Form 10-Q
Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 


FORM 10-Q

 


(Mark One)

x Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the quarterly period ended June 30, 2007

or

 

¨ Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the transition period from              to             

Commission File Number: 001-11141

 


HEALTH MANAGEMENT ASSOCIATES, INC.

(Exact name of registrant as specified in its charter)

 


 

Delaware   61-0963645

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

 

5811 Pelican Bay Boulevard, Suite 500

Naples, Florida

  34108-2710
(Address of principal executive offices)   (Zip Code)

(239) 598-3131

Registrant’s telephone number, including area code

Not applicable

(Former name, former address and former fiscal year, if changed since last report)

 


Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer  x    Accelerated filer  ¨    Non-accelerated filer  ¨

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

At August 3, 2007, 242,465,469 shares of the registrant’s Class A common stock were outstanding.

 



Table of Contents

HEALTH MANAGEMENT ASSOCIATES, INC.

FORM 10-Q

FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2007

INDEX

 

     Page

PART I—FINANCIAL INFORMATION

  
Item 1. Financial Statements.   

Consolidated Statements of Income—Three and Six Months Ended June 30, 2007 and 2006

   3

Condensed Consolidated Balance Sheets—June 30, 2007 and December 31, 2006

   4

Condensed Consolidated Statements of Cash Flows—Six Months Ended June 30, 2007 and 2006

   5

Notes to Interim Condensed Consolidated Financial Statements

   6
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations    19
Item 3. Quantitative and Qualitative Disclosures About Market Risk    29
Item 4. Controls and Procedures    29

PART II—OTHER INFORMATION

  
Item 1. Legal Proceedings    30
Item 4. Submission of Matters to a Vote of Security Holders    30
Item 6. Exhibits    30
Signatures    31
Index To Exhibits    32

 

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Table of Contents

PART I—FINANCIAL INFORMATION

 

Item 1. Financial Statements.

HEALTH MANAGEMENT ASSOCIATES, INC.

CONSOLIDATED STATEMENTS OF INCOME

(in thousands, except per share amounts)

(unaudited)

 

     Three Months Ended
June 30,
   

Six Months Ended

June 30,

 
     2007     2006     2007     2006  

Net operating revenue

   $ 1,099,161     $ 996,866     $ 2,236,991     $ 2,003,462  

Operating expenses:

        

Salaries and benefits

     444,343       395,164       897,557       787,774  

Supplies

     149,862       138,397       307,768       280,370  

Provision for doubtful accounts

     150,629       90,116       271,835       173,251  

Depreciation and amortization

     53,937       43,762       105,775       85,934  

Rent expense

     21,058       20,714       42,228       40,488  

Other operating expenses

     198,684       170,669       391,626       344,816  
                                

Total operating expenses

     1,018,513       858,822       2,016,789       1,712,633  
                                

Income from operations

     80,648       138,044       220,202       290,829  

Other income (expense):

        

Gains on sales of property, plant and equipment, net

     2,585       411       3,260       2,040  

Interest expense

     (61,642 )     (11,288 )     (94,916 )     (19,677 )

Refinancing and debt modification costs

     —         —         (761 )     (4,628 )
                                

Income from continuing operations before minority interests and income taxes

     21,591       127,167       127,785       268,564  

Minority interests in earnings of consolidated entities

     (217 )     (1,077 )     (388 )     (1,735 )
                                

Income from continuing operations before income taxes

     21,374       126,090       127,397       266,829  

Provision for income taxes

     (8,291 )     (48,707 )     (49,375 )     (102,865 )
                                

Income from continuing operations

     13,083       77,383       78,022       163,964  

Income (loss) from discontinued operations, net of income taxes

     (1,177 )     (78 )     (1,077 )     554  
                                

Net income

   $ 11,906     $ 77,305     $ 76,945     $ 164,518  
                                

Earnings (loss) per share:

        

Basic

        

Continuing operations

   $ 0.05     $ 0.32     $ 0.32     $ 0.68  

Discontinued operations

     —         —         —         —    
                                

Net income

   $ 0.05     $ 0.32     $ 0.32     $ 0.68  
                                

Diluted

        

Continuing operations

   $ 0.05     $ 0.32     $ 0.31     $ 0.68  

Discontinued operations

     —         —         —         —    
                                

Net income

   $ 0.05     $ 0.32     $ 0.31     $ 0.68  
                                

Dividends per share

   $ —       $ 0.06     $ 10.00     $ 0.12  
                                

Weighted average number of shares outstanding:

        

Basic

     242,355       240,842       242,016       240,765  
                                

Diluted

     246,794       243,561       245,609       243,491  
                                

See accompanying notes.

 

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HEALTH MANAGEMENT ASSOCIATES, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except per share amounts)

 

     June 30, 2007     December 31, 2006  
     (unaudited)        

ASSETS

    

Current assets:

    

Cash and cash equivalents

   $ 110,412     $ 66,814  

Accounts receivable, net

     642,033       633,555  

Supplies, prepaid expenses and other assets

     149,756       150,320  

Restricted funds

     33,037       20,609  

Deferred income taxes

     148,289       94,206  

Assets of discontinued operations

     88,525       88,830  
                

Total current assets

     1,172,052       1,054,334  
                

Property, plant and equipment

     3,512,787       3,395,279  

Accumulated depreciation and amortization

     (1,070,715 )     (993,179 )
                

Net property, plant and equipment

     2,442,072       2,402,100  
                

Restricted funds

     61,211       58,986  

Goodwill

     899,290       898,413  

Deferred charges and other assets

     189,453       77,119  
                

Total assets

   $ 4,764,078     $ 4,490,952  
                

LIABILITIES AND STOCKHOLDERS’ EQUITY

    

Current liabilities:

    

Accounts payable

   $ 200,833     $ 154,229  

Income taxes payable

     73,291       17,435  

Accrued expenses and other liabilities

     276,721       255,656  

Current maturities of long-term debt and capital lease obligations

     50,291       44,437  

Liabilities of discontinued operations

     978       908  
                

Total current liabilities

     602,114       472,665  

Deferred income taxes

     131,546       109,790  

Other long-term liabilities

     152,889       149,882  

Long-term debt and capital lease obligations, less current maturities

     3,736,427       1,296,403  

Minority interests in consolidated entities

     19,706       56,090  
                

Total liabilities

     4,642,682       2,084,830  
                

Stockholders’ equity:

    

Preferred stock, $0.01 par value, 5,000 shares authorized, none issued

     —         —    

Common stock, Class A, $0.01 par value, 750,000 shares authorized, 276,776 and 275,025 shares issued at June 30, 2007 and December 31, 2006, respectively

     2,768       2,750  

Accumulated other comprehensive income, net of income taxes

     36,740       654  

Additional paid-in capital

     612,191       632,037  

Retained earnings

     28,772       2,329,756  
                
     680,471       2,965,197  

Treasury stock, 34,318 shares of common stock, at cost

     (559,075 )     (559,075 )
                

Total stockholders’ equity

     121,396       2,406,122  
                

Total liabilities and stockholders’ equity

   $ 4,764,078     $ 4,490,952  
                

See accompanying notes.

 

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HEALTH MANAGEMENT ASSOCIATES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(unaudited)

 

    

Six Months Ended

June 30,

 
     2007     2006  

Cash flows from operating activities:

    

Net income

   $ 76,945     $ 164,518  

Adjustments to reconcile net income to net cash provided by continuing operating activities:

    

Depreciation and amortization

     108,193       85,934  

Provision for doubtful accounts

     271,835       173,251  

Stock-based compensation expense

     9,860       9,634  

Minority interests in earnings of consolidated entities

     388       1,735  

Gains on sales of property, plant and equipment, net

     (3,260 )     (2,040 )

Write-offs of deferred financing costs

     761       4,628  

Deferred income tax (benefit) expense

     (41,671 )     2,314  

Changes in assets and liabilities of continuing operations, net of the effects of acquisitions:

    

Accounts receivable

     (293,914 )     (243,404 )

Supplies, prepaid expenses and other assets

     (2,524 )     14,624  

Accounts payable

     47,782       15,057  

Income taxes payable

     38,958       (441 )

Accrued expenses and other liabilities

     9,471       32,427  

Equity compensation excess income tax benefit

     (273 )     (101 )

Loss (income) from discontinued operations, net

     1,077       (554 )
                

Net cash provided by continuing operating activities

     223,628       257,582  
                

Cash flows from investing activities:

    

Acquisitions of hospitals, minority interests and other

     (36,127 )     (182,566 )

Additions to property, plant and equipment

     (146,077 )     (176,343 )

Proceeds from sales of property, plant and equipment and insurance recoveries

     21,978       4,200  

Increases in restricted funds, net

     (12,267 )     (20,228 )
                

Net cash used in continuing investing activities

     (172,493 )     (374,937 )
                

Cash flows from financing activities:

    

Net proceeds from long-term borrowings

     2,706,735       831,707  

Principal payments on debt and capital lease obligations

     (313,777 )     (684,735 )

Proceeds from exercises of stock options

     24,719       5,200  

Purchases of treasury stock

     —         (1,181 )

Payments of financing costs

     (3,277 )     (494 )

Investments by minority shareholders

     8,456       —    

Cash distributions to minority shareholders

     (2,497 )     (1,896 )

Equity compensation excess income tax benefit

     273       101  

Payments of cash dividends

     (2,425,217 )     (28,880 )
                

Net cash provided by (used in) continuing financing activities

     (4,585 )     119,822  
                

Net increase in cash and cash equivalents before discontinued operations

     46,550       2,467  

Net increase (decrease) in cash and cash equivalents from discontinued operations:

    

Operating activities

     (2,051 )     5,132  

Investing activities

     (773 )     (1,483 )

Financing activities

     (128 )     (158 )
                

Net increase in cash and cash equivalents

     43,598       5,958  

Cash and cash equivalents at beginning of the period

     66,814       69,909  
                

Cash and cash equivalents at end of the period

   $ 110,412     $ 75,867  
                

See accompanying notes.

 

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HEALTH MANAGEMENT ASSOCIATES, INC.

NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2007

1. Business, Basis of Presentation and Other

Health Management Associates, Inc. (“we,” “our” or “us”) and our subsidiaries provide health care services to patients in owned and leased facilities located primarily in the southeastern and southwestern United States. As of June 30, 2007, we operated 61 general acute care hospitals in 16 states with a total of 8,668 licensed beds. At such date, eighteen and eleven of our hospitals were located in Florida and Mississippi, respectively. See Notes 3 and 5 for information concerning acquisition and divestiture activity, including our sale of two Virginia-based general acute care hospitals and certain affiliated entities subsequent to June 30, 2007.

Unless specifically indicated otherwise, all amounts and percentages presented in the notes below are exclusive of our discontinued operations, which include the following entities that we sold after June 30, 2007 or we intend to sell later in 2007: Southwest Regional Medical Center in Little Rock, Arkansas; Summit Medical Center in Van Buren, Arkansas; Lee Regional Medical Center in Pennington Gap, Virginia; Mountain View Regional Medical Center in Norton, Virginia; and certain health care entities affiliated with such hospitals. Discontinued operations also include the psychiatric hospitals in Tequesta, Florida (SandyPines) and Orlando, Florida (University Behavioral Center) that were sold on September 1, 2006 along with certain dormant real property. See Note 5 for information regarding our discontinued operations.

The condensed consolidated balance sheet as of December 31, 2006 was derived from the audited consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2006. The interim condensed consolidated financial statements as of June 30, 2007 and for the three and six months ended June 30, 2007 and 2006 are unaudited; however, such interim financial statements reflect all adjustments (only consisting of those of a normal recurring nature) that are, in our opinion, necessary for a fair presentation of our financial position and results of operations for the interim periods presented. Due to the seasonal nature of our business, among other things, our results of operations for the interim periods presented herein are not necessarily indicative of the results to be expected for the full year.

The interim condensed consolidated financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and disclosures normally included in financial statements prepared in accordance with U.S. generally accepted accounting principles have been condensed or omitted pursuant to such rules. The interim condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2006.

The interim condensed consolidated financial statements include all assets, liabilities, revenue and expenses of certain entities that are controlled by us but not wholly owned. Accordingly, we have recorded minority interests in the earnings and equity of such entities to reflect the ownership interests of such minority shareholders.

The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires us to make estimates and assumptions that affect the amounts reported in the interim condensed consolidated financial statements and accompanying notes. Actual results could differ from those estimates.

Total comprehensive income for the three and six months ended June 30, 2007 was approximately $48.4 million and $113.0 million, respectively, and for the three and six months ended June 30, 2006 was approximately $77.2 million and $164.6 million, respectively. The differences between net income and total comprehensive income related to after-tax (i) changes in the unrealized gains and losses of our available-for-sale securities and (ii) changes in the fair value of our interest rate swap contract during the three and six months ended June 30, 2007. See Note 4 for information regarding our interest rate swap contract.

Certain amounts in the interim condensed consolidated financial statements have been reclassified in the prior year to conform to the current year presentation. Such reclassifications include, but are not limited to, adjustments to cash and cash equivalents at June 30, 2006 in connection with our October 1, 2005 adoption of Securities and Exchange Commission Staff Accounting Bulletin No. 108, Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements. For further discussion, see Note 14 to the consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2006.

 

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HEALTH MANAGEMENT ASSOCIATES, INC.

NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

 

2. Earnings Per Share

Basic earnings per share is computed on the basis of the weighted average number of outstanding common shares. Diluted earnings per share is computed on the basis of the weighted average number of outstanding common shares plus the dilutive effect of common stock equivalents, primarily computed using the treasury stock method. The table below sets forth the computations of basic and diluted earnings per share (in thousands, except per share amounts).

 

     Three Months Ended
June 30,
    Six Months Ended
June 30,
     2007     2006     2007     2006

Numerators:

        

Income from continuing operations

   $ 13,083     $ 77,383     $ 78,022     $ 163,964

Effect of convertible debt interest expense

     —         1       —         1
                              

Numerator for diluted earnings per share from continuing operations

     13,083       77,384       78,022       163,965

Income (loss) from discontinued operations, net

     (1,177 )     (78 )     (1,077 )     554
                              

Numerator for diluted earnings per share (net income)

   $ 11,906     $ 77,306     $ 76,945     $ 164,519
                              

Denominators:

        

Denominator for basic earnings per share – weighted average outstanding shares

     242,355       240,842       242,016       240,765

Effect of dilutive securities:

        

Stock options and other stock-based compensation

     4,438       2,713       3,592       2,720

Convertible debt

     1       6       1       6
                              

Denominator for diluted earnings per share

     246,794       243,561       245,609       243,491
                              

Earnings (loss) per share:

        

Basic

        

Continuing operations

   $ 0.05     $ 0.32     $ 0.32     $ 0.68

Discontinued operations

     —         —         —         —  
                              

Net income

   $ 0.05     $ 0.32     $ 0.32     $ 0.68
                              

Diluted

        

Continuing operations

   $ 0.05     $ 0.32     $ 0.31     $ 0.68

Discontinued operations

     —         —         —         —  
                              

Net income

   $ 0.05     $ 0.32     $ 0.31     $ 0.68
                              

3. Acquisitions and Other Related Activity

2006 Acquisitions. Effective January 1, 2006, we acquired Barrow Community Hospital, a 56-bed general acute care hospital in Winder, Georgia. The cash paid for this acquisition during December 2005 was approximately $33.2 million for property, plant and equipment and other non-current assets and approximately $2.4 million for working capital. Effective February 1, 2006, we acquired an 80% ownership interest in Orlando Regional St. Cloud Hospital, an 84-bed general acute care hospital in St. Cloud, Florida. Orlando Regional Healthcare System, Inc., a not-for-profit organization, retained a 20% ownership interest in the hospital. The purchase price for the 80% controlling interest in Orlando Regional St. Cloud Hospital was approximately $38.1 million. Additionally, effective May 1, 2006 we acquired Cleveland Clinic-Naples Hospital, an 83-bed general acute care hospital in Naples, Florida, and a vacant land parcel near such hospital. The cash paid for this acquisition was approximately $125.5 million for property, plant and equipment and other non-current assets and approximately $1.9 million for supply inventories. Effective June 1, 2006, we acquired Gulf Coast Medical Center, a 189-bed general acute care hospital in Biloxi, Mississippi. The cash paid for this acquisition was approximately $14.9 million for property, plant and equipment, other non-current assets and working capital.

 

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HEALTH MANAGEMENT ASSOCIATES, INC.

NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

 

3. Acquisitions and Other Related Activity (continued)

 

2007 Joint Venture and Other Activity. On January 23, 2007, we completed a joint venture transaction with respect to Riverview Regional Medical Center, a 281-bed general acute care hospital in Gadsden, Alabama. As a result of this transaction and subsequent investments, sixty-six physicians own an aggregate equity interest of approximately 12% in the joint venture and participate in the hospital’s governance. We continue to own the majority equity interest in the joint venture and manage the hospital’s day-to-day operations. In connection with these transactions, we received cumulative cash proceeds of approximately $8.5 million; however, we recorded no gain or loss thereon.

We opened our newly constructed 100-bed general acute care hospital, Physicians Regional Medical Center-Collier Boulevard in Naples, Florida, on February 5, 2007.

On April 16, 2007, we paid $32.0 million to a minority shareholder in order to acquire the 20% equity interests that we did not already own in each of the 176-bed Dallas Regional Medical Center at Galloway (formerly Medical Center of Mesquite) and the 172-bed Woman’s Hospital at Dallas Regional Medical Center (formerly Mesquite Community Hospital). Both such general acute care hospitals are located in Mesquite, Texas and are now wholly owned by us. In connection with these two acquisitions, which resulted from the minority shareholder exercising its contractual right to require us to purchase its equity interests, the carrying value of our property, plant and equipment was reduced by approximately $10.7 million.

4. Long-Term Debt

Our long-term debt consisted of the following (in thousands):

 

     June 30,
2007
    December 31,
2006
 

Revolving credit facilities

   $ —       $ 275,000  

New Term Loan (as described below)

     2,743,125       —    

1.50% Convertible Senior Subordinated Notes due 2023

     564,783       564,473  

6.125% Senior Notes due 2016

     396,756       396,571  

2022 Notes and New 2022 Notes (as described below)

     —         11,296  

Installment notes and other unsecured long-term debt

     11,951       23,142  

Mortgage note

     8,465       8,594  

Capital lease obligations

     61,638       61,764  
                
     3,786,718       1,340,840  

Less current maturities

     (50,291 )     (44,437 )
                

Long-term debt and capital lease obligations, less current maturities

   $ 3,736,427     $ 1,296,403  
                

New Senior Secured Credit Facilities. On March 1, 2007, we completed a recapitalization of our balance sheet (the “Recapitalization”), which included the following principal features:

 

  (i) payment of a special cash dividend of $10.00 per share of our common stock, resulting in a total distribution of approximately $2.4 billion, and

 

  (ii) $3.25 billion in new variable rate senior secured credit facilities (the “New Credit Facilities”), which closed on February 16, 2007. Such facilities were initially used to fund the special cash dividend and repay all amounts outstanding (i.e., $275.0 million) under our predecessor revolving credit agreement.

The New Credit Facilities, which are secured by a substantial portion of our real property and other assets and are guaranteed as to payment by our subsidiaries (other than certain exempted subsidiaries), consist of a seven-year $2.75 billion term loan (the “New Term Loan”) and a $500.0 million six-year revolving credit facility (the “New Revolving Credit Agreement”). At December 31, 2006, the net book value of the assets that secure the New Credit Facilities was approximately $2.6 billion. Such assets also secure our 6.125% Senior Notes due 2016, which rank on a pari passu basis with the New Credit Facilities.

 

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HEALTH MANAGEMENT ASSOCIATES, INC.

NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

 

4. Long-Term Debt (continued)

 

The New Term Loan requires (i) quarterly principal payments to amortize 1% of the loan’s original face value during each year of the loan’s term and (ii) a balloon payment for the remaining outstanding loan balance at the termination of the agreement. The New Revolving Credit Agreement allows us to borrow up to $500.0 million, including standby letters of credit. During the New Revolving Credit Agreement’s six-year term, we are obligated to pay commitment fees based on the amounts available for borrowing. Amounts outstanding under the New Credit Facilities may be repaid at our option at any time, in whole or in part, without penalty.

We can elect whether interest on the New Credit Facilities, which is generally payable quarterly in arrears, utilizes LIBOR or prime as its base rate. The effective interest rate includes a spread above our selected base rate and is subject to modification in the event that our debt ratings change. Additionally, we may elect differing base interest rates for the New Term Loan and the New Revolving Credit Agreement. Pursuant to the requirements of the agreements underlying the New Credit Facilities, during February 2007 we entered into a receive variable/pay fixed interest rate swap contract that has a term concurrent with the New Term Loan. The interest rate swap contract provides for the effective payment of interest by us at a fixed rate of 6.7445% on the contract’s notional amount, which is expected to reasonably approximate the declining principal balance of the New Term Loan. At June 30, 2007, approximately $36.0 million of the New Term Loan was not covered by the interest rate swap contract and, accordingly, such amount is subject to the New Credit Facilities’ variable interest rate provisions (i.e., an effective interest rate of approximately 7.1% on June 30, 2007 and for approximately 90 days thereafter). We determined that the interest rate swap contract was a perfectly effective hedge instrument during the three and six months ended June 30, 2007. Therefore, the increases in the fair value of the interest rate swap contract during such periods of approximately $55.4 million and $54.0 million, respectively, were recognized as components of other comprehensive income in accordance with the provisions of Statement of Financial Accounting Standards No. 133, Accounting for Derivative Instruments and Hedging Activities.

Our effective interest rate on the variable rate New Revolving Credit Agreement, which is not covered by the aforementioned interest rate swap contract, was approximately 7.3% on August 3, 2007. Although there were no amounts outstanding under the New Revolving Credit Agreement on such date, standby letters of credit in favor of third parties of approximately $36.5 million reduced the amount available for borrowing under that credit facility to $463.5 million.

The agreements underlying the New Credit Facilities contain covenants that, without prior consent of the lenders, limit certain of our activities, including those relating to mergers; consolidations; our ability to secure additional indebtedness; sales, transfers and other dispositions of property and assets; capital expenditures; providing new guarantees; investing in joint ventures; and granting additional security interests. The New Credit Facilities also contain customary events of default and related cure provisions. Additionally, we are required to comply with certain financial covenants on a quarterly basis.

Pursuant to the terms and conditions of the New Credit Facilities, limitations are imposed on us regarding the manner in which we can redeem some or all of our 1.50% Convertible Senior Subordinated Notes due 2023 (the “2023 Notes”). Should we use future proceeds from the New Credit Facilities for such a redemption, we must meet certain financial ratios and, in some circumstances, we must maintain a specified minimum availability under the New Revolving Credit Agreement. If we elect to borrow funds other than under the New Credit Facilities or issue equity securities in order to fund a redemption of some or all of the 2023 Notes, we will be subject to separate requirements, including, among other things, a requirement that we maintain compliance with certain financial ratios. Furthermore, as set forth under the New Credit Facilities, such additional borrowed funds must be in the form of either permitted subordinated indebtedness or permitted senior unsecured indebtedness.

In connection with the closing of the New Credit Facilities, we incurred approximately $47.7 million of financing costs that have been capitalized on our balance sheet. Such costs are being amortized to interest expense using the effective interest method.

2022 Notes. On January 26, 2007, the holders of $150,000 in principal face value Zero-Coupon Convertible Senior Subordinated Notes due 2022 (the “2022 Notes”) exercised their contractual right to require us to repurchase their notes. As a result, we were obligated to repurchase such 2022 Notes on January 30, 2007 at their accreted value of approximately $132,000; however, the holders of certain 2022 Notes did not require us to repurchase their notes. In June 2007, we exercised our contractual right to repurchase all of the then outstanding 2022 Notes. In connection therewith, such notes were redeemed prior to July 1, 2007 at their accreted value of approximately $9,700.

 

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HEALTH MANAGEMENT ASSOCIATES, INC.

NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

 

4. Long-Term Debt (continued)

 

New 2022 Notes. On January 26, 2007 and January 30, 2006, the holders of approximately $12.5 million and $317.3 million, respectively, in principal face value Exchange Zero-Coupon Convertible Senior Subordinated Notes due 2022 (the “New 2022 Notes”) exercised their contractual right to require us to repurchase their notes. As a result, we were obligated to repurchase such New 2022 Notes at their accreted values of approximately $11.0 million and $275.9 million, respectively; however, the holders of certain New 2022 Notes did not require us to repurchase their notes. In June 2007, we exercised our contractual right to repurchase all of the then outstanding New 2022 Notes. In connection therewith, such notes were redeemed prior to July 1, 2007 at their accreted value of approximately $16,700. As a result of the New 2022 Note repurchases, we wrote off approximately $0.1 million and $4.6 million of deferred financing costs during the six months ended June 30, 2007 and 2006, respectively.

2023 Notes. Upon the occurrence of certain events, the 2023 Notes become convertible into cash and, in limited situations, shares of our common stock at a predetermined conversion rate, which is subject to mandatory adjustment in some circumstances. As a result of the Recapitalization, (i) the conversion rate was adjusted to 71.8108 shares of our common stock for each $1,000 principal amount of 2023 Notes converted and (ii) the 2023 Notes become convertible when our common stock trades at a level of $18.103 per share for at least twenty of the thirty trading days prior to the conversion or as a result of a triggering event pursuant to the terms and conditions of the underlying indenture. Following the announcement of the Recapitalization, our credit ratings were downgraded, which constituted a triggering event under the 2023 Notes and caused such notes to become immediately convertible. Subsequent to June 30, 2007, no holders of the 2023 Notes have indicated to us an intent to convert their notes.

Senior Debt Securities. On April 21, 2006, we completed an underwritten public offering of $400.0 million of 6.125% Senior Notes due 2016 (the “Senior Notes”). Such notes were initially unsecured obligations; however, as a result of the Recapitalization, the Senior Notes are now secured pari passu with the New Credit Facilities.

If any of our subsidiaries are required to issue a guaranty in favor of the lenders under any credit facility ranking equal with the Senior Notes, such subsidiaries are also required, under the terms of the Senior Notes, to issue a guaranty for the benefit of the holders of the Senior Notes on substantially the same terms and conditions as the guaranty issued to such other lender. As a result of the Recapitalization and the guarantees provided to the lenders under the New Credit Facilities, our subsidiaries (other than certain exempted subsidiaries) provided guarantees of payment to the holders of the Senior Notes. See Note 9 for condensed consolidating financial statements wherein guarantor and non-guarantor information is disclosed.

General. Primarily as a result of the borrowing availability under the New Revolving Credit Agreement, no amounts attributable to the 2023 Notes were classified as current liabilities at either June 30, 2007 or December 31, 2006.

During the six months ended June 30, 2007, we wrote off approximately $0.7 million of deferred financing costs in connection with the termination of our predecessor revolving credit agreement.

At June 30, 2007, we were in compliance with the financial and other covenants contained in our debt agreements.

5. Discontinued Operations

Our discontinued operations during the periods presented herein include: 79-bed Southwest Regional Medical Center in Little Rock, Arkansas; 103-bed Summit Medical Center in Van Buren, Arkansas; 80-bed Lee Regional Medical Center in Pennington Gap, Virginia; 133-bed Mountain View Regional Medical Center in Norton, Virginia; and certain health care entities affiliated with such hospitals. During the three months ended June 30, 2007, we determined that we would not divest 76-bed Williamson Memorial Hospital in Williamson, West Virginia and certain of its affiliated entities as was previously anticipated. Accordingly, all periods presented herein include the operations of such West Virginia entities in continuing operations.

 

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HEALTH MANAGEMENT ASSOCIATES, INC.

NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

 

5. Discontinued Operations (continued)

 

On July 31, 2007, we completed the sale of the two aforementioned Virginia hospitals. The aggregate selling price was $70.0 million, plus a working capital adjustment that is subject to future modification, and was paid in cash. We intend to use the after-tax net proceeds from this sale to repay debt under the New Term Loan. We are currently exploring various alternatives to dispose of our Arkansas facilities; however, the timing of such dispositions has not yet been determined.

On September 1, 2006, we sold our two psychiatric hospitals in Florida (80-bed SandyPines in Tequesta and 104-bed University Behavioral Center in Orlando) and certain real property in Lakeland, Florida that was operated as an inpatient psychiatric facility through December 31, 2000. Such entities are also considered to be discontinued operations.

The operating results of discontinued operations are included in our consolidated financial statements up to the date of disposition. Pursuant to the provisions of Statement of Financial Accounting Standards No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, the financial position, operating results and cash flows of the aforementioned entities have been presented as discontinued operations in the interim condensed consolidated financial statements.

The underlying details of discontinued operations were as follows (in thousands):

 

     Three Months Ended
June 30,
   

Six Months Ended

June 30,

 
     2007     2006     2007     2006  

Net operating revenue

   $ 25,714     $ 32,623     $ 53,668     $ 66,678  

Costs and expenses:

        

Salaries and benefits

     12,869       16,432       26,084       33,495  

Provision for doubtful accounts

     4,094       2,251       7,831       4,569  

Depreciation and amortization

     553       1,629       1,398       3,235  

Other operating expenses

     10,105       12,392       20,074       24,428  
                                

Total operating expenses

     27,621       32,704       55,387       65,727  
                                

Income (loss) from operations

     (1,907 )     (81 )     (1,719 )     951  

Other expenses, net

     (15 )     (45 )     (39 )     (58 )
                                

Income (loss) before income taxes

     (1,922 )     (126 )     (1,758 )     893  

Income tax benefit (expense)

     745       48       681       (339 )
                                

Income (loss) from discontinued operations

   $ (1,177 )   $ (78 )   $ (1,077 )   $ 554  
                                

The major classes of assets and liabilities of discontinued operations in the condensed consolidated balance sheets were as follows (in thousands):

 

     June 30,
2007
   December 31,
2006

Supplies, prepaid expenses and other assets

   $ 4,942    $ 4,847

Long-lived assets and goodwill

     83,583      83,983
             

Total assets of discontinued operations

   $ 88,525    $ 88,830
             

Liabilities of discontinued operations (principally accrued expenses and other liabilities)

   $ 978    $ 908
             

6. Income Taxes

During June 2006, the Financial Accounting Standards Board issued Interpretation No. 48, Accounting for Uncertainty in Income Taxes, an interpretation of FASB Statement No. 109, (“FIN 48”). Among other things, FIN 48 prescribes a minimum recognition threshold that an income tax position must meet before it is recorded in the reporting entity’s financial statements. FIN 48 requires that the effects of such income tax positions be recognized only if, as of the balance sheet reporting date, it is “more likely than not” (i.e., more than a 50% likelihood) that the income tax position will be sustained based solely on its technical merits. When making this assessment, management must assume that the

 

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HEALTH MANAGEMENT ASSOCIATES, INC.

NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

 

6. Income Taxes (continued)

 

responsible taxing authority will examine the income tax position and have full knowledge of all relevant facts and other pertinent information. The new accounting guidance also clarifies the method of accruing for interest and penalties when there is a difference between the amount claimed, or expected to be claimed, on a company’s income tax returns and the benefits recognized in the financial statements. Additionally, FIN 48 requires significant new and expanded footnote disclosures in all annual periods.

We adopted FIN 48 with an effective date of January 1, 2007. Retrospective application of FIN 48 was prohibited. In accordance with the transitional provisions of FIN 48, we recorded a cumulative effect adjustment to reduce retained earnings by approximately $4.7 million on January 1, 2007. During the six months ended June 30, 2007, we recorded $1.5 million of unrecognized income tax benefits for current period tax positions. During the three months ended June 30, 2007, we recognized $0.6 million of such previously unrecognized income tax benefit. The liabilities for unrecognized income tax benefits at June 30, 2007 and January 1, 2007 were approximately $34.1 million and $32.6 million, respectively.

Included in our unrecognized income tax benefits at both June 30, 2007 and January 1, 2007 were approximately $9.0 million of tax positions for which the ultimate deductibility is highly certain but for which there is uncertainty about the timing of such deductibility. Other than interest and penalties, the disallowance of such deductions in the short-term would not affect our annual or quarterly effective income tax rates but would accelerate payments to certain taxing authorities.

We file numerous consolidated and separate federal and state income tax returns. With a few exceptions, we are no longer subject to federal and state income tax examinations for fiscal years before September 30, 2004. We do not expect significant changes to the FIN 48 reserve over the next year due to current audits and potential statute extensions.

We recognize interest and penalties related to unrecognized income tax benefits in the provision for income taxes. During the three and six months ended June 30, 2007, we recognized approximately $1.3 million and $2.2 million, respectively, for interest and penalties. At June 30, 2007 and January 1, 2007, we had accrued approximately $7.4 million and $5.2 million, respectively, for interest and penalties.

7. Other Significant Matters

Net Operating Revenue, Accounts Receivable and Allowances for Doubtful Accounts. As a result of a recent class action lawsuit settlement that involved billings to uninsured patients, we began discounting our gross charges to uninsured patients for non-elective procedures by 60% in February 2007 (no such discounts were previously provided by us). In connection with this change, we recorded approximately $153.3 million and $270.4 million of uninsured self-pay patient revenue discounts during the three and six months ended June 30, 2007, respectively. Concurrent with our new discounting policy, we modified our allowance for doubtful accounts reserve policy for self-pay patients. After the implementation of the discounting policy but prior to June 30, 2007, self-pay accounts that were aged less than 300 days from the date that the services were rendered were reserved at 60% of their discounted amount and, consistent with our other commercial and governmental payors, reserved at 100% when the account aged 300 days from the date of discharge. For a discussion of our corresponding allowance for doubtful accounts accounting policies prior to February 2007, see Note 1(g) to the consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2006.

As a result of (i) a recently completed cash collection analysis that evaluated the adequacy of the February 2007 self-pay reserve policy modification and (ii) deterioration in our self-pay accounts receivable balances, we concluded that it was necessary to reserve a greater portion of self-pay accounts receivable. Accordingly, effective June 30, 2007, we further modified our reserve policy for self-pay patients to increase our reserves for those accounts that are aged less than 300 days from the date that the services were rendered. As a result of this change in estimate, we recognized a $39.0 million increase in our provision for doubtful accounts during the three and six months ended June 30, 2007, thereby reducing net income and diluted earnings per share by approximately $23.9 million and $0.10, respectively, during both such periods. We believe that this change in self-pay patient allowances for doubtful accounts appropriately addresses our risk of collection pertaining to the accounts receivable balances after application of the 60% discount.

In the ordinary course of business, we provide services to patients who are financially unable to pay for their care. Accounts characterized as charity and indigent care are not recognized in net operating revenue. Prior to January 1, 2007, our policy and practice was to forego collection of a patient’s entire account balance upon determining that the patient qualifies under a hospital’s local charity care and/or indigent policy. Commencing January 1, 2007, we implemented a uniform

 

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HEALTH MANAGEMENT ASSOCIATES, INC.

NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

 

7. Other Significant Matters (continued)

 

company-wide policy wherein patient account balances are characterized as charity and indigent care only if the patient meets certain percentages of the federal poverty level guidelines. Local hospital personnel and our collection agencies pursue payments on accounts receivable from patients that do not meet such criteria. We monitor the levels of charity and indigent care provided by our hospitals and the procedures employed to identify and account for these patients.

Physician and Physician Group Guarantees. We are committed to providing certain financial assistance pursuant to recruiting arrangements and professional services agreements with physicians and physician groups practicing in the communities that our hospitals serve. At June 30, 2007, we were committed to non-cancelable guarantees of approximately $32.6 million under such arrangements. The actual amounts advanced will depend on the financial results of each physician’s or physician group’s private practice during the contractual measurement periods, which generally do not exceed one year. We believe that the estimated liabilities for physician and physician group guarantees that are recorded in the condensed consolidated balance sheets, including approximately $10.7 million at June 30, 2007, are adequate and reasonable; however, there can be no assurances that the ultimate liability for such guarantees will not exceed our estimates.

2006 Outside Director Restricted Stock Award Plan. In light of the Recapitalization, our Board of Directors amended the 2006 Outside Director Restricted Stock Award Plan (the “Plan”) on May 15, 2007. Specifically, the Plan was amended to (i) increase the annual awards to each outside director from 3,500 restricted shares to 12,000 restricted shares, commencing January 1, 2008, and (ii) increase the number of shares still eligible for grant under the Plan from 151,000 to 353,740. There were no other modifications to the Plan.

Stock-Based Compensation. As part of the initial compensation package for our new Executive Vice President and Chief Operating Officer, who began serving in such capacity on July 1, 2007, the Compensation Committee of the Board of Directors approved a sign-on bonus that included a deferred stock award of 100,000 shares of our common stock that vests 20% on each anniversary date over five years of continued employment. The deferred stock award was issued under our 1996 Executive Incentive Compensation Plan.

Recent Accounting Pronouncement-Fair Value Measurements. During September 2006, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 157, Fair Value Measurements, (“SFAS No. 157”), which, among other things, established a framework for measuring fair value and required supplemental disclosures about such fair value measurements. The modifications to current practice resulting from the application of this new accounting pronouncement primarily relate to the definition of fair value and the methods used to measure fair value. SFAS No. 157 is effective for fiscal years beginning after November 15, 2007 and interim periods within the year of adoption. We do not believe that the adoption of this new accounting standard will materially impact our financial position or results of operations.

8. Contingencies

Ascension Health Dispute. On February 14, 2006, we announced that we terminated non-binding negotiations with Ascension Health (“Ascension”) and withdrew our non-binding offer to acquire Ascension’s St. Joseph Hospital, a 231-bed general acute care hospital in Augusta, Georgia. On June 8, 2007, certain Ascension subsidiaries filed a lawsuit against Health Management Associates, Inc. (referred to as the “Company” for Note 8 purposes), styled St. Joseph Hospital, Augusta, Georgia, Inc. et al. v. Health Management Associates, Inc., in Georgia Superior/State Court of Richmond County claiming that the Company (i) breached an agreement to purchase St. Joseph Hospital and (ii) violated a confidentiality agreement. The plaintiffs claim at least $35 million in damages. On July 17, 2007, the Company removed the case to the United States District Court for the Southern District of Georgia, Augusta Division.

We do not believe there was a binding acquisition contract with Ascension or any of its subsidiaries and we do not believe we breached a confidentiality agreement. Accordingly, we consider the lawsuit filed by the Ascension subsidiaries to be without merit and we intend to vigorously defend the Company against the allegations.

Alleged Securities Class Action Lawsuits. On August 2, 2007, the Company and three of its senior executive officers and directors were named as parties to a putative class action lawsuit, styled Florence Cole et al. v. Health Management Associates, Inc. et al., which was filed in the United States District Court for the Middle District of Florida. This action purports to be brought on behalf of all similarly situated persons who purchased the Company’s securities during the period January 17, 2007 through July 30, 2007 (the “Class Period”). The lawsuit alleges, among other things, that the Company violated federal securities laws by issuing a series of material misrepresentations and/or omitting to disclose material information during the Class Period, thereby artificially inflating the price of the Company’s securities. The plaintiff

 

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HEALTH MANAGEMENT ASSOCIATES, INC.

NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

 

8. Contingencies (continued)

 

seeks, among other things, (i) a determination that the action is a proper class action and (ii) awards for damages and interest, reasonable costs and expenses. Additional similar actions have been brought subsequently and other similar actions may be brought in the future against the Company and its officers and directors. We believe that the allegations in the abovementioned lawsuit and similar allegations are without merit and we intend to vigorously defend the Company and its officers and directors against all such allegations.

General. As it is not possible to estimate the ultimate loss, if any, relating to the abovementioned lawsuits, no loss accruals have been recorded for these matters at June 30, 2007 or December 31, 2006. We are also a party to various other legal actions arising out of the normal course of our business; however, we believe that the ultimate resolution of such actions will not have a material adverse effect on our financial position, results of operations or liquidity. Nevertheless, due to uncertainties inherent in litigation, the ultimate disposition of these actions cannot be presently determined.

9. Condensed Consolidating Financial Statements

Health Management Associates, Inc. (referred to as the “Parent” for Note 9 purposes) is the primary obligor under the New Credit Facilities and the Senior Notes discussed at Note 4. Certain of the Parent’s subsidiaries (the “Guarantor Subsidiaries”) provide joint and several unconditional guarantees as to payment for borrowings under such credit agreements; however, other Parent subsidiaries (the “Non-Guarantor Subsidiaries”) have not been required to provide any such guarantees. Below are schedules presenting condensed consolidating financial statements as of June 30, 2007 and December 31, 2006, as well as the three and six months ended June 30, 2007 and 2006.

Health Management Associates, Inc.

Condensed Consolidating Balance Sheet

June 30, 2007

(in thousands)

     Parent    Guarantor
Subsidiaries
   Non-Guarantor
Subsidiaries
   Elimination and
Consolidation
Entries
    Consolidated

Current assets:

             

Cash and cash equivalents

   $ 86,244    $ 21,392    $ 2,776    $ —       $ 110,412

Accounts receivable, net

     3,179      552,478      86,376      —         642,033

Other current assets

     11,237      126,060      45,496      —         182,793

Deferred income taxes

     148,289      —        —        —         148,289

Assets of discontinued operations

     —        —        88,525      —         88,525
                                   

Total current assets

     248,949      699,930      223,173      —         1,172,052

Property, plant and equipment, net

     51,829      2,288,257      101,986      —         2,442,072

Investments in subsidiaries

     3,805,778      —        —        (3,805,778 )     —  

Goodwill

     —        866,692      32,598      —         899,290

Other long-term assets

     122,643      33,283      94,738      —         250,664
                                   

Total assets

   $ 4,229,199    $ 3,888,162    $ 452,495    $ (3,805,778 )   $ 4,764,078
                                   

Current liabilities:

             

Accounts payable

   $ 19,426    $ 172,000    $ 9,407    $ —       $ 200,833

Accrued expenses, income taxes payable and other liabilities

     175,848      119,880      54,284      —         350,012

Current maturities of long-term debt and capital lease obligations

     27,848      21,683      760      —         50,291

Liabilities of discontinued operations

     —        —        978      —         978
                                   

Total current liabilities

     223,122      313,563      65,429      —         602,114

Deferred income taxes

     131,546      —        —        —         131,546

Long-term debt and capital lease obligations, less current maturities

     3,685,243      49,339      1,845      —         3,736,427

Other long-term liabilities

     48,186      20,948      83,755      —         152,889

Minority interests in consolidated entities

     19,706      —        —        —         19,706
                                   

Total liabilities

     4,107,803      383,850      151,029      —         4,642,682

Net assets, including amounts due to/from the Parent

     —        3,504,312      301,466      (3,805,778 )     —  

Total stockholders’ equity

     121,396      —        —        —         121,396
                                   

Total liabilities and stockholders’ equity

   $ 4,229,199    $ 3,888,162    $ 452,495    $ (3,805,778 )   $ 4,764,078
                                   

 

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HEALTH MANAGEMENT ASSOCIATES, INC.

NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

 

9. Condensed Consolidating Financial Statements (continued)

 

Health Management Associates, Inc.

Condensed Consolidating Balance Sheet

December 31, 2006

(in thousands)

 

     Parent    Guarantor
Subsidiaries
   

Non-Guarantor

Subsidiaries

    Elimination and
Consolidation
Entries
    Consolidated

Current assets:

           

Cash and cash equivalents

   $ 73,162    $ (4,156 )   $ (2,192 )   $ —       $ 66,814

Accounts receivable, net

     28,316      525,148       80,091       —         633,555

Other current assets

     9,981      122,352       38,596       —         170,929

Deferred income taxes

     94,206      —         —         —         94,206

Assets of discontinued operations

     —        —         88,830       —         88,830
                                     

Total current assets

     205,665      643,344       205,325       —         1,054,334

Property, plant and equipment, net

     56,636      2,246,865       98,599       —         2,402,100

Investments in subsidiaries

     3,709,662      —         —         (3,709,662 )     —  

Goodwill

     —        865,815       32,598       —         898,413

Other long-term assets

     24,361      21,609       90,135       —         136,105
                                     

Total assets

   $ 3,996,324    $ 3,777,633     $ 426,657     $ (3,709,662 )   $ 4,490,952
                                     

Current liabilities:

           

Accounts payable

   $ 19,599    $ 126,600     $ 8,030     $ —       $ 154,229

Accrued expenses, income taxes payable and other liabilities

     108,909      114,923       49,259       —         273,091

Current maturities of long-term debt and capital lease obligations

     20,674      20,945       2,818       —         44,437

Liabilities of discontinued operations

     —        —         908       —         908
                                     

Total current liabilities

     149,182      262,468       61,015       —         472,665

Deferred income taxes

     109,790      —         —         —         109,790

Long-term debt and capital lease obligations, less current maturities

     1,226,656      57,593       12,154       —         1,296,403

Other long-term liabilities

     48,484      22,158       79,240       —         149,882

Minority interests in consolidated entities

     56,090      —         —         —         56,090
                                     

Total liabilities

     1,590,202      342,219       152,409       —         2,084,830

Net assets, including amounts due to/from the Parent

     —        3,435,414       274,248       (3,709,662 )     —  

Total stockholders’ equity

     2,406,122      —         —         —         2,406,122
                                     

Total liabilities and stockholders’ equity

   $ 3,996,324    $ 3,777,633     $ 426,657     $ (3,709,662 )   $ 4,490,952
                                     

 

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Table of Contents

HEALTH MANAGEMENT ASSOCIATES, INC.

NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

 

9. Condensed Consolidating Financial Statements (continued)

 

Health Management Associates, Inc.

Condensed Consolidating Statement of Income

Three Months Ended June 30, 2007

(in thousands)

 

     Parent     Guarantor
Subsidiaries
    Non-Guarantor
Subsidiaries
    Elimination and
Consolidation
Entries
    Consolidated  

Net operating revenue

   $ 18,231     $ 994,824     $ 104,337     $ (18,231 )   $ 1,099,161  

Total operating expenses

     23,790       879,915       133,039       (18,231 )     1,018,513  
                                        

Income (loss) from operations

     (5,559 )     114,909       (28,702 )     —         80,648  

Gains (losses) on sales of property, plant and
equipment, net

     —         2,602       (17 )     —         2,585  

Interest expense

     (60,259 )     (1,337 )     (46 )     —         (61,642 )
                                        

Income (loss) from continuing operations before minority interests and income taxes

     (65,818 )     116,174       (28,765 )     —         21,591  

Minority interests in earnings of consolidated entities

     (217 )     —         —         —         (217 )
                                        

Income (loss) from continuing operations before income taxes

     (66,035 )     116,174       (28,765 )     —         21,374  

Income tax (expense) benefit

     25,578       (45,015 )     11,146       —         (8,291 )
                                        

Income (loss) from continuing operations

     (40,457 )     71,159       (17,619 )     —         13,083  

Loss from discontinued operations, net of income taxes

     —         —         (1,177 )     —         (1,177 )

Equity in the earnings of consolidated subsidiaries

     52,363       —         —         (52,363 )     —    
                                        

Net income (loss)

   $ 11,906     $ 71,159     $ (18,796 )   $ (52,363 )   $ 11,906  
                                        

Health Management Associates, Inc.

Condensed Consolidating Statement of Income

Three Months Ended June 30, 2006

(in thousands)

 

     Parent     Guarantor
Subsidiaries
    Non-Guarantor
Subsidiaries
    Elimination and
Consolidation
Entries
    Consolidated  

Net operating revenue

   $ 18,723     $ 901,578     $ 95,288     $ (18,723 )   $ 996,866  

Total operating expenses

     15,620       764,000       97,925       (18,723 )     858,822  
                                        

Income (loss) from operations

     3,103       137,578       (2,637 )     —         138,044  

Gains on sales of property, plant and equipment, net

     —         411       —         —         411  

Interest expense

     (10,005 )     (1,078 )     (205 )     —         (11,288 )
                                        

Income (loss) from continuing operations before minority interests and income taxes

     (6,902 )     136,911       (2,842 )     —         127,167  

Minority interests in earnings of consolidated entities

     (1,077 )     —         —         —         (1,077 )
                                        

Income (loss) from continuing operations before income taxes

     (7,979 )     136,911       (2,842 )     —         126,090  

Income tax (expense) benefit

     2,239       (52,026 )     1,080       —         (48,707 )
                                        

Income (loss) from continuing operations

     (5,740 )     84,885       (1,762 )     —         77,383  

Loss from discontinued operations, net of income taxes

     —         —         (78 )     —         (78 )

Equity in the earnings of consolidated subsidiaries

     83,045       —         —         (83,045 )     —    
                                        

Net income (loss)

   $ 77,305     $ 84,885     $ (1,840 )   $ (83,045 )   $ 77,305  
                                        

 

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HEALTH MANAGEMENT ASSOCIATES, INC.

NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

 

9. Condensed Consolidating Financial Statements (continued)

 

Health Management Associates, Inc.

Condensed Consolidating Statement of Income

Six Months Ended June 30, 2007

(in thousands)

 

     Parent    

Guarantor

Subsidiaries

    Non-Guarantor
Subsidiaries
    Elimination and
Consolidation
Entries
    Consolidated  

Net operating revenue

   $ 36,230     $ 2,020,430     $ 216,561     $ (36,230 )   $ 2,236,991  

Total operating expenses

     49,698       1,740,672       262,649       (36,230 )     2,016,789  
                                        

Income (loss) from operations

     (13,468 )     279,758       (46,088 )     —         220,202  

Gains (losses) on sales of property, plant and equipment, net

     703       2,582       (25 )     —         3,260  

Interest expense

     (92,200 )     (2,533 )     (183 )     —         (94,916 )

Refinancing and debt modification costs

     (761 )     —         —         —         (761 )
                                        

Income (loss) from continuing operations before minority interests and income taxes

     (105,726 )     279,807       (46,296 )     —         127,785  

Minority interests in earnings of consolidated entities

     (388 )     —         —         —         (388 )
                                        

Income (loss) from continuing operations before income taxes

     (106,114 )     279,807       (46,296 )     —         127,397  

Income tax (expense) benefit

     41,110       (108,425 )     17,940       —         (49,375 )
                                        

Income (loss) from continuing operations

     (65,004 )     171,382       (28,356 )     —         78,022  

Loss from discontinued operations, net of income taxes

     —         —         (1,077 )     —         (1,077 )

Equity in the earnings of consolidated subsidiaries

     141,949       —         —         (141,949 )     —    
                                        

Net income (loss)

   $ 76,945     $ 171,382     $ (29,433 )   $ (141,949 )   $ 76,945  
                                        

Health Management Associates, Inc.

Condensed Consolidating Statement of Income

Six Months Ended June 30, 2006

(in thousands)

 

     Parent     Guarantor
Subsidiaries
   

Non-Guarantor

Subsidiaries

    Elimination and
Consolidation
Entries
    Consolidated  

Net operating revenue

   $ 37,364     $ 1,823,423     $ 180,039     $ (37,364 )   $ 2,003,462  

Total operating expenses

     39,823       1,528,820       181,354       (37,364 )     1,712,633  
                                        

Income (loss) from operations

     (2,459 )     294,603       (1,315 )     —         290,829  

Gains (losses) on sales of property, plant and equipment, net

     (90 )     2,130       —         —         2,040  

Interest expense

     (17,142 )     (2,135 )     (400 )     —         (19,677 )

Refinancing and debt modification costs

     (4,628 )     —         —         —         (4,628 )
                                        

Income (loss) from continuing operations before minority interests and income taxes

     (24,319 )     294,598       (1,715 )     —         268,564  

Minority interests in earnings of consolidated entities

     (1,735 )     —         —         —         (1,735 )
                                        

Income (loss) from continuing operations before income taxes

     (26,054 )     294,598       (1,715 )     —         266,829  

Income tax (expense) benefit

     8,431       (111,948 )     652       —         (102,865 )
                                        

Income (loss) from continuing operations

     (17,623 )     182,650       (1,063 )     —         163,964  

Income from discontinued operations, net of income taxes

     —         —         554       —         554  

Equity in the earnings of consolidated subsidiaries

     182,141       —         —         (182,141 )     —    
                                        

Net income (loss)

   $ 164,518     $ 182,650     $ (509 )   $ (182,141 )   $ 164,518  
                                        

 

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HEALTH MANAGEMENT ASSOCIATES, INC.

NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

 

9. Condensed Consolidating Financial Statements (continued)

 

Health Management Associates, Inc.

Condensed Consolidating Statement of Cash Flows

Six Months Ended June 30, 2007

(in thousands)

 

     Parent     Guarantor
Subsidiaries
    Non-Guarantor
Subsidiaries
    Consolidated  

Net cash provided by continuing operating activities

   $ 12,190     $ 171,814     $ 39,624     $ 223,628  

Net cash used in continuing investing activities

     (14,972 )     (137,581 )     (19,940 )     (172,493 )

Net cash provided by (used in) continuing financing activities

     15,864       (8,685 )     (11,764 )     (4,585 )

Net cash used in discontinued operations

     —         —         (2,952 )     (2,952 )
                                

Net increase in cash and cash equivalents

     13,082       25,548       4,968       43,598  

Cash and cash equivalents at:

        

Beginning of the period

     73,162       (4,156 )     (2,192 )     66,814  
                                

End of the period

   $ 86,244     $ 21,392     $ 2,776     $ 110,412  
                                

Health Management Associates, Inc.

Condensed Consolidating Statement of Cash Flows

Six Months Ended June 30, 2006

(in thousands)

 

     Parent     Guarantor
Subsidiaries
    Non-Guarantor
Subsidiaries
    Consolidated  

Net cash provided by continuing operating activities

   $ 4,344     $ 215,560     $ 37,678     $ 257,582  

Net cash used in continuing investing activities

     (182,259 )     (166,534 )     (26,144 )     (374,937 )

Net cash provided by (used in) continuing financing activities

     128,597       (7,463 )     (1,312 )     119,822  

Net cash provided by discontinued operations

     —         —         3,491       3,491  
                                

Net increase (decrease) in cash and cash equivalents

     (49,318 )     41,563       13,713       5,958  

Cash and cash equivalents at:

        

Beginning of the period

     97,763       (39,039 )     11,185       69,909  
                                

End of the period

   $ 48,445     $ 2,524     $ 24,898     $ 75,867  
                                

 

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Table of Contents
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Results of Operations

Overview

At June 30, 2007, Health Management Associates, Inc. (“we,” “our” or “us”) operated 61 general acute care hospitals with a total of 8,668 licensed beds in non-urban communities in Alabama, Arkansas, Florida, Georgia, Kentucky, Mississippi, Missouri, North Carolina, Oklahoma, Pennsylvania, South Carolina, Tennessee, Texas, Virginia, Washington and West Virginia. Subsequent to June 30, 2007, we sold our two Virginia-based general acute care hospitals and certain affiliated entities with a combined total of 213 licensed beds.

During the quarter ended June 30, 2007, we made certain changes to our senior executive management. Burke W. Whitman, who had previously served as our Chief Operating Officer, was (i) named Chief Executive Officer, succeeding Joseph V. Vumbacco, and (ii) appointed to our Board of Directors. Mr. Vumbacco continues to serve as our Vice Chairman and a member of our Board of Directors. Additionally, Kelly E. Curry was named Executive Vice President and Chief Operating Officer.

Unless specifically indicated otherwise, the following discussion excludes our discontinued operations, which are identified at Note 5 to the Interim Condensed Consolidated Financial Statements in Item 1. Such discontinued operations were not material to our consolidated results of operations during the three and six months ended June 30, 2007 and 2006.

During the three months ended June 30, 2007, which we refer to as the 2007 Three Month Period, we experienced net operating revenue growth over the three months ended June 30, 2006, which we refer to as the 2006 Three Month Period, of approximately 10.3%. Such net operating revenue growth resulted primarily from (i) hospitals we acquired after March 31, 2006, (ii) our de novo general acute care hospital that opened on February 5, 2007, (iii) favorable case mix trends and (iv) improvements in reimbursement rates. Income from continuing operations and diluted earnings per share from continuing operations decreased by approximately $64.3 million and $0.27, respectively, during the 2007 Three Month Period when compared to the 2006 Three Month Period. Offsetting the increase in net operating revenue during the 2007 Three Month Period and ultimately causing a year-over-year reduction in income from continuing operations were increases in the provision for doubtful accounts and higher interest costs. We anticipate that the provision for doubtful accounts will continue to be a significant operating expense in future periods and may increase. Also adversely impacting income from continuing operations during the 2007 Three Month Period were increased payroll costs for newly hired physician employees.

At our hospitals that were in operation during all of the 2007 Three Month Period and the 2006 Three Month Period, which we refer to as same three month hospitals, emergency room visits and hospital admissions increased approximately 2.0% and 0.4%, respectively; however, corresponding same three month surgical volume declined by 1.6%. We believe that we will ultimately be successful in our efforts to reverse outmigration to non-urban hospitals in the communities where our hospitals operate. We recently implemented corrective action plans at certain hospitals to reverse negative operating trends, including hiring new management teams, renegotiating payor contracts and initiating patient/physician/employee satisfaction surveys. Furthermore, we continue to add physicians to our medical staffs and medical equipment to our hospitals in order to meet the needs of the communities that our hospitals serve. We believe that, over time, these investments, coupled with improving demographics, will yield increased hospital surgical volume, emergency room visits and admissions.

Outpatient services continue to play an important role in the delivery of health care in our markets, with approximately half of our net operating revenue during the 2007 Three Month Period and the 2006 Three Month Period generated on an outpatient basis. We continue to improve our emergency room and diagnostic imaging services to meet the needs of the communities that our hospitals serve and we have invested capital in nearly every one of our hospitals during the last five years in one of these two areas. As a result of this continuous focus, our same three month hospital adjusted admissions during the 2007 Three Month Period, which adjusts admissions for outpatient volume, increased approximately 2.0% when compared to the 2006 Three Month Period.

Economic conditions and changes in commercial health insurance benefit plans over the past several years have contributed to an increase in the number of uninsured and underinsured patients seeking health care in the United States. This general industry trend has affected us, with our self-pay same three month hospital admissions as a percent of total admissions increasing to approximately 7.9% during the 2007 Three Month Period, as compared to 7.3% during the 2006 Three Month Period. Additionally, we experienced an 80 basis point increase in same three month hospital self-pay admissions as a percent of total admissions when comparing the 2007 Three Month Period to the three months ended March 31, 2007. We regularly evaluate our policies and programs in light of these trends and other information available to us and consider changes or modifications to our policies as circumstances warrant.

 

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Table of Contents

Critical Accounting Policies and Estimates Update

Net Operating Revenue, Accounts Receivable and Allowances for Doubtful Accounts. As a result of a recent class action lawsuit settlement that involved billings to uninsured patients, we began discounting our gross charges to uninsured patients for non-elective procedures by 60% in February 2007 (no such discounts were previously provided by us). In connection with this change, we recorded approximately $153.3 million and $270.4 million of uninsured self-pay patient revenue discounts during the 2007 Three Month Period and the six months ended June 30, 2007, respectively. Concurrent with our new discounting policy, we modified our allowance for doubtful accounts reserve policy for self-pay patients. After the implementation of the discounting policy but prior to June 30, 2007, self-pay accounts that were aged less than 300 days from the date that the services were rendered were reserved at 60% of their discounted amount and, consistent with our other commercial and governmental payors, reserved at 100% when the account aged 300 days from the date of discharge. For a discussion of our corresponding allowance for doubtful accounts accounting policies prior to February 2007, see Note 1(g) to the consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2006.

As a result of (i) a recently completed cash collection analysis that evaluated the adequacy of the February 2007 self-pay reserve policy modification and (ii) deterioration in our self-pay accounts receivable balances, we concluded that it was necessary to reserve a greater portion of self-pay accounts receivable. Accordingly, effective June 30, 2007, we further modified our reserve policy for self-pay patients to increase our reserves for those accounts that are aged less than 300 days from the date that the services were rendered. As a result of this change in estimate, we recognized a $39.0 million increase in our provision for doubtful accounts during the 2007 Three Month Period and the six months ended June 30, 2007, thereby reducing net income and diluted earnings per share by approximately $23.9 million and $0.10, respectively, during both such periods. We believe that this change in self-pay patient allowances for doubtful accounts appropriately addresses our risk of collection pertaining to the accounts receivable balances after application of the 60% discount.

In the ordinary course of business, we provide services to patients who are financially unable to pay for their care. Accounts characterized as charity and indigent care are not recognized in net operating revenue. Prior to January 1, 2007, our policy and practice was to forego collection of a patient’s entire account balance upon determining that the patient qualifies under a hospital’s local charity care and/or indigent policy. Commencing January 1, 2007, we implemented a uniform company-wide policy wherein patient account balances are characterized as charity and indigent care only if the patient meets certain percentages of the federal poverty level guidelines. Local hospital personnel and our collection agencies pursue payments on accounts receivable from patients that do not meet such criteria. We monitor the levels of charity and indigent care provided by our hospitals and the procedures employed to identify and account for these patients.

Income Taxes. During June 2006, the Financial Accounting Standards Board (the “FASB”) issued Interpretation No. 48, Accounting for Uncertainty in Income Taxes, an interpretation of FASB Statement No. 109, (“FIN 48”). Among other things, FIN 48 prescribes a minimum recognition threshold that an income tax position must meet before it is recorded in the reporting entity’s financial statements. FIN 48 requires that the effects of such income tax positions be recognized only if, as of the balance sheet reporting date, it is “more likely than not” (i.e., more than a 50% likelihood) that the income tax position will be sustained based solely on its technical merits. When making this assessment, management must assume that the responsible taxing authority will examine the income tax position and have full knowledge of all relevant facts and other pertinent information. The new accounting guidance also clarifies the method of accruing for interest and penalties when there is a difference between the amount claimed, or expected to be claimed, on a company’s income tax returns and the benefits recognized in the financial statements. Additionally, FIN 48 requires significant new and expanded footnote disclosures in all annual periods.

We adopted FIN 48 with an effective date of January 1, 2007. Retrospective application of FIN 48 was prohibited. In accordance with the transitional provisions of FIN 48, we recorded a cumulative effect adjustment to reduce retained earnings by approximately $4.7 million on January 1, 2007. During the six months ended June 30, 2007, we recorded $1.5 million of unrecognized income tax benefits for current period tax positions. During the 2007 Three Month Period, we recognized $0.6 million of such previously unrecognized income tax benefit. The liabilities for unrecognized income tax benefits at June 30, 2007 and January 1, 2007 were approximately $34.1 million and $32.6 million, respectively.

See Note 6 to the Interim Condensed Consolidated Financial Statements in Item 1 for further discussion regarding our adoption of FIN 48.

Fair Value Measurements. During September 2006, the FASB issued Statement of Financial Accounting Standards No. 157, Fair Value Measurements, (“SFAS No. 157”), which, among other things, established a framework for measuring fair value and required supplemental disclosures about such fair value measurements. The modifications to current practice resulting from the application of this new accounting pronouncement primarily relate to the definition of fair value and the methods used to measure fair value. SFAS No. 157 is effective for fiscal years beginning after November 15, 2007 and interim periods within the year of adoption. We do not believe that the adoption of this new accounting standard will materially impact our financial position or results of operations.

 

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Table of Contents

2007 Three Month Period Compared to the 2006 Three Month Period

The tables below summarize our operating results for the 2007 Three Month Period and the 2006 Three Month Period.

 

     Three Months Ended June 30,  
     2007     2006  
     Amount    

Percent of

Net Operating
Revenue

    Amount    

Percent of

Net Operating
Revenue

 
     (in thousands)           (in thousands)        

Net operating revenue

   $ 1,099,161     100.0 %   $ 996,866     100.0 %

Operating expenses:

        

Salaries and benefits

     444,343     40.5       395,164     39.6  

Supplies

     149,862     13.6       138,397     13.9  

Provision for doubtful accounts

     150,629     13.7       90,116     9.0  

Depreciation and amortization

     53,937     4.9       43,762     4.4  

Rent expense

     21,058     1.9       20,714     2.1  

Other operating expenses

     198,684     18.1       170,669     17.1  
                            

Total operating expenses

     1,018,513     92.7       858,822     86.1  
                            

Income from operations

     80,648     7.3       138,044     13.9  

Other income (expense):

        

Gains on sales of property, plant and equipment, net

     2,585     0.2       411     —    

Interest expense

     (61,642 )   (5.6 )     (11,288 )   (1.1 )
                            

Income from continuing operations before minority interests and income taxes

     21,591     1.9       127,167     12.8  

Minority interests in earnings of consolidated entities

     (217 )   —         (1,077 )   (0.1 )
                            
        

Income from continuing operations before
income taxes

     21,374     1.9       126,090     12.7  

Provision for income taxes

     (8,291 )   (0.8 )     (48,707 )   (4.9 )
                            

Income from continuing operations

   $ 13,083     1.1 %   $ 77,383     7.8 %
                            
    

Three Months Ended

June 30,

   

Change

   

Percent
Change

 
     2007     2006      

Same Hospitals

        

Occupancy

     44.8 %   45.1 %     (30 ) bps*   n/a  

Patient days

     321,035     322,925       (1,890 )   (0.6 )%

Admissions

     76,104     75,770       334     0.4 %

Adjusted admissions

     130,120     127,578       2,542     2.0 %

Emergency room visits

     323,831     317,391       6,440     2.0 %

Total surgeries

     68,967     70,054       (1,087 )   (1.6 )%

Outpatient revenue percent

     47.6 %   50.1 %     (250 ) bps   n/a  

Inpatient revenue percent

     52.4 %   49.9 %     250   bps   n/a  

Total Hospitals

        

Occupancy

     44.2 %   44.8 %     (60 ) bps   n/a  

Patient days

     331,970     325,842       6,128     1.9 %

Admissions

     78,623     76,471       2,152     2.8 %

Adjusted admissions

     138,778     133,489       5,289     4.0 %

Emergency room visits

     336,090     325,303       10,787     3.3 %

Total surgeries

     71,123     70,935       188     0.3 %

Outpatient revenue percent

     48.1 %   51.6 %     (350 ) bps   n/a  

Inpatient revenue percent

     51.9 %   48.4 %     350   bps   n/a  

* basis points

 

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Table of Contents

Our net operating revenue during the 2007 Three Month Period was approximately $1,099.2 million as compared to $996.9 million during the 2006 Three Month Period. This change represented an increase of $102.3 million or 10.3%. Same three month hospitals provided approximately $67.8 million, or 66.3%, of the increase in net operating revenue as a result of increases in emergency room visits and reimbursement rates and favorable case mix trends. The remaining $34.5 million increase in net operating revenue was primarily attributable to the hospitals we acquired after March 31, 2006 and Physicians Regional Medical Center-Collier Boulevard, which opened on February 5, 2007.

Net operating revenue per adjusted admission at our same three month hospitals increased approximately 5.0% during the 2007 Three Month Period as compared to the 2006 Three Month Period. Contributing factors to such change included increased patient acuity and the favorable effects of renegotiated agreements with certain commercial providers.

Our provision for doubtful accounts during the 2007 Three Month Period, which includes the abovementioned $39.0 million of incremental expense for self-pay accounts, grew 470 basis points to 13.7% of net operating revenue compared to 9.0% of net operating revenue during the 2006 Three Month Period. Such increase was primarily attributable to (i) the increased prevalence of uninsured and underinsured patients in the mix of patients that we serve and (ii) the effects of the net operating revenue, accounts receivable and allowances for doubtful accounts policy modifications discussed at Note 7 to the Interim Condensed Consolidated Financial Statements in Item 1. Our consistently applied accounting policy is that accounts written off as charity and indigent care are not recognized in net operating revenue and, accordingly, such amounts have no impact on our provision for doubtful accounts. As a measure of our fiscal performance, we routinely aggregate amounts pertaining to our (i) provision for doubtful accounts, (ii) uninsured self-pay patient discounts and (iii) foregone/unrecognized revenue for charity and indigent care and then we divide the resulting total by the sum of our (i) net operating revenue, (ii) uninsured self-pay patient discounts and (iii) foregone/unrecognized revenue for charity and indigent care. We believe that this fiscal measure, which we refer to as our Uncompensated Patient Care Percentage, is important because it provides us with key information regarding the level of patient care for which we do not receive remuneration. During the 2007 Three Month Period and the 2006 Three Month Period, such percentage was determined to be 25.4% and 20.3%, respectively. The 510 basis point increase during the 2007 Three Month Period compared to the 2006 Three Month Period reflects, among other things, our increased volume of uninsured and underinsured patient activity.

Salaries and benefits as a percent of net operating revenue increased to 40.5% during the 2007 Three Month Period from 39.6% during the 2006 Three Month Period. Same three month hospital salaries and benefits increased from 38.2% of net operating revenue during the 2006 Three Month Period to 38.5% during the 2007 Three Month Period. These increases were partially attributable to an increase in total employed physicians that resulted, in part, from our May 1, 2006 acquisition of Cleveland Clinic-Naples Hospital (now known as Physicians Regional Medical Center-Pine Ridge).

Depreciation and amortization as a percent of net operating revenue increased from 4.4% during the 2006 Three Month Period to 4.9% during the 2007 Three Month Period. This increase primarily resulted from calendar year 2006 capital expenditures for renovation and expansion projects at certain of our facilities, new hospital construction and hospital replacement projects.

Other operating expenses as a percent of net operating revenue increased from 17.1% during the 2006 Three Month Period to 18.1% during the 2007 Three Month Period. In addition to increased costs for professional fees, repairs and maintenance and advertising during the 2007 Three Month Period, the percent increase was due to higher costs at hospitals we acquired after March 31, 2006 and our de novo general acute care hospital that opened on February 5, 2007.

Interest expense increased from approximately $11.3 million during the 2006 Three Month Period to $61.6 million during the 2007 Three Month Period. Such increase was primarily attributable to (i) borrowings of $2.75 billion in connection with the recapitalization of our balance sheet on March 1, 2007, (ii) Non-Put Payments, as defined and described in the Third Supplemental Indenture with respect to our 1.50% Convertible Senior Subordinated Notes due 2023, which effectively increased our interest expense during the 2007 Three Month Period by approximately $4.1 million, and (iii) $400.0 million of 6.125% Senior Notes due 2016 that we issued on April 21, 2006. Slightly offsetting these increases were reduced interest costs from our revolving credit agreements due to a lower average outstanding balance during the 2007 Three Month Period when compared to the 2006 Three Month Period. See “Liquidity-Capital Resources, Credit Facilities” below and Note 4 to the Interim Condensed Consolidated Financial Statements in Item 1 for discussion of our long-term debt arrangements.

Our effective income tax rates were approximately 38.8% and 38.6% during the 2007 Three Month Period and the 2006 Three Month Period, respectively.

 

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2007 Six Month Period Compared to the 2006 Six Month Period

The tables below summarize our operating results for the six months ended June 30, 2007 and 2006, which we refer to as the 2007 Six Month Period and the 2006 Six Month Period, respectively.

 

     Six Months Ended June 30,  
     2007     2006  
     Amount    

Percent of

Net Operating
Revenue

    Amount    

Percent of

Net Operating
Revenue

 
     (in thousands)           (in thousands)        

Net operating revenue

   $ 2,236,991     100.0 %   $ 2,003,462     100.0 %

Operating expenses:

        

Salaries and benefits

     897,557     40.1       787,774     39.3  

Supplies

     307,768     13.8       280,370     14.0  

Provision for doubtful accounts

     271,835     12.2       173,251     8.7  

Depreciation and amortization

     105,775     4.7       85,934     4.3  

Rent expense

     42,228     1.9       40,488     2.0  

Other operating expenses

     391,626     17.5       344,816     17.2  
                            

Total operating expenses

     2,016,789     90.2       1,712,633     85.5  
                            

Income from operations

     220,202     9.8       290,829     14.5  

Other income (expense):

        

Gains on sales of property, plant and equipment, net

     3,260     0.1       2,040     0.1  

Interest expense

     (94,916 )   (4.2 )     (19,677 )   (1.0 )

Refinancing and debt modification costs

     (761 )   —         (4,628 )   (0.2 )
                            

Income from continuing operations before minority interests and income taxes

     127,785     5.7       268,564     13.4  

Minority interests in earnings of consolidated entities

     (388 )   —         (1,735 )   (0.1 )
                            

Income from continuing operations before income taxes

     127,397     5.7       266,829     13.3  

Provision for income taxes

     (49,375 )   (2.2 )     (102,865 )   (5.1 )
                            

Income from continuing operations

   $ 78,022     3.5 %   $ 163,964     8.2 %
                            
     Six Months Ended June 30,    

Change

   

Percent
Change

 
     2007     2006      

Same Hospitals

        

Occupancy

     47.1 %   48.0 %     (90 ) bps*   n/a  

Patient days

     664,233     677,216       (12,983 )   (1.9 )%

Admissions

     156,156     156,773       (617 )   (0.4 )%

Adjusted admissions

     262,748     259,803       2,945     1.1 %

Emergency room visits

     649,212     631,882       17,330     2.7 %

Total surgeries

     137,629     140,640       (3,011 )   (2.1 )%

Outpatient revenue percent

     48.0 %   49.7 %     (170 ) bps   n/a  

Inpatient revenue percent

     52.0 %   50.3 %     170   bps   n/a  

Total Hospitals

        

Occupancy

     46.7 %   48.0 %     (130 ) bps   n/a  

Patient days

     696,055     687,341       8,714     1.3 %

Admissions

     163,334     159,101       4,233     2.7 %

Adjusted admissions

     283,999     273,029       10,970     4.0 %

Emergency room visits

     686,397     662,482       23,915     3.6 %

Total surgeries

     142,859     142,021       838     0.6 %

Outpatient revenue percent

     48.4 %   50.6 %     (220 ) bps   n/a  

Inpatient revenue percent

     51.6 %   49.4 %     220   bps   n/a  

* basis points

 

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Our net operating revenue during the 2007 Six Month Period was approximately $2,237.0 million as compared to $2,003.5 million during the 2006 Six Month Period. This change represented an increase of $233.5 million or 11.7%. Our hospitals that were in operation during all of the 2007 Six Month Period and the 2006 Six Month Period, which we refer to as the same six month hospitals, provided approximately $133.2 million, or 57.0%, of the increase in net operating revenue as a result of increases in emergency room visits and reimbursement rates and favorable case mix trends. The remaining $100.3 million increase in net operating revenue was primarily attributable to the hospitals we acquired after December 31, 2005 and Physicians Regional Medical Center-Collier Boulevard, which opened February 5, 2007.

Net operating revenue per adjusted admission at our same six month hospitals increased approximately 5.6% during the 2007 Six Month Period as compared to the 2006 Six Month Period. Contributing factors to such change included increased patient acuity and the favorable effects of renegotiated agreements with certain commercial providers.

Our provision for doubtful accounts during the 2007 Six Month Period, which includes the abovementioned $39.0 million of incremental expense for self-pay accounts, grew 350 basis points to 12.2% of net operating revenue compared to 8.7% of net operating revenue during the 2006 Six Month Period. Additionally, our Uncompensated Patient Care Percentage, which is described above under the heading “2007 Three Month Period Compared to the 2006 Three Month Period,” increased from 19.7% during the 2006 Six Month Period to 23.0% during the 2007 Six Month Period. These adverse trends were primarily attributable to (i) the increased prevalence of uninsured and underinsured patients in the mix of patients that we serve and (ii) the effects of the net operating revenue, accounts receivable and allowances for doubtful accounts policy modifications discussed at Note 7 to the Interim Condensed Consolidated Financial Statements in Item 1.

Salaries and benefits as a percent of net operating revenue increased to 40.1% during the 2007 Six Month Period from 39.3% during the 2006 Six Month Period. Same six month hospital salaries and benefits increased from 37.9% of net operating revenue during the 2006 Six Month Period to 38.3% during the 2007 Six Month Period. These increases were partially attributable to additional employed physicians, including those that joined us as a result of our May 1, 2006 acquisition of Cleveland Clinic – Naples Hospital.

Depreciation and amortization as a percent of net operating revenue increased from 4.3% during the 2006 Six Month Period to 4.7% during the 2007 Six Month Period. This increase primarily resulted from calendar year 2006 capital expenditures for renovation and expansion projects at certain of our facilities, new hospital construction and hospital replacement projects.

Other operating expenses as a percent of net operating revenue increased from 17.2% during the 2006 Six Month Period to 17.5% during the 2007 Six Month Period. In addition to increased costs for professional fees, repairs and maintenance and advertising during the 2007 Six Month Period, the percent increase was due to higher costs at hospitals we acquired after December 31, 2005 and our de novo general acute care hospital that opened on February 5, 2007.

Interest expense increased from approximately $19.7 million during the 2006 Six Month Period to $94.9 million during the 2007 Six Month Period. The principal factors causing such increase are the same as those set forth above under the heading “2007 Three Month Period Compared to the 2006 Three Month Period.” Slightly offsetting the 2007 Six Month Period interest expense increase were reduced interest costs from our revolving credit agreements due to a lower average outstanding balance during the 2007 Six Month Period when compared to the 2006 Six Month Period. See “Liquidity-Capital Resources, Credit Facilities” below and Note 4 to the Interim Condensed Consolidated Financial Statements in Item 1 for discussion of our long-term debt arrangements.

In connection with our repurchase of certain of our Exchange Zero-Coupon Convertible Senior Subordinated Notes due 2022 on January 31, 2006, we wrote off approximately $4.6 million of deferred financing costs during the 2006 Six Month Period. We also wrote off $0.8 million of such costs during the 2007 Six Month Period in connection with the termination of our predecessor revolving credit agreement and redemptions of certain of our convertible notes. Write-offs of deferred financing costs have been recorded as refinancing and debt modification costs in our Interim Condensed Consolidated Financial Statements in Item 1. See Note 4 to the Interim Condensed Consolidated Financial Statements for further discussion of our convertible note repurchases and recent changes to our debt structure.

Our effective income tax rates were approximately 38.8% and 38.6% during the 2007 Six Month Period and the 2006 Six Month Period, respectively.

 

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Liquidity, Capital Resources and Capital Expenditures

Liquidity

Our cash flows from continuing operating activities provide the primary source of cash for our ongoing business needs. Below is a summary of our recent cash flow activity (in thousands).

 

     Six Months Ended June 30,  
     2007     2006  

Sources (uses) of cash and cash equivalents:

    

Operating activities

   $ 223,628     $ 257,582  

Investing activities

     (172,493 )     (374,937 )

Financing activities

     (4,585 )     119,822  

Discontinued operations

     (2,952 )     3,491  
                

Net increase in cash and cash equivalents

   $ 43,598     $ 5,958  
                

Operating Activities

Our cash flows from continuing operating activities decreased approximately $34.0 million or 13.2% during the 2007 Six Month Period when compared to the 2006 Six Month Period. The decrease primarily related to (i) lower income from continuing operations during the 2007 Six Month Period compared to the 2006 Six Month Period, (ii) accounts receivable growth during the 2007 Six Month Period and (iii) payments of bonuses and incentive compensation during the 2007 Six Month Period. Offsetting these uses of cash were (i) a reduction of federal and state income tax payments of approximately $46.5 million during the 2007 Six Month Period compared to the 2006 Six Month Period and (ii) an increase in accounts payable during the 2007 Six Month Period. Business interruption insurance proceeds of approximately $2.7 million and $5.0 million were included in cash flows from continuing operating activities during the 2007 Six Month Period and the 2006 Six Month Period, respectively. Such amounts have generally been utilized to make minor repairs and fund remediation efforts at the hospitals impacted by hurricane and storm activity.

Investing Activities

Cash used in investing activities during the 2007 Six Month Period consisted primarily of (i) approximately $146.1 million for additions to property, plant and equipment, which principally consisted of renovation and expansion projects at certain of our facilities and capital expenditures for completion of the construction of Physicians Regional Medical Center-Collier Boulevard, (ii) $36.1 million that we paid for acquisitions of minority interests and other health care businesses and (iii) a net increase in restricted funds of $12.3 million. Offsetting these cash outlays were cash receipts of approximately $22.0 million from sales of property, plant and equipment and insurance recoveries. Insurance proceeds have generally been utilized for major repairs and property, plant and equipment replacement at the hospitals impacted by hurricane and storm activity.

During the 2006 Six Month Period, cash used in investing activities consisted primarily of (i) approximately $177.9 million paid for hospitals we acquired with effective acquisition dates of February 1, 2006, May 1, 2006 and June 1, 2006, (ii) a final working capital settlement payment of $4.7 million pertaining to an acquisition from a prior period, (iii) $176.3 million for additions to property, plant and equipment, which principally consisted of renovation and expansion projects at certain of our facilities, new hospital construction and capital expenditures for hospital replacement projects, and (iv) a net increase in restricted funds of $20.2 million. Offsetting these cash outlays were cash receipts of $4.2 million from sales of property, plant and equipment.

Financing Activities

Cash provided by financing activities during the 2007 Six Month Period included (i) net cash proceeds of approximately $2,706.6 million from borrowings under our New Credit Facilities (as described below) in order to finance our special cash dividend on March 1, 2007 and repay $275.0 million under our predecessor revolving credit agreement, (ii) cash proceeds from exercises of stock options of $24.7 million and (iii) investments by minority shareholders of $8.5 million in a joint venture with respect to Riverview Regional Medical Center. In addition to approximately $313.8 million of principal payments on long-term debt and capital lease obligations, which included repurchases of certain of our convertible debt securities and repayment of our predecessor revolving credit agreement, cash used by financing activities during the 2007 Six Month Period included the payment of our special cash dividend in the aggregate amount of $2,425.2 million and payments for financing costs of $3.3 million. See Note 4 to the Interim Condensed Consolidated Financial Statements in Item 1 for discussion of our long-term debt arrangements.

 

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Cash provided by financing activities during the 2006 Six Month Period included (i) borrowings of $435.0 million under our predecessor revolving credit agreement in order to finance our hospital acquisitions, certain income tax payments and our repurchase of a portion of our Exchange Zero-Coupon Convertible Senior Subordinated Notes due 2022 (the “New 2022 Notes”), (ii) net proceeds from our April 21, 2006 sale of $400.0 million of 6.125% Senior Notes due 2016 and (iii) cash proceeds from exercises of stock options of $5.2 million. As more fully discussed at Note 4 to the Interim Condensed Consolidated Financial Statements in Item 1, on January 31, 2006 we repurchased approximately $275.9 million of New 2022 Notes, which represented the accreted value thereof on such date. Additionally, cash used by financing activities during the 2006 Six Month Period included (i) principal repayments of $400.0 million on our predecessor revolving credit agreement, (ii) dividend payments of $28.9 million and (iii) distributions to minority shareholders of $1.9 million.

Discontinued Operations

The cash used by operating our discontinued operations during the 2007 Six Month Period was approximately $3.0 million. During the 2006 Six Month Period, cash provided by operating our discontinued operations was $3.5 million. We do not believe that the eventual exclusion of such amounts from our consolidated cash flows in future periods will have a material effect on our liquidity or financial position. See Note 5 to the Interim Condensed Consolidated Financial Statements in Item 1 for a discussion of our discontinued operations.

Days Sales Outstanding

On February 22, 2007, we announced a number of financial and quality objectives for the year ending December 31, 2007, including days sales outstanding, or DSO, which is calculated by dividing quarterly net operating revenue by the number of days in the quarter. The result is divided into the net accounts receivable balance at the end of the quarter to obtain our DSO. We believe that this statistic is an important measure of collections on our accounts receivable. Our DSO at June 30, 2007 was 52 days, which compares to 52 days and 53 days at March 31, 2007 and December 31, 2006, respectively, and is within our 2007 published DSO objective range of 50 days to 56 days. As a result of the abovementioned $39.0 million incremental increase in the provision for doubtful accounts for self-pay patients, our DSO at June 30, 2007 was reduced by approximately three days.

Income Taxes

Other than certain state net operating loss carryforwards, we believe that it is more likely than not that carrybacks, reversals of existing taxable temporary differences and future taxable income will allow us to realize the deferred tax assets that are recognized in our condensed consolidated balance sheets.

Capital Resources

Credit Facilities

New Senior Secured Credit Facilities. On March 1, 2007, we completed a recapitalization of our balance sheet (the “Recapitalization”) wherein we entered into agreements for $3.25 billion in new variable rate senior secured credit facilities (the “New Credit Facilities”) that closed on February 16, 2007. Such facilities were initially used to fund a special cash dividend of approximately $2.4 billion and repay all amounts outstanding (i.e., $275.0 million) under our predecessor revolving credit agreement. The New Credit Facilities consist of a seven-year $2.75 billion term loan (the “New Term Loan”) and a $500.0 million six-year revolving credit facility (the “New Revolving Credit Agreement”). The Recapitalization and the New Credit Facilities are discussed in further detail at Note 4 to the Interim Condensed Consolidated Financial Statements in Item 1.

The New Term Loan requires (i) quarterly principal payments to amortize 1% of the loan’s original face value during each year of the loan’s term and (ii) a balloon payment for the remaining outstanding loan balance at the termination of the agreement. The New Revolving Credit Agreement allows us to borrow up to $500.0 million, including standby letters of credit. During the New Revolving Credit Agreement’s six-year term, we are obligated to pay commitment fees based on the amounts available for borrowing. Amounts outstanding under the New Credit Facilities may be repaid at our option at any time, in whole or in part, without penalty.

 

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We can elect whether interest on the New Credit Facilities, which is generally payable quarterly in arrears, utilizes LIBOR or prime as its base rate. The effective interest rate includes a spread above our selected base rate and is subject to modification in the event that our debt ratings change. Additionally, we may elect differing base interest rates for the New Term Loan and the New Revolving Credit Agreement. Pursuant to the requirements of the agreements underlying the New Credit Facilities, during February 2007 we entered into a receive variable/pay fixed interest rate swap contract, which provides for us to pay a fixed interest rate of 6.7445% on the notional amount of the interest rate swap contract for the seven-year term of the New Term Loan. At June 30, 2007, approximately $36.0 million of the New Term Loan was not covered by the interest rate swap contract and, accordingly, such amount is subject to the New Credit Facilities’ variable interest rate provisions (i.e., an effective interest rate of approximately 7.1% on June 30, 2007 and for approximately 90 days thereafter).

Our effective interest rate on the variable rate New Revolving Credit Agreement, which is not covered by the aforementioned interest rate swap contract, was approximately 7.3% on August 3, 2007. Although there were no amounts outstanding under the New Revolving Credit Agreement on such date, standby letters of credit in favor of third parties of approximately $36.5 million reduced the amount available for borrowing under that credit facility to $463.5 million.

Pursuant to the terms and conditions of the New Credit Facilities, limitations are imposed on us regarding the manner in which we can redeem some or all of the 2023 Notes (as described below under the heading “Convertible Debt Securities”). Should we use future proceeds from the New Credit Facilities for such redemption, we must meet certain financial ratios and, in some circumstances, we must maintain a specified minimum availability under the New Revolving Credit Agreement. If we elect to borrow funds other than under the New Credit Facilities or issue equity securities in order to fund a redemption of some or all of the 2023 Notes, we will be subject to separate requirements, including, among other things, a requirement that we maintain compliance with certain financial ratios. Furthermore, as set forth under the New Credit Facilities, such additional borrowed funds must be in the form of either permitted subordinated indebtedness or permitted senior unsecured indebtedness.

We intend to fund the New Term Loan’s quarterly interest payments and its required annual principal payments of $27.5 million with available cash balances, cash provided by operating activities and, if necessary, borrowings under the New Revolving Credit Agreement.

Promissory Demand Note. We maintain a $20.0 million unsecured Demand Promissory Note in favor of a bank that is to be used as a working capital line of credit in conjunction with our cash management program. Pursuant to the terms and conditions of the Demand Promissory Note, we may borrow and repay, on a revolving basis, up to the principal face amount of the note. All principal and accrued interest outstanding under the Demand Promissory Note will be immediately due and payable upon the bank’s written demand. Absent such a demand, interest is payable monthly and determined using the LIBOR Market Index Rate, as that term is defined in the Demand Promissory Note, plus 0.75%. The Demand Promissory Note’s effective interest rate on August 3, 2007 was approximately 6.1%; however, there were no amounts outstanding thereunder on such date.

Senior Debt Securities

6.125% Senior Notes due 2016 (the “Senior Notes”). On April 21, 2006, we completed an underwritten public offering of $400.0 million of our Senior Notes. The Senior Notes mature on April 15, 2016 and bear interest at a fixed rate of 6.125% per annum, payable semi-annually in arrears on April 15 and October 15. We intend to fund our semi-annual interest payments with available cash balances, cash provided by operating activities and, if necessary, borrowings under the New Revolving Credit Agreement.

Convertible Debt Securities

1.50% Convertible Senior Subordinated Notes due 2023 (the “2023 Notes”). At June 30, 2007, approximately $574.7 million was outstanding under the 2023 Notes. The holders of the 2023 Notes may require us to repurchase such notes for their principal face value on August 1, 2008. Following the announcement of the Recapitalization, our credit ratings were downgraded, which constituted a triggering event under the 2023 Notes and caused such notes to become immediately convertible. Subsequent to June 30, 2007, no holders of the 2023 Notes have indicated to us an intent to convert their notes. Should some or all of the 2023 Notes be converted before August 1, 2008, we intend to fund such conversion with available cash balances, cash provided by operating activities and, if necessary, borrowings under the New Revolving Credit Agreement.

On June 30, 2006, we modified the indenture that governs the 2023 Notes. Such modification requires us to make aggregate cash payments to the noteholders equal to 4.375% per annum of the principal face amount of the outstanding 2023 Notes, in arrears, on February 1 and August 1 of each year. We intend to fund such payments with available cash balances, cash provided by operating activities and, if necessary, borrowings under the New Revolving Credit Agreement.

 

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Dividends

On January 17, 2007, we announced that our Board of Directors had declared a special cash dividend, payable on March 1, 2007, of $10.00 per share of common stock. This special cash dividend, which was a component of the Recapitalization, aggregated approximately $2.4 billion and was funded with the net proceeds from the New Term Loan. In light of the special cash dividend, all future dividend payments have been suspended indefinitely.

Standby Letters of Credit

At August 3, 2007, we maintained approximately $36.5 million of standby letters of credit in favor of third parties with various expiration dates through May 17, 2008. Should any or all of these letters of credit be drawn upon, we intend to satisfy such obligations with available cash balances, cash provided by operating activities and, if necessary, borrowings under the New Revolving Credit Agreement.

Capital Expenditures

Among other things, our long-term business strategy calls for us to acquire additional hospitals that meet our acquisition criteria. Historically, acquisitions of hospitals accounted for a significant portion of our capital expenditures in any given fiscal year and/or quarter. We generally fund acquisitions, replacement hospitals and other ongoing capital expenditure requirements with available cash balances, cash generated from operating activities, amounts available under revolving credit agreements and proceeds from long-term debt issuances, or a combination thereof. See Note 3 to the Interim Condensed Consolidated Financial Statements in Item 1 for discussion of our recently completed acquisitions.

A number of hospital renovation and/or expansion projects were underway at June 30, 2007. We do not believe that any of these projects are individually significant or that they represent, in the aggregate, a substantial commitment of our resources. We are contractually obligated to commence construction of a replacement hospital at our Monroe, Georgia location on or before September 13, 2008; however, the aggregate cost for such project has not yet been determined.

Hospital Divestitures

As more fully discussed at Note 5 to our Interim Condensed Consolidated Financial Statements in Item 1, we (i) sold two Virginia-based general acute care hospitals and certain affiliated entities on July 31, 2007 for $70.0 million, plus a working capital adjustment, and (ii) plan to divest two Arkansas-based general acute care hospitals and certain affiliated entities during 2007, however, the timing of such dispositions has not yet been determined. We intend to use the after-tax net proceeds from the July 31, 2007 sale to repay debt under the New Term Loan.

Contractual Obligations and Off-Balance Sheet Arrangements

As a result of the Recapitalization, our long-term debt contractual obligations changed materially from the amounts disclosed in Item 7 of our Annual Report on Form 10-K for the year ended December 31, 2006. Note 4 to the Interim Condensed Consolidated Financial Statements in Item 1 contains further discussion of recent changes to our debt structure and is incorporated herein by reference.

During the 2007 Six Month Period, there were no material changes to the off-balance sheet information provided by us in Item 7 of our Annual Report on Form 10-K for the year ended December 31, 2006.

Forward-Looking Statements

Certain statements contained in this Quarterly Report on Form 10-Q, including, without limitation, statements containing the words “believe,” “anticipate,” “intend,” “expect,” “may,” “plan,” “continue,” “should,” “project” and words of similar import, constitute “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. These statements may include projections of revenue, income or loss, capital expenditures, debt structure, capital structure, other financial items, statements regarding our plans and objectives for future operations and acquisitions, statements of future economic performance, statements of the assumptions underlying or relating to any of the foregoing statements, and statements which are other than statements of historical fact.

 

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Forward-looking statements are based on our current plans and expectations and involve known and unknown risks, uncertainties and other factors that may cause our actual results, performance, achievements or industry results to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. Such factors include, among other things, the risks and uncertainties identified by us under the heading “Risk Factors” in Item 1A of Part I of our Annual Report on Form 10-K for the year ended December 31, 2006. Furthermore, we operate in a continually changing business environment and new risk factors emerge from time to time. We cannot predict what these new risk factors may be, nor can we assess the impact, if any, of such new risk factors on our business or results of operations or the extent to which any factor or combination of factors may cause our actual results to differ materially from those expressed or implied by any of our forward-looking statements.

Undue reliance should not be placed on our forward-looking statements. Except as required by law, we disclaim any obligation to update any such factors or to publicly announce the results of any revisions to any of the forward-looking statements contained in this Quarterly Report on Form 10-Q in order to reflect new information, future events or other developments.

 

Item 3. Quantitative and Qualitative Disclosures About Market Risk.

There were no material changes to our quantitative and qualitative disclosures about market risks since December 31, 2006, except for the updates provided by us in Item 3 of Part I of our Quarterly Report on Form 10-Q for the three months ended March 31, 2007, which disclosures are incorporated herein by reference.

 

Item 4. Controls and Procedures.

(a) Evaluation Of Disclosure Controls And Procedures. Our President and Chief Executive Officer (principal executive officer) and our Senior Vice President and Chief Financial Officer (principal financial officer) evaluated our disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) as of the end of the period covered by this Quarterly Report on Form 10-Q. Based on this evaluation, our President and Chief Executive Officer and our Senior Vice President and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of such date.

(b) Changes In Internal Control Over Financial Reporting. There has been no change in our internal control over financial reporting that occurred during the fiscal quarter covered by this Quarterly Report on Form 10-Q that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

 

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PART II—OTHER INFORMATION

 

Item 1. Legal Proceedings.

Descriptions of material legal proceedings to which Health Management Associates, Inc. (“we,” “our” or “us”) and our subsidiaries are a party are set forth in Note 8 to the Interim Condensed Consolidated Financial Statements in Item 1 of Part I of this Report and are incorporated herein by reference.

 

Item 4. Submission of Matters to a Vote of Security Holders.

At our Annual Meeting of Stockholders held on May 15, 2007, our stockholders voted on the matters set forth below.

 

  1. The number of shares that voted for the election of each director and the number of shares that withheld authority to vote for each such director were as follows:

 

     Votes For    Votes
Withheld

William J. Schoen

   210,451,519    584,716

Joseph V. Vumbacco

   210,471,303    564,932

Kent P. Dauten

   210,423,011    613,224

Donald E. Kiernan

   210,586,831    449,404

Robert A. Knox

   209,736,167    1,300,068

William E. Mayberry, M.D.

   210,486,449    549,786

Vicki A. O’Meara

   210,549,540    486,695

William C. Steere, Jr.

   210,684,369    351,866

Randolph W. Westerfield, Ph.D.

   210,769,738    266,497

The nine abovementioned individuals were elected to serve as our directors and, together with Burke W. Whitman, they constitute our entire Board of Directors. Effective June 1, 2007, our Board of Directors increased its size to ten and appointed Mr. Whitman as a director to fill the resulting vacancy.

 

  2. Our stockholders voted to ratify the selection of Ernst & Young LLP as our independent registered public accounting firm. The number of shares that voted for, against and abstained from voting on the ratification of the selection or Ernst & Young LLP as our independent registered public accounting firm are as follows:

 

Votes For

  

Votes Against

  

Abstentions

210,512,087

   369,911    154,237

 

Item 6. Exhibits.

See Index to Exhibits beginning on page 32 of this Quarterly Report on Form 10-Q.

 

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

  HEALTH MANAGEMENT ASSOCIATES, INC.

Date: August 7, 2007

  By:  

/s/ Robert E. Farnham

    Robert E. Farnham
    Senior Vice President and Chief Financial Officer
    (Principal Financial Officer and Principal Accounting Officer)

 

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INDEX TO EXHIBITS

 

(3) (ii) Bylaws
      3.1    By-laws of Health Management Associates, Inc., as amended by its Board of Directors on May 15, 2007, previously filed and included as Exhibit 3.1 to the Company’s Current Report on Form 8-K/A dated May 15, 2007, is incorporated herein by reference.
(10) Material Contracts
  *10.1    Certain senior executive officer compensation information relative to performance-based measurement criteria for restricted stock awards under the Company’s 1996 Executive Incentive Compensation Plan, as amended, previously filed on the Company’s Current Report on Form 8-K dated March 28, 2007, is incorporated herein by reference.
  *10.2    Certain senior executive officer compensation information, previously filed on the Company’s Current Report on Form 8-K dated May 29, 2007, is incorporated herein by reference.
  *10.3    Certain senior executive officer compensation information, previously filed on the Company’s Current Report on Form 8-K dated June 14, 2007, is incorporated herein by reference.
(31) Rule 13a-14(a)/15d-14(a) Certifications
    31.1    Rule 13a-14(a)/15d-14(a) Certification of Principal Executive Officer.
    31.2    Rule 13a-14(a)/15d-14(a) Certification of Principal Financial Officer.
(32) Section 1350 Certifications
    32.1    Section 1350 Certifications.

* Management contract or compensatory plan or arrangement.

 

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