UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

Form 10-Q

For the quarterly period ended September 30, 2009

Commission file number 001-15925

COMMUNITY HEALTH SYSTEMS, INC.

(Exact name of registrant as specified in its charter)

Delaware		13-3893191
(State or other jurisdiction of		(I.R.S. Employer
incorporation or organization)		Identification Number)
4000 Meridian Boulevard		37067
Franklin, Tennessee		(Zip Code)
(Address of principal executive offices)

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

     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 has submitted electronically and posted on its corporate web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes o 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		Smaller reporting company o
				(Do not check if a smaller reporting company)

     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 October 20, 2009, there were outstanding 92,955,740 shares of the Registrant’s Common Stock, $0.01 par value.

 

 

Community Health Systems, Inc.

Form 10-Q

For the Three and Nine Months Ended September 30, 2009

		Page
Part I. Financial Information
Item 1. Financial Statements:
Condensed Consolidated Balance Sheets — September 30, 2009 and December 31, 2008 (Unaudited)			2
Condensed Consolidated Statements of Income — Three and Nine Months Ended September 30, 2009 and September 30, 2008 (Unaudited)			3
Condensed Consolidated Statements of Cash Flows — Nine Months Ended September 30, 2009 and September 30, 2008 (Unaudited)			4
Notes to Condensed Consolidated Financial Statements (Unaudited)			5
Item 2. Management’s Discussion and Analysis of Financial Condition And Results of Operations			34
Item 3. Quantitative and Qualitative Disclosures about Market Risk			50
Item 4. Controls and Procedures			50
Part II. Other Information
Item 1. Legal Proceedings			50
Item 1A. Risk Factors			53
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			53
Item 3. Defaults Upon Senior Securities			53
Item 4. Submission of Matters to a Vote of Security Holders			53
Item 5. Other Information			53
Item 6. Exhibits			54
Signatures
Index to Exhibits
EX-12
EX-31.1
EX-31.2
EX-32.1
EX-32.2

PART I FINANCIAL INFORMATION

Item 1.		Financial Statements

COMMUNITY HEALTH SYSTEMS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
(Unaudited)

		September 30,				December 31,
		2009				2008
ASSETS
Current assets
Cash and cash equivalents		$	432,815			$	220,655
Patient accounts receivable, net of allowance for doubtful accounts of $1,367,290 and $1,111,131 at September 30, 2009 and December 31, 2008, respectively			1,676,345				1,625,470
Supplies			289,145				275,696
Prepaid income taxes			—				92,710
Deferred income taxes			91,875				91,875
Prepaid expenses and taxes			91,192				73,792
Other current assets			213,260				224,852
Total current assets			2,794,632				2,605,050
Property and equipment			7,593,143				7,110,357
Less accumulated depreciation and amortization			(1,539,796	)			(1,215,952	)
Property and equipment, net			6,053,347				5,894,405
Goodwill			4,187,677				4,166,091
Other assets, net			1,008,027				1,152,708
Total assets		$	14,043,683			$	13,818,254
LIABILITIES AND EQUITY
Current liabilities
Current maturities of long-term debt		$	62,265			$	33,904
Accounts payable			495,377				532,595
Current income taxes payable			48,251				—
Deferred income taxes			6,740				6,740
Accrued interest			83,562				153,234
Accrued liabilities			863,903				782,944
Total current liabilities			1,560,098				1,509,417
Long-term debt			8,864,698				8,938,185
Deferred income taxes			461,098				460,793
Other long-term liabilities			873,587				888,557
Total liabilities			11,759,481				11,796,952
Redeemable noncontrolling interests in equity of consolidated subsidiaries			335,019				320,171
EQUITY
Community Health Systems, Inc. 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; 93,910,591 shares issued and 92,935,042 shares outstanding at September 30, 2009, and 92,483,166 shares issued and 91,507,617 shares outstanding at December 31, 2008			939				925
Additional paid-in capital			1,164,238				1,151,119
Treasury stock, at cost, 975,549 shares at September 30, 2009 and December 31, 2008			(6,678	)			(6,678	)
Accumulated other comprehensive loss			(242,242	)			(295,575	)
Retained earnings			954,311				776,249
Total Community Health Systems, Inc. stockholders’ equity			1,870,568				1,626,040
Noncontrolling interests in equity of consolidated subsidiaries			78,615				75,091
Total equity			1,949,183				1,701,131
Total liabilities and equity		$	14,043,683			$	13,818,254

See accompanying notes to the condensed consolidated financial statements.

COMMUNITY HEALTH SYSTEMS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except share and per share data)
(Unaudited)

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
		2009				2008				2009				2008
Net operating revenues		$	3,086,757			$	2,754,509			$	9,016,467			$	8,138,017
Operating costs and expenses:
Salaries and benefits			1,239,147				1,090,037				3,614,267				3,255,287
Provision for bad debts			378,357				321,570				1,078,587				899,236
Supplies			428,120				379,913				1,253,713				1,139,220
Other operating expenses			567,624				527,778				1,680,414				1,577,172
Rent			62,683				58,155				184,211				175,486
Depreciation and amortization			143,558				128,663				421,566				373,513
Total operating costs and expenses			2,819,489				2,506,116				8,232,758				7,419,914
Income from operations			267,268				248,393				783,709				718,103
Interest expense, net			161,823				166,773				487,209				484,836
Loss (gain) from early extinguishment of debt			21				—				(2,385	)			1,328
Equity in earnings of unconsolidated affiliates			(7,001	)			(8,695	)			(31,701	)			(32,078	)
Income from continuing operations before income taxes			112,425				90,315				330,586				264,017
Provision for income taxes			37,064				31,209				109,907				92,263
Income from continuing operations			75,361				59,106				220,679				171,754
Discontinued operations, net of taxes:
(Loss) income from operations of hospitals sold and hospitals held for sale			—				(608	)			1,977				1,044
(Loss) gain on sale of hospitals, net			—				—				(405	)			9,580
(Loss) income from discontinued operations			—				(608	)			1,572				10,624
Net income			75,361				58,498				222,251				182,378
Less: Net income attributable to noncontrolling interests			15,649				8,114				44,189				23,974
Net income attributable to Community Health Systems, Inc.		$	59,712			$	50,384			$	178,062			$	158,404
Income from continuing operations attributable to Community Health Systems, Inc. common stockholders per share (1):
Basic		$	0.66			$	0.53			$	1.96			$	1.56
Diluted		$	0.65			$	0.52			$	1.94			$	1.54
Discontinued operations attributable to Community Health Systems, Inc. common stockholders per share (1):
Basic		$	—			$	0.01			$	0.01			$	0.12
Diluted		$	—			$	0.01			$	0.01			$	0.12
Net income attributable to Community Health Systems, Inc. common stockholders per share (1):
Basic		$	0.66			$	0.54			$	1.97			$	1.69
Diluted		$	0.65			$	0.53			$	1.95			$	1.67
Weighted-average number of shares outstanding:
Basic			90,923,052				94,044,564				90,423,600				93,995,343
Diluted			92,010,742				95,159,619				91,117,013				95,106,115

See accompanying notes to the condensed consolidated financial statements.

COMMUNITY HEALTH SYSTEMS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)

		Nine Months Ended
		September 30,
		2009				2008
Cash flows from operating activities
Net income attributable to Community Health Systems, Inc.		$	178,062			$	158,404
Plus: Net income attributable to noncontrolling interests			44,189				23,974
Net income			222,251				182,378
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization			421,898				378,107
Stock-based compensation expense			35,121				39,812
Loss (gain) on sale of hospitals and partnership interest, net			405				(17,687	)
Income tax payable increase (excess tax benefit) relating to stock-based compensation			3,544				(1,278	)
(Gain) loss on early extinguishment of debt			(2,385	)			1,328
Other non-cash expenses, net			13,410				7,578
Changes in operating assets and liabilities, net of effects of acquisitions and divestitures:
Patient accounts receivable			(10,235	)			(117,193	)
Supplies, prepaid expenses and other current assets			18,278				3,099
Accounts payable, accrued liabilities and income taxes			194,955				184,995
Other			3,518				23,917
Net cash provided by operating activities			900,760				685,056
Cash flows from investing activities
Acquisitions of facilities and other related equipment			(211,941	)			(7,274	)
Purchases of property and equipment			(398,138	)			(451,409	)
Proceeds from disposition of hospitals and other ancillary operations			89,514				365,635
Proceeds from sale of property and equipment			2,521				13,964
Increase in other non-operating assets			(111,476	)			(152,168	)
Net cash used in investing activities			(629,520	)			(231,252	)
Cash flows from financing activities
Proceeds from exercise of stock options			9,952				1,688
(Income tax payable increase) excess tax benefit relating to stock-based compensation			(3,544	)			1,278
Deferred financing costs			(82	)			(2,569	)
Stock buy-back			—				(17,096	)
Proceeds from noncontrolling investors in joint ventures			26,314				11,652
Redemption of noncontrolling investments in joint ventures			(2,387	)			(53,485	)
Distributions to noncontrolling investors in joint ventures			(43,744	)			(24,351	)
Borrowings under credit agreement			200,000				30,596
Repayments of long-term indebtedness			(245,589	)			(192,507	)
Net cash used in financing activities			(59,080	)			(244,794	)
Net change in cash and cash equivalents			212,160				209,010
Cash and cash equivalents at beginning of period			220,655				132,874
Cash and cash equivalents at end of period		$	432,815			$	341,884

See accompanying notes to the condensed consolidated financial statements.

COMMUNITY HEALTH SYSTEMS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

1. BASIS OF PRESENTATION

     The unaudited condensed consolidated financial statements of Community Health Systems, Inc. and its subsidiaries (the “Company”) as of September 30, 2009 and December 31, 2008 and for the three-month and nine-month periods ended September 30, 2009 and September 30, 2008, have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. 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 and nine months ended September 30, 2009, are not necessarily indicative of the results to be expected for the full fiscal year ending December 31, 2009. 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, 2008, contained in the Company’s Annual Report on Form 10-K.

     Noncontrolling interests in less-than-wholly-owned consolidated subsidiaries of the parent are presented as a component of total equity to distinguish between the interests of the parent company and the interests of the noncontrolling owners. Revenues, expenses and income from continuing operations from these subsidiaries are included in the consolidated balances as presented on the condensed consolidated statements of income, along with a net income measure that separately presents the amounts attributable to the controlling interests and the amounts attributable to the noncontrolling interests for each of the periods presented. Noncontrolling interests that are redeemable or may become redeemable at a fixed or determinable price at the option of the holder or upon the occurrence of an event outside of the control of the company are presented in mezzanine equity on the condensed consolidated balance sheets.

     During the three months ended June 30, 2009, the Company decided to retain a hospital and related businesses previously classified as held for sale. Results of operations for all periods presented have been restated to include this retained hospital and related businesses, which previously were reported as discontinued operations. The condensed consolidated balance sheets for each of the periods presented have been restated to present the assets and liabilities previously reported as held for sale in the applicable financial statement line items.

     Throughout these notes to the condensed consolidated financial statements, Community Health Systems, Inc., the parent company, and its consolidated subsidiaries are referred to on a collective basis as the “Company.” This drafting style is not meant to indicate that the publicly-traded parent company or any subsidiary of the parent company owns or operates any asset, business, or property. The hospitals, operations and businesses described in this filing are owned and operated, and management services provided, by distinct and indirect subsidiaries of Community Health Systems, Inc. References to the Company may include one or more of its subsidiaries.

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”) and the Community Health Systems, Inc. 2009 Stock Option and Award Plan (the “2009 Plan”).

     The 2000 Plan allows for the grant of incentive stock options intended to qualify under Section 422 of the Internal Revenue Code (“IRC”), 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, all options granted under the 2000 Plan have 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 eight year contractual term and options granted in 2008 and 2009 have a 10 year contractual term. The exercise price of all options granted under the 2000 Plan is equal to the fair value of the Company’s common stock on the option grant date. As of September 30, 2009, 4,048,856 shares of unissued common stock remain available for future grants under the 2000 Plan.

     The 2009 Plan, which was adopted as of March 24, 2009 and approved by stockholders on May 19, 2009, provides for the grant of incentive stock options intended to qualify under Section 422 of the IRC and for the grant of stock options which do not so qualify, stock appreciation rights, restricted stock, restricted stock units, performance-based shares or units and other share awards. Persons eligible to receive grants under the 2009 Plan include the Company’s directors, officers, employees and consultants. The duration of any option granted under the 2009 Plan will be determined by the Company’s compensation committee. Generally, however, no option may be exercised more than 10 years from the date of grant, provided that the compensation committee may provide that a stock option may, upon the death of the grantee, be exercised for up to one year following the date of death even if such period extends beyond 10 years. As of September 30, 2009, no grants had been made under the 2009 Plan, with 3,500,000 shares of unissued common stock remaining reserved for future grants.

     The following table reflects the impact of total compensation expense related to stock-based equity plans on the reported operating results for the respective periods (in thousands):

		Three months ended								Nine months ended
		September 30,								September 30,
		2009				2008				2009				2008
Effect on income from continuing operations before income taxes		$	(10,316	)		$	(13,129	)		$	(35,121	)		$	(39,812	)
Effect on net income		$	(6,267	)		$	(7,976	)		$	(21,336	)		$	(24,185	)

     At September 30, 2009, $48.8 million of unrecognized stock-based compensation expense was expected to be recognized over a weighted-average period of 21 months. Of that amount, $16.5 million related to outstanding unvested stock options expected to be recognized over a weighted-average period of 18 months and $32.3 million related to outstanding unvested restricted stock, restricted stock units and phantom shares expected to be recognized over a weighted-average period of 23 months.

     The fair value of stock options was estimated using the Black Scholes option pricing model with the following weighted-average assumptions during the three and nine months ended September 30, 2009 and 2008:

		Three months ended								Nine months ended
		September 30,								September 30,
		2009				2008				2009				2008
Expected volatility			45.4	%			25.4	%			40.5	%			24.2	%
Expected dividends			0				0				0				0
Expected term		4 years				4 years				4 years				4 years
Risk-free interest rate			1.83	%			2.67	%			1.64	%			2.59	%

     In determining the expected term, the Company examined concentrations of option holdings and 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 term 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 September 30, 2009, and changes during each of the three month periods following December 31, 2008 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)				September 30, 2009
Outstanding at December 31, 2008			8,764,084			$	30.97
Granted			1,160,000				18.18
Exercised			—				—
Forfeited and cancelled			(63,165	)			31.78
Outstanding at March 31, 2009			9,860,919				29.45
Granted			31,000				25.27
Exercised			(267,400	)			13.07
Forfeited and cancelled			(170,277	)			30.52
Outstanding at June 30, 2009			9,454,242				29.88
Granted			66,000				29.22
Exercised			(315,819	)			20.44
Forfeited and cancelled			(122,329	)			33.19
Outstanding at September 30, 2009			9,082,094			$	30.16			5.9 years				$	40,828
Exercisable at September 30, 2009			6,160,836			$	30.95			4.9 years				$	24,362

     The weighted-average grant date fair value of stock options granted during the nine months ended September 30, 2009 and 2008, was $6.39 and $7.71, respectively. 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 ($31.93) 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 September 30, 2009. 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 September 30, 2009 and 2008 was $3.4 million and $3.0 million, respectively, and the aggregate intrinsic value of options exercised during the nine months ended September 30, 2009 and 2008 was $6.9 million and $3.4 million, respectively. 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 employees of certain subsidiaries. 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, for which restrictions lapsed equally on the first two anniversaries of the award date. Certain of the restricted stock awards granted to the Company’s senior executives contain a performance objective that must be met in addition to any 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 each of the first three anniversaries of the award date with the exception of the July 25, 2007 restricted stock awards, which had no additional time vesting restrictions once the performance restrictions are met. Notwithstanding the above-mentioned performance objectives and vesting requirements, the restrictions will lapse earlier in the event of death, disability or termination of employment by the Company for any reason other than for cause of the holder of the restricted stock, or 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 September 30, 2009, and changes during each of the three month periods following December 31, 2008 were as follows:

						Weighted -
						average
						fair
		Shares				value
Unvested at December 31, 2008			1,684,207			$	35.57
Granted			1,156,000				18.18
Vested			(621,312	)			35.68
Forfeited			(5,667	)			33.52
Unvested at March 31, 2009			2,213,228				26.46
Granted			12,000				25.27
Vested			(6,498	)			36.82
Forfeited			(3,335	)			35.11
Unvested at June 30, 2009			2,215,395				26.40
Granted			11,000				29.22
Vested			(325,502	)			40.30
Forfeited			(1,000	)			18.18
Unvested at September 30, 2009			1,899,893				24.05

     Also, under the 2000 Plan, on February 25, 2009, each of the Company’s outside directors received a grant of shares of phantom stock equal in value to $130,000 divided by the closing price of the Company’s common stock on that date ($18.18), or 7,151 shares per director (a total of 42,906 shares of phantom stock). Pursuant to a March 24, 2009 amendment to the 2000 Plan, future grants of this type will be denominated as “restricted stock unit” awards. On May 19, 2009, the newly elected outside director received a grant of 7,151 restricted stock units under the 2000 Plan, having a value at the time of grant of $180,706 based upon the closing price of the Company’s common stock on that date of $25.27. Vesting of these shares of phantom stock and restricted stock units occurs in one-third increments on each of the first three anniversaries of the award date. As of September 30, 2009, there were 50,057 shares of phantom stock and restricted stock units unvested at a weighted-average grant date fair value of $19.19. None of these grants were vested or canceled during the nine months ended September 30, 2009.

     Under the Directors’ Fees Deferral Plan, the Company’s outside directors may elect to receive share equivalent units in lieu of cash for their directors’ fees. 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 (in thousands, except units):

		Three months ended								Nine months ended
		September 30,								September 30,
		2009				2008				2009				2008
Directors’ fees earned and deferred into plan		$	20			$	17			$	60			$	75
Equivalent units			626.370				580.007				2,722.230				2,213.076

     At September 30, 2009, a total of 19,541.232 units were deferred in the plan with an aggregate fair value of $0.6 million, based on the closing market price of the Company’s common stock on the last trading day of the reporting period of $31.93.

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, which were $39.4 million and $42.3 million for the three months ended September 30, 2009 and 2008, respectively, and $120.2 million and $125.5 million for the nine months ended September 30, 2009 and 2008, respectively. Included in these amounts is stock-based compensation expense of $10.3 million and $13.1 million for the three months ended September 30, 2009 and 2008, respectively, and $35.1 million and $39.8 million for the nine months ended September 30, 2009 and 2008, respectively.

4. USE OF ESTIMATES

     The preparation of financial statements in conformity with U.S. 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 under different assumptions or conditions.

5. ACQUISITIONS AND DIVESTITURES

  Triad Acquisition

     On July 25, 2007, the Company completed its acquisition of Triad Hospitals, Inc. (“Triad”). Triad owned and operated 50 hospitals with 49 hospitals located in 17 states in non-urban and middle market communities and one hospital located in the Republic of Ireland.

     As of September 30, 2009, eight of the hospitals acquired from Triad have been sold. As a result of its acquisition of Triad, the Company also provides management and consulting services on a contract basis to independent hospitals, through its subsidiary, Quorum Health Resources, LLC. The Company acquired Triad for approximately $6.857 billion, including the assumption of $1.686 billion of existing indebtedness.

     In connection with the consummation of the acquisition of Triad, the Company’s wholly-owned subsidiary CHS/Community Health Systems, Inc. (“CHS”) obtained $7.215 billion of senior secured financing under a new credit facility (the “Credit Facility”) and 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 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 Credit Facility also provides an additional $750 million revolving credit facility and had a $400 million delayed draw term loan facility for future acquisitions, working capital and general corporate purposes. As of December 31, 2007, the $400 million delayed draw term loan was reduced to $300 million at the request of the Company. As of December 31, 2008, $100 million of the delayed draw term loan had been drawn by the Company, reducing the delayed draw term loan availability to $200 million at that date. In January 2009, the Company drew down the remaining $200 million of the delayed draw term loan.

     The total cost of the Triad acquisition has been allocated to the assets acquired and liabilities assumed based upon their respective fair values. 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 were centralized; and
	•		duplicate corporate functions were eliminated.

     The allocation process required 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 Company completed the allocation of the total cost of the Triad acquisition in the third quarter of 2008 and has made a final analysis and adjustment as of December 31, 2008 to deferred tax accounts based on the final cost allocation, resulting in approximately $2.781 billion of goodwill being recorded with respect to the Triad acquisition.

Other Acquisitions

     Effective June 1, 2009, one or more subsidiaries of the Company acquired from Akron General Medical Center the remaining 20% joint venture interest in Massillon Community Health System, LLC not then owned by one or more subsidiaries of the Company. This entity indirectly owns and operates Affinity Medical Center of Massillon, Ohio. The purchase price for this noncontrolling equity interest was $1.1 million in cash. Affinity Medical Center is now wholly-owned by these subsidiaries of the Company.

     Effective April 30, 2009, one or more subsidiaries of the Company acquired Wyoming Valley Health Care System in Wilkes-Barre, Pennsylvania. This health care system includes Wilkes-Barre General Hospital, a 392-bed, full-service acute care hospital located in Wilkes-Barre, and First Hospital Wyoming Valley, a behavioral health facility located in Kingston, Pennsylvania, as well as other outpatient and ancillary services. The total consideration for fixed assets and working capital of Wyoming Valley Health Care System was approximately $178.9 million, of which $153.7 million was paid in cash, net of $14.2 million of cash in acquired bank accounts, and $25.2 million was assumed in liabilities. This acquisition transaction was accounted for using the purchase method of accounting. This preliminary allocation of the purchase price has been determined by the Company based upon available information and the allocation is subject to settling amounts related to purchased working capital and valuation of tangible and intangible assets. Adjustments to the purchase price allocation are not expected to be material.

     Effective April 1, 2009, one or more subsidiaries of the Company acquired from Share Foundation the remaining 50% equity interest in MCSA L.L.C., an entity in which one or more subsidiaries of the Company previously had a 50% unconsolidated noncontrolling interest. One or more subsidiaries of the Company provided MCSA L.L.C. with certain management services. This acquisition resulted in these subsidiaries of the Company owning a 100% equity interest in that entity. MCSA L.L.C. owns and operates Medical Center of South Arkansas (166 licensed beds) in El Dorado, Arkansas. The purchase price was $26.0 million in cash. As of the acquisition date, one or more subsidiaries of the Company had a liability to MCSA L.L.C. of $14.1 million, as a result of a cash management agreement previously entered into with the hospital. Upon completion of the acquisition, this liability was eliminated in consolidation.

     Effective February 1, 2009, one or more subsidiaries of the Company completed the acquisition of Siloam Springs Memorial Hospital (74 licensed beds), located in Siloam Springs, Arkansas, from the City of Siloam Springs. The total consideration for this hospital consisted of approximately $0.1 million paid in cash for working capital and approximately $1.0 million of assumed liabilities. In connection with this acquisition, a subsidiary of the Company entered into a lease agreement for the existing hospital and agreed to build a replacement facility at this location, with construction required to commence by February 2011 and be completed by February 2013. As security for this obligation, a subsidiary of the Company deposited $1.6 million into an escrow account and agreed to deposit an additional $1.6 million by February 1, 2010. If the construction of the replacement facility is not completed within the agreed time frame, the escrow balance will be remitted to the City of Siloam Springs. If the construction of the replacement facility is completed within the agreed time frame, the escrow balance will be returned to the subsidiary of the Company.

     Effective November 14, 2008, one or more subsidiaries of the Company acquired from Willamette Community Health Solutions all of its joint venture interest in MWMC Holdings, LLC, which indirectly owns a controlling interest in and operates McKenzie-Willamette Medical Center of Springfield, Oregon. This acquisition resulted from a put right held by Willamette Community Health Solutions in connection with the 2003 transaction establishing the joint venture. The purchase price for this noncontrolling interest was $22.7 million in cash. Physicians affiliated with Oregon Healthcare Resources, Inc. continue to own a noncontrolling interest in the hospital, with the balance owned by these subsidiaries of the Company.

     Effective October 1, 2008, one or more subsidiaries of the Company completed the acquisition of Deaconess Medical Center (388 licensed beds) and Valley Hospital and Medical Center (123 licensed beds) both located in Spokane, Washington, from Empire Health Services. The total consideration for these two hospitals was approximately $184.1 million, of which $149.2 million was paid in cash and $34.9 million was assumed in liabilities. Based upon the Company’s purchase price allocation relating to this acquisition as of September 30, 2009, no goodwill has been recorded. The acquisition transaction was accounted for using the purchase method of accounting.

     Effective June 30, 2008, one or more subsidiaries of the Company acquired the remaining 35% equity interest in Affinity Health Systems, LLC, which indirectly owns and operates Trinity Medical Center (560 licensed beds) in Birmingham, Alabama, from Baptist Health Systems, Inc. of Birmingham, Alabama (“Baptist”), giving these subsidiaries 100% ownership of that facility. The purchase price for this noncontrolling interest was $51.5 million in cash and the cancellation of a promissory note issued by Baptist to Affinity Health Systems, LLC in the original principal amount of $32.8 million.

     Prior to January 1, 2009, U.S. GAAP for business combinations required certain acquisition-related costs be recognized as part of the consideration paid for a business, resulting in adjustments to the value of the acquired assets when recorded. As a result of updates to U.S. GAAP, such acquisition-related costs must be expensed for business combinations that close subsequent to December 31, 2008. Approximately $0.6 million and $3.6 million of acquisition costs related to prospective and closed acquisitions were expensed during the three and nine months ended September 30, 2009, respectively. The impact of this change in U.S. GAAP on the Company’s consolidated results of operations or consolidated financial position in future periods will be largely dependent on the number of acquisitions pursued by the Company; however, it is not anticipated that such impact will be material.

  Discontinued Operations

     Effective March 31, 2009, the Company, through its subsidiaries Triad-Denton Hospital LLC and Triad-Denton Hospital LP, completed the settlement of pending litigation which resulted in the sale of its ownership interest in a partnership, which owned and operated Presbyterian Hospital of Denton (255 licensed beds) in Denton, Texas, to Texas Health Resources for $103.0 million in cash. Also included as part of the settlement, these subsidiaries of the Company transferred certain hospital related assets.

     Effective March 1, 2008, one or more subsidiaries of 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 $315.0 million in cash.

     Effective February 21, 2008, one or more subsidiaries of 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, one or more subsidiaries of 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.

     In connection with the above actions, 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 (loss) income from discontinued operations for the respective periods are as follows (in thousands):

		Three months ended								Nine months ended
		September 30,								September 30,
		2009				2008				2009				2008
Net operating revenues		$	—			$	38,019			$	42,113			$	197,783
Income (loss) from operations of hospitals sold or held for sale before income taxes			—				348				3,024				2,954
(Loss) gain on sale of hospitals, net			—				—				(644	)			17,687
Income (loss) from discontinued operations, before taxes			—				348				2,380				20,641
Income tax expense			—				956				808				10,017
(Loss) income from discontinued operations, net of tax		$	—			$	(608	)		$	1,572			$	10,624

     Interest expense and loss on early extinguishment of debt was allocated to discontinued operations based on sale proceeds available for debt repayment.

     During the three months ended June 30, 2009, the Company decided to retain a hospital and related businesses previously classified as held for sale. Results of operations for all periods presented have been restated to include this retained hospital and related businesses, which were previously reported as discontinued operations. The condensed consolidated balance sheets for each of the periods presented have been restated to present the assets and liabilities previously reported as held for sale in the applicable financial statement line items.

6. INCOME TAXES

     The total amount of unrecognized benefit that would affect the effective tax rate, if recognized, was approximately $13.7 million as of September 30, 2009. 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 nine months ended September 30, 2009, the Company decreased liabilities by approximately $0.1 million and recorded $0.6 million in interest and penalties related to prior state income tax returns through its income tax provision from continuing operations, which are included in its liability for uncertain tax positions at September 30, 2009. A total of approximately $2.0 million of interest and penalties is included in the amount of the liability for uncertain tax positions at September 30, 2009.

     The Company believes that it is reasonably possible that approximately $4.1 million of its current unrecognized tax benefit may be recognized 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. The Company has extended the federal statute of limitations for Triad for the tax periods ended December 31, 1999, December 31, 2000, April 30, 2001, June 30, 2001, December 31, 2001, December 31, 2002 and December 31, 2003. The Company is currently under examination by the IRS regarding the federal tax return of Triad for the tax periods ended December 31, 2004, December 31, 2005, December 31, 2006 and July 25, 2007. The Company believes the results of this examination will not be material to its consolidated results of operations or consolidated financial position. With few exceptions, the Company is no longer subject to state income tax examinations for years prior to 2005 and federal income tax examinations with respect to Community Health Systems, Inc. federal returns for years prior to 2006.

     Prior to January 1, 2009, income attributable to noncontrolling interests was deducted from earnings before arriving at income from continuing operations. With the adoption of certain updates to the U.S. GAAP related to consolidations effective January 1, 2009, the income attributable to noncontrolling interests has been reclassified below net income and therefore is no longer deducted in arriving at income from continuing operations. However, the provision for income taxes does not change because those subsidiaries with noncontrolling interests attribute their taxable income to their respective investors. Accordingly, the Company will not pay tax on the income attributable to the noncontrolling interests. As a result of separately reporting income that is taxed to others, the Company’s effective tax rate on continuing operations before income taxes, as reported on the face of the financial statements is 33.0% and 34.6% for the three months ended September 30, 2009 and 2008, respectively, and 33.2% and 34.9% for the nine months ended September 30, 2009 and 2008, respectively. However, the actual effective tax rate that is attributable to the Company’s share of income from continuing operations before income taxes (income from continuing operations before income taxes, as presented on the face of the statement of income, less income from continuing operations attributable to noncontrolling interests of $15.6 million and $9.4 million for the three months ended September 30, 2009 and 2008, respectively, and $43.8 million and $25.0 million for the nine months ended September 30, 2009 and 2008, respectively) is 38.3% for the three and nine months ended September 30, 2009 and 38.6% for the three and nine months ended September 30, 2008.

     Cash paid for income taxes, net of refunds received, resulted in net cash paid of $1.8 million for the three months ended September 30, 2009 and a net cash refund of $3.2 million for the three months ended September 30, 2008. Cash paid for income taxes, net of refunds received, resulted in a net cash paid of $1.1 million and $52.4 million for the nine months ended September 30, 2009 and 2008, respectively.

7. GOODWILL AND OTHER INTANGIBLE ASSETS

     The changes in the carrying amount of goodwill for the nine months ended September 30, 2009, are as follows (in thousands):

Balance as of December 31, 2008		$	4,166,091
Goodwill acquired as part of acquisitions during 2009			16,251
Consideration adjustments and purchase price allocation adjustments for prior year’s acquisitions			5,335
Balance as of September 30, 2009		$	4,187,677

     Goodwill is allocated to each identified reporting unit, which is defined as an operating segment or one level below the operating segment (referred to as a component of the entity). Management has determined that the Company’s operating segments meet the criteria to be classified as reporting units. At September 30, 2009, the hospital operations reporting unit, the home care agency operations reporting unit, and the hospital management services reporting unit had $4.120 billion, $34.3 million and $33.3 million, respectively, of goodwill.

     Goodwill is evaluated for impairment at the same time every year and when an event occurs or circumstances change that, more likely than not, reduce the fair value of the reporting unit below its carrying value. There is a two-step method for determining goodwill impairment. Step one is to compare the fair value of the reporting unit with the unit’s carrying amount, including goodwill. If this test indicates the fair value is less than the carrying value, then step two is required to compare the implied fair value of the reporting unit’s goodwill with the carrying value of the reporting unit’s goodwill. The Company has selected September 30th as its annual testing date. The Company performed its last annual goodwill evaluation as of September 30, 2008, which evaluation took place during the fourth quarter of 2008. No impairment was indicated by this evaluation.

     The Company estimates the fair value of the related reporting units using both a discounted cash flow model, as well as an EBITDA multiple model. These models are both based on the Company’s best estimate of future revenues and operating costs and are reconciled to the Company’s consolidated market capitalization. The cash flow forecasts are adjusted by an appropriate discount rate based on the Company’s weighted-average cost of capital. Historically, the Company’s valuation models did not fully capture the fair value of the Company’s business as a whole, as they did not consider the increased consideration a potential acquirer would be required to pay, in the form of a control premium, in order to gain sufficient ownership to set policies, direct operations and control management decisions. However, because the Company’s models have indicated value significantly in excess of the carrying amount of assets in the Company’s reporting units, the additional value from a control premium was not a determining factor in the outcome of step one of the Company’s impairment assessment.

     The gross carrying amount of the Company’s other intangible assets subject to amortization was $74.6 million at September 30, 2009 and $68.6 million at December 31, 2008, and the net carrying amount was $48.5 million at September 30, 2009 and $54.1 million at December 31, 2008. The carrying amount of the Company’s other intangible assets not subject to amortization was $35.3 million and $35.2 million at September 30, 2009 and December 31, 2008, respectively. Other intangible assets are included in other assets, net on the Company’s condensed consolidated balance sheets. Substantially all of the Company’s intangible assets are contract-based intangible assets related to operating licenses, management contracts, or non-compete agreements entered into in connection with prior acquisitions.

     The weighted-average amortization period for the intangible assets subject to amortization is approximately nine years. There are no expected residual values related to these intangible assets. Amortization expense on these intangible assets during the three months ended September 30, 2009 and 2008 was $3.0 million and $0.7 million, respectively, and $9.7 million and $3.9 million for the nine months ended September 30, 2009 and 2008, respectively. Amortization expense on intangible assets is estimated to be $3.4 million for the remainder of 2009, $11.8 million in 2010, $5.9 million in 2011, $4.9 million in 2012, $4.1 million in 2013, and $18.4 million in 2014 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 earnings per share for income from continuing operations, discontinued operations and net income attributable to Community Health Systems, Inc. common stockholders (in thousands, except share data):

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
		2009				2008				2009				2008
Numerator for basic and diluted earnings per share:
Income from continuing operations, net of tax		$	75,361			$	59,106			$	220,679			$	171,754
Less: Income from continuing operations attributable to noncontrolling interests, net of taxes			15,649				9,424				43,834				25,026
Income from continuing operations attributable to Community Health Systems, Inc. common stockholders — basic and diluted		$	59,712			$	49,682			$	176,845			$	146,728
(Loss) income from discontinued operations, net of tax		$	—			$	(608	)		$	1,572			$	10,624
Less: (Loss) income from discontinued operations attributable to noncontrolling interests, net of taxes			—				(1,310	)			355				(1,052	)
Income from discontinued operations attributable to Community Health Systems, Inc. common stockholders — basic and diluted		$	—			$	702			$	1,217			$	11,676
Denominator:
Weighted-average number of shares outstanding — basic			90,923,052				94,044,564				90,423,600				93,995,343
Effect of dilutive securities:
Restricted stock awards			464,808				318,447				413,503				265,091
Employee options			608,289				796,608				271,966				845,681
Other equity based awards			14,593				—				7,944				—
Weighted-average number of shares outstanding — diluted			92,010,742				95,159,619				91,117,013				95,106,115
Dilutive securities outstanding not included in the computation of earnings per share because their effect is antidilutive:
Employee options			5,609,459				3,677,807				7,047,674				3,859,669

9. STOCKHOLDERS’ 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 $0.01 per share. Shares of preferred stock, none of which were outstanding as of September 30, 2009, 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 December 13, 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. This program will conclude at the earlier of three years or when the maximum number of shares has been repurchased. During the year ended December 31, 2008, the Company repurchased 4,786,609 shares, which is the cumulative number of shares that have been repurchased under this program, at a weighted-average price of $18.80 per share. During the nine months ended September 30, 2009, the Company did not repurchase any shares under this program.

     The following schedule presents the reconciliation of the carrying amount of total equity, equity attributable to the Company, and equity attributable to the noncontrolling interests for the nine-month period ended September 30, 2009 (in thousands):

							Community Health Systems, Inc. Stockholders
																			Accumulated
		Redeemable									Additional								Other												Total
		Noncontrolling					Common				Paid-in				Treasury				Comprehensive				Retained				Noncontrolling				Stockholders’
		Interests					Stock				Capital				Stock				Income (Loss)				Earnings				Interests				Equity
Balance, December 31, 2008 (as previously reported)		$	—				$	925			$	1,197,944			$	(6,678	)		$	(295,575	)		$	776,249			$	—			$	1,672,865
January 1, 2009 adjustment to non-controlling interests from adoption of updates to U.S. GAAP			320,171					—				(46,825	)			—				—				—				75,091				28,266
Balance, December 31, 2008 (as adjusted)			320,171					925				1,151,119				(6,678	)			(295,575	)			776,249				75,091				1,701,131
Comprehensive income (loss):
Net income			29,884					—				—				—				—				178,062				14,305				192,367
Net change in fair value of interest rate swaps			—					—				—				—				50,886				—				—				50,886
Net change in fair value of available for sale securities (loss)			—					—				—				—				283				—				—				283
Adjustment to pension liability			—					—				—				—				2,164				—				—				2,164
Total comprehensive income			29,884					—				—				—				53,333				178,062				14,305				245,700
Net distributions to noncontrolling interests			(16,882	)				—				—				—				—				—				(11,391	)			(11,391	)
Purchase of subsidiary shares from noncontrolling interests			(1,086	)				—				3,226				—				—				—				610				3,836
Sale of less than wholly - owned subsidiaries			(21,691	)				—				—				—				—				—				—				—
Adjustment to redemption value of redeemable noncontrolling interests			24,623					—				(24,623	)			—				—				—				—				(24,623	)
Issuance of common stock in connection with the exercise of stock options			—					6				9,952				—				—				—				—				9,958
Cancellation of restricted stock for tax withholdings on vested shares			—					(2	)			(3,605	)			—				—				—				—				(3,607	)
Tax benefit from exercise of options			—					—				(6,952	)			—				—				—				—				(6,952	)
Share-based compensation			—					10				35,121				—				—				—				—				35,131
Balance, September 30, 2009		$	335,019				$	939			$	1,164,238			$	(6,678	)		$	(242,242	)		$	954,311			$	78,615			$	1,949,183

     The following schedule discloses the effects of changes in the Company’s ownership interest in its less than wholly-owned subsidiaries on Community Health Systems, Inc. stockholders’ equity:

		Nine Months Ended
		September 30, 2009
Net income attributable to Community Health Systems, Inc.		$	178,062
Transfers from the noncontrolling interests:
Increase in Community Health Systems, Inc. paid-in capital for purchase of subsidiary partnership interests			3,226
Net transfers from the noncontrolling interests			3,226
Change from net income attributable to Community Health Systems, Inc. and transfers (to) from noncontrolling interests		$	181,288

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 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								Nine Months Ended
		September 30,								September 30,
		2009				2008				2009				2008
Net income		$	75,361			$	58,498			$	222,251			$	182,378
Net change in fair value of interest rate swaps			(23,163	)			(15,528	)			50,886				(10,714	)
Net change in fair value of available for sale securities			732				(386	)			283				(1,244	)
Amortization of unrecognized pension components			754				440				2,164				328
Comprehensive income			53,684				43,024				275,584				170,748
Less: Comprehensive income attributable to noncontrolling interests			(15,649	)			(8,114	)			(44,189	)			(23,974	)
Comprehensive income attributable to Community Health Systems, Inc.		$	38,035			$	34,910			$	231,395			$	146,774

     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 accumulated other comprehensive loss on the accompanying condensed consolidated balance sheets.

11. EQUITY INVESTMENTS

     As of September 30, 2009, the Company owned 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, and an equity interest of 38.0% in three hospitals in Macon, Georgia in which HCA, Inc. owns the majority interest. Effective April 1, 2009, one or more subsidiaries of the Company acquired from Share Foundation the remaining 50% equity interest in MCSA L.L.C., an entity in which one or more subsidiaries of the Company previously had a 50% unconsolidated noncontrolling interest. One or more subsidiaries of the Company provided MCSA L.L.C. with certain management services. This acquisition resulted in these subsidiaries of the Company owning 100% equity interest in that entity. MCSA L.L.C. owns and operates Medical Center of South Arkansas in El Dorado, Arkansas. The results of operations for MCSA L.L.C. were included in the consolidated financial statements effective April 1, 2009.

     Summarized combined financial information for the three and nine months ended September 30, 2009 and 2008, for these unconsolidated entities in which the Company owns an equity interest is as follows (in thousands):

		Three months ended								Nine months ended
		September 30,								September 30,
		2009				2008				2009				2008
Revenues		$	340,219			$	351,378			$	1,064,602			$	1,074,740
Operating costs and expenses			316,079				324,536				949,881				966,450
Net income			24,120				29,865				114,700				118,142

     The summarized financial information for the three and nine months ended September 30, 2009 and 2008 was derived from the unaudited financial information provided to the Company by those unconsolidated entities.

     The Company’s investment in all of its unconsolidated affiliates was $413.9 million and $421.6 million at September 30, 2009 and December 31, 2008, respectively, and is included in other assets in the accompanying condensed consolidated balance sheets. Included in the Company’s results of operations is the Company’s equity in pre-tax earnings from all of its investments in unconsolidated affiliates, which was $7.0 million and $8.7 million for the three months ended September 30, 2009 and 2008, respectively, and $31.7 million and $32.1 million for the nine months ended September 30, 2009 and 2008, respectively.

12. LONG-TERM DEBT

  Credit Facility and Notes

     On July 25, 2007, CHS entered into the Credit Facility with a syndicate of financial institutions led by Credit Suisse, as administrative agent and collateral agent. The Credit Facility consisted 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 facility had been reduced to $300 million at the request of CHS. During the fourth quarter of 2008, $100 million of the delayed draw term loan was drawn by CHS, reducing the delayed draw term loan availability to $200 million at December 31, 2008. In January 2009, CHS drew down the remaining $200 million of the delayed draw term loan. The revolving credit facility also includes a subfacility for letters of credit and a swingline subfacility. In connection with the consummation of the acquisition of Triad, CHS used a portion of the net proceeds from its Credit Facility and the Notes offering to repay its outstanding debt under the previously outstanding credit facility, the 6.50% senior subordinated notes due 2012 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 previously outstanding 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 6.50% senior subordinated notes due 2012 through a cash tender offer and consent solicitation.

     The 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 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 Credit Facility is CHS. All of the obligations under the Credit Facility are unconditionally guaranteed by the Company and certain existing and subsequently acquired or organized domestic subsidiaries. All obligations under the 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 Credit Facility bear interest on the outstanding unpaid principal amount at a rate equal to an applicable percentage plus, at CHS’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.

     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. With respect to the delayed draw term loan facility, CHS was also obligated to pay commitment fees of 0.50% per annum for the first nine months after the closing of the Credit Facility, 0.75% per annum for the next three months after such nine-month period and thereafter, 1.0% per annum. In each case, the commitment fee was paid on the unused amount of the delayed draw term loan facility. After the draw down of the remaining $200 million of the delayed draw term loan in January 2009, CHS no longer pays commitment fees for the delayed draw term loan facility. CHS paid arrangement fees on the closing of the Credit Facility and pays an annual administrative agent fee.

     The 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 Credit Facility include, but are not limited to, (1) CHS’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 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 accrues from the date of original issuance. Interest is calculated on the basis of a 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	%

     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:

          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 Securities Act of 1933, as amended). References to the Notes shall also be deemed to include Exchange Notes unless the context provides otherwise.

     During the nine months ended September 30, 2009, the Company repurchased on the open market and cancelled $126.5 million of principal amount of the Notes. This resulted in a net gain from early extinguishment of debt of $2.7 million with an after-tax impact of $1.7 million.

     On April 2, 2009, the Company paid down $110.4 million of its term loans under the Credit Facility. Of this amount, $85.0 million was paid down as required under the terms of the Credit Facility with the net proceeds received from the sale of the ownership interest in the partnership that owned and operated Presbyterian Hospital of Denton. This resulted in a loss from early extinguishment of debt of $1.1 million with an after-tax impact of $0.7 million recorded in discontinued operations for the nine months ended September 30, 2009. The remaining $25.4 million was paid on the term loans as required under the terms of the Credit Facility with the net proceeds received from the sale of various other assets. This resulted in a loss from early extinguishment of debt of $0.3 million with an after-tax impact of $0.2 million recorded in continuing operations for the nine months ended September 30, 2009.

     As of September 30, 2009, the availability for additional borrowings under the Credit Facility was $750 million pursuant to the revolving credit facility, of which $87.3 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 Credit Facility, which has not yet been accessed. CHS also has the ability to amend the 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 September 30, 2009, the weighted-average interest rate under the Credit Facility, excluding swaps, was 2.8%.

     Cash paid for interest, net of interest income, was $221.8 million and $232.4 million during the three months ended September 30, 2009 and 2008, respectively, and $557.0 million and $558.8 million during the nine months ended September 30, 2009 and 2008, respectively.

13. FAIR VALUE OF FINANCIAL INSTRUMENTS

     The fair value of financial instruments has been estimated by the Company using available market information as of September 30, 2009 and December 31, 2008, and valuation methodologies considered appropriate. The estimates presented are not necessarily indicative of amounts the Company could realize in a current market exchange (in thousands):

		September 30, 2009								December 31, 2008
		Carrying				Estimated Fair				Carrying				Estimated Fair
		Amount				Value				Amount				Value
Assets:
Cash and cash equivalents		$	432,815			$	432,815			$	220,655			$	220,655
Available-for-sale securities			7,691				7,691				6,325				6,325
Trading securities			22,323				22,323				24,325				24,325
Liabilities:
Credit facilities			6,054,715				5,676,295				5,965,866				4,653,375
Tax-exempt bonds			8,000				8,000				8,000				8,000
Senior notes			2,784,331				2,853,939				2,910,831				2,677,965
Other debt			34,188				34,188				41,663				41,663

     Cash and cash equivalents. The carrying amount approximates fair value due to the short-term maturity of these instruments (less than three months).

     Available-for-sale securities. Estimated fair value is based on closing price as quoted in public markets.

     Trading securities. Estimated fair value is based on closing price as quoted in public markets.

     Credit facilities. Estimated fair value is based on information from the Company’s bankers regarding relevant pricing for trading activity among the Company’s lending institutions.

     Tax-exempt bonds. The carrying amount approximates fair value as a result of the weekly interest rate reset feature of these publicly-traded instruments.

     Senior notes. Estimated fair value is based on the average bid and ask price as quoted by the bank who served as underwriter in the sale of these notes.

     Other debt. The carrying amount of all other debt approximates fair value due to the nature of these obligations.

     Interest Rate Swaps. The fair value of interest rate swap agreements is the amount at which they could be settled, based on estimates calculated by the Company using a discounted cash flow analysis based on observable market inputs and validated by comparison to estimates obtained from the counterparty. The Company has designated the interest rate swaps as cash flow hedge instruments whose recorded value included in other long-term liabilities in the consolidated balance sheet approximates fair market value.

     The Company assesses the effectiveness of its hedge instruments on a quarterly basis. For the three months ended September 30, 2009 and 2008, the Company completed an assessment of the cash flow hedge instruments and determined the hedges to be highly effective. The Company has also determined that the ineffective portion of the hedges do not have a material effect on the Company’s consolidated financial position, operations or cash flows. The counterparties to the interest rate swap agreements expose the Company to credit risk in the event of non-performance. However, at September 30, 2009, since all but one of the swap agreements entered into by the Company were in net liability positions so that the Company would be required to make the net settlement payments to the counterparties, the Company does not anticipate non-performance by those counterparties. The Company does not hold or issue derivative financial instruments for trading purposes.

     Interest rate swaps consisted of the following at September 30, 2009:

		Notional
		Amount				Fixed Interest				Termination		Fair Value
Swap #		(in 000’s)				Rate				Date		(in 000’s)
1		$	704,000				0.2895	%		November 30, 2009		$	(48	) (1)
2			100,000				4.3375	%		November 30, 2009			(1,035	)
3			200,000				2.8800	%		September 17, 2010			(3,643	)
4			100,000				4.9360	%		October 4, 2010			(4,091	)
5			100,000				4.7090	%		January 24, 2011			(4,860	)
6			300,000				5.1140	%		August 8, 2011			(22,146	)
7			100,000				4.7185	%		August 19, 2011			(6,730	)
8			100,000				4.7040	%		August 19, 2011			(6,702	)
9			100,000				4.6250	%		August 19, 2011			(6,550	)
10			200,000				4.9300	%		August 30, 2011			(14,482	)
11			200,000				3.0920	%		September 18, 2011			(7,486	)
12			100,000				3.0230	%		October 23, 2011			(3,696	)
13			200,000				4.4815	%		October 26, 2011			(13,527	)
14			200,000				4.0840	%		December 3, 2011			(12,159	)
15			100,000				3.8470	%		January 4, 2012			(5,567	)
16			100,000				3.8510	%		January 4, 2012			(5,653	)
17			100,000				3.8560	%		January 4, 2012			(5,665	)
18			200,000				3.7260	%		January 8, 2012			(10,761	)
19			200,000				3.5065	%		January 16, 2012			(9,783	)
20			250,000				5.0185	%		May 30, 2012			(22,571	)
21			150,000				5.0250	%		May 30, 2012			(13,635	)
22			200,000				4.6845	%		September 11, 2012			(17,004	)
23			100,000				3.3520	%		October 23, 2012			(4,637	)
24			125,000				4.3745	%		November 23, 2012			(9,656	)
25			75,000				4.3800	%		November 23, 2012			(5,866	)
26			150,000				5.0200	%		November 30, 2012			(14,746	)
27			100,000				5.0230	%		May 30, 2013			(10,469	)
28			300,000				5.2420	%		August 6, 2013			(34,429	)
29			100,000				5.0380	%		August 30, 2013			(10,767	)
30			50,000				3.5860	%		October 23, 2013			(2,627	)
31			50,000				3.5240	%		October 23, 2013			(2,506	)
32			100,000				5.0500	%		November 30, 2013			(11,079	)
33			200,000				2.0700	%		December 19, 2013			1,798
34			100,000				5.2310	%		July 25, 2014			(12,480	)
35			100,000				5.2310	%		July 25, 2014			(12,480	)
36			200,000				5.1600	%		July 25, 2014			(24,316	)
37			75,000				5.0405	%		July 25, 2014			(8,711	)
38			125,000				5.0215	%		July 25, 2014			(14,410	)

14. FAIR VALUE

Fair Value Hierarchy

     Fair value is a market-based measurement, not an entity-specific measurement. Therefore, a fair value measurement should be determined based on the assumptions that market participants would use in pricing the asset or liability. As a basis for considering market participant assumptions in fair value measurements, the Company utilizes the U.S. GAAP fair value hierarchy that distinguishes between market participant assumptions based on market data obtained from sources independent of the reporting entity (observable inputs that are classified within Levels 1 and 2 of the hierarchy) and the reporting entity’s own assumption about market participant assumptions (unobservable inputs classified within Level 3 of the hierarchy).

     The inputs used to measure fair value are classified into the following fair value 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.

     In instances where the determination of the fair value hierarchy measurement is based on inputs from different levels of the fair value hierarchy, the level in the fair value hierarchy within which the entire fair value measurement falls is based on the lowest level input that is significant to the fair value measurement in its entirety. The Company’s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment of factors specific to the asset or liability.

     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 September 30, 2009 (in thousands):

		September 30,
		2009				Level 1				Level 2				Level 3
Available-for-sale securities		$	7,691			$	7,691			$	—			$	—
Trading securities			22,323				22,323				—				—
Total assets		$	30,014			$	30,014			$	—			$	—
Fair value of interest rate swap agreements		$	355,624			$	—			$	355,624			$	—
Total liabilities		$	355,624			$	—			$	355,624			$	—

		December 31,
		2008				Level 1				Level 2				Level 3
Available-for-sale securities		$	6,325			$	6,325			$	—			$	—
Trading securities			24,325				24,325				—				—
Total assets		$	30,650			$	30,650			$	—			$	—
Fair value of interest rate swap agreements		$	435,134			$	—			$	435,134			$	—
Contractual obligation			48,985				—				—				48,985
Total liabilities		$	484,119			$	—			$	435,134			$	48,985

     Available-for-sale securities and trading securities classified as Level 1 are measured using quoted market prices.

     The valuation of the Company’s interest rate swap agreements is determined using market valuation techniques, including discounted cash flow analysis on the expected cash flows of each agreement. This analysis reflects the contractual terms of the agreement, including the period to maturity, and uses observable market-based inputs, including forward interest rate curves. The fair values of interest rate swap agreements are determined by netting the discounted future fixed cash payments (or receipts) and the discounted expected variable cash receipts (or payments). The variable cash receipts (or payments) are based on the expectation of future interest rates based on observable market forward interest rate curves and the notional amount being hedged.

     The Company incorporates credit valuation adjustments (CVAs) to appropriately reflect both its own nonperformance or credit risk and the respective counterparty’s nonperformance or credit risk in the fair value measurements. In adjusting the fair value of its interest rate swap agreements for the effect of nonperformance risk, the Company has considered the impact of any netting features included in the agreements. The CVA on the Company’s interest rate swap agreements at September 30, 2009 resulted in a decrease in the fair value of the related liability of $14.7 million and an after-tax adjustment of $9.4 million to other comprehensive income.

     The majority of the inputs used to value its interest rate swap agreements, including the forward interest rate curves and market perceptions of the Company’s credit risk used in the CVAs, are observable inputs available to a market participant. As a result, the Company has determined that the interest rate swap valuations are classified in Level 2 of the fair value hierarchy.

     The contractual obligation liability recorded during the year ended December 31, 2008, represented the fair value of a put option assumed in connection with a business combination using unobservable inputs and assumptions available to the Company. The contractual obligation represented by this liability was settled during the three months ended March 31, 2009, as a result of the sale of ownership interest in the partnership that owned Presbyterian Hospital of Denton. The following table presents a reconciliation of the beginning and ending balance of the contractual obligation liability (in thousands):

		Contractual
		Obligation
		Liability
Balance at January 1, 2009		$	48,985
Settlement of contractual obligation liability			(48,985	)
Balance at September 30, 2009		$	—