Back to GetFilings.com
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended September 30,2001
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 No. 000-18799
HEALTH MANAGEMENT ASSOCIATES, INC.
(Exact name of Registrant as specified in its charter)
Delaware 61-0963645
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
5811 Pelican Bay Boulevard
Suite 500
Naples, Florida 34108-2710
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (941) 598-3131
Securities registered pursuant to Section 12(b) of the Act:
==============================================================================
Title of Each Class Name of Each Exchange
on Which Registered
==============================================================================
Class A Common Stock, $.01 par value New York Stock Exchange
==============================================================================
Securities registered pursuant to Section 12(g) of the Act:
================================================================================
Title of Each Class
================================================================================
Convertible Senior Subordinated Debentures due 2020
================================================================================
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 December 14, 2001 there were 242,118,272 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 $3,809,539,710. Market value is
determined by reference to the listed price of the Registrant's Class A Common
Stock as of the close of business on December 14, 2001.
Portions of the Registrant's definitive Proxy Statement to be issued in
connection with the Annual Meeting of Stockholders of the Registrant to be held
on February 19, 2002 have been incorporated by reference into Part III, Items
10, 11, 12 and 13 of this Report.
TABLE OF CONTENTS
FORM 10-K ANNUAL REPORT
HEALTH MANAGEMENT ASSOCIATES, INC.
Fiscal year ended September 30, 2001
PART I
Page
----
Item 1. Business .................................................................................. 1
Item 2. Properties ................................................................................ 16
Item 3. Legal Proceedings ......................................................................... 20
Item 4. Submission of Matters to a Vote of Security Holders ...................................... 21
PART II
Item 5. Market for Registrant's Common Equity and
Related Stockholder Matters ............................................................... 22
Item 6. Selected Financial Data ................................................................... 23
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations ....................................................... 24
Item 7A. Quantitative and Qualitative Disclosures about Market Risk ................................ 30
Item 8. Financial Statements and Supplementary Data ............................................... 31
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure ....................................................... 52
PART III
Item 10. Directors and Executive Officers of the Registrant ........................................ 52
Item 11. Executive Compensation .................................................................... 52
Item 12. Security Ownership of Certain Beneficial Owners and
Management ................................................................................ 52
Item 13. Certain Relationships and Related Transactions ............................................ 52
PART IV
Item 14. Exhibits, Financial Statement Schedule, and Reports
on Form 8-K ............................................................................... 53
Note: Portions of the Registrant's definitive Proxy Statement to be issued in
connection with the Annual Meeting of Stockholders of the Registrant to
be held on February 19, 2002 have been incorporated by reference into
Part III, Items 10, 11, 12, and 13 of this Report.
PART I
Item 1. Business
General
Health Management Associates, Inc. (the "Company" or the "Registrant")
was incorporated in Delaware in 1979 and succeeded to the operations of its
subsidiary, Hospital Management Associates, Inc., which was formed in 1977. The
Company provides a broad range of general acute care health services in
non-urban communities. As of September 30, 2001, the Company operated 36 general
acute care hospitals with a total of 5,184 licensed beds and two psychiatric
hospitals with a total of 134 licensed beds. For the year ended September 30,
2001 ("Fiscal 2001"), the acute care hospital operations accounted for
approximately 97% of the Company's net patient service revenue and the
psychiatric hospital operations accounted for approximately 1%. See Item 2
"Properties".
Business Strategy
The Company pursues a business strategy of efficiently and profitably
operating its existing base of facilities and selectively acquiring additional
100 to 300 bed acute care hospitals located in non-urban communities in market
areas of 30,000 to 400,000 people primarily in the southeastern and southwestern
United States. The Company seeks to acquire, at reasonable prices, acute care
hospitals which are the sole or predominant health care providers in their
market service areas. In evaluating potential acquisitions, the Company requires
a hospital's market service area to exhibit a demographic need for the facility
and to have an established physician base which can be augmented by the
Company's ability to attract additional physicians to the community. Many of the
hospitals the Company has acquired were unprofitable at the time of acquisition.
Upon acquiring a facility, the Company employs a well-qualified executive
director and controller, implements its proprietary management information
system, recruits physicians, introduces strict cost control measures with
respect to hospital staffing and volume purchasing under Company-wide or group
purchasing agreements, and spends the necessary capital to renovate the facility
and upgrade equipment. The Company strives to provide all of the acute care
needs of each community its hospitals serve, thereby reducing the out-migration
of potential patients to hospitals in larger urban areas.
The Company manages each acquired hospital to maximize operating
margins and return on capital within the first 24 to 36 months of operations, a
time period which the Company believes is sufficient to fully implement the plan
of improvement. Generally, the Company has been successful in achieving a
significant improvement in the operating performance of its facilities within
this time period. Once a facility has matured, the Company generally achieves
additional growth through favorable demographic trends, the continued growth of
physicians' practices in the community, expansion of health care services
offered and selective rate increases.
The Company continually seeks to improve the quality of the health care
services delivered through a company-wide proprietary Quality Service Management
(QSM) program. Upon discharge, all patients are asked to fill out a confidential
survey that seeks the patients perception of the hospitals health care services,
including medical treatment, nursing care, the hospitals attention to patient
concerns, the admissions process, room cleanliness, and the quality of dietary
services. In addition, in 2000, the Company's hospitals that were
1
surveyed by the Joint Commission on Accreditation of Healthcare Organizations
averaged a score of 93, which was above the industry average. None of the
Company's hospitals were surveyed in 2001. Furthermore, in 2000, one of the
Company's hospitals was awarded Top 100 Hospital status by HCIA-Sachs, Inc. , an
independent rater of hospitals, and one additional hospital was cited as a Top
100 Hospital for its cardiac and stroke care.
See Item 2 "Properties" for a description of the Company's current
facilities.
Operations and Marketing
Upon acquisition of a hospital, the Company immediately implements its
policies to achieve its financial and operating goals. The Company (i) appraises
current management personnel and makes necessary changes, (ii) seeks to reduce
expenses by managing staffing more effectively and purchasing supplies through
volume and group purchasing agreements, (iii) improves billings and collections
and (iv) installs its proprietary management information system. The Company's
flexible staffing program allows the Company to manage its labor costs
effectively by properly staffing a hospital based on current occupancy,
utilizing a combination of full-time and part-time employees. The Company's
management information system provides the executive director and the controller
with the necessary financial and operational information to operate the hospital
effectively and to implement the Company's flexible staffing program. Based on
the information gathered, the Company can also assist physicians in appropriate
case management.
The Company also attempts to increase admissions and outpatient
business through marketing programs. The marketing programs of each of the
Company's hospitals are directed by the hospital's executive director to best
suit the particular geographic, demographic and economic characteristics of the
hospital's market area. A key element of the Company's marketing strategy is to
establish and maintain a cooperative relationship with its physicians. The
Company pursues an active physician recruitment program to attract and retain
qualified specialists and other physicians to broaden the services available and
meet identifiable community needs. The Company's hospitals often provide newly
recruited physicians with various services to assist them in opening and
commencing the operation of their practices, including staffing assistance,
financial support, equipment and office rental. Such costs are generally
expensed as incurred. The Company's hospitals also pursue various strategies
aimed at increasing utilization of their services, particularly emergency and
outpatient services. For example, hospitals offer an emergency service program
called "Nurse First," which quickly assigns a registered nurse specially trained
for emergency room duties to assess the condition of each patient upon arrival.
Other programs include "Pro Med," an emergency room computer-based diagnostic
aid that helps physicians assess a patient's medical condition quickly and
formulate a diagnosis and course of treatment, "Med Key," a plastic
identification card that contains a variety of patient information which
streamlines the registration process, and "One Call Scheduling," a dedicated
phone system which physicians and their staff can utilize to schedule various
diagnostic tests and other services easily at one time.
The operations of the Company's psychiatric hospitals focus mainly on
child/adolescent residential treatment programs. This has been in response to a
movement in recent years by third party payors to severely limit payments for
traditional inpatient treatment programs. Since the Company's psychiatric
hospitals receive most of their admissions for the
2
child/adolescent programs from state and locally-sponsored child and adolescent
care agencies and the court system, the majority of the hospitals' marketing
efforts are devoted to these areas. There is little direct marketing to the
public. See "Competition--Psychiatric Hospitals" in this Item 1.
The Company considers its management structure to be decentralized. Its
hospitals are run by experienced executive directors and controllers having both
authority and responsibility for day-to-day operations. Incentive compensation
programs have been implemented to reward such managers for accomplishing
established goals. The Company employs a relatively small corporate staff to
provide services such as systems design and development, marketing assistance,
training, human resource management, reimbursement, technical accounting
support, and purchasing and construction management. Financial control is
maintained through fiscal and accounting policies which are established at the
corporate level for use at the hospitals. Financial information is centralized
at the corporate level through the Company's proprietary management information
system.
Selected Operating Statistics
The following table sets forth selected operating statistics for the
Company's hospitals for the periods and dates indicated.
Year ended September 30,
--------------------------------
2001 2000 1999
------- ------ -------
Total hospitals owned or leased (as of the
end of period, except for 2000, which is
as of October 1) .......................................................... 38 37 36
Licensed beds (as of the end of period,
except for 2000, which is as of October 1) ............................... 5,318 5,090 4,665
Admissions .................................................................. 187,062 161,855 143,078
Patient days ................................................................ 880,624 791,617 718,035
Acute care average length of stay (days) .................................... 4.5 4.5 4.5
Psychiatric average length of stay (days) ................................... 168.5 117.1 47.5
Occupancy rate (1) .......................................................... 47% 46% 47%
Outpatient utilization (2) .................................................. 36% 35% 36%
Earnings margin, before depreciation,
interest and income taxes ................................................. 23% 24% 23%
- ------------------------
(1) Hospital occupancy rates are affected by many factors, including the
population size and general economic conditions within the service area,
the degree of variation in medical and surgical products, outpatient use of
hospital services, quality and treatment availability at competing
hospitals, and seasonality. Generally, the Company's hospitals experience a
seasonal decline in occupancy in the first and fourth fiscal quarters.
(2) Outpatient revenue as a percent of Total Patient Service Revenue (as
defined in "Sources of Revenue" in this Item 1).
3
Competition
Acute Care Hospitals. The health care industry is highly competitive
and, in recent years, has been characterized by increased competition for
patients and staff physicians, a shift from inpatient to outpatient settings and
increased consolidation. The principal factors contributing to these trends are
advances in medical technology, cost-containment efforts by managed care payors,
employers and traditional health insurers, changes in regulations and
reimbursement policies, increases in the number and type of competing health
care providers and changes in physician practice patterns. A hospital will
compete within the geographic area in which it operates by distinguishing itself
based on the quality and scope of medical services provided. With respect to the
delivery of general acute care services, most of the Company's hospitals face
less competition in their immediate patient service areas than would be expected
in larger communities. While the Company's hospitals are generally the
predominant provider in their respective communities, most of its hospitals face
competition; however, that competition is generally limited to a single
competitor in each respective market. The Company seeks to provide all the acute
health care needs in each community its hospitals serve.
The competitive position of a hospital is increasingly affected by its
ability to negotiate service contracts with purchasers of group health care
services. Such purchasers include employers, preferred provider organizations
("PPOs") and health maintenance organizations ("HMOs"). PPOs and HMOs attempt to
direct and control the use of hospital services through management of care and
either (i) receive discounts from a hospital's established charges or (ii) pay
based on a fixed per diem or on a capitated basis, where hospitals receive fixed
periodic payments based on the number of members of the organization regardless
of the actual services provided. To date, HMOs have not been a competitive
factor in the Company's non-urban hospitals. In addition, employers and
traditional health insurers are increasingly interested in containing costs
through negotiations with hospitals for managed care programs and discounts from
established charges. In return, hospitals secure commitments for a larger number
of potential patients. Accordingly, the Company has been proactive in
establishing or joining such programs to maintain, and even increase, hospital
services. Management believes the Company is able to compete effectively in its
markets, and does not believe such programs will have a significant adverse
impact on the Company's net revenue. See "Operations and Marketing" in this Item
1.
Psychiatric Hospitals. In recent years third party payors have severely
limited payments for traditional inpatient psychiatric programs, which has
negatively affected the Company's volume of business and its revenue per
admission. In response to these changes, the Company's two psychiatric hospitals
have moved to residential treatment programs for the youth services market,
which includes a variety of services for the troubled child and adolescent
groups. These changes have served to reverse the negative trends in recent
years. The Company's psychiatric hospitals face competition in their market
areas because the Company's psychiatric hospitals compete in larger urban areas
than do its acute care hospitals and these hospitals draw patients from a
limited number of sources. The Company's psychiatric hospitals realize over 90%
of their admissions through a) networking with various state and local-sponsored
child and adolescent programs and b) the Department of Juvenile Justice via
court system commitments. However, as noted earlier in this Item 1., psychiatric
operations only account for approximately 1% of the Company's net patient
service revenue.
4
Acquisitions. The Company faces competition for the acquisition of
non-urban community acute care hospitals from proprietary and not-for-profit
multi-hospital groups. Some of these competitors may have greater financial and
other resources than the Company. Historically, the Company has been able to
acquire hospitals at reasonable prices. However, increased competition for the
acquisition of non-urban community acute care hospitals could have an adverse
impact on the Company's ability to acquire such hospitals on favorable terms.
Consolidation. There has been significant consolidation in the hospital
industry over the past decade due, in large part, to continuing pressures on
payments from government and private payors and increasing shifts away from the
provision of traditional inpatient services. Those economic trends have caused
many hospitals to close and many to consolidate either through acquisitions or
affiliations. The Company believes that these cost containment pressures will
continue and will lead to further consolidation in the hospital industry.
Sources of Revenue
The Company receives payment for services rendered to patients from (i)
the federal government under the Medicare program, (ii) each of the states in
which its hospitals are located under the Medicaid program, and (iii) private
insurers and patients. The following table sets forth the approximate percentage
of Total Patient Service Revenue (defined as revenue from all sources before
deducting contractual allowances and discounts from established billing rates)
derived from the various sources of payment for the periods indicated.
Year Ended September 30,
-----------------------------
2001 2000 1999
---- ---- ----
Medicare .......................... 47% 48% 49%
Medicaid .......................... 12 12 11
Private and other sources ......... 41 40 40
--- --- ---
Total ........................ 100% 100% 100%
=== === ===
Hospital revenues depend upon inpatient occupancy levels, the extent to
which ancillary services and therapy programs are ordered by physicians and
provided to patients, and the volume of outpatient procedures. Reimbursement
rates for inpatient routine services vary significantly depending on the type of
service (e.g., acute care, intensive care or psychiatric) and the geographic
location of the hospital. The Company has maintained increased levels in the
percentage of patient revenues attributable to outpatient services in recent
years. These increased levels are primarily the result of advances in medical
technology (which allow more services to be provided on an outpatient basis) and
increased pressures from Medicare, Medicaid and private insurers to reduce
hospital stays and provide services, where possible, on a less expensive
outpatient basis. The Company's experience with respect to increased outpatient
levels mirror the trend in the hospital industry.
Medicare. Most hospitals (including all of the Company's acute care
hospitals) derive a substantial portion of their revenue from the Medicare
program, which is a federal government program designed to reimburse
5
participating health care providers for covered services rendered and items
furnished to qualified beneficiaries. The Medicare program is heavily regulated
and subject to frequent changes which in recent years have reduced, and in
future years could further restrict increases in, Medicare payments to
hospitals. In light of its hospitals' high percentage of Medicare patients, the
Company's ability in the future to operate its business successfully will depend
in large measure on its ability to adapt to changes in the Medicare program.
The Medicare program is designed primarily to provide health care
services to persons aged 65 and over and those who are chronically disabled or
who have End Stage Renal Disease ("ESRD"). The Medicare program is governed by
the Social Security Act of 1965 and is administered by the federal government,
primarily the Department of Health and Human Services ("DHHS") and the Centers
for Medicare and Medicaid Services ("CMS") formerly known as the Health Care
Financing Administration ("HCFA").
Legislative action and federal regulatory changes over the years have
resulted in significant changes in the Medicare program. Formerly, Medicare
provided reimbursement for the reasonable direct and indirect costs of hospital
services furnished to beneficiaries, plus an allowed return on equity for
proprietary hospitals. Pursuant to the Social Security Amendments of 1983 ("the
Amendments") and subsequent budget reconciliation act modifications, Congress
adopted a prospective payment system ("PPS") to reimburse the routine and
ancillary operating costs of most Medicare inpatient hospital services. In
November 2000, as described on the following page, a prospective payment system
was proposed for rehabilitation hospitals and rehabilitation units that are a
distinct part unit of a hospital. Psychiatric, long-term care and pediatric
hospitals, as well as psychiatric units that are distinct parts of a hospital,
currently are exempt from PPS and continue to be reimbursed on a reasonable cost
basis. Effective August 1, 2000, as also further described, a prospective
payment system was implemented for hospital outpatient services. The Company's
two psychiatric hospitals do not participate in the Medicare program.
Under PPS, the Secretary of DHHS has established fixed payment amounts
per discharge for categories of hospital treatment, commonly known as
diagnosis-related groups ("DRGs"). DRG rates have been established for each
individual hospital participating in the Medicare program, in part based upon
the facility's geographic location. As a general rule under PPS, if a facility's
costs of providing care for the beneficiary are less than the predetermined DRG
rate, the facility retains the difference. Conversely, if the facility's costs
of providing the necessary service are more than the predetermined rate, the
facility must absorb the loss. Because DRG rates are based upon a statistically
normal distribution of severity, patients falling outside the normal
distribution are afforded additional payments and defined as "outliers." In
certain instances, additional payments may be received for outliers.
The DRG rates are updated annually to account for projected inflation.
For several years the annual updates or percentage increases to the DRG rates
have been lower than the actual inflation in the cost of goods and services
purchased by general hospitals. The inflation index used by CMS to adjust the
DRG rates gives consideration to the cost of goods and services purchased by
hospitals as well as non-hospitals (the "market basket"). The increase in the
market basket for the federal fiscal year ("FY") beginning on October 1, 2000
("FY 2001") was 3.4%. Pursuant to the Balanced Budget Act of 1997, the net
annual updates were set as follows: market basket minus 1.1% for FY 2001
6
and 2002; and for FY 2003 and each subsequent FY, the market basket percentage.
The Medicare, Medicaid and State Children's Health Insurance Program ("SCHIP")
Benefits Improvement and Protection Act of 2000("BIPA") further revised the
update for FY 2001 to the full market basket and for FY 2002 and FY 2003 to the
market basket minus 0.55%. The Company cannot predict how future adjustments by
Congress and the CMS will affect the profitability of its health care
facilities.
On December 21, 2000, BIPA was enacted. BIPA made a number of changes
to the Medicare and Medicaid Acts affecting payments to hospitals which total
more than $35 billion nationwide and target $2 billion to rural providers over
the next six years. Some of the changes made by BIPA that affect the Company's
facilities are as follows: (a) lowering the threshold by which hospitals qualify
as rural or small urban disproportionate share hospitals; (b) decreasing the
reductions in payments to disproportionate share hospitals that had been
mandated by previous Congressional enactments; (c) increasing the update factors
for inpatient PPS payments to hospitals; (d) increasing certain payments to
non-PPS psychiatric hospitals and units; and (e)increasing Medicare
reimbursement for bad debt from 55% to 70%. In addition, BIPA places limits on
the amount of co-insurance a Medicare beneficiary must pay for outpatient
services. Under BIPA, outpatient service co-payments are capped at a maximum of
57% of the Ambulatory Payment Classification("APC" rate) for the period April 1,
2001 to December 31, 2001; 55% of the APC for calendar years 2002 and 2003; 50%
of the APC for calendar year 2004; 45% of the APC for calendar year 2005; and,
40% of the APC for calendar year 2006 and thereafter. BIPA also directs DHHS to
establish categories of items eligible for additional or "pass-through" payments
to hospitals for certain outpatient services rendered on or after April 1, 2001
including such items as current cancer therapy drugs, biologicals, brachtherapy,
and medical devices.
Hospitals currently excluded from the PPS, such as psychiatric and
rehabilitation hospitals, receive reimbursement based on their reasonable costs,
with limits placed upon the annual rate of increase in operating costs per
discharge. Pursuant to the Balanced Budget Act of 1997, the annual update for FY
1998 was set at 0%. For FY 1999 through FY 2002, the annual update factor was
and is dependent upon where the hospital's costs fall in relation to the limits
set by the Tax Equity and Fiscal Responsibility Act of 1982 ("TEFRA"). The
annual update factor will range from 0% to the market basket percentage
increase, depending upon whether the hospital's costs are at, below or above the
TEFRA target limits. On November, 3, 2000, CMS announced plans to implement a
PPS system for certain rehabilitation hospitals and rehabilitation units of a
hospital currently exempt from the PPS system. The final rules implementing the
rehabilitation PPS were issued on August 7, 2001 and are effective on January 2,
2002 for cost reporting periods beginning on or after January 2, 2002. The
payment unit under PPS is a discharge, and the payment rate will encompass the
inpatient operating costs and capital costs of furnishing the covered
rehabilitation services. Payment rates have been calculated using a relative
weight system to account for the varying resources used in each patient
category. Payments during fiscal year 2001 and 2002, by statute, are to be
budget neutral, with the fiscal year 2001 payments equaling 98% of the amount
the payments would have been if paid under the old reasonable cost system, and
100% for fiscal year 2002. Although the BBA envisioned a 2-year phase-in period
for the new PPS system, beginning on April 1, 2001, because the final rules were
promulgated late, the transitional phase-in period will be truncated. For cost
reporting periods beginning on or after January 2, 2002 and before October 1,
2002, payment will be based on 1/3 of the facility-specific and 2/3 of the
fiscal
7
year 2002 federal prospective payment. For cost reporting periods beginning on
or after October 1, 2002, payment will be based solely on the federal
prospective payment. Under final rules, a facility has the option to select
payment solely based on the federal prospective rate for periods prior to
October 1, 2002. Because of the limited number of rehabilitation beds operated
by the Company, changes under the PPS system will not have a material effect on
the Company's financial results. The Company currently has two psychiatric
hospitals that are exempt from the PPS system.
Prior to October 1, 1990, Medicare payments for outpatient
hospital-based services were generally the lower of hospital costs or customary
charges. Due to federal budget restraints, the Omnibus Budget Reconciliation Act
of 1993 ("OBRA-1993") reduced Medicare payments for the majority of outpatient
services to the lower of 94.2% of hospital costs, customary charges or a blend
of 94.2% of hospital costs and a fee schedule (such fee schedule generally being
lower than hospital costs) through FY 1998. The Balanced Budget Act of 1997, and
the Balanced Budget Refinement Act of 1999, extended this reduction to the first
date that an outpatient PPS was implemented. On August 1, 2000, as required by
the Balanced Budget Act of 1997 and the Balanced Budget Refinement Act of 1999,
a Medicare PPS went into place for hospital outpatient services. Under the
outpatient PPS, all outpatient services are grouped into Ambulatory Payment
Classifications ("APCs"). Services in each APC are clinically similar and are
similar in terms of the resources they require. A payment rate has been
established by CMS for each APC, with adjustments provided for geographic wage
differentials. Hospitals may be paid more than one APC per patient and per
encounter, depending upon the services required by and provided to the Medicare
eligible beneficiary. Significantly, the outpatient PPS revises the way in which
beneficiary co-insurance amounts are determined. Initially, co-insurance amounts
will be based on 20% of the national median charge for the APC. The Balanced
Budget Refinement Act of 1999 limits beneficiary liability so that no
co-insurance amount can be greater than the Medicare hospital inpatient
deductible for a given year. The outpatient PPS provides for a transitional
adjustment to limit potential payment reductions experienced as a result of the
transition to prospective encounter payments. For the federal fiscal years 2000
through 2003, providers will receive an adjustment if their payment-to-cost
ratio for outpatient services furnished during the year is less than a set
percentage of their payment-to-cost ratio for those services in their cost
reporting period ending in 1996 (the base year). Rural hospitals with 100 or
fewer beds and cancer hospitals will be held harmless under this provision. In
addition, small rural hospitals, for services furnished before January 1, 2004,
will be maintained at the same payment-to-cost ratio as their base year cost
report, if their PPS payment-to-cost ratio is less. The outpatient PPS has not
had a material impact on reimbursement to the Company. The Company anticipates
the Medicare outpatient prospective payment system will continue to be refined
and future adjustments may limit or reduce payments from the program. Outpatient
laboratory services are paid based on a fee schedule which is substantially
lower than customary charges. Certain ambulatory surgery procedures are paid for
at a rate based on a blend of hospital costs and the rate paid by Medicare for
similar procedures performed in free standing ambulatory surgery centers.
Certain radiology and other diagnostic services are paid on a blend of actual
cost and prevailing area charge.
Payments under the Medicare program for capital related costs, for cost
reporting periods prior to October 1, 1991, were made on a reasonable cost
basis. Reasonable capital costs generally include depreciation, rent and lease
expense, capital interest, property taxes, insurance related to the
8
physical plant, fixed equipment and movable equipment. As a result of changes
made to the Social Security Act by the Omnibus Reconciliation Act of 1987
("OBRA-1987") hospitals paid under PPS for operating costs must be reimbursed
for capital costs on a prospective basis, effective with the cost reporting
period beginning October 1, 1991 (i.e., FY 1992). CMS implemented the PPS for
capital costs for FY 1992 based upon FY 1989 Medicare inpatient capital costs
per discharge updated to FY 1992 by the estimated increase in Medicare capital
costs per discharge. A ten year transition period, beginning with FY 1992, was
established for the phasing-in of the capital PPS. Under the transition period
rules, hospitals with a hospital-specific capital rate below the standard
Federal rate are paid on a fully prospective methodology. Hospitals with a
hospital-specific rate above the standard Federal rate are paid based on a
hold-harmless method or 100% of the standard Federal rate, whichever results in
the higher payment. Beginning with cost reporting periods on or after October 1,
2001, at the end of the transition period, all hospitals are to be paid at the
standard Federal rate. Pursuant to the Balanced Budget Act of 1997, capital
payment rates were rebased in FY 1998 using the actual rates in effect in FY
1995 and the budget neutrality adjustment factor used to determine the federal
capital payment rate on September 30, 1995. In addition, capital rates are
reduced by an additional 2.1% by the Balanced Budget Act of 1997. For FY 2002,
CMS announced a proposed 1.85% increase to the Federal rate. The Company
anticipates further adjustments in the future but is unable to predict the
amount or impact of future adjustments.
The Medicare program reimburses each hospital on a reasonable cost
basis for the Medicare program's pro rata share of the hospital's allowable
capital costs related to outpatient services. Outpatient capital reimbursement
was reduced by 15% (i.e., 85% of outpatient capital costs) during FY 1990 and
OBRA-1990 extended the 15% reduction through FY 1991. OBRA-1990 and OBRA-1993
further directed that outpatient capital reimbursement be reduced by only 10%
beginning FY 1992 through FY 1998. The Balanced Budget Act of 1997 continued the
10% reduction during FY 2000 up to January 1, 2000. The Company anticipates that
payments to hospitals could be reduced as a result of future legislation but is
unable to predict what the amount of the final reduction will be.
On October, 1, 2000, as required by the Balanced Budget Act of 1997 and
the Balanced Budget Refinement Act of 1999, Medicare began paying all home
health agencies under a PPS system. Medicare will pay home health care agencies
for each covered 60-day episode of care for each Medicare beneficiary who
continues to remain eligible for home health services. The home health care PPS
system provides payment at a higher rate for the beneficiaries with greater
medical needs, based upon a payment system that relies upon data collected by
caregivers on a patient clinical assessment. PPS rates vary depending upon the
intensity of care required by each beneficiary, with actual rates adjusted by
CMS to reflect the geographic area wage differentials. Home health care agencies
will receive less than the full PPS amounts in those instances where they
provide only a minimal number of visits to beneficiaries. In addition, the new
PPS provides for "outlier" payments in instances where the costs of care are
significantly higher than the specified rate. In most other instances, they will
be paid the full PPS amount. Currently, there is not a material impact on the
Company due to the implementation of this PPS system. However, the Company will
continue to monitor the progress of the program and take the necessary steps to
minimize any further reductions in payments as a result of this program.
9
The Balanced Budget Act of 1997 mandated numerous other adjustments and
reductions to the Medicare system that collectively may impact the Company's
operations. With respect to the valuation of capital assets as a result of a
change in hospital ownership, the Balanced Budget Act of 1997 eliminates the
allowance for return on equity capital, and bases reimbursement on the book
value of the assets, recognizing no gain, loss or recapture of depreciation. In
addition, the Balanced Budget Act of 1997 mandated the following changes: a)
reimbursement for Medicare enrollee deductible and coinsurance bad debts is
reduced 40% for FY 2000 and 45% for FY 2001 and each subsequent year - BIPA
further changed the bad debt reimbursement reduction to 30% for FY 2001 and
subsequent years; b) the bonus payments made to hospitals whose costs are below
the target amounts is reduced to 2% of the target amount; and, c) skilled
nursing home reimbursement must transition to a prospective payment system,
based upon 1995 allowable costs, with a three year transition period beginning
on or after July 1, 1998.
The Balanced Budget Refinement Act ("BBRA") was signed into law on
November 29, 1999, and provided hospitals some relief from the impact of the
Balanced Budget Act of 1997. The provisions enacted by the BBRA did not
materially impact the Company. It did, however, indicate the recognition by
Congress that further reductions in payments to hospitals were not necessary.
Congress continues to evaluate a number of proposals that would give hospitals
additional relief from the impact of the Balanced Budget Act of 1997. However,
the uncertainty and fiscal pressures placed upon the federal government as a
result of the September 11th attack, the War on Terrorism, and the economic
recovery stimulus, may affect the funds available to provide such additional
relief in the future.
Medicaid. The Medicaid program, created by the Social Security Act of
1965, is designed to provide medical assistance to individuals unable to afford
care. Medicaid is a joint federal and state program in which states voluntarily
participate. Payment rates and services covered under the Medicaid program are
set by each participating state. As a result, Medicaid payment rates and covered
services may vary from state to state. Approximately 50% of Medicaid funding
comes from the federal government, with the balance shared by the state and
local governments. The Medicaid program is administered by individual state
governments, subject to compliance with broadly defined federal requirements.
The Balanced Budget Act of 1997 repealed the Boren Amendment to the
Medicaid Act which had been interpreted by the Courts as establishing a federal
minimum standard for Medicaid rates payable to hospitals and nursing homes.
Congress repealed the Boren Amendment in order to give states greater
flexibility in establishing Medicaid payment methods and rates. The Boren
Amendment required states to undertake a finding analysis and then to assure the
federal government that their Medicaid rates were reasonable and adequate to
meet the costs that must be incurred by economically and efficiently operated
hospitals in providing care to Medicaid recipients. In place of this minimum
standard, Congress has mandated that states employ a rate setting process that
requires prior publication and an opportunity for provider comment on the rates.
This replacement requirement became effective for rates of payment on and after
January 1, 1998.
State Medicaid payment methodologies vary from state to state. The most
common methodologies are state Medicaid prospective payment systems or state
programs that negotiate payment rates with individual hospitals. Generally,
Medicaid payments are less than Medicare payments and are
10
substantially less than a hospital's cost of services. In 1991 Congress passed
legislation limiting the states' use of provider-specific taxes and donated
funds to bolster the states' share and obtain increased federal Medicaid
matching funds. Certain states in which the Company operates have adopted
broad-based provider taxes to fund their Medicaid programs in response to the
1991 legislation. Congress has also established a national limit on
disproportionate share hospital adjustments (which are additional amounts
required to be paid to hospitals defined as providing a disproportionate amount
of Medicaid and low-income inpatient services). This legislation and the
resulting state broad-based provider taxes have adversely affected the Company's
net Medicaid payments, but to date the net impact has not been materially
adverse.
The federal government and many states are currently considering
additional ways to limit the increase in the level of Medicaid funding, which
also could adversely affect future levels of Medicaid payments received by the
Company's hospitals. Because the Company cannot predict precisely what action
the federal government or the states will take as a result of existing and
future legislation, the Company is unable to assess the effect of such
legislation on its business. Like Medicare funding, Medicaid funding may also be
affected by health care reform legislation, and it is impossible to predict the
effect such legislation might have on the Company.
TRICARE. Some of the Company's hospitals provide services to retired
and certain other military personnel and their families pursuant to the TRICARE
program. TRICARE pays for inpatient acute hospital care on the basis of a
prospectively determined rate applied on a per discharge basis using DRGs
similar to the Medicare system. At this time, inpatient psychiatric hospital
services are reimbursed on an individual hospital per diem rate calculated based
upon the average charges for these services by all psychiatric hospitals. The
Company can make no assurance that the TRICARE program will continue per diem
reimbursement for psychiatric hospital services in the future.
The Medicare, Medicaid and TRICARE programs are subject to statutory
and regulatory changes, administrative rulings, interpretations and
determinations, requirements for utilization review and new governmental funding
restrictions, all of which may materially increase or decrease program payments
as well as affect the cost of providing services and the timing of payments to
facilities. The final determination of amounts earned under the programs often
requires many years, because of audits by the program representatives,
providers' rights of appeal and the application of numerous technical
reimbursement provisions. Management believes that adequate provision has been
made for such adjustments. Until final adjustment, however, significant issues
remain unresolved and previously determined allowances could become either
inadequate or more than ultimately required.
Commercial Insurance. The Company's hospitals provide services to
individuals covered by private health care insurance. Private insurance carriers
either reimburse their policy holders or make direct payments to the Company's
hospitals based upon the particular hospitals' established charges and the
particular coverage program that provides its subscribers with hospital benefits
through independent organizations that vary from state to state. The Company's
hospitals are paid directly by local Blue Cross organizations on the basis
agreed to by each hospital and Blue Cross by a written contract.
11
Recently, several commercial insurers have undertaken efforts to limit
the costs of hospital services by adopting prospective payment or DRG-based
systems. To the extent such efforts are successful, and to the extent that the
insurers' systems fail to reimburse hospitals for the costs of providing
services to their beneficiaries, such efforts may have a negative impact on the
results of operations of the Company's hospitals.
Health Care Reform, Regulation and Other Factors
General. Health care, as one of the largest industries in the United
States, continues to attract much legislative interest and public attention.
Medicare, Medicaid, mandatory and other public and private hospital
cost-containment programs, proposals to limit health care spending, proposals to
limit prices and industry competitive factors are highly significant to the
health care industry. In addition, the health care industry is governed by a
framework of Federal and state laws, rules and regulations that are extremely
complex and for which the industry has the benefit of little or no regulatory or
judicial interpretation. Although the Company believes it is in compliance in
all material respects with such laws, rules and regulations, if a determination
is made that the Company was in material violation of such laws, rules or
regulations, its operations and financial results could be materially adversely
affected.
Licensure, Certification and Accreditation. Health care facility
construction and operation is subject to federal, state and local regulation
relating to the adequacy of medical care, equipment, personnel, operating
policies and procedures, fire prevention, rate-setting and compliance with
building codes and environmental protection laws. Facilities are subject to
periodic inspection by governmental and other authorities to assure continued
compliance with the various standards necessary for licensing and accreditation.
All of the Company's health care facilities are properly licensed under
appropriate state laws and are certified under the Medicare program or are
accredited by the Joint Commission on Accreditation of HealthCare Organizations
or the American Osteopathic Association ("Accredited"), the effect of which is
to permit the facilities to participate in the Medicare/Medicaid programs.
Should any Accredited facility lose its accreditation, and then not become
certified under the Medicare program, the facility would be unable to receive
reimbursement from the Medicare/Medicaid programs. Management believes that the
Company's facilities are in substantial compliance with current applicable
federal, state, local and independent review body regulations and standards. The
requirements for licensure, certification and accreditation are subject to
change and, in order to remain qualified, it may be necessary for the Company to
effect changes in its facilities, equipment, personnel and services. Although
the Company intends to continue its qualification, there can be no assurance
that its hospitals will be able to comply in the future.
Utilization Review. In order to ensure efficient utilization of
facilities and services, federal regulations require that admissions to, and the
utilization of, facilities by Medicare and Medicaid patients be reviewed by a
federally funded Peer Review Organization ("PRO"). Pursuant to Federal law, the
PRO must review the need for hospitalization and the utilization of services,
denying admission of a patient or denying payment for services provided, where
appropriate. Each of the Company's facilities has contracted with a PRO and has
had in effect a quality assurance program that provides for retrospective
patient care evaluation and utilization review.
12
Certificates of Need. The construction of new facilities, the
acquisition of existing facilities, and the addition of new beds or services may
be reviewable by state regulatory agencies under a program frequently referred
to as certificate of need. Except for Arkansas, Oklahoma, and Pennsylvania, all
of the other states in which the Company's health care facilities are located
have certificate of need or equivalent laws which generally require appropriate
state agency determination of public need and approval prior to beds or services
being added, or a related capital amount being spent. Failure to obtain
necessary state approval can result in the inability to complete the
acquisition, the imposition of civil or, in some cases, criminal sanctions, the
inability to receive Medicare or Medicaid reimbursement and/or the revocation of
the facility's license.
State Hospital Rate-Setting Activity. The Company currently operates
one facility in a state that has some form of mandated hospital rate-setting.
The West Virginia Health Care Authority ("HCA") requires that hospitals seeking
an increase in rates must submit requests for increases to hospital charges
annually. Requests for rate increases are reviewed by the HCA and are either
approved at the amount requested, approved for a lower amount than requested or
are rejected. As a result, in West Virginia, the Company's ability to increase
its rates to compensate for increased costs per admission is limited and the
Company's operating margin on its West Virginia facility may be adversely
affected. There can be no assurance that other states in which the Company
operates hospitals will not enact rate-setting provisions as well.
Antikickback and Self-Referral Regulations. During 1998, the federal
government announced that reducing health care fraud was its second priority
(behind reducing crime in America). As a result, the health care industry
continues to be subjected to unprecedented scrutiny and a panoply of statutes,
regulations and government initiatives intended to prevent those practices
deemed fraudulent or abusive by the government. The health care industry is
subject to extensive Federal, state and local regulation relating to licensure,
conduct of operations, ownership of facilities, addition of facilities and
services and prices for services. In particular, Medicare and Medicaid
antikickback, antifraud and abuse amendments codified under Section 1128B(b) of
the Social Security Act (the "Antikickback Amendments") prohibit certain
business practices and relationships that might affect the provision and cost of
health care services reimbursable under Medicare and Medicaid, including the
payment or receipt of remuneration for the referral of patients whose care will
be paid for by Medicare or other government programs. Sanctions for violating
the Antikickback Amendments include criminal penalties and civil sanctions,
including fines and possible exclusion from the Medicare and Medicaid programs.
Pursuant to the Medicare and Medicaid Patient and Program Protection Act of
1987, the DHHS has issued regulations that describe some of the conduct and
business relationships permissible under the Antikickback Amendments ("Safe
Harbors"). The fact that a given business arrangement does not fall within a
Safe Harbor does not render the arrangement per se illegal. Business
arrangements of health care service providers that fail to clearly satisfy the
applicable Safe Harbor criteria, however, risk increased scrutiny by enforcement
authorities. Because the Company may be less willing than some of its
competitors to enter into business arrangements that do not clearly satisfy the
Safe Harbors, it could be at a competitive disadvantage in entering into certain
transactions and arrangements with physicians and other health care providers.
13
In addition, Section 1877 of the Social Security Act, enacted on
December 19, 1989, which restricts referrals by physicians of Medicare and other
government-program patients to providers of a broad range of designated health
services with which they have ownership or certain other financial arrangements,
has been amended numerous times since initial enactment, the most recent of
which was amended effective January 1, 1995, to significantly broaden the scope
of prohibited physician referrals for certain services when to entities with
which they have financial relationships (the "Stark Law" or the "Self-Referral
Prohibitions"). Final rules implementing the Self-Referral Prohibitions were
adopted by DHHS on August 14, 1995 (the "Stark I" rules) and January 4, 2001
(the "Stark II" rules). Many states have adopted or are considering similar
legislative proposals, some of which extend beyond the Medicaid program to
prohibit the payment or receipt of renumeration for the referral of patients and
physician self-referrals regardless of the source of the payment for the care.
The Company's participation in and development of joint ventures and other
financial relationships with physicians could be adversely affected by these
amendments and similar state enactments. The Company systematically reviews all
of its operations to ensure that it complies with the Social Security Act and
similar state statutes. In addition, the Company has in operation a Corporate
compliance program at all of the Company's hospitals, which is an ongoing,
working program to monitor and promote continuing compliance with these
statutory prohibitions and requirements. (See "Compliance Program" for further
discussion)
Both Federal and state government agencies have announced heightened
and coordinated civil and criminal enforcement efforts in accordance with the
requirements of recent federal statutory enactments including the Health
Insurance Portability Act of 1996. The Company is unable to predict the future
course of Federal, state and local regulation or legislation, including Medicare
and Medicaid statutes and regulations. Further changes in the regulatory
framework could have a material adverse effect on the Company's financial
condition.
Conversion Legislation. Many states have enacted or are considering
enacting laws affecting the conversion or sale of not-for-profit hospitals.
These laws generally require prior approval from state attorney generals,
advance notification and community involvement. In addition, state attorney
generals in states without specific conversion legislation may exercise
authority over these transactions based upon existing law. States are showing an
increased interest in overseeing the sales or conversions of not-for-profit
hospitals. The adoption of conversion legislation and the increased review of
not-for-profit hospital conversions may make it more difficult for the Company
to acquire not-for-profit hospitals, or could increase acquisition costs in the
future. See "Business Strategy" in this Item 1.
Environmental Regulations. The Company's health care operations
generate medical waste that must be disposed of in compliance with Federal,
state and local environmental laws, rules and regulations. The Company's
operations, as well as the Company's purchases and sales of facilities, are also
subject to compliance with various other environmental laws, rules and
regulations. Such compliance does not, and the Company anticipates that such
compliance will not, materially affect the Company's capital expenditures,
financial position or results of operations.
14
Compliance Program. During 1996 the Company began developing, and in
1997 formally implemented, a Corporate compliance program to supplement and
enhance its existing ethics program. The Company believes its current compliance
program meets or exceeds all applicable federal guidelines and industry
standards. The program is designed to raise awareness of various regulatory
issues among employees and to stress the importance of complying with all
governmental laws and regulations. As part of the program, the Company provides
ethics and compliance training to every employee. Management encourages all
employees to report, without fear of retaliation, any suspected legal or ethical
violation to their supervisors, the compliance officer on staff at the hospital
or the Company's Corporate compliance officer. In addition, the Company
maintains a 24-hour toll-free telephone hotline, which is manned by an
independent company, so that employees can report suspected violations
anonymously.
HIPAA. The Health Insurance Portability and Accountability Act of 1996
("HIPAA") was enacted on August 21, 1996. HIPAA is an effort to encourage
overall administrative simplification and enhance the effectiveness and
efficiency of the health care industry. It mandates the adoption of standards
for the exchange of electronic health information. The two key factors of HIPAA
are accountability and portability. Accountability refers to the attempt of the
legislation to ensure privacy and security of patient information and
portability refers to the legislation's intent to ensure that individuals can
take their medical and insurance records with them when they change employers.
HIPAA mandates new security measures, sets standards for electronic
signatures, standardizes a method for identifying providers, employers, health
plans and patients, requires that the health care industry utilize the most
efficient method to codify data and may significantly change the manner in which
hospitals communicate with payors. These are significant and potentially costly
changes to the health care industry.
Although proposed security rules were issued on August 11, 1998, DHHS
has yet to adopt final rules implementing the security and integrity portions of
HIPAA. It is anticipated that final security rules will be promulgated and
adopted within the next year. On December 28, 2000, DHHS published final privacy
rules implementing the privacy portions of HIPPA. The final privacy rules were
effective April 14, 2001. The privacy rules give patients greater access to
their own medical records and more control over how their personal health
information is used and disclosed. The privacy rules address the obligations of
health care providers to protect health information. Providers, including the
Company, have until August 14, 2004 to comply with the privacy rule's
requirements. Sanctions for failing to comply with HIPAA include criminal
penalties and civil sanctions.
There is currently pending legislation to delay the effective
compliance date of certain portions of HIPPA requirements. However, at this
time, the Company anticipates that it will be able to fully comply with the
HIPAA requirements and regulations as they have been adopted to date. The
Company has initiated a plan which will allow it to comply with the currently
adopted regulations. Estimating the cost of such compliance is difficult and no
such estimations have been made at this time. Based on its current knowledge,
however, the Company believes that the cost of its compliance will not have a
material adverse effect on its business, financial condition or results of
operations.
15
Employees and Medical Staff
As of September 30, 2001, the Company had approximately 21,000
full-time and part-time employees, approximately 540 of whom were covered by
three collective bargaining agreements. The Company's corporate office staff
consisted of approximately 80 people at that date. The Company believes that its
relations with employees are satisfactory. In general, the staff physicians at
the Company's acute care and psychiatric hospitals are not employees of the
Company. The physicians may also be staff members of other hospitals. The
Company provides physicians with certain services and assistance. The Company
does employ approximately 100 physicians, approximately one-half of whom are
primary care physicians located at clinics the Company owns and operates. In
addition, the Company's hospitals provide emergency room coverage, radiology,
pathology and anesthesiology services by entering into service contracts with
physician groups which are generally cancelable on 90 days notice.
Liability Insurance
The Company insures for its professional liability risks under a
"claims-made" basis policy, whereby each claim is covered up to $1 million per
occurrence, subject to a $100,000 deductible (with an annual deductible cap of
$6.1 million). Liabilities in excess of these amounts are covered through a
combination of limits provided by commercial insurance companies and a
self-insurance program.
Accruals for self-insured professional liability risks are determined
using asserted and unasserted claims identified by the Company's incident
reporting system and actuarially determined estimates based on Company and
industry historical loss payment patterns and have been discounted to their
present value using a discount rate of 6.0%. Although the ultimate settlement of
these accruals may vary from these estimates, management believes that the
amounts provided in the Company's consolidated financial statements are
adequate.
The Company believes that its insurance is adequate in amount and
coverage. There can be no assurance that in the future such insurance will be
available at a reasonable price or that the Company will not have to increase
its levels of self-insurance.
Item 2. Properties
The Company's acute care hospitals offer a broad range of medical and
surgical services, including inpatient care, intensive and cardiac care,
diagnostic services and emergency services that are physician-staffed 24 hours a
day, seven days a week. The Company also provides outpatient services such as
one-day surgery, laboratory, x-ray, respiratory therapy, cardiology and physical
therapy. At certain of the Company's hospitals specialty services such as
oncology, radiation therapy, CT scanning, MRI imaging, lithotripsy and
full-service obstetrics are provided.
The Company's psychiatric care operations consist of two psychiatric
hospitals: one 64-bed and one 70-bed intensive residential treatment hospital.
The following table presents certain information with respect to the
Company's facilities as of September 30, 2001. For more information regarding
the utilization of the Company's facilities, see "Item 1. Business -- Selected
Operating Statistics".
16
Owned, Acquisition
Licensed Leased or Commencement
Hospital Location Type Beds Managed Date
- -------------------------------------- ---------------- ------------- -------- ---------- --------------
Paul B. Hall Regional Medical Center Paintsville, Acute Care 72 Owned January 1979
Kentucky
Williamson Memorial Hospital Williamson, Acute Care 76 Owned June 1979
West Virginia
Highlands Regional Medical Center Sebring, Acute Care 126 Leased August 1985
Florida
Lake Norman Regional Medical Center Mooresville, Acute Care 105 Owned January 1986
North Carolina
Fishermen's Hospital Marathon, Acute Care 58 Leased August 1986
Florida
Franklin Regional Medical Center Louisburg, Acute Care 70 Owned August 1986
North Carolina Psychiatric 15
Biloxi Regional Medical Center Biloxi, Acute Care 153 Leased September 1986
Mississippi
Medical Center of Southeastern Oklahoma Durant, Acute Care 103 Owned May 1987
Oklahoma
Crawford Memorial Hospital Van Buren, Acute Care 103 Leased May 1987
Arkansas
Sandhills Regional Medical Center (1) Hamlet, Acute Care 54 Owned August 1987
North Carolina Psychiatric 10
Upstate Carolina Medical Center Gaffney, Acute Care 125 Owned March 1988
South Carolina
University Behavioral Center Orlando, Psychiatric 70 Owned January 1989
Florida
SandyPines Tequesta, Psychiatric 64 Owned January 1990
Florida
Riverview Regional Medical Center Gadsden, Acute Care 281 Owned July 1991
Alabama
Heart of Florida Regional Medical Center Haines City, Acute Care 75 Owned August 1993
Florida
Natchez Community Hospital Natchez, Acute Care 101 Owned September 1993
Mississippi
17
Owned, Acquisition
Licensed Leased or Commencement
Hospital Location Type Beds Managed Date
- -------------------------------------- ---------------- ------------- -------- ---------- -----------------
Sebastian River Medical Center Sebastian, Acute Care 129 Owned September 1993
Florida
Charlotte Regional Medical Center Punta Gorda, Acute Care 156 Owned December 1994
Florida Psychiatric 52
Carolina Pines Regional Medical Center Hartsville, Acute Care 116 Owned September 1995
South Carolina
East Georgia Regional Medical Center (2) Statesboro, Acute Care 150 Owned October 1995
Georgia
Northwest Mississippi Regional Clarksdale, Acute Care 175 Leased January 1996
Medical Center Mississippi Skilled Nursing 20
Midwest Regional Medical Center Midwest City, Acute Care 197 Leased June 1996
Oklahoma Psychiatric 30
Skilled Nursing 20
Stringfellow Memorial Hospital Anniston, Acute Care 125 Managed January 1997
Alabama
Rankin Medical Center Brandon, Acute Care 120 Leased January 1997
Mississippi Gero-Psych 14
Southwest Regional Medical Center Little Rock, Acute Care 108 Owned November 1997
Arkansas Gero-Psych 17
Riley Memorial Hospital Meridian, Acute Care 168 Owned January 1998
Mississippi Skilled Nursing 12
River Oaks Hospital Flowood, Acute Care 110 Owned January 1998
Mississippi
Woman's Hospital at River Oaks Flowood, Acute Care 94 Owned January 1998
Mississippi Skilled Nursing 17
Brooksville Regional Hospital Brooksville, Acute Care 91 Leased June 1998
Florida
Spring Hill Regional Hospital Spring Hill, Acute Care 75 Leased June 1998
Florida
Central Mississippi Medical Center Jackson, Acute Care 444 Leased April 1999
Mississippi Psychiatric 29
Lower Keys Medical Center Key West, Acute Care 112 Leased May 1999
Florida Skilled Nursing 15
Psychiatric 40
Community Hospital of Lancaster Lancaster, Acute Care 204 Owned July 1999
Pennsylvania
18
Owned, Acquisition
Licensed Leased or Commencement
Hospital Location Type Beds Managed Date
- -------------------------------------- ---------------- ------------- -------- ---------- -----------------
Lancaster Regional Medical Center (3) Lancaster, Acute Care 268 Owned July 2000
Pennsylvania
Pasco Regional Medical Center (4) Dade City, Acute Care 120 Owned September 2000
Florida
Davis Regional Medical Center (5) Statesville, Acute Care 149 Owned October 2000
North Carolina
Carlisle Regional Medical Center (6) Carlisle, Acute Care 200 Leased June 2001
Pennsylvania
Lee Regional Medical Center (7) Pennington Gap, Acute Care 80 Owned September 2001
Virginia
-----
TOTAL LICENSED BEDS OWNED, LEASED OR MANAGED
at September 30, 2001 5,318
=====
(1) The Company opened a replacement hospital for Hamlet Hospital in
March 2000. The total cost of the project was approximately $17 million,
including equipment.
(2) The Company opened a replacement hospital for Bulloch Memorial
Hospital, The East Georgia Regional Medical Center, in July 2000. Whereas
the previous facility was operated by the Company under a lease
agreement, the Company now owns the new replacement hospital. The total
cost of the project was approximately $51 million, including equipment.
(3) Effective July 1, 2000, the Company acquired Lancaster Regional
Medical Center pursuant to an Asset Purchase Agreement. The Agreement
included the purchase of substantially all property, plant and equipment
and working capital of the hospital. The total consideration approximated
$64 million, including $58 million in cash and the assumption of $6.2
million in liabilities.
(4) Effective September 1, 2000, the Company acquired the Pasco
Regional Medical Center pursuant to an Asset Purchase Agreement. The
Agreement included the purchase of substantially all property, plant and
equipment and working capital of the hospital. The total consideration
approximated $17 million in cash.
(5) Effective October 1, 2000, the Company acquired Davis Regional
Medical Center pursuant to an Asset Purchase Agreement. The Agreement
included the purchase of substantially all property, plant and equipment
and working capital of the hospital. The total consideration approximated
$55 million in cash.
19
(6) Effective June 18, 2001 the Company acquired Carlisle Hospital
from Carlisle Hospital and Health Services, Inc. pursuant to a Definitive
Agreement. The Agreement included the lease of certain real property, the
purchase of certain real property and substantially all plant and
equipment and working capital of the hospital. The total consideration
involved approximately $41 million in cash. The Company is obligated to
the construction of a replacement hospital, subject to obtaining all
required governmental and regulatory approvals.
(7) Effective September 1, 2001, the Company acquired Lee County
Community Hospital pursuant to an Asset Purchase Agreement. The Agreement
included the purchase of substantially all property, plant and equipment
and working capital of the hospital. The total consideration approximated
$18 million in cash and the assumption of $3.6 million in liabilities.
The Company currently leases the facilities of Highlands Regional Medical
Center, Fishermen's Hospital, Biloxi Regional Medical Center, Crawford Memorial
Hospital, Northwest Mississippi Regional Medical Center, Midwest City Regional
Hospital, Rankin Medical Center, Brooksville Regional Hospital/Spring Hill
Regional Hospital, Central Mississippi Medical Center, Lower Keys Medical Center
and Carlisle Regional Medical Center pursuant to long-term leases expiring in
2025, 2011, 2040, 2027, 2025, 2026, 2026, 2027, 2028, 2040, 2029 and 2006,
respectively, which provide the Company with the exclusive right to use and
control the hospital operations.
The Company's corporate headquarters are located in an office building in
Naples, Florida, in which space is leased. The Company believes that all of its
facilities are suitable and adequate for its needs. Certain of the Company's
hospitals are subject to mortgages securing various borrowings. See Note 3 of
the Notes to the Consolidated Financial Statements (Item 8. hereof).
Item 3. Legal Proceedings
The Company is subject to claims and legal actions by patients and others
in the ordinary course of business. The Company believes that all such claims
and actions are either adequately covered by insurance or are unlikely,
individually or in the aggregate, to have a material adverse effect on the
Company's financial condition.
20
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 fiscal year ended September 30, 2001.
Executive Officers of the Registrant
The following is certain information regarding the executive officers of
the Company.
William J. Schoen, age 66, has served as Chairman of the Board since April
1986. He was first elected a director in February 1983, became President and
Chief Operating Officer in December 1983, Co-Chief Executive Officer in December
1985 and Chief Executive Officer in April 1986. He served as President until
April 1997 and Chief Executive Officer until January 2001. From 1982 to 1987 Mr.
Schoen was Chairman of Commerce National Bank, Naples, Florida, and from 1973 to
1981 he was President, Chief Operating Officer and Chief Executive Officer of
The F&M Schaefer Corporation, a consumer products company. From 1971 to 1973,
Mr. Schoenwas President of the Pierce Glass subsidiary of Indian Head, Inc., a
diversified company. Mr. Schoen also serves on the Board of Directors of Horace
Mann Insurance Companies.
Joseph V. Vumbacco, age 56, became Chief Executive Officer of the Company
in January 2001. Prior to that and since April 1997, he has been the Company's
President, as well as serving as Chief Administrative Officer and Chief
Operating Officer. He joined the Company as an Executive Vice President in
January 1996 after 14 years with The Turner Corporation (construction and real
estate), most recently as an Executive Vice President. Prior to joining Turner,
he served as the Senior Vice President and General Counsel for The F&M Schaefer
Corporation, and previously was an attorney with the Manhattan law firm of
Mudge, Rose, Guthrie & Alexander. Mr. Vumbacco was elected a director by the
Board of Directors in May 2001.
Timothy R. Parry, age 46, is Vice President and General Counsel of the
Company. He joined the Company in February 1996 as a Divisional Vice-President
and Assistant General Counsel after 12 years in the law firm of Harter, Secrest
& Emery, the last seven years as partner. Prior to joining Harter, Secrest &
Emery he was an Assistant Ohio Attorney General for two years and before that a
law clerk for the United States District Court for the Southern District of
Ohio.
Robert E. Farnham, age 46, is Senior Vice President and Chief Financial
Officer of the Company. He joined the Company in 1985 and served as the
Company's Controller for the past twelve years before his promotion to Chief
Financial Officer in March 2001. Prior to joining the Company, Mr. Farnham, who
is a C.P.A., was with Cooper's & Lybrand, LLP.
21
PART II
Item 5. Market for the Registrant's Common Equity and Related Stockholder
Matters
The Company completed an initial public offering of its Class A Common
Stock on February 5, 1991. The Company's Class A Common Stock is listed on the
New York Stock Exchange under the Symbol HMA. At December 14, 2001 there were
approximately 1,600 record holders of the Company's Class A Common Stock. The
following table sets forth, for the periods indicated, the high and low sale
prices per share of the Company's Class A Common Stock as listed on the New York
Stock Exchange.
High Low
--------- --------
Fiscal Year Ended September 30, 2000
First Quarter................................. $13.50 $ 7.00
Second Quarter................................ 18.25 9.63
Third Quarter................................. 16.56 11.25
Fourth Quarter................................ 21.13 12.75
Fiscal Year Ended September 30, 2001
First Quarter................................. 22.75 17.69
Second Quarter................................ 20.56 13.42
Third Quarter................................. 21.14 15.00
Fourth Quarter................................ $22.22 $17.95
The Company has not paid any cash dividends since its inception, but could
pay cash dividends in the future.
In connection with a stock repurchase program approved by the Board of
Directors in February 1998 the Company sold, pursuant to Section 4(2) of the
Securities Act of 1933, 2,459,000 put options to an independent third party for
proceeds totaling $2,090,000. Each put option entitled the holder to sell one
share of the Company's common stock to the Company at a price of $17.50 per
share, exercisable only at maturity and expiring at various dates from November
1998 to December 1998. The put options expired without being exercised.
During Fiscal 1999 the Company repurchased 7.5 million shares of its stock
at a cost of $69.1 million, which completed the February 1998 stock repurchase
plan referred to above. In September 1999 the Board of Directors approved a
stock repurchase program of up to 25 million shares of common stock. On October
14, 1999 the Company executed a share repurchase agreement with an independent
third party, whereby the third party agreed to "sell short" 5 million shares of
the Company's common stock to the Company. As of October 19, 1999 the 5 million
shares were delivered to the Company and became treasury stock. From October 15,
1999 to December 15, 1999, a period of 60 days, the third party covered the
"short sale" by buying shares on the open market. On December 15, 1999 the
Company reimbursed the third party the cost of the common stock purchased plus a
commission plus interest (at LIBOR) on the outstanding balance of funds used to
purchase the common stock. The total cost for the purchase of the 5 million
shares of treasury stock was approximately $42.4 million.
22
In September 2001, the Board of Directors approved a stock repurchase
program of up to 5 million shares of the Company's common stock. Purchases will
be made from time to time in the open market and will continue until all of such
shares are repurchased or until the Company decides to terminate the repurchase
program. Through November 30, 2001, the Company has purchased 3.2 million shares
at an average purchase price of $19.76 per share.
At September 30, 2001 and 2000, there were 14.5 million shares of common
stock reserved for future issuance upon the conversion of the Company's
subordinated convertible notes (see financial statement note No. 3.b.).
Item 6. Selected Financial Data
The following table summarizes certain selected financial data of the
Registrant and should be read in conjunction with the related Consolidated
Financial Statements and accompanying Notes to Consolidated Financial Statements
(Item 8. hereof).
HEALTH MANAGEMENT ASSOCIATES, INC.
FIVE YEAR SUMMARY OF SELECTED FINANCIAL DATA
(Dollars in thousands, except per share data)
Year ended September 30,
-----------------------------------------------------------------------------
2001 2000 1999 1998 1997
---------- ---------- ---------- ---------- --------
Net patient service revenue $1,879,801 $1,577,767 $1,355,707 $1,138,802 $895,482
Costs and expenses 1,558,850 1,301,772 1,109,054 913,523 717,173
Income before income taxes 320,951 275,995 246,653 225,279 178,309
Net income 194,978 167,667 149,845 136,844 108,322
Net income per share-diluted $ .76 $ .68 $ .59 $ .54 $ .43
Weighted average number of
shares outstanding-diluted 264,351 247,277 255,067 255,575 249,130
At Year End
- -----------
Working capital $ 377,144 $ 317,181 $ 250,549 $ 196,578 $153,250
Total assets 1,941,577 1,772,065 1,527,381 1,106,022 734,041
Short-term debt 6,752 6,523 9,351 8,544 8,263
Long-term debt 428,990 520,151 401,522 134,217 49,650
Stockholders' equity 1,253,649 1,030,066 890,523 756,825 560,220
Book value per common share $ 4.86 $ 4.03 $ 3.51 $ 3.01 $ 2.30
23
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Results of Operations
Fiscal Year Ended September 30, 2001 Compared to Fiscal Year Ended
September 30, 2000
Net patient service revenue for Fiscal 2001 was $1,879.8 million, as
compared to $1,577.8 million for the fiscal year ended September 30, 2000
("Fiscal 2000"). This represented an increase in net patient service revenue of
$302.0 million, or 19.1%. Hospitals in operation for the entire period of Fiscal
2001 and Fiscal 2000 ("same hospitals") provided $134.0 million of the increase
in net patient service revenue, which resulted primarily from inpatient and
outpatient volume increases and rate increases. The source of the remaining net
increase of $168.0 million included the following: (1) $169.5 million of net
patient service revenue from Fiscal 2000 and Fiscal 2001 acquisitions including
the July 2000 acquisition of a 268-bed hospital, the September 2000 acquisition
of a 120 bed hospital, the October 2000 acquisition of a 149-bed hospital , the
June 2001 acquisition of a 200-bed hospital and the September 2001 acquisition
of an 80-bed hospital, and (2) $1.5 million decrease in net patient service
revenue from psychiatric hospitals, due primarily to the closure of one facility
in December 2000.
The Company's hospitals generated 880,624 patient days of service in
Fiscal 2001, which produced an overall occupancy rate of 47.2%. During Fiscal
2000 the Company's hospitals generated 791,617 patient days of service for an
overall occupancy rate of 46.2%. Admissions in same hospitals for Fiscal 2001
increased 4.8%, from 158,830 to 166,521.
The Company's salaries and benefits, supplies and other expenses and
provision for doubtful accounts for Fiscal 2001 were $1,390.4 million, or 74.0%
of net patient service revenue, as compared to $1,163.8 million, or 73.8% of net
patient service revenue for Fiscal 2000. Of the total $226.6 million increase
approximately $92.5 million related to same hospitals, which was largely
attributable to increased inpatient and outpatient volumes. Another $132.3
million of increased operating expenses related to the acquisitions mentioned
previously. The remaining increase of $1.8 million represented an increase in
Corporate and miscellaneous other operating expenses offset by a reduction in
expenses resulting from the closure of one psychiatric facility as previously
noted. The Company's Fiscal 2001 rent expense increased by $2.7 million, which
resulted both from acquisitions and the expansion of hospital services.
The Company's depreciation and amortization costs increased by $16.1
million. Approximately $8.0 million of the increase resulted from the
acquisitions mentioned above with the remaining increase attributable to two
replacement hospitals opened in Fiscal 2000, as well as ongoing building
improvements and equipment purchases. Interest expense decreased $5.4 million
due to paydowns and lower interest rates on the Company's Revolving Credit
Agreement. The $17.0 million non-cash charge for retirement benefits and write
down of assets held for sale during Fiscal 2001 related to (1) the present value
of the future costs of retirement benefits granted to the Company's chairman
pursuant to an employment agreement which became effective January 2, 2001, and
(2) the write down of two hospital assets held for sale subsequent to their
respective replacement.
24
The Company's income before income taxes was $321.0 million for Fiscal
2001. Excluding the non-recurring charge for retirement benefits and write down
of assets held for sale of $17.0 million, income before taxes was $338.0 million
for Fiscal 2001 as compared to $276.0 million for Fiscal 2000, an increase of
$62.0 million or 22.5%. As noted above, the increased profitability resulted
from an increase in same hospital inpatient and outpatient business and from the
acquisitions previously mentioned. The Company's provision for income taxes was
$126.0 million for Fiscal 2001 as compared to $108.3 million for Fiscal 2000.
These provisions reflect an effective income tax rate of 39.25% for Fiscal 2001
and Fiscal 2000. As a result of the foregoing, the Company's net income was
$195.0 million for Fiscal 2001 including the aforementioned charge, and $205.3
million excluding the charge, as compared to $167.7 million for Fiscal 2000.
Fiscal Year Ended September 30, 2000 Compared to Fiscal Year Ended
September 30, 1999
Net patient service revenue for Fiscal 2000 was $1,577.8 million, as
compared to $1,355.7 million for the fiscal year ended September 30, 1999
("Fiscal 1999"). This represented an increase in net patient service revenue of
$222.1 million, or 16.4%. Same hospitals provided $77.6 million of the increase
in net patient service revenue, which resulted primarily from inpatient and
outpatient volume increases. The source of the remaining net increase of $144.5
million included the following: (1) $147.6 million of net patient service
revenue from Fiscal 1999 and Fiscal 2000 acquisitions including the April 1999
acquisition of a 473-bed hospital system, the May 1999 acquisition of a 167-bed
hospital system, the July 1999 acquisition of a 204-bed hospital, the July 2000
acquisition of a 268-bed hospital and the September 2000 acquisition of a
120-bed hospital, (2) $2.6 million decrease in net patient service revenue from
psychiatric hospitals, due primarily to the closure of one facility as of March
31, 2000 and (3) a decrease of $.5 million in Corporate and miscellaneous
revenue.
The Company's hospitals generated 791,617 patient days of service in
Fiscal 2000, which produced an overall occupancy rate of 46.2%. During Fiscal
1999 the Company's hospitals generated 718,035 patient days of service for an
overall occupancy rate of 47.1%. Admissions in same hospitals for Fiscal 2000
increased 4.7%, from 134,285 to 140,545.
The Company's salaries and benefits, supplies and other expenses and
provision for doubtful accounts for Fiscal 2000 were $1,163.8 million, or 73.8%
of net patient service revenue, as compared to $1,006.2 million, or 74.2% of net
patient service revenue for Fiscal 1999. Of the total $157.6 million increase
approximately $49.4 million related to same hospitals, which was largely
attributable to increased inpatient and outpatient volumes. Another $103.7
million of increased operating expenses related to the acquisitions mentioned
previously. The remaining increase of $4.5 million represented an increase in
Corporate and miscellaneous other operating expenses offset by a reduction in
expenses resulting from the closure of one psychiatric facility as previously
noted. The Company's Fiscal 2000 rent
25
expense increased by $5.0 million, which resulted both from acquisitions and the
expansion of hospital services.
The Company's depreciation and amortization costs increased by $13.2
million. Approximately $6.2 million of the increase resulted from the
acquisitions mentioned above with the remaining increase attributable to two
replacement hospitals opened in Fiscal 1999 and Fiscal 2000, as well as ongoing
building improvements and equipment purchases. Interest expense increased $17.0
million due to borrowings related to Fiscal 1999 and Fiscal 2000 acquisitions, a
higher interest rate on the Revolving Credit Agreement, and the recognition of a
lower amount in capitalized interest cost in Fiscal 2000.
The Company's income before income taxes was $276.0 million for Fiscal
2000 as compared to $246.7 million for Fiscal 1999, an increase of $29.3 million
or 11.9%. As noted above, the increased profitability resulted from an increase
in same hospital inpatient and outpatient business and from the acquisitions
previously mentioned. The Company's provision for income taxes was $108.3
million for Fiscal 2000 as compared to $96.8 million for Fiscal 1999. These
provisions reflect an effective income tax rate of 39.25% for Fiscal 2000 and
Fiscal 1999. As a result of the foregoing, the Company's net income was $167.7
million for Fiscal 2000 as compared to $149.8 million for Fiscal 1999.
Liquidity and Capital Resources
Fiscal 2001 Cash Flows Compared to Fiscal 2000 Cash Flows
Working capital increased to $377.1 million at September 30, 2001 from
$317.2 million at September 30, 2000, resulting primarily from increased
business volumes and good management of the Company's working capital. The
Company's cash flows from operating activities increased by $113.1 million from
$176.9 million in Fiscal 2000 to $290.0 million in Fiscal 2001. Improved
profitability contributed to the majority of this net increase. The use of the
Company's cash in investing activities decreased from $250.9 million in Fiscal
2000 to $171.0 million in Fiscal 2001, resulting from smaller outlays of cash
for acquisitions and replacement hospitals in Fiscal 2001 compared to Fiscal
2000. The Company's cash flows from financing activities decreased $142.7
million from $77.5 million provided in Fiscal 2000 to $65.2 million used in
Fiscal 2001. The decrease is primarily the result of net borrowings of debt of
$104.3 in Fiscal 2000 versus net payments of debt of $93.5 in Fiscal 2001.
Fiscal 2000 Cash Flows Compared to Fiscal 1999 Cash Flows
Working capital increased to $317.2 million at September 30, 2000 from
$250.5 million at September 30, 1999, resulting primarily from increased
business volumes and good management of the Company's working capital. The
Company's cash flows from operating activities increased by $8.6 million from
$168.3 million in Fiscal 1999 to $176.9 million in Fiscal 2000. Improved
profitability contributed to the majority of this net increase.
26
The use of the Company's cash in investing activities decreased from
$343.2 million in Fiscal 1999 to $250.1 million in Fiscal 2000, resulting from
smaller outlays of cash for acquisitions and replacement hospitals in Fiscal
2000 compared to Fiscal 1999. The Company's cash flows from financing activities
decreased $97.6 million from $175.1 million provided in Fiscal 1999 to $77.5
million provided in Fiscal 2000, resulting from the net effect of proceeds of
$282.7 from a convertible debt offering used to pay down existing debt under the
Company's revolving credit agreement, reduced borrowings for acquisitions in
Fiscal 2000, and reduced treasury stock purchases in Fiscal 2000.
Capital Resources
The Company currently has a 5-year $450 million Credit Agreement (the
"Credit Agreement") due November 30, 2004. The Credit Agreement is a term loan
agreement which permits the Company to borrow under an unsecured revolving
credit loan at any time through November 30, 2004, at which time the agreement
terminates and all outstanding amounts become due and payable. The Company may
choose a Base Rate Loan (prime interest rate) or a Eurodollar Rate Loan (LIBOR
interest rate). The interest rate for a Eurodollar Rate Loan is currently LIBOR
plus 1.00 percent, and will increase or decrease in relation to a change in the
Company's credit rating. Monthly or quarterly interest payments are required
depending on the type of loan chosen by the Company. The interest rate on the
outstanding balance at September 30, 2001 was 3.7%.
The Company also has a $15 million unsecured revolving credit
commitment (increased from $10 million effective March 2000) with a bank. The
$15 million credit is a working capital commitment which is tied to the
Company's cash management system, and renews annually on November 1. Currently,
interest on any outstanding balance is payable monthly at a fluctuating rate not
to exceed the bank's prime rate less 1/4%. The interest rate at September 30,
2001 was 6.0%. There were no outstanding balances at September 30, 2001.
In addition, the Company is obligated to pay certain commitment fees
based upon amounts available for borrowing during the terms of the credit
agreements described above.
The credit agreements contain covenants which, without prior consent of
the banks, limit certain activities, including those relating to mergers,
consolidations and the Company's ability to secure additional indebtedness, make
guarantees, grant security interests and declare dividends. The Company must
also maintain minimum levels of consolidated tangible net worth, debt service
coverage and interest coverage. At September 30, 2001, the Company was in
compliance with these covenants.
On August 16, 2000, the Company sold $488.8 million face value of
zero-coupon subordinated convertible notes for gross proceeds of $287.7 million.
The notes mature on August 16, 2020 unless converted or redeemed earlier. The
notes are convertible into the Company's common stock at a conversion rate of
29.5623 shares of common stock for each $1,000 principal amount of the notes
(equivalent to the conversion price of $19.9125 per share). Interest on the
notes is payable semiannually in arrears on August 16 and
27
February 16 of each year at a rate of .25% per year on the principal amount at
maturity. The rate of cash interest and accrual of original issue discount
represent a yield to maturity of 3% per year calculated from August 16, 2000.
Holders may require the Company to purchase all or a portion of their
notes on August 16, 2003, August 16, 2008 and August 16, 2013 for a purchase
price per note of $635.88, $724.58 and $827.53, respectively, plus accrued and
unpaid interest to each purchase date. The Company may choose to pay the
purchase price in cash or common stock or a combination of cash and common
stock. In addition, upon a change in control of the Company occurring on or
before August 16, 2003, each holder may require the Company to repurchase all or
a portion of such holder's notes. The Company may redeem all or a portion of the
notes at any time on or after August 16, 2003. There are 14.5 million shares of
common stock reserved for future issuance upon the conversion of the Company's
subordinated convertible notes.
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. However, the Company believes that these
continued changes will not have a material adverse effect on the Company's
future revenue or liquidity. 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, either of
which could have a material adverse effect on the Company's future revenue and
liquidity. Additionally, any future restructuring of the financing and delivery
of health care in the United States and the continued rise in managed care
programs could have an effect on the Company's future revenue and liquidity. See
Item 1. "Sources of Revenue" and "Regulation and Other Factors".
Capital Expenditures
Effective June 19, 2001 the Company acquired Carlisle Hospital from
Carlisle Hospital and Health Services, Inc. pursuant to a Definitive Agreement.
The Agreement included the lease of certain real property, the purchase of
certain real property and substantially all plant and equipment and working
capital of the hospital. The total consideration involved approximately $41
million in cash. The Company is obligated to the construction of a replacement
hospital, subject to obtaining all required governmental and regulatory
approvals.
Effective September 1, 2001, the Company acquired Lee County Community
Hospital pursuant to an Asset Purchase Agreement. The Agreement included the
purchase of substantially all property, plant and equipment and working capital
of the hospital. The total consideration approximated $18 million in cash and
the assumption of $3.6 million in liabilities.
28
Effective November 30, 2001, the Company acquired the East Pointe
Hospital pursuant to an Asset Purchase Agreement. The Agreement included the
purchase of substantially all property, plant and equipment of the hospital. The
total consideration approximated $16.5 million in cash.
The Company financed the above acquisitions through a combination of
cash on hand and borrowings under its credit agreement.
In September 2001, the Board of Directors approved a stock repurchase
program of up to 5 million shares of the Company's common stock. Purchases will
be made from time to time in the open market and will continue until all of such
shares are repurchased or until the Company decides to terminate the repurchase
program. Through November 30, 2001, the Company had purchased 3.2 million shares
at an average purchase price of $19.76 per share. The Company used cash on hand
for these purchases.
In November 2001, the Company entered into a Definitive Agreement to
purchase four acute-care hospitals from Clarent Hospital Corporation for
approximately $170 million. In December 2001, the Company entered into a
Definitive Agreement for the sale of one of these hospitals to Universal Health
Services, Inc. (See footnote 11 to the Financial Statements). Both of these
transactions are expected to be effective during the Company's second fiscal
quarter of 2002. At the present time, the Company plans to use amounts available
under its credit agreement to finance the net cost of the transaction.
The Company currently has a number of hospital renovation/expansion
projects underway. None of these projects are individually significant nor do
they represent a significant commitment in total to the Company.
The Company anticipates spending approximately $95-$100 million for
capital equipment and renovations during the fiscal year ending September 30,
2002 ("Fiscal 2002"). At the present time, cash on hand, internally generated
funds in Fiscal 2002, and funds available under the Credit Facilities are
expected to be sufficient to satisfy the Company's requirements for capital
expenditures, future acquisitions and working capital in Fiscal 2002.
Impact of Seasonality and Inflation
The Company's business is seasonal, with higher patient volumes and net
patient service revenue in the second and third quarters of the Company's fiscal
year. This seasonality occurs because more people become ill during the winter
months, which results in significant increases in the number of patients treated
in the Company's hospitals during those months.
The health care industry is labor intensive. Wages and other expenses
increase especially during periods of inflation and when shortages in the
marketplace occur. In addition, suppliers pass along rising costs to the Company
in the form of higher prices. The Company has, to date, offset increases in
operating costs to the Company by increasing charges for services and expanding
services. The Company has also implemented cost control measures to curb
increases in operating costs and expenses. The Company cannot predict its
ability to cover or offset future cost increases.
29
Forward-Looking Statements
Certain statements contained in this Form 10-K, including, without
limitation, statements containing the words "believes," "anticipates,"
"intends," "expects" and words of similar import, constitute "forward-looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995. Forward-looking statements are based upon the Company's current plans,
expectations and projections about future events. However, such statements
involve known and unknown risks, uncertainties and other factors that may cause
the actual results, performance or achievements of the Company to be materially
different from any future results, performance or achievements expressed or
implied by such forward-looking statements. Such factors include, among others,
the following: general economic and business conditions, both nationally and in
the regions in which the Company operates; demographic changes; existing
governmental regulations and changes in, or the failure to comply with,
governmental regulations; legislative proposals for health care reform; the
ability to enter into managed care provider arrangements on acceptable terms;
changes in Medicare and Medicaid payment levels; liability and other claims
asserted against the Company; competition; the loss of any significant ability
to attract and retain qualified personnel, including physicians; the
availability and terms of capital to fund additional acquisitions or replacement
facilities. Given these uncertainties, prospective investors are cautioned not
to place undue reliance on such forward-looking statements. The Company
disclaims any obligation to update any such factors or to publicly announce the
results of any revision to any of the forward-looking statements contained
herein to reflect future events or developments.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Interest Rates
The Company is exposed to interest rates, primarily as a result of its
$450 million revolving credit agreement with a floating interest rate (see
financial statement note No. 3). The Company is currently not using derivative
instruments to alter the interest rate characteristics of the Company's variable
rate long term debt. The following table summarizes principal cash flows and
related weighted average interest rates by expected maturity dates. At September
30, 2001 the fair value of the Company's fixed rate debt was $435.2 million,
while the carrying value was approximately $390.7 million. At September 30, 2001
the fair value of the Company's variable rate debt was $45.0 million, while the
carrying value was approximately $45.0 million.
30
2002 2003 2004 2005 2006 Thereafter Total
---- ---- ---- ---- ---- ---------- -----
(in millions, except interest rates)
Long term debt:
Fixed rate long-term
debt $ 6.8 $ 8.2 $ 5.6 $ 5.2 $ 4.3 $ 64.7 $ 94.8
Average interest rates 7.5% 7.9% 7.9% 7.8% 7.3% 7.4% 7.5%
Fixed rate convert-
ible long-term debt $295.9 $295.9
Average interest rate 3.0% 3.0%
Variable rate
long-term debt $45.0 $ 45.0
Average interest rate * *
* The Company may choose a Base Rate Loan (prime interest rate) or a
Eurodollar Rate Loan (LIBOR interest rate). The interest rate for a Eurodollar
Rate Loan is currently LIBOR plus 1.00 percent, and will increase or decrease in
relation to the Company's credit rating. The interest rate on the outstanding
balance at September 30, 2001 was 3.7%.
Item 8. Financial Statements and Supplementary Data
INDEX TO FINANCIAL STATEMENTS
Page
----
Health Management Associates, Inc.
Consolidated Financial Statements:
Report of Independent Certified Public Accountants ............... 32
Consolidated Statements of Income -- for the years ended
September 30, 2001, 2000 and 1999 .............................. 33
Consolidated Balance Sheets --September 30, 2001 and 2000 ........ 34
Consolidated Statements of Stockholders' Equity -- for the
years ended September 30, 2001, 2000 and 1999 .................. 36
Consolidated Statements of Cash Flows -- for the years
ended September 30, 2001, 2000 and 1999 ........................ 37
Notes to Consolidated Financial Statements .......................39
31
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors and Stockholders
Health Management Associates, Inc.
We have audited the accompanying consolidated balance sheets of Health
Management Associates, Inc. and subsidiaries as of September 30, 2001 and 2000,
and the related consolidated statements of income, stockholders' equity, and
cash flows for each of the three years in the period ended September 30, 2001.
Our audits also included the financial statement schedule listed in the Index at
Item 14(a). These financial statements and schedule are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements and schedule based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. 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, the financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Health
Management Associates, Inc. and subsidiaries at September 30, 2001 and 2000 and
the consolidated results of their operations and their cash flows for each of
the three years in the period ended September 30, 2001, in conformity with
accounting principles generally accepted in the United States. Also, in our
opinion, the related 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.
Ernst & Young LLP
Tampa, Florida
October 24, 2001
32
HEALTH MANAGEMENT ASSOCIATES, INC.
CONSOLIDATED STATEMENTS OF INCOME
Year ended September 30,
------------------------------------
2001 2000 1999
---------- ---------- ----------
(in thousands, except per share data)
Net patient service revenue .................. $1,879,801 $1,577,767 $1,355,707
Costs and expenses:
Salaries and benefits ...................... 710,535 569,112 486,003
Supplies and other ......................... 535,926 458,817 390,229
Provision for doubtful accounts ............ 143,923 135,862 130,013
Depreciation and amortization .............. 90,646 74,499 61,278
Rent expense ............................... 40,850 38,118 33,146
Interest, net .............................. 19,970 25,364 8,385
Non-cash charge for retirement
benefits and write down of
assets held for sale ..................... 17,000 -- --
---------- ---------- ----------
Total costs and expenses ............... 1,558,850 1,301,772 1,109,054
---------- ---------- ----------
Income before income taxes ................... 320,951 275,995 246,653
Provision for income taxes ................... 125,973 108,328 96,808
---------- ---------- ----------
Net income ................................... $ 194,978 $ 167,667 $ 149,845
========== ========== ==========
Net income per share:
Basic ..................................... $ .80 $ .69 $ .60
========== ========== ==========
Diluted ................................... $ .76 $ .68 $ .59
========== ========== ==========
Weighted average number of shares outstanding:
Basic ..................................... 244,425 241,946 250,467
========== ========== ==========
Diluted ................................... 264,351 247,277 255,067
========== ========== ==========
See accompanying notes.
33
HEALTH MANAGEMENT ASSOCIATES, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands)
September 30,
--------------------------
2001 2000
----------- -----------
ASSETS
Current assets:
Cash and cash equivalents .............................. $ 70,263 $ 16,471
Accounts receivable, less allowances for doubtful
accounts of $116,785 and $118,602 at September
30, 2001 and 2000, respectively ...................... 350,941 343,583
Accounts receivable - other ............................ 29,195 29,070
Supplies, at cost ...................................... 50,113 39,207
Prepaid expenses and other assets ...................... 19,026 18,659
Funds held by trustee .................................. 1,892 2,562
Deferred income taxes .................................. 43,801 37,411
----------- -----------
Total current assets ................................ 565,231 486,963
Property, plant and equipment:
Land and improvements .................................. 53,582 47,365
Buildings and improvements ............................. 824,363 793,363
Leaseholds ............................................. 103,272 97,174
Equipment .............................................. 435,903 379,473
Construction in progress ............................... 36,783 35,444
----------- -----------
1,453,903 1,352,819
Less: accumulated depreciation and amortization ........ (364,490) (287,489)
----------- -----------
Net property, plant and equipment .................... 1,089,413 1,065,330
Funds held by trustee .................................... 1,791 2,005
Excess of cost over acquired net assets, net ............. 251,315 182,265
Deferred charges and other assets ........................ 33,827 35,502
----------- -----------
$ 1,941,577 $ 1,772,065
=========== ===========
See accompanying notes.
34
HEALTH MANAGEMENT ASSOCIATES, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands)
September 30,
---------------------------
2001 2000
------------ ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable ............................................................ $ 91,862 $ 78,227
Accrued payroll and related taxes ........................................... 31,942 27,029
Accrued expenses and other liabilities ...................................... 41,675 32,909
Due to third party payors ................................................... 14,500 22,972
Income taxes - currently payable ............................................ 1,356 2,122
Current maturities of long-term debt ........................................ 6,752 6,523
----------- -----------
Total current liabilities ................................................. 188,087 169,782
Deferred income taxes ......................................................... 34,286 34,496
Other long-term liabilities ................................................... 36,565 17,570
Long-term debt ................................................................ 428,990 520,151
Stockholders' equity:
Preferred stock, $.01 par value, 5,000 shares
authorized ................................................................ -- --
Common stock, Class A, $.01 par value, 750,000 shares authorized, 258,074 and
255,357 shares issued and outstanding at
September 30, 2001 and 2000, respectively ................................. 2,581 2,554
Additional paid-in-capital .................................................. 340,192 308,834
Retained earnings ........................................................... 1,025,147 830,169
----------- -----------
1,367,920 1,141,557
Less: treasury stock, 12,639 and 12,500 shares at
September 30, 2001 and 2000, respectively ........................... (114,271) (111,491)
----------- -----------
Total stockholders' equity ................................................ 1,253,649 1,030,066
----------- -----------
$ 1,941,577 $ 1,772,065
=========== ===========
See accompanying notes.
35
HEALTH MANAGEMENT ASSOCIATES, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Years ended September 30, 2001, 2000, and 1999
(in thousands)
Common Stock Additional
----------------------
Par Paid-in Retained Treasury
Shares Value Capital Earnings Stock
------ ------- --------- ---------- -------
Balance at September 30, 1998 ........... 251,558 $2,491 $ 241,677 $ 512,657 $ --
Exercise of stock options ............ 1,847 18 6,436 -- --
Income tax benefit from exercise
of stock options .................... -- -- 3,455 -- --
Expiration of put option
obligation .......................... -- 25 43,011 -- --
Purchase of treasury stock, at cost.... -- -- -- -- (69,092)
Net income ........................... -- -- -- 149,845 --
---------- ---------- ---------- ---------- ----------
Balance at September 30, 1999 ........... 253,405 2,534 294,579 662,502 (69,092)
Exercise of stock options ............. 1,952 20 11,611 -- --
Income tax benefit from exercise
of stock options .................... -- -- 2,644 -- --
Purchase of treasury stock, at cost.... -- -- -- -- (42,399)
Net income ............................ -- -- -- 167,667 --
---------- ---------- ---------- ---------- ----------
Balance at September 30, 2000 ........... 255,357 2,554 308,834 830,169 (111,491)
Exercise of stock options ............. 2,717 27 25,245 -- --
Income tax benefit from exercise
of stock options .................... -- -- 6,113 -- --
Purchase of treasury stock, at cost.... -- -- -- -- (2,780)
Net income ............................ -- -- -- 194,978 --
---------- ---------- ---------- ---------- ----------
Balance at September 30, 2001 ........... 258,074 $ 2,581 $ 340,192 $1,025,147 $ (114,271)
========== ========== ========== ========== ==========
See accompanying notes.
36
HEALTH MANAGEMENT ASSOCIATES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Year ended September 30,
---------------------------------------------
2001 2000 1999
--------- -------- ----------
Cash flows from operating activities:
Net income ................................................ $ 194,978 $ 167,667 $ 149,845
Adjustments to reconcile net income
to net cash provided by operating
activities:
Depreciation and amortization ......................... 90,646 74,499 61,278
Provision for doubtful accounts ....................... 143,923 135,862 130,013
(Gain)loss on sale of
fixed assets ....................................... (6) 85 171
Change in deferred income taxes . ..................... (6,600) (4,979) (5,000)
Charges for retirement benefits
and write down of assets held
for sale ............................................ 17,000 - -
Changes in assets and liabilities,
net of effects of acquisitions
and dispositions:
Accounts receivable ............................... (149,288) (160,239) (195,068)
Supplies .......................................... (9,993) (4,802) (3,834)
Prepaid expenses and
other assets .................................... (257) (9,146) (441)
Deferred charges and
other assets .................................... (6,018) (10,426) (3,954)
Accounts payable .................................. 13,315 4,632 22,878
Accrued payroll, interest and
other liabilities ............................... 2,053 1,785 3,371
Income taxes - currently
payable ......................................... (766) (18,156) 10,092
Other long-term liabilities ....................... 1,055 115 (1,002)
--------- --------- ---------
Net cash provided by
operating activities ...................................... 290,042 176,897 168,349
--------- --------- ---------
Cash flows from investing activities:
Acquisition of facilities, net of
cash acquired and purchase
price adjustments ....................................... (100,894) (130,402) (183,967)
Additions to property, plant
and equipment ........................................... (73,473) (120,704) (159,392)
Proceeds from sale of property,
plant and equipment .................................... 3,357 207 111
--------- --------- ---------
Net cash used in investing
activities ................................................ $(171,010) $(250,899) $(343,248)
--------- --------- ---------
See accompanying notes.
37
HEALTH MANAGEMENT ASSOCIATES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
(in thousands)
Year ended September 30,
--------------------------------------------
2001 2000 1999
--------- --------- ---------
Cash flows from financing activities:
Proceeds from long-term borrowings ......................... $ 35,591 $ 447,117 $ 249,645
Principal payments on debt ................................. (129,098) (342,774) (17,229)
Purchase of treasury stock, at cost ........................ (2,780) (42,399) (69,092)
Proceeds from issuance of common
stock .................................................... 31,385 14,275 11,999
Payment of interest on debentures .......................... (1,222) - -
Decrease (increase) in funds
held by trustee .......................................... 884 1,328 (183)
--------- --------- ----------
Net cash (used in) provided by
financing activities ....................................... (65,240) 77,547 175,140
--------- --------- ---------
Net increase in cash and
cash equivalents ........................................... 53,792 3,545 241
Cash and cash equivalents at
beginning of year ......................................... 16,471 12,926 12,685
--------- --------- ---------
Cash and cash equivalents at
end of year ............................................... $ 70,263 $ 16,471 $ 12,926
========= ========= =========
Supplemental schedule of noncash investing
and financing activities:
Fair value of assets acquired
(including cash) ....................................... $ 63,049 $ 136,649 $ 218,863
Consideration: Cash paid ................................. 59,436 130,402 183,967
--------- --------- ---------
Liabilities assumed ...................................... $ 3,613 $ 6,247 $ 34,896
========= ========= =========
See accompanying notes.
38
HEALTH MANAGEMENT ASSOCIATES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2001
1. Business and summary of significant accounting policies
Health Management Associates, Inc. ("the Company"), through its
subsidiary companies, substantially all of which are wholly-owned, provides
health care services to patients in owned and leased facilities primarily in the
southeast and southwest United States. The Company consistently applies the
following significant accounting policies:
a. Principles of consolidation
The consolidated financial statements include the accounts of the
Company and its subsidiaries in which the Company exercises control. All
significant intercompany accounts and transactions have been eliminated.
b. Cash equivalents
The Company considers all highly liquid investments purchased with a
maturity of less than three months to be cash equivalents. The Company's cash
equivalents consist principally of investment grade instruments.
c. Property, plant and equipment
Property, plant and equipment are carried at cost and include major
expenditures which increase their values or extend their useful lives.
Depreciation and amortization are computed using the straight line method based
on estimated useful lives. Estimated useful lives for buildings and improvements
range from twenty to forty years and for equipment range from three to ten
years. Leaseholds are amortized on a straight-line basis over the terms of the
respective leases. Depreciation expense was $77.3 million, $63.7 million and
$51.7 million for the years ended September 30, 2001, 2000 and 1999,
respectively.
d. Excess of cost over acquired net assets, net and deferred charges
and other assets
Excess of cost over acquired net assets has been amortized on a
straight-line basis over lives ranging from three to twenty-five years.
Accumulated amortization relating thereto is $32.3 million and $23.1 million at
September 30, 2001 and 2000, respectively. Deferred charges and other assets
consist principally of deferred financing costs and certain non-productive
assets held for sale. The financing costs are being amortized over the life of
the related debt. The accumulated amortization of deferred financing costs was
$3.7 million and $2.9 million at September 30, 2001 and 2000, respectively.
Certain long-lived assets and the related excess of cost over acquired
net assets may become impaired, requiring a writedown of the assets to their
estimated fair values. The Company periodically reviews future cash flows
related to these assets, and if necessary, reduces such assets to their
estimated fair values.
e. Use of estimates
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management of the
Company to make estimates and assumptions that affect the amounts reported in
the consolidated financial statements and accompanying notes. Actual results
could differ from those estimates.
39
HEALTH MANAGEMENT ASSOCIATES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
1. Business and summary of significant accounting policies (continued)
f. Net patient service revenue and accounts receivable
Approximately 59%, 60% and 60% of gross patient service charges for the
years ended September 30, 2001, 2000 and 1999, respectively, relates to services
rendered to patients covered by the Medicare and Medicaid programs. Payments for
services rendered to patients covered by these programs are generally less than
billed charges. Provisions for contractual adjustments are made to reduce the
charges to these patients to estimated receipts based upon the programs'
principles of payment/reimbursement (either prospectively determined or
retrospectively determined costs). Final settlements under these programs are
subject to administrative review and audit, and provision is currently made for
adjustments which may result. Revenues and receivables from government programs
are significant to the Company's operations, but the Company does not believe
that there are significant credit risks associated with these government
programs.
Estimates for contractual allowances under managed care health plans
are based primarily on the payment terms of contractual arrangements such as
predetermined rates per diagnosis, per diem rates or discounted fee for service
rates.
Net patient service revenue is presented net of provisions for
contractual adjustments and other allowances of $2.981 billion, $2.195 billion
and $1.748 billion in 2001, 2000 and 1999, respectively, in the accompanying
consolidated statements of income. In the ordinary course of business, the
Company renders services in its facilities to patients who are financially
unable to pay for the 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.
g. Income taxes
The Company accounts for income taxes under the Financial Accounting
Standards Board (FASB) SFAS No. 109, Accounting for Income Taxes. Deferred
income tax assets and liabilities are determined based upon difference between
financial reporting and tax bases of assets and liabilities and are measured
using the enacted tax rates and laws that will be in effect when the differences
are expected to reverse (see Note 5).
h. Earnings per share
Earnings per share is based on the weighted average number of common
and common equivalent shares (stock options and convertible debt) outstanding
during the periods presented (see Note 7).
i. Segment reporting
The Company's business of providing health care services to patients in
owned and leased facilities comprises a single reportable operating segment
under FASB SFAS No. 131, Disclosures About Segments of an Enterprise and Related
Information.
j. Reclassifications
Certain amounts have been reclassified in prior years to conform with
the current year presentation.
k. Recent Accounting Pronouncements
In July 2001, the FASB issued SFAS No. 141, Business Combinations, and
SFAS No. 142, Goodwill and Other Intangible Assets. SFAS No. 141 requires that
the purchase method of accounting be used for all business combinations
initiated after June 30, 2001 as well as all purchase method business
combinations completed after June 30, 2001. SFAS No. 141 also specifies criteria
intangible assets acquired in a purchase method business combination
40
HEALTH MANAGEMENT ASSOCIATES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
1. Business and summary of significant accounting policies (continued)
must meet to be recognized and reported apart from goodwill, noting that any
purchase price allocable to an assembled workforce may not be accounted for
separately. SFAS No. 142 will require that goodwill and intangible assets with
indefinite useful lives no longer be amortized, but instead tested for
impairment at least annually in accordance with the provisions of SFAS No. 142.
The Company adopted the provisions of SFAS No. 141 effective July 1,
2001 and intends to early adopt SFAS No. 142 effective October 1, 2001.
Subsequent to October 1, 2001, any goodwill and intangible asset determined to
have an indefinite useful life will no longer be amortized, but will be subject
to annual impairment tests in accordance with SFAS No. 142. During fiscal year
2001, the Company recorded $9.2 million of goodwill amortization expense. The
Company will be performing the first of the required impairment tests under SFAS
No. 142 during fiscal 2002 and has not yet determined the effect of adoption on
the Company's business, results of operations, or financial condition.
As a result of the Company's adoption of SFAS No. 141, no amortization
of the goodwill associated with the hospital acquired by the Company in
September 2001 has been included in the financial statements.
In 1998 the FASB issued SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities, which the Company adopted October 1, 2000.
Because of the Company's minimal use of derivatives, adoption of this standard
did not have an impact on the earnings or financial position of the Company.
2. Acquisitions and dispositions
During 2001 the Company acquired certain assets of two hospitals
through purchase agreements for $59.4 million in cash and the assumption of $3.6
million in liabilities. During 2000 the Company acquired certain assets of three
hospitals (one at September 30, 2000) through purchase agreements for $130.4
million in cash and the assumption of $6.2 million in liabilities. During 1999
the Company acquired certain assets of four hospitals through one purchase and
two long-term lease agreements for $184.0 million in cash and the assumption of
$34.9 million in liabilities. The foregoing acquisitions were accounted for
using the purchase method of accounting. The allocation of the purchase price
has been determined by the Company based upon available information and is
subject to further refinement.
The operating results of the foregoing hospitals have been included in
the accompanying consolidated statements of income from the respective dates of
acquisition. The following unaudited pro forma combined summary of operations of
the Company for each of the years in the three year period ended September 30,
2001 give effect to the operation of the hospitals purchased in 2001, 2000 and
1999 as if the acquisitions had occurred as of October 1, 1999, 1998 and 1997,
respectively:
2001 2000 1999
--------- -------- --------
(in millions, except per share data)
Net patient service revenue ......... $1,945.4 $1,785.1 $1,602.5
Net income .......................... $ 193.5 $ 160.7 $ 140.4
Net income per share - Basic ........ $ .79 $ .66 $ .56
Net income per share - Diluted ...... $ .75 $ .65 $ .55
41
HEALTH MANAGEMENT ASSOCIATES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
3. Long-term debt
The Company's long-term debt consists of the following:
September 30,
-------------------
2001 2000
------- --------
(in thousands)
Revolving Credit Agreements (a) ......................................... $ 45,000 $140,000
Zero-Coupon Subordinated Convertible Notes
due 2020 at 3%, net of discount of $192.6 and
$200.2 million at September 30, 2001 and
2000, respectively(b) .................................................. 295,864 288,421
Industrial Revenue Bond Issue (c) . ..................................... 5,580 5,940
Mortgage notes, secured by real and
personal property (d) ................................................... 50,486 53,592
Various mortgage and installment notes and
debentures, some secured by equipment,
at interest rates ranging from 6% to
prime plus 1%, payable through 2009 .................................... 9,939 11,325
Capitalized lease obligations (see Note 4) .............................. 28,873 27,396
-------- --------
435,742 526,674
Less current maturities ................................................. 6,752 6,523
-------- --------
$428,990 $520,151
======== ========
a. Revolving Credit Agreements
The Company currently has a 5-year $450 million Credit Agreement (the
"Credit Agreement") due November 30, 2004. The Credit Agreement is a term loan
agreement which permits the Company to borrow under an unsecured revolving
credit loan at any time through November 30, 2004, at which time the agreement
terminates and all outstanding amounts become due and payable. The Company may
choose a Base Rate Loan (prime interest rate) or a Eurodollar Rate Loan (LIBOR
interest rate). The interest rate for a Eurodollar Rate Loan is currently LIBOR
plus 1.00 percent, and will increase or decrease in relation to a change in the
Company's credit rating. Monthly or quarterly interest payments are required
depending on the type of loan chosen by the Company. The interest rate on the
outstanding balance at September 30, 2001 and September 30, 2000 was 3.7% and
7.6%, respectively.
The Company also has a $15 million unsecured revolving credit
commitment with a bank. The $15 million credit is a working capital commitment
which is tied to the Company's cash management system, and renews annually on
November 1. Currently, interest on any outstanding balance is payable monthly at
a fluctuating rate not to exceed the bank's prime rate less .25%. The interest
rate at September 30, 2001 and 2000 was 6.0% and 9.5%, respectively. As of
September 30, 2001 and 2000, there were no amounts outstanding under this credit
commitment.
In addition, the Company is obligated to pay certain commitment fees
based upon amounts available for borrowing during the terms of the credit
agreements described above.
The credit agreements contain covenants which, without prior consent of
the banks, limit certain activities, including those relating to mergers,
consolidations and the Company's ability to secure additional indebtedness, make
guarantees, grant security interests and declare dividends. The Company must
also maintain minimum levels of consolidated tangible net worth, debt service
coverage and interest coverage. At September 30, 2001, the Company was in
compliance with these covenants.
42
HEALTH MANAGEMENT ASSOCIATES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
3. Long-term debt (continued)
b. Subordinated Convertible Notes
On August 16, 2000, the Company sold $488.8 million face value of
zero-coupon subordinated convertible notes for gross proceeds of $287.7 million.
The notes mature on August 16, 2020 unless converted or redeemed earlier. The
notes are convertible into the Company's common stock at a conversion rate of
29.5623 shares of common stock for each $1,000 principal amount of the notes
(equivalent to a conversion price of $19.9125 per share). Interest on the notes
is payable semiannually in arrears on August 16 and February 16 of each year at
a rate of .25% per year on the principal amount at maturity. The rate of cash
interest and accrual of original issue discount represent a yield to maturity of
3% per year calculated from August 16, 2000.
Holders may require the Company to purchase all or a portion of their
notes on August 16, 2003, August 16, 2008 and August 16, 2013 for a purchase
price per note of $635.88, $724.58 and $827.53, respectively, plus accrued and
unpaid interest to each purchase date. The Company may choose to pay the
purchase price in cash or common stock or a combination of cash and common
stock. In addition, upon a change in control of the Company occurring on or
before August 16, 2003, each holder may require the Company to repurchase all or
a portion of such holder's notes. The Company may redeem all or a portion of the
notes at any time on or after August 16, 2003.
c. Industrial Revenue Bond Issue
The Company has one Industrial Revenue Bond issue outstanding at
September 30, 2001 and 2000, which is secured by all real and personal property
of a facility with aggregate net book value of $11.4 million and $11.0 million,
respectively, and a pledge of the stock of the subsidiary owning the facility;
payment of principal and interest is unconditionally guaranteed by the Company.
The bonds are serial bonds with maturities and rates ranging from September 1,
2005 to September 1, 2011 and 8.5% to 8.75%, respectively. The Company makes
monthly sinking-fund payments in amounts sufficient to cover principal and
interest payment requirements.
d. Mortgage Notes
The Company has six mortgage notes which are secured by all the real
and personal property related to five facilities with a net book value of $96.3
million and $78.0 million at September 30, 2001 and 2000, respectively. The
notes are payable in various installments with maturity dates ranging from 2002
through 2007 and carry interest rates ranging from prime (6.0% and 9.5% at
September 30, 2001 and 2000, respectively) to 11.5%.
As of September 30, 2001 and 2000, the quoted market price for the
subordinated convertible notes was approximately $340.3 million and $353.8
million, respectively. The fair value of the other debt included above, based on
available market information, approximates its carrying value.
43
HEALTH MANAGEMENT ASSOCIATES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
3. Long-term debt (Continued)
Maturities of long-term debt and capital leases for the next five
fiscal years and thereafter, are as follows (in thousands):
2002 $ 6,752
2003 8,221
2004 5,619
2005 50,169
2006 4,338
Thereafter $360,643
The Company paid interest of $22.3 million, $31.1 million and $14.4
million for the years ended September 30, 2001, 2000 and 1999, respectively.
There was no capitalized interest for the year ended September 30, 2001.
Capitalized interest totaled $3.1 million and $4.3 million for the years ended
September 30, 2000 and 1999 respectively.
4. Leases
The Company leases real estate properties, equipment and vehicles under
cancelable and non-cancelable leases. Future minimum operating and capital lease
payments, including amounts relating to leased hospitals, are as follows at
September 30, 2001 (in thousands):
Operating Capital
------------------------- ------------
Real
Real Property and
September 30, Property Equipment Equipment Total
- ------------- ----------- ----------- ------------ -----------
2002 .................. $ 4,538 $ 19,989 $ 4,132 $ 28,659
2003 .................. 3,373 16,192 4,398 23,963
2004 .................. 2,981 13,009 4,170 20,160
2005 .................. 2,739 9,550 3,557 15,846
2006 .................. 2,685 7,611 2,834 13,130
Thereafter ............ 18,512 1,048 38,319 57,879
-------- -------- -------- --------
Total minimum payments $ 34,828 $ 67,399 57,410 $159,637
======== ======== ========
Less amounts
representing interest 28,537
--------
Present value of
minimum lease
payments ............ $ 28,873
========
44
HEALTH MANAGEMENT ASSOCIATES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
4. Leases (continued)
The following summarizes amounts related to assets leased by the
Company under capital leases (in thousands):
September 30,
------------------
2001 2000
-------- --------
Cost .................................... $71,870 $70,139
Less accumulated amortization ........... (17,191) (13,503)
------- -------
Net book value .......................... $54,679 $56,636
======= =======
The Company entered into capitalized leases for equipment of $4.0
million, $.2 million and $.8 million for the years ended September 30, 2001,
2000 and 1999, respectively.
5. Income taxes
The significant components of the provision for income taxes are as
follows (in thousands):
Year ended September 30,
----------------------------------
2001 2000 1999
--------- --------- --------
Federal:
Current ............................ $114,109 $ 96,713 $ 85,248
Deferred ........................... (6,731) (3,439) (2,777)
-------- -------- --------
Total Federal .................. 107,378 93,274 82,471
State:
Current and deferred ............... 18,595 15,054 14,337
-------- -------- --------
Total ........................... $125,973 $108,328 $ 96,808
======== ======== ========
An analysis of the Company's effective income tax rates is as follows:
Year ended September 30,
--------------------------------------------------
2001 2000 1999
---------------- ----------------- ---------------
Statutory income
tax rate ............ $112,333 35.0% $ 96,598 35.0% $86,329 35.0%
State income taxes, net
of Federal benefit .. 12,628 3.9 10,797 3.9 9,319 3.8
Other items (each less
than 5% of computed
tax) ................ 1,012 .4 933 .4 1,160 .5
-------- ----- -------- ----- ------- -----
Total ............. $125,973 39.3% $108,328 39.3% $96,808 39.3%
======== ===== ======== ===== ======= =====
45
HEALTH MANAGEMENT ASSOCIATES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
5. Income taxes (continued)
The tax effects of temporary differences that give rise to significant portions
of the Federal and state deferred income tax assets and liabilities are
comprised of the following:
September 30,
-------------------
2001 2000
------- -------
(in thousands)
Deferred income tax assets:
Allowance for doubtful accounts $ 24,082 $ 26,201
Accrued liabilities 10,524 8,712
Self insurance liability risks 6,519 2,498
Other 2,676 --
-------- --------
$ 43,801 37,411
Less: Valuation allowance -- --
-------- --------
Net deferred income tax assets 43,801 37,411
Deferred income tax liabilities:
Depreciable assets (32,124) (32,334)
Other (2,162) (2,162)
-------- --------
Net deferred income tax asset $ 9,515 $ 2,915
======== ========
Income taxes paid (net of refunds) amounted to $126.1 million,$123.6
million, and $79.3 million for the years ended September 30, 2001, 2000 and
1999, respectively.
6. Retirement plans
The Company has a defined contribution retirement plan which covers
substantially all eligible employees at its hospitals and the corporate office.
This plan includes a provision for the Company to match a portion of employee
contributions. Total retirement program expense under this plan was $4.5
million, $4.0 million and $3.8 million for the years ended September 30, 2001,
2000 and 1999 respectively.
In addition, the Company maintains a supplemental retirement plan for
certain Company executives which provides for predetermined annual payments to
these executives after the attainment of age 62, if still employed by the
Company at that time. These payments generally continue for the remainder of the
executive's life (see Note 10).
46
HEALTH MANAGEMENT ASSOCIATES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
7. Earnings per share
The following table sets forth the computation of basic and diluted earnings per
share (in thousands, except per share data):
Year ended September 30,
------------------------------------
2001 2000 1999
------- ------- --------
Numerator:
Numerator for basic earnings
per share - net income $194,978 $167,667 $149,845
Effect of convertible debt 5,346 655 --
-------- -------- --------
Numerator for diluted
earnings per share $200,324 $168,322 $149,845
======== ======== ========
Denominator:
Denominator for basic earnings
per share-weighted average shares 244,425 241,946 250,467
Effect of dilutive securities:
Employee stock options 5,477 3,550 4,600
Convertible debt 14,449 1,781 --
-------- -------- --------
Denominator for diluted
earnings per share 264,351 247,277 255,067
======== ======== ========
Basic earnings per share $ .80 $ .69 $ .60
======== ======== ========
Diluted earnings per share $ .76 $ .68 $ .59
======== ======== ========
Outstanding options to purchase 5.4 million, 7.2 million, and 7.0
million shares of the Company's common stock were not included in the
computation of earnings per share for the years ended September 30, 2001, 2000,
and 1999, respectively, because the options' exercise prices were greater than
the average market price of the Company's common stock.
8. Stockholders' equity
The Company has elected to follow Accounting Principles Board Opinion
No. 25, Accounting for Stock Issued to Employees ("APB 25"). Under APB 25, since
the exercise price of the Company's employee stock options equals the market
price of the underlying stock on the date of grant, no compensation expense is
recognized. Pro forma disclosure of alternative fair value accounting is then
required under FASB Statement No. 123, Accounting for Stock-Based Compensation
(Statement 123), utilizing an option valuation model.
The Company has a 1991 Stock Option Plan, a 1993 Stock Option Plan and
a 1996 Executive Incentive Compensation Plan for the granting of options to key
employees of the Company. All options granted have 10 year terms and vest and
become fully exercisable at the end of either 3 or 4 years of continued
employment.
47
HEALTH MANAGEMENT ASSOCIATES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
8. Stockholders' equity (continued)
Pertinent information covering the plans is summarized below:
Price Weighted
Shares Range Average Price
---------- -------------- -------------
(in thousands)
Balance at September 30, 1998 18,377 $ 1.24 -$21.63 $ 8.36
Granted 3,688 8.25 - 13.00 12.72
Exercised (1,623) 2.07 - 12.72 3.43
Terminated (204) 10.33 - 21.63 18.61
------
Balance at September 30, 1999 20,238 1.24 - 21.63 10.30
Granted 3,807 12.13 - 14.69 12.14
Exercised (1,809) 1.24 - 13.00 5.97
Terminated (403) 10.33 - 21.63 16.14
------
Balance at September 30, 2000 21,833 1.24 - 21.63 10.87
Granted 2,804 16.60 - 21.25 16.62
Exercised (2,553) 1.24 - 13.00 9.99
Terminated (1,506) 12.13 - 21.63 13.38
------
Balance at September 30, 2001 20,578 $ 2.07 -$21.63
======
Exercisable at
September 30, 2001 15,144
======
The following table summarizes information concerning currently
outstanding and exercisable options:
Options Outstanding Options Exercisable
--------------------------------------------------- -----------------------------------
Weighted
Average Weighted Weighted
Range of Remaining Average Average
Exercise Number Contractual Exercise Number Exercise
Prices Outstanding Life Price Exercisable Price
------------- ----------- ----------- --------- ----------- ---------------
$ 2.07-$10.33 5,668,000 2.7 $ 4.98 5,558,000 $ 4.91
$12.13-$21.63 14,842,000 7.4 $14.10 9,586,000 $13.51
Pro forma information regarding net income and earnings per share is
required by Statement 123, which also requires that the information be
determined as if the Company has accounted for its employee stock options
granted subsequent to December 31, 1995 under the fair value method of that
Statement. The fair value for these options was estimated at the date of grant
using the Black-Scholes option pricing model with the following weighted-average
assumptions for 2001, 2000 and 1999: risk-free interest rate of 5.51%, 6.56%,
and 5.81% - 6.18%; no dividend yields; volatility factor of the expected market
price of the Company's common stock of .489, .486 and .446; and weighted average
expected lives of the options of 7 years.
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions including the expected stock price
volatility. Because the Company's employee stock options have characteristics
significantly different from those of traded
48
HEALTH MANAGEMENT ASSOCIATES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
8. Stockholders' equity (continued)
options, and because changes in the subjective input assumptions can materially
affect the fair value estimate, in management's opinion, the existing models do
not necessarily provide a reliable single measure of the fair value of its
employee stock options.
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. The Company's
pro forma information follows (in thousands, except per share data):
2001 2000 1999
-------- -------- --------
Pro forma net income $184,537 $156,702 $138,588
Pro forma earnings per share:
Basic $ .75 $ .65 $ .55
Diluted $ .72 $ .64 $ .54
At September 30, 2001 there were approximately 14.7 million shares of
common stock reserved for future issuance under the plans. In addition, the
Company has granted options for shares of Class A Common Stock to seven
non-employee directors. At September 30, 2001 there were approximately 233,000
options outstanding at $2.07 to $21.63 per share, expiring in 2003 through 2011.
The Company also has a Stock Incentive Plan for corporate officers and
management staff. This plan provides for the awarding of additional compensation
to key personnel in the form of Company stock. The stock will be issued to the
grantee four years after the date of grant, provided the individual is still an
employee of the Company. At September 30, 2001 there were approximately 388,000
shares reserved under the plan, for which the Company has recorded $2.0 million,
$1.5 million and $1.5 million of compensation expense for the years ended
September 30, 2001, 2000 and 1999, respectively.
In February 1998 the Board of Directors approved a stock repurchase
program. In connection with the program, put options were sold to an independent
third party in September 1998. Proceeds of $2,090,000 from the issuance of the
put options were accounted for as additional paid-in-capital. Each put option
entitled the holder to sell one share of the Company's common stock to the
Company at a price of $17.50 per share. At September 30, 1998, 2,459,000 put
options were outstanding, which were exercisable only at maturity and expired at
various dates from November 1998 to December 1998. The potential repurchase
obligation of $43,036,000 was reclassified from stockholders' equity to a
liability as of September 30, 1998. Subsequent to year end, the liability was
eliminated in connection with the expiration of the put options.
During 1999 the Company repurchased 7.5 million shares of its stock at
a cost of $69.1 million, which completed the February 1998 stock repurchase plan
referred to above. In September 1999 the Board of Directors approved a stock
repurchase program of up to 25 million shares of common stock. On October 14,
1999 the Company executed a share repurchase agreement with an independent third
party, whereby the third party agreed to "sell short" 5 million shares of the
Company's common stock to the Company. As of October 19, 1999 the 5 million
shares were delivered to the Company and became treasury stock. From October 15,
1999 to December 15, 1999, a period of 60 days, the third party covered the
"short sale" by buying shares on the open market. On December 15, 1999 the
Company reimbursed the third party $42,399,000, which represented the cost of
the common stock purchased plus a commission plus interest (at LIBOR) on the
outstanding balance of funds used to purchase the common stock.
49
HEALTH MANAGEMENT ASSOCIATES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
8. Stockholders' equity (continued)
In September 2001, the Board of Directors approved a stock repurchase
program of up to 5 million shares of the Company's common stock. Purchases will
be made from time to time in the open market and will continue until all of such
shares are repurchased or until the Company decides to terminate the repurchase
program. As of September 30, 2001, the Company had repurchased 139,000 shares.
Subsequent to September 30, 2001 and through November 1, 2001, the Company had
purchased an additional 1.9 million shares at an average purchase price of
$19.65 per share.
At September 30, 2001 and 2000, there were 14.5 million shares of
common stock reserved for future issuance upon the conversion of the Company's
subordinated convertible notes.
9. Professional and liability risks
The Company insures for its professional liability risks under a
"claims-made" basis policy, whereby each claim is covered up to $1 million per
occurrence, subject to a $100,000 deductible (with an annual deductible cap of
$6.1 million). Liabilities in excess of these amounts are covered through a
combination of limits provided by commercial insurance companies and a
self-insurance program.
Accruals for self-insured professional liability risks are determined
using asserted and unasserted claims identified by the Company's incident
reporting system and actuarially determined estimates based on Company and
industry historical loss payment patterns and have been discounted to their
present value using a discount rate of 6.0%. Although the ultimate settlement of
these accruals may vary from these estimates, management believes that the
amounts provided in the Company's consolidated financial statements are
adequate.
10. Non-cash charge
The non-cash charge for retirement benefits and write down of assets
held for sale represents (1) the present value of the future costs of retirement
benefits granted to the Company's chairman pursuant to an employment agreement
which became effective January 2, 2001, and (2) the write down of two hospital
assets held for sale subsequent to their respective replacement.
11. Commitments
The Company has a number of hospital renovation/expansion projects
underway at September 30, 2001. None of these projects are individually
significant nor do they represent a significant commitment in total at September
30, 2001. In addition, the Company plans to replace three of its existing
hospitals over the next five years, subject to approval by the appropriate
regulatory agencies. Included in this is the Company's obligation to construct a
new facility at its recently acquired Carlisle, Pennsylvania location.
50
HEALTH MANAGEMENT ASSOCIATES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
11. Commitments (continued)
Subsequent to September 30, 2001, the Company entered into definitive
agreements to purchase, for approximately $187 million, the following five
hospitals:
. East Pointe Hospital, Lehigh Acres, Florida, 88 licensed beds
. Santa Rosa Medical Center, Milton, Florida, 129 licensed beds
. Fentress County General Hospital, Jamestown, Tennessee, 85 licensed
beds
. The Medical Center of Mesquite, Mesquite, Texas, 176 licensed beds
. Lancaster Community Hospital, Lancaster, California, 117 licensed
beds
In December 2001, the Company announced that it had signed a definitive
agreement to sell the Lancaster Community Hospital in Lancaster, California. The
transaction is expected to close simultaneously with the closing of the
Company's above referenced purchase of the hospital.
12. Quarterly data (unaudited)
Years ended September 30, 2001 and 2000
(in thousands, except per share data)
Quarter
-----------------------------------------------------
1st 2nd 3rd 4th Total
-------- -------- -------- -------- ----------
2001
- ----------
Net patient
service revenue ................ $434,237 $481,144 $473,203 $491,217 $1,879,801
Income before income
taxes .......................... 66,122 80,265 89,156 85,408 320,951
Net income ....................... 40,178 48,740 54,138 51,922 194,978
Net income per share:
Basic ................... $ .17 $ .20 $ .22 $ .21 $ .80
Diluted ................. $ .16 $ .19 $ .21 $ .20 $ .76
Weighted average number of shares:
Basic ................... 243,234 244,117 245,048 245,297 244,425
Diluted ................. 264,297 263,100 264,305 265,568 264,351
2000
- ----------
Net patient
service revenue ................ $370,094 $408,655 $391,099 $407,919 $1,577,767
Income before income
taxes .......................... 56,451 83,103 72,138 64,303 275,995
Net income ....................... 34,292 50,487 43,823 39,065 167,667
Net income per share:
Basic ................... $ .14 $ .21 $ .18 $ .16 $ .69
Diluted ................. $ .14 $ .21 $ .18 $ .16 $ .68
Weighted average number of shares:
Basic ................... 241,916 241,064 242,078 242,816 241,946
Diluted ................. 245,015 244,979 245,917 254,788 247,277
51
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 (i) incorporated herein by
reference to the Company's proxy statement to be issued in connection with the
Annual Meeting of Stockholders of the Company to be held on February 19, 2002
under "Election of Directors", which proxy statement will be filed within 120
days after the end of the Company's fiscal year and (ii) set forth under
"Executive Officers of the Registrant" in Part I of this Report.
Item 11. Executive Compensation
The information required by this Item is incorporated herein by reference
to the Company's proxy statement to be issued in connection with the Annual
Meeting of the Stockholders of the Company to be held on February 19, 2002 under
"Executive Compensation", which proxy statement will be filed within 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 issued in connection with the Annual
Meeting of Stockholders of the Company to be held on February 19, 2002 under
"Security Ownership of Certain Beneficial Owners and Management", which proxy
statement will be filed within 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 issued in connection with the Annual
Meeting of Stockholders of the Company to be held on February 19, 2002 under
"Certain Transactions", which proxy statement will be filed within 120 days
after the end of the Company's fiscal year.
52
PART IV
Item 14. Exhibits, Financial Statement Schedule, 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 54 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): See Index to Exhibits.
Item 14(b):
During the last quarter of the fiscal year ended September 30, 2001,
the Registrant did not file a Current Report on Form 8-K.
53
HEALTH MANAGEMENT ASSOCIATES, INC.
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
(in thousands of dollars)
Balance at Acquisitions Charged Balance at
Beginning of and Charges to to other End of
Period Dispositions Operations(a) Accounts Deductions(b) Period
------------ ------------ ------------- -------- ------------- ---------
Year ended September 30, 1999
Allowance for doubtful
accounts ..................... $ 87,800 $20,818 $153,021 $ - ($146,847) $114,792
======== ======= ======== ======== ========= ========
Year ended September 30, 2000
Allowance for doubtful
accounts ..................... $114,792 $ - $169,712 $ - ($165,902) $118,602
======== ======= ======== ======== ========= ========
Year ended September 30, 2001
Allowance for doubtful
accounts ..................... $118,602 $ 5,482 $154,114 $ - ($161,413) $116,785
======== ======= ======== ======== ========= ========
(a) Charges to operations include amounts related to provisions for
doubtful accounts, before recoveries.
(b) Includes amounts written-off as uncollectible.
54
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
HEALTH MANAGEMENT ASSOCIATES, INC.
By /s/ Joseph V. Vumbacco President and Chief
------------------------------- Executive Officer December 4, 2001
Joseph V. Vumbacco
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant in the capacities and on the dates indicated:
/s/ William J. Schoen Chairman of the Board
- --------------------------------- of Directors December 4, 2001
William J. Schoen
/s/ Joseph V. Vumbacco President, Chief December 4, 2001
- --------------------------------- Executive Officer,
Joseph V. Vumbacco Director and (Princi-
pal Executive Officer)
/s/ Robert E. Farnham Senior Vice President
- --------------------------------- and Chief Financial December 4, 2001
Robert E. Farnham Officer (Principal
Financial Officer
and Principal
Accounting Officer)
/s/ Kent P. Dauten
- ---------------------------------
Kent P. Dauten Director December 4, 2001
- ---------------------------------
Robert A. Knox Director December 4, 2001
/s/ Charles R. Lees
- ---------------------------------
Charles R. Lees Director December 4, 2001
/s/ Kenneth D. Lewis
- ---------------------------------
Kenneth D. Lewis Director December 4, 2001
/s/ William E. Mayberry
- ---------------------------------
William E. Mayberry, M.D. Director December 4, 2001
/s/ Randolph W. Westerfield
- ---------------------------------
Randolph W. Westerfield, Ph.D. Director December 4, 2001
/s/ Donald E. Kiernan
- ---------------------------------
Donald E. Kiernan Director December 4, 2001
55
INDEX TO EXHIBITS
(2) Plan of acquisition, reorganization, arrangement, liquidation or
succession
Not applicable.
(3) (i) Articles of Incorporation
3.1/(i)/ Fifth Restated Certificate of Incorporation. (Exhibit 3.1)
3.2/(r)/ Certificate of Amendment to Fifth Restated Certificate of
Incorporation. (Exhibit 3.2)
(ii) By-laws
3.3/(w)/ By-laws, as amended. (Exhibit 3.3)
(4) Instruments defining rights of security holders, including indentures
The Exhibits referenced under (3) of this Index to Exhibits are
incorporated herein by reference.
4.1/(f)/ Specimen Stock Certificate. (Exhibit 4.11)
4.5/(r)/ Credit Agreement by and among Health Management Associates, Inc.,
as Borrower, Bank of America, N.A., as Administrative Agent and
as Lender, First Union National Bank, as Syndication Agent and as
Lender, and the Chase Manhattan Bank, as Syndication Agent and as
Lender, and The Lenders Party Hereto From Time To Time, dated
November 30, 1999. (Exhibit 4.5)
4.6/(s)/ Credit Agreement dated March 23, 2000 between First Union
National Bank and Health Management Associates, Inc. pertaining
to a $15 million working capital and cash management line of
credit. (Exhibit 4.1)
(9) Voting Trust Agreement
Not applicable.
(10) Material Contracts
The Exhibits referenced under (4) of this Index to Exhibits are incorporated
herein by reference.
10.1/(i)/ First Amended and Restated Lease Agreement, dated as of January
1, 1995 between The Board of Commissioners of the Highlands
County Hospital District and Sebring Hospital Management
Associates, Inc. (Exhibit 10.1)
10.2/(c)/ Lease dated as of July 1, 1986 between Fishermen's Hospital, Inc.
and Marathon H.M.A., Inc. (Exhibit 28.1)
56
10.3/(e)/ First Amendment of the July 1, 1986 Lease Agreement by and
between Fishermen's Hospital, Inc. and Marathon H.M.A., Inc.
dated December 18, 1991. (Exhibit 28.1)
10.4/(a)/ Lease Agreement dated January 12, 1990 between Biloxi Regional
Medical Center, Inc. and Biloxi H.M.A., Inc. (Exhibit 10.54)
10.5/(g)/ Lease Agreement between Heart of Florida Hospital Association,
Inc., Haines City HMA, Inc. and the Company, dated April 30,
1993. (Exhibit 10.49)
10.6/(d)/ Health Management Associates, Inc. Stock Incentive Plan for
Corporate Officers and Management Staff. (Exhibit 10.56)
10.7/(i)/ Amendment No. 1 to the Health Management Associates, Inc. Stock
Incentive Plan for Corporate Officers and Management Staff.
(Exhibit 10.2)
10.8/(g)/ Health Management Associates, Inc. Supplemental Executive
Retirement Plan, dated July 12, 1990. (Exhibit 10.22)
10.9/(h)/ First Amendment to the Health Management Associates, Inc.
Supplemental Executive Retirement Plan, dated January 1, 1994.
(Exhibit 10.51)
10.10/(a)/ Registration Agreement dated September 2, 1988 between HMA
Holding Corp., First Chicago Investment Corporation, Madison
Dearborn Partners IV, Prudential Venture Partners, Prudential
Venture Partners II, William J. Schoen, Kelly E. Curry, Stephen
M. Ray, Robb L. Smith, George A. Taylor and Earl P. Holland.
(Exhibit 10.23)
10.11/(b)/ Health Management Associates, Inc. 1991 Non-Statutory Stock
Option Plan. (Exhibit 10.67)
10.12/(f)/ Amendment No. 1 and Amendment No. 2 to the Health Management
Associates, Inc. 1991 Non-Statutory Stock Option Plan. (Exhibit
10.44)
10.13/(f)/ Health Management Associates, Inc. 1993 Non-Statutory Stock
Option Plan. (Exhibit 10.45)
10.14/(i)/ Health Management Associates, Inc. Stock Option Plan for Outside
Directors. (Exhibit 10.5)
10.15/(g)/ Stock Option Agreement, dated May 18, 1993, between the Company
and Charles R. Lees. (Exhibit 10.48)
57
10.16/(h)/ Stock Option Agreement dated May 20, 1994, between the Company
and Charles R. Lees. (Exhibit 10.52)
10.17/(h)/ Stock Option Agreement dated May 17, 1994, between the Company
and Kenneth D. Lewis. (Exhibit 10.53)
10.18/(j)/ Amendment No. 5 to the Health Management Associates, Inc. 1991
Non-Statutory Stock Option Plan. (Exhibit 10.57)
10.19/(j)/ Amendment No. 3 to the Health Management Associates, Inc. 1993
Non-Statutory Stock Option Plan. (Exhibit 10.58)
10.20/(j)/ Amendment No. 1 to the Health Management Associates, Inc. Stock
Option Plan for Outside Directors. (Exhibit 10.59)
10.21/(l)/ Lease Agreement dated as of December 28, 1995 among Coahoma
County, Mississippi, Clarksdale HMA, Inc. and the Company.
(Exhibit 10.1)
10.22/(n)/ Lease Agreement dated May 21, 1996 among Midwest City Memorial
Hospital Authority, an Oklahoma Public Trust, and Midwest City
HMA, Inc. and Health Management Associates, Inc. (Exhibit 2.1)
10.23/(l)/ Amendment No. 6 to the Health Management Associates, Inc. 1991
Non-Statutory Stock Option Plan. (Exhibit 10.2)
10.24/(l)/ Amendment No. 7 to the Health Management Associates, Inc. 1991
Non-Statutory Stock Option Plan. (Exhibit 10.3)
10.25/(l)/ Amendment No. 4 to the Health Management Associates, Inc. 1993
Non-Statutory Stock Option Plan. (Exhibit 10.4)
10.26/(l)/ Amendment No. 5 to the Health Management Associates, Inc. 1993
Non-Statutory Stock Option Plan. (Exhibit 10.5)
10.27/(k)/ Health Management Associates, Inc. 1996 Executive Incentive
Compensation Plan. (Exhibit 99.15)
10.28/(m)/ Amendment No. 1 to the Health Management Associates, Inc. 1996
Executive Incentive Compensation Plan. (Exhibit 10.1)
10.29/(o)/ Second Amendment to the Health Management Associates, Inc.
Supplemental Executive Retirement Plan, dated September 17,
1996. (Exhibit 10.64)
10.30/(p)/ Hospital Management Agreement by and between Anniston HMA, Inc.
and the Trust created under the last will and testament of Susie
P. Stringfellow, entered into on January 24, 1997. (Exhibit
10.1)
10.31/(q)/ Lease Agreement made as of June 1, 1998 between Hernando County,
Florida and Hernando HMA, Inc. (Exhibit 10.2)
58
10.32/(t)/ Amendment No. 5 to the Health Management Associates, Inc. 1996
Executive Incentive Compensation Plan. (Exhibit 10.1)
10.33/(t)/ Amendment No. 6 to the Health Management Associates, Inc. 1996
Executive Incentive Compensation Plan. (Exhibit 10.2)
10.34/(u)/ Amendment No. 10 to the Health Management Associates, Inc. 1991
Non-Statutory Stock Option Plan.(Exhibit 10.37)
10.35/(u)/ Amendment No. 8 to the Health Management Associates, Inc. 1993
Non-Statutory Stock Option Plan.(Exhibit 10.38)
10.36/(u)/ Amendment to Stock Option Agreements between Health Management
Associates, Inc. and William J. Schoen dated as of December 5,
2000.(Exhibit 10.39)
10.37/(u)/ Third Amendment to the Health Management Associates, Inc.
Supplemental Retirement Plan. (Exhibit 10.40)
10.38/(v)/ Employment Agreement for William J. Schoen made as of
January 2, 2001. (Exhibit 99.2)
(11) Statement re computation of per share earnings
Not applicable.
(12) Statements re computation of ratios
Not applicable.
(13) Annual report to security holders, Form 10-Q or quarterly report to
security holders
Not applicable.
(16) Letter re change in certifying accountant
Not applicable.
(18) Letter re change in accounting principles
Not applicable.
(21) Subsidiaries of the registrant
21.1 Subsidiaries of the registrant are listed on Exhibit 21.1 included
herein at page 63 of this Report.
(22) Published report regarding matters submitted to vote of security
holders
None.
59
(23) Consents of experts and counsel
23.1 Consent of Ernst & Young LLP is filed as part of this Report as
Exhibit 23.1 at page 64 hereof.
(24) Power of Attorney
Not applicable.
(99) Additional Exhibits
None.
(a) Exhibit previously filed as part of and is incorporated herein by
reference to the Company's Registration Statement on Form S-1
(Registration No. 33-36406). The exhibit number contained in
parenthesis refers to the exhibit number in such Registration
Statement.
(b) Exhibit previously filed as part of and is incorporated herein by
reference to the Company's Registration Statement on Form S-1
(Registration No. 33-43193). The exhibit number contained in
parenthesis refers to the exhibit number in such Registration
Statement.
(c) Exhibit previously filed as part of and is incorporated herein by
reference to the Company's Current Report on Form 8-K dated July 1,
1986. The exhibit number contained in parenthesis refers to the
exhibit number in such Form 8-K.
(d) Exhibit previously filed as part of and is incorporated herein by
reference to the Company's Quarterly Report on Form 10-Q for the
quarter ended June 30, 1991. The exhibit number contained in
parenthesis refers to the exhibit number in such Form 10-Q.
(e) Exhibit previously filed as part of and is incorporated herein by
reference to the Company's Quarterly Report on Form 10-Q for the
quarter ended December 31, 1991. The exhibit number contained in
parenthesis refers to the exhibit number in such Form 10-Q.
(f) Exhibit previously filed as part of and is incorporated herein by
reference to the Company's Annual Report on Form 10-K for the fiscal
year ended September 30, 1992. The exhibit number contained in
parenthesis refers to the exhibit number in such Form 10-K.
(g) Exhibit previously filed as part of and is incorporated herein by
reference to the Company's Annual Report on Form 10-K for the fiscal
year ended September 30, 1993. The exhibit number contained in
parenthesis refers to the exhibit number in such Form 10-K.
(h) Exhibit previously filed as part of and is incorporated herein by
reference to the Company's Annual Report on Form 10-K for the fiscal
year ended September 30, 1994. The exhibit number contained in
parenthesis refers to the exhibit number in such Form 10-K.
(i) Exhibit previously filed as part of and is incorporated herein by
reference to the Company's Quarterly Report on Form 10-Q for the
quarter ended March 31, 1995. The exhibit number contained in
60
parenthesis refers to the exhibit number in such Form 10-Q.
(j) Exhibit previously filed as part of and is incorporated herein by
reference to the Company's Annual Report on Form 10-K for the fiscal
year ended September 30, 1995. The exhibit number contained in
parenthesis refers to the exhibit number in such Form 10-K.
(k) Exhibit previously filed as part of and is incorporated herein by
reference to the Company's Registration Statement on Form S-8
Registration No. 33-80433). The exhibit number contained in
parenthesis refers to the exhibit number in such Registration
Statement.
(l) Exhibit previously filed as part of and is incorporated herein by
reference to the Company's Quarterly Report on Form 10-Q for the
quarter ended December 31, 1995. The exhibit number contained in
parenthesis refers to the exhibit number in such Form 10-Q.
(m) Exhibit previously filed as part of and is incorporated herein by
reference to the Company's Quarterly Report on Form 10-Q for the
quarter ended March 31, 1996. The exhibit number contained in
parenthesis refers to the exhibit number in such Form 10-Q.
(n) Exhibit previously filed as part of and is incorporated herein by
reference to the Company's Current Report on Form 8-K dated June 10,
1996. The exhibit number contained in parenthesis refers to the
exhibit number in such Form 8-K.
(o) Exhibit previously filed as part of and is incorporated herein by
reference to the Company's Annual Report on Form 10-K for the fiscal
year ended September 30, 1996. The exhibit number contained in
parenthesis refers to the exhibit number in such Form 10-K.
(p) Exhibit previously filed as part of and is incorporated herein by
reference to the Company's Quarterly Report on Form 10-Q for the
quarter ended December 31, 1996. The exhibit number contained in
parenthesis refers to the exhibit number in such Form 10-Q.
(q) Exhibit previously filed as part of and is incorporated herein by
reference to the Company's Quarterly Report on Form 10-Q for the
quarter ended June 30, 1998. The exhibit number contained in
parenthesis refers to the exhibit number in such Form 10-Q.
(r) Exhibit previously filed as part of and is incorporated herein by
reference to the Company's Annual Report on Form 10-K for the fiscal
year ended September 30, 1999. The exhibit number contained in
parenthesis refers to the exhibit number in such Form 10-K.
61
(s) Exhibit previously filed as part of and is incorporated herein by
reference to the Company's Quarterly Report on Form 10-Q for the
quarter year ended March 31, 2000. The exhibit number contained in
parenthesis refers to the exhibit number in such Form 10-Q.
(t) Exhibit previously filed as part of and is incorporated herein by
reference to the Company's Quarterly Report on Form 10-Q for the
quarter year ended June 30, 2000. The exhibit number contained in
parenthesis refers to the exhibit number in such Form 10-Q.
(u) Exhibit previously filed as part of and is incorporated herein by
reference to the Company's Annual Report on Form 10-K for the fiscal
year ended September 30, 2000. The exhibit number contained in
parenthesis refers to the exhibit number in such Form 10-K.
(v) Exhibit previously filed as part of and is incorporated herein by
reference to the Company's Registration Statement on Form S-8
(Registration No. 333-53602) filed on January 12, 2001. The exhibit
number contained in parenthesis refers to the exhibit number in such
Registration Statement.
(w) Exhibit previously filed as part of and is incorporated herein by
reference to the Company's Quarterly Report on Form 10-Q for the
quarter ended March 31, 2001. The exhibit number contained in
parenthesis refers to the exhibit number in such Form 10-Q.
62