UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

 

(Mark One)

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

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

Commission File Number: 333-71934

 

VANGUARD HEALTH SYSTEMS, INC.

(Exact name of registrant as specified in its charter)

Delaware		62-1698183
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

20 Burton Hills Boulevard, Suite 100
Nashville, TN 37215
(Address and zip code of principal executive offices)

(615) 665-6000
(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed under 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. o Yes þ No *

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of the Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files.) Yes o No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

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

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

There were 751,234 shares of registrant’s common stock outstanding as of May 9, 2011 (all of which are privately owned and not traded on a public market).

 

 

VANGUARD HEALTH SYSTEMS, INC.
QUARTERLY REPORT ON FORM 10-Q
TABLE OF CONTENTS

		Page
PART I FINANCIAL INFORMATION
Item 1. Financial Statements (unaudited):
Condensed Consolidated Balance Sheets as of June 30, 2010 and March 31, 2011			3
Condensed Consolidated Statements of Operations for the three and nine months ended March 31, 2010 and 2011			4
Condensed Consolidated Statements of Equity for the nine months ended March 31, 2011			5
Condensed Consolidated Statements of Cash Flows for the for the nine months ended March 31, 2010 and 2011			6
Notes to Condensed Consolidated Financial Statements			7
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			41
Item 3. Quantitative and Qualitative Disclosures About Market Risk			60
Item 4. Controls and Procedures			61
PART II OTHER INFORMATION
Item 1A. Risk Factors			62
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			87
Item 6. Exhibits			87
Signature			88
Exhibit Index			89
Exhibit 31.1
Exhibit 31.2
Exhibit 32.1
Exhibit 32.2

PART I
FINANCIAL INFORMATION

Item 1.		Financial Statements.

VANGUARD HEALTH SYSTEMS, INC.

						(Unaudited)
		June 30, 2010				March 31, 2011
		(In millions, except share and
		per share amounts)
ASSETS
Current assets:
Cash and cash equivalents		$	257.6			$	502.6
Restricted cash			2.3				2.3
Accounts receivable, net of allowance for doubtful accounts of approximately $75.6 and $165.0, respectively			270.4				517.0
Inventories			49.6				83.8
Deferred tax assets			21.9				18.3
Prepaid expenses and other current assets			119.2				164.6
Total current assets			721.0				1,288.6
Property, plant and equipment, net of accumulated depreciation			1,203.8				1,795.9
Goodwill			649.1				786.9
Intangible assets, net of accumulated amortization			66.0				96.2
Deferred tax assets, noncurrent			50.0				48.1
Investments in securities			19.8				81.6
Other assets			19.9				64.9
Total assets		$	2,729.6			$	4,162.2
LIABILITIES AND EQUITY (DEFICIT)
Current liabilities:
Accounts payable		$	194.8			$	313.8
Accrued salaries and benefits			144.9				243.4
Accrued health plan claims and settlements			149.8				168.3
Accrued interest			41.4				32.0
Other accrued expenses and current liabilities			76.9				161.6
Current maturities of long-term debt			8.2				13.0
Total current liabilities			616.0				932.1
Professional and general liability and workers compensation reserves			83.6				320.3
Pension benefit obligation, less current portion			—				202.8
Other liabilities			31.6				127.5
Long-term debt, less current maturities			1,743.8				2,766.1
Commitments and contingencies
Equity (deficit):
Vanguard Health Systems, Inc. stockholders’ equity (deficit):
Common Stock of $.01 par value; 1,000,000 shares authorized; 749,104 and 750,224 issued and outstanding at June 30, 2010 and March 31, 2011, respectively			—				—
Additional paid-in capital (distributions in excess of paid-in capital)			354.9				(88.5	)
Accumulated other comprehensive income (loss)			(2.5	)			0.9
Retained deficit			(105.9	)			(106.9	)
Total Vanguard Health Systems, Inc. stockholders’ equity (deficit)			246.5				(194.5	)
Non-controlling interests			8.1				7.9
Total equity (deficit)			254.6				(186.6	)
Total liabilities and equity		$	2,729.6			$	4,162.2

See accompanying notes.

VANGUARD HEALTH SYSTEMS, INC.

		Three months ended March 31,								Nine months ended March 31,
		2010				2011				2010				2011
		(In millions, except share and per share amounts)
Patient service revenues		$	646.7			$	1,305.7			$	1,890.5			$	2,747.8
Premium revenues			211.4				213.9				628.0				646.3
Total revenues			858.1				1,519.6				2,518.5				3,394.1
Costs and Expenses:
Salaries and benefits (includes stock compensation of of $0.6, $0.7, $3.5 and $3.6, respectively)			327.0				650.9				962.6				1,381.2
Health plan claims expense			168.1				169.1				499.9				508.0
Supplies			114.0				207.8				339.4				462.3
Provision for doubtful accounts			40.8				111.1				113.0				214.1
Rents and leases			10.9				15.2				32.8				37.9
Other operating expenses			107.4				237.6				330.6				501.5
Depreciation and amortization			34.3				55.8				101.9				131.6
Interest, net			29.9				48.0				84.7				117.9
Impairment and restructuring charges			—				5.1				43.1				6.0
Debt extinguishment costs			73.2				—				73.2				—
Acquisition related expenses			—				6.9				—				11.9
Other			0.9				0.9				3.5				3.0
Income (loss) from continuing operations before income taxes			(48.4	)			11.2				(66.2	)			18.7
Income tax benefit (expense)			16.5				(4.4	)			18.2				(11.7	)
Income (loss) from continuing operations			(31.9	)			6.8				(48.0	)			7.0
Loss from discontinued operations, net of taxes			(0.5	)			(3.2	)			(1.9	)			(5.4	)
Net income (loss)			(32.4	)			3.6				(49.9	)			1.6
Less: Net income attributable to non-controlling interests			(0.4	)			(0.8	)			(2.1	)			(2.6	)
Net income (loss) attributable to Vanguard Health Systems, Inc. stockholders		$	(32.8	)		$	2.8			$	(52.0	)		$	(1.0	)
Amounts attributable to Vanguard Health Systems, Inc. stockholders:
Income (loss) from continuing operations, net of taxes		$	(32.3	)		$	6.0			$	(50.1	)		$	4.4
Loss from discontinued operations, net of taxes			(0.5	)			(3.2	)			(1.9	)			(5.4	)
Net income (loss) attributable to Vanguard Health Systems, Inc. stockholders		$	(32.8	)		$	2.8			$	(52.0	)		$	(1.0	)
Earnings (loss) per share attributable to Vanguard Health Systems, Inc. stockholders
Basic
Continuing operations		$	(43.10	)		$	7.98			$	(66.85	)		$	5.77
Discontinued operations			(0.63	)			(4.28	)			(2.50	)			(7.23	)
		$	(43.74	)		$	3.70			$	(69.35	)		$	(1.45	)
Diluted
Continuing operations		$	(43.10	)		$	6.99			$	(66.85	)		$	5.03
Discontinued operations			(0.63	)			(3.75	)			(2.50	)			(6.30	)
		$	(43.74	)		$	3.24			$	(69.35	)		$	(1.27	)
Weighted average shares:
Basic			749,243				749,664				749,449				749,288
Diluted			749,243				856,843				749,449				859,430

See accompanying notes.

VANGUARD HEALTH SYSTEMS, INC.

		Vanguard Health Systems, Inc. Stockholders
										Additional
										Paid-In Capital				Accumulated
										(Distributions				Other								Non-				Total
		Common Stock								in excess of				Comprehensive				Retained				Controlling				Equity
		Shares				Amount				paid-in capital)				Income (loss)				Deficit				Interests				(Deficit)
		(In millions, except share amounts)
Balance at June 30, 2010			749,104			$	—			$	354.9			$	(2.5	)		$	(105.9	)		$	8.1			$	254.6
Stock compensation (non-cash)			—				—				3.6				—				—				—				3.6
Dividend to equity holders			—				—				(447.2	)			—				—				—				(447.2	)
Issuance of common stock			1,120				—				0.2				—				—				—				0.2
Distributions paid to non-controlling interests			—				—				—				—				—				(2.8	)			(2.8	)
Comprehensive income:
Change in fair value of auction rate securities (net of tax)			—				—				—				1.9				—				—				1.9
Change in fair value of available for sale investments (net of tax)			—				—				—				1.5				—				—				1.5
Net income (loss)			—				—				—				—				(1.0	)			2.6				1.6
Total comprehensive income (loss)															3.4				(1.0	)			2.6				5.0
Balance at March 31, 2011			750,224			$	—			$	(88.5	)		$	0.9			$	(106.9	)		$	7.9			$	(186.6	)

See accompanying notes.

VANGUARD HEALTH SYSTEMS, INC.

		Nine months ended March 31,
		2010				2011
		(In millions)
Operating activities:
Net income (loss)		$	(49.9	)		$	1.6
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Loss from discontinued operations			1.9				5.4
Depreciation and amortization			101.9				131.6
Provision for doubtful accounts			113.0				214.1
Amortization of loan costs			4.1				4.3
Accretion of principal on notes			6.1				10.6
Loss on disposal of assets			0.4				0.9
Debt extinguishment costs			73.2				—
Acquisition related expenses			—				11.9
Stock compensation			3.5				3.6
Deferred income taxes			(20.0	)			6.5
Impairment loss			43.1				0.9
Realized loss on investments			—				0.1
Changes in operating assets and liabilities, net of the impact of acquisitions:
Accounts receivable			(132.5	)			(326.2	)
Inventories			(0.9	)			(1.3	)
Prepaid expenses and other current assets			(12.8	)			39.2
Accounts payable			40.2				32.8
Accrued expenses and other liabilities			49.3				79.4
Net cash provided by operating activities — continuing operations			220.6				215.4
Net cash used in operating activities — discontinued operations			(1.9	)			(5.4	)
Net cash provided by operating activities			218.7				210.0
Investing activities:
Acquisitions and related expenses, net of cash acquired			(1.5	)			(463.9	)
Capital expenditures			(111.1	)			(139.1	)
Proceeds from asset dispositions			1.5				1.6
Net proceeds from sale of investments in securities			—				110.9
Other			(0.3	)			(3.7	)
Net cash used in investing activities			(111.4	)			(494.2	)
Financing activities:
Payments of long-term debt and capital lease obligations			(1,557.4	)			(6.6	)
Proceeds from debt borrowings			1,751.3				1,011.2
Payments of refinancing costs and fees			(90.1	)			(25.7	)
Dividends to equity holders			—				(447.2	)
Repurchases of stock			(300.6	)			—
Payments related to derivative instrument with financing element			(6.0	)			—
Other financing activities			(2.4	)			(2.5	)
Net cash provided by (used in) financing activities			(205.2	)			529.2
Net increase (decrease) in cash and cash equivalents			(97.9	)			245.0
Cash and cash equivalents, beginning of period			308.2				257.6
Cash and cash equivalents, end of period		$	210.3			$	502.6
Supplemental cash flow information:
Net cash paid for interest		$	72.7			$	116.1
Net cash paid (received) for income taxes		$	(13.2	)		$	0.5

See accompanying notes.

VANGUARD HEALTH SYSTEMS, INC.

(Unaudited)

1. BUSINESS AND BASIS OF PRESENTATION

Business

Vanguard Health Systems, Inc. (“Vanguard”) is an investor-owned healthcare company whose affiliates own and operate hospitals and related healthcare businesses in urban and suburban areas. As of March 31, 2011, Vanguard’s affiliates owned and managed 26 acute care and specialty hospitals with 6,280 licensed beds and related outpatient service locations complementary to the hospitals providing healthcare services in San Antonio, Texas; metropolitan Detroit, Michigan; metropolitan Phoenix, Arizona; metropolitan Chicago, Illinois; and Massachusetts. Vanguard also owns managed health plans in Chicago, Illinois and Phoenix, Arizona and two surgery centers in Orange County, California.

Basis of Presentation

The accompanying condensed consolidated financial statements include the accounts of subsidiaries and affiliates controlled by Vanguard. Vanguard generally defines control as the ownership of the majority of an entity’s voting interests. Vanguard also consolidates any entities for which it receives the majority of the entity’s expected returns or is at risk for the majority of the entity’s expected losses based upon its investment or financial interest in the entity. All material intercompany accounts and transactions have been eliminated. Certain prior year amounts from the accompanying condensed consolidated financial statements have been reclassified to conform to current year presentation. The majority of Vanguard’s expenses are “cost of revenue” items. Costs that could be classified as general and administrative include certain Vanguard corporate office costs, which approximated $15.5 million, $17.0 million, $47.2 million and $50.7 million for the three and nine months ended March 31, 2010 and 2011, respectively.

The unaudited condensed consolidated financial statements as of March 31, 2011 and for the three and nine months ended March 31, 2010 and 2011 have been prepared in conformity with accounting principles generally accepted in the United States for interim reporting and in accordance with Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and notes required by accounting principles generally accepted in the United States for complete financial statements. In the opinion of management, the unaudited condensed consolidated financial statements reflect all adjustments (consisting of normal recurring adjustments) necessary for a fair presentation of the financial position and the results of operations for the periods presented. The results of operations for the periods presented are not necessarily indicative of the expected results for the fiscal year ending June 30, 2011. The interim unaudited condensed consolidated financial statements should be read in connection with the audited consolidated financial statements as of and for the year ended June 30, 2010 included in Vanguard’s Annual Report on Form 10-K (“10-K”) filed with the Securities and Exchange Commission on August 26, 2010. The accompanying condensed consolidated balance sheet at June 30, 2010, has been derived from the audited consolidated financial statements included in the 10-K.

Use of Estimates

In preparing Vanguard’s financial statements in conformity with accounting principles generally accepted in the United States, management makes estimates and assumptions that affect the amounts recorded or classification of items in the condensed consolidated financial statements and accompanying notes. Actual results could differ from those estimates.

2. BUSINESS COMBINATIONS

Acquisition of Westlake and West Suburban

Effective August 1, 2010, Vanguard acquired substantially all of the assets used in the operations of Westlake Hospital in Melrose Park, Illinois and West Suburban Medical Center in Oak Park, Illinois, (collectively, “the Resurrection Facilities”) from certain affiliates of Resurrection Health Care. These assets included the two general acute care hospital facilities with a combined 458 licensed beds, the real property on which each facility is located, their respective current assets (except cash and certain other current assets) and outpatient facilities and other healthcare assets related to each such hospital, such as outpatient facilities located in River Forest, Illinois and three physician clinics located in Oak Park and Melrose Park, Illinois. The cash purchase price for the acquired assets was approximately $45.3 million.

VANGUARD HEALTH SYSTEMS, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (continued)

Under the acquisition method of accounting, the purchase price of the Resurrection Facilities was allocated to the identifiable assets acquired and liabilities assumed based upon their estimated fair values as of August 1, 2010. Vanguard has completed the purchase price allocation based upon its estimates of fair value of assets acquired based upon appraisal information and liabilities assumed at the acquisition date and has determined that no goodwill should be recorded related to this acquisition.

The fair values of assets acquired and liabilities assumed at the date of acquisition were as follows (in millions):

Accounts receivable		$	14.6
Inventories			3.7
Prepaid expenses and other current assets			2.8
Property and equipment			34.6
Other assets			1.0
Total assets acquired			56.7
Accounts payable			3.6
Other current liabilities			7.8
Total liabilities assumed			11.4
Net assets acquired		$	45.3

Acquisition of Arizona Heart Hospital and Institute

In October 2010, Vanguard completed the purchase of substantially all of the assets and assumed certain liabilities used in the operation of the 59-bed Arizona Heart Hospital and of the Arizona Heart Institute (collectively “Arizona Heart”), both located in Phoenix, Arizona, for an aggregate purchase price of approximately $39.0 million, which was funded with cash on hand.

Under the acquisition method of accounting, the purchase price of Arizona Heart was allocated to the identifiable assets acquired and liabilities assumed based upon their estimated fair values as of the acquisition dates. Vanguard has completed the purchase price allocation based upon its estimates of fair value of assets acquired and liabilities assumed at the acquisition date. The excess of the purchase price over the estimated fair value of the identifiable assets acquired and liabilities assumed was recorded as goodwill. Goodwill recorded for this acquisition represents the business value of the entity not specifically related to net assets acquired. The $0.9 million of goodwill was assigned to our acute care services segment and is expected to be deductible for tax purposes.

Acquisition of The Detroit Medical Center

Effective January 1, 2011, Vanguard purchased substantially all of the assets of The Detroit Medical Center, a Michigan non-profit corporation, and certain of its affiliates (collectively, “DMC”), which assets consist primarily of eight acute care and specialty hospitals in the Detroit, Michigan metropolitan area and related healthcare facilities. The eight hospitals are DMC Children’s Hospital of Michigan, DMC Detroit Receiving Hospital, DMC Harper University Hospital, DMC Huron Valley-Sinai Hospital, DMC Hutzel Women’s Hospital, DMC Rehabilitation Institute of Michigan, DMC Sinai-Grace Hospital and DMC Surgery Hospital, with a combined 1,734 licensed beds. The cash purchase price for the acquired DMC assets paid at closing was $363.3 million and was funded with cash on hand. Vanguard has completed its preliminary purchase price allocation based upon its estimates of fair value of assets acquired and liabilities assumed at the acquisition date. However, certain adjustments to acquired property, plant and equipment values may become necessary as additional appraisal information becomes available.

VANGUARD HEALTH SYSTEMS, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (continued)

Vanguard acquired all of DMC’s assets (other than donor-restricted assets and certain other assets) and assumed all of its liabilities (other than its outstanding bonds, certain other debt and certain other liabilities). The assumed liabilities include a pension liability under a “frozen” defined benefit pension plan of DMC (estimated at approximately $228.0 million as of December 31, 2010), which liability Vanguard expects to fund over 15 years after closing based upon current actuarial assumptions and estimates (which assumptions and assessments are subject to periodic adjustment). Vanguard also committed to spend $350.0 million during the five years subsequent to closing for the routine capital needs of the DMC facilities and an additional $500.0 million in capital expenditures during this same five-year period, which latter amount relates to a specific project list agreed to between the DMC board of trustees and Vanguard. To collateralize this commitment, concurrent with the closing of the transaction, Vanguard placed into escrow for the benefit of DMC a warrant certificate representing warrants in respect of 400,000 shares of Vanguard’s common stock (the “Warrant Shares”). The number of Warrant Shares outstanding is reduced proportionately as Vanguard expends capital or escrows cash related to its capital commitments. Vanguard commenced the process of replacing the Warrant Shares with a contingent note payable during April 2011, see “Subsequent Events” (note 16) for additional details.

The fair values of assets acquired and liabilities assumed at the acquisition date were as follows (in millions):

Cash		$	6.4
Accounts receivable			117.7
Inventories			26.7
Prepaid expenses and other current assets			94.7
Property and equipment			527.2
Goodwill			131.5
Other intangible assets			10.7
Investments in securities			166.4
Other assets			33.0
Total assets acquired			1,114.3
Accounts payable			80.9
Other current liabilities			160.5
Pension benefit obligation			228.0
Other non-current liabilities			281.6
Total liabilities assumed			751.0
Net assets acquired		$	363.3

Acquisition related expenses for DMC and other acquisitions were $11.9 million for the nine months ended March 31, 2011 and are included in other expenses on the accompanying condensed consolidated statements of operations.

Pro Forma Information

Revenues of approximately $715.3 million and income from continuing operations before income taxes of $19.5 million for the combined Resurrection acquisition (effective August 1, 2010) and the DMC acquisition (effective January 1, 2011) are included in Vanguard’s consolidated results of operations for the nine months ended March 31, 2011. The following table provides certain pro forma financial information for Vanguard as if these acquisitions occurred at the beginning of fiscal year 2010 (in millions).

		Nine months ended March 31,
		2010				2011
Total revenues		$	4,187.0			$	4,453.3
Income (loss) from continuing operations, before income taxes		$	(133.0	)		$	49.0

VANGUARD HEALTH SYSTEMS, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (continued)

The pro forma results for the Arizona Heart acquisition are not included, as Vanguard deems those results to be insignificant for disclosure.

3. FAIR VALUE MEASUREMENTS

Vanguard’s financial assets recorded at fair value on a recurring basis primarily relate to investments in available-for-sale securities held by one of its captive insurance subsidiaries. The following tables present information about the assets that are measured at fair value on a recurring basis as of March 31, 2011 and June 30, 2010 (in millions). The following tables also indicate the fair value hierarchy of the valuation techniques Vanguard utilized to determine such fair values. In general, fair values determined by Level 1 inputs utilize quoted prices (unadjusted) in active markets for identical assets. Vanguard considers a security that trades at least weekly to have an active market. Fair values determined by Level 2 inputs utilize data points that are observable, such as quoted prices, interest rates and yield curves. Fair values determined by Level 3 inputs are unobservable data points for the asset, and include situations where there is little, if any, market activity for the asset. Vanguard’s policy is to recognize transfers between levels as of the actual date of the event or change in circumstances that caused the transfer.

						Quoted Prices				Significant
						in Active				Other				Significant
						Markets for				Observable				Unobservable
						Identical Assets				Inputs				Inputs
		March 31, 2011				(Level 1)				(Level 2)				(Level 3)
Cash and cash equivalents		$	13.5			$	0.4			$	13.1			$	—
Auction rate securities			14.3				—				—				14.3
United States government obligations			1.0				—				1.0				—
Asset and mortgage-backed securities			4.6				—				4.6				—
Corporate bonds			26.5				—				26.5				—
Common stock — domestic			21.1				9.1				12.0				—
Common stock — international			0.3				0.1				0.2				—
Preferred stock — international			0.3				0.3				—				—
Investments in securities		$	81.6			$	9.9			$	57.4			$	14.3

Quoted Prices

Significant

in Active

Other

Significant

Markets for

Observable

Unobservable

Identical Assets

Inputs

Inputs

June 30, 2010

(Level 1)

(Level 2)

(Level 3)

Auction rate securities

$

19.8

$

—

$

—

$

19.8

The following tables provide reconciliations of the beginning and ending balances for the nine months ended March 31, 2011 and the year ended June 30, 2010 for those fair value measurements using significant Level 3 unobservable inputs (in millions).

														Increase in
		Balance at								Realized loss				Fair Value,				Balance at
		June 30, 2010				Redemptions				on redemptions				pre tax				March 31, 2011
Auction rate securities		$	19.8			$	(8.4	)		$	(0.1	)		$	3.0			$	14.3

VANGUARD HEALTH SYSTEMS, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (continued)

														Increase in
		Balance at								Realized loss				Fair Value,				Balance at
		June 30, 2009				Redemptions				on redemptions				pre tax				June 30, 2010
Auction rate securities		$	21.6			$	(1.8	)		$	—			$	—			$	19.8

Investments in securities

As of March 31, 2011, Vanguard held $81.6 million in total available for sale investments in debt and equity securities, which are included in investments in securities on the condensed consolidated balance sheet. The investments include securities held within one of Vanguard’s wholly-owned captive insurance subsidiaries acquired in the DMC acquisition. Investments in corporate bonds, valued at approximately $26.5 million at March 31, 2011, consist of corporate bonds and other fixed income investments with average maturities of approximately 11.4 years as of March 31, 2011.

During the three months ended March 31, 2011, Vanguard recorded net proceeds of approximately $101.4 million for the sale a portion of the DMC securities. As of March 31, 2011, approximately $67.3 million of the acquired DMC investments were reflected on the accompanying condensed consolidated balance sheet in investments in securities. It is Vanguard’s policy to calculate the realized gain or loss on sales of investments by using the amortized cost basis, as determined by specific identification. The amortized cost basis of these investments was approximately $65.0 million as of March 31, 2011.

The investments acquired from DMC are classified as “available-for-sale” and are recorded at fair value. The investment securities are held for the purpose of providing the funding source to pay professional liability claims covered by the captive insurance subsidiary. Vanguard adjusts the book value of these investments to fair value on a quarterly basis.

As of March 31, 2011, Vanguard held $14.3 million in total available for sale investments in auction rate securities (“ARS”) backed by student loans, which are included in investments in securities on the accompanying condensed consolidated balance sheets. These ARS are accounted for as long-term available for sale securities. The par value of the remaining interest in ARS was $15.9 million at March 31, 2011. The ARS have maturity dates ranging from 2039 to 2043 and are guaranteed by the U.S. government at approximately 96%-98% of the principal and accrued interest under the Federal Family Education Loan Program or other similar programs. Due to the lack of market liquidity and other observable market inputs for these ARS, Vanguard utilized Level 3 inputs to estimate the $14.3 million fair value of these ARS. Valuations from forced liquidations or distressed sales are inconsistent with the definition of fair value set forth in the pertinent accounting guidance, which assumes an orderly market. For its valuation estimate, management utilized a discounted cash flow analysis that included estimates of the timing of liquidation of these ARS and the impact of market risks on exit value. Vanguard does not currently intend to sell and does not believe it is more likely than not it will be required to sell these ARS prior to liquidity returning to the market and their fair value substantially recovering to par value. During the nine months ended March 31, 2011, approximately $8.4 million of the ARS have been redeemed for cash.

Since the beginning of fiscal year 2008, Vanguard has recognized realized losses of approximately $0.7 million, $0.6 million of which related to a failed tender offer for $10.0 million principal amount of ARS during the quarter ended September 30, 2008 and $0.1 million of which related to a redemption of $6.2 million principal amount of ARS at 98% of par value during the quarter ended December 31, 2010. During this time, Vanguard also recognized temporary impairments of $1.1 million ($0.5 million, net of taxes). These temporary impairments are included in accumulated other comprehensive income (loss) (“AOCL”) on the accompanying condensed consolidated balance sheets.

Cash and Cash Equivalents and Restricted Cash

The carrying amounts reported for cash and cash equivalents and restricted cash approximate fair value because of the short-term maturity of these instruments.

VANGUARD HEALTH SYSTEMS, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (continued)

Accounts Receivable and Accounts Payable

The carrying amounts reported for accounts receivable and accounts payable approximate fair value because of the short-term maturity of these instruments.

Long-Term Debt

The fair values of the 8.0% Notes and the 2010 term loan facility (both defined in Note 7) as of March 31, 2011 were approximately $1,204.4 million and $814.0 million, respectively, based upon stated market prices. The fair values for the 7.750% Senior Notes and the 10.375% Senior Discount Notes (both as defined in Note 7) were approximately $354.4 million and $474.3 million, respectively, based upon significant unobservable inputs including interest rates, maturity and credit ratings as of March 31, 2011. The fair values are subject to change as market conditions change.

4. STOCK BASED COMPENSATION

Vanguard has a stock-based compensation plan, the 2004 Stock Incentive Plan (“the 2004 Plan”), which provides for the issuance of options, stock appreciation rights, restricted stock units or other stock-based awards in respect of Vanguard’s common stock. As of March 31, 2011, the 2004 Plan allows the granting of stock-based awards for the issuance of up to 145,611 shares of the common stock of Vanguard to its employees and certain other grantees. As of March 31, 2011, Vanguard has issued only stock options and restricted stock units under the 2004 Plan.

The stock options may be granted as Liquidity Event Options, Time Options or Performance Options at the discretion of the Board or a committee thereof. The Liquidity Event Options vest 100% at the eighth anniversary of the date of grant and have an exercise price per share as determined by the Board or a committee thereof. The Time Options vest 20% at each of the first five anniversaries of the date of grant and have an exercise price per share as determined by the Board or a committee thereof. The Performance Options vest 20% at each of the first five anniversaries of the date of grant and, as of March 31, 2011, have an exercise price currently equal to $2,005.95 per share or as determined by the Board or a committee thereof. The Time Options and Performance Options immediately vest upon a change of control, while the Liquidity Event Options immediately vest only upon a qualifying Liquidity Event, as defined in the 2004 Plan. The exercise prices of the options outstanding were reduced commensurate with the dividends paid to the equity holders in both January 2010 and January 2011. As of March 31, 2011, 104,405 options were outstanding under the 2004 Plan.

The restricted stock units may be granted as Time Vesting Units or Liquidity Event Units. The Time Vesting Units vest 20% on each of the first five anniversaries of the date of grant, while the Liquidity Event Units vest on the eighth anniversary of the date of grant subject to accelerated vesting upon the occurrence of a qualifying Liquidity Event. Upon a change of control, all Time Vesting Units fully vest, and Liquidity Event Units fully vest if the change in control constitutes a Liquidity Event. As of March 31, 2011, 4,207 restricted stock units were outstanding under the 2004 Plan.

Vanguard records stock-based employee compensation granted prior to July 1, 2006 using a minimum value method. For grants dated July 1, 2006 and subsequent, Vanguard records stock-based employee compensation using a Black-Scholes-Merton model. For stock options included in the Black-Scholes-Merton valuation model, Vanguard used historical stock price information of certain peer group companies for a period of time equal to the expected option life period to determine estimated volatility. Vanguard determined the expected life of the stock options by averaging the contractual life of the options and the vesting period of the options. The estimated fair value of options is amortized to expense on a straight-line basis over the options’ vesting period.

Vanguard recognized salaries and benefits expense related to the 2004 Plan of $0.6 million, $0.7 million, $3.5 million and $3.6 million, during the three and nine months ended March 31, 2010 and 2011, respectively.

VANGUARD HEALTH SYSTEMS, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (continued)

5. IMPAIRMENT AND RESTRUCTURING CHARGES

During the nine months ended March 31, 2011, Vanguard determined that a $0.9 million ($0.6 million net of taxes) impairment charge was necessary to write-down the book value of real property associated with a hospital that is being replaced in its Texas market to fair value. The remaining net impairment and restructuring charges for the nine months ended March 31, 2011 include approximately $5.1 million of restructuring charges related to employee severance and related costs during the three months ended March 31, 2011.

Vanguard’s restructuring charges during the three and nine months ended March 31, 2011 represent the elimination of approximately forty positions for the realignment of certain corporate services. As of March 31, 2011 accrued expenses on the accompanying condensed consolidated balance sheet included approximately $4.9 million of severance and related expenses that Vanguard expects to fund over the next eighteen months.

6. GOODWILL AND INTANGIBLE ASSETS

The following table provides information regarding the intangible assets, including deferred loan costs, included on the accompanying condensed consolidated balance sheets as of June 30, 2010 and March 31, 2011 (in millions).

		Gross Carrying Amount								Accumulated Amortization
Class of Intangible Asset		June 30, 2010				March 31, 2011				June 30, 2010				March 31, 2011
Amortized intangible assets:
Deferred loan costs		$	39.1			$	64.8			$	1.9			$	6.2
Contracts			31.4				31.4				18.0				20.4
Physician income and other guarantees			31.1				34.2				25.0				28.1
Other			8.8				10.0				2.7				3.4
Subtotal			110.4				140.4				47.6				58.1
Indefinite-lived intangible assets:
License and accreditation			3.2				13.9				—				—
Total		$	113.6			$	154.3			$	47.6			$	58.1

Amortization expense for contract-based intangibles and other intangible assets during the nine month period ended March 31, 2010 and 2011 was approximately $3.8 million and $3.1 million, respectively.

Amortization of deferred loan costs of $4.1 million and $4.3 million during the nine months ended March 31, 2010 and 2011, respectively, is included in net interest. Vanguard capitalized approximately $25.7 million of additional loan costs during the nine months ended March 31, 2011 associated with the additional debt offerings in July 2010 and January 2011 (see Note 7). Amortization of physician income and other guarantees of $3.7 million and $3.1 million for the nine months ended March 31, 2010 and 2011, respectively, is included in other operating expenses.

During the three months ended March 31, 2011, goodwill increased by $136.7 million related to acute care services segment acquisitions.

7. FINANCING ARRANGEMENTS

A summary of Vanguard’s long-term debt as of June 30, 2010 and March 31, 2011 follows (in millions).

		June 30, 2010				March 31, 2011
10.375% Senior Discount Notes due 2016		$	—			$	453.2
8.0% Senior Unsecured Notes due 2018			937.0				1,155.6
7.750% Senior Notes due 2019			—				350.0
Term loans payable under credit facility due 2016			815.0				808.9
Capital leases and other long term debt			—				11.4
			1,752.0				2,779.1
Less: current maturities			(8.2	)			(13.0	)
		$	1,743.8			$	2,766.1

VANGUARD HEALTH SYSTEMS, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (continued)

8.0% Senior Unsecured Notes

On January 29, 2010, Vanguard completed a comprehensive refinancing plan (the “Refinancing”). In connection with the Refinancing on January 29, 2010, two of Vanguard’s wholly owned subsidiaries, Vanguard Health Holding Company II, LLC and Vanguard Holding Company II, Inc. (collectively, the “Issuers”), completed a private placement of $950.0 million ($936.3 million cash proceeds) 8% Senior Unsecured Notes due February 1, 2018 (“8.0% Notes”). Interest on the 8.0% Notes is payable semi-annually in August and February of each year. The 8.0% Notes are unsecured general obligations of the Issuers and rank pari passu in right of payment to all existing and future senior unsecured indebtedness of the Issuers. The $13.7 million discount is accreted to par over the term of the 8.0% Notes. All payments on the 8.0% Notes are guaranteed jointly and severally on a senior unsecured basis by Vanguard and its domestic subsidiaries, other than those subsidiaries that do not guarantee the obligations of the borrowers under the 2010 credit facilities (as defined below).

On or after February 1, 2014, the Issuers may redeem all or part of the 8.0% Notes at various redemption prices given the date of redemption as set forth in the indenture governing the 8.0% Notes. In addition, the Issuers may redeem up to 35% of the 8.0% Notes prior to February 1, 2013 with the net cash proceeds from certain equity offerings at a price equal to 108% of their principal amount, plus accrued and unpaid interest. The Issuers may also redeem some or all of the 8.0% Notes before February 1, 2014 at a redemption price equal to 100% of the principal amount thereof, plus a “make-whole” premium and accrued and unpaid interest.

On May 7, 2010, the Issuers exchanged substantially all of their outstanding 8.0% Notes for new 8.0% senior unsecured notes with identical terms and conditions, except that the exchange notes were registered under the Securities Act of 1933. Terms and conditions of the exchange offer were set forth in the registration statement on Form S-4 filed with the Securities and Exchange Commission on March 3, 2010, that became effective on April 1, 2010.

On July 14, 2010, the Issuers entered into a Second Supplemental Indenture, under which the Issuers co-issued (the “Add-on Notes Offering”) $225.0 million ($216.6 million cash proceeds) aggregate principal amount of 8.0% Senior Unsecured Notes due 2018 (the “Add-on Notes”), which are guaranteed on a senior unsecured basis by Vanguard and its domestic subsidiaries, other than those subsidiaries that do not guarantee the obligations of the borrowers under the 2010 credit facilities. The Add-on Notes Offering was made under the indenture governing the 8.0% Notes that were issued on January 29, 2010 as part of the Refinancing. The Add-on Notes were issued at an offering price of 96.25% plus accrued interest, if any, from January 29, 2010. The discount of $8.4 million is accreted to par over the remaining term of the Add-on Notes. The proceeds from the Add-on Notes were used to finance, in part, Vanguard’s acquisition of substantially all the assets of DMC and to pay fees and expenses incurred in connection with the foregoing.

Prior to June 30, 2011, the Issuers expect to exchange substantially all of its outstanding Add-on Notes for new 8.0% senior unsecured notes with identical terms and conditions, except that the exchange notes will be registered under the Securities Act of 1933. Terms and conditions of the exchange offer were set forth in the registration statement on Form S-4 filed with the Securities and Exchange Commission on April 8, 2011, that became effective on May 4, 2011.

7.750% Senior Notes

On January 26, 2011, the Issuers issued an aggregate principal amount of $350.0 million of senior notes due 2019 (the “Senior Notes”), in a private placement. The Issuers’ obligations under the Senior Notes were fully and unconditionally guaranteed on a senior basis by Vanguard, Vanguard Health Holding Company I, LLC and certain subsidiaries of VHS Holdco II.

The Senior Notes bear interest at a rate of 7.750% per annum. Vanguard will pay cash interest semi-annually in arrears on February 1 and August 1 of each year, beginning on August 1, 2011. The Senior Notes mature on February 1, 2019. Vanguard used the proceeds from the Senior Notes for general corporate purposes, including acquisitions, and to pay the related transaction fees and expenses of the offering and the offering of the Senior Discount Notes, defined below.

VANGUARD HEALTH SYSTEMS, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (continued)

Prior to June 30, 2011, the Issuers expect to exchange substantially all of its outstanding Senior Notes for new 7.750% senior notes with identical terms and conditions, except that the exchange notes will be registered under the Securities Act of 1933. Terms and conditions of the exchange offer were set forth in the registration statement on Form S-4 filed with the Securities and Exchange Commission on April 8, 2011, that became effective on May 4, 2011.

10.375% Senior Discount Notes

On January 26, 2011, Vanguard issued senior discount notes due 2016 with a stated principal amount at maturity of approximately $747.2 million generating approximately $444.7 million of gross proceeds (the “Senior Discount Notes”), in a private placement. The Senior Discount Notes are not guaranteed by any of Vanguard’s subsidiaries.

The Senior Discount Notes had an initial accreted value of $602.23 per $1,000 stated principal amount at maturity and were issued at a price of $595.08 per $1,000 stated principal amount at maturity. No cash interest will accrue on the Senior Discount Notes, but the Senior Discount Notes will accrete at a rate of 10.375% per annum, compounded semi-annually on February 1 and August 1 of each year, such that the accreted value will equal the stated principal amount at maturity on February 1, 2016. Vanguard used the proceeds from the offering of the Senior Discount Notes to pay a dividend of approximately $447.2 million ($593.58 per common share) to its equity holders.

Prior to June 30, 2011, Vanguard expects to exchange substantially all of its outstanding Senior Discount Notes for new 10.375% senior discount notes with identical terms and conditions, except that the exchange notes will be registered under the Securities Act of 1933. Terms and conditions of the exchange offer were set forth in the registration statement on Form S-4 filed with the Securities and Exchange Commission on April 8, 2011, that became effective on May 4, 2011.

Credit Facility Debt

In connection with the Refinancing on January 29, 2010, two of Vanguard’s wholly owned subsidiaries, Vanguard Health Holding Company II, LLC and Vanguard Holding Company II, Inc. (collectively, the “Co-borrowers”), entered into new senior secured credit facilities (the “2010 credit facilities”) with various lenders and Bank of America, N.A. as administrative agent, and repaid all amounts outstanding under the previous credit facility. The 2010 credit facilities include a six-year term loan facility (the “2010 term loan facility”) in the aggregate principal amount of $815.0 million and a five-year $260.0 million revolving credit facility (the “2010 revolving facility”).

In addition, subject to the receipt of commitments by existing lenders or other financial institutions and the satisfaction of certain other conditions, the Co-borrowers may request an incremental term loan facility to be added to the 2010 term loan facility. The Co-borrowers may also seek to increase the borrowing availability under the 2010 revolving facility to an amount larger than $260.0 million, subject to the receipt of commitments by existing lenders or other financial institutions for such increased revolving capacity and the satisfaction of other conditions. Vanguard’s remaining borrowing capacity under the 2010 revolving facility, net of letters of credit outstanding, was $223.9 million as of March 31, 2011.

The 2010 term loan facility bears interest at a rate equal to, at Vanguard’s option, LIBOR (subject to a 1.50% floor) plus 3.50% per annum or a base rate plus 2.50% per annum. The interest rate applicable to the 2010 term loan facility was approximately 5.0% as of March 31, 2011. Vanguard also makes quarterly principal payments equal to one-fourth of one percent of the outstanding principal balance of the 2010 term loan facility and will continue to make such payments until maturity of the term debt.

Any future borrowings under the 2010 revolving facility will bear interest at a rate equal to, at Vanguard’s option, LIBOR plus 3.50% per annum or a base rate plus 2.50% per annum, both of which are subject to a decrease of up to 0.25% dependent upon Vanguard’s consolidated leverage ratio. Vanguard may utilize the 2010 revolving facility to issue up to $100.0 million of letters of credit ($36.1 million of which were outstanding at March 31, 2011). Vanguard also pays a commitment fee to the lenders under the 2010 revolving facility in respect of unutilized commitments thereunder at a rate equal to 0.50% per annum. Vanguard also pays customary letter of credit fees under this facility.

VANGUARD HEALTH SYSTEMS, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (continued)

The 2010 credit facilities contain numerous covenants that restrict Vanguard or its subsidiaries from completing certain transactions and also include limitations on capital expenditures, a minimum interest coverage ratio requirement and a maximum leverage ratio requirement. Vanguard was in compliance with each of these debt covenants as of March 31, 2011. Obligations under the credit agreement are unconditionally guaranteed by Vanguard and Vanguard Health Holding Company I, LLC (“VHS Holdco I”) and, subject to certain exceptions, each of VHS Holdco I’s wholly-owned domestic subsidiaries (the “U.S. Guarantors”). Obligations under the credit agreement are also secured by substantially all of the assets of Vanguard Health Holding Company II, LLC (“VHS Holdco II”) and the U.S. Guarantors including a pledge of 100% of the membership interests of VHS Holdco II, 100% of the capital stock of substantially all U.S. Guarantors (other than VHS Holdco I) and 65% of the capital stock of each of VHS Holdco II’s non-U.S. subsidiaries that are directly owned by VHS Holdco II or one of the U.S. Guarantors and a security interest in substantially all tangible and intangible assets of VHS Holdco II and each U.S. Guarantor.

Future Maturities

The aggregate annual principal payments of long-term debt, including capital leases and other long term debt, for each of the next five years and thereafter are as follows: Year 1 — $13.0 million; Year 2 — $13.0 million; Year 3 — $10.0 million; Year 4 — $8.2 million; Year 5 — $1,523.5 million and $1,524.8 million thereafter.

8. DMC PENSION PLAN

Upon completing the acquisition of DMC on January 1, 2011, Vanguard assumed a frozen noncontributory defined benefit retirement plan (“DMC Pension Plan”) covering substantially all of the employees of DMC and its subsidiaries hired prior to June 1, 2003. The benefits under the DMC Pension Plan are primarily based on years of service and final average earnings.

Vanguard’s funding policy for the DMC Pension Plan is to fund an amount based on the recommendation of consulting actuaries that is in compliance with the requirements of the Employee Retirement Income Security Act of 1974.

The following table summarizes the funded status of the DMC Pension Plan, assumed as part of the acquisition on January 1, 2011, based upon actuarial valuations prepared as of the most recent valuation date of December 31, 2010 (in millions).

		December 31,
		2010
Reconciliation of funded status:
Projected benefit obligation and accumulated benefit obligation		$	974.8
Fair value of plan assets			746.8
Funded status		$	228.0

The following table reflects the financial activity impacting the DMC Pension Plan pension benefit obligation reflected in our accompanying condensed consolidated balance sheet as of March 31, 2011 (in millions):

Funded status at January 1, 2011		$	228.0
Employer contributions during the three months ended March 31, 2011			(2.4	)
Net pension benefit expense			(1.1	)
Accrued retirement liability at March 31, 2011		$	224.5

VANGUARD HEALTH SYSTEMS, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (continued)

Amounts recognized in the accompanying condensed consolidated balance sheet at March 31, 2011 include the following with respect to the DMC Pension Plan:
Other accrued expenses and current liabilities		$	21.7
Pension benefit obligation, less current portion			202.8
		$	224.5
Assumptions used to determine the plan benefit obligation:
Discount rate			5.35	%
Compensation increase rate			Frozen at 2003 level
Measurement date			December 31, 2010

A summary of the components of net pension plan expense for the three months ended March 31, 2011 is as follows (in millions):

Interest cost on projected benefit obligation		$	12.7
Expected return on assets			(13.8	)
Total net pension plan expense (credit)		$	(1.1	)
Assumptions used to determine the net periodic pension plan expense for the three months ended March 31, 2011 were as follows:
Discount rate			5.35	%
Expected long-term rate of return on plan assets			7.50	%

Vanguard will recognize changes in the funded status of the pension plan as a direct increase or decrease to stockholders’ equity (deficit) through accumulated other comprehensive income (loss). No changes in the funded status of the pension plan have been recognized since Vanguard assumed the plan on January 1, 2011.

To develop the expected long-term rate of return on assets assumption, the DMC Pension Plan considers the current level of expected returns on risk-free investments (primarily government bonds), the historical level of risk premium associated with the other asset classes in which the portfolio is invested and the expectations for future returns on each asset class. The expected return for each asset class was then weighted based on the target asset allocation to develop the expected long-term rate of return on assets assumption for the portfolio. The DMC Pension Plan’s weighted-average asset allocations by asset category as of December 31, 2010, the last measurement date, were as follows:

						December 31,
						2010
		Target				Actual
Asset category:
Cash and cash equivalents			0	%			3	%
Equity securities			56	%			64	%
Debt securities			25	%			15	%
Alternatives and other			19	%			18	%

The DMC Pension Plan assets are invested in separately managed portfolios using investment management firms. The DMC Pension Plan’s objective for all asset categories is to maximize total return without assuming undue risk exposure. The DMC Pension Plan maintains a well-diversified asset allocation that best meets these objectives. Pension plan assets are largely comprised of equity securities, which include companies with all market capitalization sizes in addition to international and convertible securities. Cash and cash equivalents are comprised of money market funds. Debt securities include domestic and foreign government obligations, corporate bonds, and mortgage backed securities. Alternative investments include investments in limited partnerships. Under the investment policy of the DMC Pension Plan, investments in derivative securities are not permitted for the sole purpose of speculating on the direction of market interest rates. Included in this prohibition are leveraging, shorting, swaps, futures, options, forwards, and similar strategies.

VANGUARD HEALTH SYSTEMS, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (continued)

In each investment account, investment managers are responsible to monitor and react to economic indicators, such as GDP, CPI and the Federal Monetary Policy, that may affect the performance of their account. The performance of all managers and the aggregate asset allocation are formally reviewed on a quarterly basis, with a rebalancing of the asset allocation occurring at least once a year. The current asset allocation objective is to maintain a certain percentage with each class allowing for a 10% deviation from the target.

The following table summarizes the pension plan assets measured at fair value on a recurring basis as of December 31, 2010, the most recent measurement date, aggregated by the level in the fair value hierarchy within which those measurements are determined as disclosed in Note 5. Fair value methodologies for Level 1 and Level 2 are consistent with the inputs described in Note 5. Fair value for Level 3 represents Vanguard’s ownership interest in the net asset value of the respective partnership, which approximates fair value.

						Quoted Prices				Significant
						in Active				Other				Significant
						Markets for				Observable				Unobservable
		December 31,				Identical Assets				Inputs				Inputs
		2010				(Level 1)				(Level 2)				(Level 3)
Cash and cash equivalents		$	20.8			$	19.0			$	1.8			$	—
United States government obligations			14.1				—				14.1				—
Foreign obligations			0.1				—				0.1				—
Asset and mortgage-backed securities			26.2				—				26.2				—
Corporate bonds			68.0				—				68.0				—
Equity securities			483.2				132.8				350.4				—
Alternative investments			134.4				—				—				134.4
		$	746.8			$	151.8			$	460.6			$	134.4

The expected future employer contributions and benefit payments for the DMC Pension Plan are as follows (in millions):

						Fiscal years ending June 30,
		Total				2011				2012				2013				2014				2015				2016
Expected employer contributions		$	143.1			$	6.2			$	25.3			$	40.6			$	26.6			$	23.9			$	20.5
Expected benefit payments		$	273.6			$	11.0			$	47.0			$	49.8			$	52.6			$	55.3			$	57.9

The DMC Pension Plan’s expected employer contributions above represent amounts to be paid to the pension plan trust and the benefit payments above represent the total benefits expected to be paid from the plan assets held by the pension plan trust.

VANGUARD HEALTH SYSTEMS, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (continued)

9. COMPREHENSIVE INCOME

Comprehensive income consists of two components: net income (loss) attributable to Vanguard Health Systems, Inc. stockholders and other comprehensive income. Other comprehensive income refers to revenues, expenses, gains and losses that under the guidance related to accounting for comprehensive income are recorded as elements of equity but are excluded from net income (loss) attributable to Vanguard Health Systems, Inc. stockholders. The following table presents the components of comprehensive income, net of taxes, for the three and nine months ended March 31, 2010 and 2011 (in millions).

		Three months ended March 31,								Nine months ended March 31,
		2010				2011				2010				2011
Net income (loss) attributable to Vanguard Health Systems, Inc. stockholders		$	(32.8	)		$	2.8			$	(52.0	)		$	(1.0	)
Change in fair value of interest rate swap			0.9				—				5.2				—
Change in unrealized position of investments in securities			—				2.3				—				5.3
Change in income tax expense			(1.0	)			(0.7	)			(2.6	)			(1.9	)
Termination of interest rate swap			1.7								1.7
Net income attributable to non-controlling interests			0.4				0.8				2.1				2.6
Comprehensive income (loss)		$	(30.8	)		$	5.2			$	(45.6	)		$	5.0

The components of accumulated other comprehensive income (loss), net of taxes, as of June 30, 2010 and March 31, 2011 are as follows (in millions):

		June 30, 2010				March 31, 2011
Unrealized holding loss on investments in auction rate securities		$	(4.1	)		$	(1.0	)
Unrealized holding gain on investments in other securities			—				2.3
Income tax benefit (expense)			1.6				(0.4	)
Accumulated other comprehensive income (loss)		$	(2.5	)		$	0.9

10. EARNINGS PER SHARE

Vanguard computes basic earnings (loss) per share using the weighted average number of common shares outstanding. Vanguard computes diluted earnings (loss) per share using the weighted average number of common shares outstanding, plus the dilutive effect of outstanding stock options, warrants for equity incentive units and restricted stock units, computed using the treasury stock method.

The following table sets forth the computation of basic and diluted earnings (loss) per share for the quarters and nine months ended March 31, 2011 and 2010 (dollars in millions, except per share and share amounts):

		Three months ended March 31,								Nine months ended March 31,
		2010				2011				2010				2011
Numerator for basic and diluted earnings (loss per share):
Income (loss) from continuing operations		$	(32.3	)		$	6.0			$	(50.1	)		$	4.4
Loss from discontinued operations			(0.5	)			(3.2	)			(1.9	)			(5.4	)
Net income (loss) attributable to Vanguard Health Systems, Inc. stockholders		$	(32.8	)		$	2.8			$	(52.0	)		$	(1.0	)
Denominator:
Weighted average common shares outstanding			749,243				749,664				749,449				749,288
Dilutive securities:
Effect of dilutive stock options			—				49,862				—				52,833
Effect of dilutive warrants for equity incentive units			—				56,790				—				56,790
Effect of dilutive restricted stock units			—				527				—				519
Shares used for diluted earnings per share			749,243				856,843				749,449				859,430

VANGUARD HEALTH SYSTEMS, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (continued)

		Three months ended March 31,								Nine months ended March 31,
		2010				2011				2010				2011
Basic net earnings (loss) per share:
Basic earnings (loss) from continuing operations		$	(43.10	)		$	7.98			$	(66.85	)		$	5.77
Basic loss from discontinued operations			(0.63	)			(4.28	)			(2.50	)			(7.23	)
		$	(43.74	)		$	3.70			$	(69.35	)		$	(1.45	)
Diluted net earnings (loss) per share:
Diluted earnings (loss) from continuing operations		$	(43.10	)		$	6.99			$	(66.85	)		$	5.03
Diluted loss from discontinued operations			(0.63	)			(3.75	)			(2.50	)			(6.30	)
		$	(43.74	)		$	3.24			$	(69.35	)		$	(1.27	)

11. INCOME TAXES

Significant components of the provision for income taxes from continuing operations are as follows (in millions):

		Nine months ended March 31,
		2010				2011
Current:
Federal		$	0.4			$	2.4
State			1.4				2.8
Total current			1.8				5.2
Deferred:
Federal			(20.5	)			3.4
State			(2.9	)			(0.6	)
Total deferred			(23.4	)			2.8
Change in valuation allowance			3.4				3.7
Total income tax expense (benefit)		$	(18.2	)		$	11.7

As of March 31, 2011, Vanguard had generated net operating loss (“NOL”) carryforwards for federal income tax and state income tax purposes of approximately $59.0 million and $640.0 million, respectively. The remaining federal and state NOL carryforwards expire from 2020 to 2030 and 2011 to 2030, respectively.

Income tax expense for the nine months ended March 31, 2011 includes the impact of establishing a $4.5 million valuation allowance for unitary state net operating loss carryforwards during the year. Given the magnitude of Vanguard’s valuation allowance, Vanguard’s future income/losses could result in a significant adjustment to this valuation allowance.

Vanguard assesses the realization of deferred tax assets to determine whether an income tax valuation allowance is required. Based on all available evidence, both positive and negative, and the weight of that evidence to the extent such evidence can be objectively verified, Vanguard determines whether it is more likely than not that all or a portion of the deferred tax assets will be realized. The main factors considered include:

•

Cumulative losses in recent years;

•

Income/losses expected in future years;

•

Unsettled circumstances that, if unfavorably resolved, would adversely affect future operations and profit levels:

•

The availability, or lack thereof, of taxable income in prior carryback periods that would limit realization of tax benefits;

•

The carryforward period associated with the deferred tax assets and liabilities; and

•

Prudent and feasible tax planning strategies.

VANGUARD HEALTH SYSTEMS, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (continued)

Through the first quarter of fiscal 2011, Vanguard concluded that it was more likely than not that the unitary state net operating loss deferred tax assets were realizable. However, Vanguard determined that it was appropriate to record a valuation allowance after considering and weighing all evidence during the second quarter of 2011. The negative factors of having pretax unitary state losses for the two consecutive years ended June 30, 2010, and a cumulative pretax unitary state loss through the third quarter of the current fiscal year, together with the possibility of unitary state losses in early future years, imposed a high standard for compelling objective positive evidence to exist in order to overcome the negative factors indicating that the unitary state net operating loss carryforwards may expire before being utilized. Vanguard established the valuation allowance as a result of lower forecasted pre-tax income attributable to a significant increase in forecasted interest expense, decreased apportioned income to Vanguard’s existing unitary states as a result of the DMC acquisition and due to recently enacted Illinois legislation that suspended net operating loss deductions for four years.

Vanguard’s U.S. federal income tax returns for tax years 2006 and subsequent years remain subject to examination by the Internal Revenue Service.

12. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

In December 2010, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) issued ASU No. 2010-29, “Business Combinations” (Topic 805): Disclosure of Supplementary Pro Forma Information for Business Combinations. ASU 2010-29 clarifies that, if a reporting entity presents comparative financial statements, the pro forma revenue and earnings of the combined entity should be reported as though the business combinations that occurred during the current year had occurred as of the beginning of the comparable prior annual reporting period. The ASU is effective prospectively for business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2010. Early adoption is permitted. ASU No.2010-29 is effective for Vanguard’s fiscal year beginning July 1, 2011, with early adoption permitted, and is an accounting principle which clarifies disclosure requirements, and is not expected to significantly impact Vanguard’s financial position, results of operations or cash flows.

In December 2010, the FASB issued ASU No. 2010-28, “Intangibles—Goodwill and Other” (Topic 350): When to Perform Step 2 of the Goodwill Impairment Test for Reporting Units with Zero or Negative Carrying Amounts. ASU 2010-28 requires Step 2 of the impairment test be performed in circumstances where the carrying amount of a reporting unit is zero or negative and there are qualitative factors that indicate it is more likely than not that a goodwill impairment exists. The ASU is effective for fiscal years, and interim periods within those years, beginning after December 15, 2010. ASU 2010-28 is not expected to significantly impact Vanguard’s financial position, results of operations or cash flows.

In October 2010, the FASB issued ASU No. 2010-26, “Financial Services —Insurance” (Topic 944): Accounting for Costs Associated with Acquiring or Renewing Insurance Contracts. ASU 2010-26 provides guidance on accounting for deferred policy acquisition costs of internal replacements of insurance and investment contracts. The amendments in this ASU specify that certain costs incurred in the successful acquisition of new and renewal contracts should be capitalized. Those costs include incremental direct costs of contract acquisition that result directly from and are essential to the contract transaction(s) and would not have been incurred by the insurance entity had the contract transaction(s) not occurred. ASU 2010-26 is effective for Vanguard’s fiscal year beginning July 1, 2012, with early adoption permitted, and is not expected to significantly impact Vanguard’s financial position, results of operations or cash flows.

In August 2010, the FASB issued ASU No. 2010-23, “Health Care Entities” (Topic 954): Measuring Charity Care for Disclosure. Due to the lack of comparability existing due to the use of either revenue or cost as the basis for disclosure of charity care, this ASU standardizes cost as the basis for charity care disclosures and specifies the elements of cost to be used in charity care disclosures. ASU 2010-23 is effective for Vanguard’s fiscal year beginning July 1, 2011 and is not expected to significantly impact Vanguard’s financial position, results of operations or cash flows although additional disclosures may be required.

VANGUARD HEALTH SYSTEMS, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (continued)

Also in August 2010, the FASB issued ASU No. 2010-24, “Health Care Entities” (Topic 954): Presentation of Insurance Claims and Related Insurance Recoveries. This ASU eliminates the practice of netting claim liabilities with expected related insurance recoveries for balance sheet presentation. Claim liabilities are to be determined with no regard for recoveries and presented gross. Expected recoveries are presented separately. ASU 2010-24 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2010. Vanguard chose to early adopt this guidance for its quarter ended March 31, 2011. Vanguard recorded approximately $24.0 million of additional non-current professional and general liability reserves and non-current excess insurance coverage receivables (including the impact of the acquired DMC balances), which are included in its condensed consolidated balance sheet as of March 31, 2011. There was no impact to Vanguard’s results of operations or cash flows for the early adoption of this guidance.

13. SEGMENT INFORMATION

Vanguard’s acute care hospitals and related healthcare businesses are similar in their activities and the economic environments in which they operate (i.e. urban markets). Accordingly, Vanguard’s reportable operating segments consist of 1) acute care hospitals and related healthcare businesses, collectively, and 2) health plans consisting of MacNeal Health Plan, a contracting entity for outpatient services provided by MacNeal Hospital and Weiss Memorial Hospital and participating physicians in the Chicago area, Phoenix Health Plan (“PHP”), a Medicaid managed health plan operating in Arizona, and Abrazo Advantage Health Plan, a Medicare and Medicaid dual eligible managed health plan operating in Arizona. The following tables provide unaudited condensed financial information by operating segment for the three and nine months ended March 31, 2010 and 2011, including a reconciliation of Segment EBITDA to income (loss) from continuing operations before income taxes (in millions).

		Three months ended March 31, 2010
		Acute Care				Health
		Services				Plans				Eliminations				Consolidated
Patient service revenues (1)		$	646.7			$	—			$	—			$	646.7
Premium revenues			—				211.4				—				211.4
Intersegment revenues			10.7				—				(10.7	)			—
Total revenues			657.4				211.4				(10.7	)			858.1
Salaries and benefits (excludes stock compensation)			318.0				8.4				—				326.4
Health plan claims expense (1)			—				168.1				—				168.1
Supplies			114.0				—				—				114.0
Provision for doubtful accounts			40.8				—				—				40.8
Other operating expenses-external			109.0				9.3				—				118.3
Operating expenses-intersegment			—				10.7				(10.7	)			—
Total operating expenses			581.8				196.5				(10.7	)			767.6
Segment EBITDA (2)			75.6				14.9				—				90.5
Less:
Interest, net			30.1				(0.2	)			—				29.9
Depreciation and amortization			33.2				1.1				—				34.3
Equity method income			(0.3	)			—				—				(0.3	)
Stock compensation			0.6				—				—				0.6
Debt extinguishment costs			73.2				—				—				73.2
Monitoring fees and expenses			1.2				—				—				1.2
Income (loss) from continuing operations before income taxes		$	(62.4	)		$	14.0			$	—			$	(48.4	)
Capital expenditures		$	42.6			$	0.1			$	—			$	42.7