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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
(MARK ONE)
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES AND EXCHANGE ACT OF 1934
FOR THE YEAR ENDED DECEMBER 31, 2000
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ______________ TO ______________
COMMISSION FILE NUMBER 001-15925
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COMMUNITY HEALTH SYSTEMS, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 13-3893191
(State of incorporation) (IRS Employer Identification No.)
155 FRANKLIN ROAD, SUITE 400 37027
Brentwood, Tennessee (zip code)
(Address of principal executive
offices)
Registrant's telephone number, including area code: (615) 373-9600
Securities registered pursuant to Section 12(g) of the Act:
Title of Each Class Name of Each Exchange on Which Registered
Common Stock, $.01 par value New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
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Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes /X/ No / /
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. / /
As of March 16, 2001 there were 86,141,941 shares of Common Stock, par value
$.01 per share outstanding. The aggregate market value of the voting stock held
by non-affiliates of the Registrant is $1,041,749,979. Market value is
determined by reference to the closing price on March 16, 2001 of the
Registrant's Common Stock as reported by the New York Stock Exchange.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's definitive Proxy Statement to be filed under
Regulation 14A in connection with the Annual Meeting of Stockholders of the
Registrant scheduled to be held on May 22, 2001 have been incorporated by
reference into Part I and Part III of this Report.
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TABLE OF CONTENTS
FORM 10-K ANNUAL REPORT
COMMUNITY HEALTH SYSTEMS, INC.
YEAR ENDED DECEMBER 31, 2000
PAGE
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PART I
Item 1. Business.................................................... 1
Item 2. Properties.................................................. 18
Item 3. Legal Proceedings........................................... 21
Item 4. Submission of Matters to a Vote of Security Holders......... 22
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters....................................... 23
Item 6. Selected Financial Data..................................... 24
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 25
Item 7A. Quantitative and Qualitative Disclosures about Market
Risk...................................................... 34
Item 8. Financial Statements and Supplementary Data................. 36
Item 9. Changes in and Disagreements with Accountants on Accounting
and
Financial Disclosure...................................... 59
PART III
Item 10. Directors and Executive Officers of the Registrant.......... 59
Item 11. Executive Compensation...................................... 59
Item 12. Security Ownership of Certain Beneficial Owners and
Management................................................ 59
Item 13. Certain Relationships and Related Transactions.............. 59
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form
8-K....................................................... 59
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Note: Portions of the Registrant's definitive Proxy Statement to be filed under
Regulation 14A in connection with the Annual Meeting of Stockholders of
the Registrant scheduled to be held on May 22, 2001 have been
incorporated by reference into Part I, Item 4 and Part III, Items 10, 11,
12, and 13 of this Report.
PART I
ITEM 1.
BUSINESS OF COMMUNITY HEALTH SYSTEMS
OVERVIEW OF OUR COMPANY
We are the largest non-urban provider of general hospital healthcare
services in the United States in terms of number of facilities and the second
largest in terms of revenues and EBITDA. As of December 31, 2000, we owned,
leased or operated 52 hospitals, geographically diversified across 20 states,
with an aggregate of 4,688 licensed beds. In over 85% of our markets, we are the
sole provider of these services. In most of our other markets, we are one of two
providers of these services. For the fiscal year ended December 31, 2000, we
generated $1.34 billion in revenues and $252.7 million in adjusted EBITDA (as
such item is defined in footnote 10 of the table under the caption "Selected
Operating Data").
In July 1996, affiliates of Forstmann Little & Co. acquired our predecessor
company from its public stockholders. The predecessor company was formed in
1985. The aggregate purchase price for the acquisition was $1,100.2 million.
Wayne T. Smith, who has over 30 years of experience in the healthcare industry,
joined our company as President in January 1997. We named him Chief Executive
Officer in April 1997 and Chairman of the Board in February 2001. Under this new
ownership and leadership, we have:
- strengthened the senior management team in all key business areas;
- standardized and centralized our operations across key business areas;
- implemented a disciplined acquisition program;
- expanded and improved the services and facilities at our hospitals;
- recruited additional physicians to our hospitals;
- instituted a company-wide regulatory compliance program; and
- divested certain non-core assets.
As a result of these initiatives, we achieved revenue growth of 23.8% in
2000, 26.4% in 1999 and 15.1% in 1998. We also achieved growth in adjusted
EBITDA of 23.8% in 2000, 22.7% in 1999 and 36.1% in 1998. Our adjusted EBITDA
margins improved from 16.5% for 1997 to 18.9% for 2000.
Our hospitals typically have 50 to 200 beds and annual revenues ranging from
$12 million to $70 million. They generally are located in non-urban markets with
populations of 20,000 to 80,000 people and economically diverse employment
bases. These facilities, together with their medical staffs, provide a wide
range of inpatient and outpatient general hospital services and a variety of
specialty services.
We target growing, non-urban healthcare markets because of their favorable
demographic and economic trends and competitive conditions. Because non-urban
service areas have smaller populations, there are generally fewer hospitals and
other healthcare service providers in these communities. We believe that smaller
populations result in less direct competition for hospital-based services. Also,
we believe that non-urban communities generally view the local hospital as an
integral part of the community. There is generally a lower level of managed care
presence in these markets.
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OUR BUSINESS STRATEGY
The key elements of our business strategy are to:
- increase revenue at our facilities;
- grow through selective acquisitions;
- reduce costs; and
- improve quality.
INCREASE REVENUE AT OUR FACILITIES
OVERVIEW. We seek to increase revenue at our facilities by providing a
broader range of services in a more attractive care setting, as well as by
supporting and recruiting physicians. We identify the healthcare needs of the
community by analyzing demographic data and patient referral trends. We also
work with local hospital boards, management teams, and medical staffs to
determine the number and type of additional physicians needed. Our initiatives
to increase revenue include:
- recruiting additional primary care physicians and specialists;
- expanding the breadth of services offered at our hospitals through
targeted capital expenditures to support the addition of more complex
services, including orthopedics, cardiology, OB/GYN, and occupational
medicine; and
- providing the capital to invest in technology and the physical plant at
the facilities, particularly in our emergency rooms.
By taking these actions, we believe that we can increase our share of the
healthcare dollars spent by local residents and limit inpatient and outpatient
migration to larger urban facilities. Total revenue for hospitals operated by us
for a full year increased by 10.3% from 1999 to 2000. Total inpatient admissions
for those same hospitals increased by 6.3% over the same period.
PHYSICIAN RECRUITING. The primary method of adding or expanding medical
services is the recruitment of new physicians into the community. A core group
of primary care physicians is necessary as an initial contact point for all
local healthcare. The addition of specialists who offer services including
general surgery, OB/GYN, cardiology, and orthopedics completes the full range of
medical and surgical services required to meet a community's core healthcare
needs. When we acquire a hospital, we identify the healthcare needs of the
community by analyzing demographic data and patient referral trends. We are then
able to determine what we believe to be the optimum mix of primary care
physicians and specialists. We employ recruiters at the corporate level to
support the local hospital managers in their recruitment efforts. During the
past three years, we have increased the number of physicians affiliated with us
by 405, including 84 in 1998, 156 in 1999 and 165 in 2000. The percentage of
recruited or other physicians commencing practice that were surgeons or
specialists grew from 45% in 1997 to 65% in 2000. We do not employ most of our
physicians, but rather they are in private practice in their communities. We
have been successful in recruiting physicians because of the practice
opportunities afforded physicians in our markets, as well as the lower managed
care penetration as compared to urban areas. These physicians are able to earn
incomes comparable to incomes earned by physicians in urban centers. As of
December 31, 2000, approximately 2,000 physicians were on active staff with our
hospitals.
EMERGENCY ROOM INITIATIVES. Given that over 50% of our hospital admissions
originate in the emergency room, we systematically take steps to increase
patient flow in our emergency rooms as a means of optimizing utilization rates
for our hospitals. Furthermore, the impression of our overall operations by our
customers is substantially influenced by our emergency room since often that is
their
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first experience with our hospitals. The steps we take to increase patient flow
in our emergency rooms include renovating and expanding our emergency room
facilities, improving service, and reducing waiting times, as well as
publicizing our emergency room capabilities in the local community. We have
expanded or renovated 16 of our emergency room facilities since 1997. Since
1997, we have entered into approximately 30 new contracts with emergency room
operating groups to improve performance in our emergency rooms. We have
implemented marketing campaigns that emphasize the speed, convenience, and
quality of our emergency rooms to enhance each community's awareness of our
emergency room services.
Our upgrades include the implementation of specialized software programs
designed to assist physicians in making diagnoses and determining treatments.
The software also benefits patients and hospital personnel by assisting in
proper documentation of patient records. It enables our nurses to provide more
consistent patient care and provides clear instructions to patients at time of
discharge to help them better understand their treatments.
EXPANSION OF SERVICES. To capture a greater portion of the healthcare
spending in our markets and to more efficiently utilize our hospital facilities,
we have added a broad range of emergency, outpatient, and specialty services to
our hospitals. Depending on the needs of the community, we identify
opportunities to expand into various specialties, including orthopedics,
cardiology, OB/GYN, and occupational medicine. In addition to expanding
services, we have completed major capital projects at selected facilities to
offer these types of services. For example, in 1999 we invested $1 million in a
new cardiac catheterization laboratory at our Crestview, Florida hospital. As a
result, this laboratory increased the number of procedures it performed by 84%,
from 122 in 1998 to 224 in 1999. In 1999, major capital projects included
renovations to nine emergency rooms, two operating rooms, two OB/ GYN
facilities, and three intensive care units at various hospitals. In 2000, major
capital projects included expansion of five emergency rooms, upgrades to three
critical care units and two OB/GYN facilities and the purchase of an MRI and
cath lab at various hospitals. We believe that through these efforts we will
reduce patient migration to competing providers of healthcare services and
increase volume.
MANAGED CARE STRATEGY. Managed care has seen growth across the U.S. as
health plans expand service areas and membership. As we service primarily
non-urban markets, we have limited relationships with managed care
organizations. We have responded with a proactive and carefully considered
strategy developed specifically for each of our facilities. Our experienced
business development department reviews and approves all managed care contracts,
which are managed through a central database. The primary mission of this
department is to select and evaluate appropriate managed care opportunities,
manage existing reimbursement arrangements, negotiate contracts, and educate our
physicians. We have terminated our only risk sharing capitated contract, which
we acquired through our acquisition of a California hospital.
GROW THROUGH SELECTIVE ACQUISITIONS
ACQUISITION CRITERIA. Each year we intend to acquire, on a selective basis,
two to four hospitals that fit our acquisition criteria. We pursue acquisition
candidates that:
- have a general service area population between 20,000 and 80,000 with a
stable or growing population base;
- are the sole or primary provider of acute care services in the community;
- are located more than 25 miles from a competing hospital;
- are not located in an area that is dependent upon a single employer or
industry; and
- have financial performance that we believe will benefit from our
management's operating skills.
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Most hospitals we have acquired are located in service areas having
populations within the lower to middle range of our criteria. However, we have
also acquired hospitals having service area populations in the upper range of
our criteria. For example, in 1998, we acquired a 162-bed facility in Roswell,
New Mexico which has a service area population of over 70,000 and is located 200
miles from the nearest urban centers in Albuquerque, New Mexico and Lubbock,
Texas; in 2000 we acquired a 164-bed facility in Kirksville, Missouri which has
a service area population of over 100,000. Facilities similar to the ones
located in Roswell and Kirksville offer even greater opportunities to expand
services given their larger service area populations.
Most of our acquisition targets are municipal and other not-for-profit
hospitals. We believe that our access to capital and ability to recruit
physicians make us an attractive partner for these communities. In addition, we
have found that communities located in states where we already operate a
hospital are more receptive to us when they consider selling their hospital
because they are aware of our operating track record with respect to our
facilities within the state.
Pursuant to hospital purchase agreements in effect as of December 31, 2000,
we are required to construct four replacement hospitals through 2005 with an
aggregate estimated construction cost, including equipment, of approximately
$120 million. Of this amount, approximately $9 million has been expended as of
December 31, 2000.
REDUCE COSTS
OVERVIEW. To improve efficiencies and increase operating margins, we
implement cost containment programs and adhere to operating philosophies which
include:
- standardizing and centralizing our operations;
- optimizing resource allocation by utilizing our company-devised case and
resource management program, which assists in improving clinical care and
containing expenses;
- capitalizing on purchasing efficiencies through the use of company-wide
standardized purchasing contracts and terminating or renegotiating certain
vendor contracts;
- installing a standardized management information system, resulting in more
efficient billing and collection procedures; and
- managing staffing levels according to patient volumes and the appropriate
level of care.
In addition, each of our hospital management teams is supported by our
centralized operational, reimbursement, regulatory, and compliance expertise as
well as by our senior management team, which has an average of 20 years of
experience in the healthcare industry. Adjusted EBITDA margins on a same
hospitals basis improved from 18.8% in 1999 to 19.9% in 2000.
IMPROVE QUALITY
We have implemented various programs to ensure improvement in the quality of
care provided. We have developed training programs for all senior hospital
management, chief nursing officers, quality directors, physicians and other
clinical staff. We share information among our hospital management to implement
best practices and assist in complying with regulatory requirements. We have
standardized accreditation documentation and requirements. Corporate support is
provided to each facility to assist with accreditation reviews. Several of our
facilities have received accreditation "with commendation" from the Joint
Commission on Accreditation of Healthcare Organizations. All hospitals conduct
patient, physician, and staff satisfaction surveys to help identify methods of
improving the quality of care.
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Each of our hospitals is governed by a board of trustees, which includes
members of the hospital's medical staff. The board of trustees establishes
policies concerning the hospital's medical, professional, and ethical practices,
monitors these practices, and is responsible for ensuring that these practices
conform to legally required standards. We maintain quality assurance programs to
support and monitor quality of care standards and to meet Medicare and Medicaid
accreditation and regulatory requirements. Patient care evaluations and other
quality of care assessment activities are reviewed and monitored continuously.
SELECTED OPERATING DATA
The following table sets forth operating statistics for our hospitals for
each of the years presented. Statistics for 2000 include a full year of
operations for 45 hospitals, and partial periods for one hospital disposed of
and seven hospitals acquired during the year. Statistics for 1999 include a full
year of operations for 41 hospitals and partial periods for four hospitals
acquired, and one hospital constructed and opened, during the year. Statistics
for 1998 include a full year of operations for 37 hospitals and partial periods
for four hospitals acquired during the year.
YEARS ENDED DECEMBER 31,
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2000 1999 1998
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(DOLLARS IN THOUSANDS)
Number of hospitals (1).................................... 52 46 41
Licensed beds (1)(2)....................................... 4,688 4,115 3,644
Beds in service (1)(3)..................................... 3,587 3,123 2,776
Admissions (4)............................................. 143,310 120,414 100,114
Adjusted admissions (5).................................... 262,419 217,006 177,075
Patient days (6)........................................... 548,827 478,658 416,845
Average length of stay (days) (7).......................... 3.8 4.0 4.2
Occupancy rate (beds in service) (8)....................... 44.6% 44.1% 43.3%
Net operating revenues..................................... $1,337,501 $1,079,953 $854,580
Net inpatient revenues as a % of total net operating
revenues................................................. 51.0% 52.7% 55.7%
Net outpatient revenues as a % of total net operating
revenues................................................. 47.3% 45.5% 42.6%
Adjusted EBITDA as a % of total net operating revenues..... 18.9% 18.9% 19.5%
Net cash flows provided by (used in) operating
activities............................................... $ 22,985 $ (11,746) $ 15,719
Net cash flows used in investing activities................ (244,441) (155,541) (236,553)
Net cash flows provided by financing activities............ 230,914 164,850 219,890
YEAR ENDED DECEMBER 31,
----------------------- PERCENTAGE
INCREASE
2000 1999 (DECREASE)
---------- ---------- ----------
Same Hospitals Data (9)
Admissions (4)............................................. 125,207 117,768 6.3%
Adjusted admissions (5).................................... 227,780 212,246 7.3%
Patient days (6)........................................... 481,620 467,884 2.9%
Average length of stay (days) (7).......................... 3.8 4.0
Occupancy rate (beds in service) (8)....................... 45.1% 44.8%
Net operating revenues..................................... $1,155,850 $1,047,950
Adjusted EBITDA (10)....................................... 229,637 196,843 10.3%
Adjusted EBITDA, as a % of net operating revenues.......... 19.9% 18.8% 16.7%
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(1) At end of period.
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(2) Licensed beds are the number of beds for which the appropriate state agency
licenses a facility regardless of whether the beds are actually available
for patient use.
(3) Beds in service are the number of beds that are readily available for
patient use.
(4) Admissions represent the number of patients admitted for inpatient
treatment.
(5) Adjusted admissions is a general measure of combined inpatient and
outpatient volume. We computed adjusted admissions by multiplying admissions
by gross patient revenues and then dividing that number by gross inpatient
revenues.
(6) Patient days represent the total number of days of care provided to
inpatients.
(7) Average length of stay (days) represents the average number of days
inpatients stay in our hospitals.
(8) We calculated percentages by dividing the average daily number of inpatients
by the weighted average of beds in service.
(9) Includes acquired hospitals to the extent we operated them during comparable
periods in both years.
(10) We define adjusted EBITDA as EBITDA adjusted to exclude cumulative effect
of a change in accounting principle, impairment of long-lived assets and
compliance settlement and Year 2000 remediation costs. EBITDA consists of
income (loss) before interest, income taxes, depreciation and amortization,
and amortization of goodwill. EBITDA and adjusted EBITDA should not be
considered as measures of financial performance under generally accepted
accounting principles. Items excluded from EBITDA and adjusted EBITDA are
significant components in understanding and assessing financial performance.
EBITDA and adjusted EBITDA are key measures used by management to evaluate
our operations and provide useful information to investors. EBITDA and
adjusted EBITDA should not be considered in isolation or as alternatives to
net income, cash flows generated by operations, investing or financing
activities, or other financial statement data presented in the consolidated
financial statements as indicators of financial performance or liquidity.
Because EBITDA and adjusted EBITDA are not measurements determined in
accordance with generally accepted accounting principles and are thus
susceptible to varying calculations, EBITDA and adjusted EBITDA as presented
may not be comparable to other similarly titled measures of other companies.
SOURCES OF REVENUE
We receive payment for healthcare services provided by our hospitals from:
- the federal Medicare program;
- state Medicaid programs;
- healthcare insurance carriers, health maintenance organizations or "HMOs,"
preferred provider organizations or "PPOs," and other managed care
programs; and
- patients directly.
The following table presents the approximate percentages of net revenue
received from private, Medicare, Medicaid and other sources for the periods
indicated. The data for the years presented are
6
not strictly comparable due to the significant effect that hospital acquisitions
and dispositions have had on these statistics.
NET OPERATING REVENUES BY PAYOR SOURCE 2000 1999 1998
- -------------------------------------- -------- -------- --------
Medicare.................................................... 34.2% 36.2% 39.0%
Medicaid.................................................... 11.8% 11.9% 10.2%
Managed Care (HMO/PPO)...................................... 15.9% 14.3% 14.0%
Private and Other........................................... 38.1% 37.6% 36.8%
----- ----- -----
Total................................................... 100.0% 100.0% 100.0%
===== ===== =====
As shown above, we receive a substantial portion of our revenue from the
Medicare and Medicaid programs.
Medicare is a federal program that provides medical insurance benefits to
persons age 65 and over, some disabled persons, and persons with end-stage renal
disease. Medicaid is a federal-state funded program, administered by the states,
which provides medical benefits to individuals who are unable to afford
healthcare. All of our hospitals are certified as providers of Medicare and
Medicaid services. Amounts received under the Medicare and Medicaid programs are
generally significantly less than the hospital's customary charges for the
services provided. In recent years, changes made to the Medicare and Medicaid
programs have further reduced payment to hospitals. We expect this trend to
continue. Since an important portion of our revenues comes from patients under
Medicare and Medicaid programs, our ability to operate our business successfully
in the future will depend in large measure on our ability to adapt to changes in
these programs.
In addition to government programs, we are paid by private payors, which
include insurance companies, HMOs, PPOs, other managed care companies, and
employers, as well as by patients directly. Patients are generally not
responsible for any difference between customary hospital charges and amounts
paid for hospital services by Medicare and Medicaid programs, insurance
companies, HMOs, PPOs, and other managed care companies, but are responsible for
services not covered by these programs or plans, as well as for deductibles and
co-insurance obligations of their coverage. The amount of these deductibles and
co-insurance obligations has increased in recent years. Collection of amounts
due from individuals is typically more difficult than collection of amounts due
from government or business payors. To further reduce their healthcare costs, an
increasing number of insurance companies, HMOs, PPOs, and other managed care
companies are negotiating discounted fee structures or fixed amounts for
hospital services performed, rather than paying healthcare providers the amounts
billed. We negotiate discounts with managed care companies which are typically
smaller than discounts under governmental programs. If an increased number of
insurance companies, HMOs, PPOs, and other managed care companies succeed in
negotiating discounted fee structures or fixed amounts, our results of
operations may be negatively affected. For more information on the payment
programs on which our revenues depend, see "--Payment."
Hospital revenues depend upon inpatient occupancy levels, the volume of
outpatient procedures, and the charges or negotiated payment rates for hospital
services provided. Charges and payment rates for routine inpatient services vary
significantly depending on the type of service performed and the geographic
location of the hospital. In recent years, we have experienced a significant
increase in revenue received from outpatient services. We attribute this
increase to:
- advances in technology, which have permitted us to provide more services
on an outpatient basis; and
- pressure from Medicare or Medicaid programs, insurance companies, and
managed care plans to reduce hospital stays and to reduce costs by having
services provided on an outpatient rather than on an inpatient basis.
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SUPPLY CONTRACTS
During fiscal 1997, we entered into an affiliation agreement with BuyPower,
a group purchasing organization owned by Tenet Healthcare Corporation. Our
affiliation with BuyPower combines the purchasing power of our hospitals with
the purchasing power of more than 600 other healthcare providers affiliated with
the program. This increased purchasing power has resulted in reductions in the
prices paid by our hospitals for medical supplies and equipment and
pharmaceuticals. In March 2000, we entered into an agreement with
Broadlane Inc., an affiliate of Tenet Healthcare Corporation, to use their
e-commerce marketplace as our exclusive internet purchasing portal.
INDUSTRY OVERVIEW
The U.S. Healthcare Financing Administration estimated that in 2000, total
U.S. healthcare expenditures grew by 8.3% to $1.3 trillion. It projects total
U.S. healthcare spending to grow by 8.6% in 2001 and by 6.5% annually from 2002
through 2010. By these estimates, healthcare expenditures will account for
approximately $2.6 trillion, or 15.9% of the total U.S. gross domestic product,
by 2010.
Hospital services, the market in which we operate, is the largest single
category of healthcare at 32.1% of total healthcare spending in 2000, or
$415.8 billion. The U.S. Healthcare Financing Administration projects the
hospital services category to grow by 5.7% per year through 2010. It expects
growth in hospital healthcare spending to continue due to the aging of the U.S.
population and consumer demand for expanded medical services. As hospitals
remain the primary setting for healthcare delivery, it expects hospital services
to remain the largest category of healthcare spending.
U.S. HOSPITAL INDUSTRY. The U.S. hospital industry is broadly defined to
include acute care, rehabilitation, and psychiatric facilities that are either
public (government owned and operated), not-for-profit private (religious or
secular), or for-profit institutions (investor owned). According to the American
Hospital Association, there are approximately 5,015 inpatient hospitals in the
U.S. which are not-for-profit owned, investor owned, or state or local
government owned. Of these hospitals, 44% are located in non-urban communities.
These facilities offer a broad range of healthcare services, including internal
medicine, general surgery, cardiology, oncology, neurosurgery, orthopedics,
OB/GYN, and emergency services. In addition, hospitals also offer other
ancillary services including psychiatric, diagnostic, rehabilitation, home
health, and outpatient surgery services.
URBAN VS. NON-URBAN HOSPITALS
According to the U.S. Census Bureau, 25% of the U.S. population lives in
communities designated as non-urban. In these non-urban communities, hospitals
are typically the primary source of healthcare and, in many cases, a single
hospital is the only provider of general healthcare services. According to the
American Hospital Association, in 1998, there were 2,200 non-urban hospitals in
the U.S. We believe that a majority of these hospitals are owned by
not-for-profit or governmental entities.
FACTORS AFFECTING PERFORMANCE. Among the many factors that can influence a
hospital's financial and operating performance are:
- facility size and location;
- facility ownership structure (i.e., tax-exempt or investor owned);
- a facility's ability to participate in group purchasing organizations; and
- facility payor mix.
We believe that non-urban hospitals are generally able to obtain higher
operating margins than urban hospitals. Factors contributing to a non-urban
hospital's margin advantage include fewer patients with complex medical
problems, a lower cost structure, limited competition, and favorable Medicare
8
payment provisions. Patients needing the most complex care are more often served
by the larger and/or more specialized urban hospitals. A non-urban hospital's
lower cost structure results from its geographic location as well as the lower
number of patients treated who need the most highly advanced services.
Additionally, because non-urban hospitals are generally sole providers or one of
a small group of providers in their markets, there is limited competition. This
generally results in more favorable pricing with commercial payors. Medicare has
special payment provisions for "sole community hospitals." Under present law,
hospitals that qualify for this designation receive higher reimbursement rates
and are guaranteed capital reimbursement equal to 90% of capital costs. As of
December 31, 2000, 15 of our hospitals were "sole community hospitals." In
addition, we believe that non-urban communities are generally characterized by a
high level of patient and physician loyalty that fosters cooperative
relationships among the local hospitals, physicians, employees, and patients.
The type of third party responsible for the payment of services performed by
healthcare service providers is also an important factor which affects hospital
margins. These providers have increasingly exerted pressure on healthcare
service providers to reduce the cost of care. The most active providers in this
regard have been HMOs, PPOs, and other managed care organizations. The
characteristics of non-urban markets make them less attractive to these managed
care organizations. This is partly because the limited size of non-urban markets
and their diverse, non-national employer bases minimize the ability of managed
care organizations to achieve economies of scale. In 2000, approximately 16% of
our revenues were paid by managed care organizations.
HOSPITAL INDUSTRY TRENDS
DEMOGRAPHIC TRENDS. According to the U.S. Census Bureau, there are
approximately 35 million Americans aged 65 or older in the U.S. today, who
comprise approximately 13% of the total U.S. population. By the year 2030 the
number of elderly is expected to climb to 69 million, or 20% of the total
population. Due to the increasing life expectancy of Americans, the number of
people aged 85 years and older is also expected to increase from 4.3 million to
8.5 million by the year 2030. This increase in life expectancy will increase
demand for healthcare services and, as importantly, the demand for innovative,
more sophisticated means of delivering those services. Hospitals, as the largest
category of care in the healthcare market, will be among the main beneficiaries
of this increase in demand. Based on data compiled for us, the populations of
the service areas where our hospitals are located grew by 6.9% from 1990 to 1997
and are projected to grow by 4.6% from 1998 to 2002. The number of people aged
65 or older in these service areas grew by 16.4% from 1990 to 1997 and is
projected to grow by 5.7% from 1998 to 2002.
CONSOLIDATION. During the late 1980s and early 1990s, there was significant
industry consolidation involving large, investor owned hospital companies
seeking to achieve economies of scale. While consolidation activity in the
hospital industry is continuing, the consolidations are primarily taking place
through mergers and acquisitions involving not-for-profit hospital systems.
Reasons for this activity include:
- limited access to capital;
- financial performance issues, including challenges associated with changes
in reimbursement;
- the desire to enhance the local availability of healthcare in the
community;
- the need and ability to recruit primary care physicians and specialists;
and
- the need to achieve general economies of scale and to gain access to
standardized and centralized functions, including favorable supply
agreements.
9
SHIFTING UTILIZATION TRENDS. Over the past decade, many procedures that had
previously required hospital visits with overnight stays have been performed on
an outpatient basis. This shift has been driven by cost containment efforts led
by private and government payors. The focus on cost containment has coincided
with advancements in medical technology that have allowed patients to be treated
with less invasive procedures that do not require overnight stays. According to
the American Hospital Association, the number of surgeries performed on an
inpatient basis declined from 1994 to 1998 at an average annual rate of 0.3%,
from 9.8 million in 1994 to 9.7 million in 1998. During the same period, the
number of outpatient surgeries increased at an average annual rate of 4.3%, from
13.2 million in 1994 to 15.6 million in 1998. The mix of inpatient as compared
to outpatient surgeries shifted from a ratio of 42.8% inpatient to 57.2%
outpatient in 1994 to a ratio of 38.4% inpatient to 61.6% outpatient in 1998.
These trends have led to a reduction in the average length of stay and, as a
result, inpatient utilization rates. According to the American Hospital
Association, the average length of stay in general hospitals has declined from
6.7 days in 1994 to 6.0 days in 1998.
GOVERNMENT REGULATION
OVERVIEW. The healthcare industry is required to comply with extensive
government regulation at the federal, state, and local levels. Under these
regulations, hospitals must meet requirements to be certified as hospitals and
qualified to participate in government programs, including the Medicare and
Medicaid programs. These requirements relate to the adequacy of medical care,
equipment, personnel, operating policies and procedures, maintenance of adequate
records, hospital use, rate-setting, compliance with building codes, and
environmental protection laws. There are also extensive regulations governing a
hospital's participation in these government programs. If we fail to comply with
applicable laws and regulations, we can be subject to criminal penalties and
civil sanctions, our hospitals can lose their licenses and we could lose our
ability to participate in these government programs. In addition, government
regulations may change. If that happens, we may have to make changes in our
facilities, equipment, personnel, and services so that our hospitals remain
certified as hospitals and qualified to participate in these programs. We
believe that our hospitals are in substantial compliance with current federal,
state, and local regulations and standards.
Hospitals are subject to periodic inspection by federal, state, and local
authorities to determine their compliance with applicable regulations and
requirements necessary for licensing and certification. All of our hospitals are
licensed under appropriate state laws and are qualified to participate in
Medicare and Medicaid programs. In addition, most of our hospitals are
accredited by the Joint Commission on Accreditation of Healthcare Organizations.
This accreditation indicates that a hospital satisfies the applicable health and
administrative standards to participate in Medicare and Medicaid programs.
FRAUD AND ABUSE LAWS. Participation in the Medicare program is heavily
regulated by federal statute and regulation. If a hospital fails substantially
to comply with the requirements for participating in the Medicare program, the
hospital's participation in the Medicare program may be terminated and/or civil
or criminal penalties may be imposed. For example, a hospital may lose its
ability to participate in the Medicare program if it performs any of the
following acts:
- making claims to Medicare for services not provided or misrepresenting
actual services provided in order to obtain higher payments;
- paying money to induce the referral of patients where services are
reimbursable under a federal health program; or
10
- failing to provide treatment to any individual who comes to a hospital's
emergency room with an "emergency medical condition" or otherwise failing
to properly treat and transfer emergency patients.
The Health Insurance Portability and Accountability Act of 1996 broadened
the scope of the fraud and abuse laws by adding several criminal statutes that
are not related to receipt of payments from a federal healthcare program. The
Accountability Act created civil penalties for conduct, including upcoding and
billing for medically unnecessary goods or services. It established new
enforcement mechanisms to combat fraud and abuse. These include a bounty system,
where a portion of the payments recovered is returned to the government
agencies, as well as a whistleblower program. This law also expanded the
categories of persons that may be excluded from participation in federal
healthcare programs.
Another law regulating the healthcare industry is a section of the Social
Security Act, known as the "anti-kickback" or "fraud and abuse" statute. This
law prohibits some business practices and relationships under Medicare,
Medicaid, and other federal healthcare programs. These practices include the
payment, receipt, offer, or solicitation of money in connection with the
referral of patients covered by a federal or state healthcare program.
Violations of the anti-kickback statute may be punished by criminal and civil
fines, exclusion from federal healthcare programs, and damages up to three times
the total dollar amount involved.
The Office of Inspector General of the Department of Health and Human
Services is authorized to publish regulations outlining activities and business
relationships that would be deemed not to violate the anti-kickback statute.
These regulations are known as "safe harbor" regulations. However, the failure
of a particular activity to comply with the safe harbor regulations does not
mean that the activity violates the anti-kickback statute.
The Office of Inspector General is responsible for identifying fraud and
abuse activities in government programs. In order to fulfill its duties, the
Office of Inspector General performs audits, investigations, and inspections. In
addition, it provides guidance to healthcare providers by identifying types of
activities that could violate the anti-kickback statute. The Office of the
Inspector General has identified the following incentive arrangements as
potential violations:
- payment of any incentive by the hospital each time a physician refers a
patient to the hospital;
- use of free or significantly discounted office space or equipment for
physicians in facilities usually located close to the hospital;
- provision of free or significantly discounted billing, nursing, or other
staff services;
- free training for a physician's office staff including management and
laboratory techniques;
- guarantees which provide that if the physician's income fails to reach a
predetermined level, the hospital will pay any portion of the remainder;
- low-interest or interest-free loans, or loans which may be forgiven if a
physician refers patients to the hospital;
- payment of the costs of a physician's travel and expenses for conferences;
- payment of services which require few, if any, substantive duties by the
physician, or payment for services in excess of the fair market value of
the services rendered; or
- purchasing goods or services from physicians at prices in excess of their
fair market value.
We have a variety of financial relationships with physicians who refer
patients to our hospitals. Physicians own interests in a few of our facilities.
Physicians may also own our stock. We also have contracts with physicians
providing for a variety of financial arrangements, including employment
11
contracts, leases, management agreements, and professional service agreements.
We provide financial incentives to recruit physicians to relocate to communities
served by our hospitals. These incentives include revenue guarantees and, in
some cases, loans. Although we believe that we have structured our arrangements
with physicians in light of the "safe harbor" rules, we cannot assure you that
regulatory authorities will not determine otherwise. If that happens, we would
be subject to criminal and civil penalties and/or exclusion from participating
in Medicare, Medicaid, or other government healthcare programs.
The Social Security Act also includes a provision commonly known as the
"Stark law." This law prohibits physicians from referring Medicare and Medicaid
patients to healthcare entities in which they or any of their immediate family
members have ownership or other financial interests. These types of referrals
are commonly known as "self referrals." Sanctions for violating the Stark law
include civil money penalties, assessments equal to twice the dollar value of
each service, and exclusion from Medicare and Medicaid programs. There are
ownership and compensation arrangement exceptions to the self-referral
prohibition. One exception allows a physician to make a referral to a hospital
if the physician owns the entire hospital, as opposed to an ownership interest
in a department of the hospital. Another exception allows a physician to refer
patients to a healthcare entity in which the physician has an ownership interest
if the entity is located in a rural area, as defined in the statute. There are
also exceptions for many of the customary financial arrangements between
physicians and providers, including employment contracts, leases, and
recruitment agreements. The federal government has not finalized its regulations
which will interpret several of the provisions included in the Stark law. We
have structured our financial arrangements with physicians to comply with the
statutory exceptions included in the Stark law. However, when the government
finalizes these regulations, it may interpret certain provisions of this law in
a manner different from the manner with which we have interpreted them. We
cannot predict the final form that such regulations will take or the effect
those regulations will have on us.
Many states in which we operate also have adopted, or are considering
adopting, similar laws. Some of these state laws apply even if the payment for
care does not come from the government. These statutes typically provide
criminal and civil penalties as well as loss of licensure. While there is little
precedent for the interpretation or enforcement of these state laws, we have
attempted to structure our financial relationships with physicians and others in
light of these laws. However, if we are found to have violated these state laws,
it could result in the imposition of criminal and civil penalties as well as
possible licensure revocation.
CORPORATE PRACTICE OF MEDICINE; FEE-SPLITTING. Some states have laws that
prohibit unlicensed persons or business entities, including corporations, from
employing physicians. Some states also have adopted laws that prohibit direct or
indirect payments or fee-splitting arrangements between physicians and
unlicensed persons or business entities. Possible sanctions for violations of
these restrictions include loss of a physician's license, civil and criminal
penalties and rescission of business arrangements. These laws vary from state to
state, are often vague and have seldom been interpreted by the courts or
regulatory agencies. We structure our arrangements with healthcare providers to
comply with the relevant state law. However, we cannot assure you that
governmental officials charged with responsibility for enforcing these laws will
not assert that we, or transactions in which we are involved, are in violation
of these laws. These laws may also be interpreted by the courts in a manner
inconsistent with our interpretations.
EMERGENCY MEDICAL TREATMENT AND ACTIVE LABOR ACT. The Emergency Medical
Treatment and Active Labor Act imposes requirements as to the care that must be
provided to anyone who comes to facilities providing emergency medical services
seeking care before they may be transferred to another facility or otherwise
denied care. Regulations have recently been adopted, but not yet implemented,
that expand the areas within a facility that must provide emergency treatment.
Sanctions for failing to
12
fulfill these requirements include exclusion from participation in Medicare and
Medicaid programs and civil money penalties. In addition, the law creates
private civil remedies which enable an individual who suffers personal harm as a
direct result of a violation of the law to sue the offending hospital for
damages and equitable relief. A medical facility that suffers a financial loss
as a direct result of another participating hospital's violation of the law also
has a similar right. Although we believe that our practices are in compliance
with the law, we can give no assurance that governmental officials responsible
for enforcing the law or others will not assert we are in violation of these
laws.
FALSE CLAIMS ACT. Another trend in healthcare litigation is the use of the
False Claims Act. This law has been used not only by the U.S. government, but
also by individuals who bring an action on behalf of the government under the
law's "qui tam" or "whistleblower" provisions. When a private party brings a qui
tam action under the False Claims Act, the defendant will generally not be aware
of the lawsuit until the government makes a determination whether it will
intervene and take a lead in the litigation.
Civil liability under the False Claims Act can be up to three times the
actual damages sustained by the government plus civil penalties for each
separate false claim. There are many potential bases for liability under the
False Claims Act. Although liability under the False Claims Act arises when an
entity knowingly submits a false claim for reimbursement to the federal
government, the False Claims Act defines the term "knowingly" broadly. Thus,
although simple negligence generally will not give rise to liability under the
False Claims Act, submitting a claim with reckless disregard to its truth or
falsity can constitute "knowingly" submitting a claim. See "Item 3--Legal
Proceedings" for a description of pending, False Claims Act litigation.
HEALTHCARE REFORM. The healthcare industry continues to attract much
legislative interest and public attention. In recent years, an increasing number
of legislative proposals have been introduced or proposed in Congress and in
some state legislatures that would effect major changes in the healthcare
system. Proposals that have been considered include cost controls on hospitals,
insurance market reforms to increase the availability of group health insurance
to small businesses, and mandatory health insurance coverage for employees. The
costs of implementing some of these proposals would be financed, in part, by
reductions in payments to healthcare providers under Medicare, Medicaid, and
other government programs. We cannot predict the course of future healthcare
legislation or other changes in the administration or interpretation of
governmental healthcare programs and the effect that any legislation,
interpretation, or change may have on us.
CONVERSION LEGISLATION. Many states, including some where we have hospitals
and others where we may in the future acquire hospitals, have adopted
legislation regarding the sale or other disposition of hospitals operated by
not-for-profit entities. In other states that do not have specific legislation,
the attorneys general have demonstrated an interest in these transactions under
their general obligations to protect charitable assets from waste. These
legislative and administrative efforts primarily focus on the appropriate
valuation of the assets divested and the use of the proceeds of the sale by the
not-for-profit seller. While these review and, in some instances, approval
processes can add additional time to the closing of a hospital acquisition, we
have not had any significant difficulties or delays in completing any of our
recent hospital acquisitions. There can be no assurance, however, that future
actions on the state level will not seriously delay or even prevent our ability
to acquire hospitals. If these activities are widespread, they could have a
negative impact on our ability to acquire additional hospitals. See "--Our
Business Strategy."
CERTIFICATES OF NEED. The construction of new facilities, the acquisition
of existing facilities and the addition of new services at our facilities may be
subject to state laws that require prior approval by state regulatory agencies.
These certificate of need laws generally require that a state agency determine
the public need and give approval prior to the construction or acquisition of
facilities or the addition of new services. We operate hospitals in 11 states
that have adopted certificate of need laws. If we fail to
13
obtain necessary state approval, we will not be able to expand our facilities,
complete acquisitions or add new services in these states. Violation of these
state laws may result in the imposition of civil sanctions or the revocation of
a hospital's licenses.
PAYMENT
MEDICARE. Under the Medicare program, we are paid for inpatient and
outpatient services performed by our hospitals.
Payments for inpatient acute services are generally made pursuant to a
prospective payment system, commonly known as "PPS." Under a PPS, our hospitals
are paid a prospectively determined amount for each hospital discharge based on
the patient's diagnosis. Specifically, each discharge is assigned to a
diagnosis-related group, commonly known as a "DRG," based upon the patient's
condition and treatment during the relevant inpatient stay. Each DRG is assigned
a payment rate that is prospectively set using national average costs per case
for treating a patient for a particular diagnosis. DRG payments do not consider
the actual costs incurred by a hospital in providing a particular inpatient
service. However, DRG payments are adjusted by a predetermined geographic
adjustment factor assigned to the geographic area in which the hospital is
located. While a hospital generally does not receive payment in addition to a
DRG payment, hospitals may qualify for an "outlier" payment when the relevant
patient's treatment costs are extraordinarily high and exceed a specified
threshold.
The DRG rates are adjusted by an update factor each federal fiscal year,
which begins on October 1. The update factor is determined, in part, by the
projected increase in the cost of goods and services that are purchased by
hospitals. For several years the annual update factor has been lower than the
projected increases in the costs of goods and services purchased by hospitals.
DRG rate increases were 1.1% for federal fiscal year 1995, 1.5% for federal
fiscal year 1996, and 2.0% for federal fiscal year 1997. For federal fiscal year
1998, there was no increase. The DRG rate was increased by the projected
increase in the cost of goods and services minus 1.9% for federal fiscal year
1999; 1.8% for federal fiscal year 2000; and by the full increase in the cost of
goods and services for federal fiscal year 2001. For both federal fiscal years
2002 and 2003, the DRG rate will be increased by the projected increase in the
cost of goods and services minus 1.1%. Future legislation may decrease the rate
of increase for DRG payments, but we are not able to predict the amount of the
reduction or the effect that the reduction will have on us.
Outpatient services have traditionally been paid at the lower of customary
charges or on a reasonable cost basis. The Balanced Budget Act established a PPS
for outpatient hospital services that commenced on August 1, 2000. All services
paid under the new PPS for hospital outpatient services are classified into
groups called ambulatory payment classifications or "APCs". Services in each APC
are similar clinically and in terms of the resources they require. Depending on
the services provided, each outpatient encounter could result in the assignment
of multiple APC payments. The Balanced Budget Refinement Act of 1999 eliminated
the anticipated average reduction of 5.7% for various Medicare outpatient
business under the Balanced Budget Act of 1997. Under the Balanced Budget
Refinement Act of 1999, non-urban hospitals with 100 beds or less are held
harmless under Medicare outpatient PPS through December 31, 2003. Thirty-four of
our hospitals qualify for this relief. Losses under Medicare outpatient PPS for
non-urban hospitals with greater than 100 beds and urban hospitals will be
mitigated through a corridor reimbursement approach, where a percentage of
losses will be reimbursed through December 31, 2003. All of our remaining
hospitals qualify for relief under this provision.
Skilled nursing facilities have historically been paid by Medicare on the
basis of actual costs, subject to limitations. The Balanced Budget Act
established a PPS for Medicare skilled nursing facilities. The new PPS commenced
in July 1998, and is being implemented progressively over a three year term. We
have experienced reductions in payments for our skilled nursing services.
However, the
14
Balanced Budget Refinement Act of 1999, effective as of October 1, 2000 and the
Benefit and Improvement Act of 2000 established adjustments to the PPS payments
made to skilled nursing facilities.
The Balanced Budget Act also required the Department of Health and Human
Services to establish a PPS for home health services. The Balanced Budget Act of
1997 put in place the interim payment system, commonly known as "IPS," until the
home health PPS could be implemented. As of October 1, 2000, the home health PPS
replaced IPS. We have experienced reductions in payments for our home health
services and a decline in home health visits due to a reduction in benefits by
reason of the Balanced Budget Act. Home health PPS has increased payments for
our home health services.
MEDICAID. Most state Medicaid payments are made under a PPS, reasonable
cost, per diem, or established fee schedules. Medicaid is currently funded
jointly by state and federal governments. The federal government and many states
are currently considering significantly reducing Medicaid funding, while at the
same time expanding Medicaid benefits. This could adversely affect future levels
of Medicaid payments received by our hospitals.
ANNUAL COST REPORTS. Hospitals participating in the Medicare and some
Medicaid programs, whether paid on a reasonable cost basis or under a PPS, are
required to meet certain financial reporting requirements. Federal and, where
applicable, state regulations require submission of annual cost reports
identifying medical costs and expenses associated with the services provided by
each hospital to Medicare beneficiaries and Medicaid recipients.
Annual cost reports required under the Medicare and some Medicaid programs
are subject to routine governmental audits. These audits may result in
adjustments to the amounts ultimately determined to be due to us under these
reimbursement programs. Finalization of these audits often takes several years.
Providers can appeal any final determination made in connection with an audit.
COMMERCIAL INSURANCE. Our hospitals provide services to individuals covered
by private healthcare insurance. Private insurance carriers pay our hospitals or
in some cases reimburse their policyholders based upon the hospital's
established charges and the coverage provided in the insurance policy.
Commercial insurers are trying to limit the costs of hospital services by
negotiating discounts, including PPS, which would reduce payments by commercial
insurers to our hospitals. Reductions in payments for services provided by our
hospitals to individuals covered by commercial insurers could adversely affect
us.
COMPETITION
The hospital industry is highly competitive. An important part of our
business strategy is to acquire hospitals each year in non-urban markets.
However, not-for-profit hospital systems and other for-profit hospital companies
generally attempt to acquire the same type of hospitals as we do. In addition,
some hospitals are sold through an auction process, which may result in higher
purchase prices than we believe are reasonable.
In addition to the competition we face for acquisitions and physicians, we
must also compete with other hospitals and healthcare providers for patients.
The competition among hospitals and other healthcare providers for patients has
intensified in recent years. Our hospitals are located in non-urban service
areas. Most of our hospitals face no direct competition because there are no
other hospitals in their primary service areas. However, these hospitals do face
competition from hospitals outside of their primary service area, including
hospitals in urban areas that provide more complex services. These facilities
are generally located in excess of 25 miles from our facilities. Patients in our
primary service areas may travel to these other hospitals for a variety of
reasons, including the need for services we do not offer or physician referrals.
Patients who are required to seek services from these other hospitals may
subsequently shift their preferences to those hospitals for services we do
provide.
15
Some of our hospitals operate in primary service areas where they compete
with one other hospital. One of our hospitals competes with more than one other
hospital in its primary service area. Some of these competing hospitals use
equipment and services more specialized than those available at our hospitals.
In addition, some of the hospitals that compete with us are owned by
tax-supported governmental agencies or not-for-profit entities supported by
endowments and charitable contributions. These hospitals can make capital
expenditures without paying sales, property and income taxes. We also face
competition from other specialized care providers, including outpatient surgery,
orthopedic, oncology, and diagnostic centers.
The number and quality of the physicians on a hospital's staff is an
important factor in a hospital's competitive advantage. Physicians decide
whether a patient is admitted to the hospital and the procedures to be
performed. Admitting physicians may be on the medical staffs of other hospitals
in addition to those of our hospitals. We attempt to attract our physicians'
patients to our hospitals by offering quality services and facilities,
convenient locations, and state-of-the-art equipment.
COMPLIANCE PROGRAM
OUR COMPLIANCE PROGRAM. In early 1997, under our new management and
leadership, we voluntarily adopted a company-wide compliance program. The
program included the appointment of a compliance officer and committee, adoption
of an ethics and business conduct code, employee education and training,
implementation of an internal system for reporting concerns, auditing and
monitoring programs, and a means for enforcing the program's policies.
We take an operations team approach to compliance and utilize corporate
experts for program design efforts and facility leaders for employee-level
implementation. Compliance is another area that demonstrates our utilization of
standardization and centralization techniques and initiatives which yield
efficiencies and consistency throughout our facilities. We recognize that our
compliance with applicable laws and regulations depends on individual employee
actions as well as company operations. Our approach focuses on integrating
compliance responsibilities with operational function. This approach is intended
to reinforce our company-wide commitment to operate strictly in accordance with
the laws and regulations that govern our business.
Since its initial adoption, the compliance program continues to be expanded
and developed to meet the industry's expectations and our needs. Specific
written policies, procedures, training and educational materials and programs,
as well as auditing and monitoring activities have been prepared and implemented
to address the functional and operational aspects of our business. Included
within these functional areas are materials and activities for business
sub-units, including laboratory, radiology, pharmacy, emergency, surgery,
observation, home health, skilled nursing, and clinics. Specific areas
identified through regulatory interpretation and enforcement activities have
also been addressed in our program. Claims preparation and submission, including
coding, billing, and cost reports, comprise the bulk of these areas. Financial
arrangements with physicians and other referral sources, including anti-kickback
and Stark laws, emergency department treatment and transfer requirements, and
other patient disposition issues are also the focus of policy and training,
standardized documentation requirements, and review and audit.
INPATIENT CODING COMPLIANCE ISSUE. In August 1997, during a routine
internal audit at one of our facilities, we discovered inaccuracies in the DRG
coding for some of our inpatient medical records. At that time, this was the
primary auditing activity for our compliance program. These inaccuracies
involved inpatient coding practices that had been put in place prior to the time
we acquired our operating company in 1996.
Because of the concerns raised by the internal audit, we performed an
internal review of historical inpatient coding practices. At the completion of
this review in December 1997, we voluntarily disclosed the coding problems to
the Office of Inspector General of the U.S. Department of Health and Human
16
Services. After discussions with the Inspector General, we agreed to have an
independent consultant audit the coding for eight specific DRGs. This audit
ultimately involved a review by the consultant of approximately 1,500 patient
files. The audit procedures we followed generated a statistically valid estimate
of the dollar amounts related to coding errors for these DRGs at 36 of our
hospitals for the period 1993 to 1997.
The results of this audit were reviewed by the Inspector General and the
Department of Justice, who also conducted their own investigation. We cooperated
fully with their investigation. The government agencies advised us of potential
liability under various legal theories, including the False Claims Act. Under
the False Claims Act, we could be liable for as much as treble damages and
penalties of between $5,000 and $10,000 per false claim submitted to Medicare
and Medicaid.
We entered into a settlement agreement in May 2000 with these federal
government agencies and the applicable state Medicaid programs. Pursuant to the
settlement agreement, we paid approximately $31.8 million in May 2000 and were
released from all civil claims relating to the coding of the eight specific DRGs
for the hospitals and time periods covered in the audit. We funded this payment
from our acquisition loan facility. During 1998 and 1999, we established a
liability in our financial statements for this amount. We have also agreed with
the Inspector General to continue our existing voluntary compliance program
under a corporate compliance agreement and to adopt various additional
compliance measures for a period of three years. These additional compliance
measures include making various reports to the federal government and having our
actions pursuant to the compliance agreement reviewed annually by a third party.
The compliance measures and reporting and auditing requirements contained in
the compliance agreement include:
- continuing the duties and activities of our corporate compliance officer,
corporate compliance work group, and facility compliance chairs and
committees;
- maintaining our written ethics and conduct policy, which sets out our
commitment to full compliance with all statutes, regulations, and
guidelines applicable to federal healthcare programs;
- maintaining our written policies and procedures addressing the operation
of our compliance program, including proper coding for inpatient hospital
stays;
- continuing our general training on the ethics and conduct policy and
adding training about our compliance program and the compliance agreement;
- continuing our specific training for the appropriate personnel on billing
and coding issues;
- continuing independent third party periodic audits of our facilities'
inpatient DRG coding;
- having an independent third party perform an annual review of our
compliance with the compliance agreement;
- continuing our confidential disclosure program and "ethics hotline" to
enable employees or others to disclose issues or questions regarding
possible inappropriate policies or behavior;
- enhancing our screening program to ensure that we do not hire or engage
employees or contractors who are ineligible persons for federal healthcare
programs;
- reporting any material deficiency which resulted in an overpayment to us
by a federal healthcare program; and
- submitting annual reports to the Inspector General which describe in
detail the operations of our corporate compliance program for the past
year.
17
Our substantial adherence to the terms and conditions of the compliance
agreement will constitute an element of our eligibility to participate in the
federal healthcare programs. Consequently, material, uncorrected violations of
the compliance agreement could lead to suspension or disbarment from these
federal programs. In addition, we will be subject to possible civil penalties
for a failure to substantially comply with the terms of the compliance
agreement, including stipulated penalties ranging between $1,000 to $2,500 per
day. We will also be subject to a stipulated penalty of $25,000 per day,
following notice and cure periods, for any deliberate and/or flagrant breach of
the material provisions of the compliance agreement.
EMPLOYEES
At December 31, 2000, we employed approximately 14,073 full time employees
and 3,616 part-time employees. Of these employees, approximately 973 are
represented by labor organizations. We believe that our labor relations are
good.
PROFESSIONAL LIABILITY
As part of our business of owning and operating hospitals, we are subject to
legal actions alleging liability on our part. To cover claims arising out of the
operations of hospitals, we generally maintain professional malpractice
liability insurance and general liability insurance on a claims made basis in
amounts and with deductibles that we believe to be sufficient for our
operations. We also maintain umbrella liability coverage covering claims which,
due to their nature or amount, are not covered by our insurance policies. We
cannot assure you that professional liability insurance will cover all claims
against us or continue to be available at reasonable costs for us to maintain
adequate levels of insurance.
ENVIRONMENTAL MATTERS
We are subject to various federal, state, and local laws and regulations
governing the use, discharge, and disposal of hazardous materials, including
medical waste products. Compliance with these laws and regulations is not
expected to have a material adverse effect on us. It is possible, however, that
environmental issues may arise in the future which we cannot now predict.
ITEM 2.
PROPERTIES
Our hospitals are general care hospitals offering a wide range of inpatient
and outpatient medical services. These services generally include internal
medicine, general surgery, cardiology, oncology, orthopedics, OB/GYN, diagnostic
and emergency room services, outpatient surgery, laboratory, radiology,
respiratory therapy, physical therapy, and rehabilitation services. In addition,
some of our hospitals provide skilled nursing and home health services based on
individual community needs.
18
For each of our hospitals, the following table shows its location, the date
of its acquisition or lease inception and the number of licensed beds as of
December 31, 2000:
DATE OF
LICENSE ACQUISITION/LEASE OWNERSHIP
HOSPITAL CITY BEDS(1) INCEPTION TYPE
- -------- -------------- -------- ----------------- ------------
ALABAMA
Woodland Community Hospital........... Cullman 100 October, 1994 Owned
Parkway Medical Center Hospital....... Decatur 120 October, 1994 Owned
L.V. Stabler Memorial Hospital........ Greenville 72 October, 1994 Owned
Hartselle Medical Center.............. Hartselle 150 October, 1994 Owned
Edge Regional Hospital................ Troy 97 December, 1994 Owned
Lakeview Community Hospital........... Eufaula 74 April, 2000 Owned
South Baldwin Regional................ Foley 82 June, 2000 Leased
ARIZONA
Payson Regional Medical Center........ Payson 66 August, 1997 Leased
Western Arizona Regional.............. Bullhead City 90 July, 2000 Owned
ARKANSAS
Harris Hospital....................... Newport 132 October, 1994 Owned
Randolph County Medical Center........ Pocahontas 50 October, 1994 Leased
CALIFORNIA
Barstow Community Hospital............ Barstow 56 January, 1993 Leased
Fallbrook Hospital.................... Fallbrook 47 November, 1998 Operated (2)
Watsonville Community Hospital........ Watsonville 102 September, 1998 Owned
FLORIDA
North Okaloosa Medical Center......... Crestview 110 March, 1996 Owned
GEORGIA
Berrien County Hospital............... Nashville 71 October, 1994 Leased
Fannin Regional Hospital.............. Blue Ridge 34 January, 1986 Owned
ILLINOIS
Crossroads Community Hospital......... Mt. Vernon 55 October, 1994 Owned
Marion Memorial Hospital.............. Marion 99 October, 1996 Leased
KENTUCKY
Parkway Regional Hospital............. Fulton 70 May, 1992 Owned
Three Rivers Medical Center........... Louisa 90 May, 1993 Owned
Kentucky River Medical Center......... Jackson 55 August, 1995 Leased
19
DATE OF
LICENSE ACQUISITION/LEASE OWNERSHIP
HOSPITAL CITY BEDS(1) INCEPTION TYPE
- -------- -------------- -------- ----------------- ------------
LOUISIANA
Byrd Regional Hospital................ Leesville 70 October, 1994 Owned
Sabine Medical Center................. Many 52 October, 1994 Owned
River West Medical Center............. Plaquemine 80 August, 1996 Leased
MISSISSIPPI
The King's Daughters Hospital......... Greenville 137 September, 1999 Owned
MISSOURI
Moberly Regional Medical Center....... Moberly 114 November, 1993 Owned
Northeastern Regional Medical
Center.............................. Kirksville 164 December, 2000 Owned
NEW MEXICO
Mimbres Memorial Hospital............. Deming 49 March, 1996 Owned
Eastern New Mexico Medical Center..... Roswell 162 April, 1998 Owned
Northeastern Regional Hospital........ Las Vegas 54 April, 2000 Leased
NORTH CAROLINA
Martin General Hospital............... Williamston 49 November, 1998 Leased
PENNSYLVANIA
Berwick Hospital...................... Berwick 144 March, 1999 Owned
SOUTH CAROLINA
Marlboro Park Hospital................ Bennettsville 109 August, 1996 Leased
Chesterfield General Hospital......... Cheraw 66 August, 1996 Leased
Springs Memorial Hospital............. Lancaster 194 November, 1994 Owned
TENNESSEE
Lakeway Regional Hospital............. Morristown 135 May, 1993 Owned
Scott County Hospital................. Oneida 99 November, 1989 Leased
Cleveland Community Hospital.......... Cleveland 100 October, 1994 Owned
White County Community Hospital....... Sparta 60 October, 1994 Owned
TEXAS
Big Bend Regional Medical Center...... Alpine 40 October, 1999 Owned
Northeast Medical Center.............. Bonham 75 August, 1996 Owned
Cleveland Regional Medical Center..... Cleveland 115 August, 1996 Leased
Highland Medical Center............... Lubbock 123 September, 1986 Owned
Scenic Mountain Medical Center........ Big Spring 150 October, 1994 Owned
20
DATE OF
LICENSE ACQUISITION/LEASE OWNERSHIP
HOSPITAL CITY BEDS(1) INCEPTION TYPE
- -------- -------------- -------- ----------------- ------------
Hill Regional Hospital................ Hillsboro 92 October, 1994 Owned
Lake Granbury Medical Center.......... Granbury 56 January, 1997 Leased
UTAH
Tooele Valley Regional Medical
Center.............................. Tooele 38 October, 2000 Owned (3)
VIRGINIA
Greensville Memorial Hospital......... Emporia 114 March, 1999 Leased
Russell County Medical Center......... Lebanon 78 September, 1986 Owned
Southampton Memorial Hospital......... Franklin 105 March, 2000 Leased
WYOMING
Evanston Regional Hospital............ Evanston 42 November, 1999 Owned
- ------------------------
(1) Licensed beds are the number of beds for which the appropriate state agency
licenses a facility regardless of whether the beds are actually available
for patient use.
(2) We operate this hospital under a lease-leaseback and operating agreement. We
recognize all operating statistics, revenue and expenses associated with
this hospital in our consolidated financial statements.
(3) We acquired this hospital as of October 1, 2000. Prior to the acquisition,
we operated this hospital under a management agreement and did not include
the operating statistics of this hospital in our consolidated statistics.
During the term of the management agreement, our fee was equal to the
hospital's EBITDA.
ITEM 3.
LEGAL PROCEEDINGS
We entered into a settlement agreement in May 2000 with the Inspector
General, the Department of Justice, and the applicable state Medicaid programs
pursuant to which we paid approximately $31.8 million in exchange for a release
of civil claims associated with possible inaccurate inpatient coding for the
period 1993 to 1997. For a description of the terms of the settlement agreement
as well as the events giving rise to the settlement agreement, see "Item
1--Compliance Program."
In May 1999, we were served with a complaint in U.S. EX REL. BLEDSOE V.
COMMUNITY HEALTH SYSTEMS, INC., Case # 1-98-CV-0435-MHS (N.D. Ga.). This qui tam
action seeks treble damages and penalties under the False Claims Act against us.
The Department of Justice did not intervene in this action. The allegations in
the amended complaint are extremely general, but involve Medicare billing at our
White County Community Hospital in Sparta, Tennessee. In September 2000, the
court granted our motion to transfer this case to federal court in Tennessee and
our motion to dismiss the case is before the court. Based on our review of the
allegations of the relator, we do not believe that this lawsuit is meritorious
and we intend to vigorously defend ourselves against this action.
The Department of Justice also has notified us of the existence of U.S. EX
REL. SMITH V. COMMUNITY HEALTH SYSTEMS, INC., filed in September 1999 in the
federal court in Nashville, Tennessee. This qui tam lawsuit was brought against
us by a former employee of our Lakeway Regional Hospital. The complaint alleges
violations of the False Claims Act in connection with alleged inflated costs
caused by incorrect allocation of employee salaries to Lakeway Regional
Hospital's rehabilitation unit, as well as improper
21
Medicare reimbursement for patients readmitted to that hospital from the
rehabilitation unit. Our review indicates that the allegations relating to the
reimbursement for the readmitted patients lack factual support. In addition, our
review indicates that any inaccuracies in salary allocations to the
rehabilitation unit's cost reports were relatively minimal in amount. The
Department of Justice has advised us informally that it has decided not to
intervene, but we have not been formally served with the complaint. We intend to
assert a number of factual and legal defenses to these allegations.
The Department of Justice also has notified us of the existence of U.S. EX
REL. KOWATLI V. RUSSELL COUNTY MEDICAL CENTER, ET AL., filed in January 1999 in
the federal court in Abingdon, Virginia. This lawsuit was brought by a physician
who formerly had privileges at Russell County Medical Center. The complaint is
filed under the False Claims Act against various individual doctors as well as
Russell County Medical Center and us. The complaint alleges that the defendants
engaged in unnecessary and unsafe medical procedures, tests and
hospitalizations. The physician had previously filed two antitrust actions
against the doctors and hospital which were both found to be without merit and
dismissed by the courts. Based upon our investigation into the allegations at
the request and direction of the Department of Justice, we do not believe this
lawsuit has any merit. We have not been served with the complaint, and the
Department of Justice has not made a decision to intervene.
In 1999, we received federal grand jury subpoenas from the U.S. Attorney's
Office for the Eastern District of Arkansas seeking documents from our Harris
Hospital facility relating to its mammography department. Investigators from the
Food and Drug Administration and the State of Arkansas also sought documents and
interviewed employees relating to the activities of the Harris Hospital
mammography department. We have cooperated with the government's investigation
and made documents and individuals available. In January 2001, we received a
contact letter in connection with this matter from the Civil Division of the
United States Attorney's Office. The letter alleges violations of the False
Claims Act and the Mammography Quality Standards Act. We have reopened our
investigation into this matter to determine whether the allegations have merits
and will defend them accordingly.
Because of the uncertain nature of litigation, we cannot predict the outcome
of these matters.
We also receive various inquiries or subpoenas from state regulators, fiscal
intermediaries, and the Department of Justice regarding various Medicare and
Medicaid issues. In addition, we are subject to other claims and lawsuits
arising in the ordinary course of our business or arising out of transactions.
Plaintiffs in these lawsuits generally request punitive or other damages that by
state law may not be able to be covered by insurance. We are not aware of any
pending or threatened litigation which we believe would have a material adverse
impact on us.
ITEM 4.
SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth
quarter of the year ended December 31, 2000.
22
PART II
ITEM 5.
MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
We completed an initial public offering of our Common Stock which began
trading on June 9, 2000 and was closed on June 14, 2000. Our Common Stock is
listed on the New York Stock Exchange under the symbol CYH. At March 16, 2001,
there were approximately 48 record holders and 4,150 beneficial holders of our
Common Stock. The following table sets forth, for the periods indicated, the
high and low sale prices per share of our Common Stock as reported by the New
York Stock Exchange. Our Common Stock did not trade below the June 9, 2000
initial public offering price of $13.00.
HIGH LOW
-------- --------
Year Ended December 31, 2000
Second Quarter (beginning June 9, 2000)................ $16.3125 $ 13.00
Third Quarter.......................................... 32.50 15.625
Fourth Quarter......................................... 37.20 24.25
We have not paid any cash dividends since its inception, and do not
anticipate the payment of cash dividends in the foreseeable future.
The shares of our Common Stock sold in our initial public offering were
registered under the Securities Act of 1933, as amended, on a Registration
Statement on Form S-1 (the "Registration Statement") (Registration
No. 333-31790). In total, we sold 20,425,717 shares in the offering at $13.00
per share, including 1,675,717 shares sold on July 3, 2000 in connection with
the exercise by the underwriters of their overallotment option. After deducting
the underwriting discounts and commissions and the offering expenses described
above, the Company received net proceeds from the offering of $245.7 million
which was used to repay long-term debt.
On November 3, 2000, we closed a second public offering of Common Stock. The
shares of our Common Stock sold in the offering were registered under the
Securities Act of 1933, as amended, on a Registration Statement on Form S-1 (the
"Registration Statement") (Registration No. 333-47354). The 10,000,000 shares
offered by the Company and 8,000,000 shares offered by the selling shareholders
under the Registration Statement were sold at a price of $28.1875 per share.
After deducting the underwriting discounts and commissions and the offering
expenses described above, the Company received net proceeds from the offering of
$268.9 million which was used to repay long-term debt.
23
ITEM 6.
SELECTED FINANCIAL DATA
PERIOD FROM PREDECESSOR(1)
JULY 1 PERIOD FROM
THROUGH JANUARY 1
YEAR ENDED DECEMBER 31, DECEMBER THROUGH JUNE
--------------------------------------------------- 31, 30,
2000 1999 1998 1997 1996(3) 1996(2)
---------- ---------- ----------- ----------- ----------- --------------
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
CONSOLIDATED STATEMENT OF
OPERATIONS DATA
Net operating revenues... $1,337,501 $1,079,953 $ 854,580 $ 742,350 $ 327,922 $294,166
Income (loss) from
operations............. 155,112 105,255 (95,152) 53,081 27,118 (34,069)
Net income (loss)........ 9,569 (16,789) (183,290) (32,171) (13,102) (27,252)
Net income (loss) per
share -- Diluted....... 0.14 (0.31) (3.38) (0.60) (0.24) --
Weighted-average number
of shares outstanding
-- Diluted (4)......... 69,187,191 54,545,030 54,249,895 53,989,089 53,786,432 --
CONSOLIDATED BALANCE
SHEET DATA (AS OF END
OF PERIOD OR YEAR)
Cash and cash
equivalents............ $ 13,740 $ 4,282 $ 6,719 $ 7,663 $ 26,588 $ 10,410
Total assets............. 2,213,837 1,895,084 1,747,016 1,643,521 1,630,630 506,323
Long-term obligations.... 1,216,790 1,430,099 1,273,502 1,053,450 1,009,698 246,216
Stockholders' equity..... 756,174 229,708 246,826 433,625 465,673 165,879
- --------------------------
(1) Effective in July 1996, we acquired all of the outstanding common stock of
our principal subsidiary, CHS/Community Health Systems, Inc. The predecessor
company had a substantially different capital structure compared to ours.
Because of the limited usefulness of the earnings per share information for
the predecessor company, these amounts have been excluded.
(2) Includes two acquisitions.
(3) Includes six acquisitions.
(4) See note 10 to the consolidated financial statements, included later in this
Form 10-K.
24
ITEM 7.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
You should read this discussion together with our consolidated financial
statements and the accompanying notes and Selected Financial Data included
elsewhere in this Form 10-K.
OVERVIEW
We are the largest non-urban provider of general hospital healthcare
services in the United States in terms of number of facilities and the second
largest in terms of revenues and EBITDA. As of December 31, 2000, we owned,
leased or operated 52 hospitals, geographically diversified across 20 states,
with an aggregate of 4,688 licensed beds. In over 85% of our markets, we are the
sole provider of general hospital healthcare services. In most of our other
markets, we are one of two providers of general hospital healthcare services.
For the fiscal year ended December 31, 2000, we generated $1.34 billion in net
operating revenues and $252.7 million in adjusted EBITDA. We achieved revenue
growth of 23.8% in 2000 and 26.4% in 1999. We also achieved growth in adjusted
EBITDA of 23.8% in 2000 and 22.7% in 1999.
ACQUISITIONS
During 2000, we acquired, through five purchases and two capital lease
transactions, most of the assets, including working capital, of seven hospitals.
These acquisitions include the purchase of assets of a hospital which we were
managing under an operating agreement. We had purchased the working capital
accounts of that hospital in 1998. The consideration for the seven hospitals
totaled approximately $247 million. This consideration consisted of
$148 million in cash, which we borrowed under our acquisition loan facilities,
and assumed liabilities of $99 million. We prepaid the lease obligation relating
to each lease transaction. We included the prepayment as part of the cash
consideration.
During 1999, we acquired, through three purchases and one capital lease
transaction, most of the assets, including working capital, of four hospitals.
The consideration for the four hospitals totaled approximately $78 million. This
consideration consisted of $59.7 million in cash, which we borrowed under our
acquisition loan facility, and assumed liabilities of $18.1 million. We prepaid
the entire lease obligation relating to the lease transaction. We included the
prepayment as part of the cash consideration. We also opened one additional
hospital, after completion of construction, at a cost of $15.3 million. This
owned hospital replaced a hospital that we managed.
During 1998, we acquired, through two purchase and two capital lease
transactions, most of the assets, including working capital, of four hospitals.
The consideration for the four hospitals totaled approximately $219 million.
This consideration consisted of $169.8 million in cash, which we borrowed under
our acquisition loan facility, and assumed liabilities of $48.8 million. We
prepaid the entire lease obligation relating to each lease transaction. We
included the prepayment as part of the cash consideration. Also, effective
December 1, 1998, we entered into an operating agreement relating to a 38
licensed bed hospital. We also purchased the working capital accounts of that
hospital. The cash payment made for this hospital was $2.8 million. Pursuant to
this operating agreement, upon specified conditions being met, we will be
obligated to construct a replacement hospital and to purchase for $0.9 million
the remaining assets of the hospital. Upon completion, all rights of ownership
and operation will transfer to us.
Goodwill from the acquisition of our predecessor company in 1996 was
$662.1 million and from subsequent hospital acquisitions was $323.5 million as
of December 31, 2000. Based on management's
25
assessment of the goodwill's estimated useful life, we generally amortize our
goodwill over 40 years. Goodwill represented 130.3% of our shareholders' equity
as of December 31, 2000; the amount of goodwill amortized equaled 16.6% of our
income from operations for the year ended December 31, 2000. Significant adverse
changes in facts regarding our industry, markets and operations could cause our
management to shorten the estimated useful life used to amortize our goodwill.
This could result in material increases in amortization of goodwill, or cause
impairments to the carrying amount of such goodwill, resulting in a non-cash
charge which would reduce operating income.
In the future, we intend to acquire, on a selective basis, two to four
hospitals in our target markets annually. Because of the financial impact of
acquisitions, it is difficult to make meaningful comparisons between our
financial statements for the periods presented. Because EBITDA margins at
hospitals we acquire are, at the time of acquisition, lower than those of our
existing hospitals, acquisitions can negatively affect our EBITDA margins on a
consolidated basis.
On May 1, 2000, we terminated the lease of a hospital previously held for
disposition. At December 31, 2000, the carrying amounts of one of our hospitals,
which is being held for disposition, were segregated from our remaining assets
and classified in other assets, net in our consolidated balance sheet as of
December 31, 2000. We do not expect the impact of any gain or loss on our
financial results to be material.
SOURCES OF REVENUE
Net operating revenues include amounts estimated by management to be
reimbursable by Medicare and Medicaid under prospective payment systems and
provisions of cost-reimbursement and other payment methods. Approximately 46% of
net operating revenues for the year ended December 31, 2000, 48% for the year
ended December 31, 1999, and 49% for the year ended December 31, 1998, are
related to services rendered to patients covered by the Medicare and Medicaid
programs. In addition, we are reimbursed by non-governmental payors using a
variety of payment methodologies. Amounts we receive for treatment of patients
covered by these programs are generally less than the standard billing rates. We
account for the differences between the estimated program reimbursement rates
and the standard billing rates as contractual adjustments, which we deduct from
gross revenues to arrive at net operating revenues. Final settlements under some
of these programs are subject to adjustment based on administrative review and
audit by third parties. We record adjustments to the estimated billings in the
periods that such adjustments become known. We account for adjustments to
previous program reimbursement estimates as contractual adjustments and report
them in future periods as final settlements are determined. Adjustments related
to final settlements or appeals that increased revenue were insignificant in
each of the years ended December 31, 2000, 1999 and 1998. Net amounts due to
third-party payors as of December 31, 2000 were $2.3 million and as of
December 31, 1999 were $9.1 million. We included these amounts in "Accrued
Liabilities--Other" in our balance sheets. Substantially all Medicare and
Medicaid cost reports are final settled through 1997.
We expect the percentage of revenues received from the Medicare program to
increase due to the general aging of the population and the restoration of some
payments under the Balanced Budget Refinement Act of 1999 and Benefit and
Improvement Protection Act of 2000. The payment rates under the Medicare program
for inpatients are based on a prospective payment system, based upon the
diagnosis of a patient. While these rates are indexed for inflation annually,
the increases have historically been less than actual inflation. Reductions in
the rate of increase in Medicare reimbursement may have an adverse impact on our
net operating revenue growth.
The implementation of Medicare's new prospective payment system for
outpatient hospital care, effective August 1, 2000, had a favorable impact,
however, not material to our overall operating results. The Health Care
Financing Administration estimated that this new prospective payment system will
result in an overall 9.7% increase in projected outpatient payments which began
August 1, 2000.
26
In December 2000, the Benefit Improvement and Protection Act of 2000 became
law. It is estimated that the changes to be implemented to many facets of the
Medicare reimbursement system will increase reimbursement. We do not believe
these increases will be material to our overall operating results.
In addition, Medicaid programs, insurance companies, and employers are
actively negotiating the amounts paid to hospitals as opposed to their standard
rates. The trend toward increased enrollment in managed care may adversely
affect our net operating revenue growth.
RESULTS OF OPERATIONS
Our hospitals offer a variety of services involving a broad range of
inpatient and outpatient medical and surgical services. These include
orthopedics, cardiology, OB/GYN, occupational medicine, rehabilitation
treatment, home health, and skilled nursing. The strongest demand for hospital
services generally occurs during January through April and the weakest demand
for these services occurs during the summer months. Accordingly, eliminating the
effect of new acquisitions, our net operating revenues and earnings are
generally highest during the first quarter and lowest during the third quarter.
The following tables summarize, for the periods indicated, selected
operating data.
YEARS ENDED DECEMBER 31,
---------------------------------
2000 1999 1998
--------- --------- ---------
(EXPRESSED AS A PERCENTAGE OF NET
OPERATING REVENUES)
Net operating revenues...................................... 100.0 100.0 100.0
Operating expenses (1)...................................... (81.1) (81.1) (80.5)
----- ----- -----
Adjusted EBITDA (2)......................................... 18.9 18.9 19.5
Depreciation and amortization............................... (5.4) (5.3) (5.8)
Amortization of goodwill.................................... (1.9) (2.3) (3.1)
Impairment of long-lived assets............................. -- -- (19.3)
Compliance settlement and Year 2000 remediation costs (3)... -- (1.6) (2.4)
----- ----- -----
Income (loss) from operations............................... 11.6 9.7 (11.1)
Interest, net............................................... (9.5) (10.8) (11.8)
----- ----- -----
Income (loss) before cumulative effect of a change in
accounting principle and income taxes..................... 2.1 (1.1) (22.9)
Provision for (benefit from) income taxes................... 1.4 0.5 (1.5)
----- ----- -----
Income (loss) before cumulative effect of a change in
accounting principle...................................... 0.7 (1.6) (21.4)
===== ===== =====
27
YEARS ENDED
DECEMBER 31,
-------------------
2000 1999
-------- --------
Percentage change from prior period:
Net operating revenues...................................... 23.8 26.4
Admissions.................................................. 19.0 20.3
Adjusted admissions (4)..................................... 20.9 22.6
Average length of stay...................................... (5.0) (4.8)
Adjusted EBITDA (2)......................................... 23.8 22.7
Same hospitals percentage change from prior period (5):
Net operating revenues...................................... 10.3 7.6
Admissions.................................................. 6.3 4.9
Adjusted admissions......................................... 7.3 7.7
Adjusted EBITDA (2)......................................... 16.7 12.6
- ------------------------
(1) Operating expenses include salaries and benefits, provision for bad debts,
supplies, rent, and other operating expenses, and exclude the items that are
excluded for purposes of determining adjusted EBITDA as discussed in
footnote (2) below.
(2) We define adjusted EBITDA as EBITDA adjusted to exclude cumulative effect of
a change in accounting principle, impairment of long-lived assets and
compliance settlement and Year 2000 remediation costs. EBITDA consists of
income (loss) before interest, income taxes, depreciation and amortization,
and amortization of goodwill. EBITDA and adjusted EBITDA should not be
considered as measures of financial performance under generally accepted
accounting principles. Items excluded from EBITDA and adjusted EBITDA are
significant components in understanding and assessing financial performance.
EBITDA and adjusted EBITDA are key measures used by management to evaluate
our operations and provide useful information to investors. EBITDA and
adjusted EBITDA should not be considered in isolation or as alternatives to
net income, cash flows generated by operations, investing or financing
activities, or other financial statement data presented in the consolidated
financial statements as indicators of financial performance or liquidity.
Because EBITDA and adjusted EBITDA are not measurements determined in
accordance with generally accepted accounting principles and are thus
susceptible to varying calculations, EBITDA and adjusted EBITDA as presented
may not be comparable to other similarly titled measures of other companies.
(3) Includes Year 2000 remediation costs representing 0.0% in 1998, 0.3% in 1999
and 0.0% in 2000.
(4) Adjusted admissions is a general measure of combined inpatient and
outpatient volume. We computed adjusted admissions by multiplying admissions
by gross patient revenues and then dividing that number by gross inpatient
revenues.
(5) Includes acquired hospitals to the extent we operated them during comparable
periods in both years.
28
YEAR ENDED DECEMBER 31, 2000 COMPARED TO YEAR ENDED DECEMBER 31, 1999
Net operating revenues increased by 23.8% to $1,337.5 million in 2000 from
$1,080.0 million in 1999. Of the $257.5 million increase in net operating
revenues, the hospitals we acquired, including one constructed, in 2000 and
1999, contributed $149.6 million and hospitals we owned throughout both periods
contributed $107.9 million. The $107.9 million, or 10.3%, increase in same
hospitals net operating revenues was attributable primarily to inpatient and
outpatient volume increases. In 2000, we experienced an estimated $25 million of
reductions from the Balanced Budget Act of 1997. We have experienced lower
payments from a number of payors, resulting primarily from:
- reductions mandated by the Balanced Budget Act of 1997, particularly in
the areas of reimbursement for Medicare outpatient, capital, bad debts,
home health, and skilled nursing;
- reductions in various states' Medicaid programs; and
- reductions in length of stay for patients not reimbursed on an admission
basis.
We expect the Balanced Budget Refinement Act of 1999 and the Benefit
Improvement and Protection Act of 2000 to lessen the impact of these reductions
in future periods.
Inpatient admissions increased by 19.0%. Adjusted admissions increased by
20.9%. Average length of stay decreased by 5.0%. On a same hospitals basis,
inpatient admissions increased by 6.3% and adjusted admissions increased by
7.3%. The increase in same hospitals inpatient admissions and adjusted
admissions was due primarily to an increase in services offered, physician
relationship development efforts, and the addition of physicians through our
focused recruitment program. On a same hospitals basis, net outpatient operating
revenues increased 13.7%. Outpatient growth reflects the continued trend toward
a preference for outpatient procedures, where appropriate, by patients,
physicians, and payors.
Operating expenses, as a percentage of net operating revenues, remained
unchanged at 81.1% from 1999 to 2000. Adjusted EBITDA margin remained unchanged
at 18.9% from 1999 to 2000. Salaries and benefits, as a percentage of net
operating revenues, decreased from 38.8% in 1999 to 38.7% in 2000. Provision for
bad debts, as a percentage of net operating revenues, increased to 9.1% in 2000
from 8.8% in 1999 due to an increase in self-pay revenues and payor remittance
slowdowns in part caused by an increase in the number of acquisition
conversions. The conversion is the process by which the Company must apply for
new Medicare and Medicaid provider numbers on acquired hospitals. This process
results in billing delays and payor remittance slowdowns and subsequently an
increase in the allowance for uncollectible receivables during the conversion
period. Supplies, as a percentage of net operating revenues, decreased to 11.5%
in 2000 from 11.7% in 1999. Rent and other operating expenses, as a percentage
of net operating revenues, remained unchanged at 21.7% from 1999 to 2000.
On a same hospitals basis, operating expenses as a percentage of net
operating revenues decreased from 81.2% in 1999 to 80.1% in 2000 and adjusted
EBITDA margin increased from 18.8% in 1999 to 19.9% in 2000. These efficiency
and productivity gains resulted from the achievement of target staffing ratios,
physician recruiting efforts, and improved compliance with national purchasing
contracts. Operating expenses improved as a percentage of net operating revenues
in every major category except provision for bad debts which increased slightly
and other operating expenses which were flat compared to 1999.
Depreciation and amortization increased by $15.0 million from $56.9 million
in 1999 to $71.9 million in 2000. The twelve hospitals acquired in 1999 and 2000
accounted for $5.9 million of the increase and facility renovations and
purchases of equipment primarily accounted for the remaining $9.1 million.
29
Amortization of goodwill increased by $1.0 million from $24.7 million in
1999 to $25.7 million in 2000. This increase primarily related to the twelve
hospitals acquired, including one constructed, in 1999 and 2000.
Interest, net increased by $10.9 million from $116.5 million in 1999 to
$127.4 million in 2000. The twelve hospitals acquired, including one
constructed, in 1999 and 2000 accounted for approximately $8.5 million of the
increase, borrowings under our credit agreement to finance capital expenditures
and physician recruiting accounted for $10.0 million of the increase, borrowings
to fund our compliance settlement accounted for $1.9 million of the increase and
changes in interest rates accounted for $8.2 million of the increase. These
increases were offset by savings of approximately $16.0 million from the
repayment of long-term debt with the proceeds from our initial public and
secondary offerings in 2000 and a savings of $1.7 million from an increase in
cash flow from operations.
Income before income taxes for 2000 was $27.7 million compared to a loss of
$11.2 million in 1999. This improvement is primarily the result of revenue
growth from both acquisitions and same store hospitals, management's ability to
control expenses and a reduction in the growth rate of interest expense.
The provision for income taxes in 2000 was $18.2 million compared to
$5.6 million in 1999. Due to the non-deductible nature of certain goodwill
amortization, the resulting effective tax rate is in excess of the statutory
rate.
Net income for 2000 was $9.6 million as compared to $16.8 million net loss
in 1999.
YEAR ENDED DECEMBER 31, 1999 COMPARED TO YEAR ENDED DECEMBER 31, 1998
Net operating revenues increased by 26.4% to $1,080.0 million in 1999 from
$854.6 million in 1998. Of the $225.4 million increase in net operating
revenues, the nine hospitals we acquired, including one constructed, in 1998 and
1999, contributed $160.6 million and hospitals we owned throughout both periods
contributed $64.8 million. The $64.8 million, or 7.6%, increase in same
hospitals net operating revenues was attributable primarily to inpatient and
outpatient volume increases, partially offset by a decrease in reimbursement. In
1999, we experienced an estimated $23 million of revenue reductions from the
Balanced Budget Act of 1997. We have experienced lower payments from a number of
payors, resulting primarily from:
- reductions mandated by the Balanced Budget Act of 1997, particularly in
the areas of reimbursement for Medicare outpatient, capital, bad debts,
home health, and skilled nursing;
- reductions in various states' Medicaid programs; and
- reductions in length of stay for patients not reimbursed on an admission
basis.
Inpatient admissions increased by 20.3%. Adjusted admissions increased by
22.6%. Average length of stay decreased by 4.8%. On a same hospitals basis,
inpatient admissions increased by 4.9% and adjusted admissions increased by
7.7%. The increase in same hospitals inpatient admissions and adjusted
admissions was due primarily to an increase in services offered, physician
relationship development efforts, and the addition of physicians through our
focused recruitment program. On a same hospitals basis, net outpatient operating
revenues increased 14.8%. Outpatient growth reflects the continued trend toward
a preference for outpatient procedures, where appropriate, by patients,
physicians, and payors.
Operating expenses, as a percentage of net operating revenues, increased
from 80.5% in 1998 to 81.1% in 1999 due to higher operating expenses and lower
initial adjusted EBITDA margins associated with acquired hospitals and one
recently constructed hospital. Adjusted EBITDA margin decreased from 19.5% in
1998 to 18.9% in 1999. Salaries and benefits, as a percentage of net operating
revenues, increased to 38.8% in 1999 from 38.4% in 1998, due to acquisitions of
hospitals in 1998 and 1999
30
having higher salaries and benefits as a percentage of net operating revenues
than our 1998 results. Provision for bad debts, as a percentage of net operating
revenues, increased to 8.8% in 1999 from 8.1% in 1998 due to an increase in
self-pay revenues and payor remittance slowdowns in part caused by payors
converting their information systems to become year 2000 compliant. Supplies, as
a percentage of net operating revenues, decreased to 11.7% in 1999 from 11.8% in
1998. Rent and other operating expenses, as a percentage of net operating
revenues, decreased to 21.7% in 1999 from 22.3% in 1998.
On a same hospitals basis, operating expenses as a percentage of net
operating revenues decreased from 81.1% in 1998 to 80.3% in 1999 and adjusted
EBITDA margin increased from 18.9% in 1998 to 19.7% in 1999. These efficiency
and productivity gains resulted from the achievement of target staffing ratios
and improved compliance with national purchasing contracts. Operating expenses
improved as a percentage of net operating revenues in every major category
except provision for bad debts.
Depreciation and amortization increased by $7.0 million from $49.9 million
in 1998 to $56.9 million in 1999. The nine hospitals acquired in 1998 and 1999
accounted for $7.1 million of the increase, and facility renovations and
purchases of equipment accounted for the remaining $3.3 million. These increases
were offset by a $3.4 million reduction in depreciation and amortization related
to the 1998 impairment write-off of certain assets.
Amortization of goodwill decreased by $1.9 million from $26.6 million in
1998 to $24.7 million in 1999. The 1998 impairment charge resulted in a
$3.6 million reduction in amortization of goodwill, offset by an increase of
$1.7 million primarily related to the nine hospitals acquired in 1998 and 1999.
Interest, net increased by $15.3 million from $101.2 million in 1998 to
$116.5 million in 1999. The nine hospitals acquired in 1998 and 1999 accounted
for $10.2 million of the increase, and borrowings under our credit agreement to
finance capital expenditures accounted for the remaining $5.1 million.
Loss before cumulative effect of a change in accounting principle and income
taxes for 1999 was $11.2 million compared to a loss of $196.3 million in 1998. A
majority of this variance was due to a $164.8 million charge for impairment of
long-lived assets recorded in 1998. In December 1998, in connection with our
periodic review process, we determined that as a result of adverse changes in
physician relationships, undiscounted cash flows from seven of our hospitals
were below the carrying value of long-lived assets associated with those
hospitals. Therefore, in accordance with Statement of Financial Accounting
Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed of," we adjusted the carrying value of the
related long-lived assets, primarily goodwill, to their estimated fair value. We
based the estimated fair values of these hospitals on specific market
appraisals.
The provision for income taxes in 1999 was $5.6 million compared to a
benefit of $13.4 million in 1998. Due to the non-deductible nature of certain
goodwill amortization and the goodwill portion of the 1998 impairment charge,
the effective tax rate is in excess of the statutory rate.
Including the impairment of long-lived assets, compliance settlement costs,
Year 2000 remediation costs, and cumulative effect of a change in accounting
principle charges, net loss for 1999 was $16.8 million as compared to
$183.3 million net loss in 1998. In 1997, we initiated a voluntary review of
inpatient medical records to determine whether documentation supported the
inpatient codes billed to certain governmental payors for the years 1993 through
1997. We executed a settlement agreement with the appropriate state and federal
governmental agencies for a negotiated settlement amount of approximately
$31.8 million, which we paid in May 2000. We recorded as a charge to income,
under the caption "Compliance settlement and Year 2000 remediation costs,"
$20 million in 1998 and $14 million in 1999.
31
LIQUIDITY AND CAPITAL RESOURCES
2000 COMPARED TO 1999
Net cash provided by operating activities increased by $34.7 million, from a
use of $11.7 million during 1999 to cash provided of $23.0 million during 2000
due primarily to an increase in net income of $26.4 million, use of deferred tax
assets of $17.2 million during 2000 as compared to creating deferred tax assets
of $3.8 million in 1999, and an increase in accounts payable and accrued
liabilities, offset by an increase in accounts receivable and the $31.8 million
compliance settlement payment made during 2000. The use of cash in investing
activities increased $88.9 million from $155.5 million in 1999 to
$244.4 million in 2000. The increase is due primarily to an increase in cash
used to finance hospital acquisitions of $88.5 million during 2000 and an
increase in cash used to finance all other capital expenditures of
$0.4 million. Net cash provided by financing activities increased $66.0 million
from $164.9 million in 1999 to $230.9 million in 2000. We raised $514.5 million
in proceeds, net of expenses from our initial public and secondary offerings
completed in 2000, which were used to repay long term debt. Our borrowings
during 2000 were $241.3 million and, excluding the offering proceeds, repayments
would have been $11.0 million. Excluding the 2000 offering proceeds and the
refinancing of our credit facility in 1999, this represents a $64.8 million
increase compared to borrowings of $186.3 million and repayments of
$20.9 million in 1999. The $64.8 million increase in borrowings is related to
the increase in the amount spent on acquisitions of facilities partially offset
by an increase in operating cash flows.
1999 COMPARED TO 1998
Net cash provided by operating activities decreased by $27.4 million, from
$15.7 million during 1998 to a use of $11.7 million during 1999 due primarily to
an increase in accounts receivable at both same hospitals and newly-acquired
hospitals. The use of cash in investing activities decreased from
$236.6 million in 1998 to $155.5 million in 1999. The $81.1 million decrease was
due primarily to a decrease in cash used to finance hospital acquisitions of
$112.9 million during 1999. This decrease was offset by a $31.8 million increase
in cash used primarily to finance capital expenditures during 1999, including
approximately $15.0 million of Year 2000 expenditures. The 1998 use of cash to
acquire facilities included four hospitals, two of which were larger facilities.
Net cash provided by financing activities decreased from $219.9 million in 1998
to $164.9 million in 1999. Excluding the refinancing of our credit facility,
borrowings in 1999 would have been $186.3 million and repayments would have been
$20.9 million. This represents a $56.2 million decrease compared to
$242.5 million borrowed in 1998 and repayments of long-term indebtedness of
$20.9 million in 1999 compared to repayments of $18.8 million in 1998. The
$56.2 million decrease in borrowings related to a lesser amount spent on
acquisition of facilities, partially offset by increased capital expenditures
and an increase in the accounts receivable balance.
CAPITAL EXPENDITURES
Our capital expenditures for 2000 totaled $63.0 million compared to
$65.0 million in 1999 and $51.3 million in 1998. Our capital expenditures for
1999 excludes $15.3 million of costs associated with the opening and
construction of one additional hospital. The decrease in capital expenditures in
2000 was due primarily to the increase in purchases of medical equipment and
information system upgrades in 1999 related to year 2000 compliance. These same
expenditures account for the increase in capital expenditures during 1999 as
compared to 1998.
Pursuant to hospital purchase agreements in effect as of December 31, 2000,
we are required to construct four replacement hospitals through 2005 with an
aggregate estimated construction cost, including equipment, of approximately
$120 million. We expect total capital expenditures of approximately $90 million
in 2001, including approximately $60 million for renovation and equipment
purchases and approximately $30 million for construction of replacement
hospitals.
32
CAPITAL RESOURCES
Net working capital was $167.7 million at December 31, 2000 compared to
$65.2 million at December 31, 1999. The $102.5 million increase was attributable
primarily to an increase in accounts receivable due to a combination of growth
in same hospitals revenues during 2000 and the addition of seven hospitals in
2000 as well as the payment of approximately $31.8 million related to the
compliance settlement, which was borrowed against the acquisition loan facility,
offset by an increase in accounts payable.
During March 1999, we amended our credit agreement. The amended credit
agreement provides for $644 million in term debt with quarterly amortization and
staggered maturities in 2000, 2001, 2002, 2003, 2004 and 2005. This agreement
also provides for revolving facility debt for working capital of up to
$200 million and for acquisitions of up to $263.2 million. This revolving
facility matures on December 31, 2002. Borrowings under the facility bear
interest at either LIBOR or the higher of the prime rate, the three month
certificate of deposit rate plus 1% of the federal funds rate plus 1/2 of 1%,
plus in all cases various applicable margins. Some of these margins are fixed
and others are based upon financial covenant ratio tests. As of December 31,
2000, under our credit agreement, our weighted average interest rate was 10.03%.
As of December 31, 2000, we had availability to borrow an additional
$159.9 million under the working capital revolving facility and an additional
$193.2 million under the acquisition loan revolving facility.
We are required to pay a quarterly commitment fee at a rate which ranges
from .375% to .500% based on specified financial performance criteria. This fee
applies to unused commitments under the revolving credit facility and the
acquisition loan facility.
The terms of the credit agreement include various restrictive covenants.
These covenants include restrictions on additional indebtedness, investments,
asset sales, capital expenditures, dividends, sale and leasebacks, contingent
obligations, transactions with affiliates, and fundamental changes. The
covenants also require maintenance of various ratios regarding senior
indebtedness, senior interest, and fixed charges.
We believe that internally generated cash flows and borrowings under our
revolving credit facility and acquisition facility will be sufficient to finance
acquisitions, capital expenditures and working capital requirements through the
next 12 months. If funds required for future acquisitions exceed existing
sources of capital, we will need to increase our credit facilities or obtain
additional capital by other means.
REIMBURSEMENT, LEGISLATIVE AND REGULATORY CHANGES
Legislative and regulatory action has resulted in continuing change in the
Medicare and Medicaid reimbursement programs which will continue to limit
payment increases under these programs. Within the statutory framework of the
Medicare and Medicaid programs, there are substantial areas subject to
administrative rulings, interpretations, and discretion which may further affect
payments made under those programs, and the federal and state governments might,
in the future, reduce the funds available under those programs or require more
stringent utilization and quality reviews of hospital facilities. Additionally,
there may be a continued rise in managed care programs and future restructuring
of the financing and delivery of healthcare in the United States. These events
could have an adverse effect on our future financial results.
INFLATION
The healthcare industry is labor intensive. Wages and other expenses
increase during periods of inflation and when labor shortages occur in the
marketplace. In addition, suppliers pass along rising costs to us in the form of
higher prices. We have implemented cost control measures, including our
33
case and resource management program, to curb increases in operating costs and
expenses. We have, to date, offset increases in operating costs by increasing
reimbursement for services and expanding services. However, we cannot predict
our ability to cover or offset future cost increases.
RECENT ACCOUNTING PRONOUNCEMENT NOT YET ADOPTED
SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities", is effective for all fiscal years beginning after June 15, 2000.
SFAS No. 133, as amended, establishes accounting and reporting standards for
derivative instruments, including certain derivative instruments embedded in
other contracts and for hedging activities. Under SFAS No. 133, certain
contracts that were not formerly considered derivatives may now meet the
definition of a derivative. The Company will adopt SFAS No. 133 effective
January 1, 2001. Management does not expect the adoption of SFAS No. 133 to have
a significant impact on the financial position, results of operations, or cash
flows of the Company.
FEDERAL INCOME TAX EXAMINATIONS
The Internal Revenue Service is examining our filed federal income tax
returns for the tax periods ended between December 31, 1993 and December 31,
1996. The Internal Revenue Service has indicated that it is considering a number
of adjustments, primarily involving temporary or timing differences. To date, a
revenue agent's report has not been issued in connection with the examination of
these tax periods. While we anticipate a resolution of the current examinations
within the next six months, we do not expect that the ultimate outcome of the
Internal Revenue Service examinations will have a material effect on us.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to interest rate changes, primarily as a result of our credit
agreement which bears interest based on floating rates. We have not taken any
action to cover interest rate market risk, and are not a party to any interest
rate market risk management activities.
A 1% change in interest rates on variable rate debt would have resulted in
interest expense fluctuating approximately $9 million for 2000, $8 million for
1999, and $6 million for 1998.
34
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
THIS ANNUAL REPORT INCLUDES FORWARD-LOOKING STATEMENTS WHICH COULD DIFFER FROM
ACTUAL FUTURE RESULTS.
Some of the matters discussed in this Annual Report include forward-looking
statements. Statements that are predictive in nature, that depend upon or refer
to future events or conditions or that include words such as "expects,"
"anticipates," "intends," "plans," "believes," "estimates," "thinks," and
similar expressions are forward-looking statements. These statements involve
known and unknown risks, uncertainties, and other factors that may cause our
actual results and performance to be materially different from any future
results or performance expressed or implied by these forward-looking statements.
These factors include the following:
- general economic and business conditions, both nationally and in the
regions in which we operate;
- demographic changes;
- existing governmental regulations and changes in, or the failure to comply
with, governmental regulations or our corporate compliance agreement;
- legislative proposals for healthcare reform;
- our ability, where appropriate, to enter into managed care provider
arrangements and the terms of these arrangements;
- changes in Medicare and Medicaid payment levels;
- liability and other claims asserted against us;
- competition;
- our ability to attract and retain qualified personnel, including
physicians;
- trends toward treatment of patients in lower acuity healthcare settings;
- changes in medical or other technology;
- changes in generally accepted accounting principles;
- the availability and terms of capital to fund additional acquisitions or
replacement facilities; and
- our ability to successfully acquire and integrate additional hospitals.
Although we believe that these statements are based upon reasonable
assumptions, we can give no assurance that our goals will be achieved. Given
these uncertainties, prospective investors are cautioned not to place undue
reliance on these forward-looking statements. These forward-looking statements
are made as of the date of this Annual Report. We assume no obligation to update
or revise them or provide reasons why actual results may differ.
35
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
INDEX TO FINANCIAL STATEMENTS
PAGE
------------
Community Health Systems, Inc. Consolidated Financial
Statements:
Independent Auditors' Report.............................. 37
Consolidated Statements of Operations for the Years
Ended December 31, 2000, 1999 and 1998................. 38
Consolidated Balance Sheets as of December 31, 2000 and
1999................................................... 39
Consolidated Statements of Stockholders' Equity for the
Years Ended December 31, 2000, 1999 and 1998........... 40
Consolidated Statements of Cash Flows for the Years
Ended December 31, 2000, 1999 and 1998................. 41
Notes to Consolidated Financial Statements.............. 42--58
36
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
Community Health Systems, Inc.
Brentwood, Tennessee
We have audited the accompanying consolidated balance sheets of Community Health
Systems, Inc. and subsidiaries as of December 31, 2000 and 1999, and the related
consolidated statements of operations, stockholders' equity, and cash flows for
each of the three years in the period ended December 31, 2000. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the consolidated financial position of Community Health
Systems, Inc. and subsidiaries as of December 31, 2000 and 1999, and the results
of their operations and their cash flows for each of the three years in the
period ended December 31, 2000, in conformity with accounting principles
generally accepted in the United States of America.
/s/ Deloitte & Touche LLP
Nashville, Tennessee
February 20, 2001
37
COMMUNITY HEALTH SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
YEAR ENDED DECEMBER 31,
---------------------------------------
2000 1999 1998
----------- ----------- -----------
Net operating revenues................................ $ 1,337,501 $ 1,079,953 $ 854,580
Operating costs and expenses:
Salaries and benefits............................... 517,392 419,320 328,264
Provision for bad debts............................. 122,303 95,149 69,005
Supplies............................................ 154,211 126,693 100,633
Rent................................................ 31,385 25,522 22,344
Other operating expenses............................ 259,474 209,084 167,944
Depreciation and amortization....................... 71,931 56,943 49,861
Amortization of goodwill............................ 25,693 24,708 26,639
Impairment of long-lived assets..................... -- -- 164,833
Compliance settlement and Year 2000 remediation
costs............................................. -- 17,279 20,209
----------- ----------- -----------
Total operating costs and expenses.................... 1,182,389 974,698 949,732
----------- ----------- -----------
Income (loss) from operations......................... 155,112 105,255 (95,152)
Interest expense, net of interest income of $600, $288
and $261 in 2000, 1999 and 1998, respectively....... 127,370 116,491 101,191
----------- ----------- -----------
Income (loss) before cumulative effect of a change in
accounting principle and income taxes............... 27,742 (11,236) (196,343)
Provision for (benefit from) income taxes............. 18,173 5,553 (13,405)
----------- ----------- -----------
Income (loss) before cumulative effect of a change in
accounting principle................................ 9,569 (16,789) (182,938)
Cumulative effect of a change in accounting principle,
net of taxes of $189................................ -- -- (352)
----------- ----------- -----------
Net income (loss)..................................... $ 9,569 $ (16,789) $ (183,290)
=========== =========== ===========
Basic and diluted earnings (loss) per common share:
Income (loss) before cumulative effect of a change in
accounting principle................................ $ 0.14 $ (0.31) $ (3.37)
Cumulative effect of a change in accounting
principle........................................... -- -- (0.01)
----------- ----------- -----------
Net income (loss)..................................... $ 0.14 $ (0.31) $ (3.38)
=========== =========== ===========
Weighted average number of shares outstanding:
Basic............................................... 67,610,399 54,545,030 54,249,895
=========== =========== ===========
Diluted............................................. 69,187,191 54,545,030 54,249,895
=========== =========== ===========
See notes to consolidated financial statements.
38
COMMUNITY HEALTH SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
DECEMBER 31,
-----------------------
2000 1999
---------- ----------
ASSETS
Current assets:
Cash and cash equivalents................................. $ 13,740 $ 4,282
Patient accounts receivable, net of allowance for doubtful
accounts of $52,935 and $34,499 in 2000 and 1999,
respectively............................................ 309,826 226,350
Supplies.................................................. 39,679 32,134
Prepaid expenses and taxes................................ 19,989 9,846
Deferred income taxes..................................... 2,233 5,862
Other current assets...................................... 23,110 22,022
---------- ----------
Total current assets.................................... 408,577 300,496
---------- ----------
Property and equipment:
Land and improvements..................................... 46,268 41,327
Buildings and improvements................................ 536,428 470,856
Equipment and fixtures.................................... 267,505 219,659
---------- ----------
850,201 731,842
Less accumulated depreciation and amortization............ (142,120) (108,499)
---------- ----------
Property and equipment, net............................. 708,081 623,343
---------- ----------
Goodwill, net of accumulated amortization of $123,459 and
$97,766 in 2000 and 1999, respectively.................... 985,568 877,890
---------- ----------
Other assets, net of accumulated amortization of $37,142 and
$34,265 in 2000 and 1999, respectively.................... 111,611 93,355
---------- ----------
Total assets............................................ $2,213,837 $1,895,084
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt...................... $ 17,433 $ 27,029
Accounts payable.......................................... 83,191 57,392
Compliance settlement payable............................. -- 30,900
Accrued liabilities:
Employee compensation................................... 56,840 49,346
Interest................................................ 27,389 19,451
Other................................................... 56,020 51,159
---------- ----------
Total current liabilities............................. 240,873 235,277
---------- ----------
Long-term debt.............................................. 1,201,590 1,407,604
---------- ----------
Other long-term liabilities................................. 15,200 22,495
---------- ----------
Commitments and contingencies:
Stockholders' equity:
Preferred stock, $.01 par value per share, 100,000,000
shares authorized; none issued.......................... -- --
Common stock, $.01 par value per share, 300,000,000 shares
authorized; 87,105,562 shares issued and 86,137,582
shares outstanding at December 31, 2000 and 56,588,787
shares issued and 55,620,807 shares outstanding at
December 31, 1999....................................... 871 566
Additional paid-in capital................................ 998,092 483,237
Accumulated deficit....................................... (235,783) (245,352)
Treasury stock, at cost, 967,980 shares at December 31,
2000 and 1999........................................... (6,587) (6,587)
Notes receivable for common stock......................... (334) (1,997)
Unearned stock compensation............................... (85) (159)
---------- ----------
Total stockholders' equity.............................. 756,174 229,708
---------- ----------
Total liabilities and stockholders' equity............ $2,213,837 $1,895,084
========== ==========
See notes to consolidated financial statements.
39
COMMUNITY HEALTH SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE DATA)
NOTES
COMMON STOCK ADDITIONAL TREASURY STOCK RECEIVABLE UNEARNED
--------------------- PAID-IN ACCUMULATED ------------------- FOR COMMON STOCK
SHARES AMOUNT CAPITAL DEFICIT SHARES AMOUNT STOCK COMPENSATION
---------- -------- ---------- ----------- -------- -------- ------------ ------------
BALANCE, January 1,
1998................ 56,376,695 $564 $480,435 $ (45,273) (135,868) $(1,041) $(1,050) $ --
Issuance of common
stock............... 212,092 2 1,653 -- 150,067 1,120 (900) --
Common stock purchased
for treasury, at
cost................ -- -- -- -- (970,269) (5,634) 204 --
Payments on notes
receivable.......... -- -- -- -- -- -- 36 --
Net loss.............. -- -- -- (183,290) -- -- -- --
---------- ---- -------- --------- -------- ------- ------- -----
BALANCE, December 31,
1998................ 56,588,787 566 482,088 (228,563) (956,070) (5,555) (1,710) --
Issuance of common
stock............... -- -- 907 -- 314,425 1,748 (440) --
Common stock purchased
for treasury, at
cost................ -- -- -- -- (326,335) (2,780) -- --
Payments on notes
receivable.......... -- -- -- -- -- -- 153 --
Unearned stock
compensation........ -- -- 242 -- -- -- -- (242)
Earned stock
compensation........ -- -- -- -- -- -- -- 83
Net loss.............. -- -- -- (16,789) -- -- -- --
---------- ---- -------- --------- -------- ------- ------- -----
BALANCE, December 31,
1999................ 56,588,787 566 483,237 (245,352) (967,980) (6,587) (1,997) (159)
Issuance of common
stock in connection
with initial public
offering, net of
issuance costs...... 20,425,717 204 245,498 -- -- -- -- --
Issuance of common
stock in connection
with secondary
public offering, net
of issuance costs... 10,000,000 100 268,722 -- -- -- -- --
Issuance of common
stock in connection
with the exercise of
options............. 91,058 1 635 -- -- -- -- --
Payments on notes
receivable.......... -- -- -- -- -- -- 1,663 --
Earned stock
compensation........ -- -- -- -- -- -- -- 74
Net income............ -- -- -- 9,569 -- -- -- --
---------- ---- -------- --------- -------- ------- ------- -----
BALANCE, December 31,
2000................ 87,105,562 $871 $998,092 $(235,783) (967,980) $(6,587) $ (334) $ (85)
========== ==== ======== ========= ======== ======= ======= =====
TOTAL
--------
BALANCE, January 1,
1998................ $433,635
Issuance of common
stock............... 1,875
Common stock purchased
for treasury, at
cost................ (5,430)
Payments on notes
receivable.......... 36
Net loss.............. (183,290)
--------
BALANCE, December 31,
1998................ 246,826
Issuance of common
stock............... 2,215
Common stock purchased
for treasury, at
cost................ (2,780)
Payments on notes
receivable.......... 153
Unearned stock
compensation........ --
Earned stock
compensation........ 83
Net loss.............. (16,789)
--------
BALANCE, December 31,
1999................ 229,708
Issuance of common
stock in connection
with initial public
offering, net of
issuance costs...... 245,702
Issuance of common
stock in connection
with secondary
public offering, net
of issuance costs... 268,822
Issuance of common
stock in connection
with the exercise of
options............. 636
Payments on notes
receivable.......... 1,663
Earned stock
compensation........ 74
Net income............ 9,569
--------
BALANCE, December 31,
2000................ $756,174
========
See notes to consolidated financial statements.
40
COMMUNITY HEALTH SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31,
-------------------------------
2000 1999 1998
-------- -------- ---------
(DOLLARS IN THOUSANDS)
Cash flows from operating activities:
Net income (loss)......................................... $ 9,569 $(16,789) $(183,290)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization........................... 97,624 81,651 76,500
Deferred income taxes................................... 17,210 (3,799) (14,797)
Impairment charge....................................... -- -- 164,833
Compliance settlement costs............................. -- 14,000 20,000
Stock compensation expense.............................. 74 83 --
Other non-cash (income) expenses, net................... (5,030) (570) (528)
Changes in operating assets and liabilities, net of
effects of acquisitions and divestitures:
Patient accounts receivable........................... (52,989) (42,973) (33,908)
Supplies, prepaid expenses and other current assets... (15,604) (17,598) (7,724)
Accounts payable, accrued liabilities and income
taxes............................................... 17,931 (28,071) 4,461
Compliance settlement payable......................... (30,900) -- --
Other................................................. (14,900) 2,320 (9,828)
-------- -------- ---------
Net cash provided by (used in) operating activities......... 22,985 (11,746) 15,719
-------- -------- ---------
Cash flows from investing activities:
Acquisitions of facilities, pursuant to purchase
agreements.............................................. (148,216) (59,699) (172,597)
Purchases of property and equipment....................... (63,005) (80,255) (52,880)
Proceeds from sale of equipment........................... 107 121 1,531
Increase in other assets.................................. (33,327) (15,708) (12,607)
-------- -------- ---------
Net cash used in investing activities....................... (244,441) (155,541) (236,553)
-------- -------- ---------
Cash flows from financing activities:
Proceeds from issuance of common stock.................... 514,524 2,215 1,875
Proceeds from exercise of stock options................... 636 -- --
Common stock purchased for treasury....................... -- (2,780) (5,634)
Borrowings under Credit Agreement......................... 241,310 436,300 242,491
Repayments of long-term indebtedness...................... (525,556) (270,885) (18,842)
-------- -------- ---------
Net cash provided by financing activities................... 230,914 164,850 219,890
-------- -------- ---------
Net change in cash and cash equivalents..................... 9,458 (2,437) (944)
Cash and cash equivalents at beginning of period............ 4,282 6,719 7,663
-------- -------- ---------
Cash and cash equivalents at end of period.................. $ 13,740 $ 4,282 $ 6,719
======== ======== =========
See notes to consolidated financial statements.
41
COMMUNITY HEALTH SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BUSINESS. Community Health Systems Inc. (the "Company") owns, leases and
operates acute care hospitals that are the principal providers of primary
healthcare services in non-urban communities. As of December 31, 2000, the
Company owned, leased or operated 52 hospitals, licensed for 4,688 beds in 20
states.
USE OF ESTIMATES. The preparation of financial statements in conformity
with accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results could differ
from those estimates.
PRINCIPLES OF CONSOLIDATION. The consolidated financial statements include
the accounts of the Company and its subsidiaries. All significant intercompany
accounts and transactions have been eliminated. Certain of the subsidiaries have
minority stockholders. The amount of minority interest in equity and minority
interest in income or loss is not material and is included in other long-term
liabilities and other operating expenses.
CASH EQUIVALENTS. The Company considers highly liquid investments with
original maturities of three months or less to be cash equivalents.
SUPPLIES. Supplies, principally medical supplies, are stated at the lower
of cost (first-in, first-out basis) or market.
PROPERTY AND EQUIPMENT. Property and equipment are recorded at cost.
Depreciation is recognized using the straight-line method over the estimated
useful lives of the land improvements (2 to 15 years; weighted average useful
life is 11 years), buildings and improvements (5 to 40 years; weighted average
useful life is 33 years) and equipment and fixtures (5 to 20 years; weighted
average useful life is 7 years). Costs capitalized as construction in progress
were $30.3 million and $27.2 million at December 31, 2000 and 1999,
respectively, and are included in buildings and improvements. Expenditures for
renovations and other significant improvements are capitalized; however,
maintenance and repairs which do not improve or extend the useful lives of the
respective assets are charged to operations as incurred. Interest capitalized in
accordance with Statement of Financial Accounting Standards ("SFAS") No. 34,
"Capitalization of Interest Cost," was $2.5 million, $1.4 million and
$0.7 million for the years ended December 31, 2000, 1999, and 1998,
respectively.
The Company also leases certain facilities and equipment under capital
leases (see Notes 2 and 7). Such assets are amortized on a straight-line basis
over the lesser of the terms of the respective leases, or the remaining useful
lives of the assets.
GOODWILL. Goodwill represents the excess of cost over the fair value of net
assets acquired and is amortized on a straight-line basis ranging from 18 to
40 years. Annually, as required by Accounting Principles Board ("APB") Opinion
No. 17, the Company reviews its total enterprise goodwill for possible
impairment, by comparing total projected undiscounted cash flows to the total
carrying amount of goodwill.
OTHER ASSETS. Other assets consist primarily of the noncurrent portion of
deferred income taxes and costs associated with the issuance of debt which are
amortized over the life of the related debt using the effective interest method.
Amortization of deferred financing costs is included in interest expense.
42
COMMUNITY HEALTH SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
THIRD-PARTY REIMBURSEMENT. Net operating revenues include amounts estimated
by management to be reimbursable by Medicare and Medicaid under prospective
payment systems, provisions of cost-reimbursement and other payment methods.
Approximately 46% of net operating revenues for the year ended December 31,
2000, 48% for the year ended December 31, 1999, and 49% for the year ended
December 31, 1998, are related to services rendered to patients covered by the
Medicare and Medicaid programs. In addition, the Company is reimbursed by
non-governmental payors using a variety of payment methodologies. Amounts
received by the Company for treatment of patients covered by such programs are
generally less than the standard billing rates. The differences between the
estimated program reimbursement rates and the standard billing rates are
accounted for as contractual adjustments, which are deducted from gross revenues
to arrive at net operating revenues. Final settlements under certain of these
programs are subject to adjustment based on administrative review and audit by
third parties. Adjustments to the estimated billings are recorded in the periods
that such adjustments become known. Adjustments to previous program
reimbursement estimates are accounted for as contractual adjustments and
reported in future periods as final settlements are determined. Adjustments
related to final settlements or appeals increased revenue by an insignificant
amount in each of the years ended December 31, 2000, 1999 and 1998. Net amounts
due to third-party payors as of December 31, 2000 were $2.3 million and as of
December 31, 1999 were $9.1 million and are included in accrued
liabilities-other in the accompanying balance sheets. Substantially all Medicare
and Medicaid cost reports are final settled through 1997.
CONCENTRATIONS OF CREDIT RISK. The Company grants unsecured credit to its
patients, most of whom reside in the service area of the Company's facilities
and are insured under third-party payor agreements. Because of the geographic
diversity of the Company's facilities and non-governmental third-party payors,
Medicare and Medicaid represent the Company's only significant concentrations of
credit risk.
NET OPERATING REVENUES. Net operating revenues are recorded net of
provisions for contractual adjustments of approximately $1,649 million,
$1,157 million and $829 million in 2000, 1999 and 1998, respectively. Net
operating revenues are recognized when services are provided. In the ordinary
course of business the Company renders services to patients who are financially
unable to pay for hospital care. The value of these services to patients who are
unable to pay is not material to the Company's consolidated results of
operations.
PROFESSIONAL LIABILITY INSURANCE CLAIMS. The Company accrues, on a
quarterly basis, for estimated losses resulting from professional liability
claims to the extent they are not covered by insurance. The accrual, which
includes an estimate for incurred but not reported claims, is based on
historical loss patterns and annual actual projections. To the extent that
subsequent claims information varies from management's estimates, the liability
is adjusted currently.
ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS. In accordance with SFAS
No. 121, "Accounting for Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed Of," whenever events or changes in circumstances indicate
that the carrying values of certain long-lived assets and related intangible
assets may be impaired, the Company projects the undiscounted cash flows
expected to be generated by these assets. If the projections indicate that the
reported amounts are not expected to be recovered, such amounts are reduced to
their estimated fair value based on a quoted market price, if available, or an
estimate based on valuation techniques available in the circumstances.
43
COMMUNITY HEALTH SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
INCOME TAXES. The Company accounts for income taxes under the asset and
liability method, in which deferred income tax assets and liabilities are
recognized for the tax consequences of "temporary differences" by applying
enacted statutory tax rates applicable to future years to differences between
the financial statement carrying amounts and the tax bases of existing assets
and liabilities. The effect on deferred taxes of a change in tax rates is
recognized in the statement of operations during the period in which the tax
rate change becomes law.
COMPREHENSIVE INCOME. SFAS No. 130, "Reporting Comprehensive Income,"
defines comprehensive income as the change in equity of a business enterprise
during a period from transactions and other events and circumstances from
non-owner sources. Comprehensive income (loss) for 2000, 1999 and 1998 is equal
to the net income (loss) reported.
STOCK-BASED COMPENSATION. The Company accounts for stock-based compensation
using the intrinsic value method prescribed in APB Opinion No. 25, "Accounting
for Stock Issued to Employees" and related interpretations. Compensation cost,
if any, is measured as the excess of the fair value of the Company's stock at
the date of grant over the amount an employee must pay to acquire the stock.
SFAS No. 123, "Accounting for Stock-Based Compensation," established accounting
and disclosure requirements using a fair value based method of accounting for
stock-based employee compensation plans; however, it allows an entity to
continue to measure compensation for those plans using the intrinsic value
method of accounting prescribed by APB Opinion No. 25. The Company has elected
to continue to measure compensation under the method of accounting as described
above, and has adopted the disclosure requirements of SFAS No. 123.
SEGMENT REPORTING. SFAS No. 131, "Disclosures About Segments of an
Enterprise and Related Information," requires that a public company report
annual and interim financial and descriptive information about its reportable
operating segments. Operating segments, as defined, are components of an
enterprise about which separate financial information is available that is
evaluated regularly by the chief operating decision maker in deciding how to
allocate resources and in assessing performance. SFAS No. 131 allows aggregation
of similar operating segments into a single operating segment if the businesses
have similar economic characteristics and are considered similar under the
criteria established by SFAS No. 131. The Company owns, leases and operates 52
acute care hospitals in 52 different non-urban communities. All of these
hospitals have similar services, have similar types of patients, operate in a
consistent manner and have similar economic and regulatory characteristics.
Therefore, the Company has one reportable segment.
RECENT ACCOUNTING PRONOUNCEMENT NOT YET ADOPTED. SFAS No. 133, "Accounting
for Derivative Instruments and Hedging Activities", is effective for all fiscal
years beginning after June 15, 2000. SFAS No. 133, as amended, establishes
accounting and reporting standards for derivative instruments, including certain
derivative instruments embedded in other contracts and for hedging activities.
Under SFAS No. 133, certain contracts that were not formerly considered
derivatives may now meet the definition of a derivative. The Company will adopt
SFAS No. 133 effective January 1, 2001. Management does not expect the adoption
of SFAS No. 133 to have a significant impact on the financial position, results
of operations, or cash flows of the Company.
2. LONG-TERM LEASES AND PURCHASES OF HOSPITALS
During 2000, the Company acquired five hospitals through purchase
transactions, effective in March, April, July, October and December and acquired
two hospitals through capital lease transactions, effective in April and June,
respectively. The consideration for the seven hospitals totaled
44
COMMUNITY HEALTH SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. LONG-TERM LEASES AND PURCHASES OF HOSPITALS (CONTINUED)
$246.9 million. The consideration consisted of $147.6 million in cash, which was
borrowed under the acquisition loan facilities and assumed liabilities of
$99.3 million. The entire lease obligation relating to each lease transaction
was prepaid. The repayment was included as part of the cash consideration.
Licensed beds at these seven hospitals totaled 607 beds.
During 1999, the Company acquired, through three purchase transactions,
effective in March, September, and November, respectively, and one capital lease
transaction, effective in March, most of the assets, including working capital,
of four hospitals. The consideration for the four hospitals totaled
$77.8 million. The consideration consisted of $59.7 million in cash, which was
borrowed under the acquisition loan facilities, and assumed liabilities of
$18.1 million. The entire lease obligation relating to the lease transaction was
prepaid. The prepayment was included as part of the cash consideration. The
Company also constructed and opened an additional hospital at a cost of
$15.3 million, which replaced a hospital we managed. Licensed beds at the four
hospitals acquired totaled 477.
During 1998, the Company acquired, through two purchase transactions,
effective in April and September, respectively, and two capital lease
transactions, effective in November, most of the assets, including working
capital, of four hospitals. The consideration for the four hospitals totaled
$218.6 million. The consideration consisted of $169.8 million in cash, which was
borrowed under the acquisition loan facilities, and assumed liabilities of
$48.8 million. The entire lease obligation relating to each lease transaction
was prepaid. The prepayment was included as part of the cash consideration.
Licensed beds at these four hospitals totaled 360.
Also, effective December 1, 1998, the Company entered into an operating
agreement relating to, and purchased certain working capital accounts, primarily
accounts receivable, supplies and accounts payable, of a 38 licensed bed
hospital, for a cash payment of $2.8 million. Pursuant to this agreement, the
hospital was acquired on October 1, 2000, with the remaining assets being
purchased for $0.9 million and is included in the acquisitions described above.
The foregoing acquisitions were accounted for using the purchase method of
accounting. The allocation of the purchase price for acquisition transactions
closed in 2000 has been determined by the Company based upon available
information and is subject to obtaining final asset valuations prepared by
independent appraisers, and settling amounts related to purchased working
capital. Independent asset valuations are generally completed within 120 days of
the date of acquisition; working capital settlements are generally made within
180 days of the date of acquisition. Adjustments to the purchase price
allocation are not expected to be material.
The table below summarizes the allocations of the purchase price (including
assumed liabilities) for these acquisitions (in thousands):
2000 1999 1998
-------- -------- --------
Current assets................................... $39,844 $15,514 $40,680
Property and equipment........................... 84,512 53,746 116,443
Goodwill......................................... 122,585 24,840 61,441
The operating results of the foregoing hospitals have been included in the
consolidated statements of operations from their respective dates of
acquisition. The following pro forma combined summary of operations of the
Company gives effect to using historical information of the operations of the
hospitals
45
COMMUNITY HEALTH SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. LONG-TERM LEASES AND PURCHASES OF HOSPITALS (CONTINUED)
purchased in 2000 and 1999 as if the acquisitions had occurred as of January 1,
1999 (in thousands except per share data):
YEAR ENDED DECEMBER 31,
-----------------------
2000 1999
---------- ----------
Pro forma net operating revenues..................... $1,456,867 $1,347,785
Pro forma net income (loss).......................... 6,008 (24,904)
Pro forma net income (loss) per share:
Basic.............................................. $ 0.09 $ (0.46)
Diluted............................................ $ 0.09 $ (0.46)
3. IMPAIRMENT OF LONG-LIVED ASSETS
In December 1998, in connection with the Company's periodic review process,
it was determined that primarily as a result of adverse changes in physician
relationships, undiscounted cash flows from seven of the Company's hospitals
were below the carrying value of long-lived assets associated with those
hospitals. Therefore, in accordance with SFAS No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of",
the Company adjusted the carrying value of the related long-lived assets to
their estimated fair value. The estimated fair values of these hospitals were
based on independently prepared specific market appraisals. The impairment
charge of $164.8 million was comprised of reductions to goodwill of
$134.3 million, tangible property of $27.1 million and identifiable intangibles
of $3.4 million.
Of the seven impaired hospitals, two are located in Georgia; two are located
in Texas; one is located in Florida; one is located in Louisiana; and one is
located in Kentucky. The events and circumstances leading to the impairment
charge were unique to each of the hospitals.
One of our Kentucky hospitals lost its only anesthesiologist due to
unexpected death and a leading surgeon due to illness. We had not been able to
successfully recruit a replacement surgeon. One of our Georgia hospitals lost a
key surgeon due to unexpected death and a leading specialist due to relocation
to another market. We had not been able to successfully recruit replacement
physicians. One of our Louisiana hospitals relies heavily on foreign physicians
and, following the departure of four foreign physicians from its market over a
short period of time, had difficulties replacing these physicians because of
regulatory changes in recruiting foreign physicians. The skilled nursing and
home health reimbursement for one of our Texas hospitals was disproportionately
and adversely affected by the Balanced Budget Act of 1997. In addition, the
market in which this hospital operates relies on foreign physicians that have
been difficult to recruit because of regulatory changes. Our other Georgia
hospitals terminated an employed specialty surgeon who was responsible for over
5% of the hospital's revenue. We had not been able to replace the surgeon. In
addition, this hospital's skilled nursing reimbursement was disproportionately
and adversely affected by the Balanced Budget Act of 1997. Our other Texas
hospital lost market share and was excluded from several key managed care
contracts caused by the combination in 1998 of two larger competing hospitals.
This is our only hospital which competes with more than one hospital in its
primary service area. A Florida hospital we then owned terminated discussions in
1998 with an unrelated hospital, located in a contiguous county, to build a
combined replacement facility. The short and long-term success of this hospital
was in our view dependent upon the combination being effected.
Generally, we have not experienced difficulty in recruiting physicians and
specialists for our hospitals. However, for the four hospitals referred to above
we have experienced difficulty in recruiting
46
COMMUNITY HEALTH SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. IMPAIRMENT OF LONG-LIVED ASSETS (CONTINUED)
physicians and specialists where the number of physicians on staff is low. These
four hospitals averaged 13 physicians per hospital as of December 31, 1998. The
average number of physicians on the medical staff of our other hospitals was 39
physicians at that time. We continually monitor the relationships of our
hospitals with their physicians and any physician recruiting requirements. We
have frequent discussions with board members, chief executive officers and chief
financial officers of our hospitals. We are not aware of any significant adverse
relationships with physicians or any recurring physician recruitment needs that,
if not resolved in a timely manner, would have a material adverse effect on our
results of operations and financial position, either currently or in future
periods.
4. INCOME TAXES
The provision for (benefit from) income taxes consists of the following (in
thousands):
YEAR ENDED DECEMBER 31,
------------------------------
2000 1999 1998
-------- -------- --------
Current
Federal........................................ $ 195 $ -- $ --
State.......................................... 1,328 2,815 1,204
------- ------ --------
................................................. 1,523 2,815 1,204
------- ------ --------
Deferred
Federal........................................ 16,519 3,163 (11,036)
State.......................................... 131 (425) (3,573)
------- ------ --------
................................................. 16,650 2,738 (14,609)
------- ------ --------
Total provision for (benefit from) income
taxes.......................................... $18,173 $5,553 $(13,405)
======= ====== ========
The following table reconciles the differences between the statutory federal
income tax rate and the effective tax rate (dollars in thousands):
YEAR ENDED DECEMBER 31,
------------------------------------------------------------------------------
2000 1999 1998
---------------------- ---------------------- ----------------------
AMOUNT % AMOUNT % AMOUNT %
-------- -------- -------- -------- -------- --------
Provision for (benefit from) income
taxes at statutory federal rate..... $ 9,710 35.0% $(3,933) 35.0% $(68,843) 35.0%
State income taxes, net of federal
income tax benefit.................. 1,459 5.3 2,389 (21.3) (1,379) 0.7
Non-deductible goodwill
amortization........................ 6,675 24.0 6,751 (60.1) 7,859 (4.0)
Impairment charge - goodwill.......... -- -- -- -- 41,652 (21.2)
Other................................. 329 1.2 346 (3.0) 7,306 (3.7)
------- ---- ------- ----- -------- -----
Provision for (benefit from) income
taxes and effective tax rate........ $18,173 65.5% $ 5,553 (49.4)% $(13,405) 6.8%
======= ==== ======= ===== ======== =====
47
COMMUNITY HEALTH SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. INCOME TAXES (CONTINUED)
Deferred income taxes are based on the estimated future tax effects of
differences between the financial statement and tax bases of assets and
liabilities under the provisions of the enacted tax laws. Deferred income taxes
as of December 31, consist of (in thousands):
2000 1999
---------------------- ----------------------
ASSETS LIABILITIES ASSETS LIABILITIES
-------- ----------- -------- -----------
Net operating loss and credit
carryforwards........................ $77,316 $ -- $76,798 $ --
Property and equipment................. -- 54,420 -- 40,020
Self-insurance liabilities............. 6,421 -- 6,212 --
Intangibles............................ -- 14,204 -- 9,385
Other liabilities...................... -- 736 -- 1,828
Long-term debt and interest............ -- 4,409 -- 4,373
Accounts receivable.................... 12,956 -- 5,362 --
Accrued expenses....................... 4,140 -- 15,975 --
Other.................................. 3,259 308 2,538 1,578
------- ------- ------- -------
104,092 74,077 106,885 57,184
Valuation allowance.................... (15,999) -- (18,474) --
------- ------- ------- -------
Total deferred income taxes............ $88,093 $74,077 $88,411 $57,184
======= ======= ======= =======
Management believes that the net deferred tax assets will ultimately be
realized, except as noted below. Management's conclusion is based on its
estimate of future taxable income and the expected timing of temporary
difference reversals. The Company has federal net operating loss carryforwards
of $153.4 million which expire from 2001 to 2020 and state net operating loss
carryforwards of $284.8 million which expire from 2001 to 2020.
The valuation allowance, which was recognized at the date of the acquisition
by affiliates of Forstmann Little & Co. ("FL & Co.") of the operating company of
the Company in June 1996 (the "Acquisition") of $13.2 million, relates primarily
to state net operating losses and other tax attributes. Any future decrease in
this valuation allowance will be recorded as a reduction in goodwill recorded in
connection with the Acquisition.
The valuation allowance decreased by $2.5 million and increased by
$0.2 million during the years ended December 31, 2000 and 1999, respectively.
The decrease relates to a redetermination of the amount, and realizability of
net operating losses in certain state income tax jurisdictions for which a
valuation allowance was previously provided. The increase is primarily related
to net operating losses in certain state income tax jurisdictions not expected
to be realized.
The Company paid income taxes, net of refunds received, of $1.5 million, and
$1.4 million during 2000 and 1999, respectively.
FEDERAL INCOME TAX EXAMINATIONS. The Internal Revenue Service ("IRS") is
examining the Company's federal income tax returns for the tax periods between
December 31, 1993 and December 31, 1996. The IRS has indicated that it is
considering certain adjustments primarily involving "temporary" or timing
differences. To date, a Revenue Agent's Report has not been issued in connection
with the examination of these tax periods. In management's opinion, the ultimate
outcome of the IRS examination will not have a material effect on the Company's
results of operations or financial condition.
48
COMMUNITY HEALTH SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. LONG-TERM DEBT
Long-term debt consists of the following (in thousands):
AS OF DECEMBER 31,
-----------------------
2000 1999
---------- ----------
Credit Facilities:
Revolving Credit Loans.................................... $ -- $ 109,750
Acquisition Loans......................................... 70,000 138,551
Term Loans................................................ 568,679 624,345
Subordinated debentures..................................... 500,000 500,000
Taxable bonds............................................... 26,100 29,700
Tax-exempt bonds............................................ 8,000 8,000
Capital lease obligations (see Note 7)...................... 21,100 20,828
Term loan from acquisition in 2000.......................... 21,700 --
Other....................................................... 3,444 3,459
---------- ----------
Total debt............................................ 1,219,023 1,434,633
Less current maturities..................................... (17,433) (27,029)
---------- ----------
Total long-term debt.................................. $1,201,590 $1,407,604
========== ==========
CREDIT FACILITIES. In connection with the Acquisition, a $900 million
credit agreement was entered into with a consortium of creditors (the "Credit
Agreement"). The financing under the Credit Agreement consists of (i) a 6 1/2
year term loan facility (the "Tranche A Loan") in an aggregate principal amount
equal to $50 million, (ii) a 7 1/2 year term loan facility (the "Tranche B
Loan") in an aggregate principal amount equal to $132.5 million, (iii) an 8 1/2
year term loan facility (the "Tranche C Loan") in an aggregate principal amount
equal to $132.5 million, (iv) a 9 1/2 year term loan facility (the "Tranche D
Loan") in an original aggregate principal amount equal to $100 million and
amended to an aggregate principal amount of $350 million in March 1999
(collectively, the "Term Loans"), (v) a revolving credit facility (the
"Revolving Credit Loans") in an aggregate principal amount equal to
$200 million, of which up to $90 million may be used, to the extent available,
for standby and commercial letters of credit and up to $25 million is available
to the Company pursuant to a swingline facility and (vi) a reducing acquisition
loan facility (the "Acquisition Loans") in an aggregate principal amount of
$285 million, reduced to $263.2 million in July 2000.
The Term Loans are scheduled to be paid in consecutive quarterly
installments with aggregate principal payments for future years as follows (in
thousands):
2001........................................................ $ 10,094
2002........................................................ 47,216
2003........................................................ 125,360
2004........................................................ 162,970
2005........................................................ 223,039
2006........................................................ --
--------
Total....................................................... $568,679
========
Revolving Credit Loans may be made, and letters of credit may be issued, at
any time during the period between July 22, 1996, the loan origination date (the
"Origination Date"), and December 31,
49
COMMUNITY HEALTH SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. LONG-TERM DEBT (CONTINUED)
2002 (the "Termination Date"). No letter of credit is permitted to have an
expiration date after the Termination Date. The Acquisition Loans may be made at
any time during the period preceding the Termination Date.
The Acquisition Loans facility will automatically be reduced and the
Acquisition Loans will be repaid to the following levels on each of the
following anniversaries of the Origination Date: July 22, 2001, $215.3 million;
July 22, 2002, $139.0 million; with payment of any remaining balance on the
Termination Date.
The Company may elect that all or a portion of the borrowings under the
Credit Agreement bear interest at a rate per annum equal to (a) an annual
benchmark rate, which will be equal to the greatest of (i) "Prime Rate,"
(ii) the "Base" CD Rate plus 1% or (iii) the Federal Funds effective rate plus
50 basis points (the "ABR") or (b) the Eurodollar Rate, in each case increased
by the applicable margin (the "Applicable Margin") which will vary between 1.50%
and 3.75% per annum. The applicable margin on the Revolving Credit Loans,
Acquisition Loans and Tranche A Loan is subject to a reduction based on
achievement of certain levels of total senior indebtedness to annualized
consolidated EBITDA, as defined in the Credit Agreement. To date, the Company
has not achieved a reduction of the Applicable Margin.
Interest based on the ABR is payable on the last day of each calendar
quarter and interest based on the Eurodollar Rate is payable on set maturity
dates. The borrowings under the Credit Agreement bore interest at rates ranging
from 9.13% to 10.38% as of December 31, 2000.
The Company is also required to pay a quarterly commitment fee at a rate
which ranges from .375% to .500% based on the Eurodollar Applicable Margin for
Revolving Credit Loans. This rate is applied to unused commitments under the
Revolving Credit Loans and the Acquisition Loans.
The Company is also required to pay letters of credit fees at rates which
vary from 1.625% to 2.625%.
All or a portion of the outstanding borrowings under the Credit Agreement
may be prepaid at any time and the unutilized portion of the facility for the
Revolving Credit Loans or the Acquisition Loans may be terminated, in whole or
in part, at the Company's option. Repaid Term Loans and permanent reductions to
the Acquisition Loans and Revolving Credit Loans may not be reborrowed.
Credit Facilities generally are required to be prepaid with the net proceeds
(in excess of $20 million) of certain permitted asset sales and the issuances of
debt obligations (other than certain permitted indebtedness) of the Company or
any of its subsidiaries.
Generally, prepayments of Term Loans will be applied to principal payments
due during the next twelve months with any excess being applied pro rata to
scheduled principal payments thereafter.
The terms of the Credit Agreement include certain restrictive covenants.
These covenants include restrictions on indebtedness, investments, asset sales,
capital expenditures, dividends, sale and leasebacks, contingent obligations,
transactions with affiliates, and fundamental change. The covenants also require
maintenance of certain ratios regarding senior indebtedness, senior interest,
and fixed charges. The Company was in compliance with all debt covenants at
December 31, 2000.
As of December 31, 2000 and 1999, the Company had letters of credit issued,
primarily in support of its Taxable Bonds and Tax-Exempt Bonds, of approximately
$40 million and $43 million, respectively.
50
COMMUNITY HEALTH SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. LONG-TERM DEBT (CONTINUED)
Availability at December 31, 2000 and 1999 under the Revolving Credit Loans
facility was approximately $160 million and $47 million, respectively and under
the Acquisition Loans facility was approximately $193 million and $144 million,
respectively.
SUBORDINATED DEBENTURES. In connection with the Acquisition, the Company
issued its subordinated debentures to an affiliate of FL & Co. for $500 million
in cash. The debentures are a general senior subordinated obligation of the
Company, are not subject to mandatory redemption and mature in three equal
annual installments beginning June 30, 2007, with the final payment due on
June 30, 2009. The debentures bear interest at a fixed rate of 7.50% which is
payable semi-annually in January and July. Total interest expense for the
debentures was $37.5 million for each of the years ended December 31, 2000, 1999
and 1998.
TAXABLE BONDS AND TAX-EXEMPT BONDS. Taxable Bonds bear interest at a
floating rate which averaged 6.40% and 5.29% during 2000 and 1999, respectively.
These bonds are subject to mandatory annual redemptions with the final payment
of $17.4 million due on October 1, 2003. Tax-Exempt Bonds bear interest at
floating rates which averaged 4.21% and 3.36% during 2000 and 1999,
respectively. These bonds are not subject to mandatory annual redemptions under
the bond provisions and are due in 2010. Taxable Bonds and Tax-Exempt Bonds are
both guaranteed by letters of credit.
TERM LOAN FROM ACQUISITION IN 2000. The Company acquired a hospital in
December 2000, in which we assumed debt upon acquisition, through an amended and
restated credit agreement dated December 1, 2000. The loan bears interest at a
rate of 9.18% as of December 31, 2000 and has the same terms as the Tranche A
Term Loan in the "Credit Agreement", previously described. Required principal
payments are as follows: $1,350,000 in 2001, $1,875,000 in 2002 and $18,475,000
in 2003.
OTHER DEBT. As of December 31, 2000, other debt consisted primarily of an
industrial revenue bond and other obligations maturing in various installments
through 2014.
As of December 31, 2000, the scheduled maturities of long-term debt
outstanding, including capital leases, for each of the next five years and
thereafter are as follows (in thousands):
2001........................................................ $ 17,433
2002........................................................ 126,166
2003........................................................ 165,549
2004........................................................ 164,090
2005........................................................ 224,118
Thereafter.................................................. 521,667
----------
$1,219,023
==========
The Company paid interest of $115 million, $118 million and $101 million on
borrowings during the years ended December 31, 2000, 1999 and 1998,
respectively.
6. FAIR VALUES OF FINANCIAL INSTRUMENTS
The fair value of financial instruments has been estimated by the Company
using available market information as of December 31, 2000 and 1999, and
valuation methodologies considered appropriate.
51
COMMUNITY HEALTH SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. FAIR VALUES OF FINANCIAL INSTRUMENTS (CONTINUED)
The estimates presented are not necessarily indicative of amounts the Company
could realize in a current market exchange (in thousands):
AS OF DECEMBER 31,
-----------------------------------------------------
2000 1999
------------------------- -------------------------
CARRYING ESTIMATED FAIR CARRYING ESTIMATED FAIR
AMOUNT VALUE VALUE VALUE
-------- -------------- -------- --------------
Assets:
Cash and cash equivalents..................... $13,740 $13,740 $ 4,282 $ 4,282
Liabilities:
Credit facilities............................. 638,679 633,506 872,646 862,174
Taxable Bonds................................. 26,100 26,100 29,700 29,700
Tax-exempt Bonds.............................. 8,000 8,000 8,000 8,000
Other term loans.............................. 21,700 21,483 -- --
Cash and cash equivalents: The carrying amount approximates fair value due
to the short term maturity of these instruments (less than three months).
Credit facilities and other term loans: Estimated fair value is based on
communications with the Company's bankers regarding relevant pricing for trading
activity among the Company's lending institutions.
Taxable and Tax-exempt Bonds: The carrying amount approximates fair value as
a result of the weekly interest rate reset feature of these publicly traded
instruments.
The Company believes that it is not practicable to estimate the fair value
of the subordinated debentures because of (i) the fact that the subordinated
debentures were issued in connection with the issuance of the original equity of
the Company at the date of Acquisition as an investment unit, (ii) the related
party nature of the subordinated debentures, (iii) the lack of comparable
securities, and (iv) the lack of a credit rating of the Company by an
established rating agency.
7. LEASES
The Company leases hospitals, medical office buildings, and certain
equipment under capital and operating lease agreements. All lease agreements
generally require the Company to pay maintenance, repairs, property taxes and
insurance costs. Commitments relating to noncancellable operating and capital
leases for each of the next five years and thereafter are as follows (in
thousands):
YEAR ENDED DECEMBER 31, OPERATING CAPITAL
- ----------------------- --------- --------
2001........................................................ $ 24,141 $ 5,715
2002........................................................ 21,073 4,738
2003........................................................ 19,379 3,706
2004........................................................ 17,160 2,773
2005........................................................ 11,943 2,311
Thereafter.................................................. 72,376 23,999
-------- -------
Total minimum future payments............................... $166,072 43,242
Less debt discounts......................................... (22,142)
-------
21,100
Less current portion........................................ (2,290)
-------
Long-term capital lease obligations......................... $18,810
=======
52
COMMUNITY HEALTH SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. LEASES (CONTINUED)
Assets capitalized under capital leases as reflected in the accompanying
consolidated balance sheets were $9.9 million of land and improvements,
$73.3 million of buildings and improvements, and $35.5 million of equipment and
fixtures as of December 31, 2000 and $5.8 million of land and improvements,
$55.7 million of buildings and improvements and $19.2 million of equipment and
fixtures as of December 31, 1999. The accumulated depreciation related to assets
under capital leases was $26.4 million and $15.1 million as of December 31, 2000
and 1999, respectively. Depreciation of assets under capital leases is included
in depreciation and amortization and amortization of debt discounts on capital
lease obligations is included in interest expense in the consolidated statements
of operations.
8. EMPLOYEE BENEFIT PLANS
The Company has a defined contribution plan that is qualified under
Section 401(k) of the Internal Revenue Code, which covers all eligible employees
at its hospitals, clinics, and the corporate offices. Participants may
contribute a portion of their compensation not exceeding a limit set annually by
the Internal Revenue Service. This plan includes a provision for the Company to
match a portion of employee contributions. The Company also provides a defined
contribution welfare benefit plan for post-termination benefits to executive and
middle management employees. Total expense under the 401(k) plan was
$2.8 million, $2.9 million and $2.2 million for the years ended December 31,
2000, 1999 and 1998, respectively. Total expense under the welfare benefit plan
was $0.7 million, $0.8 million and $0.9 million for the years ended
December 31, 2000, 1999 and 1998, respectively.
9. STOCKHOLDERS' EQUITY
On June 14, 2000, the Company closed its initial public offering of
18,750,000 shares of common stock and on July 3, 2000, the underwriters
exercised their overallotment option and purchased 1,675,717 shares of common
stock. These shares were offered at $13.00 per share. On November 3, 2000, the
Company completed a secondary offering of 18,000,000 shares of its common stock
at an offering price of $28.1875. Of these shares, 8,000,000 shares were sold by
affiliates of FL & Co. and other shareholders. The net proceeds to the Company
from these offerings were $514.5 million in the aggregate and were used to repay
long-term debt.
Authorized capital shares of the Company include 400,000,000 shares of
capital stock consisting of 300,000,000 shares of common stock and 100,000,000
shares of Preferred Stock. Each of the aforementioned classes of capital stock
has a par value of $.01 per share. Shares of Preferred Stock, none of which are
outstanding as of December 31, 2000, may be issued in one or more series having
such rights, preferences and other provisions as determined by the Board of
Directors without approval by the holders of common stock.
Common shares held by employees that were acquired directly from the Company
are the subject of a stockholder's agreement under which each share, until
vested, is subject to repurchase, upon termination of employment. Shares vest,
on a cumulative basis, each year at a rate of 20% of the total shares issued
beginning after the first anniversary date of the purchase. Further, under the
stockholder's agreement shares of common stock held by stockholders other than
FL&Co. will only be transferable together with shares transferred by FL&Co.
until FL&Co.'s ownership falls below 25%.
During 1997, the Company granted options to purchase 191,614 shares of
common stock to non-employee directors at an exercise price of $8.96 per share.
One-third of such options are
53
COMMUNITY HEALTH SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. STOCKHOLDERS' EQUITY (CONTINUED)
exercisable each year on a cumulative basis beginning on the first anniversary
of the date of grant and expiring ten years from the date of grant. As of
December 31, 2000, 178,839 non-employee director options to purchase common
stock were exercisable with a weighted average remaining contractual life of
6.5 years.
In November 1996, the Board of Directors approved an Employee Stock Option
Plan (the "1996 Plan") to provide incentives to key employees of the Company.
Options to purchase up to 756,636 shares of common stock are authorized under
the 1996 Plan. All options granted pursuant to the 1996 Plan are generally
exercisable each year on a cumulative basis at a rate of 20% of the total number
of common shares covered by the option beginning one year from the date of grant
and expiring ten years from the date of grant. There will be no additional
grants of options under the 1996 Plan.
In April 2000, the Board of Directors approved the 2000 Stock Option and
Award Plan (the "2000 Plan"). The 2000 Plan provides for the grant of incentive
stock options intended to qualify under Section 422 of the Internal Revenue Code
as well as stock options which do not so qualify, stock appreciation rights,
restricted stock, performance units and performance shares, phantom stock awards
and share awards. Persons eligible to receive grants under the 2000 Plan include
the Company's directors, officers, employees and consultants. Options to
purchase 4,562,791 shares of common stock are authorized under the 2000 Plan.
All options granted pursuant to the 2000 Plan are generally exercisable each
year on a cumulative basis at a rate of 33 1/3% of the total number of common
shares covered by the option beginning on the first anniversary of the date of
grant and expiring ten years from the date of grant. As of December 31, 2000,
there were 3,917,500 options granted and 645,291 shares of unissued common stock
reserved for future grants under the 2000 Plan.
The options granted are "nonqualified" for tax purposes. For financial
reporting purposes, the exercise price of certain option grants under the 1996
plan were considered to be below the fair value of the stock at the time of
grant. The fair value of those grants was determined based on an appraisal
conducted by an independent appraisal firm as of the relevant date. Options
granted under the 2000 Plan were granted to employees at the fair value of the
related stock. The aggregate differences between fair value and the exercise
price is being charged to compensation expense over the relevant vesting
periods. Such expense aggregated $74,000 and $83,000 in 2000 and 1999,
respectively.
54
COMMUNITY HEALTH SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. STOCKHOLDERS' EQUITY (CONTINUED)
A summary of the number of shares of common stock issuable upon the exercise
of options under the Company's 1996 Plan and 2000 Plan for fiscal 2000, 1999 and
1998 and changes during those years is presented below:
WEIGHTED
SHARES PRICE RANGE AVERAGE PRICE
--------- ------------ -------------
Balance at December 31, 1997............................ 431,282 $ 6.99 $ 6.99
Granted............................................... 299,292 6.99 6.99
Exercised............................................. -- -- --
Forfeited or canceled................................. (119,801) 6.99 6.99
--------- ------------ ------
Balance at December 31, 1998............................ 610,773 $ 6.99 $ 6.99
Granted............................................... 90,376 6.99 6.99
Exercised............................................. -- -- --
Forfeited or canceled................................. (150,907) 6.99 6.99
--------- ------------ ------
Balance at December 31, 1999............................ 550,242 $ 6.99 $ 6.99
Granted............................................... 3,943,000 13.00-31.70 13.69
Exercised............................................. (78,284) 6.99 6.99
Forfeited or canceled................................. (83,927) 6.99-20.06 9.40
--------- ------------ ------
Balance at December 31, 2000............................ 4,331,031 $ 6.99-31.70 $13.05
The following table summarizes information concerning currently outstanding
and exercisable options:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
- ------------------------------------------------------------------------- ------------------------------
WEIGHTED AVERAGE
RANGE OF EXERCISE NUMBER REMAINING WEIGHTED AVERAGE NUMBER WEIGHTED AVERAGE
PRICES OUTSTANDING CONTRACTUAL LIFE EXERCISE PRICE EXERCISABLE EXERCISE PRICE
- --------------------- ----------- ---------------- ---------------- ----------- ----------------
$ 6.99 413,531 6.8 years $ 6.99 153,668 $6.99
$13.00-31.70 3,917,500 9.5 years $13.69 -- --
Under SFAS No. 123, the fair value of each option grant is estimated on the
date of grant using the Black-Scholes option-pricing model. The weighted-average
fair value of each option granted during 2000, 1999 and 1998 were $6.11, $5.10
and $2.05, respectively. In 2000 and 1998, the exercise price of options granted
was the same as the fair value of the related stock. In 1999, the exercise price
of options granted was less than the fair value of the related stock. The
following weighted-average assumptions were used for grants in fiscal 2000, 1999
and 1998: risk-free interest rate of 6.46%, 5.49% and 5.14%; expected volatility
of the Company's common stock based on peer companies in the healthcare industry
of 58%, 45% and 34%, respectively; no dividend yields; and weighted-average
expected life of the options of 3 years for all years.
Had the fair value of the options granted been recognized as compensation
expense on a straight-line basis over the vesting period of the grant, the
Company's net income (loss) and income
55
COMMUNITY HEALTH SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. STOCKHOLDERS' EQUITY (CONTINUED)
(loss) per share would have been reduced to the pro forma amounts indicated
below (in thousands except per share data):
2000 1999 1998
-------- -------- ---------
Pro forma net income (loss)................................. $6,907 $(17,010) $(183,513)
Pro forma net income (loss) per share:
Basic..................................................... $ 0.10 $ (0.31) $ (3.38)
Diluted................................................... $ 0.10 $ (0.31) $ (3.38)
10. EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted net
income (loss) per share (in thousands, except share data):
YEAR ENDED DECEMBER 31,
---------------------------------------
2000 1999 1998
----------- ----------- -----------
NUMERATOR:
Income (loss) before cumulative effect of a change
in accounting principle........................... $ 9,569 $ (16,789) $ (182,938)
Cumulative effect of a change in accounting
principle......................................... -- -- (352)
----------- ----------- -----------
Net income (loss) available to common -- basic and
diluted........................................... $ 9,569 $ (16,789) $ (183,290)
=========== =========== ===========
DENOMINATOR:
Weighted-average number of shares outstanding --
basic................................................. 67,610,399 54,545,030 54,249,895
Effect of dilutive securities:
Non-employee director options....................... 54,885 -- --
Unvested common shares.............................. 802,471 -- --
Employee options.................................... 719,436 -- --
----------- ----------- -----------
Weighted-average number of shares outstanding --
diluted............................................... 69,187,191 54,545,030 54,249,895
=========== =========== ===========
Dilutive securities outstanding not included in the
computation of earnings (loss) per share because their
effect is antidilutive:
Non-employee director options....................... -- 191,614 191,614
Unvested common shares.............................. -- 1,031,734 1,239,902
Employee options.................................... -- 550,242 610,773
11. ACCOUNTING CHANGE
In 1998, the Company adopted The American Institute of Certified Public
Accountants Statement of Position 98-5, "Reporting on the Costs of Start-Up
Activities," which affects the accounting for start-up costs. The change
involved expensing these costs as incurred, rather than capitalizing and
subsequently amortizing such costs. The cumulative effect of the change on the
accumulated deficit as of the beginning of 1998 is reflected as a charge of
$0.5 million ($0.4 million net of taxes) to 1998 earnings.
56
COMMUNITY HEALTH SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
12. COMMITMENTS AND CONTINGENCIES
CONSTRUCTION COMMITMENTS. As of December 31, 2000, the Company has
obligations under certain hospital purchase agreements to construct four
hospitals through 2005 with an aggregate estimated construction cost, including
equipment, of approximately $120 million.
PROFESSIONAL LIABILITY RISKS. Substantially all of the Company's
professional and general liability risks are subject to a $0.5 million per
occurrence deductible (with an annual deductible cap of $5 million). The
Company's insurance is underwritten on a "claims-made basis." The Company
accrues an estimated liability for its uninsured exposure and self-insured
retention based on historical loss patterns and actuarial projections. The
Company's estimated liability for the self-insured portion of professional and
general liability claims was $16.6 million and $16.4 million as of December 31,
2000 and 1999, respectively. These estimated liabilities represent the present
value of estimated future professional liability claims payments based on
expected loss patterns using a discount rate of 5.77% and 5.72% in 2000 and
1999, respectively. The discount rate is based on an estimate of the risk-free
interest rate for the duration of the expected claim payments. The estimated
undiscounted claims liability was $19.5 million and $18.9 million as of
December 31, 2000 and 1999, respectively. The effect of discounting professional
and general liability claims was a $0.3 million increase to expense in 2000 and
$0.1 million decrease in 1999 and 1998.
COMPLIANCE SETTLEMENT AND YEAR 2000 REMEDIATION COSTS. In 1997, the Company
initiated a voluntary review of its inpatient medical records in order to
determine the extent it may have had coding inaccuracies under certain
government programs. At December 31, 1998, an estimate of the costs of these
coding inaccuracies settlement was accrued based on information available and
additional costs were accrued at December 31, 1999. In March 2000, the Company
reached a settlement with appropriate governmental agencies pursuant to which
the Company paid approximately $31.8 million to settle potential liabilities
related to coding inaccuracies occurring from October 1993 through
September 1997. Year 2000 remediation costs totaled $3.3 million and
$0.2 million for 1999 and 1998, respectively.
LEGAL MATTERS. The Company is a party to legal proceedings incidental to
its business. In the opinion of management, any ultimate liability with respect
to these actions will not have a material adverse effect on the Company's
consolidated financial position, cash flows or results of operations.
13. RELATED PARTY TRANSACTIONS
Notes receivable for common shares held by employees, as disclosed on the
consolidated balance sheets, represent the outstanding balance of notes accepted
by the Company as partial payment for the purchase of the common shares from
senior management employees. These notes bear interest at 6.84%, are full
recourse promissory notes and are secured by the shares to which they relate.
Each of the full recourse promissory notes mature on the fifth anniversary date
of the note, with accelerated maturities in case of employee termination,
Company stock repurchases, or stockholder's sale of common stock. Employees have
fully paid for purchases of common stock by cash or by a combination of cash and
full recourse promissory notes.
The Company purchased marketing services and materials at a cost of $239,400
and $268,000 in 2000 and 1999, respectively, from a company owned by the spouse
of one of the Company's officers.
57
COMMUNITY HEALTH SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
13. RELATED PARTY TRANSACTIONS (CONTINUED)
In 1996, in connection with the Company's relocation from Houston to
Nashville, the Company provided a $100,000 non-interest bearing loan to one of
its executives. This loan was repaid on December 13, 2000.
14. QUARTERLY FINANCIAL DATA (UNAUDITED)
QUARTER
-------------------------------------------------
1ST 2ND 3RD 4TH TOTAL
---------- ---------- ---------- ---------- ----------
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
2000
Net operating revenues............. $ 308,651 $ 317,136 $ 342,447 $ 369,267 $1,337,501
Income before taxes................ 4,850 3,413 5,163 14,316 27,742
Net income......................... 921 178 1,258 7,212 9,569
Net income per share:
Basic............................ 0.02 -- 0.02 0.09 0.14
Diluted.......................... 0.02 -- 0.02 0.09 0.14
Weighted average number of shares:
Basic............................ 54,634,285 58,175,050 75,120,860 81,717,585 67,610,399
Diluted.......................... 55,838,214 59,310,601 77,193,350 84,067,319 69,187,191
1999
Net operating revenues............. $ 263,004 $ 261,821 $ 266,896 $ 288,232 $1,079,953
Income (loss) before taxes......... 6,498 254 (4,036) (13,952) (11,236)
Net income (loss).................. 1,918 (1,843) (4,427) (12,437) (16,789)
Net income (loss) per share:
Basic............................ 0.04 (0.03) (0.08) (0.23) (0.31)
Diluted.......................... 0.03 (0.03) (0.08) (0.23) (0.31)
Weighted average number of shares:
Basic............................ 54,439,895 54,517,660 54,495,334 54,459,838 54,545,030
Diluted.......................... 55,632,718 54,517,660 54,495,334 54,459,838 54,545,030
58
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this Item is incorporated herein by reference to
the Company's proxy statement to be filed under Regulation 14A in connection
with the Annual Meeting of Stockholders of the Company scheduled to be held on
May 22, 2001 under "Election of Directors", no later than 120 days after the end
of the year of the Company's fiscal year.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item is incorporated herein by reference to
the Company's proxy statement to be filed under Regulation 14A in connection
with the Annual Meeting of the Stockholders of the Company scheduled to be held
on May 22, 2001 under "Executive Compensation", no later than 120 days after the
end of the Company's fiscal year.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this Item is incorporated herein by reference to
the Company's proxy statement to be filed under Regulation 14A in connection
with the Annual Meeting of Stockholders of the Company scheduled to be held on
May 22, 2001 under "Security Ownership of Certain Beneficial Owners and
Management", no later than 120 days after the end of the Company's fiscal year.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item is incorporated herein by reference to
the Company's proxy statement to be filed under Regulation 14A in connection
with the Annual Meeting of Stockholders of the Company to be held on May 22,
2001 under "Certain Transactions", scheduled no later than 120 days after the
end of the Company's fiscal year.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
Item 14(a)(1), 14(a)(2) and 14(d):
The following financial statement schedule is filed as part of this Report
at page 64 hereof:
Schedule II--Valuation and Qualifying Accounts
All other schedules are omitted since the required information is not
present or is not present in amounts sufficient to require submission of the
schedule, or because the information required is included in the consolidated
financial statements and notes thereto.
Item 14(a)(3) and 14(c):
The following exhibits are filed with this Report.
NO. DESCRIPTION
--- -----------
2.1 Agreement and Plan of Merger between the Registrant, FLCH
Acquisition Corp. and Community Health Systems, Inc., dated
on June 9, 1996 (incorporated by reference to Exhibit 2.1 to
the Company's Registration Statement on Form S-1
(No. 333-7190))
59
NO. DESCRIPTION
--- -----------
3.1 Form of Restated Certificate of Incorporation of the
Registrant (incorporated by reference to Exhibit 3.1 to the
Company's Registration Statement on Form S-1
(No. 333-7190))
3.2 Form of Restated By-laws of the Registrant *
4.1 Form of Common Stock Certificate (incorporated by reference
to Exhibit 4.1 to the Company's Registration Statement on
Form S-1 (No. 333-7190))
10.1 Form of outside director Stock Option Agreement
(incorporated by reference to Exhibit 10.1 to the Company's
Registration Statement on Form S-1 (No. 333-7190))
10.2 Form of Stockholder's Agreement between the Registrant and
outside directors (incorporated by reference to Exhibit 10.2
to the Company's Registration Statement on Form S-1
(No. 333-7190))
10.3 Form of Employee Stockholder's Agreement (incorporated by
reference to Exhibit 10.3 to the Company's Registration
Statement on Form S-1 (No. 333-7190))
10.4 The Registrant's Employee Stock Option Plan and form of
Stock Option Agreement (incorporated by reference to
Exhibit 10.4 to the Company's Registration Statement on
Form S-1 (No. 333-7190))
10.5 The Registrant's 2000 Stock Option and Award Plan
(incorporated by reference to Exhibit 10.5 to the Company's
Registration Statement on Form S-1 (No. 333-7190))
10.6 Form of Stockholder's Agreement between the Registrant and
employees (incorporated by reference to Exhibit 10.6 to the
Company's Registration Statement on Form S-1
(No. 333-7190))
10.7 Registration Rights Agreement, dated July 9, 1996, among the
Registrant, FLCH Acquisition Corp., Forstmann Little & Co.
Equity Partnership -- V, L.P. and Forstmann Little & Co.
Subordinated Debt and Equity Management Buyout Partnership
-- VI, L.P. (incorporated by reference to Exhibit 10.7 to
the Company's Registration Statement on Form S-1
(No. 333-7190))
10.8 Form of Indemnification Agreement between the Registrant and
its directors and executive officers (incorporated by
reference to Exhibit 10.8 to the Company's Registration
Statement on Form S-1 (No. 333-7190))
10.9 Amended and Restated Credit Agreement, dated as of March 26,
1999, among Community Health Systems, Inc., the Registrant,
certain lenders, The Chase Manhattan Bank, as Administrative
Agent, and Nationsbank, N.A. and The Bank of Nova Scotia, as
Co-Agents (incorporated by reference to Exhibit 10.9 to the
Company's Registration Statement on Form S-1
(No. 333-7190))
10.10 First Amendment, dated February 24, 2000, to the Amended and
Restated Credit Agreement, dated as of March 26, 1999, among
Community Health Systems, Inc., the Registrant, certain
lenders, The Chase Manhattan Bank, as Administrative Agent,
and Nationsbank, N.A. and The Bank of Nova Scotia, as
Co-Agents (incorporated by reference to Exhibit 10.10 to the
Company's Registration Statement on Form S-1
(No. 333-7190))
10.11 Form of Management Rights Letter between Registrant and the
partnerships affiliated with Forstmann Little & Co.
(incorporated by reference to Exhibit 10.11 to the Company's
Registration Statement on Form S-1 (No. 333-7190))
10.12 Form of Series A 7 1/2% Subordinated Debenture (incorporated
by reference to Exhibit 10.12 to the Company's Registration
Statement on Form S-1 (No. 333-7190))
60
NO. DESCRIPTION
--- -----------
10.13 Form of Series B 7 1/2% Subordinated Debenture (incorporated
by reference to Exhibit 10.13 to the Company's Registration
Statement on Form S-1 (No. 333-7190))
10.14 Form of Series C 7 1/2% Subordinated Debenture (incorporated
by reference to Exhibit 10.14 to the Company's Registration
Statement on Form S-1 (No. 333-7190))
10.15 Corporate Compliance Agreement between the Office of
Inspector General of the Department of Health and Human
Services and the Registrant (incorporated by reference to
Exhibit 10.15 to the Company's Registration Statement on
Form S-1 (No. 333-7190))
10.16 Tenet BuyPower Purchasing Assistance Agreement, dated June
13, 1997, between Community Health Systems, Inc. and Tenet
HealthSystem Inc., Addendum, dated September 19, 1997 and
First Amendment, dated March 15, 2000 (incorporated by
reference to Exhibit 10.16 to the Company's Registration
Statement on Form S-1 (No. 333-7190))
10.17 The Registrant's 2000 Employee Stock Purchase Plan
(incorporated by reference to Exhibit 10.17 to the Company's
Registration Statement on Form S-1 (No. 333-7190))
10.18 Settlement Agreement between the United States of America,
the states of Illinois, New Mexico, South Carolina,
Tennessee, Texas, West Virginia and the Registrant
(incorporated by reference to Exhibit 10.18 to the Company's
Registration Statement on Form S-1 (No. 333-7190))
21 List of subsidiaries (incorporated by reference to
Exhibit 21 to the Company's Registration Statement on
Form S-1 (No. 333-47354))
23.1 Consent of Deloitte & Touche LLP*
- ------------------------
* Filed herewith.
Item 14(b):
During the last quarter of the year ended December 31, 2000, the Registrant
did not file a Current Report on Form 8-K.
61
SIGNATURES
Pursuant to the requirements section 13 or 15(d) of the Securities Act of
1934, the registrant has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized, in the City of Brentwood, State of
Tennessee, on the 29th day of March, 2001.
COMMUNITY HEALTH SYSTEMS, INC.
By: /s/ WAYNE T. SMITH
-----------------------------------------
Wayne T. Smith
CHARIMAN OF THE BOARD
PRESIDENT AND CHIEF EXECUTIVE OFFICER
Pursuant to the requirements of the Securities Act of 1933, this Report has
been signed below by the following persons in the capacities indicated.
NAME TITLE DATE
---- ----- ----
President and Chief Executive
/s/ WAYNE T. SMITH Officer and Director
------------------------------------------- (principal executive March 29, 2001
Wayne T. Smith officer)
Executive Vice President and
/s/ W. LARRY CASH Chief Financial Officer
------------------------------------------- (principal financial March 29, 2001
W. Larry Cash officer)
Vice President and Corporate
/s/ T. MARK BUFORD Controller
------------------------------------------- (principal accounting March 29, 2001
T. Mark Buford officer)
/s/ SHEILA P. BURKE
------------------------------------------- Director March 29, 2001
Sheila P. Burke
/s/ ROBERT J. DOLE
------------------------------------------- Director March 29, 2001
Robert J. Dole
/s/ J. ANTHONY FORSTMANN
------------------------------------------- Director March 29, 2001
J. Anthony Forstmann
/s/ THEODORE J. FORSTMANN
------------------------------------------- Director March 29, 2001
Theodore J. Forstmann
/s/ DALE F. FREY
------------------------------------------- Director March 29, 2001
Dale F. Frey
/s/ SANDRA J. HORBACH
------------------------------------------- Director March 29, 2001
Sandra J. Horbach
/s/ THOMAS H. LISTER
------------------------------------------- Director March 29, 2001
Thomas H. Lister
/s/ MICHAEL A. MILES
------------------------------------------- Director March 29, 2001
Michael A. Miles
62
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
Community Health Systems, Inc.
Brentwood, Tennessee
We have audited the consolidated financial statements of Community Health
Systems, Inc. and subsidiaries as of December 31, 2000 and 1999, and for each of
the three years in the period ended December 31, 2000, and have issued our
report thereon dated February 20, 2001 (included elsewhere in this Annual
Report). Our audits also included the consolidated financial statement schedule
listed in Item 14 of this Annual Report on Form 10-K. This consolidated
financial statement schedule is the responsibility of the Company's management.
Our responsibility is to express an opinion based on our audits. In our opinion,
such consolidated financial statement schedule, when considered in relation to
the basic financial statements taken as a whole, presents fairly in all material
respects the information set forth therein.
/s/ Deloitte & Touche LLP
Nashville, Tennessee
February 20, 2001
63
COMMUNITY HEALTH SYSTEMS, INC. AND SUBSIDIARIES
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
(IN THOUSANDS)
BALANCE AT CHARGED TO BALANCE
BEGINNING COSTS AND AT END
DESCRIPTION OF YEAR EXPENSES WRITE-OFFS OF YEAR
- ----------- ---------- ---------- ---------- --------
Year ended December 31, 2000 allowance for doubtful
accounts.......................................... $34,499 $122,303 $(103,867) $52,935
Year ended December 31, 1999 allowance for doubtful
accounts.......................................... 28,771 95,149 (89,421) 34,499
Year ended December 31, 1998 allowance for doubtful
accounts.......................................... 20,873 69,005 (61,107) 28,771
64
EXHIBIT INDEX
NO. DESCRIPTION
--- -----------
2.1 Agreement and Plan of Merger between the Registrant, FLCH
Acquisition Corp. and Community Health Systems, Inc., dated
on June 9, 1996 (incorporated by reference to
Exhibit 2.1 to the Company's Registration Statement on Form
S-1 (No. 333-7190))
3.1 Form of Restated Certificate of Incorporation of the
Registrant (incorporated by reference to Exhibit 3.1 to the
Company's Registration Statement on Form S-1 (No. 333-7190))
3.2 Form of Restated By-laws of the Registrant*
4.1 Form of Common Stock Certificate (incorporated by reference
to Exhibit 4.1 to the Company's Registration Statement on
Form S-1 (No. 333-7190))
10.1 Form of outside director Stock Option Agreement
(incorporated by reference to Exhibit 10.1 to the Company's
Registration Statement on Form S-1 (No. 333-7190))
10.2 Form of Stockholder's Agreement between the Registrant and
outside directors (incorporated by reference to Exhibit 10.2
to the Company's Registration Statement on Form S-1
(No. 333-7190))
10.3 Form of Employee Stockholder's Agreement (incorporated by
reference to Exhibit 10.3 to the Company's Registration
Statement on Form S-1 (No. 333-7190))
10.4 The Registrant's Employee Stock Option Plan and form of
Stock Option Agreement (incorporated by reference to Exhibit
10.4 to the Company's Registration Statement on
Form S-1 (No. 333-7190))
10.5 The Registrant's 2000 Stock Option and Award Plan
(incorporated by reference to Exhibit 10.5 to the Company's
Registration Statement on Form S-1 (No. 333-7190))
10.6 Form of Stockholder's Agreement between the Registrant and
employees (incorporated by reference to Exhibit 10.6 to the
Company's Registration Statement on Form S-1
(No. 333-7190))
10.7 Registration Rights Agreement, dated July 9, 1996, among the
Registrant, FLCH Acquisition Corp., Forstmann Little & Co.
Equity Partnership -- V, L.P. and Forstmann Little & Co.
Subordinated Debt and Equity Management Buyout Partnership
-- VI, L.P. (incorporated by reference to Exhibit 10.7 to
the Company's Registration Statement on Form S-1
(No. 333-7190))
10.8 Form of Indemnification Agreement between the Registrant and
its directors and executive officers (incorporated by
reference to Exhibit 10.8 to the Company's Registration
Statement on Form S-1 (No. 333-7190))
10.9 Amended and Restated Credit Agreement, dated as of March 26,
1999, among Community Health Systems, Inc., the Registrant,
certain lenders, The Chase Manhattan Bank, as Administrative
Agent, and Nationsbank, N.A. and The Bank of Nova Scotia, as
Co-Agents (incorporated by reference to Exhibit 10.9 to the
Company's Registration Statement on
Form S-1 (No. 333-7190))
65
NO. DESCRIPTION
--- -----------
10.10 First Amendment, dated February 24, 2000, to the Amended and
Restated Credit Agreement, dated as of March 26, 1999, among
Community Health Systems, Inc., the Registrant, certain
lenders, The Chase Manhattan Bank, as Administrative Agent,
and Nationsbank, N.A. and The Bank of Nova Scotia, as
Co-Agents (incorporated by reference to Exhibit 10.10 to the
Company's Registration Statement on Form S-1 (No. 333-7190))
10.11 Form of Management Rights Letter between Registrant and the
partnerships affiliated with Forstmann Little & Co.
(incorporated by reference to Exhibit 10.11 to the Company's
Registration Statement on Form S-1 (No. 333-7190))
10.12 Form of Series A 7 1/2% Subordinated Debenture (incorporated
by reference to Exhibit 10.12 to the Company's Registration
Statement on Form S-1 (No. 333-7190))
10.13 Form of Series B 7 1/2% Subordinated Debenture (incorporated
by reference to Exhibit 10.13 to the Company's Registration
Statement on Form S-1 (No. 333-7190))
10.14 Form of Series C 7 1/2% Subordinated Debenture (incorporated
by reference to Exhibit 10.14 to the Company's Registration
Statement on Form S-1 (No. 333-7190))
10.15 Corporate Compliance Agreement between the Office of
Inspector General of the Department of Health and Human
Services and the Registrant (incorporated by reference to
Exhibit 10.15 to the Company's Registration Statement on
Form S-1 (No. 333-7190))
10.16 Tenet BuyPower Purchasing Assistance Agreement, dated June
13, 1997, between Community Health Systems, Inc. and Tenet
HealthSystem Inc., Addendum, dated September 19, 1997 and
First Amendment, dated March 15, 2000 (incorporated by
reference to Exhibit 10.16 to the Company's Registration
Statement on Form S-1 (No. 333-7190))
10.17 The Registrant's 2000 Employee Stock Purchase Plan
(incorporated by reference to
Exhibit 10.17 to the Company's Registration Statement on
Form S-1 (No. 333-7190))
10.18 Settlement Agreement between the United States of America,
the states of Illinois, New Mexico, South Carolina,
Tennessee, Texas, West Virginia and the Registrant
(incorporated by reference to Exhibit 10.18 to the Company's
Registration Statement on Form S-1
(No. 333-7190))
21 List of subsidiaries (incorporated by reference to
Exhibit 21 to the Company's Registration Statement on Form
S-1
(No. 333-47354))
23.1 Consent of Deloitte & Touche LLP*
- ------------------------
* Filed herewith.
66