UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

 

 

Form 10-Q

 

 

 

Commission file number: 000-51251

 

(Exact name of registrant as specified in its charter)

 

 

 

(615) 372-8500

(Registrant’s 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, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

 

Indicate by check mark whether the registrant is a shell company (as defined in the Rule 12b-2 of the Exchange Act). Yes o  No þ

 

As of April 21, 2008, the number of outstanding shares of Common Stock of LifePoint Hospitals, Inc. was 54,205,946.

 

 

TABLE OF CONTENTS

 

 

 

LIFEPOINT HOSPITALS, INC.

 

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
Unaudited
(In millions, except per share amounts)

 

 

See accompanying notes.

LIFEPOINT HOSPITALS, INC.

 

CONDENSED CONSOLIDATED BALANCE SHEETS

(Dollars in millions, except per share amounts)

 

 

 

 

See accompanying notes.

LIFEPOINT HOSPITALS, INC.

 

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Unaudited
(In millions)

 

 

See accompanying notes.

LIFEPOINT HOSPITALS, INC.

 

CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY

For the Three Months Ended March 31, 2008

Unaudited

(In millions)

 

 

See accompanying notes.

LIFEPOINT HOSPITALS, INC.

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2008

Unaudited

 

 

LifePoint Hospitals, Inc., a Delaware corporation, acting through its subsidiaries, operates general acute care hospitals in non-urban communities in the United States. Unless the context otherwise requires, LifePoint and its subsidiaries are referred to herein as “LifePoint,” the “Company,” “we,” “our” or “us.” At April 1, 2008, our subsidiaries owned or leased 48 hospitals, having a total of 5,637 licensed beds, and serving non-urban communities in 17 states.

 

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and notes required by GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring adjustments) and disclosures considered necessary for a fair presentation have been included. Operating results for the three months ended March 31, 2008 are not necessarily indicative of the results that may be expected for the year ending December 31, 2008. For further information, refer to the consolidated financial statements and notes thereto included in the Company’s 2007 Annual Report on Form 10-K.

 

The majority of the Company’s expenses are “cost of revenue” items. Costs that could be classified as “general and administrative” by the Company would include LifePoint corporate overhead costs, which were $20.8 million and $24.2 million for the three months ended March 31, 2007 and 2008, respectively.

 

Certain prior year amounts have been reclassified to conform to the current year presentation for discontinued operations. This reclassification has no impact on the Company’s total assets, liabilities, stockholders’ equity, net income or cash flows. Unless noted otherwise, discussions in these notes pertain to the Company’s continuing operations.

 

 

In November 2007, the Company’s Board of Directors authorized the repurchase of up to $150.0 million of outstanding shares of the Company’s common stock either in the open market or through privately negotiated transactions, subject to market conditions, regulatory constraints and other factors, to utilize excess cash flow after its capital expenditure needs have been satisfied. The Company is not obligated to repurchase any specific number of shares under the program. The program expires on November 26, 2008, but may be extended, suspended or discontinued at any time prior to the expiration date. The Company repurchased approximately 3.0 million shares during the three months ended March 31, 2008, for an aggregate purchase price, including commissions, of approximately $75.4 million at an average purchase price of $25.15 per share. As of March 31, 2008, the Company had repurchased in the aggregate, approximately 4.4 million shares at an aggregate purchase price, including commissions, of approximately $116.6 million. These shares have been designated by the Company as treasury stock.

 

 

The Company issues stock options and other stock-based awards to key employees and directors under various stockholder-approved stock-based compensation plans. The Company currently has the following four types of stock-based awards outstanding under these plans: stock options; nonvested stock; restricted stock units; and deferred stock units. The Company accounts for its stock-based awards in accordance with the provisions of Statements of Financial Accounting Standards (“SFAS”) No. 123(R), “Share-Based Payment” (“SFAS No. 123(R)”). Under SFAS No. 123(R), the Company recognizes compensation expense based on the grant date fair value estimated in accordance with the standard.

 

LIFEPOINT HOSPITALS, INC.

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

Stock Options

 

The Company estimated the fair value of stock options granted during the three months ended March 31, 2007 and 2008 using the Hull-White II (“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 Company granted stock options to purchase 492,375 and 1,076,750 shares of the Company’s common stock to certain key employees during the three months ended March 31, 2007 and 2008, respectively. The stock options that were granted during the three months ended March 31, 2007 and 2008 vest 33.3% on each grant anniversary date over three years of continued employment.

 

In addition, during March 2007, the Company granted performance-based stock options to certain senior executives to acquire up to an aggregate of 760,000 shares of the Company’s common stock. These stock options were subject to forfeiture unless certain targeted levels of diluted earnings per share were achieved for the year ended December 31, 2007. Depending on the level of diluted earnings per share achieved for the current fiscal year, the senior executives would forfeit zero to 100% of these stock options. The stock options that would not have been forfeited at year end would have vested ratably beginning one year from the date of the grant to three years after the date of the grant. Through March 31, 2007, for purposes of accounting for the expense of these stock options, the Company assumed a target level of diluted earnings per share that resulted in the recognition of stock compensation expense assuming earned options to acquire an aggregate of 380,000 shares and forfeited options for the remaining 380,000 shares. At September 30, 2007, the Company projected that the required targeted level of diluted earnings per share was not going to be met and reversed the previously recognized stock compensation expense associated with these stock options.

 

The following table shows the weighted average assumptions the Company used to develop the fair value estimates under its HW-II option valuation model and the resulting estimates of weighted-average fair value per share of stock options granted during the periods presented:

 

 

The Company received $1.0 million in cash from stock option exercises for the three months ended March 31, 2007. There was a nominal amount of actual tax benefits realized for the tax deductions from these stock option exercises. There was a nominal amount of cash received and tax benefits realized from stock option exercises for the three months ended March 31, 2008.

 

As of March 31, 2008, there was $12.8 million of total unrecognized compensation cost related to stock option compensation arrangements. Total unrecognized compensation cost will be adjusted for future changes in estimated forfeitures. The Company expects to recognize that cost over a weighted average period of 1.6 years.

 

Nonvested Stock

 

The fair value of nonvested stock is determined based on the closing price of the Company’s common stock on the day prior to the grant date. The nonvested stock requires no payment from employees and

 

LIFEPOINT HOSPITALS, INC.

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

directors, and stock-based compensation expense is recorded equally over the vesting periods (three to five years).

 

The Company granted 364,960 and 457,491 shares of nonvested stock awards to certain key employees during the three months ended March 31, 2007 and 2008, respectively. These nonvested stock awards cliff-vest three years from the grant date. The fair market value at the date of grant of the 364,960 and 457,491 shares of nonvested stock awards was $36.60 and $25.79 per share, respectively.

 

Of the nonvested stock awards granted during the three months ended March 31, 2007 and 2008, 190,000 and 247,500 shares, respectively, are performance-based. In addition to requiring continuing service of an employee, the vesting of these nonvested stock awards is contingent upon the satisfaction of certain financial goals specifically related to the achievement of specified annual net revenues and other 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 performance-based nonvested stock awards was determined based on the closing price of the Company’s common stock on the day prior to the grant date and assumes that the performance goals will be achieved. If these performance goals are not met, no compensation expense will be recognized and any recognized compensation expense will be reversed.

 

As of March 31, 2008, there was $25.3 million of total unrecognized compensation cost related to nonvested stock compensation arrangements. Total unrecognized compensation cost will be adjusted for future changes in estimated forfeitures. The Company expects to recognize that cost over a weighted average period of 2.1 years.

 

On February 18, 2008, pursuant to the Outside Directors Stock and Incentive Compensation Plan (“ODSICP”), the Company’s 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 Gregory T. Bier, who was appointed to the Company’s Board of Directors on this same date. 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 2008 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 ODSICP. 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 2008 Annual Meeting of Stockholders. The non-employee director’s 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 Company’s Board of Directors.

 

The following table summarizes the Company’s total stock-based compensation expense as well as the total recognized tax benefits related thereto (in millions):

 

 

The Company did not capitalize any stock — based compensation cost for the three months ended March 31, 2007 and 2008. As of March 31, 2008, there was $38.1 million of total unrecognized compensation cost related to all of the Company’s stock compensation arrangements. Total unrecognized compensation cost may be adjusted for future changes in estimated forfeitures. The Company expects to recognize that cost over a weighted-average period of 1.9 years.

 

LIFEPOINT HOSPITALS, INC.

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

 

The following table sets forth the computation of basic and diluted earnings (loss) per share (in millions, except per share amounts):

 

 

The Company’s 31/2% Convertible Senior Subordinated Notes due May 15, 2014 (the “31/2% Notes”) and 31/4% Convertible Senior Subordinated Debentures due August 15, 2025 (the “31/4% Debentures”) are included in the calculation of diluted earnings per share whether or not the contingent requirements have been met for conversion using the treasury stock method if the conversion price of $51.79 and $61.22, respectively, is less than the average market price of the Company’s common stock for the period. Upon conversion, the par value is settled in cash, and only the conversion premium is settled in shares of the Company’s common stock. The impact of the 31/4% Debentures has been excluded because the effect would have been anti-dilutive for the three months ended March 31, 2007 and 2008. The impact of the 31/2% Notes has been excluded because the effect would have been anti-dilutive for the three months ended March 31, 2008.

 

 

The Company evaluates its goodwill for impairment annually, or more frequently if circumstances indicate potential impairment, in accordance with SFAS No. 142 “Goodwill and Other Intangible Assets.” The Company performed its most recent annual goodwill impairment test as of October 1, 2007 and did not incur an impairment charge.

 

LIFEPOINT HOSPITALS, INC.

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

The following table provides information regarding the Company’s intangible assets, which are included in the accompanying condensed consolidated balance sheets (in millions):

 

 

Contract-Based Physician Minimum Revenue Guarantees

 

The Company has committed to provide certain financial assistance pursuant to recruiting agreements, or “physician minimum revenue guarantees,” 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 to assist in establishing his or her practice.

 

The Company accounts for contract-based physician minimum revenue guarantees in accordance with Financial Accounting Standards Board (the “FASB”) Staff Position (“FSP”) No. 45-3 “Application of FASB Interpretation No. 45 to Minimum Revenue Guarantees Granted to a Business or Its Owners” (“FSP FIN 45-3”). Under FSP FIN 45-3, the Company records a contract-based intangible asset and a related guarantee liability for new physician minimum revenue guarantees and amortizes the contract-based intangible asset to other operating expenses, in the accompanying condensed consolidated statements of operations, over the period of the physician contract, which is typically five years. As of December 31, 2007 and March 31, 2008, the Company’s liability balance for contract-based physician minimum revenue guarantees was $15.3 million and $17.7 million, respectively, which is included in other current liabilities in the accompanying condensed consolidated balance sheets.

 

LIFEPOINT HOSPITALS, INC.

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

Non-Competition Agreements

 

The Company has entered into non-competition agreements and these non-competition agreements are amortized on a straight-line basis over the term of the agreements.

 

Certificates of Need

 

The construction of new facilities, the acquisition or expansion of existing facilities and the addition of new services and certain equipment at the Company’s facilities may be subject to state laws that require prior approval by state regulatory agencies. These certificates of need laws generally require that a state agency determine the public need and give approval prior to the construction or acquisition of facilities or the addition of new services. The Company operates hospitals in certain states that have adopted certificate of need laws. If the Company fails to obtain necessary state approval, the Company will not be able to expand its facilities, complete acquisitions or add new services at its facilities in these states. These intangible assets have been determined to have indefinite lives and, accordingly, are not amortized.

 

 

Impact of Discontinued Operations

 

Effective April 1, 2008, the existing lease agreement of Colorado River Medical Center (“Colorado River”), a 25 bed facility located in Needles, California was terminated, as discussed in detail within this note.

 

Effective July 1, 2007, the Company sold Coastal Carolina Medical Center, a 41 bed facility located in Hardeeville, South Carolina, to Tenet Healthcare Corporation for approximately $35.0 million, plus working capital.

 

Effective May 1, 2007, the Company sold St. Joseph’s Hospital, a 325 bed facility located in Parkersburg, West Virginia, to Signature Hospital, LLC for approximately $68.5 million, plus working capital.

 

Effective January 1, 2007, the Company sold Saint Francis’ Hospital, a 155 bed facility located in Charleston, West Virginia, to the Herbert J. Thomas Memorial Hospital Association for approximately $37.5 million, plus working capital.

 

The results of operations, net of income taxes, of the Company’s sold hospitals are reflected in the accompanying condensed consolidated financial statements as discontinued operations in accordance with SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets”.

 

The Company allocated to discontinued operations interest expense of $1.7 million and $0.1 million for the three months ended March 31, 2007 and 2008, respectively. For those disposed assets that were part of an acquisition group for which specifically identifiable debt was incurred, the allocation of interest expense to discontinued operations was based on the ratio of the disposed net assets to the sum of total net assets of the acquisition group plus the debt that was incurred. For those asset acquisitions for which specifically identifiable debt was not incurred, the allocation of interest expense to discontinued operations was based on the ratio of disposed net assets to the sum of total net assets of the Company plus the Company’s total outstanding debt.

 

The revenues and loss before income taxes, excluding impairment (charge) adjustment and loss on sale of hospitals, of discontinued operations were as follows (in millions):

 

 

LIFEPOINT HOSPITALS, INC.

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

Impairment

 

In March 2007, the Company, through its indirect subsidiary, Principal-Needles, Inc. (“PNI”), signed a letter of intent with the Board of Trustees of Needles Desert Communities Hospital (the “Board of Trustees”) to transfer to the Board of Trustees substantially all of the operating assets and net working capital of Colorado River plus $1.5 million in cash, which approximated the net present value of future lease payments due under the lease agreement between PNI and the Board of Trustees in consideration for the termination of the existing operating lease agreement. Subsequently, in December 2007, the Company entered into a definitive agreement with the Board of Trustees that terminated the existing lease agreement effective April 1, 2008, on which date the Company transferred Colorado River to the Board of Trustees. In connection with the signing of the letter of intent in March 2007 and the termination of the lease agreement effective April 1, 2008, the Company recognized an impairment (charge) adjustment of ($7.9) million and $2.3 million, net of income taxes, or ($0.14) and $0.04 per diluted share, in discontinued operations for the three months ended March 31, 2007 and 2008, respectively. The impairment charge relates to goodwill impairment, the property and equipment and net working capital that was originally to be transferred to the Board of Trustees, for which the Company anticipated receiving no consideration. The impairment adjustment relates to the reversal of a portion of the previously recognized impairment charge for certain net working capital components that were ultimately excluded from the assets transferred effective April 1, 2008.

 

The following table sets forth the components of Colorado River’s impairment (charge) adjustment (in millions):

 

 

 

On June 1, 2006, the Company entered into an interest rate swap agreement with Citibank as counterparty. The interest rate swap agreement, as amended, was effective as of November 30, 2006 and has a maturity date of May 30, 2011. 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 Citibank calculated on a notional amount as set forth in the table below at an annual fixed rate of 5.585% while Citibank is obligated to make quarterly floating payments to the Company based on the three-month LIBOR 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, as amended and restated, supplemented or otherwise modified from time to time (the “Credit Agreement”), entered into on April 15, 2005, 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.

 

 

LIFEPOINT HOSPITALS, INC.

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

 

On January 1, 2008, the Company adopted the provisions of FASB Statement No. 157, “Fair Value Measurements” (“SFAS No. 157”), with respect to the valuation of its interest rate swap agreement. The Company did not adopt the provisions of SFAS No. 157 as it relates to nonfinancial assets pursuant to FSP FAS 157-2, “Effective Date of FASB Statement No. 157”. SFAS No. 157 clarifies how companies are required to use a fair value measure for recognition and disclosure by establishing a common definition of fair value, a framework for measuring fair value, and expanding disclosures about fair value measurements. The adoption of SFAS No. 157 did not have a material impact on the Company’s results of operations or financial position.

 

SFAS No. 157 establishes a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value. These tiers include: Level 1, defined as observable inputs such as quoted prices in active markets; Level 2, defined as inputs other than quoted prices in active markets that are either directly or indirectly observable; and Level 3, defined as unobservable inputs in which little or no market data exists, therefore requiring an entity to develop its own assumptions.

 

The Company determines the fair value of its interest rate swap based on the amount at which it could be settled, which is referred to in SFAS No. 157 as the exit price. This price is based upon observable market assumptions and appropriate valuation adjustments for credit risk. The Company has categorized its interest rate swap as Level 2 under SFAS No. 157.

 

The interest rate swap agreement exposes the Company to credit risk in the event of non-performance by Citibank. However, the Company does not anticipate non-performance by Citibank. The Company does not hold or issue derivative financial instruments for trading purposes. The fair value of the Company’s interest rate swap at December 31, 2007 and March 31, 2008 reflected a liability of approximately $31.0 million and $50.2 million, respectively, and is included in professional and general liability claims and other liabilities in the accompanying condensed consolidated balance sheets. The interest rate swap reflects a liability balance as of December 31, 2007 and March 31, 2008 because of decreases in market interest rates since inception.

 

The Company has designated the interest rate swap as a cash flow hedge instrument. The Company assesses the effectiveness of this cash flow hedge instrument on a quarterly basis. The Company completed its quarterly assessment of the cash flow hedge instrument at March 31, 2008, and determined the hedge to be partially ineffective in accordance with SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities” (“SFAS No. 133”). Because the notional amount of the interest rate swap in effect at March 31, 2008 exceeded the Company’s outstanding borrowings under its variable rate debt Credit Agreement, a portion of the cash flow hedge instrument was determined to be ineffective. The Company recognized an increase in interest expense of approximately $0.6 million related to the ineffective portion of the Company’s cash flow hedge during the three months ended March 31, 2008.

 

 

In December 2007, the FASB issued SFAS No. 141(R), “Business Combinations” (“SFAS No. 141(R)”). SFAS No. 141(R) retains the purchase method of accounting for acquisitions, but requires a number of changes, including changes in the way assets and liabilities are recognized in the purchase accounting as well as requiring the expensing of acquisition-related costs as incurred. Furthermore, SFAS No. 141(R) provides guidance for recognizing and measuring the goodwill acquired in the business combination and determines

 

LIFEPOINT HOSPITALS, INC.

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

what information to disclose to enable users of the financial statements to evaluate the nature and financial effects of the business combination. SFAS No. 141(R) is effective for fiscal years beginning on or after December 15, 2008. Earlier adoption is prohibited. While the Company has not yet fully evaluated the impact that SFAS No. 141(R) will have on its results of operations or financial position, the Company will be required to expense costs related to any future acquisitions beginning January 1, 2009.

 

In December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements — An Amendment of ARB No. 51” (“SFAS No. 160”). SFAS No. 160 amends Accounting Research Bulletin (“ARB”) No. 51, “Consolidated Financial Statements” (“ARB No. 51”) to establish accounting and reporting standards for the noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary. SFAS No. 160 clarifies that a noncontrolling interest in a subsidiary is an ownership interest in the consolidated entity that should be reported as equity in the consolidated financial statements. Additionally, SFAS No. 160 changes the way the consolidated income statement is presented by requiring consolidated net income to be reported at amounts that include the amounts attributable to both the parent and the noncontrolling interest.

 

SFAS No. 160 requires expanded disclosures in the consolidated financial statements that clearly identify and distinguish between the interests of the parent’s owners and the interests of the noncontrolling owners of a subsidiary, including a reconciliation of the beginning and ending balances of the equity attributable to the parent and the noncontrolling owners and a schedule showing the effects of changes in a parent’s ownership interest in a subsidiary on the equity attributable to the parent. SFAS No. 160 does not change ARB No. 51’s provisions related to consolidation purposes or consolidation policy, or the requirement that a parent consolidate all entities in which it has a controlling financial interest. SFAS No. 160 does, however, amend certain of ARB No. 51’s consolidation procedures to make them consistent with the requirements of SFAS No. 141(R) as well as to provide definitions for certain terms and to clarify some terminology. In addition to the amendments to ARB No. 51, SFAS No. 160 amends SFAS No. 128, “Earnings per Share,” so that the calculation of earnings per share amounts in consolidated financial statements will continue to be based on amounts attributable to the parent. SFAS No. 160 is effective for fiscal years beginning on or after December 15, 2008. Earlier adoption is prohibited. SFAS No. 160 must be applied prospectively as of the beginning of the fiscal year in which it is initially applied, except for the presentation and disclosure requirements, which must be applied retrospectively for all periods presented. The Company has not yet evaluated the impact that SFAS No. 160 will have on its results of operations or financial position.

 

In March 2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments and Hedging Activities, an amendment of FASB Statement No. 133” (“SFAS No. 161”). SFAS No. 161 applies to all derivative instruments and related hedged items accounted for under SFAS No. 133. SFAS No. 161 requires entities to provide greater transparency about (a) how and why an entity uses derivative instruments, (b) how derivative instruments and related hedged items are accounted for under SFAS No. 133 and its related interpretations, and (c) how derivative instruments and related hedged items affect an entity’s financial position, results of operations, and cash flows. To meet these objectives, SFAS No. 161 requires (1) qualitative disclosures about objectives for using derivatives by primary underlying risk exposure and by purpose or strategy, (2) information about the volume of derivative activity in a flexible format that the preparer believes is the most relevant and practicable, (3) tabular disclosures about balance sheet location and gross fair value amounts of derivative instruments, income statement and other comprehensive income location and amounts of gains and losses on derivative instruments by type of contract, and (4) disclosures about credit-risk related contingent features in derivative agreements. SFAS No. 161 is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008. Early application is encouraged, as are comparative disclosures for earlier periods, but neither are required. The Company has not yet fully evaluated the impact that SFAS No. 161 will have on its results of operations or financial position, but anticipates that additional disclosure surrounding its interest rate swap instrument will be required.

 

LIFEPOINT HOSPITALS, INC.

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

 

Americans with Disabilities Act Claim

 

On January 12, 2001, a class action lawsuit was filed by Access Now in the United States District Court of the Eastern District of Tennessee (the “District Court”) against each of the Company’s existing hospitals alleging non-compliance with the Americans with Disabilities Act (the “ADA”). This lawsuit has been amended to add hospitals the Company subsequently acquired and to dismiss divested facilities. The lawsuit does not seek any monetary damages, but seeks injunctive relief requiring facility modification, where necessary, to meet ADA guidelines, in addition to attorneys’ fees and costs. The Company may be required to make significant capital expenditures at one or more of its facilities in order to comply with the ADA.

 

Through March 31, 2008, the plaintiffs had conducted inspections at 32 of the Company’s hospitals (including two subsequently divested hospitals), and have entered into settlement agreements with the plaintiffs regarding 13 of the Company’s hospitals. Under settlement agreements reached with the plaintiffs, 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 the ten other facilities which have settlement agreements will range from $5.1 million to $7.0 million. On February 12, 2008, the District Court entered an order dismissing the case due to the lack of individual plaintiffs. The Company anticipates that the plaintiffs will re-file the case in another jurisdiction.

 

Legal Proceedings and General Liability Claims

 

The Company is, from time to time, subject to claims and suits arising in the ordinary course of business, including claims for damages for personal injuries, medical malpractice, breach of contracts, wrongful restriction of or interference with physicians’ staff privileges and employment related claims. In certain of these actions, plaintiffs request payment for damages, including punitive damages that may not be covered by insurance. The Company is currently not a party to any pending or threatened proceeding, which, in management’s opinion, would have a material adverse effect on the Company’s business, financial condition or results of operations.

 

Physician Commitments

 

The Company has committed to provide certain financial assistance pursuant to recruiting agreements with various physicians practicing in the communities it serves. In consideration for a physician relocating to one of its communities and agreeing to engage in private practice for the benefit of the respective community, the Company may advance certain amounts of money to a physician, normally over a period of one year, to assist in establishing the physician’s practice. The amount of commitments the Company estimates it will advance to physicians as of March 31, 2008 is $17.7 million and often depends upon the financial results of a physician’s 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 Company’s standard physician recruiting agreement, any breach or non-fulfillment by a physician under the physician recruiting agreement gives the Company the right to recover any payments made to the physician under the agreement.

 

Capital Expenditure Commitments

 

The Company is reconfiguring some of its facilities to accommodate patient services more effectively and restructuring existing surgical capacity in some of its hospitals to permit additional patient volume and a greater variety of services. The Company has incurred approximately $22.3 million in uncompleted projects as

 

LIFEPOINT HOSPITALS, INC.

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

of March 31, 2008, which is included as construction in progress in the Company’s accompanying condensed consolidated balance sheet. At March 31, 2008, the Company had projects under construction with an estimated cost to complete and equip of approximately $89.7 million.

 

The Company agreed in connection with the lease of Wythe County Community Hospital 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 $8.3 million of the required capital expenditures and improvements as of March 31, 2008.

 

The Company is subject to additional annual capital expenditure commitments in connection with several of its other facilities.

 

Acquisitions

 

The Company has historically acquired businesses with prior operating histories. Acquired companies may have unknown or contingent liabilities, including liabilities for failure to comply with healthcare laws and regulations, medical and general professional liabilities, workers compensation liabilities, previous tax liabilities and unacceptable business practices. Although the Company institutes policies designed to conform practices to its standards following completion of acquisitions, there can be no assurance that the Company will not become liable for past activities that may later be asserted to be improper by private plaintiffs or government agencies. Although the Company generally seeks to obtain indemnification from prospective sellers covering such matters, there can be no assurance that any such matter will be covered by indemnification, or if covered, that such indemnification will be adequate to cover potential losses and fines.

 

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 2007 Annual Report on Form 10-K. Unless otherwise indicated, all relevant financial and statistical information included herein relates to our continuing operations.

 

Overview

 

We operate general acute care hospitals in non-urban communities in the United States. We seek to fulfill our mission of making communities healthier by striving to (1) improve the quality and types of healthcare services available in our communities; (2) provide physicians with a positive environment in which to practice medicine, with access to necessary equipment, office space and resources; (3) develop and provide a positive work environment for employees; (4) expand each hospital’s role as a community asset; and (5) improve each hospital’s financial performance.

 

The following table reflects our summarized operating results for the periods presented (in millions, except per share amounts):

 

 

Key Challenges

 

We anticipate increasing our revenues and profitability on both a long-term and short-term basis. However, we have the following internal and external key challenges to overcome:

 

 

The following table reflects our quarterly admissions for the periods presented:

 

 

 

Our quarterly provision for doubtful accounts on a consolidated basis, which comprises our continuing and discontinued operations was as follows for the periods presented (in millions):

 

 

Our revenues decrease when we write-off patient accounts identified as charity and indigent care. Our hospitals write-off a portion of a patient’s account upon the determination that the patient qualifies under the hospital’s 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.

 

The following table reflects our quarterly consolidated charity and indigent care write-offs for the periods presented (in millions):

 

 

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):

 

The following table shows our consolidated revenue days outstanding reflected in our consolidated net accounts receivable as of the dates indicated:

 

 

The approximate percentages of billed hospital receivables, which is a component of total accounts receivable, are summarized as follows as of the dates presented:

 

 

The approximate percentages of billed hospital receivables in summarized aging categories are as follows as of the dates presented:

 

 

We continue to implement a number of operating strategies related to cash collections. However, if the trend of increasing self-pay revenues continues, our future results of operations and future financial position could be materially adversely affected.

 

 

 

On April 14, 2008, CMS issued its IPPS proposed rule for FFY 2009. Among other items, the proposed rule would provide for a market basket increase of 3.0% in FFY 2009 for hospitals that report certain patient care quality measures and an increase of 1.0% for hospitals that do not. As required by Public Law No. 110-90, the proposed rule also reduces payment rates by 0.9% for FFY 2009 to account for the coding and discharge classification changes that CMS believes will occur as a result of the implementation of the MS-DRG system. In addition to the payment rate changes, the proposed rule reduces the outlier threshold from $22,185 to $21,025 in FFY 2009, adds 43 new patient care quality measures that hospitals would be required to report in order to receive the full market basket increase in FFY 2010, and adds nine additional categories of conditions that CMS will no longer reimburse at a higher weighted MS-DRG when those conditions are acquired in a hospital. The proposed rule also contains a number of amendments to the CMS regulations that implement the Stark Law and seeks additional comments on the Disclosure of Financial Relationships Report, which, if implemented, would require selected hospitals to disclose certain information regarding each hospital’s ownership, investment, and compensation relationships with physicians. CMS anticipates that the payment changes in the proposed rule would increase Medicare payments to acute care hospitals by nearly $4.0 billion in FFY 2009. Although difficult to predict, the provisions of the proposed rule may result in our Medicare acute inpatient hospital reimbursement increasing 3.0% to 3.5% in FFY 2009.

 

 

 

 

Hospital Acquisitions

 

We seek to identify and acquire selected hospitals in non-urban 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 hospital’s 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. Part I, Item 2. Properties in our 2007 Annual Report on Form 10-K contains a table of our hospitals, including acquisition dates. Our results of operations include the operations of our acquisitions since the effective date of each acquisition.

 

Discontinued Operations

 

From time to time, we evaluate our facilities and may sell assets which we believe may no longer fit with our long-term strategy for various reasons.

 

Effective April 1, 2008, the existing lease agreement of Colorado River Medical Center (“Colorado River”), a 25 bed facility located in Needles, California was terminated, as discussed in detail below.

 

Effective July 1, 2007, we sold Coastal Carolina Medical Center, a 41 bed facility located in Hardeeville, South Carolina, to Tenet Healthcare Corporation for approximately $35.0 million, plus working capital.

 

Effective May 1, 2007, we sold St.  Joseph’s Hospital, a 325 bed facility located in Parkersburg, West Virginia, to Signature Hospital, LLC for approximately $68.5 million, plus working capital.

 

Effective January 1, 2007, we sold Saint Francis’ Hospital, a 155 bed facility located in Charleston, West Virginia, to the Herbert J. Thomas Memorial Hospital Association for approximately $37.5 million, plus working capital.

 

The following table reflects our summarized operating results of discontinued operations for the periods presented (in millions, except per share amounts):

 

Impairment

 

In March 2007, we signed a letter of intent with the Board of Trustees of Needles Desert Communities Hospital (the “Board of Trustees”) to transfer to the Board of Trustees substantially all of the operating assets and net working capital of Colorado River plus $1.5 million in cash, which approximated the net present value of future lease payments due under the lease agreement between Colorado River and the Board of Trustees in consideration for the termination of the existing operating lease agreement. Subsequently, in December 2007, we entered into a definitive agreement with the Board of Trustees that terminated the existing lease agreement effective April 1, 2008, on which date we transferred Colorado River to the Board of Trustees. In connection with the signing of the letter of intent in March 2007 and the termination of the lease agreement effective April 1, 2008, we recognized an impairment (charge) adjustment of ($7.9) million and $2.3 million, net of income taxes, or ($0.14) and $0.04 per diluted share, in discontinued operations for the three months ended March 31, 2007 and 2008, respectively. The impairment charge relates to goodwill impairment, the property and equipment and net working capital that was originally to be transferred to the Board of Trustees, for which we anticipated receiving no consideration. The impairment adjustment relates to the reversal of a portion of the previously recognized impairment charge for certain net working capital components which were ultimately excluded from the assets transferred effective April 1, 2008.

 

The following table sets forth the components of Colorado River’s impairment (charge) adjustment (in millions):

 

 

Revenue Sources

 

Our hospitals generate revenues by providing healthcare services to our patients. The majority of these healthcare services are directed by physicians. We are paid for these healthcare services from a number of different sources, depending upon the patient’s 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 hospital’s customary charges for the services provided. Please refer to Part I, Item 1. Business, “Sources of Revenue” in our 2007 Annual Report on Form 10-K for 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 the state levels. For these reasons, revenues from governmental programs change frequently and require us to monitor regularly the environment in which these governmental programs operate.

 

Revenues from HMOs, PPOs and other private insurers are subject to contracts and other arrangements that require us to discount the amounts we customarily charge for healthcare services. These discounted arrangements often limit our ability to increase charges in response to increasing costs. We actively negotiate with these payors to seek to maintain or increase the pricing of our healthcare services. Insured patients are generally not responsible for any difference between customary hospital charges and the amounts received

from commercial insurance payors. However, insured patients are responsible for payments not covered by insurance, such as exclusions, deductibles and co-payments.

 

Self-pay revenues are primarily generated through the treatment of uninsured patients. Our hospitals experienced an increase in self-pay revenues during recent 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:

 

 

Our critical accounting estimates are more fully described in our Annual 2007 Report on Form 10-K and continue to include the following areas:

 

 

Critical Accounting Estimate Update

 

During 2008, we modified our quarterly process for estimating our reserve for our critical accounting estimate for professional and general liability claims by reducing the number of actuarial calculations upon which the reserve is determined from the average of two calculations to one.

 

Results of Operations

 

The following definitions apply throughout the remaining portion of Management’s 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.

Operating Results Summary

 

The following tables present summaries of results of operations for the periods presented (dollars in millions):

 

 

For the Three Months Ended March 31, 2007 and 2008

 

Revenues

 

The increase in our revenues for the three months ended March 31, 2008 as compared to the three months ended March 31, 2007, was primarily the result of increases in outpatient diagnostic services, such as CT imaging, laboratory and cardiovascular services, as well as emergency room visits and revenues per equivalent admission. The increase in our emergency room visits was the result of a widespread outbreak of the flu during February and March of 2008. Our respiratory admissions increased by approximately 14% during the three months ended March 31, 2008 as compared to the same period last year. This was partially offset by a decrease in our surgical volumes during the three months ended March 31, 2008 as compared to the same period last year. Adjustments to estimated reimbursement amounts increased our revenues by $1.3 million and $1.6 million for the three months ended March 31, 2007 and 2008, respectively.

 

The following table shows the key drivers of our revenues for the periods presented:

 

The following table shows the sources of our revenues by payor for the periods presented , expressed as percentages of total revenues, including adjustments to estimated reimbursement amounts:

 

 

Expenses

 

Salaries and Benefits

 

The following table summarizes our salaries and benefits expenses for the periods presented (dollars in millions, except for salaries and benefits per equivalent admission):

 

 

Salaries and wages as a percentage of revenues increased during the three months ended March 31, 2008 as compared to the three months ended March 31, 2007, primarily as a result of increases in our average hourly rate. We experienced an increase in our average hourly rate as a result of market rate increases for skilled personnel and an increase in our employed physicians. Additionally, during the three months ended March 31, 2008, we continued to implement strategies to reduce our contract labor by employing nurses, physicians and other clinical personnel.

 

The increase in our stock-based compensation is generally a result of an increase in the number of outstanding unvested stock options and nonvested stock and a change in our forfeiture rate methodology. We changed from a static forfeiture rate methodology to a dynamic forfeiture rate methodology during the later half of 2007. The dynamic forfeiture rate methodology incorporates the lapse of time into the resulting expense calculation and results in a forfeiture rate that diminishes as the granted awards approach its vest date. Accordingly, the dynamic forfeiture rate methodology results in a more consistent stock compensation expense calculation over the vesting period of the award. This change in methodology resulted in a higher stock compensation expense during the three months ended March 31, 2008 as compared to three months ended March 31, 2007.

 

Our ESOP expense has two components: (1) common stock and (2) cash. Shares of our common stock are allocated ratably to employee accounts at approximately 70,000 shares each quarter. The cash component is discretionary and is impacted by the amount of forfeitures in the ESOP. We made $1.6 million of

discretionary cash contributions to the ESOP during the three months ended March 31, 2007. There were no cash contributions made during the three months ended March 31, 2008, which was the primary reason why our ESOP expense decreased by 51.4% during the three months ended March 31, 2008 as compared to three months ended March 31, 2007.

 

Supplies

 

The following table summarizes our supplies expense for the periods presented (dollars in millions, except for supplies per equivalent admission):

 

 

Our supplies expense increased for the three months ended March 31, 2008 compared to the three months ended March 31, 2007, primarily as a result of increases in supplies per equivalent admission. Supplies as a percentage of revenues decreased slightly 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 increased as a result of rising supply costs, particularly those related to pharmaceutical products, orthopedic implants and other surgical-related supplies.

 

Other Operating Expenses

 

The following table summarizes our other operating expenses for the periods presented (dollars in millions):