognized compensation cost related to nonvested stock
compensation arrangements granted under both the LTIP and ODSIP.
Total unrecognized compensation cost will be adjusted for future
changes in estimated forfeitures. We expect to recognize that
cost over a weighted average period of 2.7 years.
42
Comparable
Disclosures
As discussed above, we accounted for stock-based compensation
under the fair value method of SFAS No. 123(R) during
the nine months ended September 30, 2006. Prior to
January 1, 2006, we accounted for stock-based compensation
under the provisions of APB No. 25. Accordingly, we
recorded stock-based compensation expense for our nonvested
stock and did not record stock-based compensation expense for
our stock options and ESPP for the nine months ended
September 30, 2005. The following table illustrates the
effect on our net income and net income per share for the three
and nine months ended September 30, 2005 and 2006 if we had
applied the fair value recognition provisions of
SFAS No. 123 to stock-based compensation using the BSM
valuation model (in millions, except per share amounts):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months
|
|
|
Nine Months
|
|
|
|
Ended
|
|
|
Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2005(d)
|
|
|
2006
|
|
|
2005(d)
|
|
|
2006
|
|
|
Net income, as reported in prior
period(a)
|
|
$
|
29.6
|
|
|
|
|
|
|
$
|
48.3
|
|
|
|
|
|
Add: Stock-based compensation
expense included in reported net income, net of income taxes
|
|
|
1.4
|
|
|
|
|
|
|
|
6.8
|
|
|
|
|
|
Less: Stock-based compensation
expense determined under fair value based method for all awards,
net of income taxes(b)
|
|
|
(2.1
|
)
|
|
|
|
|
|
|
(15.6
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income, including stock-based
compensation(c)
|
|
$
|
28.9
|
|
|
$
|
34.9
|
|
|
$
|
39.5
|
|
|
$
|
107.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic as reported in
prior period(a)
|
|
$
|
0.54
|
|
|
|
|
|
|
$
|
0.99
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic including
stock-based compensation(c)
|
|
$
|
0.52
|
|
|
$
|
0.63
|
|
|
$
|
0.82
|
|
|
$
|
1.94
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted as reported in
prior period(a)
|
|
$
|
0.53
|
|
|
|
|
|
|
$
|
0.98
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted including
stock-based compensation(c)
|
|
$
|
0.51
|
|
|
$
|
0.62
|
|
|
$
|
0.80
|
|
|
$
|
1.92
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
Net income and net income per share as reported for periods
prior to January 1, 2006 did not include stock-based
compensation expense for stock options and our ESPP because we
did not adopt the recognition provisions of
SFAS No. 123. |
|
(b) |
|
Stock-based compensation expense for periods prior to
January 1, 2006 is calculated based on the pro forma
application of SFAS No. 123. |
|
(c) |
|
Net income and net income per share including stock-based
compensation for periods prior to January 1, 2006 are based
on the pro forma application of SFAS No. 123. |
|
(d) |
|
All outstanding stock options as of April 15, 2005, except
for 28,500 stock options granted in December 2004, and all
outstanding nonvested stock awards became fully vested on
April 15, 2005, as a result of the Province business
combination and the change of control provisions in our
stock-based compensation plans. The estimated pro forma
after-tax charge we would have incurred during the nine months
ended September 30, 2005 as a result of the accelerated
vesting of stock options was $4.9 million. In addition, as
a result of the accelerated vesting of nonvested stock awards,
we recognized an after-tax charge of $2.5 million for the
nine months ended September 30, 2005. |
43
Results
of Operations
The following definitions apply throughout 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 hospitals operated during the three months ended
September 30, 2006 and 2005. Same-hospital information also
includes the operations of Valley View Medical Center, which was
opened during November 2005 and replaced Colorado River Medical
Center, which was converted to a critical access hospital. The
costs of corporate overhead and discontinued operations are
excluded from same-hospital information.
44
Operating
Results Summary
The following tables present summaries of results of operations
for the three and nine months ended September 30, 2005 and
2006 (dollars in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
|
Nine Months Ended September 30,
|
|
|
|
2005
|
|
|
2006
|
|
|
2005
|
|
|
2006
|
|
|
|
|
|
|
% of
|
|
|
|
|
|
% of
|
|
|
|
|
|
% of
|
|
|
|
|
|
% of
|
|
|
|
Amount
|
|
|
Revenues
|
|
|
Amount
|
|
|
Revenues
|
|
|
Amount
|
|
|
Revenues
|
|
|
Amount
|
|
|
Revenues
|
|
|
Revenues
|
|
$
|
548.9
|
|
|
|
100.0
|
%
|
|
$
|
640.3
|
|
|
|
100.0
|
%
|
|
$
|
1,285.3
|
|
|
|
100.0
|
%
|
|
$
|
1,799.1
|
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries and benefits
|
|
|
221.0
|
|
|
|
40.2
|
|
|
|
252.3
|
|
|
|
39.4
|
|
|
|
515.0
|
|
|
|
40.1
|
|
|
|
712.2
|
|
|
|
39.6
|
|
Supplies
|
|
|
76.4
|
|
|
|
13.9
|
|
|
|
88.9
|
|
|
|
13.9
|
|
|
|
172.4
|
|
|
|
13.4
|
|
|
|
249.5
|
|
|
|
13.9
|
|
Other operating expenses
|
|
|
90.5
|
|
|
|
16.5
|
|
|
|
111.5
|
|
|
|
17.4
|
|
|
|
214.1
|
|
|
|
16.7
|
|
|
|
309.0
|
|
|
|
17.1
|
|
Provision for doubtful accounts
|
|
|
63.5
|
|
|
|
11.6
|
|
|
|
70.1
|
|
|
|
10.9
|
|
|
|
127.5
|
|
|
|
9.9
|
|
|
|
197.5
|
|
|
|
11.0
|
|
Depreciation and amortization
|
|
|
28.0
|
|
|
|
5.2
|
|
|
|
30.4
|
|
|
|
4.8
|
|
|
|
67.8
|
|
|
|
5.2
|
|
|
|
78.3
|
|
|
|
4.4
|
|
Interest expense, net
|
|
|
20.4
|
|
|
|
3.7
|
|
|
|
28.5
|
|
|
|
4.4
|
|
|
|
38.2
|
|
|
|
3.0
|
|
|
|
76.2
|
|
|
|
4.2
|
|
Debt retirement costs
|
|
|
2.1
|
|
|
|
0.4
|
|
|
|
|
|
|
|
|
|
|
|
12.1
|
|
|
|
0.9
|
|
|
|
|
|
|
|
|
|
Transaction costs
|
|
|
(1.4
|
)
|
|
|
(0.3
|
)
|
|
|
|
|
|
|
|
|
|
|
43.2
|
|
|
|
3.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
500.5
|
|
|
|
91.2
|
|
|
|
581.7
|
|
|
|
90.8
|
|
|
|
1,190.3
|
|
|
|
92.6
|
|
|
|
1,622.7
|
|
|
|
90.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations
before minority interests and income taxes
|
|
|
48.4
|
|
|
|
8.8
|
|
|
|
58.6
|
|
|
|
9.2
|
|
|
|
95.0
|
|
|
|
7.4
|
|
|
|
176.4
|
|
|
|
9.8
|
|
Minority interests in earnings of
consolidated entities
|
|
|
0.3
|
|
|
|
|
|
|
|
0.4
|
|
|
|
0.1
|
|
|
|
0.8
|
|
|
|
0.1
|
|
|
|
1.1
|
|
|
|
0.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations
before income taxes
|
|
|
48.1
|
|
|
|
8.8
|
|
|
|
58.2
|
|
|
|
9.1
|
|
|
|
94.2
|
|
|
|
7.3
|
|
|
|
175.3
|
|
|
|
9.7
|
|
Provision for income taxes
|
|
|
17.8
|
|
|
|
3.3
|
|
|
|
23.7
|
|
|
|
3.7
|
|
|
|
41.2
|
|
|
|
3.2
|
|
|
|
70.6
|
|
|
|
3.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations
|
|
$
|
30.3
|
|
|
|
5.5
|
%
|
|
$
|
34.5
|
|
|
|
5.4
|
%
|
|
$
|
53.0
|
|
|
|
4.1
|
%
|
|
$
|
104.7
|
|
|
|
5.8
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
45
For
the Quarters Ended September 30, 2005 and
2006
Revenues
The increase in revenues for the quarter ended
September 30, 2006 compared to the quarter ended
September 30, 2005 was primarily the result of the third
quarter 2006 acquisition of two facilities from HCA and an
increase in same-hospital revenues per equivalent admission.
The following table shows the sources of our revenues and the
key drivers of our revenues for the three months ended
September 30, 2005 and 2006 (dollars in millions, except
for revenues per equivalent admission):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
|
|
%
|
|
|
|
September 30,
|
|
|
Increase
|
|
|
Increase
|
|
|
|
2005
|
|
|
2006
|
|
|
(Decrease)
|
|
|
(Decrease)
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Same-hospital
|
|
$
|
548.9
|
|
|
$
|
595.5
|
|
|
$
|
46.6
|
|
|
|
8.5
|
%
|
Two HCA facilities
|
|
|
|
|
|
|
44.1
|
|
|
|
44.1
|
|
|
|
N/A
|
|
Other
|
|
|
|
|
|
|
0.7
|
|
|
|
0.7
|
|
|
|
N/A
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
548.9
|
|
|
$
|
640.3
|
|
|
$
|
91.4
|
|
|
|
16.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Admissions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Same-hospital
|
|
|
44,450
|
|
|
|
44,392
|
|
|
|
(58
|
)
|
|
|
(0.1
|
)
|
Continuing operations
|
|
|
44,450
|
|
|
|
48,952
|
|
|
|
4,502
|
|
|
|
10.1
|
|
Equivalent admissions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Same-hospital
|
|
|
87,741
|
|
|
|
88,708
|
|
|
|
967
|
|
|
|
1.1
|
|
Continuing operations
|
|
|
87,741
|
|
|
|
96,664
|
|
|
|
8,923
|
|
|
|
10.2
|
|
Revenues per equivalent admission:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Same-hospital
|
|
$
|
6,256
|
|
|
$
|
6,714
|
|
|
$
|
458
|
|
|
|
7.3
|
|
Continuing operations
|
|
$
|
6,256
|
|
|
$
|
6,623
|
|
|
$
|
367
|
|
|
|
5.9
|
|
Medicare case mix index:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Same-hospital
|
|
|
1.23
|
|
|
|
1.22
|
|
|
|
(0.01
|
)
|
|
|
(0.8
|
)
|
Continuing operations
|
|
|
1.23
|
|
|
|
1.21
|
|
|
|
(0.02
|
)
|
|
|
(1.6
|
)
|
Average length of stay (days):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Same-hospital
|
|
|
4.2
|
|
|
|
4.2
|
|
|
|
|
|
|
|
|
|
Continuing operations
|
|
|
4.2
|
|
|
|
4.2
|
|
|
|
|
|
|
|
|
|
Inpatient surgeries:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Same-hospital
|
|
|
13,108
|
|
|
|
13,593
|
|
|
|
485
|
|
|
|
3.7
|
|
Continuing operations
|
|
|
13,108
|
|
|
|
14,918
|
|
|
|
1,810
|
|
|
|
13.8
|
|
Outpatient surgeries:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Same-hospital
|
|
|
34,323
|
|
|
|
34,062
|
|
|
|
(261
|
)
|
|
|
(0.8
|
)
|
Continuing operations
|
|
|
34,323
|
|
|
|
36,654
|
|
|
|
2,331
|
|
|
|
6.8
|
|
Emergency room visits:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Same-hospital
|
|
|
209,738
|
|
|
|
209,075
|
|
|
|
(663
|
)
|
|
|
(0.3
|
)
|
Continuing operations
|
|
|
209,738
|
|
|
|
225,378
|
|
|
|
15,640
|
|
|
|
7.5
|
|
Outpatient factor:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Same-hospital
|
|
|
1.97
|
|
|
|
2.00
|
|
|
|
0.03
|
|
|
|
1.5
|
|
Continuing operations
|
|
|
1.97
|
|
|
|
1.97
|
|
|
|
|
|
|
|
|
|
46
Inpatient
Revenues
Despite a slight decrease in our same-hospital admissions, our
same-hospital gross inpatient revenues increased by 8.7% for the
quarter ended September 30, 2006 as compared to the quarter
ended September 30, 2005. This gross inpatient revenue
growth was primarily the result of a 7.3% increase in our
same-hospital revenues per equivalent admission principally as a
result of pricing increases from third party payors and revenue
mix changes. Inpatient revenues were also favorably impacted by
inpatient surgery growth.
Outpatient
Revenues
Our same-hospital gross outpatient revenues for the quarter
ended September 30, 2006 increased by 11.3% as compared to
the quarter ended September 30, 2005 despite a 0.8%
decrease in same-hospital outpatient surgeries. The gross
outpatient revenue growth was largely driven by increases in
radiology revenues, laboratory revenues and pharmacy revenues.
We are focusing on physician recruitment and retention during
the remainder of 2006 in an attempt to reverse the negative
trend in our outpatient surgeries.
Other
Adjustments to estimated reimbursement amounts increased our
revenues by $1.6 million and $5.1 million for the
quarters ended September 30, 2005 and 2006, respectively.
The following table shows the sources of our revenues for the
quarters ended September 30 of the years indicated,
expressed as percentages of total revenues, including
adjustments to estimated reimbursement amounts:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing
|
|
|
|
|
|
|
Operations
|
|
|
Same-Hospital
|
|
|
|
2005
|
|
|
2006
|
|
|
2005
|
|
|
2006
|
|
|
Medicare
|
|
|
35.9
|
%
|
|
|
32.9
|
%
|
|
|
35.9
|
%
|
|
|
33.4
|
%
|
Medicaid
|
|
|
8.5
|
|
|
|
9.7
|
|
|
|
8.5
|
|
|
|
9.7
|
|
HMOs, PPOs and other private
insurers
|
|
|
39.2
|
|
|
|
40.1
|
|
|
|
39.2
|
|
|
|
38.8
|
|
Self-Pay
|
|
|
13.5
|
|
|
|
13.7
|
|
|
|
13.5
|
|
|
|
14.3
|
|
Other
|
|
|
2.9
|
|
|
|
3.6
|
|
|
|
2.9
|
|
|
|
3.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
47
Expenses
Salaries
and Benefits
The following table summarizes our salaries and benefits
expenses for the three months ended September 30, 2005 and
2006 (dollars in millions, except for salaries and benefits per
equivalent admission):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
|
|
|
|
|
|
|
|
|
|
|
% of
|
|
|
|
|
|
% of
|
|
|
Increase
|
|
|
% Increase
|
|
|
|
2005
|
|
|
Revenues
|
|
|
2006
|
|
|
Revenues
|
|
|
(Decrease)
|
|
|
(Decrease)
|
|
|
Salaries and benefits:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries and wages
|
|
$
|
169.7
|
|
|
|
30.9
|
%
|
|
$
|
194.4
|
|
|
|
30.4
|
%
|
|
$
|
24.7
|
|
|
|
14.4
|
%
|
Stock-based compensation
|
|
|
2.1
|
|
|
|
0.4
|
|
|
|
3.8
|
|
|
|
0.6
|
|
|
|
1.7
|
|
|
|
72.5
|
|
Employee benefits
|
|
|
37.1
|
|
|
|
6.7
|
|
|
|
38.8
|
|
|
|
6.1
|
|
|
|
1.7
|
|
|
|
4.9
|
|
Contract labor
|
|
|
7.6
|
|
|
|
1.4
|
|
|
|
13.0
|
|
|
|
2.0
|
|
|
|
5.4
|
|
|
|
70.7
|
|
ESOP expense
|
|
|
4.5
|
|
|
|
0.8
|
|
|
|
2.3
|
|
|
|
0.3
|
|
|
|
(2.2
|
)
|
|
|
(49.8
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
221.0
|
|
|
|
40.2
|
%
|
|
$
|
252.3
|
|
|
|
39.4
|
%
|
|
$
|
31.3
|
|
|
|
14.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Man-hours
per equivalent admission
|
|
|
92.6
|
|
|
|
N/A
|
|
|
|
90.9
|
|
|
|
N/A
|
|
|
|
(1.7
|
)
|
|
|
(1.9
|
)
|
Salaries and benefits per
equivalent admission
|
|
$
|
2,388
|
|
|
|
N/A
|
|
|
$
|
2,483
|
|
|
|
N/A
|
|
|
$
|
95
|
|
|
|
4.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate office salaries and
benefits
|
|
$
|
6.5
|
|
|
|
1.2
|
%
|
|
$
|
10.7
|
|
|
|
1.7
|
%
|
|
$
|
4.2
|
|
|
|
64.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Same-hospital:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries and wages
|
|
$
|
164.7
|
|
|
|
30.0
|
%
|
|
$
|
171.7
|
|
|
|
28.8
|
%
|
|
$
|
7.0
|
|
|
|
4.2
|
|
Stock-based compensation
|
|
|
0.6
|
|
|
|
0.1
|
|
|
|
0.9
|
|
|
|
0.2
|
|
|
|
0.3
|
|
|
|
50.0
|
|
Employee benefits
|
|
|
37.4
|
|
|
|
6.8
|
|
|
|
35.8
|
|
|
|
6.0
|
|
|
|
(1.6
|
)
|
|
|
(4.3
|
)
|
Contract labor
|
|
|
7.5
|
|
|
|
1.4
|
|
|
|
12.7
|
|
|
|
2.2
|
|
|
|
5.2
|
|
|
|
69.3
|
|
ESOP expense
|
|
|
4.2
|
|
|
|
0.8
|
|
|
|
1.9
|
|
|
|
0.3
|
|
|
|
(2.3
|
)
|
|
|
(54.8
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
214.4
|
|
|
|
39.1
|
%
|
|
$
|
223.0
|
|
|
|
37.5
|
%
|
|
$
|
8.6
|
|
|
|
4.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Same-hospital:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Man-hours
per equivalent admission
|
|
|
92.6
|
|
|
|
N/A
|
|
|
|
90.7
|
|
|
|
N/A
|
|
|
|
(1.9
|
)
|
|
|
(2.1
|
)
|
Salaries and benefits per
equivalent admission
|
|
$
|
2,388
|
|
|
|
N/A
|
|
|
$
|
2,502
|
|
|
|
N/A
|
|
|
$
|
114
|
|
|
|
4.8
|
|
Our salaries and benefits increased for the quarter ended
September 30, 2006 compared to the quarter ended
September 30, 2005, primarily as a result of the third
quarter 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 at a rate of 23,306 shares per month.
The ESOP expense amount for the common stock component is
determined using the average market price of our common stock
released to participants in the ESOP. The decrease in ESOP
expense in the quarter ended September 30, 2006 as compared
to the same period in 2005 was the result of a lower average
market price of our common stock during the quarter ended
September 30, 2006 ($33.87 per share) as compared to
the quarter ended September 30, 2005 ($46.32 per
share). The cash component is discretionary and is impacted by
the amount
48
of forfeitures in the ESOP. There were no discretionary cash
contributions during both quarters ended September 30, 2005
and 2006.
The increase in our stock-based compensation was the result of
our adoption of SFAS No. 123(R) effective
January 1, 2006, and the additional nonvested stock awards
outstanding during the quarter ended September 30, 2006, as
compared to the quarter ended September 30, 2005. The
adoption of SFAS No. 123(R) required us to start
recognizing the cost of employee stock options in our condensed
consolidated statement of operations, which was approximately
$1.5 million during the quarter ended September 30,
2006. Please refer to the section entitled New Critical
Accounting Estimate in this Part I, Item 2.
Managements Discussion and Analysis of Financial
Condition and Results of Operations and Note 8 of our
condensed consolidated financial statements included elsewhere
in this report for a discussion of our adoption of
SFAS No. 123(R) and the impact of this new accounting
standard on our financial statements.
Supplies
The following table summarizes our supplies expense for the
three months ended September 30, 2005 and 2006 (dollars in
millions, except for supplies per equivalent admission):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months
|
|
|
|
|
|
|
|
|
|
Ended September 30,
|
|
|
Increase
|
|
|
% Increase
|
|
|
|
2005
|
|
|
2006
|
|
|
(Decrease)
|
|
|
(Decrease)
|
|
|
Continuing operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplies
|
|
$
|
76.4
|
|
|
$
|
88.9
|
|
|
$
|
12.5
|
|
|
|
16.3
|
%
|
Supplies as a percentage of
revenues
|
|
|
13.9
|
%
|
|
|
13.9
|
%
|
|
|
|
|
|
|
|
|
Supplies per equivalent admission
|
|
$
|
816
|
|
|
$
|
888
|
|
|
$
|
72
|
|
|
|
8.8
|
%
|
Same-hospital:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplies
|
|
$
|
76.3
|
|
|
$
|
81.4
|
|
|
$
|
5.1
|
|
|
|
6.7
|
%
|
Supplies as a percentage of
revenues
|
|
|
13.9
|
%
|
|
|
13.7
|
%
|
|
|
(20)bps
|
|
|
|
|
|
Supplies per equivalent admission
|
|
$
|
866
|
|
|
$
|
916
|
|
|
$
|
50
|
|
|
|
5.8
|
%
|
Our supplies expense increased for the quarter ended
September 30, 2006 compared to the quarter ended
September 30, 2005, primarily as a result of the
acquisition of two HCA facilities. Supplies as a percentage of
revenues remained consistent for continuing operations but
decreased 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 higher utilization of cardiology,
orthopaedic and other implantable devices.
49
Other
Operating Expenses
The following table summarizes our other operating expenses for
the three months ended September 30, 2005 and 2006 (dollars
in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
|
|
|
|
|
|
|
|
|
|
|
% of
|
|
|
|
|
|
% of
|
|
|
Increase
|
|
|
% Increase
|
|
|
|
2005
|
|
|
Revenues
|
|
|
2006
|
|
|
Revenues
|
|
|
(Decrease)
|
|
|
(Decrease)
|
|
|
Other operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Professional fees
|
|
$
|
8.8
|
|
|
|
1.6
|
%
|
|
$
|
11.6
|
|
|
|
1.8
|
%
|
|
$
|
2.8
|
|
|
|
32.6
|
%
|
Utilities
|
|
|
10.8
|
|
|
|
2.0
|
|
|
|
12.4
|
|
|
|
1.9
|
|
|
|
1.6
|
|
|
|
14.1
|
|
Repairs and maintenance
|
|
|
10.8
|
|
|
|
2.0
|
|
|
|
13.4
|
|
|
|
2.1
|
|
|
|
2.6
|
|
|
|
24.5
|
|
Rents and leases
|
|
|
5.7
|
|
|
|
1.0
|
|
|
|
6.6
|
|
|
|
1.0
|
|
|
|
0.9
|
|
|
|
14.8
|
|
Insurance
|
|
|
4.3
|
|
|
|
0.8
|
|
|
|
7.8
|
|
|
|
1.2
|
|
|
|
3.5
|
|
|
|
81.5
|
|
HCA-IT expense
|
|
|
7.7
|
|
|
|
1.4
|
|
|
|
7.9
|
|
|
|
1.2
|
|
|
|
0.2
|
|
|
|
4.4
|
|
Physician recruiting
|
|
|
6.9
|
|
|
|
1.3
|
|
|
|
4.3
|
|
|
|
0.7
|
|
|
|
(2.6
|
)
|
|
|
(37.7
|
)
|
Contract services
|
|
|
18.7
|
|
|
|
3.4
|
|
|
|
25.0
|
|
|
|
3.9
|
|
|
|
6.3
|
|
|
|
33.9
|
|
Non-income taxes
|
|
|
7.5
|
|
|
|
1.4
|
|
|
|
10.4
|
|
|
|
1.7
|
|
|
|
2.9
|
|
|
|
36.5
|
|
Other
|
|
|
9.3
|
|
|
|
1.6
|
|
|
|
12.1
|
|
|
|
1.9
|
|
|
|
2.8
|
|
|
|
33.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
90.5
|
|
|
|
16.5
|
%
|
|
$
|
111.5
|
|
|
|
17.4
|
%
|
|
$
|
21.0
|
|
|
|
23.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate office other operating
expenses
|
|
$
|
5.5
|
|
|
|
1.0
|
%
|
|
$
|
6.9
|
|
|
|
1.1
|
%
|
|
$
|
1.4
|
|
|
|
24.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Same-hospital other operating
expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Professional fees
|
|
$
|
8.7
|
|
|
|
1.6
|
%
|
|
$
|
10.9
|
|
|
|
1.7
|
%
|
|
$
|
2.2
|
|
|
|
25.3
|
%
|
Utilities
|
|
|
10.6
|
|
|
|
1.9
|
|
|
|
11.6
|
|
|
|
1.9
|
|
|
|
1.0
|
|
|
|
9.4
|
|
Repairs and maintenance
|
|
|
10.6
|
|
|
|
1.9
|
|
|
|
12.3
|
|
|
|
2.1
|
|
|
|
1.7
|
|
|
|
16.0
|
|
Rents and leases
|
|
|
5.0
|
|
|
|
0.9
|
|
|
|
5.5
|
|
|
|
0.9
|
|
|
|
0.5
|
|
|
|
10.0
|
|
Insurance
|
|
|
3.5
|
|
|
|
0.6
|
|
|
|
5.3
|
|
|
|
0.9
|
|
|
|
1.8
|
|
|
|
51.4
|
|
HCA-IT expense
|
|
|
7.4
|
|
|
|
1.4
|
|
|
|
7.2
|
|
|
|
1.2
|
|
|
|
(0.2
|
)
|
|
|
(2.7
|
)
|
Physician recruiting
|
|
|
6.9
|
|
|
|
1.2
|
|
|
|
4.2
|
|
|
|
0.7
|
|
|
|
(2.7
|
)
|
|
|
(39.1
|
)
|
Contract services
|
|
|
17.2
|
|
|
|
3.1
|
|
|
|
20.6
|
|
|
|
3.5
|
|
|
|
3.4
|
|
|
|
19.8
|
|
Non-income taxes
|
|
|
7.4
|
|
|
|
1.4
|
|
|
|
8.9
|
|
|
|
1.5
|
|
|
|
1.5
|
|
|
|
20.3
|
|
Other
|
|
|
7.5
|
|
|
|
1.4
|
|
|
|
8.2
|
|
|
|
1.4
|
|
|
|
0.7
|
|
|
|
9.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
84.8
|
|
|
|
15.4
|
%
|
|
$
|
94.7
|
|
|
|
15.8
|
%
|
|
$
|
9.9
|
|
|
|
11.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Our other operating expenses are generally not volume driven.
The increase in other operating expenses for the quarter ended
September 30, 2006 compared to the quarter ended
September 30, 2005 was primarily attributable to the
acquisition of two facilities from HCA during the third quarter
of 2006. We incurred increased clinical and physician-related
fees as well as increased contract service fees related to our
conversions of the patient accounting applications at our
recently acquired facilities. Additionally, we experienced an
increase in our utility expenses as a result of higher natural
gas and oil prices.
As discussed in Note 4 of our condensed consolidated
financial statements included elsewhere in this report, we
adopted FSP
FIN 45-3
effective January 1, 2006. The impact of this adoption
decreased our physician recruiting expense by approximately
$3.3 million ($2.0 million net of income taxes) and
increased our diluted earnings per share by $0.03 for the
quarter ended September 30, 2006.
50
Provision
for Doubtful Accounts
The following table summarizes our provision for doubtful
accounts for the three months ended September 30, 2005 and
2006 (dollars in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months
|
|
|
|
|
|
|
|
|
|
Ended September 30,
|
|
|
Increase
|
|
|
% Increase
|
|
|
|
2005
|
|
|
2006
|
|
|
(Decrease)
|
|
|
(Decrease)
|
|
|
Continuing operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for doubtful accounts
|
|
$
|
63.5
|
|
|
$
|
70.1
|
|
|
$
|
6.6
|
|
|
|
10.1
|
%
|
Percentage of revenue
|
|
|
11.6
|
%
|
|
|
10.9
|
%
|
|
|
(70)bps
|
|
|
|
|
|
Charity care write-offs
|
|
$
|
7.6
|
|
|
$
|
9.8
|
|
|
$
|
2.1
|
|
|
|
29.2
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Same-hospital:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for doubtful accounts
|
|
$
|
63.5
|
|
|
$
|
66.4
|
|
|
$
|
2.9
|
|
|
|
4.6
|
%
|
Percentage of revenues
|
|
|
11.6
|
%
|
|
|
11.2
|
%
|
|
|
(40)bps
|
|
|
|
|
|
Charity care write-offs
|
|
$
|
7.6
|
|
|
$
|
7.4
|
|
|
$
|
(0.2
|
)
|
|
|
(2.6
|
)%
|
The increase in the provision for doubtful accounts for the
quarter ended September 30, 2006 as compared to the quarter
ended September 30, 2005 was primarily attributable to the
acquisition of two facilities from HCA during the third quarter
of 2006 and same-hospital 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 September 30, 2006 compared with the quarter
ended September 30, 2005. The provision for doubtful
accounts relates principally to self-pay amounts due from
patients. During the quarter ended September 30, 2005, the
provision for doubtful accounts was unfavorably impacted by an
increase in self-pay patients at our Louisiana hospitals as a
result of Hurricanes Katrina and Rita. 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 2005 Annual
Report on
form 10-K.
Depreciation
and Amortization
Depreciation and amortization expense increased for the quarter
ended September 30, 2006 compared to the quarter ended
September 30, 2005, primarily as a result of the
acquisition of two facilities from HCA during the third quarter
of 2006.
The following table sets forth our depreciation and amortization
expense for the three months ended September 30, 2005 and
2006 (dollars in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months
|
|
|
|
|
|
|
|
|
|
Ended September 30,
|
|
|
Increase
|
|
|
% Increase
|
|
|
|
2005
|
|
|
2006
|
|
|
(Decrease)
|
|
|
(Decrease)
|
|
|
Same-hospital
|
|
$
|
27.8
|
|
|
$
|
27.4
|
|
|
$
|
(0.4
|
)
|
|
|
(1.4
|
)%
|
Two HCA facilities
|
|
|
|
|
|
|
1.5
|
|
|
|
1.5
|
|
|
|
N/A
|
|
Corporate office
|
|
|
0.2
|
|
|
|
1.5
|
|
|
|
1.3
|
|
|
|
650.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
28.0
|
|
|
$
|
30.4
|
|
|
$
|
2.4
|
|
|
|
8.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
51
Interest
Expense
The following table summarizes our interest expense for the
three months ended September 30, 2005 and 2006 (dollars in
millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months
|
|
|
|
|
|
|
Ended
|
|
|
|
|
|
|
September 30,
|
|
|
Increase
|
|
|
|
2005
|
|
|
2006
|
|
|
(Decrease)
|
|
|
Interest expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
Senior credit facility, including
commitment fees
|
|
$
|
18.0
|
|
|
$
|
27.8
|
|
|
$
|
9.8
|
|
Senior subordinated credit
agreement
|
|
|
1.5
|
|
|
|
|
|
|
|
(1.5
|
)
|
Province
71/2% senior
subordinated notes
|
|
|
0.1
|
|
|
|
0.1
|
|
|
|
|
|
31/4% convertible
notes
|
|
|
1.0
|
|
|
|
1.8
|
|
|
|
0.8
|
|
Other
|
|
|
0.3
|
|
|
|
0.4
|
|
|
|
0.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
20.9
|
|
|
|
30.1
|
|
|
|
9.2
|
|
Amortization of deferred loan costs
|
|
|
1.3
|
|
|
|
1.3
|
|
|
|
|
|
Less:
|
|
|
|
|
|
|
|
|
|
|
|
|
Discontinued operations interest
expense allocation
|
|
|
(0.3
|
)
|
|
|
(2.0
|
)
|
|
|
(1.7
|
)
|
Interest income
|
|
|
(0.4
|
)
|
|
|
(0.5
|
)
|
|
|
(0.1
|
)
|
Capitalized interest
|
|
|
(1.1
|
)
|
|
|
(0.4
|
)
|
|
|
0.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
20.4
|
|
|
$
|
28.5
|
|
|
$
|
8.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The increase in interest expense during the quarter ended
September 30, 2006 as compared to the same period in 2005
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
$1,485.4 million during the three months ended
September 30, 2005 to $1,760.5 million during the same
period in 2006. For a further discussion of our long-term debt,
see Liquidity and Capital Resources-Debt.
Provision
for Income Taxes
The following table summarizes our provision for income taxes
for the three months ended September 30, 2005 and 2006
(dollars in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months
|
|
|
|
|
|
|
Ended September 30,
|
|
|
Increase
|
|
|
|
2005
|
|
|
2006
|
|
|
(Decrease)
|
|
|
Provision for income taxes
|
|
$
|
17.8
|
|
|
$
|
23.7
|
|
|
$
|
5.9
|
|
Effective income tax rate
|
|
|
37.1
|
%
|
|
|
40.7
|
%
|
|
|
360bps
|
|
The increase in our provision for income taxes was primarily a
result of higher income from continuing operations during the
quarter ended September 30, 2006 as compared to the same
period in 2005 and a higher effective state tax rate. The
effective tax rate for the quarter ended September 30, 2005
was favorably impacted due to the recognition of the income tax
benefit related to debt retirement costs attributed to the
extinguishment of our
41/2%
Convertible Subordinated Notes during the second quarter of
2005, for which no income tax benefit was originally recognized.
Based on further research and refinement of the estimate, we
concluded that the debt retirement costs would be deductible,
and accordingly, recognized the income tax benefit during the
third quarter of 2005.
52
For
the Nine Months Ended September 30, 2005 and
2006
Revenues
The increase in revenues for the nine months ended
September 30, 2006 compared to the nine months ended
September 30, 2005 was primarily the result of the
acquisition of two facilities from HCA during the third quarter
of 2006, the Province business combination during the second
quarter of 2005 as well as the 2005 Acquisitions.
The following table shows the sources of our revenues and the
key drivers of our revenues from continuing operations (dollars
in millions, except for revenues per equivalent admission):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
Increase
|
|
|
% Increase
|
|
|
|
2005
|
|
|
2006
|
|
|
(Decrease)
|
|
|
(Decrease)
|
|
|
Revenues
|
|
$
|
1,285.3
|
|
|
$
|
1,799.1
|
|
|
$
|
513.8
|
|
|
|
40.0
|
%
|
Admissions
|
|
|
108,796
|
|
|
|
140,978
|
|
|
|
32,182
|
|
|
|
29.6
|
%
|
Equivalent admissions
|
|
|
213,023
|
|
|
|
275,471
|
|
|
|
62,448
|
|
|
|
29.3
|
%
|
Revenues per equivalent admission
|
|
$
|
6,034
|
|
|
$
|
6,531
|
|
|
$
|
497
|
|
|
|
8.2
|
%
|
Medicare case mix index
|
|
|
1.21
|
|
|
|
1.22
|
|
|
|
0.01
|
|
|
|
0.8
|
%
|
Average length of stay (days)
|
|
|
4.1
|
|
|
|
4.3
|
|
|
|
0.2
|
|
|
|
4.9
|
%
|
Inpatient surgeries
|
|
|
31,214
|
|
|
|
41,930
|
|
|
|
10,716
|
|
|
|
34.3
|
%
|
Outpatient surgeries
|
|
|
84,008
|
|
|
|
105,490
|
|
|
|
21,482
|
|
|
|
25.6
|
%
|
Emergency room visits
|
|
|
497,978
|
|
|
|
637,410
|
|
|
|
139,432
|
|
|
|
28.0
|
%
|
Outpatient factor
|
|
|
1.96
|
|
|
|
1.95
|
|
|
|
(0.01
|
)
|
|
|
(0.6
|
)%
|
Inpatient
Revenues
Gross inpatient revenues increased by 42.8% for the nine months
ended September 30, 2006 as compared to the nine months
ended September 30, 2005 primarily as a result of the
acquisition of two facilities from HCA during the third quarter
of 2006, the Province business combination during the second
quarter of 2005 and the 2005 Acquisitions.
Outpatient
Revenues
Our gross outpatient revenues for the nine months ended
September 30, 2006 increased by 42.2% as compared to the
nine months ended September 30, 2005 primarily as a result
of the third quarter acquisition of two facilities from HCA, the
Province business combination during the second quarter of 2005
and the 2005 Acquisitions.
Other
Adjustments to estimated reimbursement amounts increased our
revenues by $6.6 million and $10.1 million for the nine
months ended September 30, 2005 and 2006, respectively.
53
The following table shows the sources of our revenues for the
nine months ended September 30 of the years indicated,
expressed as percentages of total revenues, including
adjustments to estimated reimbursement amounts:
|
|
|
|
|
|
|
|
|
|
|
Continuing
|
|
|
|
Operations
|
|
|
|
2005
|
|
|
2006
|
|
|
Medicare
|
|
|
36.8
|
%
|
|
|
34.8
|
%
|
Medicaid
|
|
|
9.5
|
|
|
|
9.8
|
|
HMOs, PPOs and other private
insurers
|
|
|
37.5
|
|
|
|
38.5
|
|
Self-Pay
|
|
|
12.1
|
|
|
|
13.0
|
|
Other
|
|
|
4.1
|
|
|
|
3.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
Expenses
Salaries
and Benefits
The following table summarizes our salaries and benefits
expenses for the nine months ended September 30, 2005 and
2006 (dollars in millions, except for salaries and benefits per
equivalent admission):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30,
|
|
|
|
|
|
|
|
|
|
|
|
|
% of
|
|
|
|
|
|
% of
|
|
|
Increase
|
|
|
% Increase
|
|
|
|
2005
|
|
|
Revenues
|
|
|
2006
|
|
|
Revenues
|
|
|
(Decrease)
|
|
|
(Decrease)
|
|
|
Salaries and benefits:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries and wages
|
|
$
|
394.2
|
|
|
|
30.7
|
%
|
|
$
|
546.1
|
|
|
|
30.4
|
%
|
|
$
|
151.9
|
|
|
|
38.5
|
%
|
Stock-based compensation
|
|
|
4.2
|
|
|
|
0.3
|
|
|
|
9.5
|
|
|
|
0.5
|
|
|
|
5.3
|
|
|
|
121.3
|
|
Employee benefits
|
|
|
89.3
|
|
|
|
6.9
|
|
|
|
110.5
|
|
|
|
6.1
|
|
|
|
21.2
|
|
|
|
23.9
|
|
Contract labor
|
|
|
16.3
|
|
|
|
1.3
|
|
|
|
35.1
|
|
|
|
2.0
|
|
|
|
18.8
|
|
|
|
115.9
|
|
ESOP expense
|
|
|
11.0
|
|
|
|
0.9
|
|
|
|
11.0
|
|
|
|
0.6
|
|
|
|
|
|
|
|
0.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
515.0
|
|
|
|
40.1
|
%
|
|
$
|
712.2
|
|
|
|
39.6
|
%
|
|
$
|
197.2
|
|
|
|
38.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Man-hours
per equivalent admission
|
|
|
90.2
|
|
|
|
N/A
|
|
|
|
87.6
|
|
|
|
N/A
|
|
|
|
(2.6
|
)
|
|
|
(2.9
|
)
|
Salaries and benefits per
equivalent admission
|
|
$
|
2,248
|
|
|
|
N/A
|
|
|
$
|
2,451
|
|
|
|
N/A
|
|
|
$
|
203
|
|
|
|
9.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate office salaries and
benefits
|
|
$
|
21.9
|
|
|
|
1.7
|
%
|
|
$
|
33.9
|
|
|
|
1.9
|
%
|
|
$
|
12.0
|
|
|
|
54.3
|
|
Our salaries and benefits increased for the nine months ended
September 30, 2006 compared to the nine months ended
September 30, 2005, primarily as a result of the
acquisition of two facilities from HCA during the third quarter
of 2006, the Province business combination during the second
quarter of 2005 and the 2005 Acquisitions. Salaries and benefits
as a percentage of revenues decreased 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 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 at a rate of 23,306 shares per month.
The ESOP expense amount for the common stock component is
determined using the average market price of our common stock
released to participants in the ESOP. The cash component is
discretionary and is impacted by the amount of forfeitures in
the ESOP. There were no discretionary cash contributions during
the nine months ended September 30, 2005. There were
$3.9 million of discretionary cash contributions during the
nine months ended September 30, 2006.
54
Our corporate office salaries and benefits during the nine
months ended September 30, 2006 were impacted by the
retirement of our former Chief Executive Officer, Kenneth
Donahey. As a result of his retirement, we incurred additional
net compensation expense of approximately $2.0 million
($1.2 million net of income taxes) during the nine months
ended September 30, 2006. This amount consists of
$3.5 million of installment payments offset by a
$1.5 million reversal of stock compensation expense due to
the termination of his unvested stock options and nonvested
stock.
The increase in our stock-based compensation was the result of
our adoption of SFAS No. 123(R) effective
January 1, 2006 and the additional nonvested stock awards
outstanding during the nine months ended September 30, 2006
as compared to the nine months ended September 30, 2005.
The adoption of SFAS No. 123(R) required us to start
recognizing the cost of employee stock options in our condensed
consolidated statement of operations, which was approximately
$4.3 million during the nine months ended
September 30, 2006. Please refer to the section entitled
New Critical Accounting Estimate in this
Part I, Item 2. Managements Discussion and
Analysis of Financial Condition and Results of Operations
and Note 8 of our condensed consolidated financial
statements included elsewhere in this report for a discussion of
our adoption of SFAS No. 123(R) and the impact of this
new accounting standard on our financial statements.
Supplies
The following table summarizes our supplies expense for the nine
months ended September 30, 2005 and 2006 (dollars in
millions, except for supplies per equivalent admission):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
Increase
|
|
|
% Increase
|
|
|
|
2005
|
|
|
2006
|
|
|
(Decrease)
|
|
|
(Decrease)
|
|
|
Supplies
|
|
$
|
172.4
|
|
|
$
|
249.5
|
|
|
$
|
77.1
|
|
|
|
44.6
|
%
|
Supplies as a percentage of
revenues
|
|
|
13.4
|
%
|
|
|
13.9
|
%
|
|
|
50bps
|
|
|
|
|
|
Supplies per equivalent admission
|
|
$
|
784
|
|
|
$
|
863
|
|
|
$
|
79
|
|
|
|
10.1
|
%
|
Our supplies expense increased for the nine months ended
September 30, 2006 compared to the nine months ended
September 30, 2005, primarily as a result of the
acquisition of two facilities from HCA during the third quarter
of 2006, the Province business combination during the second
quarter of 2005 and the 2005 Acquisitions. Supplies as a
percentage of revenues and supplies per equivalent admission
increased as a result of rising supply costs particularly
related to higher utilization of cardiology, pharmacy,
orthopaedic and other implantable devices. In addition, we
experienced higher supply costs as a percentage of revenues at
our two facilities acquired from HCA and at our 2005
Acquisitions than at our other hospitals.
55
Other
Operating Expenses
The following table summarizes our other operating expenses for
the nine months ended September 30, 2005 and 2006 (dollars
in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30,
|
|
|
|
|
|
|
|
|
|
|
|
|
% of
|
|
|
|
|
|
% of
|
|
|
Increase
|
|
|
% Increase
|
|
|
|
2005
|
|
|
Revenues
|
|
|
2006
|
|
|
Revenues
|
|
|
(Decrease)
|
|
|
(Decrease)
|
|
|
Other operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Professional fees
|
|
$
|
19.3
|
|
|
|
1.5
|
%
|
|
$
|
31.7
|
|
|
|
1.8
|
%
|
|
$
|
12.4
|
|
|
|
64.7
|
%
|
Utilities
|
|
|
23.2
|
|
|
|
1.8
|
|
|
|
35.4
|
|
|
|
2.0
|
|
|
|
12.2
|
|
|
|
52.1
|
|
Repairs and maintenance
|
|
|
24.5
|
|
|
|
1.9
|
|
|
|
36.7
|
|
|
|
2.0
|
|
|
|
12.2
|
|
|
|
49.7
|
|
Rents and leases
|
|
|
12.7
|
|
|
|
1.0
|
|
|
|
17.8
|
|
|
|
1.0
|
|
|
|
5.1
|
|
|
|
38.5
|
|
Insurance
|
|
|
13.2
|
|
|
|
1.0
|
|
|
|
22.1
|
|
|
|
1.2
|
|
|
|
8.9
|
|
|
|
66.9
|
|
HCA-IT expense
|
|
|
17.5
|
|
|
|
1.4
|
|
|
|
22.0
|
|
|
|
1.2
|
|
|
|
4.5
|
|
|
|
25.8
|
|
Physician recruiting
|
|
|
15.2
|
|
|
|
1.2
|
|
|
|
13.2
|
|
|
|
0.7
|
|
|
|
(2.0
|
)
|
|
|
(12.4
|
)
|
Contract services
|
|
|
43.8
|
|
|
|
3.4
|
|
|
|
67.1
|
|
|
|
3.7
|
|
|
|
23.3
|
|
|
|
53.4
|
|
Non-income taxes
|
|
|
19.5
|
|
|
|
1.5
|
|
|
|
26.2
|
|
|
|
1.5
|
|
|
|
6.7
|
|
|
|
33.9
|
|
Other
|
|
|
25.2
|
|
|
|
2.0
|
|
|
|
36.8
|
|
|
|
2.0
|
|
|
|
11.6
|
|
|
|
46.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
214.1
|
|
|
|
16.7
|
%
|
|
$
|
309.0
|
|
|
|
17.1
|
%
|
|
$
|
94.9
|
|
|
|
44.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate office other operating
expenses
|
|
$
|
14.5
|
|
|
|
1.1
|
%
|
|
$
|
20.7
|
|
|
|
1.2
|
%
|
|
$
|
6.2
|
|
|
|
42.6
|
|
Our other operating expenses are generally not volume driven.
The increase in other operating expenses for the nine months
ended September 30, 2006 compared to the nine months ended
September 30, 2005 was primarily attributable to the
acquisition of two facilities from HCA during the third quarter
of 2006, the Province business combination during the second
quarter of 2005 and the 2005 Acquisitions. Our HCA-IT expense
increased as a result of more hospitals utilizing the HCA-IT
systems because of these recent acquisitions. Additionally, we
incurred increased clinical and physician-related fees as well
as increased contract service fees related to our conversions of
the patient accounting applications at our recently acquired
facilities. Furthermore, we experienced an increase in our
utility expenses as a result of higher natural gas and oil
prices. Our professional and general liability insurance expense
increased from $9.8 million during the nine months ended
September 30, 2005 to $18.2 million during the nine
months ended September 30, 2006, as a result of the
acquisition of two facilities from HCA during the third quarter
of 2006, the Province business combination during the second
quarter of 2005 and the 2005 Acquisitions. We incurred
$2.1 million in other operating expenses during the nine
months ended September 30, 2006 as a result of a
shareholder lawsuit, as discussed further in Note 11 of our
condensed consolidated financial statements included elsewhere
in this report.
As discussed in Note 4 of our condensed consolidated
financial statements included elsewhere in this report, we
adopted FSP
FIN 45-3
effective January 1, 2006. The impact of this adoption
decreased our physician recruiting expense by approximately
$5.7 million ($3.4 million net of income taxes) and
increased our diluted earnings per share by $0.06 for the nine
months ended September 30, 2006.
56
Provision
for Doubtful Accounts
The following table summarizes our provision for doubtful
accounts for the nine months ended September 30, 2005 and
2006 (dollars in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
Increase
|
|
|
% Increase
|
|
|
|
2005
|
|
|
2006
|
|
|
(Decrease)
|
|
|
(Decrease)
|
|
|
Provision for doubtful accounts
|
|
$
|
127.5
|
|
|
$
|
197.5
|
|
|
$
|
70.0
|
|
|
|
54.9
|
%
|
Percentage of revenues
|
|
|
9.9
|
%
|
|
|
11.0
|
%
|
|
|
110bps
|
|
|
|
|
|
Charity care write-offs
|
|
$
|
15.0
|
|
|
$
|
28.0
|
|
|
$
|
12.9
|
|
|
|
6.3
|
%
|
The increase in the provision for doubtful accounts for the nine
months ended September 30, 2006 compared to the nine months
ended September 30, 2005 was primarily attributable to the
acquisition of two facilities from HCA during the third quarter
of 2006, the Province business combination during the second
quarter of 2005 and the 2005 Acquisitions. The provision for
doubtful accounts, as well as charity care write-offs, relates
principally to self-pay amounts due from patients. Our self-pay
revenues increased for the nine months ended September 30,
2006 compared to the nine months ended September 30, 2005
partially as a result of the changes in the eligibility
requirements of the Tennessee, Texas and Mississippi Medicaid
programs. Other factors influencing this increase were the
increased number of uninsured patients and healthcare plan
design changes that resulted in increased copayments and
deductibles. 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 2005
Annual Report on
Form 10-K.
Depreciation
and Amortization
Depreciation and amortization expense increased for the nine
months ended September 30, 2006 compared to the nine months
ended September 30, 2005, primarily as a result of the
acquisition of two facilities from HCA during the third quarter
of 2006, the Province business combination during the second
quarter of 2005 and the 2005 Acquisitions. As a result of the
final purchase price allocations of both DRMC and Province, we
incurred a net reduction in our depreciation expense of
approximately $13.5 million during the nine months ended
September 30, 2006.
The following table sets forth our depreciation and amortization
expense for the periods presented (dollars in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
Increase
|
|
|
% Increase
|
|
|
|
2005
|
|
|
2006
|
|
|
(Decrease)
|
|
|
(Decrease)
|
|
|
Hospital operations
|
|
$
|
67.2
|
|
|
$
|
88.3
|
|
|
$
|
21.1
|
|
|
|
31.4
|
%
|
Purchase price allocation
adjustment
|
|
|
|
|
|
|
(13.5
|
)
|
|
|
(13.5
|
)
|
|
|
N/A
|
|
Corporate office
|
|
|
0.6
|
|
|
|
3.5
|
|
|
|
2.9
|
|
|
|
525.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
67.8
|
|
|
$
|
78.3
|
|
|
$
|
10.5
|
|
|
|
15.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
57
Interest
Expense
The following table summarizes our interest expense for the nine
months ended September 30, 2005 and 2006 (dollars in
millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months
|
|
|
|
|
|
|
Ended September 30,
|
|
|
Increase
|
|
|
|
2005
|
|
|
2006
|
|
|
(Decrease)
|
|
|
Interest expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
Senior credit facility, including
commitment fees
|
|
$
|
30.9
|
|
|
$
|
69.6
|
|
|
$
|
38.7
|
|
Senior subordinated credit
agreement
|
|
|
2.1
|
|
|
|
|
|
|
|
(2.1
|
)
|
41/2% convertible
notes
|
|
|
4.5
|
|
|
|
|
|
|
|
(4.5
|
)
|
Province
41/4% convertible
notes
|
|
|
0.3
|
|
|
|
|
|
|
|
(0.3
|
)
|
Province
71/2% senior
subordinated notes
|
|
|
0.2
|
|
|
|
0.3
|
|
|
|
0.1
|
|
31/4% convertible
notes
|
|
|
1.0
|
|
|
|
5.5
|
|
|
|
4.5
|
|
Other
|
|
|
0.5
|
|
|
|
1.2
|
|
|
|
0.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
39.5
|
|
|
|
76.6
|
|
|
|
37.1
|
|
Amortization of deferred loan costs
|
|
|
2.8
|
|
|
|
3.9
|
|
|
|
1.1
|
|
Less:
|
|
|
|
|
|
|
|
|
|
|
|
|
Discontinued operations interest
expense allocation
|
|
|
(0.4
|
)
|
|
|
(2.1
|
)
|
|
|
(1.7
|
)
|
Interest income
|
|
|
(1.4
|
)
|
|
|
(1.5
|
)
|
|
|
(0.1
|
)
|
Capitalized interest
|
|
|
(2.3
|
)
|
|
|
(0.7
|
)
|
|
|
1.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
38.2
|
|
|
$
|
76.2
|
|
|
$
|
38.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The increase in interest expense during the nine months ended
September 30, 2006 as compared to the same period in 2005
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) during the third quarter of
2006, the Province business combination during the second
quarter of 2005 and the 2005 Acquisitions as well as increases
in interest rates on our variable rate debt. Our
weighted-average monthly interest-bearing debt balance increased
from $945.7 million during the nine months ended
September 30, 2005 to $1,595.4 million during the same
period in 2006. For a further discussion of our long-term debt,
see Liquidity and Capital Resources-Debt.
Provision
for Income Taxes
The following table summarizes our provision for income taxes
for the nine months ended September 30, 2005 and 2006
(dollars in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months
|
|
|
|
|
|
|
Ended September 30,
|
|
|
Increase
|
|
|
|
2005
|
|
|
2006
|
|
|
(Decrease)
|
|
|
Provision for income taxes
|
|
$
|
41.2
|
|
|
$
|
70.6
|
|
|
$
|
29.4
|
|
Effective income tax rate
|
|
|
43.8
|
%
|
|
|
40.3
|
%
|
|
|
(350
|
)bps
|
The increase in our provision for income taxes was primarily a
result of higher income from continuing operations during the
nine months ended September 30, 2006 as compared to the
same period in 2005 and a higher effective state tax rate. The
effective tax rate for the nine months ended September 30,
2005 was higher as a result of several non-deductible expenses
incurred during the period relating to the Province business
combination. During the nine months ended September 30,
2005, we incurred non-deductible compensation relating to the
early vesting of nonvested stock awards and MSPP awards, for
which the tax impact of the non-deductible costs was recorded
entirely in the nine months ended September 30, 2005.
58
Liquidity
and Capital Resources
Liquidity
Our primary sources of liquidity are cash flows provided by our
operations and our debt 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 principal
uses of our cash flows from operations are to fund our capital
expenditures and small to mid-size hospital acquisitions and
repayments on our debt borrowings. It is not our intent to
maintain large cash balances.
The following table presents summarized cash flow information
for the three and nine months ended September 30 for the
periods indicated (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2005
|
|
|
2006
|
|
|
2005
|
|
|
2006
|
|
|
Net cash flows provided by
continuing operating activities
|
|
$
|
67.7
|
|
|
$
|
62.0
|
|
|
$
|
196.9
|
|
|
$
|
175.7
|
|
Less: Purchase of property and
equipment
|
|
|
(47.6
|
)
|
|
|
(39.5
|
)
|
|
|
(108.0
|
)
|
|
|
(134.5
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Free operating cash flow
|
|
|
20.1
|
|
|
|
22.5
|
|
|
|
88.9
|
|
|
|
41.2
|
|
Acquisitions
|
|
|
(3.6
|
)
|
|
|
(20.4
|
)
|
|
|
(963.3
|
)
|
|
|
(281.0
|
)
|
Proceeds from sale of hospitals
|
|
|
|
|
|
|
1.0
|
|
|
|
32.5
|
|
|
|
28.6
|
|
Proceeds from borrowings
|
|
|
375.0
|
|
|
|
|
|
|
|
1,967.0
|
|
|
|
260.0
|
|
Payments on borrowings
|
|
|
(402.6
|
)
|
|
|
|
|
|
|
(1,111.8
|
)
|
|
|
(20.0
|
)
|
Payment of debt issue costs
|
|
|
(8.9
|
)
|
|
|
(0.6
|
)
|
|
|
(40.7
|
)
|
|
|
(1.0
|
)
|
Proceeds from exercise of stock
options
|
|
|
1.7
|
|
|
|
|
|
|
|
43.3
|
|
|
|
0.3
|
|
Other
|
|
|
|
|
|
|
1.0
|
|
|
|
(3.0
|
)
|
|
|
1.5
|
|
Cash flows from operations
provided by (used in) discontinued operations
|
|
|
5.3
|
|
|
|
(12.6
|
)
|
|
|
8.5
|
|
|
|
(12.8
|
)
|
Cash flows from investing
activities used in discontinued operations
|
|
|
(0.8
|
)
|
|
|
|
|
|
|
(0.8
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (decrease) increase in cash
and cash equivalents
|
|
$
|
(13.8
|
)
|
|
$
|
(9.1
|
)
|
|
$
|
20.6
|
|
|
$
|
16.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The decrease in our free operating cash flow for the nine months
ended September 30, 2006 as compared to the nine months
ended September 30, 2005 is primarily the result of a
build-up of
net patient accounts receivable due to approximately
$21.0 million of payments that were withheld by CMS during
the last nine days of September 2006 and approximately
$41.6 million of net patient accounts receivable from four
hospitals acquired from HCA on July 1, 2006 during the nine
months ended September 30, 2006. In addition, we had more
construction projects during the nine months ended
September 30, 2006 as compared to the nine months ended
September 30, 2005, which results in an increase in capital
expenditures.
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 flow provided by continuing operations
less cash flows used for purchases of property and equipment. 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. Computations of free operating cash flow may
differ from company to company. Therefore, free operating cash
flow should be used as a complement to, and in conjunction with,
our condensed consolidated statements of cash flows presented in
our condensed consolidated financial statements included
elsewhere in this report.
59
Working
Capital
Net working capital is summarized as follows (dollars in
millions):
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
September 30,
|
|
|
|
2005
|
|
|
2006
|
|
|
Total current assets
|
|
$
|
433.3
|
|
|
$
|
634.1
|
|
Total current liabilities
|
|
|
230.1
|
|
|
|
310.9
|
|
|
|
|
|
|
|
|
|
|
Net working capital
|
|
$
|
203.2
|
|
|
$
|
323.2
|
|
|
|
|
|
|
|
|
|
|
Current ratio
|
|
|
1.88
|
|
|
|
2.04
|
|
|
|
|
|
|
|
|
|
|
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.
The following table reflects our capital expenditures for the
three and nine months ended September 30 for the periods
indicated (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2005
|
|
|
2006
|
|
|
2005
|
|
|
2006
|
|
|
Capital projects
|
|
$
|
25.4
|
|
|
$
|
22.7
|
|
|
$
|
63.7
|
|
|
$
|
79.0
|
|
Routine
|
|
|
15.3
|
|
|
|
12.0
|
|
|
|
29.6
|
|
|
|
39.2
|
|
Purchase of buildings
|
|
|
|
|
|
|
|
|
|
|
3.2
|
|
|
|
|
|
Information systems
|
|
|
6.9
|
|
|
|
4.8
|
|
|
|
11.5
|
|
|
|
16.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
47.6
|
|
|
$
|
39.5
|
|
|
$
|
108.0
|
|
|
$
|
134.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation expense (excluding
purchase price allocation adjustment)
|
|
$
|
27.7
|
|
|
$
|
30.1
|
|
|
$
|
67.0
|
|
|
$
|
90.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ratio of capital expenditures to
depreciation expense
|
|
|
171.8
|
%
|
|
|
131.2
|
%
|
|
|
161.2
|
%
|
|
|
148.1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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.
60
Debt
An analysis and roll-forward of our long-term debt is as follows
(in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
Proceeds from
|
|
|
Payments of
|
|
|
|
|
|
September 30,
|
|
|
|
2005
|
|
|
Debt Borrowings
|
|
|
Borrowings
|
|
|
Other
|
|
|
2006
|
|
|
Senior Credit Facility:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Term B Loans
|
|
$
|
1,281.9
|
|
|
$
|
50.0
|
|
|
$
|
(10.0
|
)
|
|
$
|
|
|
|
$
|
1,321.9
|
|
Revolving loan
|
|
|
|
|
|
|
210.0
|
|
|
|
(10.0
|
)
|
|
|
|
|
|
|
200.0
|
|
Province
71/2% Senior
Subordinated Notes
|
|
|
6.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6.1
|
|
Province
41/4% Convertible
Subordinated Notes
|
|
|
0.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0.1
|
|
31/4% Convertible
Senior Subordinated Debentures
|
|
|
225.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
225.0
|
|
Other, including capital leases
|
|
|
3.2
|
|
|
|
|
|
|
|
(0.5
|
)
|
|
|
4.9
|
|
|
|
7.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,516.3
|
|
|
$
|
260.0
|
|
|
$
|
(20.5
|
)
|
|
$
|
4.9
|
|
|
$
|
1,760.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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,
|
|
|
September 30,
|
|
|
Increase
|
|
|
|
2005
|
|
|
2006
|
|
|
(Decrease)
|
|
|
Current portion of long-term debt
|
|
$
|
0.5
|
|
|
$
|
0.9
|
|
|
$
|
0.4
|
|
Long-term debt
|
|
|
1,515.8
|
|
|
|
1,759.8
|
|
|
|
244.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total debt
|
|
|
1,516.3
|
|
|
|
1,760.7
|
|
|
|
244.4
|
|
Total stockholders equity
|
|
|
1,287.8
|
|
|
|
1,404.2
|
|
|
|
116.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total capitalization
|
|
$
|
2,804.1
|
|
|
$
|
3,164.9
|
|
|
|
360.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total debt to total capitalization
|
|
|
54.1
|
%
|
|
|
55.6
|
%
|
|
|
150bps
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage of:
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed rate debt
|
|
|
15.5
|
%
|
|
|
13.6
|
%
|
|
|
|
|
Variable rate debt
|
|
|
84.5
|
|
|
|
86.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage of:
|
|
|
|
|
|
|
|
|
|
|
|
|
Senior debt
|
|
|
84.8
|
%
|
|
|
86.9
|
%
|
|
|
|
|
Subordinated debt
|
|
|
15.2
|
|
|
|
13.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
We entered into an interest rate swap agreement during the
second quarter of 2006 to mitigate our floating interest rate
risk on our outstanding variable rate borrowings. Please refer
to the 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
61
Agreement provides for secured term B loans of up to
$1,250.0 million maturing on April 15, 2012 (the
Term B Loans) and revolving loans of up to
$300.0 million, maturing on April 15, 2012 (the
Revolving Loans). In addition, the Credit Agreement
provides that we may request additional tranches of Term B Loans
of up to $400.0 million and additional tranches of
Revolving Loans up to $100.0 million. The Credit Agreement
is guaranteed on a senior secured basis by our subsidiaries with
certain limited exceptions. Under the terms of the Credit
Agreement, Term B Loans available for borrowing were
$200.0 million as of September 30, 2006, all of which
is available under the additional tranche.
An amendment to the Credit Agreement provides for the increase
in the maximum amount of letters of credit from
$50.0 million to $75.0 million, the increase in the
amount of the general basket for permitted asset sales from
$300 million to $600 million and certain other
amendments and clarifications.
On September 8, 2006, we amended our Credit Agreement to
increase the aggregate amount available for Incremental
Revolving Loans under the Credit Agreement by
$50.0 million. On June 30, 2006, we entered into an
incremental facility amendment to increase the availability of
Term B Loans under our Credit Agreement by $50.0 million. We
borrowed $50.0 million in the form of the incremental Term
B Loans thereunder. The proceeds of these incremental Term B
Loans have been used to finance the acquisition of the four
hospitals from HCA.
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
Adjusted LIBO Rate plus a margin of 1.625%. Interest on the
Revolving Loans is payable at ABR or Adjusted LIBO Rate plus a
margin. 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 September 30, 2006, the applicable annual interest
rate under the Term B Loans was approximately 6.95%. The nine
month Adjusted LIBO Rate was 5.32% at September 30, 2006.
The weighted average applicable annual interest rates for the
three and nine months ended September 30, 2006 under the
Term B Loans were 7.12% and 6.63%, respectively.
The outstanding principal balances of the Term B Loans were
scheduled to be repaid in consecutive quarterly installments of
approximately $3.1 million each over six years beginning on
June 30, 2005. However, we made early installment payments
under the Term B Loans totaling $118.1 million and
$10.0 million during the year ended December 31, 2005
and nine months ended September 30, 2006, respectively.
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
installments totaling $1,321.9 million. The Term B Loans
are subject to additional mandatory prepayments with net
proceeds from asset sales, equity issuances other than excluded
equity issuances, debt issuances other than excluded debt
issuances and insurance proceeds. In addition, the Term B Loans
are subject to additional mandatory payments with a certain
percentage of excess cash flow as specifically set forth in the
Credit Agreement.
The Credit Agreement requires us to satisfy certain financial
covenants, including maintaining a minimum interest coverage
ratio and a maximum total leverage ratio, each as defined 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 4.75:1.00 for the periods ending on September 30,
2005 through December 31, 2006; 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
that we may spend on capital expenditures. Such amounts cannot
exceed 12% of revenues for the period ending December 31,
2006, and cannot exceed 10% thereafter.
62
The financial covenant requirements and ratios are as follows:
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Level at
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September 30,
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Requirement
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2006
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Minimum Interest Coverage Ratio
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³3.50:1.00
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4.61
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Maximum Total Leverage Coverage
Ratio
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£4.75:1.00
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3.79
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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.
During March 2006, we borrowed $10.0 million under the
Credit Agreement for general corporate purposes. The outstanding
principal and interest were repaid before the end of March 2006.
As of September 30, 2006, we had $30.4 million in
letters of credit outstanding under the Revolving Loans. Of this
amount, $30.3 million was related to the self-insured
retention level of our general and professional liability
insurance and workers compensation programs as security
for payment of claims, and $0.1 million was related to
certain utility companies. We borrowed $200.0 million in
Revolving Loans under the Credit Agreement on June 30,
2006, to finance a portion of the acquisition of the four
hospitals from HCA. Under the terms of the Credit Agreement,
Revolving Loans available for borrowing were $219.6 million
as of September 30, 2006, including the $150.0 million
available under the additional tranche.
Our Credit Agreement does not contain provisions that would
accelerate the maturity date of the loans under the Credit
Agreement upon a downgrade in our credit rating. However, a
downgrade in our credit rating could adversely affect our
ability to obtain other capital sources in the future and could
increase our costs of borrowings.
Interest
Rate Swap
On June 1, 2006, we entered into an interest rate swap
agreement with the Counterparty. The interest rate swap
agreement is effective as of November 15, 2006 and has a
maturity date of May 15, 2011. The Counterparty is one of
the lenders under the Credit Agreement. We entered into the
interest rate swap agreement to mitigate our floating interest
rate risk on a portion of our outstanding variable rate
borrowings. The interest rate swap agreement requires us to make
quarterly fixed rate payments to the Counterparty calculated on
a notional amount as set forth in the schedule below at a fixed
rate of 5.585% while the Counterparty will be obligated to make
quarterly floating payments to us based on the three-month LIBO
rate on the same referenced notional amount. Notwithstanding the
terms of the interest rate swap transaction, we are ultimately
obligated for all amounts due and payable under the Credit
Agreement.
Notional
Schedule
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Date Range
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Notional Amount
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November 15, 2006 to
November 15, 2007
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$
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900.0 million
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November 15, 2007 to
November 15, 2008
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$
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750.0 million
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November 15, 2008 to
November 15, 2009
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$
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600.0 million
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November 15, 2009 to
November 15, 2010
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$
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450.0 million
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November 15, 2010 to
May 15, 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
the Counterparty. We have designated the interest rate swap as a
cash flow hedge instrument, which is recorded in our condensed
consolidated balance sheet at its fair value. The fair value of
the interest rate swap at September 30, 2006 reflected a
liability of approximately $16.3 million
($10.6 million net of income taxes) and is included in
professional and general liability claims and other liabilities
and
63
accumulated other comprehensive loss on our condensed
consolidated balance sheet. The interest rate swap reflects a
liability balance as of September 30, 2006 because of a
recent decrease in market interest rates.
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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Stable
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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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Stable
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BB−
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Stable
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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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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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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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BB
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Negative
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BB
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Stable
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October 2006
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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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BB
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Stable
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Province
71/2% Senior
Subordinated Notes
In connection with the Province business combination,
approximately $193.9 million of the $200.0 million
outstanding principal amount of Provinces
71/2%
Senior Subordinated Notes due 2013 (the
71/2% Notes)
was purchased and subsequently retired. The fair value assigned
to the
71/2% Notes
in the Province purchase price allocation included tender
premiums of $19.5 million paid in connection with the debt
retirement.
The supplemental indenture incorporating the amendments to the
indenture governing the
71/2% Notes
in connection with Provinces consent solicitation with
respect to such
71/2% Notes
became operative on April 15, 2005 and is binding upon the
holders of any
71/2% Notes
that were not tendered pursuant to such tender offer.
The remaining $6.1 million outstanding principal amount of
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
64
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 in the Province purchase price allocation
included tender premiums of $12.1 million paid in
connection with the debt retirement.
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 the indebtedness under the Senior Subordinated
Credit Agreement 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 our
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
defined in the indenture governing the securities
(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. In
certain circumstances, even if any of the foregoing conditions
to conversion have occurred, the
31/4% Debentures
will not be convertible because of the Credit Agreement, 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 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 2005 and the first nine months of 2006 was trading below
the conversion price of $61.22 per share of our common stock,
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 3
1/4% 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.
The indenture for the
31/4% Debentures
does not contain any financial covenants or any restrictions on
the payment of dividends, incurring 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.
65
Liquidity
and Capital Resources Outlook
We expect the level of capital expenditures during the period
October 1, 2006 to December 31, 2006, to be in a range
of $45.0 million to $60.0 million. We have large
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 September 30,
2006, we had projects under construction with an estimated cost
to complete and equip of approximately $110.3 million. See
Note 11 to the 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.
Although we do not contemplate making any acquisitions during
the remainder of 2006, our long-term business strategy
contemplates the selective acquisition of additional hospitals
and we regularly review 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 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 nine months ended September 30,
2006, there were no material changes in our contractual
obligations presented in our 2005 Annual Report on
Form 10-K
except for the $240.0 million increase in our borrowings
under our Credit Agreement and related interest expense.
Off-Balance
Sheet Arrangements
We had standby letters of credit outstanding of approximately
$30.4 million as of September 30, 2006. Of the
$30.4 million outstanding, $30.3 million of this
amount relates to the self-insured retention levels of our
professional and general liability insurance and workers
compensation programs as security for the payment of claims, and
$0.1 million relates to obligations to certain utility
companies.
Recently
Issued Accounting Pronouncements
Please refer to Note 6 of our condensed consolidated
financial statements included elsewhere in this report for a
discussion of the impact of recently issued accounting
pronouncements.
66
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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Claims made under the Americans with Disabilities Act;
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Our Corporate Integrity Agreement;
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Legal proceedings and general liability claims;
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Shareholder lawsuit;
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Physician commitments;
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Capital expenditure commitments;
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Tax matters; and
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Acquisitions.
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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
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descriptions of assumptions underlying or relating to any of the
foregoing.
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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 and other effects associated with 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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competition with other hospitals;
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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 payment of dividends;
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future acquisitions and dispositions;
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67
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de novo facilities;
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tax-related liabilities;
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reimbursement changes;
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patient volumes and related revenues;
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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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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.
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There are several factors, many beyond our control, that could
cause results to differ significantly from our expectations.
Part I, Item 1A. Risk Factors of our 2005
Annual Report on
Form 10-K
contains a summary of these factors. Any factor described in our
2005 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
2005 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, and we might not update them to reflect
changes that occur after the date they are made. 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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the possibility that problems may arise in successfully
integrating the businesses of LifePoint Hospitals and Province
and achieving cost-cutting synergies or the ability to acquire
hospitals on favorable terms and complete planned capital
improvements successfully;
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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;
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the ability to manage healthcare risks, including malpractice
litigation, and the lack of state and federal tort reform;
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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;
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the highly competitive nature of the healthcare business,
including the competition to recruit and retain physicians and
other healthcare professionals;
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68
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the ability to attract and retain qualified management and
personnel;
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the geographic concentration of our hospital 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
strategies;
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changes in our liquidity or the amount or terms of our
indebtedness and in our 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 or intepretations of generally accepted accounting
principles or practices;
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volatility in the market value of our common stock;
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changes in general economic conditions in the markets we serve;
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our reliance on information technology systems maintained by
HCA-IT;
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the costs of complying with the Americans with Disabilities Act;
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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.
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Item 3.
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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 September 30, 2006, we had outstanding debt of
$1,760.7 million, 86.4% or $1,521.9 million of which
was subject to variable rates of interest. As of
September 30, 2006, 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 $201.7 million, based on the
quoted market prices at September 30, 2006.
Based on a hypothetical 100 basis point increase in
interest rates, the potential annualized decrease in our future
pre-tax earnings would be approximately $15.2 million as of
September 30, 2006. 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. On June 1,
2006, we entered into an interest rate swap agreement with an
effective date of November 15, 2006, 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 condensed consolidated financial statements included
elsewhere in this report for more information regarding the
interest rate swap.
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|
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 Financial Officer, of the effectiveness of the
design and operation of our disclosure controls and procedures
(as defined in
Rule 13a-15(e)
of the Exchange Act) as of the end of the period covered by this
report pursuant to
Rule 13a-15
under the Exchange Act. Based upon that evaluation, the Chief
Executive Officer and Chief Financial 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.
69
There has been no change in our internal control over financial
reporting during the three months ended September 30, 2006
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.
|
On April 10, 2006, Accipiter Life Sciences Fund, L.P.
(Accipiter) filed an action against us and our
directors in the Delaware Court of Chancery. The complaint
alleged, among other things, that our directors breached their
fiduciary duties by enforcing our advance notification bylaw in
connection with Accipiters attempt to nominate members to
our board of directors. Accipiter originally sought, among other
things, to enjoin us from proceeding with our 2006 Annual
Meeting of Stockholders without first waiving the advance
notification bylaw and permitting Accipiter to solicit proxies
on behalf of its nominees. On April 25, 2006, the court
denied Accipiters motion for a preliminary injunction in
connection with our 2006 Annual Meeting of Stockholders, which
proceeded on May 8, 2006 as scheduled.
On May 26, 2006, we moved for summary judgment dismissing
each of Accipiters claims. In its answering brief dated
June 7, 2006, Accipiter requested that the court instead
enter summary judgment in its favor and order a new election of
directors, at which time Accipiters proposed nominees
would be considered. On August 2, 2006, the Delaware
Chancery Court granted a summary judgment in the Companys
favor, dismissing Accipiters lawsuit.
There have been no material changes in our risk factors from
those disclosed in our 2005 Annual Report on
Form 10-K.
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|
|
|
|
Exhibit
|
|
|
Number
|
|
Description
|
|
|
3
|
.1
|
|
Amended and Restated Certificate
of Incorporation of LifePoint Hospitals, Inc.(a)
|
|
3
|
.2
|
|
Second Amended and Restated
By-Laws of LifePoint Hospitals, Inc.(b)
|
|
4
|
.1
|
|
Indenture, dated August 10,
2005, between LifePoint Hospitals, Inc. as Issuer and Citibank,
N.A., as Trustee(c)
|
|
4
|
.2
|
|
Form of 3.25% Convertible
Senior Subordinated Debenture due 2025 (included as part of
Exhibit 4.1)(c)
|
|
4
|
.3
|
|
Registration Rights Agreement,
dated August 10, 2005, between LifePoint Hospitals, Inc.
and Citigroup Global Markets Inc. as Representatives of the
Initial Purchasers(c)
|
|
10
|
.1
|
|
ISDA 2002 Master Agreement and
Schedule to the ISDA 2002 Master Agreement, dated June 1,
2006, between Citibank, N.A. and LifePoint Hospitals,
Inc. (d)
|
|
10
|
.2
|
|
Confirmation, dated June 2,
2006, between Citibank, N.A. and LifePoint Hospitals, Inc.(d)
|
|
10
|
.3
|
|
Incremental Facility Amendment
No. 4 to the Credit Agreement, dated September 8,
2006, among LifePoint Hospitals, Inc., as borrower, Citicorp
North America, Inc., as administrative agent and the lenders
party thereto(e)
|
|
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
Financial Officer of LifePoint Hospitals, Inc. Pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.
|
70
|
|
|
|
|
Exhibit
|
|
|
Number
|
|
Description
|
|
|
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
Financial Officer of LifePoint Hospitals, Inc. Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
|
|
|
|
(a) |
|
Incorporated by reference to exhibits to the Registration
Statement on Form S-8 dated April 15, 2005 of LifePoint
Hospitals, Inc. (formerly Lakers Holding Corp.), File
Number 333-124151 |
|
(b) |
|
Incorporated by reference to Exhibit 3.2 to the Current
Report on
Form 8-K
dated October 16, 2006 of LifePoint Hospitals, Inc., File
Number 0-51251. |
|
(c) |
|
Incorporated by reference to exhibits to the Current Report on
Form 8-K
dated August 10, 2005 of LifePoint Hospitals, Inc., File
Number 0-51251. |
|
(d) |
|
Incorporated by reference to exhibits to the Current Report on
Form 8-K/A
dated September 8, 2006 of LifePoint Hospitals, Inc., File
Number 0-51251. |
|
(e) |
|
Incorporated by reference to Exhibit 10.5 to the Current
Report on
Form 8-K
dated September 12, 2006 of LifePoint Hospitals, Inc., File
Number 0-51251. |
71
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 Accounting Officer)
Date: October 26, 2006
72
EXHIBIT INDEX
|
|
|
|
|
Exhibit
|
|
|
Number
|
|
Description
|
|
|
3
|
.1
|
|
Amended and Restated Certificate
of Incorporation of LifePoint Hospitals, Inc.(a)
|
|
3
|
.2
|
|
Second Amended and Restated
By-Laws of LifePoint Hospitals, Inc.(b)
|
|
4
|
.1
|
|
Indenture, dated August 10,
2005, between LifePoint Hospitals, Inc. as Issuer and Citibank,
N.A., as Trustee(c)
|
|
4
|
.2
|
|
Form of 3.25% Convertible
Senior Subordinated Debenture due 2025 (included as part of
Exhibit 4.1)(c)
|
|
4
|
.3
|
|
Registration Rights Agreement,
dated August 10, 2005, between LifePoint Hospitals, Inc.
and Citigroup Global Markets Inc. as Representatives of the
Initial Purchasers(c)
|
|
10
|
.1
|
|
ISDA 2002 Master Agreement and
Schedule to the ISDA 2002 Master Agreement, dated June 1,
2006, between Citibank, N.A. and LifePoint Hospitals,
Inc. (d)
|
|
10
|
.2
|
|
Confirmation, dated June 2,
2006, between Citibank, N.A. and LifePoint Hospitals,
Inc. (d)
|
|
10
|
.3
|
|
Incremental Facility Amendment
No. 4 to the Credit Agreement, dated September 8,
2006, among LifePoint Hospitals, Inc., as borrower, Citicorp
North America, Inc., as administrative agent and the lenders
party thereto (e)
|
|
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
Financial 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
Financial Officer of LifePoint Hospitals, Inc. Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
|
|
|
|
(a) |
|
Incorporated by reference to exhibits to the Registration
Statement on Form S-8 dated April 15, 2005 of LifePoint
Hospitals, Inc. (formerly Lakers Holding Corp.), File
Number 333-124151 |
|
(b) |
|
Incorporated by reference to Exhibit 3.2 to the Current
Report on
Form 8-K
dated October 16, 2006 of LifePoint Hospitals, Inc., File
Number 0-51251. |
|
(c) |
|
Incorporated by reference to exhibits to the Current Report on
Form 8-K
dated August 10, 2005 of LifePoint Hospitals, Inc., File
Number 0-51251 |
|
(d) |
|
Incorporated by reference to exhibits to the Current Report on
Form 8-K/A
dated September 8, 2006 of LifePoint Hospitals, Inc., File
Number 0-51251. |
|
(e) |
|
Incorporated by reference to Exhibit 10.5 to the Current
Report on
Form 8-K
dated September 12, 2006 of LifePoint Hospitals, Inc., File
Number 0-51251. |