UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

Form 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934

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 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		Smaller reporting company o
				(Do not check if a smaller reporting company)

     Indicate by check mark whether the registrant is a shell company (as defined in Rule 126-2 of the Exchange Act). Yes þ No o

     As of July 22, 2010, there were outstanding 94,394,206 shares of the Registrant’s Common Stock, $0.01 par value.

 

 

Community Health Systems, Inc.

Form 10-Q

For the Three and Six Months Ended June 30, 2010

							Page
Part I.		Financial Information
		Item 1.		Financial Statements:
				Condensed Consolidated Balance Sheets — June 30, 2010 and December 31, 2009 (Unaudited)			2
				Condensed Consolidated Statements of Income — Three and Six Months Ended June 30, 2010 and June 30, 2009 (Unaudited)			3
				Condensed Consolidated Statements of Cash Flows — Six Months Ended June 30, 2010 and June 30, 2009 (Unaudited)			4
				Notes to Condensed Consolidated Financial Statements (Unaudited)			5
		Item 2.		Management’s Discussion and Analysis of Financial Condition And Results of Operations			33
		Item 3.		Quantitative and Qualitative Disclosures about Market Risk			50
		Item 4.		Controls and Procedures			50
Part II.		Other Information
		Item 1.		Legal Proceedings			51
		Item 1A.		Risk Factors			52
		Item 2.		Unregistered Sales of Equity Securities and Use of Proceeds			52
		Item 3.		Defaults Upon Senior Securities			53
		Item 4.		(Removed and Reserved)			53
		Item 5.		Other Information			53
		Item 6.		Exhibits			54
Signatures							55
Index to Exhibits							56
EX-12
EX-31.1
EX-31.2
EX-32.1
EX-32.2
EX-101 INSTANCE DOCUMENT
EX-101 SCHEMA DOCUMENT
EX-101 CALCULATION LINKBASE DOCUMENT
EX-101 LABELS LINKBASE DOCUMENT
EX-101 PRESENTATION LINKBASE DOCUMENT

PART I FINANCIAL INFORMATION

Item 1. Financial Statements

COMMUNITY HEALTH SYSTEMS, INC. AND SUBSIDIARIES

		June 30,				December 31,
		2010				2009
ASSETS
Current assets
Cash and cash equivalents		$	548,754			$	344,541
Patient accounts receivable, net of allowance for doubtful accounts of $1,493,207 and $1,417,188 at June 30, 2010 and December 31, 2009, respectively			1,681,799				1,617,903
Supplies			307,373				302,609
Prepaid income taxes			75,997				45,414
Deferred income taxes			78,962				80,714
Prepaid expenses and taxes			98,780				89,475
Other current assets			188,538				194,339
Total current assets			2,980,203				2,674,995
Property and equipment			7,969,992				7,787,256
Less accumulated depreciation and amortization			(1,885,006	)			(1,655,010	)
Property and equipment, net			6,084,986				6,132,246
Goodwill			4,161,196				4,157,927
Other assets, net			1,087,046				1,056,304
Total assets		$	14,313,431			$	14,021,472
LIABILITIES AND EQUITY
Current liabilities
Current maturities of long-term debt		$	64,095			$	66,470
Accounts payable			514,601				428,565
Deferred income taxes			28,431				28,397
Accrued interest			147,348				145,201
Accrued liabilities			746,773				789,163
Total current liabilities			1,501,248				1,457,796
Long-term debt			8,819,162				8,844,638
Deferred income taxes			474,748				475,812
Other long-term liabilities			966,288				858,952
Total liabilities			11,761,446				11,637,198
Redeemable noncontrolling interests in equity of consolidated subsidiaries			388,385				368,857
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; 96,540,756 shares issued and 95,565,207 shares outstanding at June 30, 2010, and 94,013,537 shares issued and 93,037,988 shares outstanding at December 31, 2009			965				940
Additional paid-in capital			1,208,782				1,158,359
Treasury stock, at cost, 975,549 shares at June 30, 2010 and December 31, 2009			(6,678	)			(6,678	)
Accumulated other comprehensive loss			(260,573	)			(221,385	)
Retained earnings			1,159,471				1,019,399
Total Community Health Systems, Inc. stockholders’ equity			2,101,967				1,950,635
Noncontrolling interests in equity of consolidated subsidiaries			61,633				64,782
Total equity			2,163,600				2,015,417
Total liabilities and equity		$	14,313,431			$	14,021,472

See accompanying notes to the condensed consolidated financial statements.

COMMUNITY HEALTH SYSTEMS, INC. AND SUBSIDIARIES

		Three Months Ended								Six Months Ended
		June 30,								June 30,
		2010				2009				2010				2009
Net operating revenues		$	3,171,024			$	3,016,961			$	6,331,746			$	5,929,710
Operating costs and expenses:
Salaries and benefits			1,267,762				1,201,680				2,550,593				2,375,120
Provision for bad debts			381,450				362,462				759,524				700,230
Supplies			438,602				419,956				869,054				825,593
Other operating expenses			587,827				567,813				1,172,080				1,112,790
Rent			63,230				61,200				127,651				121,528
Depreciation and amortization			153,381				142,447				301,060				278,008
Total operating costs and expenses			2,892,252				2,755,558				5,779,962				5,413,269
Income from operations			278,772				261,403				551,784				516,441
Interest expense, net			161,841				161,473				322,297				325,386
Loss (gain) from early extinguishment of debt			—				6				—				(2,406	)
Equity in earnings of unconsolidated affiliates			(10,977	)			(11,783	)			(23,565	)			(24,700	)
Income from continuing operations before income taxes			127,908				111,707				253,052				218,161
Provision for income taxes			41,566				37,209				81,714				72,843
Income from continuing operations			86,342				74,498				171,338				145,318
Discontinued operations, net of taxes:
(Loss) income from operations of hospitals sold and hospitals held for sale			—				(508	)			—				1,977
Loss on sale of hospitals, net			—				—				—				(405	)
(Loss) income from discontinued operations			—				(508	)			—				1,572
Net income			86,342				73,990				171,338				146,890
Less: Net income attributable to noncontrolling interests			16,277				14,555				31,266				28,540
Net income attributable to Community Health Systems, Inc.		$	70,065			$	59,435			$	140,072			$	118,350
Basic earnings per share attributable to Community Health Systems, Inc. common stockholders(1):
Continuing operations		$	0.75			$	0.66			$	1.51			$	1.30
Discontinued operations			—				(0.01	)			—				0.01
Net income		$	0.75			$	0.66			$	1.51			$	1.31
Diluted earnings per share attributable to Community Health Systems, Inc. common stockholders(1):
Continuing operations		$	0.74			$	0.66			$	1.49			$	1.29
Discontinued operations			—				(0.01	)			—				0.01
Net income		$	0.74			$	0.65			$	1.49			$	1.31
Weighted-average number of shares outstanding:
Basic			93,358,771				90,358,583				92,491,839				90,169,735
Diluted			94,711,919				91,071,147				93,779,001				90,666,009

See accompanying notes to the condensed consolidated financial statements.

COMMUNITY HEALTH SYSTEMS, INC. AND SUBSIDIARIES

		Six Months Ended
		June 30,
		2010				2009
Cash flows from operating activities
Net income		$	171,338			$	146,890
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization			301,060				278,340
Stock-based compensation expense			20,418				24,805
Loss on sale of hospitals and partnership interest, net			—				405
(Excess tax benefit) income tax payable increase relating to stock-based compensation			(10,104	)			3,389
Gain on early extinguishment of debt			—				(2,406	)
Other non-cash expenses, net			(2,342	)			(6,472	)
Changes in operating assets and liabilities, net of effects of acquisitions and divestitures:
Patient accounts receivable			(63,896	)			8,937
Supplies, prepaid expenses and other current assets			(1,147	)			5,198
Accounts payable, accrued liabilities and income taxes			114,100				72,042
Other			12,365				13,279
Net cash provided by operating activities			541,792				544,407
Cash flows from investing activities
Acquisitions of facilities and other related equipment			(2,413	)			(210,904	)
Purchases of property and equipment			(263,924	)			(267,275	)
Proceeds from disposition of hospitals and other ancillary operations			—				89,909
Proceeds from sale of property and equipment			2,307				355
Increase in other non-operating assets			(64,258	)			(74,506	)
Net cash used in investing activities			(328,288	)			(462,421	)
Cash flows from financing activities
Proceeds from exercise of stock options			53,615				3,445
Excess tax benefit (income tax payable increase) relating to stock-based compensation			10,104				(3,389	)
Deferred financing costs			—				(207	)
Stock buy-back			(12,242	)			—
Proceeds from noncontrolling investors in joint ventures			5,155				26,314
Redemption of noncontrolling investments in joint ventures			(2,395	)			(1,631	)
Distributions to noncontrolling investors in joint ventures			(29,371	)			(22,166	)
Borrowings under credit agreement			—				200,000
Repayments of long-term indebtedness			(34,157	)			(236,182	)
Net cash used in financing activities			(9,291	)			(33,816	)
Net change in cash and cash equivalents			204,213				48,170
Cash and cash equivalents at beginning of period			344,541				220,655
Cash and cash equivalents at end of period		$	548,754			$	268,825
Supplemental disclosure of cash flow information:
Interest payments		$	320,150			$	335,039
Income taxes paid (refunds received), net		$	79,711			$	(726	)

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 June 30, 2010 and December 31, 2009 and for the three-month and six-month periods ended June 30, 2010 and June 30, 2009, 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 six months ended June 30, 2010, are not necessarily indicative of the results to be expected for the full fiscal year ending December 31, 2010. 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, 2009, 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 on the condensed consolidated balance sheets to distinguish between the interests of the parent company and the interests of the noncontrolling owners. 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.

     Throughout these notes to the condensed consolidated financial statements, Community Health Systems, Inc., (the “Parent”), 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 or any subsidiary of the Parent 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, restricted stock units, performance-based shares or units, phantom stock and other 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 through 2010 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 June 30, 2010, 1,084,763 shares of unissued common stock were reserved for future grants under the 2000 Plan.

     The 2009 Plan, which was adopted by the Board of Directors of the Parent 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 June 30, 2010, no grants had been made under the 2009 Plan, with 3,500,000 shares of unissued common stock remaining reserved for future grants.

COMMUNITY HEALTH SYSTEMS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) — (Continued)

     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								Six Months Ended
		June 30,								June 30,
		2010				2009				2010				2009
Effect on income from continuing operations before income taxes		$	(10,655	)		$	(12,519	)		$	(20,418	)		$	(24,805	)
Effect on net income		$	(6,473	)		$	(7,605	)		$	(12,404	)		$	(15,069	)

     At June 30, 2010, $64.1 million of unrecognized stock-based compensation expense was expected to be recognized over a weighted-average period of 26 months. Of that amount, $14.7 million related to outstanding unvested stock options expected to be recognized over a weighted-average period of 25 months and $49.4 million related to outstanding unvested restricted stock, restricted stock units and phantom shares expected to be recognized over a weighted-average period of 26 months. There were no modifications to awards during the three and six months ended June 30, 2010.

     The fair value of stock options was estimated using the Black Scholes option pricing model with the following assumptions and weighted-average fair values during the three and six months ended June 30, 2010 and 2009:

		Three Months Ended								Six Months Ended
		June 30,								June 30,
		2010				2009				2010				2009
Expected volatility			35.3	%			44.0	%			33.6	%			40.2	%
Expected dividends			—				—				—				—
Expected term		3 years				4 years				3.1 years				4 years
Risk-free interest rate			1.20	%			1.75	%			1.47	%			1.63	%

     In determining 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.

COMMUNITY HEALTH SYSTEMS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) — (Continued)

     Options outstanding and exercisable under the 2000 Plan as of June 30, 2010, and changes during each of the three-month periods following December 31, 2009 were as follows (in thousands, except share and per share data):

										Weighted -
						Weighted -				Average				Aggregate
						Average				Remaining				Intrinsic
						Exercise				Contractual				Value as of
		Shares				Price				Term				June 30, 2010
Outstanding at December 31, 2009			8,954,081			$	30.19
Granted			1,255,500				33.90
Exercised			(891,366	)			26.93
Forfeited and cancelled			(69,012	)			28.09
Outstanding at March 31, 2010			9,249,203				31.02
Granted			57,000				39.66
Exercised			(1,183,524	)			25.02
Forfeited and cancelled			(118,851	)			29.14
Outstanding at June 30, 2010			8,003,828			$	31.99			6.1 years				$	30,444
Exercisable at June 30, 2010			4,906,305			$	32.56			4.8 years				$	18,256

     The weighted-average grant date fair value of stock options granted during the three months ended June 30, 2010 and 2009 was $10.07 and $9.18, respectively, and $8.54 and $6.14 during the six months ended June 30, 2010 and 2009, 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 ($33.81) 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 June 30, 2010. 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 June 30, 2010 and 2009 was $18.6 million and $3.5 million, respectively. The aggregate intrinsic value of options exercised during the six months ended June 30, 2010 and 2009 was $28.2 million and $3.5 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. 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. 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.

COMMUNITY HEALTH SYSTEMS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) — (Continued)

     Restricted stock outstanding under the 2000 Plan as of June 30, 2010, and changes during each of the three-month periods following December 31, 2009 were as follows:

						Weighted -
						Average
						Grant Date
		Shares				Fair Value
Unvested at December 31, 2009			1,897,541			$	24.09
Granted			1,047,000				33.90
Vested			(826,174	)			26.97
Forfeited			(2,000	)			29.22
Unvested at March 31, 2010			2,116,367				27.81
Granted			7,000				39.66
Vested			(11,500	)			32.75
Forfeited			—				—
Unvested at June 30, 2010			2,111,867				27.83

     On February 25, 2009, under the 2000 Plan, 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 $180,706 based upon the closing price of the Company’s common stock on that date of $25.27. On February 24, 2010, six of the Company’s seven outside directors each received a grant of 4,130 restricted stock units under the 2000 Plan, having a value at the time of $140,000 based upon the closing price of the Company’s common stock on that date of $33.90. One outside director, who did not stand for reelection in 2010, did not receive a grant on February 24, 2010. 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. During the three months ended June 30, 2010, 7,151 shares vested at a weighted-average grant date fair value of $20.54. During the six months ended June 30, 2010, 21,449 shares vested at a weighted-average grant date fair value of $18.97. None of these grants were canceled during the three and six months ended June 30, 2010. As of June 30, 2010, there were 53,388 shares of phantom stock and restricted stock units unvested at a weighted-average grant date fair value of $26.11.

     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 share equivalent 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 share equivalent units into which they converted for each of the respective periods (in thousands, except units):

		Three Months Ended								Six Months Ended
		June 30,								June 30,
		2010				2009				2010				2009
Directors’ fees earned and deferred into plan		$	45			$	20			$	90			$	40
Share equivalent units			1,330.968				792.079				2,549.490				2,095.860

     At June 30, 2010, a total of 16,143.82 share equivalent units were 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 at June 30, 2010 of $33.81.

COMMUNITY HEALTH SYSTEMS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) — (Continued)

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 include the Company’s corporate office costs, which were $42.4 million and $39.0 million for the three months ended June 30, 2010 and 2009, respectively, and $80.2 million and $80.8 million for the six months ended June 30, 2010 and 2009, respectively. Included in these amounts is stock-based compensation expense of $10.7 million and $12.5 million for the three months ended June 30, 2010 and 2009, respectively, and $20.4 million and $24.8 million for the six months ended June 30, 2010 and 2009, 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

Acquisitions

     On December 31, 2009, one or more subsidiaries of the Company completed an affiliation transaction providing $54.2 million of financing to Rockwood Clinic, P.S., a multi-specialty clinic with 32 locations across the inland northwest region of eastern Washington and western Idaho. This transaction was accounted for as a purchase business combination as required by U.S. GAAP.

     Effective June 1, 2009, one or more subsidiaries of the Company acquired from Akron General Medical Center the remaining 20% noncontrolling 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 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 healthcare system includes Wilkes-Barre General Hospital, a 392-bed, full-service acute care hospital located in Wilkes-Barre, Pennsylvania, 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 $179.1 million, of which $153.7 million was paid in cash, net of $14.2 million of cash in acquired bank accounts, and approximately $25.4 million was assumed in liabilities. This acquisition transaction was accounted for using the purchase method of accounting.

     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. 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 (73 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 at closing and agreed to deposit an additional $1.6 million by February 1, 2010, which the Company’s subsidiary deposited in January 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 one of these subsidiaries of the Company.

COMMUNITY HEALTH SYSTEMS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) — (Continued)

     Approximately $1.2 million and $2.0 million of acquisition costs related to prospective and closed acquisitions were expensed during the three months ended June 30, 2010 and 2009, respectively, and approximately $1.8 million and $3.0 million during the six months ended June 30, 2010 and 2009, respectively.

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. The Company has classified the results of operations for this hospital 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								Six Months Ended
		June 30,								June 30,
		2010				2009				2010				2009
Net operating revenues		$	—			$	85			$	—			$	42,113
(Loss) income from operations of hospitals sold or held for sale before income taxes			—				(807	)			—				3,024
Loss on sale of hospitals, net			—				—				—				(644	)
(Loss) income from discontinued operations, before taxes			—				(807	)			—				2,380
(Benefit from) provision for income taxes			—				(299	)			—				808
(Loss) income from discontinued operations, net of taxes		$	—			$	(508	)		$	—			$	1,572

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

6. INCOME TAXES

     The total amount of unrecognized benefit that would affect the effective tax rate, if recognized, was approximately $9.1 million as of June 30, 2010. It is the Company’s policy to recognize interest and penalties related to unrecognized benefits in its condensed consolidated statements of income as income tax expense. During the six months ended June 30, 2010, the Company decreased interest and penalties by approximately $0.3 million. A total of approximately $1.7 million of interest and penalties is included in the amount of the liability for uncertain tax positions at June 30, 2010.

     The Company believes that it is reasonably possible that approximately $5.9 million of its current unrecognized tax benefit may be recognized within the next 12 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 Hospitals, Inc. (“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 2006 and federal income tax examinations with respect to Community Health Systems, Inc. federal returns for years prior to 2006.

COMMUNITY HEALTH SYSTEMS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) — (Continued)

     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 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 less than wholly-owned consolidated subsidiaries 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 32.5% and 33.3% for the three months ended June 30, 2010 and 2009, respectively, and 32.3% and 33.4% for the six months ended June 30, 2010 and 2009, 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 condensed consolidated statement of income, less income from continuing operations attributable to noncontrolling interests of $16.3 million and $14.6 million for the three months ended June 30, 2010 and 2009, respectively, and $31.3 million and $28.2 million for the six months ended June 30, 2010 and 2009, respectively) is 37.2% and 38.3% for the three months ended June 30, 2010 and 2009, respectively, and 36.8% and 38.3% for the six months ended June 30, 2010 and 2009, respectively.

     Cash paid for income taxes, net of refunds received, resulted in net cash paid of $78.8 million and $61.6 million for the three months ended June 30, 2010 and 2009, respectively. Cash paid for income taxes, net of refunds received, resulted in net cash paid of $79.7 million for the six months ended June 30, 2010 and a net cash refund of $0.7 million for the six months ended June 30, 2009.

7. GOODWILL AND OTHER INTANGIBLE ASSETS

     The changes in the carrying amount of goodwill for the six months ended June 30, 2010, are as follows (in thousands):

Balance as of December 31, 2009		$	4,157,927
Goodwill acquired as part of acquisitions during 2010			686
Consideration adjustments and purchase price allocation adjustments for prior year’s acquisitions			2,583
Balance as of June 30, 2010		$	4,161,196

     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 June 30, 2010, the hospital operations reporting unit, the home care agency operations reporting unit, and the hospital management services reporting unit had approximately $4.1 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 30 as its annual testing date. The Company performed its last annual goodwill evaluation as of September 30, 2009, which evaluation took place during the fourth quarter of 2009. 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. The cash flow forecasts are adjusted by an appropriate discount rate based on the Company’s weighted-average cost of capital. 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, with consideration of the amount 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.

COMMUNITY HEALTH SYSTEMS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) — (Continued)

     The gross carrying amount of the Company’s other intangible assets subject to amortization was $77.0 million at June 30, 2010 and $76.2 million at December 31, 2009, and the net carrying amount was $41.5 million at June 30, 2010 and $47.0 million at December 31, 2009. The carrying amount of the Company’s other intangible assets not subject to amortization was $44.0 million and $44.4 million at June 30, 2010 and December 31, 2009, 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 eight years. There are no expected residual values related to these intangible assets. Amortization expense on these intangible assets was $3.1 million and $3.6 million during the three months ended June 30, 2010 and 2009, respectively, and $6.3 million and $6.9 million during the six months ended June 30, 2010 and 2009, respectively. Amortization expense on intangible assets is estimated to be $6.3 million for the remainder of 2010, $6.9 million in 2011, $5.7 million in 2012, $4.3 million in 2013, $2.8 million in 2014 and $15.5 million in 2015 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								Six Months Ended
		June 30,								June 30,
		2010				2009				2010				2009
Numerator:
Income from continuing operations, net of taxes		$	86,342			$	74,498			$	171,338			$	145,318
Less: Income from continuing operations attributable to noncontrolling interests, net of taxes			16,277				14,555				31,266				28,185
Income from continuing operations attributable to Community Health Systems, Inc. common stockholders — basic and diluted		$	70,065			$	59,943			$	140,072			$	117,133
(Loss) income from discontinued operations, net of taxes		$	—			$	(508	)		$	—			$	1,572
Less: Income from discontinued operations attributable to noncontrolling interests, net of taxes			—				—				—				355
(Loss) income from discontinued operations attributable to Community Health Systems, Inc. common stockholders — basic and diluted		$	—			$	(508	)		$	—			$	1,217
Denominator:
Weighted-average number of shares outstanding — basic			93,358,771				90,358,583				92,491,839				90,169,735
Effect of dilutive securities:
Restricted stock awards			522,496				534,525				423,442				387,851
Employee options			815,455				168,802				847,380				103,805
Other equity based awards			15,197				9,237				16,340				4,618
Weighted-average number of shares outstanding — diluted			94,711,919				91,071,147				93,779,001				90,666,009
Dilutive securities outstanding not included in the computation of earnings per share because their effect is antidilutive:
Employee options			3,503,906				7,127,843				4,432,069				8,356,281

COMMUNITY HEALTH SYSTEMS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) — (Continued)

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 June 30, 2010, 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 9, 2009, the Company commenced a new open market repurchase program for up to 3,000,000 shares of the Company’s common stock, not to exceed $100 million in repurchases. This program will conclude at the earliest of three years from the commencement date, when the maximum number of shares has been repurchased or when the maximum dollar amount has been expended. During the six months ended June 30, 2010, the Company repurchased 356,000 shares at a weighted-average price of $34.24 per share, which is the cumulative number of shares that have been repurchased under this program through June 30, 2010.

     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 six-month period ended June 30, 2010 (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				Loss				Earnings				Interests				Equity
Balance, December 31, 2009		$	368,857				$	940			$	1,158,359			$	(6,678	)		$	(221,385	)		$	1,019,399			$	64,782			$	2,015,417
Comprehensive income (loss):
Net income			23,644					—				—				—				—				140,072				7,622				147,694
Net change in fair value of interest rate swaps			—					—				—				—				(45,051	)			—				—				(45,051	)
Net change in fair value of available-for-sale securities			—					—				—				—				630				—				—				630
Amortization and recognition of unrecognized pension cost components			—					—				—				—				5,233				—				—				5,233
Total comprehensive income (loss)			23,644					—				—				—				(39,188	)			140,072				7,622				108,506
Net distributions to noncontrolling interests			(14,422	)				—				—				—				—				—				(9,733	)			(9,733	)
Purchase of subsidiary shares from noncontrolling interests			(1,055	)				—				(1,340	)			—				—				—				—				(1,340	)
Other reclassifications of noncontrolling interests			1,038					—				—				—				—				—				(1,038	)			(1,038	)
Adjustment to redemption value of redeemable noncontrolling interests			10,323					—				(10,323	)			—				—				—				—				(10,323	)
Repurchases of common stock			—					(4	)			(12,242	)			—				—				—				—				(12,246	)
Issuance of common stock in connection with the exercise of stock options			—					21				53,615				—				—				—				—				53,636
Cancellation of restricted stock for tax withholdings on vested shares			—					(3	)			(9,809	)			—				—				—				—				(9,812	)
Tax benefit from exercise of options			—					—				10,104				—				—				—				—				10,104
Share-based compensation			—					11				20,418				—				—				—				—				20,429
Balance, June 30, 2010		$	388,385				$	965			$	1,208,782			$	(6,678	)		$	(260,573	)		$	1,159,471			$	61,633			$	2,163,600

COMMUNITY HEALTH SYSTEMS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) — (Continued)

     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:

		Six Months Ended
		June 30, 2010
Net income attributable to Community Health Systems, Inc.		$	140,072
Transfers to the noncontrolling interests:
Decrease in Community Health Systems, Inc. paid-in capital for purchase of subsidiary partnership interests			(1,340	)
Net transfers to noncontrolling interests			(1,340	)
Change from net income attributable to Community Health Systems, Inc. and transfers to noncontrolling interests		$	138,732

10. COMPREHENSIVE INCOME

     The following table presents the components of comprehensive income, net of related taxes (in thousands):

		Three Months Ended								Six Months Ended
		June 30,								June 30,
		2010				2009				2010				2009
Net income		$	86,342			$	73,990			$	171,338			$	146,890
Net change in fair value of interest rate swaps			(33,694	)			61,139				(45,051	)			74,049
Net change in fair value of available-for-sale securities			476				801				630				(449	)
Amortization and recognition of unrecognized pension cost components			758				970				5,233				1,410
Comprehensive income			53,882				136,900				132,150				221,900
Less: Comprehensive income attributable to noncontrolling interests			16,277				14,555				31,266				28,540
Comprehensive income attributable to Community Health Systems, Inc.		$	37,605			$	122,345			$	100,884			$	193,360

     The net change in fair value of the interest rate swaps, the net change in fair value of available-for-sale securities and the amortization and recognition of unrecognized pension cost components are included in accumulated other comprehensive loss on the accompanying condensed consolidated balance sheets.

11. EQUITY INVESTMENTS

     As of June 30, 2010, 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. 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 six months ended June 30, 2010 and 2009, for these unconsolidated entities in which the Company owns an equity interest is as follows (in thousands):

		Three Months Ended								Six Months Ended
		June 30,								June 30,
		2010				2009				2010				2009
Revenues		$	358,586			$	348,684			$	716,065			$	724,382
Operating costs and expenses			321,457				309,129				645,977				633,802
Net income			37,113				39,541				70,045				90,580

COMMUNITY HEALTH SYSTEMS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) — (Continued)

     The summarized financial information for the three and six months ended June 30, 2010 and 2009 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 $412.9 million and $399.4 million at June 30, 2010 and December 31, 2009, respectively, and is included in other assets, net 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 $11.0 million and $11.8 million for the three months ended June 30, 2010 and 2009, respectively, and $23.6 million and $24.7 million for the six months ended June 30, 2010 and 2009, respectively.

12. LONG-TERM DEBT

Credit Facility and Notes

     In connection with the consummation of the acquisition of Triad on July 25, 2007, the Company’s wholly-owned subsidiary CHS/Community Health Systems, Inc. (“CHS”) obtained approximately $7.2 billion of senior secured financing under a new credit facility (the “Credit Facility”) with a syndicate of financial institutions led by Credit Suisse, as administrative agent and collateral agent and issued approximately $3.0 billion aggregate principal amount of 8.875% senior notes due 2015 (the “Notes”). The Company used the net proceeds of $3.0 billion from the Notes offering and the net proceeds of approximately $6.1 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. Specifically, the Company repaid 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 consists of an approximately $6.1 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.

     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.

COMMUNITY HEALTH SYSTEMS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) — (Continued)

     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 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 was 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 any 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 the Company’s and its subsidiaries’ ability, subject to certain exceptions, 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 approximately $3.0 billion. The 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.

COMMUNITY HEALTH SYSTEMS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) — (Continued)

     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	%

     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 Applicable 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 the Exchange Notes unless the context provides otherwise.

     During the year ended December 31, 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 year ended December 31, 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 year ended December 31, 2009.

     As of June 30, 2010, the availability for additional borrowings under the Credit Facility was $750 million pursuant to the revolving credit facility, of which $92.9 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 June 30, 2010, the weighted-average interest rate under the Credit Facility, excluding swaps, was 3.1%.

     The Company paid interest of $99.9 million and $102.1 million on borrowings during the three months ended June 30, 2010 and 2009, respectively, and $320.2 million and $335.0 million during the six months ended June 30, 2010 and 2009, respectively.

COMMUNITY HEALTH SYSTEMS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) — (Continued)

13. FAIR VALUE OF FINANCIAL INSTRUMENTS

     The fair value of financial instruments has been estimated by the Company using available market information as of June 30, 2010 and December 31, 2009, 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):

		June 30, 2010								December 31, 2009
		Carrying				Estimated Fair				Carrying				Estimated Fair
		Amount				Value				Amount				Value
Assets:
Cash and cash equivalents		$	548,754			$	548,754			$	344,541			$	344,541
Available-for-sale securities			27,360				27,360				28,025				28,025
Trading securities			28,669				28,669				22,777				22,777
Liabilities:
Credit facilities			6,022,111				5,645,729				6,043,847				5,681,216
Tax-exempt bonds			—				—				8,000				8,000
Senior notes			2,784,331				2,867,861				2,784,331				2,881,783
Other debt			39,901				39,901				38,015				38,015

     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 assesses the effectiveness of its hedge instruments on a quarterly basis. For the three and six months ended June 30, 2010 and 2009, 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 June 30, 2010, since all 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.

COMMUNITY HEALTH SYSTEMS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) — (Continued)

     Interest rate swaps consisted of the following at June 30, 2010:

		Notional
		Amount				Fixed Interest				Termination		Fair Value
Swap #		(in 000’s)				Rate				Date		(in 000’s)
1		$	200,000				2.8800	%		September 17, 2010		$	(1,444	)
2			100,000				4.9360	%		October 4, 2010			(1,557	)
3			100,000				4.7090	%		January 24, 2011			(2,606	)
4			300,000				5.1140	%		August 8, 2011			(14,295	)
5			100,000				4.7185	%		August 19, 2011			(4,407	)
6			100,000				4.7040	%		August 19, 2011			(4,389	)
7			100,000				4.6250	%		August 19, 2011			(4,293	)
8			200,000				4.9300	%		August 30, 2011			(9,566	)
9			200,000				3.0920	%		September 18, 2011			(5,215	)
10			100,000				3.0230	%		October 23, 2011			(2,721	)
11			200,000				4.4815	%		October 26, 2011			(9,552	)
12			200,000				4.0840	%		December 3, 2011			(9,139	)
13			100,000				3.8470	%		January 4, 2012			(4,457	)
14			100,000				3.8510	%		January 4, 2012			(4,463	)
15			100,000				3.8560	%		January 4, 2012			(4,471	)
16			200,000				3.7260	%		January 8, 2012			(8,609	)
17			200,000				3.5065	%		January 16, 2012			(8,024	)
18			250,000				5.0185	%		May 30, 2012			(19,986	)
19			150,000				5.0250	%		May 30, 2012			(12,027	)
20			200,000				4.6845	%		September 11, 2012			(16,477	)
21			100,000				3.3520	%		October 23, 2012			(5,420	)
22			125,000				4.3745	%		November 23, 2012			(6,030	)
23			75,000				4.3800	%		November 23, 2012			(9,787	)
24			150,000				5.0200	%		November 30, 2012			(14,482	)
25			200,000				2.2420	%		February 28, 2013			(4,707	) (1)
26			100,000				5.0230	%		May 30, 2013			(10,969	)
27			300,000				5.2420	%		August 6, 2013			(36,371	)
28			100,000				5.0380	%		August 30, 2013			(11,636	)
29			50,000				3.5860	%		October 23, 2013			(3,597	)
30			50,000				3.5240	%		October 23, 2013			(3,495	)
31			100,000				5.0500	%		November 30, 2013			(12,225	)
32			200,000				2.0700	%		December 19, 2013			(4,188	)
33			100,000				5.2310	%		July 25, 2014			(14,161	)
34			100,000				5.2310	%		July 25, 2014			(14,161	)
35			200,000				5.1600	%		July 25, 2014			(27,758	)
36			75,000				5.0405	%		July 25, 2014			(10,053	)
37			125,000				5.0215	%		July 25, 2014			(16,661	)
38			100,000				2.6210	%		July 25, 2014			(3,779	)
39			100,000				3.1100	%		July 25, 2014			(4,694	) (2)
40			100,000				3.2580	%		July 25, 2014			(4,830	) (3)
41			200,000				2.6930	%		October 26, 2014			(3,384	) (4)
42			300,000				3.4470	%		August 8, 2016			(11,902	) (5)
43			200,000				3.4285	%		August 19, 2016			(7,595	) (6)
44			100,000				3.4010	%		August 19, 2016			(3,670	) (7)
45			200,000				3.5000	%		August 30, 2016			(8,088	) (8)
46			100,000				3.0050	%		November 30, 2016			(3,889	)

COMMUNITY HEALTH SYSTEMS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) — (Continued)

     The Company is exposed to certain risks relating to its ongoing business operations. The risk managed by using derivative instruments is interest rate risk. Interest rate swaps are entered into to manage interest rate fluctuation risk associated with the term loans in the Credit Facility. Companies are required to recognize all derivative instruments as either assets or liabilities at fair value in the condensed consolidated balance sheet. The Company designates its interest rate swaps as cash flow hedges. For derivative instruments that are designated and qualify as cash flow hedges, the effective portion of the gain or loss on the derivative is reported as a component of other comprehensive income and reclassified into earnings in the same period or periods during which the hedged transactions affect earnings. Gains and losses on the derivative representing either hedge ineffectiveness or hedge components excluded from the assessment of effectiveness are recognized in current earnings.

     Assuming no change in June 30, 2010 interest rates, approximately $199.4 million of interest expense resulting from the spread between the fixed and floating rates defined in each interest rate swap agreement will be recognized during the next 12 months. If interest rate swaps do not remain highly effective as a cash flow hedge, the derivatives’ gains or losses resulting from the change in fair value reported through other comprehensive income will be reclassified into earnings.

     The following tabular disclosure provides the amount of pre-tax gain (loss) recognized in the condensed consolidated balance sheets as a component of other comprehensive income during the three and six months ended June 30, 2010 and 2009 (in thousands):

Derivatives in Cash Flow Hedging		Amount of Pre-Tax Gain (Loss) Recognized in OCI on Derivative (Effective Portion)
Relationships		Three Months Ended June 30,								Six Months Ended June 30,
		2010				2009				2010				2009
Interest rate swaps		$	(107,656	)		$	53,126			$	(178,564	)		$	43,300

     The following tabular disclosure provides the location of the effective portion of the pre-tax loss reclassified from accumulated other comprehensive loss (“OCL”) into interest expense on the condensed consolidated statements of income during the three and six months ended June 30, 2010 and 2009 (in thousands):

Location of Loss Reclassified from		Amount of Pre-Tax Loss Reclassified from Accumulated OCL into Income (Effective Portion)
Accumulated OCL into Income (Effective Portion)		Three Months Ended June 30,								Six Months Ended June 30,
		2010				2009				2010				2009
Interest expense, net		$	55,009			$	42,404			$	108,173			$	72,402

     The fair value of derivative instruments in the condensed consolidated balance sheets as of June 30, 2010 and December 31, 2009 was as follows (in thousands):

Asset Derivatives

Liability Derivatives

June 30, 2010

December 31, 2009

June 30, 2010

December 31, 2009

Balance

Balance

Balance

Balance

Sheet

Sheet

Sheet

Sheet

Location

Fair Value

Location

Fair Value

Location

Fair Value

Location

Fair Value

Derivatives designated as hedging instruments

Other assets, net

$

—

Other assets, net

$

—

Other long-term liabilities

$

386,424

Other long-term liabilities

$

316,033