The following table sets forth our selected historical financial and operating data for, or as of the end of, each of the five years ended June 30, 2006 (including the predecessor and successor periods). The selected historical financial data as of and for each of the predecessor years ended June 30, 2002, 2003, and 2004, the combined predecessor and successor year ended June 30, 2005 and the year ended June 30, 2006 were derived from our audited consolidated financial statements that have been audited by Ernst & Young LLP, an independent registered public accounting firm. Comparability of the selected historical financial and operating data has been impacted by the timing of acquisitions completed during fiscal 2002, 2003, 2004 and 2005. Please read the section on “Impact of Acquisitions” included in “
The following discussion and analysis of our financial condition and results of operations covers periods both prior to and subsequent to the Merger (as discussed below). Accordingly, the discussion and analysis of historical periods do not reflect the significant impact of the Merger. We have presented the information for the year ended June 30, 2005 on a predecessor period and successor period combined basis to facilitate meaningful comparisons of those operating results to the years ended June 30, 2004 and June 30, 2006. You should read the following discussion together with our historical financial statements and related notes included elsewhere herein and the information set forth under “Item 6. Selected Financial Data.”
The discussion contains forward-looking statements that involve risks and uncertainties. For additional information regarding some of the risks and uncertainties that affect our business and the industry in which we operate, please read “Item 1A. - Risk Factors” included elsewhere herein. Our actual results may differ materially from those estimated or projected in any of these forward-looking statements.
Each of the markets we serve is unique. We believe that a key factor in increasing patient volumes is to provide the range of services that our patients need. Our strategy of developing market-focused regional healthcare systems provides us greater flexibility in improving the quality, convenience and efficiency of healthcare services. As we expand our service offerings and grow patient volumes, we seek to recruit and retain physicians and nurses and to invest resources in capital projects including upgrading our existing facility framework and expanding facilities. Expanding facilities may include constructing new facilities or increasing capacities at existing facilities. By the end of calendar 2006, we expect to have completed construction at two San Antonio hospitals and one Arizona hospital to expand emergency services, surgery and labor and delivery units. We have also begun expansion projects at three other hospitals that we expect to complete during fiscal 2007 and 2008.
Providing high-quality, efficient healthcare services to our patients begins with having skilled physicians, nurses and employees at our hospitals who share our ideals and beliefs. We plan to continue to invest heavily in training programs to provide upward mobility for our employees. These programs include expanded degree and designation programs in our nursing schools in San Antonio and Phoenix and development of a senior management training program intended to attract candidates both within and external to our existing hospitals. We believe the best physicians want to work with hospital management and nurses who are proven leaders and who are dedicated to service excellence.
Our goal is to recruit over 150 physicians to our facilities during fiscal 2007 with primary emphasis on family practice and internal medicine, internists, obstetrics and gynecology, cardiology and orthopedics. This recruiting effort will include many employed physicians, and we may provide incentives for many of the non-employed physicians to move their practices to our communities where primary or specialty care is needed.
We maintain residency programs at certain of our hospitals including a residency arrangement with the University of Chicago School of Medicine at our MacNeal and Weiss hospitals. We also intend to increase our participation, consistent with applicable laws, in the development of joint venture partnerships with physicians in those situations where such relationships fit our strategic objectives.
We expect to continue allocating resources to existing markets or to acquire hospitals in new markets where we can obtain significant market share and capture additional business from the aging U.S. population. According to the U.S. Census Bureau there were approximately 35 million Americans aged 65 or older in the United States in 2000, comprising approximately 12.4% of the total U.S. population. The number of these elderly persons is expected to climb to 40 million, or 13.0% of the total population by 2010 and to nearly 55 million or 16.3% of the total population by 2020. We believe our capital investment initiatives will position us to capitalize on this demographic trend. Growing our presence in the communities we serve will make our delivery of care more efficient, will provide greater flexibility in negotiations with managed care and other third party payers and will aid in our recruiting initiatives.
Acquiring acute care hospitals in urban and suburban markets that fit our strategic objectives is a key part of our business strategy. Since we have grown most years through acquisitions, it is difficult to make meaningful comparisons between our financial statements for certain of the fiscal periods presented. In addition, since we own a relatively small number of hospitals, even a single hospital acquisition can have a material effect on our overall operating performance. When we acquire a hospital, we generally implement a number of measures to lower costs, and we often make significant investments in the facility to expand services, strengthen the medical staff and improve our overall market position. The effects of these initiatives are not generally realized immediately. Therefore, the financial performance of a newly acquired hospital may adversely affect our overall performance in the short term.
Our revenues depend upon inpatient occupancy levels, outpatient procedures performed at our facilities, the ancillary services and therapy programs ordered by physicians and provided to patients and our ability to successfully negotiate appropriate rates for these services with third party payers. During the year ended June 30, 2006, we experienced a 6.6% increase in discharges and a 10.1% increase in hospital adjusted discharges compared to the same period in fiscal 2005 due to the acquisition of the Massachusetts hospitals. On a same hospital basis, period over period discharges and hospital adjusted discharges decreased by 2.5% and 1.7%, respectively.
Includes discharges under managed Medicare, managed Medicaid and other governmental managed plans in addition to commercial managed care plans.
We attribute the decrease in same hospital discharges to a general reduction in demand for inpatient healthcare services during the current year period as a result of fewer admissions for respiratory illnesses and decreases in rehabilitation discharges as a result of regulatory changes. We expect our inpatient volumes to improve over the long-term as a result of service expansion initiatives, new contracts negotiated with managed care providers and our market-driven management strategies. We also expect that as we complete our significant expansion projects, patient volumes will improve at those facilities where growth is currently constrained by physical plant limitations and patient throughput inefficiencies. However, the success of our growth initiatives is dependent upon maintaining the community’s confidence in our services and staying ahead of the competition in the markets we serve. Continued weakened demand for hospital healthcare services could negate these growth initiatives in the short-term.
The majority of our patient service revenues are based on negotiated, per diem or pre-determined payment structures. Our facilities’ gross charges typically do not reflect what the facilities are actually paid. In addition to volume factors described above, patient mix, acuity factors and pricing trends affect our patient service revenues. Net patient revenues per adjusted hospital discharge increased 7.6% from $6,899 during fiscal 2005 to $7,421 during fiscal 2006. This increase reflects improved reimbursement for services provided under negotiated managed care contracts, improved Medicare reimbursements and changes in the mix of services provided. Increases in levels of charity care and negotiated self-pay discounts also impact this statistic by decreasing revenues and decreasing the provision for doubtful accounts. On a same hospital basis, net patient revenues per adjusted hospital discharge increased by 8.1% to $7,468 during fiscal 2006 from $6,907 during fiscal 2005. We cannot assure you that future reimbursement rates, even if improved, will sufficiently cover potential increases in the cost of providing healthcare services to our patients.
(2) Includes accounts receivable balances for the Massachusetts hospitals acquired on December 31, 2004.
consolidated balance sheets for those respective periods because the balance sheet accounts receivable amounts are reduced by manual
Our combined allowance for bad debts and allowance for charity care covered 90.5% and 93.4% of self-pay accounts receivable as of June 30, 2005 and 2006, respectively.
Many states, including certain states in which we operate, have periodically reported budget deficits as a result of increased costs and lower than expected tax collections. Health and human service programs, including Medicaid and similar programs, represent a significant component of state spending. To address these budgetary concerns, certain states have decreased funding for these programs and other states may make similar funding cuts. These cuts may include tightened participant eligibility standards, reduction of benefits, enrollment caps or payment reductions. Additionally, pressure exists at the federal level to reduce Medicaid matching funds provided to states as evidenced by a budget resolution set forth by Congress in April 2005 calling for $10.0 billion in cuts to federal funding of the Medicaid program over a five-year period. We are unable to assess the financial impact of enacted or proposed state or federal funding cuts at this time.
The hospital industry continues to face a nationwide shortage of nurses. We have experienced particular difficulties in retaining and recruiting nurses in our metropolitan Phoenix, Arizona, and Orange County, California markets. As a result of this shortage, we have utilized more contract labor resources that are typically more costly and less reliable than employed nurses. We expect this shortage to continue for the foreseeable future. We expect to mitigate the effects of the nursing shortage by expanding our comprehensive nurse recruiting and retention program. This program includes the following key components, among others:
We operate the Baptist Health System School of Health Professions (“SHP”) in San Antonio, which offers eight different programs with the greatest enrollment in the professional nursing program. The SHP trains approximately 400 students each year, the majority of which we expect to choose permanent employment with us. SHP expects total enrollment for fall 2006 to increase by 99 students or 32.5% compared to fall 2005 enrollment. Plans are underway to transition SHP’s current diploma program to a degree granting program that will be more
attractive to potential students. SHP enrollment includes approximately 80 students in our metropolitan Phoenix market that are trained using state of the art distance learning technology maximizing utilization of SHP instructors. Students are provided with company-funded scholarships that cover tuition, books and fees in return for a commitment to work at one of our hospitals for a defined period of time. Should we be unsuccessful in our attempts to maintain adequate nursing staff for our present and future needs, our future operating results could be adversely impacted.
Medicare regulations and our principal managed care contracts are often complex and may include multiple reimbursement mechanisms for different types of services provided in our healthcare facilities. To obtain reimbursement for certain services under the Medicare program, we must submit annual cost reports and record estimates of amounts owed to or receivable from Medicare. These cost reports include complex calculations and estimates related to indirect medical education, reimbursable Medicare bad debts and other items that are often subject to interpretation that could result in payments that differ from our estimates. We make our estimates of amounts owed to or receivable from the Medicare program using the best information available to us and our interpretation of the applicable Medicare regulations. We include differences between original estimates and subsequent revisions to those estimates (including final cost report settlements) in the consolidated statements of operations in the period in which the revisions are made. During the years ended June 30, 2004, 2005 and 2006, we recorded increases to patient service revenues of $10.9 million, $6.1 million and $11.9 million, respectively, related to changes in estimated third party settlements as a result of receipt of notices of provider reimbursement or final audited cost reports. Additionally, updated regulations and contract negotiations occur frequently, which necessitates continual review of estimation processes by management. We believe that future adjustments to our current third party settlement estimates will not significantly impact our results of operations or statement of position.
Our ability to collect the self-pay portions of outstanding receivables is critical to our operating performance and cash flows. The allowance for doubtful accounts was approximately 24.0% and 26.0% of accounts receivable, net of contractual discounts, as of June 30, 2005 and 2006, respectively. The primary collection risk relates to uninsured patient accounts and patient accounts for which primary insurance has paid but patient deductibles or co-insurance portions remain outstanding. We estimate the allowance for doubtful accounts using a standard policy that reserves 100% of all accounts aged greater than 180 days subsequent to discharge date plus a pre-determined percentage of accounts receivable due from patients less than 180 days old. We adjust our estimate as necessary on a quarterly basis using a hindsight calculation that utilizes write-off data for all payer classes duringthe previous twelve-month period to estimate the allowance for doubtful accounts at a point in time. We also monitor cash collections and self-pay utilization. We believe that our standard policy is flexible to adapt to changing collection and self-pay utilization trends and our procedures for testing the standard policy provide timely and accurate information. Significant changes in payer mix, business office operations, general economic conditions or healthcare coverage provided by federal or state governments or private insurers may have a significant impact on our estimates and significantly affect our future operations and cash flows.
We classify accounts pending Medicaid approval as Medicaid accounts in our accounts receivable aging report and record a manual contractual allowance for these accounts equal to the average Medicaid reimbursement rate for that specific state. We have historically been successful in qualifying approximately 60% of submitted accounts for Medicaid coverage. In the event an account is not successfully qualified for Medicaid coverage and does not meet our charity guidelines, the previously recorded Medicaid contractual adjustment remains a revenue deduction (similar to a self-pay discount), and the remaining net account balance is reclassified to the self-pay category to be subjected to our allowance for doubtful accounts policy. If the account does not qualify for Medicaid coverage, but does qualify as charity care, the contractual adjustment is reversed and the gross account balance is recorded as a charity deduction.
We use an independent actuary to estimate our reserves for professional and general liability and workers compensation claims. Each reserve is comprised of estimated indemnity and expense payments related to: 1) reported events (“case reserves”) and 2) incurred but not reported (“IBNR”) events as of the end of the period. Management uses information from its risk managers and its best judgment to estimate case reserves. Actuarial IBNR estimates are dependent on multiple variables including our loss exposures, our self-insurance limits,
We believe that our tax return provisions are accurate and supportable, but certain tax matters require interpretations of tax law that may be subject to future challenge and may not be upheld under tax audit. To reflect the possibility that all of our tax positions may not be sustained, we maintain tax reserves that are subject to adjustment as updated information becomes available or as circumstances change. We record the impact of tax reserve changes to our income tax provision in the period in which the additional information, including the progress of tax audits, is obtained. We also estimate a valuation allowance to reduce deferred tax assets to the amount management believes is more likely than not to be realized in future periods. When establishing a valuation allowance, we consider all relative information including ongoing feasible tax planning strategies. We adjust our
valuation allowance estimate and record the impact of such change to our income tax provision in the period in which management determines that the realization of the deferred tax assets has changed.
Adjusted discharges-hospitals is used by management and certain investors as a general measure of combined hospital inpatient and outpatient volumes. Adjusted discharges-hospitals is computed by multiplying discharges by the sum of gross hospital inpatient and outpatient revenues and then dividing the result by gross hospital inpatient revenues. This computation enables management to assess hospital volumes by a combined measure of inpatient and outpatient utilization.
Adjusted patient days-hospitals is calculated by multiplying patient days by the sum of gross hospital inpatient and outpatient revenues and then dividing the result by gross hospital inpatient revenues. This computation is an indicator of combined inpatient and outpatient volumes.
Occupancy rate represents the percentage of hospital licensed beds occupied by patients. Occupancy rate provides a measure of the utilization of inpatient rooms.
Member lives represent the total number of enrollees in PHP, AAHP and MHP as of the end of the respective period.
Same hospital patient service revenues represent patient service revenues (excluding health plan premium revenues) from entities owned for the full 12 months of both years presented.
Same hospital discharges represent discharges for hospitals owned for the full 12 months of both years presented.
Same hospital average length stay represents average length of stay days for hospitals owned for the full 12 months of both years presented.
Same hospital net revenue per adjusted discharge-hospitals is calculated by dividing hospital net patient revenues by adjusted discharges-hospitals for those hospitals owned for the full 12 months of both years presented. This statistic measures the average net payment expected to be received for a patient’s stay in those hospitals owned during both respective periods.
Same hospital outpatient surgeries represent the number of surgeries performed at hospitals or ambulatory surgery centers owned for the full 12 months of both years presented, on an outpatient basis (patient overnight stays not necessary).
Year Ended June 30, 2006 Compared to the Year Ended June 30, 2005
Revenues. $247.4 million of the $383.8 million increase in total revenues during fiscal 2006 related to our acquisition of the Massachusetts hospitals, while same hospital revenues improved by $136.4 million. We experienced weakened demand for inpatient and outpatient healthcare services during fiscal 2006. Same hospital adjusted discharges decreased by 1.7% during fiscal 2006. Same hospital emergency room visits and outpatient surgeries decreased by 0.3% and 3.9%, respectively, during fiscal 2006. We attribute this weakened demand to multiple factors including a mild respiratory illness season, decreases in rehabilitation discharges as a result of regulatory changes, greater competition from other hospitals in recruiting and retaining quality physicians and the increase in the number of uninsured patients or those insured patients with higher coinsurance and deductible limits. Although our same hospital volumes declined during fiscal 2006, we realized an 8.1% increase in same hospital net revenue per adjusted discharge compared to fiscal 2005. We implemented successful service mix strategies and realized improved reimbursement from managed care payers and Medicare. We expect revenues growth to continue during fiscal 2007, although factors outside our control including patient demand for healthcare services and increased competition could limit such growth.
Salaries and benefits. Salaries and benefits as a percentage of total revenues decreased to 42.2% during fiscal 2006 from 45.6% during fiscal 2005. The decrease resulted primarily from a $95.7 million decrease in stock compensation. Absent the effect of stock compensation, this ratio would have increased to 42.1% during fiscal 2006 compared to 41.3% during fiscal 2005. Our fiscal 2006 salaries and benefits as a percentage of total revenues was adversely impacted by the additional six months of operations of the Massachusetts hospitals which incur higher salaries and benefits costs for approximately 1,550 unionized employees. On a same hospital basis, salaries and benefits excluding stock compensation as a percentage of total revenues decreased to 39.6% during fiscal 2006 compared to 39.9% during fiscal 2005.
The national nursing shortage hindered our ability to fully manage salaries and benefits. We experienced particular difficulty in retaining and recruiting nurses in our metropolitan Phoenix and Orange County markets and were required to utilize more costly and less efficient temporary nurse staffing. We believe the nursing shortage will persist during the foreseeable future. Additionally, state mandated nurse staffing ratios in California strain our nursing resources even further. We believe our comprehensive nursing recruiting and retention plan will mitigate the impact of the nursing shortage to a certain degree. However, should we be unsuccessful in our attempts to maintain employed nursing coverage adequate for our present and future needs, and especially if additional states in which we operate enact new laws mandating nurse staffing ratios, our salaries and wages costs could be materially adversely impacted.
Supplies. Supplies as a percentage of total revenues decreased to 16.2% during fiscal 2006 from 16.5% during fiscal 2005. Supplies as a percentage of patient service revenues decreased to 18.8% during fiscal 2006 compared to 19.3% during fiscal 2005. The year over year improvement in this ratio resulted from our efforts to increase utilization of our group purchasing organization and to implement our materials management strategies in Massachusetts. Because most of our growth strategies include expansion of high acuity services, we do not expect to realize significant future decreases in this ratio. We continue to streamline our materials management process, which should help offset acuity increases. However, price increases for pharmaceuticals and medical supplies, including the impact of increased use of drug-eluting stents, could have a significant adverse impact on future supply costs.
Medical claims expense. Medical claims expense as a percentage of premium revenues increased from 71.1% during fiscal 2005 to 72.1% during fiscal 2006 primarily as a result of the start of AAHP operations on January 1, 2006. Medical claims expense represents the amounts paid by the health plans for healthcare services provided to their members, including an estimate of incurred but not reported claims that is determined based upon lag data and other actuarial assumptions. Revenues and expenses between the health plans and our hospitals and related outpatient service providers of approximately $40.0 million, or 12.9% of gross health plan medical claims expense, were eliminated in consolidation during fiscal 2006.
Provision for doubtful accounts. During fiscal 2006, the provision for doubtful accounts as a percentage of patient service revenues remained consistent with that of fiscal 2005. During fiscal 2006, self-pay revenues as a percentage of net patient revenues decreased from 11.1% to 9.8%. Under our hindsight estimation methodology, our provision for doubtful accounts may be adversely affected by delays in the timing of non self-pay account collections period over period. Collecting outstanding self-pay accounts receivable remains difficult; however, we have experienced improved upfront cash collections and success in qualifying patients for coverage under Medicaid or similar programs. Our provision for doubtful accounts as a percentage of patient service revenues is reduced by our policy of deducting charity accounts from revenues at the time in which those accounts meet our charity care guidelines. On a combined basis, the provision for doubtful accounts and charity care deductions as a percentage of patient service revenues (prior to charity deductions) increased to 10.9% during fiscal 2006 compared to 10.4% during fiscal 2005.
Other. Depreciation and amortization as a percentage of total revenues increased to 4.0% during fiscal 2006 compared to 3.6% during fiscal 2005 as a result of our capital improvement and expansion initiatives. The increase in net interest as a percentage of total revenues to 4.2% during fiscal 2006 compared to 3.9% during fiscal 2005 resulted primarily from our $175.0 million delayed draw term loan borrowing in September 2005. We incurred significant debt extinguishment costs and Merger expenses related to the Merger during fiscal 2005 and recognized an impairment charge of $15.0 million during fiscal 2006 related to the excess carrying value of our California hospital asset group over our estimate of its fair value.
Income taxes. The effective tax rate increased from 30.1% in fiscal 2005 to 44.6% in fiscal 2006. This increase was due to certain Merger-related costs that were non-deductible for tax purposes during fiscal 2005 and nondeductible goodwill associated with the impairment charge in fiscal 2006.
Net income. The $91.0 million year over year increase in net income resulted from the increased revenues as described above in excess of increased expenses. Net income during fiscal 2005 was adversely affected by the significant Merger-related costs.
Revenues, exclusive of health plan premium and other non-hospital revenues, per adjusted discharge increased 6.5% during fiscal 2005. We successfully negotiated with managed care payers to receive favorable reimbursement for our services. The acuity of care required by our patients also affected this statistic.
Salaries and benefits. Salaries and benefits as a percentage of total revenues increased to 45.6% during fiscal 2005 from 41.6% during fiscal 2004. As a result of the Merger, stock compensation expense increased from $0.1 million during fiscal year 2004 to $97.4 million during fiscal 2005. Absent the effect of stock compensation, salaries and benefits as a percentage of revenues would have been 41.3% during fiscal 2005. On a same hospital basis, absent the effect of stock compensation, salaries and benefits as a percentage of total revenues decreased to 39.9% during fiscal 2005 as a result of our care management, nurse utilization and service expansion strategies. Our improvements in this same hospital ratio were offset by higher salaries and benefits in our newly-acquired Massachusetts hospitals, in which approximately 1,100 of our employees were unionized as of June 30, 2005.
Medical claims expense. Medical claims expense as a percentage of premium revenues decreased to 71.1% during fiscal 2005 compared to 72.1% during fiscal 2004. This ratio decreased primarily due to our change from a cash basis to an accrual basis for eliminating in consolidation the impact of healthcare services provided by our hospitals to enrollees in our health plans during fiscal 2005. Medical claims
expense represents the amounts paid by the health plans for healthcare services provided to their members, including an estimate of incurred but not reported claims that is determined based upon lag data and other actuarial assumptions. Revenues and expenses between the health plans and our hospitals and related outpatient service providers of approximately $36.6 million, or 13.4% of gross health plan medical claims expense, were eliminated in consolidation during fiscal 2005.
Other operating expenses. Other operating expenses include, among others, purchased services, insurance, property taxes, rents and leases, repairs and maintenance and utilities. Other operating expenses as a percentage of total revenues remained consistent year over year.
Income taxes. Our effective tax rate decreased from approximately 38.3% during fiscal 2004 to approximately 30.1% during fiscal 2005 primarily as a result of certain Merger-related costs that were not deductible for tax purposes.
Net income. The $118.2 million year over year decrease in net income resulted primarily from our improved operating results offset by increased interest expense and the Merger-related costs incurred during the current year.
At June 30, 2006, we had working capital of $149.7 million, including cash and cash equivalents of $123.6 million. Working capital at June 30, 2005 was $77.7 million. The increase in working capital was primarily due to the borrowing of the $175.0 million in delayed draw term loans in September 2005. Cash provided by operating activities decreased from $201.8 million during fiscal 2005 to $149.3 million during fiscal 2006. The significant decrease was due to positive cash flows of $108.3 million during fiscal 2005 related to the buildup of accounts payable and other liabilities compared to only $3.6 million of positive cash flows for these items in fiscal 2006 and a $21.9 million increase in net interest payments during fiscal 2006 compared to fiscal 2005. These changes were offset by $53.3 million in cash outflows during fiscal 2005 related to the buildup of accounts receivable at our Massachusetts hospitals. Our net revenue days in accounts receivable decreased from 53 days during fiscal 2005 to 51 days during fiscal 2006 as a result of improved upfront cash collections and business office efficiency initiatives.
Cash used in investing activities decreased from $324.3 million during fiscal 2005 to $245.4 million during fiscal 2006, primarily as a result of the $50.9 million of direct acquisition costs we paid during fiscal 2005 related to the Merger, the $87.7 million purchase price paid for the Massachusetts hospitals offset by a $46.3 million period over period increase in capital expenditures.
In addition to increasing the number of licensed beds by 33, the expansion project will allow for the utilization of an additional 67 previously licensed beds.
We anticipate spending a total of $230.0 million to $250.0 million in capital expenditures during fiscal 2007. This estimate includes the expansion projects mentioned above and all other renovation projects and technology upgrades at our facilities. These capital expenditures will be funded by cash flows from operations and availability under our revolving credit facility. We believe our capital expenditure program is sufficient to service, expand and improve our existing facilities to meet our quality objectives.
Cash provided by financing activities decreased from $151.6 million during fiscal 2005 to $140.5 million during fiscal 2006, due to the significant financing activities associated with the Merger on September 23, 2004.
We have outstanding $1,519.2 million in aggregate indebtedness and $207.2 million of available borrowing capacity under our revolving credit facility ($250.0 million net of outstanding letters of credit of $42.8 million). Our liquidity requirements are significant, primarily due to debt service requirements. The 9.0% Notes require semi-annual interest payments. However, prior to October 1, 2009, the interest expense on the 11.25% Notes will consist solely of non-cash accretions of principal.
Our previous senior secured credit facilities executed in September 2004 consisted of a revolving credit facility and the initial term loan facility. Our revolving credit facility provides for loans in a total principal amount of up to $250.0 million, and matures in September 2010. The initial term loan facility, which was scheduled to
mature in September 2011, provided for loans in a total principal amount of up to $800.0 million as follows: (1) $475.0 million borrowed on September 23, 2004 to finance the Merger, to refinance our then existing indebtedness and to pay fees and expenses relating thereto; (2) $150.0 million borrowed on December 31, 2004 and February 18, 2005 to finance the acquisition of the Massachusetts hospitals and for other general corporate purposes and (3) $175.0 million borrowed in September 2005 to fund capital expenditures and for other general corporate purposes.
The 2005 term loan facility borrowings bear interest at a rate equal to, at our option, a base rate plus 1.25% per annum or LIBOR plus 2.25% per annum. These rates reflect a savings of 1.0% per annum over the interest rate options for our previous initial term loan facility. The borrowings under the revolving credit facility currently bear interest at a rate equal to, at our option, a base rate plus 1.00% per annum or LIBOR plus 2.00% per annum. These rates are subject to increase by up to 0.50% per annum should our leverage ratio exceed certain designated levels.
As of June 30, 2006, we were in compliance with the debt covenant ratios as defined in our senior secured credit agreement, as follows.
The senior credit facilities and the indentures governing the 9.0% Notes and the 11.25% Notes limit our ability to:
• pay dividends on or make other distributions or repurchase our capital stock or make other restricted
California has a statute and regulations that require hospitals to meet certain seismic performance standards. Hospitals that do not meet the standards may be required to retrofit their facilities. We have filed our required compliance plans with the State of California. Assuming we continue to own our California hospitals, we expect to comply with the initial seismic requirements at all of our California facilities by 2013 and to incur approximately $14.8 million in costs to meet our compliance plan. Upon completion of the $14.8 million in improvements, our California facilities will be compliant with the seismic regulations and standards through 2029. We estimate that the majority of the square footage in our California facilities will be compliant with the seismic regulations and standards that come into effect during 2030 once we have completed our $14.8 million in improvements, but we are unable at this time to estimate our costs for full compliance with the 2030 requirements.
In recent years, an increasing number of legislative proposals have been introduced or proposed to Congress and in some state legislatures that would significantly affect the services provided by and reimbursement to healthcare providers in our markets. The cost of certain proposals would be funded in significant part by reduction