SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

Form 10-Q

COMMUNITY HEALTH SYSTEMS, INC.

Delaware (State or other jurisdiction of incorporation or organization)		13-3893191 (I.R.S. Employer Identification Number)

4000 Meridian Boulevard
Franklin, Tennessee
(Address of principal executive offices)

37067
(Zip Code)

615-465-7000
(Registrant’s telephone number)

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):

Large accelerated filer þ		Accelerated filer o		Non-accelerated filer   o (Do not check if a smaller reporting company)		Smaller reporting company o

Indicated by check mark whether the registrant is a shell company (as defined in Rule 126-2 of the Exchange Act).

Yes o           No þ

As of April 21, 2008, there were outstanding 96,231,791 shares of the Registrant’s Common Stock, $.01 par value.

 

 

Community Health Systems, Inc.

Form 10-Q

For the Three Months Ended March 31, 2008

								Page
Part I.		Financial Information
		Item 1.				Financial Statements:
						Condensed Consolidated Balance Sheets — March 31, 2008 and December 31, 2007 (Unaudited)			2
						Condensed Consolidated Statements of Income — Three Months Ended March 31, 2008 and March 31, 2007 (Unaudited)			3
						Condensed Consolidated Statements of Cash Flows — Three Months Ended March 31, 2008 and March 31, 2007 (Unaudited)			4
						Notes to Condensed Consolidated Financial Statements (Unaudited)			5
		Item 2.				Management’s Discussion and Analysis of Financial Condition And Results of Operations			24
		Item 3.				Quantitative and Qualitative Disclosures about Market Risk			38
		Item 4.				Controls and Procedures			39
Part II.		Other Information
		Item 1.				Legal Proceedings			40
		Item 1A.				Risk Factors			42
		Item 2.				Unregistered Sales of Equity Securities and Use of Proceeds			42
		Item 3.				Defaults Upon Senior Securities			43
		Item 4.				Submission of Matters to a Vote of Security Holders			43
		Item 5.				Other Information			43
		Item 6.				Exhibits			43
Signatures									44
Index to Exhibits									45
		31.1				Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.			46
		31.2				Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.			47
		32.1				Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.			48
		32.2				Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.			49
Ex-31.1 Section 302 Certification of the CEO
Ex-31.2 Section 302 Certification of the CFO
Ex-32.1 Section 906 Certification of the CEO
Ex-32.2 Section 906 Certification of the CFO

PART I FINANCIAL INFORMATION

Item 1. Financial Statements

COMMUNITY HEALTH SYSTEMS, INC. AND SUBSIDIARIES

		March 31,				December 31,
		2008				2007
ASSETS
Current assets
Cash and cash equivalents		$	164,353			$	132,874
Patient accounts receivable, net of allowance for doubtful accounts of $1,036,766 and $1,033,516 at March 31, 2008, and December 31, 2007, respectively			1,625,658				1,533,798
Supplies			264,061				262,903
Prepaid income taxes			110,160				99,417
Deferred income taxes			113,741				113,741
Prepaid expenses and taxes			83,852				70,339
Other current assets			244,567				339,826
Total current assets			2,606,392				2,552,898
Property and equipment			6,230,360				6,201,911
Less accumulated depreciation and amortization			(791,963	)			(689,337	)
Property and equipment, net			5,438,397				5,512,574
Goodwill			4,375,293				4,247,714
Other assets, net			912,267				1,180,457
Total assets		$	13,332,349			$	13,493,643
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities
Current maturities of long-term debt		$	19,476			$	20,710
Accounts payable			461,437				492,693
Current income taxes payable			—				—
Accrued interest			90,442				153,832
Accrued liabilities			731,271				780,700
Total current liabilities			1,302,626				1,447,935
Long-term debt			8,886,355				9,077,367
Deferred income taxes			407,947				407,947
Other long-term liabilities			679,722				483,459
Minority interests in equity of consolidated subsidiaries			384,129				366,131
Stockholders’ equity
Preferred stock, $.01 par value per share, 100,000,000 shares authorized, none issued			—				—
Common stock, $.01 par value per share, 300,000,000 shares authorized; 97,195,340 shares issued and 96,219,791 shares outstanding at March 31, 2008, and 96,611,085 shares issued and 95,635,536 shares outstanding at December 31, 2007			972				966
Additional paid-in capital			1,247,241				1,240,308
Treasury stock, at cost, 975,549 shares at March 31, 2008 and December 31, 2007			(6,678	)			(6,678	)
Accumulated other comprehensive income			(188,037	)			(81,737	)
Retained earnings			618,072				557,945
Total stockholders’ equity			1,671,570				1,710,804
Total liabilities and stockholders’ equity		$	13,332,349			$	13,493,643

See accompanying notes to the condensed consolidated financial statements.

COMMUNITY HEALTH SYSTEMS, INC. AND SUBSIDIARIES

		Three Months Ended
		March 31,
		2008				2007
Net operating revenues		$	2,727,554			$	1,154,278
Operating costs and expenses:
Salaries and benefits			1,087,770				462,765
Provision for bad debts			297,080				128,054
Supplies			386,409				134,294
Other operating expenses			526,167				234,165
Rent			59,857				24,756
Depreciation and amortization			122,715				48,497
Total operating costs and expenses			2,479,998				1,032,531
Income from operations			247,556				121,747
Interest expense, net			165,702				28,433
Loss from early extinguishment of debt			1,328				—
Minority interest in earnings			9,682				193
Equity in earnings of unconsolidated affiliates			(12,884	)			—
Income from continuing operations before income taxes			83,728				93,121
Provision for income taxes			32,235				35,832
Income from continuing operations			51,493				57,289
Discontinued operations, net of taxes:
Loss from operations of hospitals sold and hospital held for sale			(983	)			(2,965	)
Gain on sale of hospitals, net			9,617				—
Income (loss) on discontinued operations			8,634				(2,965	)
Net income		$	60,127			$	54,324
Income from continuing operations per common share:
Basic		$	0.55			$	0.61
Diluted		$	0.54			$	0.61
Net income per common share:
Basic		$	0.64			$	0.58
Diluted		$	0.63			$	0.58
Weighted-average number of shares outstanding:
Basic			94,107,532				93,402,545
Diluted			95,006,721				94,365,292

See accompanying notes to the condensed consolidated financial statements.

COMMUNITY HEALTH SYSTEMS, INC. AND SUBSIDIARIES

		Three Months Ended
		March 31,
		2008				2007
Cash flows from operating activities
Net income		$	60,127			$	54,324
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization			122,478				51,270
Minority interest in earnings			9,682				193
Stock-based compensation expense			13,246				6,330
Gain on sale of hospitals, net			(12,885	)			—
Excess tax benefits relating to stock-based compensation			947				(758	)
Other non-cash expenses, net			2,770				132
Changes in operating assets and liabilities, net of effects of acquisitions and divestitures:
Patient accounts receivable			(100,057	)			(33,322	)
Supplies, prepaid expenses and other current assets			(26,584	)			(7,867	)
Accounts payable, accrued liabilities and income taxes			(81,965	)			45,688
Other			21,119				4,357
Net cash provided by operating activities			8,878				120,347
Cash flows from investing activities
Acquisitions of facilities and other related equipment			(1,705	)			(44,039	)
Purchases of property and equipment			(137,071	)			(44,789	)
Disposition of hospitals			365,680				—
Proceeds from sale of property and equipment			13,717				134
Increase in other assets			(56,549	)			(7,051	)
Net cash provided by (used in) investing activities			184,072				(95,745	)
Cash flows from financing activities
Proceeds from exercise of stock options			94				3,311
Excess tax benefits relating to stock-based compensation			(947	)			758
Deferred financing costs			(2,232	)			(14	)
Proceeds from minority investors in joint ventures			12,881				1,019
Redemption of minority investments in joint ventures			—				(1,253	)
Distributions to minority investors in joint ventures			(7,524	)			(1,079	)
Borrowings under credit agreement			25,000				—
Repayments of long-term indebtedness			(188,743	)			(5,032	)
Net cash used in financing activities			(161,471	)			(2,290	)
Net change in cash and cash equivalents			31,479				22,312
Cash and cash equivalents at beginning of period			132,874				40,566
Cash and cash equivalents at end of period		$	164,353			$	62,878

See accompanying notes to the condensed consolidated financial statements.

COMMUNITY HEALTH SYSTEMS, INC. AND SUBSIDIARIES

1. BASIS OF PRESENTATION

The unaudited condensed consolidated financial statements of Community Health Systems, Inc. and its subsidiaries (the “Company”) as of March 31, 2008 and for the three month periods ended March 31, 2008 and March 31, 2007, have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”). In the opinion of management, such information contains all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of the results for such periods. All intercompany transactions and balances have been eliminated. The results of operations for the three months ended March 31, 2008, are not necessarily indicative of the results to be expected for the full fiscal year ending December 31, 2008. Certain information and disclosures normally included in the notes to consolidated financial statements have been condensed or omitted as permitted by the rules and regulations of the Securities and Exchange Commission (“SEC”). The Company believes the disclosures are adequate to make the information presented not misleading. The accompanying unaudited condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto for the year ended December 31, 2007, contained in the Company’s Annual Report on Form 10-K.

2. ACCOUNTING FOR STOCK-BASED COMPENSATION

Stock-based compensation awards are granted under the Community Health Systems, Inc. Amended and Restated 2000 Stock Option and Award Plan (the “2000 Plan”). The 2000 Plan allows for the grant of incentive stock options intended to qualify under Section 422 of the Internal Revenue Code, as well as stock options which do not so qualify, stock appreciation rights, restricted stock, performance units and performance shares, phantom stock awards and share awards. Persons eligible to receive grants under the 2000 Plan include the Company’s directors, officers, employees and consultants. To date, the options granted under the 2000 Plan have all been “nonqualified” stock options for tax purposes. Generally, vesting of these granted options occurs in one third increments on each of the first three anniversaries of the award date. Options granted prior to 2005 have a 10 year contractual term, options granted in 2005 through 2007 have an 8 year contractual term and options granted in 2008 have a 10 year contractual term. The exercise price of options granted to employees under the 2000 Plan were equal to the fair value of the Company’s common stock on the option grant date. As of March 31, 2008, 3,525,142 shares of unissued common stock remain reserved for future grants under the 2000 Plan.

The following table reflects the impact of total compensation expense related to stock-based equity plans under the Statement of Financial Accounting Standards (“SFAS”) No. 123(R), on the reported operating results for the respective periods (in thousands, except per share data):

		Three months ended
		March 31,
		2008				2007
Effect on income from continuing operations before income taxes		$	(13,246	)		$	(6,330	)
Effect on net income		$	(8,047	)		$	(3,845	)
Effect on net income per share-diluted		$	(0.08	)		$	(0.04	)

SFAS No. 123(R) also requires the benefits of tax deductions in excess of the recognized tax benefit on compensation expense to be reported as a financing cash flow, rather than as an operating cash flow as required under Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees” and related interpretations. This requirement increased the Company’s net operating cash flows and decreased the Company’s financing cash flows by $0.9 million for the three months ended March 31, 2008. This requirement reduced the Company’s net operating cash flows and increased the Company’s financing cash flows by $0.8 million for the three months ended March 31, 2007.

At March 31, 2008, $98.1 million of unrecognized stock-based compensation expense from all outstanding unvested stock options and restricted stock is expected to be recognized over a weighted-average period of 22 months.

The fair value of stock options was estimated using the Black Scholes option pricing model during the three months ended March 31, 2008 and 2007, with the following assumptions:

COMMUNITY HEALTH SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

2. ACCOUNTING FOR STOCK-BASED COMPENSATION (Continued)

		Three months ended
		March 31,
		2008				2007
Expected volatility			24.1	%			25.6	%
Expected dividends			0				0
Expected term		4 years				4 years
Risk-free interest rate			2.57	%			4.48	%

In determining expected return, the Company examined concentrations of option holdings, historical patterns of option exercises and forfeitures, as well as forward looking factors, in an effort to determine if there were any discernable employee populations. From this analysis, the Company identified two employee populations, one consisting primarily of certain senior executives and the other consisting of all other recipients.

The expected volatility rate was estimated based on historical volatility. In determining expected volatility, the Company also reviewed the market-based implied volatility of actively traded options of its common stock and determined that historical volatility did not differ significantly from the implied volatility.

The expected life computation is based on historical exercise and cancellation patterns and forward looking factors, where present, for each population identified. The risk-free interest rate is based on the U.S. Treasury yield curve in effect at the time of the grant. The pre-vesting forfeiture rate is based on historical rates and forward looking factors for each population identified. The Company adjusts the estimated forfeiture rate to its actual experience. Options outstanding and exercisable under the 2000 Plan as of March 31, 2008, and changes during the three months then ended were as follows (in thousands, except share and per share data):

										Weighted
										average
						Weighted				remaining				Aggregate
						average				contractual				intrinsic
						exercise				term				value as of
		Shares				price				(in years)				March 31, 2008
Outstanding at December 31, 2007			8,439,015			$	30.90
Granted			996,500				32.28
Exercised			(11,666	)			23.26
Forfeited and cancelled			(172,600	)			35.02
Outstanding at March 31, 2008			9,251,249			$	30.98			6.4 years				$	43,418
Exercisable at March 31, 2008			4,805,509			$	25.64			5.5 years				$	41,971

The weighted-average grant date fair value of stock options granted during the three months ended March 31, 2008, was $7.55. The aggregate intrinsic value (the number of in-the-money stock options multiplied by the difference between the Company’s closing stock price on the last trading day of the reporting period ($33.57) and the exercise price of the respective stock options) in the table above represents the amount that would have been received by the option holders had all option holders exercised their options on March 31, 2008. This amount changes based on the market value of the Company’s common stock. The aggregate intrinsic value of options exercised during the three months ended March 31, 2008 was $0.1 million and the aggregate intrinsic value of options exercised during the three months ended March 31, 2007 was $1.4 million. The aggregate intrinsic value of options vested and expected to vest approximates that of the outstanding options.

The Company has also awarded restricted stock under the 2000 Plan to its directors and various subsidiaries’ employees. The restrictions on these shares generally lapse in one-third increments on each of the first three anniversaries of the award date, except for restricted stock granted on July 25, 2007, which restrictions generally lapse equally on the first two anniversaries of the award date. Certain of the restricted stock awards granted to the Company’s senior executives also contain a performance objective that must be met in addition to the vesting requirements. If the performance objective is not attained the awards will be forfeited in their entirety. Once the performance objective has been attained, restrictions will lapse in one-third increments on

COMMUNITY HEALTH SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

2. ACCOUNTING FOR STOCK-BASED COMPENSATION (Continued)

each of the first three anniversaries of the award date with the exception of the July 25, 2007 restricted stock awards, which have no additional time vesting restrictions. Notwithstanding the above mentioned performance objectives and vesting requirements, the restrictions will lapse earlier in the event of death, disability, termination of employment of the holder of the restricted stock by employer for any reason other than for cause or in the event of change in control of the Company. Restricted stock awards subject to performance standards are not considered outstanding for purposes of determining earnings per share until the performance objectives have been satisfied.

Restricted stock outstanding under the 2000 Plan as of March 31, 2008, and changes during the three months then ended are as follows:

						Weighted
						average
						fair
		Shares				value
Unvested at December 31, 2007			1,956,543			$	38.04
Granted			748,500				32.38
Vested			(592,505	)			36.09
Forfeited			(3,000	)			37.20
Unvested at March 31, 2008			2,109,538				36.58

As of March 31, 2008, there was $64.8 million of unrecognized stock-based compensation expense related to unvested restricted stock expected to be recognized over a weighted-average period of 21 months.

Under the Director’s Fee Deferral Plan, the Company’s outside directors may elect to receive share equivalent units in lieu of cash for their director’s fee. Share equivalent units are calculated by dividing the deferred directors’ fees by the closing market price of the Company’s common stock on the last trading day of the reporting period. These units are held in the plan until the director electing to receive the share equivalent units retires or otherwise terminates his/her directorship with the Company. Share equivalent units are converted to shares of common stock of the Company at the time of distribution. The following table represents the amount of directors’ fees which were deferred and the equivalent units into which they converted for each of the respective periods:

		Three months ended
		March 31,
		2008				2007
Directors’ fees earned and deferred into plan		$	40,875			$	35,875
Equivalent units			1,217.605				1,017.731

At March 31, 2008, there are a total of 14,626.137 units deferred in the plan with an aggregate fair value of $0.5 million, based on the closing market price of the Company’s common stock on the last trading day of the reporting period of $33.57.

3. COST OF REVENUE

The majority of the Company’s operating costs and expenses are “cost of revenue” items. Operating costs that could be classified as general and administrative by the Company would include the Company’s corporate office costs at the Company’s Franklin, Tennessee office, which were $38.1 million and $23.1 million for the three month periods ended March 31, 2008 and 2007, respectively. Included in these amounts is stock-based compensation expense of $13.2 million and $6.3 million for the three month periods ended March 31, 2008 and 2007, respectively.

4. USE OF ESTIMATES

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the condensed consolidated financial statements. Actual results could differ from these estimates.

COMMUNITY HEALTH SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

5. ACQUISITIONS AND DIVESTITURES

Triad Acquisition

On July 25, 2007, the Company completed its acquisition of Triad. Triad owned and operated 50 hospitals in non-urban and middle market communities in 17 states, as well as the Republic of Ireland. Immediately following the acquisition, on a combined basis, the Company owned and operated 128 hospitals in 28 states, as well as the Republic of Ireland. As of December 31, 2007, two hospitals acquired from Triad had been sold and six hospitals acquired from Triad were classified as held for sale. During the three months ended March 31, 2008, the Company completed the sale of five of the six former Triad hospitals held for sale at December 31, 2007. The Company also provides management and consulting services on a contract basis to independent hospitals, through its subsidiary, Quorum Health Resources, LLC, which was acquired as part of the acquisition of Triad. The Company acquired Triad for approximately $6.836 billion, including the assumption of $1.686 billion of existing indebtedness.

In connection with the consummation of the acquisition of Triad, the Company obtained $7.215 billion of senior secured financing under a new credit facility (the “New Credit Facility”) and its wholly-owned subsidiary CHS/Community Health Systems, Inc. (“CHS”) issued $3.021 billion aggregate principal amount of 8.875% senior notes due 2015 (the “Notes”). The Company used the net proceeds of $3.000 billion from the Notes offering and the net proceeds of $6.065 billion of term loans under the New Credit Facility to acquire the outstanding shares of Triad, to refinance certain of Triad’s indebtedness and the Company’s indebtedness, to complete certain related transactions, to pay certain costs and expenses of the transactions and for general corporate uses. This New Credit Facility also provides an additional $750 million revolving credit facility and a $300 million delayed draw term loan facility for future acquisitions, working capital and general corporate purposes. The delayed draw term loan was reduced from $400 million to $300 million at the request of the Company in the fourth quarter of 2007.

The total cost of the Triad acquisition has been allocated to the assets acquired and liabilities assumed based upon their respective preliminary estimated fair values in accordance with SFAS No. 141. The purchase price represented a premium over the fair value of the net tangible and identifiable intangible assets acquired for reasons such as:

•		strategically, Triad had operations in five states in which the Company previously had no operations;
•		the combined company has smaller concentrations of credit risk through greater geographic diversification;
•		many support functions will be centralized; and
•		duplicate corporate functions will be eliminated.

The allocation process requires the analysis of acquired fixed assets, contracts, contractual commitments, and legal contingencies to identify and record the fair value of all assets acquired and liabilities assumed. The values of certain assets and liabilities are based on preliminary valuations and are subject to adjustment as additional information is obtained. Such additional information includes, but is not limited to: valuations of property and equipment, valuation of equity investments and intangible assets, valuation of contractual commitments, finalization of involuntary termination of employees, and review of open cost report settlement periods. The Company is also negotiating the termination of certain assumed contracts it deems unfavorable, such as various physician and service contracts. Under GAAP, the Company has up to twelve months from the closing of the acquisition to complete its valuations and complete contract terminations in order for these terminations to be considered in the allocation process. The Company expects to complete the allocation of the total cost of the Triad acquisition in the second quarter of 2008. Material adjustments to goodwill may result upon the completion of these matters.

Other Acquisitions

Effective April 1, 2007, the Company completed its acquisition of Lincoln General Hospital (157 licensed beds), located in Ruston, Louisiana. The total consideration for this hospital was approximately $49.4 million, of which $44.7 million was paid in cash and $4.7 million was assumed in liabilities. On May 1, 2007, the Company completed its acquisition of Porter Health (301 licensed beds), located in Valparaiso, Indiana, with a satellite campus in Portage, Indiana and outpatient medical campuses located in Chesterton, Demotte, and Hebron, Indiana. As part of this acquisition, the Company has agreed to construct a 225-bed replacement facility for the Valparaiso hospital no later than April 2011. The total consideration for Porter Health was approximately $113.4 million, of which $88.9 million was paid in cash and $24.5 million was assumed in liabilities. The Company has estimated its purchase price allocation relating to these acquisitions resulting in approximately $8.1 million of goodwill being recorded. The allocation of Porter Health is preliminary pending, among other things, finalization of valuation of tangible and intangible assets. These acquisition transactions were accounted for using the purchase method of accounting. The

COMMUNITY HEALTH SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

5. ACQUISITIONS AND DIVESTITURES (Continued)

allocation of the purchase price has been determined by the Company based upon available information and is subject to settling amounts related to purchased working capital and in some instances final appraisals. Adjustments to the purchase price allocation are not expected to be material.

Discontinued Operations

Effective March 1, 2008, the Company sold Woodland Medical Center (100 licensed beds) located in Cullman, Alabama; Parkway Medical Center (108 licensed beds) located in Decatur, Alabama; Hartselle Medical Center (150 licensed beds) located in Hartselle, Alabama; Jacksonville Medical Center (89 licensed beds) located in Jacksonville, Alabama; National Park Medical Center (166 licensed beds) located in Hot Springs, Arkansas; St. Mary’s Regional Medical Center (170 licensed beds) located in Russellville, Arkansas; Mineral Area Regional Medical Center (135 licensed beds) located in Farmington, Missouri; Willamette Valley Medical Center (80 licensed beds) located in McMinnville, Oregon; and White County Community Hospital (60 licensed beds) located in Sparta, Tennessee, to Capella Healthcare, Inc., headquartered in Franklin, Tennessee. The proceeds from this sale were $315 million in cash.

Effective February 21, 2008, the Company sold THI Ireland Holdings Limited, a private limited company incorporated in the Republic of Ireland, which leased and managed the operations of Beacon Medical Center (122 licensed beds) located in Dublin, Ireland, to Beacon Medical Group Limited, headquartered in Dublin, Ireland. The proceeds from this sale were $1.5 million in cash.

Effective February 1, 2008, the Company sold Russell County Medical Center (78 licensed beds) located in Lebanon, Virginia to Mountain States Health Alliance, headquartered in Johnson City, Tennessee. The proceeds from this sale were $48.6 million in cash.

Effective November 30, 2007, the Company sold Barberton Citizens Hospital (312 licensed beds) located in Barberton, Ohio to Summa Health System of Akron, Ohio. The proceeds from this sale were $53.8 million in cash.

Effective October 31, 2007, the Company sold its 60% membership interest in Northeast Arkansas Medical Center, a 104 bed facility in Jonesboro, Arkansas to Baptist Memorial Health Care (“Baptist”), headquartered in Memphis, Tennessee for $16.8 million. In connection with this transaction, the Company also sold real estate and other assets to a subsidiary of Baptist for $26.2 million in cash.

Effective September 1, 2007, the Company sold its partnership interest in River West L.P., which owned and operated River West Medical Center (an 80 bed facility) located in Plaquemine, Louisiana to an affiliate of Shiloh Health Services, Inc. of Lubbock, Texas. The proceeds from this sale were $0.3 million in cash.

As of March 31, 2008, the Company had one hospital classified as held for sale.

In connection with the above actions and in accordance with SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets,” the Company has classified the results of operations of the above mentioned hospitals as discontinued operations in the accompanying condensed consolidated statements of income.

Net operating revenues and income (loss) on discontinued operations for the respective periods are as follows (in thousands):

		Three months ended
		March 31,
		2008				2007
Net operating revenues		$	106,633			$	49,719
Loss from operations of hospitals sold or held for sale before income taxes			(789	)			(4,789	)
Gain on sale of hospitals, net			17,724				—
Income from discontinued operations before taxes			16,935				(4,789	)
Income tax (expense) benefit			(8,301	)			1,824
Income (loss) on discontinued operations, net of tax		$	8,634			$	(2,965	)

COMMUNITY HEALTH SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

5. ACQUISITIONS AND DIVESTITURES (Continued)

The computation of income from discontinued operations, before taxes, for the three months ended March 31, 2008 includes the net write-off of $96.3 million of tangible assets and $32.5 million of goodwill (including $21.3 million of goodwill included in non-current assets held for sale at December 31, 2007) at the hospitals sold during the three months ended March 31, 2008.

Interest expense was allocated to discontinued operations based on estimated sale proceeds available for debt repayment.

The assets and liabilities of one hospital held for sale as of March 31, 2008 are included in the accompanying condensed consolidated balance sheet as follows: current assets of $19.7 million, included in other current assets; net property and equipment of $53.3 million and other long-term assets of $0.1 million, included in other assets; and current liabilities of $23.5 million, included in other accrued liabilities.

The assets and liabilities of the hospitals held for sale as of December 31, 2007 are included in the accompanying condensed consolidated balance sheet as follows: current assets of $118.9 million, included in other current assets; net property and equipment of $331.1 million and other long-term assets of $86.0 million, included in other assets; and current liabilities of $67.6 million, included in accrued liabilities.

6. INCOME TAXES

The Company adopted the provisions of FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes” (“FIN 48”), on January 1, 2007. The total amount of unrecognized benefit that would affect the effective tax rate, if recognized, is approximately $5.9 million as of March 31, 2008. It is the Company’s policy to recognize interest and penalties accrued related to unrecognized benefits in its condensed consolidated statements of income as income tax expense. During the three months ended March 31, 2008, the Company recorded approximately $0.2 million in interest and penalties related to prior state income tax returns through its income tax provision from continuing operations and which are included in its FIN 48 liability at March 31, 2008. A total of approximately $1.9 million of interest and penalties is included in the amount of FIN 48 liability at March 31, 2008.

The Company’s unrecognized tax benefits consist primarily of state exposure items. The Company believes that it is reasonably possible that approximately $1.2 million of its current unrecognized tax benefit may decrease within the next twelve months as a result of a lapse of the statute of limitations and settlements with taxing authorities.

The Company or one of its subsidiaries files income tax returns in the U.S. federal jurisdiction and various state jurisdictions. With few exceptions, the Company is no longer subject to U.S. federal or state income tax examinations for years prior to 2003.

The IRS has concluded an examination of the federal income tax returns of Triad for the short taxable years ended April 27, 2001, June 30, 2001 and December 31, 2001, and the taxable years ended December 31, 2002 and 2003. The Company has received a closing letter from the IRS with respect to the examination for those tax years. The settlement was not material to the Company’s consolidated results of operations or consolidated financial position.

Cash paid for income taxes, net of refunds received, resulted in a net cash refund of $2.8 million for the three months ended March 31, 2008 and net cash paid of $13.2 million during the three months ended March 31, 2007.

7. GOODWILL AND OTHER INTANGIBLE ASSETS

The changes in the carrying amount of goodwill for the three months ended March 31, 2008, are as follows (in thousands):

Balance as of December 31, 2007		$	4,247,714
Goodwill acquired as part of acquisitions during 2008			114
Consideration adjustments and finalization of purchase price allocations for acquisitions completed prior to 2008			138,626
Goodwill written-off as part of disposals			(11,161	)
Balance as of March 31, 2008		$	4,375,293

Goodwill related to the former Triad hospitals of $3.039 billion has not been allocated to the reporting unit level as of March 31, 2008 because the final purchase price allocation has not been completed (see Note 5).

The Company completed its most recent annual goodwill impairment test as required by SFAS No. 142, “Goodwill and Other Intangible Assets,” during 2007, using a measurement date of September 30, 2007. Based on the results of the impairment test, the Company was not required to recognize an impairment of goodwill in 2007.

COMMUNITY HEALTH SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

7. GOODWILL AND OTHER INTANGIBLE ASSETS (Continued)

The gross carrying amount of the Company’s other intangible assets was $202.3 million at March 31, 2008 and $194.6 million at December 31, 2007, and the net carrying amount was $187.1 million at March 31, 2008 and $181.0 million at December 31, 2007. Other intangible assets are included in other assets, net on the Company’s condensed consolidated balance sheets.

The weighted-average amortization period for the intangible assets subject to amortization is approximately eight years. There are no expected residual values related to these intangible assets. Amortization expense on these intangible assets during the three months ended March 31, 2008 and March 31, 2007 was $2.4 million and $0.5 million, respectively. Amortization expense on intangible assets is estimated to be $11.6 million for the remainder of 2008, $14.0 million in 2009, $13.0 million in 2010, $11.9 million in 2011, $9.7 million in 2012, and $0.3 million in 2013 and thereafter.

8. EARNINGS PER SHARE

The following table sets forth the components of the numerator and denominator for the computation of basic and diluted income from continuing operations per share (in thousands, except share data):

		Three months ended March 31,
		2008				2007
Numerator:
Numerator for basic earnings per share -
Income from continuing operations available to common stockholders – basic		$	51,493			$	57,289
Numerator for diluted earnings per share -
Income from continuing operations available to common stockholders – diluted		$	51,493			$	57,289
Denominator:
Weighted-average number of shares outstanding – basic			94,107,532				93,402,545
Effect of dilutive securities:
Non-employee director options			—				11,826
Restricted stock awards			77,299				36,235
Employee options			821,890				914,686
Weighted-average number of shares outstanding – diluted			95,006,721				94,365,292
Dilutive securities outstanding not included in the computation of earning per share because their effect is antidilutive:
Employee options			4,361,131				1,926,567

9. STOCKHOLDER’S EQUITY

Authorized capital shares of the Company include 400,000,000 shares of capital stock consisting of 300,000,000 shares of common stock and 100,000,000 shares of preferred stock. Each of the aforementioned classes of capital stock has a par value of $.01 per share. Shares of preferred stock, none of which are outstanding as of March 31, 2008 may be issued in one or more series having such rights, preferences and other provisions as determined by the Board of Directors without approval by the holders of common stock.

On January 14, 2006, the Company commenced an open market repurchase program for up to 5,000,000 shares of the Company’s common stock, not to exceed $200 million in repurchases. Under this program, the Company repurchased the entire 5,000,000 shares at a weighted average price of $35.23. This program concluded on November 8, 2006 when the maximum number of shares had been repurchased. This repurchase plan followed a prior repurchase plan for up to 5,000,000 shares which concluded on January 13, 2006. The Company repurchased 3,029,700 shares at a weighted average price of $31.20 per share under this program. On December 13, 2006, the Company commenced another open market repurchase program for up to 5,000,000 shares of the Company’s common stock, not to exceed $200 million in repurchases. This program will conclude at the earlier of three years or when the maximum number of shares has been repurchased. As of March 31, 2008, the Company has not repurchased any shares under this program.

COMMUNITY HEALTH SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

10. COMPREHENSIVE INCOME

The following table presents the components of comprehensive income, net of related taxes. The net change in fair value of interest rate swap agreements is a function of the spread between the fixed interest rate of each swap and the underlying variable interest rate under the Company’s New Credit Facility, the change in fair value of available for sale securities is the unrealized gain (losses) on the related investments and the amortization of unrecognized pension cost components is the amortization of prior service costs and credits and actuarial gains and losses (in thousands):

		Three months ended
		March 31,
		2008				2007
Net income		$	60,127			$	54,324
Net change in fair value of interest rate swaps			(104,554	)			(3,870	)
Net change in fair value of available for sale securities			(753	)			(213	)
Amortization of unrecognized pension components			(993	)			—
Comprehensive income		$	(46,173	)		$	50,241

The net change in fair value of the interest rate swaps, the net change in fair value of available for sale securities and amortization of unrecognized pension cost components are included in stockholders’ equity on the accompanying condensed consolidated balance sheets.

11. EQUITY INVESTMENTS

The Company owns equity interests of 27.5% in four hospitals in Las Vegas, Nevada, and 26.1% in one hospital in Las Vegas, Nevada in which Universal Health Systems, Inc. owns the majority interest; an equity interest of 38.0% in a hospital in Macon, Georgia in which HCA Inc. owns the majority interest; and an equity interest of 50.0% in a hospital in El Dorado, Arkansas in which the SHARE Foundation, a not-for-profit foundation, owns the remaining 50.0%. These equity investments were acquired as part of the acquisition of Triad. The Company uses the equity method of accounting for its investments in these entities. The balance of the Company’s investment in unconsolidated affiliates is $276.5 million and $213.3 million at March 31, 2008 and December 31, 2007, respectively, and is included in other assets in the accompanying condensed consolidated balance sheet. Included in the Company’s results of operations for the quarter ended March 31, 2008, is $12.9 million representing the Company’s equity in pre-tax earnings from investments in unconsolidated affiliates.

Summarized combined financial information for the three months ended March 31, 2008, for the unconsolidated entities in which the Company owns an equity interest is as follows (in thousands):

		For the three months ended
		March 31, 2008
Revenues		$	363,667
Net income			50,955

12. LONG-TERM DEBT

Terminated Credit Facility and Notes

On August 19, 2004, CHS entered into a $1.625 billion senior secured credit facility with a consortium of lenders which was subsequently amended on December 16, 2004, July 8, 2005 and December 13, 2006 (the “Terminated Credit Facility”). The purpose of the Terminated Credit Facility was to refinance and replace the Company’s previous credit agreement, repay specified other indebtedness, and fund general corporate purposes, including amending the credit facility to permit declaration and payment of cash dividends, to repurchase shares or make other distributions, subject to certain restrictions. The Terminated Credit Facility consisted of a $1.2 billion term loan that was due to mature in 2011 and a $425 million revolving credit facility that was due to mature in 2009. The First Incremental Facility Amendment, dated as of December 13, 2006, increased the Company’s term loans by $400 million (the “Incremental Term Loan Facility”) and also gave the Company the ability to add up to $400 million of additional term loans. The full amount of the Incremental Term Loan Facility was funded on December 13, 2006, and the proceeds were used to repay the full outstanding amount (approximately $326 million) of the revolving credit facility under the Terminated Credit Agreement and the balance was available to be used for general corporate purposes. The Company was able to elect from time to time an interest rate per annum for the borrowings under the term loan, including the incremental term loan,

COMMUNITY HEALTH SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

12. LONG-TERM DEBT (Continued)

and revolving credit facility equal to (a) an alternate base rate, which would have been equal to the greatest of (i) the Prime Rate (as defined) in effect and (ii) the Federal Funds Effective Rate (as defined), plus 50 basis points, plus (1) 75 basis points for the term loan and (2) the Applicable Margin (as defined) for revolving credit loans or (b) the Eurodollar Rate (as defined) plus (1) 175 basis points for the term loan and (2) the Applicable Margin for Eurodollar revolving credit loans. The Company also paid a commitment fee for the daily average unused commitments under the revolving credit facility. The commitment fee was based on a pricing grid depending on the Applicable Margin for Eurodollar revolving credit loans and ranged from 0.250% to 0.500%. The commitment fee was payable quarterly in arrears and on the revolving credit termination date with respect to the available revolving credit commitments. In addition, the Company paid fees for each letter of credit issued under the credit facility.

On December 16, 2004, the Company issued $300 million 6-1/2% senior subordinated notes due 2012. On April 8, 2005, the Company exchanged these notes for notes having substantially the same terms as the outstanding notes, except the exchanged notes were registered under the Securities Act of 1933, as amended (the “1933 Act”). The debt was repaid in 2007.

New Credit Facility and Notes

On July 25, 2007, the New Credit Facility was entered into with a syndicate of financial institutions led by Credit Suisse, as administrative agent and collateral agent. The New Credit Facility consists of a $6.065 billion funded term loan facility with a maturity of seven years, a $400 million delayed draw term loan facility with a maturity of seven years and a $750 million revolving credit facility with a maturity of six years. As of December 31, 2007, the $400 million delayed draw term loan had been reduced to $300 million at the request of the Company. The revolving credit facility also includes a subfacility for letters of credit and a swingline subfacility. As previously disclosed, in connection with the consummation of the acquisition of Triad, the Company used a portion of the net proceeds from its New Credit Facility and the Notes offering to repay its outstanding debt under the Terminated Credit Facility, the 6-1/2% Notes and certain of Triad’s existing indebtedness. During the third quarter of 2007, the Company recorded a pre-tax write-off of approximately $13.9 million in deferred loan costs relative to the early extinguishment of the debt under the Terminated Credit Facility and incurred tender and solicitation fees of approximately $13.4 million on the early repayment of the Company’s $300 million aggregate principal amount of 6-1/2% Senior Subordinated Notes due 2012 through a cash tender offer and consent solicitation.

The New Credit Facility requires quarterly amortization payments of each term loan facility equal to 0.25% of the outstanding amount of the term loans, if any, with the outstanding principal balance payable on July 25, 2014.

The term loan facility must be prepaid in an amount equal to (1) 100% of the net cash proceeds of certain asset sales and dispositions by the Company and its subsidiaries, subject to certain exceptions and reinvestment rights, (2) 100% of the net cash proceeds of issuances of certain debt obligations or receivables based financing by the Company and its subsidiaries, subject to certain exceptions, and (3) 50%, subject to reduction to a lower percentage based on the Company’s leverage ratio (as defined in the New Credit Facility generally as the ratio of total debt on the date of determination to the Company’s EBITDA, as defined, for the four quarters most recently ended prior to such date), of excess cash flow (as defined) for any year, commencing in 2008, subject to certain exceptions. Voluntary prepayments and commitment reductions are permitted in whole or in part, without any premium or penalty, subject to minimum prepayment or reduction requirements.

The obligor under the New Credit Facility is CHS. All of the obligations under the New Credit Facility are unconditionally guaranteed by the Company and certain existing and subsequently acquired or organized domestic subsidiaries. All obligations under the New Credit Facility and the related guarantees are secured by a perfected first priority lien or security interest in substantially all of the assets of the Company, CHS and each subsidiary guarantor, including equity interests held by the Company, CHS or any subsidiary guarantor, but excluding, among others, the equity interests of non-significant subsidiaries, syndication subsidiaries, securitization subsidiaries and joint venture subsidiaries.

The loans under the New Credit Facility will bear interest on the outstanding unpaid principal amount at a rate equal to an applicable percentage plus, at the Company’s option, either (a) an Alternate Base Rate (as defined) determined by reference to the greater of (1) the Prime Rate (as defined) announced by Credit Suisse or (2) the Federal Funds Effective Rate (as defined) plus one-half of 1.0%, or (b) a reserve adjusted London interbank offered rate for dollars (Eurodollar Rate) (as defined). The applicable percentage for term loans is 1.25% for Alternate Base Rate loans and 2.25% for Eurodollar rate loans. The applicable percentage for revolving loans is initially 1.25% for Alternate Base Rate revolving loans and 2.25% for Eurodollar revolving loans, in each case subject to reduction based on the Company’s leverage ratio. Loans under the swingline subfacility bear interest at the rate applicable to Alternate Base Rate loans under the revolving credit facility.

COMMUNITY HEALTH SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

12. LONG-TERM DEBT (Continued)

CHS has agreed to pay letter of credit fees equal to the applicable percentage then in effect with respect to Eurodollar rate loans under the revolving credit facility times the maximum aggregate amount available to be drawn under all letters of credit outstanding under the subfacility for letters of credit. The issuer of any letter of credit issued under the subfacility for letters of credit will also receive a customary fronting fee and other customary processing charges. CHS is initially obligated to pay commitment fees of 0.50% per annum (subject to reduction based upon the Company’s leverage ratio) on the unused portion of the revolving credit facility. For purposes of this calculation, swingline loans are not treated as usage of the revolving credit facility. CHS is also obligated to pay commitment fees of 0.50% per annum for the first six months after the closing of the New Credit Facility, 0.75% per annum for the next three months thereafter and 1.0% per annum thereafter, in each case on the unused amount of the delayed draw term loan facility. The Company paid arrangement fees on the closing of the New Credit Facility and will pay an annual administrative agent fee.

The New Credit Facility contains customary representations and warranties, subject to limitations and exceptions, and customary covenants restricting, subject to certain exceptions, the Company’s and its subsidiaries’ ability to, among other things (1) declare dividends, make distributions or redeem or repurchase capital stock, (2) prepay, redeem or repurchase other debt, (3) incur liens or grant negative pledges, (4) make loans and investments and enter into acquisitions and joint ventures, (5) incur additional indebtedness or provide certain guarantees, (6) make capital expenditures, (7) engage in mergers, acquisitions and asset sales, (8) conduct transactions with affiliates, (9) alter the nature of the Company’s businesses, (10) grant certain guarantees with respect to physician practices, (11) engage in sale and leaseback transactions or (12) change the Company’s fiscal year. The Company is also required to comply with specified financial covenants (consisting of a leverage ratio and an interest coverage ratio) and various affirmative covenants.

Events of default under the New Credit Facility include, but are not limited to, (1) the Company’s failure to pay principal, interest, fees or other amounts under the credit agreement when due (taking into account any applicable grace period), (2) any representation or warranty proving to have been materially incorrect when made, (3) covenant defaults subject, with respect to certain covenants, to a grace period, (4) bankruptcy events, (5) a cross default to certain other debt, (6) certain undischarged judgments (not paid within an applicable grace period), (7) a change of control, (8) certain ERISA-related defaults, and (9) the invalidity or impairment of specified security interests, guarantees or subordination provisions in favor of the administrative agent or lenders under the New Credit Facility.

The Notes were issued by CHS in connection with the Triad acquisition in the principal amount of $3.021 billion. These Notes will mature on July 15, 2015. The Notes bear interest at the rate of 8.875% per annum, payable semiannually in arrears on January 15 and July 15, commencing January 15, 2008. Interest on the Notes accrue from the date of original issuance. Interest will be calculated on the basis of 360-day year comprised of twelve 30-day months.

Except as set forth below, CHS is not entitled to redeem the Notes prior to July 15, 2011.

On and after July 15, 2011, CHS is entitled, at its option, to redeem all or a portion of the Notes upon not less than 30 nor more than 60 days notice, at the redemption prices (expressed as a percentage of principal amount on the redemption date), plus accrued and unpaid interest, if any, to the redemption date (subject to the right of holders of record on the relevant record date to receive interest due on the relevant interest payment date), if redeemed during the 12-month period commencing on July 15 of the years set forth below:

Period		Redemption Price
2011			104.438	%
2012			102.219	%
2013 and thereafter			100.000	%

COMMUNITY HEALTH SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

12. LONG-TERM DEBT (Continued)

In addition, any time prior to July 15, 2010, CHS is entitled, at its option, on one or more occasions to redeem the Notes (which include additional Notes (the “Additional Notes”), if any which may be issued from time to time under the indenture under which the Notes were issued) in an aggregate principal amount not to exceed 35% of the aggregate principal amount of the Notes (which includes Additional Notes, if any) originally issued at a redemption price (expressed as a percentage of principal amount) of 108.875%, plus accrued and unpaid interest to the redemption date, with the Net Cash Proceeds (as defined) from one or more Public Equity Offerings (as defined) (provided that if the Public Equity Offering is an offering by the Company, a portion of the Net Cash Proceeds thereof equal to the amount required to redeem any such Notes is contributed to the equity capital of CHS); provided, however, that:

	1)		at least 65% of such aggregate principal amount of Notes originally issued remains outstanding immediately after the occurrence of each such redemption (other than the Notes held, directly or indirectly, by the Company or its subsidiaries); and
	2)		each such redemption occurs within 90 days after the date of the related Public Equity Offering.

CHS is entitled, at its option, to redeem the Notes, in whole or in part, at any time prior to July 15, 2011, upon not less than 30 or more than 60 days notice, at a redemption price equal to 100% of the principal amount of Notes redeemed plus the Application Premium (as defined), and accrued and unpaid interest, if any, as of the applicable redemption date.

Pursuant to a registration rights agreement entered into at the time of the issuance of the Notes as a result of an exchange offer made by CHS, substantially all of the Notes issued in July 2007 were exchanged in November 2007 for new notes (the “Exchange Notes”) having terms substantially identical in all material respects to the Notes (except that the Exchange Notes were issued under a registration statement pursuant to the 1933 Act). References to the Notes shall also be deemed to include Exchange Notes unless the context provides otherwise.

During the quarter ended March 31, 2008, the Company repurchased on the open market and cancelled $62.7 million of the Notes. This resulted in a loss from early extinguishment of debt of $1.3 million with an after-tax impact of $0.9 million.

As of March 31, 2008, the availability for additional borrowings under the New Credit Facility was $1.050 billion (consisting of a $750 million revolving credit facility and a $300 million delayed draw term loan facility), of which $35 million was set aside for outstanding letters of credit. CHS also has the ability to add up to $300 million of borrowing capacity from receivable transactions (including securitizations) under the New Credit Facility which has not yet been accessed. CHS also has the ability to amend the New Credit Facility to provide for one or more tranches of term loans in an aggregate principal amount of $600 million, which CHS has not yet accessed. As of March 31, 2008, the weighted-average interest rate under the New Credit Facility was 5.7%.

Cash paid for interest, net of interest income, was $229.1 million and $25.9 million during the three months ended March 31, 2008 and 2007, respectively.

13. RECENT ACCOUNTING PRONOUNCEMENTS

In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities — Including an Amendment of FASB Statement No. 115” (“SFAS No. 159”). SFAS No. 159 expands the use of fair value accounting but does not affect existing standards that require assets or liabilities to be carried at fair value. SFAS No. 159 permits an entity, on a contract-by-contract basis, to make an irrevocable election to account for certain types of financial instruments and warranty and insurance contracts at fair value, rather than historical cost, with changes in the fair value, whether realized or unrealized, recognized in earnings. SFAS No. 159 is effective for fiscal years beginning after November 15, 2007. The Company adopted SFAS No. 159 as of January 1, 2008. The adoption of this statement has not had a material effect on the Company’s consolidated results of operations or consolidated financial position.

COMMUNITY HEALTH SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

13. RECENT ACCOUNTING PRONOUNCEMENTS (Continued)

In December 2007, the FASB issued SFAS No. 141(R), “Business Combinations” (“SFAS No. 141(R)”). SFAS No. 141(R) replaces SFAS No. 141 and addresses the recognition and accounting for identifiable assets acquired, liabilities assumed, and noncontrolling interests in business combinations. This standard will require more assets and liabilities to be recorded at fair value and will require expense recognition (rather than capitalization) of certain pre-acquisition costs. This standard also will require any adjustments to acquired deferred tax assets and liabilities occurring after the related allocation period to be made through earnings. Furthermore, this standard requires this treatment of acquired deferred tax assets and liabilities also be applied to acquisitions occurring prior to the effective date of this standard. SFAS No. 141(R) is effective for fiscal years beginning after December 15, 2008 and is required to be adopted prospectively with no early adoption permitted. SFAS No. 141(R) will be adopted by the Company in the first quarter of 2009. The Company is currently assessing the potential impact that SFAS No. 141(R) will have on its consolidated results of operations or financial position.

In December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements” (“SFAS No. 160”). SFAS No. 160 addresses the accounting and reporting framework for noncontrolling ownership interests in consolidated subsidiaries of the parent. SFAS No. 160 also establishes disclosure requirements that clearly identify and distinguish between the interests of the parent company and the interests of the noncontrolling owners and that require minority ownership interests be presented separately within equity in the consolidated financial statements. SFAS No. 160 is effective for fiscal years beginning after December 15, 2008, and will be adopted by the Company in the first quarter of 2009. The Company is currently assessing the potential impact that SFAS No. 160 will have on its consolidated results of operations or financial position.

In March 2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments and Hedging Activities” (“SFAS No. 161”). SFAS No. 161 expands the disclosure requirements for derivative instruments and for hedging activities in order to provide additional understanding of how an entity uses derivative instruments and how they are accounted for and reported in an entity’s financial statements. The new disclosure requirements for SFAS No. 161 are effective for fiscal years beginning after November 15, 2008, and will be adopted by the Company in the first quarter of 2009.

14. SEGMENT INFORMATION

The Company operates in three distinct operating segments, represented by the hospital operations (which includes our general acute care hospitals and related healthcare entities that provide inpatient and outpatient health care services), the home health agencies operations (which provide in-home outpatient care), and our hospital management services business (which provides executive management and consulting services to non-affliated acute care hospitals). Only the hospital operations segment meets the criteria in SFAS No. 131, “Disclosure about Segments of an Enterprise and Related Information” (“SFAS No. 131”), as a separate reportable segment. The financial information for the home health agencies and management services segments do not meet the quantitative thresholds defined in SFAS No. 131 and are combined into the corporate and all other reportable segment.

The distribution between reportable segments of our revenues and income from continuing operations before income taxes is summarized in the following tables (in thousands):

		For the Three Months Ended March 31,
		2008				2007
Revenues:
Hospital operations		$	2,664,016			$	1,130,207
Corporate and all other			63,538				24,071
		$	2,727,554			$	1,154,278
Income from continuing operations before income taxes:
Hospital operations		$	117,892			$	113,529
Corporate and all other			(34,164	)			(20,408	)
		$	83,728			$	93,121

15. FAIR VALUE

In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements” (“SFAS No. 157”), which defines fair value, provides a framework for measuring fair value, and expands disclosures required for fair value measurements. SFAS No. 157 applies to other accounting pronouncements that require fair value measurement; it does not require any new fair value measurements. SFAS No. 157 is effective for fiscal years beginning after November 15, 2007, and was adopted by the Company as of January 1, 2008. The adoption of this statement has not had a material effect on the Company’s consolidated results of operations or consolidated financial position.

In February 2008, the FASB issued FASB Statement of Position No.157-2, “Effective Date of FASB Statement No. 157,” (“FSP 157-2”). FSP 157-2 deferred the effective date of the provisions of SFAS No. 157 for all non-financial assets and non-financial liabilities to fiscal years beginning after November 15, 2008, and will be adopted by the Company in the first quarter of 2009. The Company is currently assessing the potential impact of SFAS No. 157 for non-financial assets and non-financial liabilities on its consolidated statements of financial position and results of operations.

Fair Value Hierarchy

SFAS No. 157 classifies the inputs used to measure fair value into the following hierarchy:

Level 1:		Quoted market prices in active markets for identical assets or liabilities.
Level 2:		Observable market-based inputs or unobservable inputs that are corroborated by market data.
Level 3:		Unobservable inputs that are supported by little or no market activity and are significant to the fair value of the assets or liabilities. Level 3 includes values determined using pricing models, discounted cash flow methodologies, or similar techniques reflecting the Company’s own assumptions.

The following table sets forth, by level within the fair value hierarchy, the financial assets and liabilities recorded at fair value on a recurring basis as of March 31, 2008 (in thousands):

		March 31,
		2008				Level 1				Level 2				Level 3
Available-for-sale securities		$	7,968			$	7,968			$	—			$	—
Trading securities			31,749				31,749				—				—
Total assets		$	39,717			$	39,717			$	—			$	—
Fair value of interest
rate swap agreements		$	290,553			$	—			$	290,553			$	—
Total liabilities		$	290,553			$	—			$	290,553			$	—

Available-for-sale securities and trading securities classified as Level 1 are measured using quoted market prices. The fair value of the Company’s interest rate swap agreements are classified as Level 2, and are estimated using an income approach based on the LIBOR swap rate, which is observable at commonly quoted intervals for the full term of the swap.

16. CONTINGENCIES

The Company is a party to various legal proceedings incidental to its business. In the opinion of management, any ultimate liability with respect to these actions will not have a material adverse effect on the Company’s consolidated financial position, cash flows or results of operations. In addition, in connection with the closing of the Triad acquisition on July 25, 2007, the

COMMUNITY HEALTH SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

16. CONTINGENCIES (Continued)

Company has assumed both recorded and unrecorded contingencies of Triad. The Company’s management is not aware of any unrecorded contingencies assumed in connection with the Triad acquisition, whose ultimate outcome will have a material adverse effect on the Company’s consolidated financial position, cash flows or results of operations.

In a letter dated October 4, 2007, the Civil Division of the Department of Justice notified the Company that, as a result of an investigation into the way in which different state Medicaid programs apply to the federal government for matching or supplemental funds that are ultimately used to pay for a small portion of the services provided to Medicaid and indigent patients, it believes the Company and three of its New Mexico hospitals have caused the State of New Mexico to submit improper claims for federal funds in violation of the federal False Claims Act. In a letter dated January 22, 2008, the Civil Division notified the Company that based on its investigation, it has calculated that these three hospitals received ineligible federal participation payments from August 2000 to June 2006 of approximately $27.5 million. The Civil Division also advised the Company that were it to proceed to trial, it would seek treble damages plus an appropriate penalty for each of the violations of the False Claims Act. The Company continues to believe that it has not violated the False Claims Act, and is continuing discussions with the Civil Division in an effort to resolve this matter.

17. SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL INFORMATION

In connection with the consummation of the Triad acquisition, the Company obtained $7.215 billion of senior secured financing under the New Credit Facility and CHS issued the Notes in the aggregate principal amount of $3.021 billion. The Notes are senior unsecured obligations of CHS and are guaranteed on a senior basis by the Company and by certain of the Company’s domestic subsidiaries. The Notes are fully and unconditionally guaranteed by the Company and certain existing and subsequently acquired or organized domestic subsidiaries. Such guarantees are joint and several. The following condensed consolidating financial statements present the Company (as guarantor), CHS (as the issuer), the subsidiary guarantors, the subsidiary non-guarantors and eliminations. This condensed consolidating financial information has been prepared and presented in accordance with SEC Regulation S-X Rule 3-10 “Financial Statements of Guarantors and Issuers of Guaranteed Securities Registered or Being Registered”.

COMMUNITY HEALTH SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

Condensed Consolidated Balance Sheet
March 31, 2008

		Parent								Other				Non-
		Guarantor				Issuer				Guarantors				Guarantors				Eliminations				Consolidated
		(In thousands, except share data)
ASSETS
Current assets
Cash and cash equivalents		$	—			$	—			$	213,879			$	—			$	(49,526	)		$	164,353
Patient accounts receivable, net of allowance for doubtful accounts			—				—				1,021,244				604,414				—				1,625,658
Supplies			—				—				164,622				99,439				—				264,061
Deferred income taxes			113,741				—				—				—				—				113,741
Prepaid expenses and taxes			—				58				180,024				13,930				—				194,012
Other current assets			—				390				129,601				114,576				—				244,567
Total current assets			113,741				448				1,709,370				832,359				(49,526	)			2,606,392
Property and equipment, net			—				—				3,343,680				2,094,717				—				5,438,397
Goodwill			21,126				—				2,435,773				1,918,394				—				4,375,293
Other assets, net			—				186,076				487,395				238,796				—				912,267
Net investment in subsidiaries			1,506,013				1,234,270				3,680,406				—				(6,420,689	)			—
Total assets		$	1,640,880			$	1,420,794			$	11,656,624			$	5,084,266			$	(6,470,215	)		$	13,332,349
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities
Current maturities of long-term debt		$	—			$	—			$	14,667			$	4,809			$	—			$	19,476
Accounts payable			—				41				339,276				171,646				(49,526	)			461,437
Current income taxes payable			—				—				—				—				—				—
Accrued liabilities			—				—				434,906				296,365				—				731,271
Interest payable (receivable)			—				2,599				88,205				(362	)			—				90,442
Total current liabilities			—				2,640				877,054				472,458				(49,526	)			1,302,626
Long-term debt payable (receivable)			4				4,325,296				4,509,849				51,206				—				8,886,355
Deferred income taxes			407,947				—				—				—				—				407,947
Other long-term liabilities			195				284,848				198,936				195,743				—				679,722
Minority interests in equity of consolidated subsidiaries			—				—				2,156				381,973				—				384,129
Intercompany (receivable) payable			(438,836	)			(4,698,000	)			4,841,662				4,101,680				(3,806,506	)			—
Stockholders’ equity
Preferred stock			—				—				—				—				—				—
Common stock			972				—				1				2				(3	)			972
Additional paid-in capital			1,247,241				—				—				—				—				1,247,241
Treasury stock, at cost, 975,549 shares			(6,678	)			—				—				—				—				(6,678	)
Accumulated other comprehensive income (loss)			(188,037	)			(188,037	)			(5,734	)			—				193,771				(188,037	)
Retained earnings			618,072				1,694,047				1,232,700				(118,796	)			(2,807,951	)			618,072
Total stockholders’ equity			1,671,570				1,506,010				1,226,967				(118,794	)			(2,614,183	)			1,671,570
Total liabilities and stockholders’ equity		$	1,640,880			$	1,420,794			$	11,656,624			$	5,084,266			$	(6,470,215	)		$	13,332,349

COMMUNITY HEALTH SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

Condensed Consolidated Balance Sheet
December 31, 2007

		Parent								Other				Non-
		Guarantor				Issuer				Guarantors				Guarantors				Eliminations				Consolidated
		(In thousands, except share data)
ASSETS
Current assets
Cash and cash equivalents		$	—			$	—			$	114,075			$	18,799			$	—			$	132,874
Patient accounts receivable, net of allowance for doubtful accounts			—				—				954,106				579,692				—				1,533,798
Supplies			—				—				163,961				98,942				—				262,903
Deferred income taxes			113,741				—				—				—				—				113,741
Prepaid expenses and taxes			—				102				156,733				12,921				—				169,756
Other current assets			—				—				129,147				210,679				—				339,826
Total current assets			113,741				102				1,518,022				921,033				—				2,552,898
Property and equipment, net			—				—				3,667,487				1,845,087				—				5,512,574
Goodwill			96,671				—				2,162,601				1,988,442								4,247,714
Other assets, net			—				189,140				276,589				714,728								1,180,457
Net investment in subsidiaries			1,519,952				1,464,944				4,968,905				—				(7,953,801	)			—
Total assets		$	1,730,364			$	1,654,186			$	12,593,604			$	5,469,290			$	(7,953,801	)		$	13,493,643
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities
Current maturities of long-term debt		$	—			$	—			$	16,603			$	4,107			$	—			$	20,710
Accounts payable			—				19				276,503				216,171				—				492,693
Current income taxes payable			—				—				—				—				—				—
Deferred income taxes — current			—				—				—				—				—				—
Accrued liabilities			—				—				437,808				342,892				—				780,700
Interest payable (receivable)			—				153,085				8,042				(7,295	)			—				153,832
Total current liabilities			—				153,104				738,956				555,875				—				1,447,935
Long-term debt payable (receivable)			4				4,487,090				4,633,801				(43,528	)			—				9,077,367
Deferred income taxes			407,947				—				—				—				—				407,947
Other long-term liabilities			(2,519	)			121,482				188,316				176,180				—				483,459
Minority interests in equity of consolidated subsidiaries			—				—				13,491				352,640				—				366,131
Intercompany (receivable) payable			(385,872	)			(4,627,439	)			5,956,358				4,562,215				(5,505,262	)			—
Stockholders’ equity
Preferred stock			—				—				—				—				—				—
Common stock			966				—				1				2				(3	)			966
Additional paid-in capital			1,240,308				—				—				—				—				1,240,308
Treasury stock, at cost, 975,549 shares			(6,678	)			—				—				—				—				(6,678	)
Accumulated other comprehensive income (loss)			(81,737	)			(81,737	)			(3,990	)			—				85,727				(81,737	)
Retained earnings			557,945				1,601,686				1,066,671				(134,094	)			(2,534,263	)			557,945
Total stockholders’ equity			1,710,804				1,519,949				1,062,682				(134,092	)			(2,448,539	)			1,710,804
Total liabilities and stockholders’ equity		$	1,730,364			$	1,654,186			$	12,593,604			$	5,469,290			$	(7,953,801	)		$	13,493,643

COMMUNITY HEALTH SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

Condensed Consolidated Statement of Income
Three Months Ended March 31, 2008

		Parent								Other				Non-
		Guarantor				Issuer				Guarantors				Guarantors				Eliminations				Consolidated
		(In thousands)
Net operating revenues		$	—			$	—			$	1,688,744			$	1,038,810			$	—			$	2,727,554
Operating costs and expenses:
Salaries and benefits			—				—				638,641				449,129				—				1,087,770
Provision for bad debts			—				—				193,890				103,190				—				297,080
Supplies			—				—				226,130				160,279				—				386,409
Other operating expenses			—				—				300,191				225,976				—				526,167
Rent			—				—				31,301				28,556				—				59,857
Depreciation and amortization			—				—				77,785				44,930				—				122,715
			—				—				1,467,938				1,012,060				—				2,479,998
Income from operations			—				—				220,806				26,750				—				247,556
Interest expense, net			—				72,577				75,937				17,188				—				165,702
Loss from early extinguishment of debt			—				1,328				—				—				—				1,328
Minority interest in earnings			—				—				(193	)			9,875				—				9,682
Equity in earnings of subsididary			(92,362	)			(166,267	)			(20,967	)			—				266,712				(12,884	)
Income (loss) from continuing operations before income taxes			92,362				92,362				166,029				(313	)			(266,712	)			83,728
Provision for income taxes			32,235				—				—				—				—				32,235
Income (loss) from continuing operations			60,127				92,362				166,029				(313	)			(266,712	)			51,493
Discontinued operations, net of taxes:
Loss from operations of hospitals sold and held for sale			—				—				—				(983	)			—				(983	)
Gain on sale of hospitals, net			—				—				—				9,617				—				9,617
Income on discontinued operations			—				—				—				8,634				—				8,634
Net income		$	60,127			$	92,362			$	166,029			$	8,321			$	(266,712	)		$	60,127