<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MAY 17, 2000
REGISTRATION NO. 333-31790
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
------------------------
AMENDMENT NO. 3
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
---------------------
COMMUNITY HEALTH SYSTEMS, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C> <C>
DELAWARE 8062 13-3893191
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer Identification
incorporation or organization) Classification Code Number) Number)
</TABLE>
--------------------------
155 FRANKLIN ROAD, SUITE 400
BRENTWOOD, TENNESSEE 37027
(615) 373-9600
(Address, including zip code, and telephone number, including
area code, of registrant's principal executive offices)
--------------------------
RACHEL A. SEIFERT
155 FRANKLIN ROAD, SUITE 400
BRENTWOOD, TENNESSEE 37027
(615) 373-9600
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
--------------------------
COPIES TO:
<TABLE>
<S> <C>
JEFFREY BAGNER MICHAEL W. BLAIR
FRIED, FRANK, HARRIS, SHRIVER & JACOBSON DEBEVOISE & PLIMPTON
ONE NEW YORK PLAZA 875 THIRD AVENUE
NEW YORK, NEW YORK 10004 NEW YORK, NEW YORK 10022
(212) 859-8000 (212) 909-6000
</TABLE>
--------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO PUBLIC: As soon as
practicable after the effective date of this registration statement.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act,
check the following box. / /
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. / /
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. / /
------------------------------
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
TITLE OF EACH CLASS OF SECURITIES PROPOSED MAXIMUM AGGREGATE
TO BE REGISTERED OFFERING PRICE (1) AMOUNT OF REGISTRATION FEE (2)
<S> <C> <C>
COMMON STOCK, $.01 PAR VALUE $366,562,500 $96,773(3)
</TABLE>
(1) A portion of the proposed maximum aggregate offering price represents shares
that are to be offered outside the United States but that may be resold from
time to time in the United States. Such shares are not being registered for
the purpose of sales outside the United States.
(2) Estimated pursuant to Rule 457(o) solely for the purpose of calculating the
registration fee.
(3) Includes a filing fee of $91,080 previously paid.
------------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
EXPLANATORY NOTE
This registration statement contains two separate prospectuses. The first
prospectus relates to a public offering in the United States and Canada of an
aggregate of 15,937,500 shares of common stock. The second prospectus relates to
a concurrent offering outside the United States and Canada of an aggregate of
2,812,500 shares of common stock. The prospectuses for each of the U.S. offering
and the international offering will be identical with the exception of an
alternate front cover page, an alternate back cover page, and an alternate
"Underwriting" section for the international offering. These alternate pages
appear in this registration statement immediately following the complete
prospectus for the U.S. offering.
<PAGE>
The information in this prospectus is not complete and may be changed. We may
not sell these securities until the registration statement filed with the
Securities and Exchange Commission is effective. This prospectus is not an
offer to sell these securities and it is not soliciting an offer to buy these
securities in any state where the offer or sale is not permitted.
<PAGE>
SUBJECT TO COMPLETION
PRELIMINARY PROSPECTUS DATED MAY 17, 2000
PROSPECTUS
18,750,000 SHARES
[LOGO]
COMMON STOCK
--------------
This is Community Health Systems, Inc.'s initial public offering. We are
selling all of the shares. The U.S. underwriters are offering 15,937,500 shares
in the U.S. and Canada and the international managers are offering 2,812,500
shares outside the U.S. and Canada.
We expect the public offering price to be between $15.00 and $17.00 per
share. Currently, no public market exists for the shares. After pricing of the
offering, the shares will trade on the New York Stock Exchange under the symbol
"CYH."
INVESTING IN THE COMMON STOCK INVOLVES RISKS WHICH ARE DESCRIBED IN THE
"RISK FACTORS" SECTION BEGINNING ON PAGE 7 OF THIS PROSPECTUS.
-----------------
<TABLE>
<CAPTION>
PER SHARE TOTAL
--------- -----
<S> <C> <C>
Public offering price...................................... $ $
Underwriting discount...................................... $ $
Proceeds before expenses to Community Health Systems....... $ $
</TABLE>
The U.S. underwriters may also purchase up to an additional 2,390,625 shares
from us at the public offering price, less the underwriting discount, within
30 days from the date of this prospectus to cover over-allotments. The
international managers may similarly purchase up to an additional 421,875 shares
from us.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if this
prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.
The shares will be ready for delivery on or about , 2000.
-------------------
MERRILL LYNCH & CO.
BANC OF AMERICA SECURITIES LLC
CHASE H&Q
CREDIT SUISSE FIRST BOSTON
GOLDMAN, SACHS & CO.
MORGAN STANLEY DEAN WITTER
-------------------
The date of this prospectus is , 2000.
<PAGE>
[INSIDE FRONT COVER]
[DESCRIPTION OF ARTWORK: MAP OF THE UNITED STATES INDICATING LOCATIONS OF OUR
FACILITIES]
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
--------
<S> <C>
Prospectus Summary.......................................... 1
Risk Factors................................................ 7
Special Note Regarding Forward-Looking Statements........... 12
Use of Proceeds............................................. 13
Dividend Policy............................................. 13
Capitalization.............................................. 14
Dilution.................................................... 15
Selected Consolidated Financial and Other Data.............. 16
Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 20
Business of Community Health Systems........................ 32
Management.................................................. 55
Principal Stockholders...................................... 65
Description of Indebtedness................................. 67
Description of Capital Stock................................ 69
Shares Eligible for Future Sale............................. 72
United States Federal Tax Considerations for Non-United
States Holders............................................ 73
Underwriting................................................ 77
Legal Matters............................................... 81
Experts..................................................... 81
Where You Can Find More Information......................... 81
Index to Consolidated Financial Statements.................. F-1
</TABLE>
i
<PAGE>
PROSPECTUS SUMMARY
YOU SHOULD READ THE ENTIRE PROSPECTUS CAREFULLY, ESPECIALLY THE RISKS OF
INVESTING IN OUR COMMON STOCK DISCUSSED UNDER RISK FACTORS.
COMMUNITY HEALTH SYSTEMS
OVERVIEW OF OUR COMPANY
We are the largest non-urban provider of general hospital healthcare
services in the United States in terms of number of facilities and the second
largest in terms of revenues. As of April 30, 2000, we owned, leased or operated
49 hospitals, geographically diversified across 20 states, with an aggregate of
4,348 licensed beds. In over 80% of our markets, we are the sole provider of
general hospital healthcare services. In most of our other markets, we are one
of two providers of these services. For the fiscal year ended December 31, 1999,
we generated $1.08 billion in revenues.
Affiliates of Forstmann Little & Co. formed us in 1996 to acquire our
predecessor company. Wayne T. Smith, who has over 30 years of experience in the
healthcare industry, joined our company in January 1997. Under this new
ownership and leadership, we have:
- strengthened the senior management team in all key business areas;
- standardized and centralized our operations across key business areas;
- implemented a disciplined acquisition program;
- expanded and improved the services and facilities at our hospitals;
- recruited additional physicians to our hospitals;
- instituted a company-wide regulatory compliance program; and
- divested certain non-core assets.
As a result of these initiatives, we achieved revenue growth of 26.4% in 1999
and 15.1% in 1998.
We target growing, non-urban healthcare markets because of their favorable
demographic and economic trends and competitive conditions. Because non-urban
service areas have smaller populations, there are generally fewer hospitals and
other healthcare service providers in these communities. We believe that smaller
populations result in less direct competition for hospital-based services. Also,
we believe that non-urban communities generally view the local hospital as an
integral part of the community. There is generally a lower level of managed care
presence in these markets.
OUR BUSINESS STRATEGY
The key elements of our business strategy are to:
- INCREASE REVENUE AT OUR FACILITIES. We seek to increase our share of the
healthcare dollars spent by local residents and limit inpatient and
outpatient migration to larger urban facilities. Our initiatives to
increase revenue include:
u recruiting additional primary care physicians and specialists;
u expanding the breadth of services offered at our hospitals through
targeted capital expenditures; and
u providing the capital to invest in our facilities, particularly in our
emergency rooms.
- GROW THROUGH SELECTIVE ACQUISITIONS. Each year we intend to acquire, on a
selective basis, two to four hospitals. We pursue acquisition candidates
that:
u have a general service area population between 20,000 and 80,000 with a
stable or growing population base;
u are the sole or primary provider of general hospital services in the
community;
1
<PAGE>
u are located more than 25 miles from a competing hospital;
u are not located in an area that is dependent upon a single employer or
industry; and
u have financial performance that we believe will benefit from our
management's operating skills.
We estimate that there are currently approximately 400 hospitals that
meet our acquisition criteria. These hospitals are primarily
not-for-profit or municipally owned.
- REDUCE COSTS. To improve efficiencies and increase margins, we implement
cost containment programs which include:
u standardizing and centralizing our operations;
u optimizing resource allocation by utilizing our company-devised case and
resource management program;
u capitalizing on purchasing efficiencies;
u installing a standardized management information system; and
u managing staffing levels.
- IMPROVE QUALITY. We implement new programs to improve the quality of care
provided. These include training programs, sharing of best practices,
assistance in complying with regulatory requirements, standardized
accreditation documentation, and patient, physician, and staff
satisfaction surveys.
RECENT DEVELOPMENTS
Since December 31, 1999, we acquired three additional hospitals for an
aggregate consideration of approximately $37 million, increasing the number of
hospitals we own, lease, or operate to 49 as of April 30, 2000. In addition, on
May 15, 2000, we signed an agreement to acquire an additional hospital for
$66 million, plus working capital. The sellers of each of these hospitals are
tax-exempt entities. Each of these hospitals is the sole provider of general
hospital services in its community.
INDUSTRY OVERVIEW
Hospital services is the largest single category of healthcare expenditures
at 33.7% of total healthcare spending in 1999, or $401.3 billion. The U.S.
Health Care Financing Administration projects the hospital services category to
grow by 5.7% per year through 2008.
According to the American Hospital Association, there are approximately
5,015 hospitals in the U.S. that are owned by not-for-profit entities,
for-profit investors, or state or local governments. Of these hospitals, 44%, or
approximately 2,200, are located in non-urban areas.
------------------------
At the closing of the offering, we will have only one class of common stock.
To achieve this, we will effect a recapitalization immediately before the
closing of the offering. The recapitalization includes the exchange of Class B
common stock for Class A common stock, the exchange of options to acquire
Class C common stock for options to acquire Class A common stock, the
redesignation of Class A common stock as common stock, and a 118.7148-for-1
split of our common stock. Unless otherwise indicated, all information in this
prospectus gives effect to the recapitalization. See "Description of Capital
Stock--Overview."
We were incorporated in Delaware in 1996. Our principal subsidiary was
incorporated in Delaware in 1985. Our principal executive offices are located at
155 Franklin Road, Suite 400, Brentwood, Tennessee 37027. Our telephone number
at that address is (615) 373-9600. Our World Wide Web site address is
www.chs.net. The information in the website is not intended to be incorporated
into this prospectus by reference and should not be considered a part of this
prospectus.
2
<PAGE>
THE OFFERING
<TABLE>
<S> <C>
Common stock offered by Community Health
Systems:
U.S. offering.............................. 15,937,500 shares
International offering..................... 2,812,500 shares
---------------
Total.................................... 18,750,000 shares
Common stock to be outstanding after the
offering................................... 74,342,859 shares (a)
Use of proceeds.............................. Our net proceeds from the offering are
estimated to be approximately
$279.0 million. We will use these proceeds to
repay senior debt, including approximately
$60.3 million of senior debt held by
affiliates of the underwriters.
Risk factors................................. See "Risk Factors" and other information
included in this prospectus for a discussion
of factors you should carefully consider
before deciding to invest in shares of our
common stock.
NYSE symbol.................................. CYH
</TABLE>
- --------------------------
(a) Excludes 5,238,406 shares of common stock we have reserved for issuance
under our stock option plans. Of these reserved shares, 738,406 shares are
issuable upon exercise of outstanding stock options at an average exercise
price of $7.23.
If our value changes significantly prior to the pricing of the offering, we
will change the split ratio and exchange rates indicated in this preliminary
prospectus to reflect the fair values of the shares. If that occurs, the number
of our outstanding shares and the number of shares held by each of our
stockholders reflected in this preliminary prospectus will change. We will
reflect the actual split ratio, exchange rates, and share numbers in the final
prospectus.
Unless we specifically state otherwise, the information in this prospectus
does not take into account the sale of up to 2,812,500 shares of common stock
which the underwriters have the option to purchase from us to cover
over-allotments. All information in this prospectus assumes the issuance and
sale of common stock in the offering at an assumed initial public offering price
of $16.00 per share, the mid-point of the range of the initial public offering
prices set forth on the cover page of this prospectus.
3
<PAGE>
SUMMARY CONSOLIDATED FINANCIAL AND OTHER DATA
You should read the summary consolidated financial and other data below in
conjunction with our consolidated financial statements and the accompanying
notes. We derived the historical financial data for the three years ended
December 31, 1999 from our audited consolidated financial statements. We derived
the historical financial data for the three months ended March 31, 1999 and
March 31, 2000, and as of March 31, 2000, from our unaudited interim condensed
consolidated financial statements. You should also read Selected Consolidated
Financial and Other Data and the accompanying Management's Discussion and
Analysis of Financial Condition and Results of Operations. All of these
materials are contained later in this prospectus. The pro forma consolidated
statement of operations data reflects the offering and the use of the estimated
net proceeds from the offering to repay a portion of outstanding debt as if
these events had occurred on January 1, 1999 for the year ended December 31,
1999 and on January 1, 2000 for the three months ended March 31, 2000. The pro
forma consolidated balance sheet data give effect to these events as if they had
occurred on March 31, 2000.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, THREE MONTHS ENDED MARCH 31,
--------------------------------------------------------- ---------------------------------------
PRO FORMA PRO FORMA
1997 1998 1999 1999(a) 1999 2000 2000(a)
----------- ------------ ----------- -------------- ----------- ----------- -----------
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF
OPERATIONS DATA
Net operating revenues.... $ 742,350 $ 854,580 $ 1,079,953 $ 1,079,953 $ 263,004 $ 308,651 $ 308,651
Operating expenses (b).... 620,112 688,190 875,768 875,768 210,734 248,570 248,570
Depreciation and
amortization............ 43,753 49,861 56,943 56,943 13,033 16,380 16,380
Amortization of
goodwill................ 25,404 26,639 24,708 24,708 5,677 6,168 6,168
Impairment of long-lived
assets.................. -- 164,833 -- -- -- -- --
Compliance settlement and
Year 2000 remediation
costs (c)............... -- 20,209 17,279 17,279 300 -- --
----------- ------------ ----------- ----------- ----------- ----------- -----------
Income (loss) from
operations.............. 53,081 (95,152) 105,255 105,255 33,260 37,533 37,533
Interest expense, net..... 89,753 101,191 116,491 94,963 26,762 32,683 26,943
----------- ------------ ----------- ----------- ----------- ----------- -----------
Income (loss) before
cumulative effect of a
change in accounting
principle and income
taxes................... (36,672) (196,343) (11,236) 10,292 6,498 4,850 10,590
Provision for (benefit
from) income taxes...... (4,501) (13,405) 5,553 13,949 4,580 3,929 6,168
----------- ------------ ----------- ----------- ----------- ----------- -----------
Income (loss) before
cumulative effect of a
change in accounting
principle............... (32,171) (182,938) (16,789) (3,657) 1,918 921 4,422
Cumulative effect of a
change in accounting
principle, net of
taxes................... -- (352) -- -- -- -- --
----------- ------------ ----------- ----------- ----------- ----------- -----------
Net income (loss)......... $ (32,171) $ (183,290) $ (16,789) $ (3,657) $ 1,918 $ 921 $ 4,422
=========== ============ =========== =========== =========== =========== ===========
Basic income (loss) per
common share:
Income (loss) before
cumulative effect of a
change in accounting
principle............. $ (0.60) $ (3.39) $ (0.31) $ (0.05) $ 0.04 $ 0.02 $ 0.06
Cumulative effect of a
change in accounting
principle............. -- (0.01) -- -- -- -- --
----------- ------------ ----------- ----------- ----------- ----------- -----------
Net income (loss)....... $ (0.60) $ (3.40) $ (0.31) $ (0.05) $ 0.04 $ 0.02 $ 0.06
=========== ============ =========== =========== =========== =========== ===========
Diluted income (loss) per
common share:
Income (loss) before
cumulative effect of a
change in accounting
principle............. $ (0.60) $ (3.39) $ (0.31) $ (0.05) $ 0.03 $ 0.02 $ 0.06
Cumulative effect of a
change in accounting
principle............. -- (0.01) -- -- -- -- --
----------- ------------ ----------- ----------- ----------- ----------- -----------
Net income (loss)....... $ (0.60) $ (3.40) $ (0.31) $ (0.05) $ 0.03 $ 0.02 $ 0.06
=========== ============ =========== =========== =========== =========== ===========
Weighted-average number of
shares outstanding (d):
Basic................... 53,568,891 53,892,388 54,258,465 73,008,481 54,128,085 54,369,202 73,119,202
=========== ============ =========== =========== =========== =========== ===========
Diluted................. 53,568,891 53,892,388 54,258,465 73,008,481 55,607,631 55,857,980 74,607,980
=========== ============ =========== =========== =========== =========== ===========
</TABLE>
(FOOTNOTES BEGIN ON PAGE 6)
4
<PAGE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
-------------------------
PRO FORMA
2000 2000(a)
----------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
CONSOLIDATED BALANCE SHEET DATA (AS OF END OF PERIOD)
Cash and cash equivalents............................... $ 10,885 $ 10,885
Total assets............................................ 1,935,730 1,935,730
Long-term obligations................................... 1,488,018 1,209,018
Stockholders' equity.................................... 230,694 509,694
</TABLE>
SELECTED OPERATING DATA
The following table sets forth operating statistics for our hospitals for
each of the periods presented. Statistics for 1997 include a full year of
operations for 36 hospitals, including one hospital acquired on January 1, 1997,
and a partial period for one hospital acquired during the year. Statistics for
1998 include a full year of operations for 37 hospitals and partial periods for
four hospitals acquired during the year. Statistics for 1999 include a full year
of operations for 41 hospitals and partial periods for four hospitals acquired,
and one hospital constructed and opened, during the year. Statistics for the
three months ended March 31, 1999 include operations for 41 hospitals and
partial periods for two hospitals acquired. Statistics for the three months
ended March 31, 2000 include operations for 46 hospitals and partial periods for
one hospital acquired.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
------------------------------------------ ---------------------
1997 1998 1999 1999 2000
---------- ---------- ---------- --------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Number of hospitals (e)......................... 37 41 46 43 47
Licensed beds (e)(f)............................ 3,288 3,644 4,115 3,903 4,223
Beds in service (e)(g).......................... 2,543 2,776 3,123 2,952 3,281
Admissions (h).................................. 88,103 100,114 120,414 31,516 34,704
Adjusted admissions (i)......................... 153,618 177,075 217,006 53,637 62,309
Patient days (j)................................ 399,012 416,845 478,658 131,698 138,473
Average length of stay (days) (k)............... 4.5 4.2 4.0 4.2 4.0
Occupancy rate (beds in service) (l)............ 43.1% 43.3% 44.1% 51.4% 47.4%
Net inpatient revenue as a % of total net
revenue....................................... 57.3% 55.7% 52.7% 55.5% 52.4%
Net outpatient revenue as a % of total net
revenue....................................... 41.5% 42.6% 45.5% 43.0% 45.8%
Adjusted EBITDA (m)............................. $122,238 $ 166,390 $ 204,185 $ 52,270 $ 60,081
Adjusted EBITDA as a % of net revenue........... 16.5% 19.5% 18.9% 19.9% 19.5%
Net cash flows provided by (used in) operating
activities.................................... $ 21,544 $ 15,719 $ (11,746) $ (18,860) $ (4,945)
Net cash flows used in investing activities..... $(76,651) $(236,553) $(155,541) $ (66,143) $ (38,423)
Net cash flows provided by financing
activities.................................... $ 36,182 $ 219,890 $ 164,850 $ 89,595 $ 49,971
</TABLE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, PERCENTAGE MARCH 31, PERCENTAGE
-------------------------- INCREASE ------------------------ INCREASE
1998 1999 (DECREASE) 1999 2000 (DECREASE)
---------- ---------- ---------- --------- --------- ----------
(DOLLARS IN THOUSANDS) (DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
SAME HOSPITALS DATA (n)
Admissions (h).................... 100,114 105,053 4.9% 30,798 31,307 1.7%
Adjusted admissions (i)........... 177,075 190,661 7.7% 52,488 55,878 6.5%
Patient days (j).................. 416,845 419,942 0.7% 128,520 124,251 (3.3%)
Average length of stay (days)
(k)............................. 4.2 4.0 (4.8%) 4.2 4.0 (4.8%)
Occupancy rate (beds in
service) (l).................... 43.3% 43.5% 52.2% 48.6%
Net revenue....................... $850,980 $915,811 7.6% $ 255,006 $ 275,303 8.0%
Adjusted EBITDA (m)............... $160,611 $180,794 12.6% $ 49,975 $ 57,013 14.1%
Adjusted EBITDA, as a % of net
revenue......................... 18.9% 19.7% 19.6% 20.7%
</TABLE>
(FOOTNOTES BEGIN ON FOLLOWING PAGE)
5
<PAGE>
(FOOTNOTES FOR TABLES FROM PAGES 4 AND 5)
(a) Reflects the offering, the application of the estimated net proceeds from
the offering to repay debt of $279.0 million based upon outstanding debt
balances as of December 31, 1999 and March 31, 2000, and the resultant
reduction of interest expense of $21.5 million for the year ended
December 31, 1999 as if these events had occurred on January 1, 1999 and
$5.7 million for the three months ended March 31, 2000 as if these events
had occurred on January 1, 2000. Also reflects an increase in provision for
income taxes of $8.4 million for the year ended December 31, 1999 and
$2.2 million for the three months ended March 31, 2000 resulting from the
decrease in interest expense. See "Use of Proceeds" and note (e) to the
"Selected Consolidated Financial and Other Data."
(b) Operating expenses include salaries and benefits, provision for bad debts,
supplies, rent, and other operating expenses, and exclude the items that are
excluded for purposes of determining adjusted EBITDA as discussed in
footnote (m) below.
(c) Includes Year 2000 remediation costs of $0.2 million in 1998 and
$3.3 million in 1999.
(d) See notes 10 and 14 to the consolidated financial statements.
(e) At end of period.
(f) Licensed beds are the number of beds for which the appropriate state agency
licenses a facility regardless of whether the beds are actually available
for patient use.
(g) Beds in service are the number of beds that are readily available for
patient use.
(h) Admissions represent the number of patients admitted for inpatient
treatment.
(i) Adjusted admissions is a general measure of combined inpatient and
outpatient volume. We computed adjusted admissions by multiplying admissions
by gross patient revenues and then dividing that number by gross inpatient
revenues.
(j) Patient days represent the total number of days of care provided to
inpatients.
(k) Average length of stay (days) represents the average number of days
inpatients stay in our hospitals.
(l) We calculated percentages by dividing the average daily number of inpatients
by the weighted average of beds in service.
(m) We define adjusted EBITDA as EBITDA adjusted to exclude cumulative effect of
a change in accounting principle, impairment of long-lived assets,
compliance settlement and Year 2000 remediation costs, and loss from
hospital sales. EBITDA consists of income (loss) before interest, income
taxes, depreciation and amortization, and amortization of goodwill. EBITDA
and adjusted EBITDA should not be considered as measures of financial
performance under generally accepted accounting principles. Items excluded
from EBITDA and adjusted EBITDA are significant components in understanding
and assessing financial performance. EBITDA and adjusted EBITDA are key
measures used by management to evaluate our operations and provide useful
information to investors. EBITDA and adjusted EBITDA should not be
considered in isolation or as alternatives to net income, cash flows
generated by operations, investing or financing activities, or other
financial statement data presented in the consolidated financial statements
as indicators of financial performance or liquidity. Because EBITDA and
adjusted EBITDA are not measurements determined in accordance with generally
accepted accounting principles and are thus susceptible to varying
calculations, EBITDA and adjusted EBITDA as presented may not be comparable
to other similarly titled measures of other companies.
(n) Includes acquired hospitals to the extent we operated them during comparable
periods in both years.
6
<PAGE>
RISK FACTORS
IF FEDERAL OR STATE HEALTHCARE PROGRAMS OR MANAGED CARE COMPANIES REDUCE THE
PAYMENTS WE RECEIVE AS REIMBURSEMENT FOR SERVICES WE PROVIDE, OUR REVENUES MAY
DECLINE.
A large portion of our revenues come from the Medicare and Medicaid
programs. In recent years, federal and state governments made significant
changes in the Medicare and Medicaid programs. These changes have decreased the
amount of money we receive for our services relating to these programs.
In recent years, Congress and some state legislatures have introduced an
increasing number of other proposals to make major changes in the healthcare
system. Future federal and state legislation may further reduce the payments we
receive for our services.
In addition, insurance and managed care companies and other third parties
from whom we receive payment for our services increasingly are attempting to
control healthcare costs by requiring that hospitals discount their services in
exchange for exclusive or preferred participation in their benefit plans. We
believe that this trend may continue and may reduce the payments we receive for
our services.
IF WE FAIL TO COMPLY WITH EXTENSIVE LAWS AND GOVERNMENT REGULATIONS, WE COULD
SUFFER PENALTIES OR BE REQUIRED TO MAKE SIGNIFICANT CHANGES TO OUR OPERATIONS.
The healthcare industry is required to comply with many laws and regulations
at the federal, state, and local government levels. These laws and regulations
require that hospitals meet various requirements, including those relating to
the adequacy of medical care, equipment, personnel, operating policies and
procedures, maintenance of adequate records, compliance with building codes, and
environmental protection. If we fail to comply with applicable laws and
regulations, we could suffer civil or criminal penalties, including the loss of
our licenses to operate and our ability to participate in the Medicare,
Medicaid, and other federal and state healthcare programs.
In addition, there are heightened coordinated civil and criminal enforcement
efforts by both federal and state government agencies relating to the healthcare
industry, including the hospital segment. The ongoing investigations relate to
various referral, cost reporting, and billing practices, laboratory and home
healthcare services, and physician ownership and joint ventures involving
hospitals.
In the future, different interpretations or enforcement of these laws and
regulations could subject our current practices to allegations of impropriety or
illegality or could require us to make changes in our facilities, equipment,
personnel, services, capital expenditure programs, and operating expenses.
IF WE FAIL TO COMPLY WITH THE MATERIAL TERMS OF OUR CORPORATE COMPLIANCE
AGREEMENT, WE COULD BE EXCLUDED FROM GOVERNMENT HEALTHCARE PROGRAMS.
In December 1997, we approached the Office of Inspector General of the U.S.
Department of Health and Human Services and made a voluntary disclosure
regarding reimbursements we received from the U.S. government programs from 1993
to 1997. The disclosure related to possible inaccurate practices and policies
for the assignment of billing codes for inpatient services. We have executed a
settlement agreement with the U.S. Department of Justice, the Inspector General,
and all applicable state medical programs. Under the terms of this agreement, we
will pay approximately $31 million to the appropriate governmental agencies in
exchange for a release of civil claims relating to these reimbursements.
As part of this settlement, we entered into a corporate compliance agreement
with the Inspector General. Complying with our corporate compliance agreement
will require additional efforts and costs.
7
<PAGE>
Our failure to comply with the terms of the compliance agreement could subject
us to civil and criminal penalties, including significant fines. In addition,
failure to comply with the material terms of the compliance agreement could lead
to suspension or disbarment from further participation in the federal and state
healthcare programs, including Medicare and Medicaid. Any suspension or
disbarment would restrict our ability to treat patients and receive
reimbursement from these programs. See "Business of Community Health
Systems--Compliance Program."
IF COMPETITION DECREASES OUR ABILITY TO ACQUIRE ADDITIONAL HOSPITALS ON
FAVORABLE TERMS, WE MAY BE UNABLE TO EXECUTE OUR ACQUISITION STRATEGY.
An important part of our business strategy is to acquire two to four
hospitals each year in non-urban markets. However, not-for-profit hospital
systems and other for-profit hospital companies generally attempt to acquire the
same type of hospitals as we do. Some of these other purchasers have greater
financial resources than we do. Our principal competitors for acquisitions
include Health Management Associates, Inc. and Province Healthcare Company. In
addition, some hospitals are sold through an auction process, which may result
in higher purchase prices than we believe are reasonable. Therefore, we may not
be able to acquire additional hospitals on terms favorable to us.
IF WE FAIL TO IMPROVE THE OPERATIONS OF ACQUIRED HOSPITALS, WE MAY BE UNABLE TO
ACHIEVE OUR GROWTH STRATEGY.
Some of the hospitals we have acquired had operating losses prior to the
time we acquired them. We may be unable to operate profitably any hospital or
other facility we acquire, effectively integrate the operations of any
acquisitions, or otherwise achieve the intended benefit of our growth strategy.
IF WE ACQUIRE HOSPITALS WITH UNKNOWN OR CONTINGENT LIABILITIES, WE COULD BECOME
LIABLE FOR MATERIAL OBLIGATIONS.
Hospitals that we acquire may have unknown or contingent liabilities,
including liabilities for failure to comply with healthcare laws and
regulations. Although we seek indemnification from prospective sellers covering
these matters, we may nevertheless have material liabilities for past activities
of acquired hospitals.
STATE EFFORTS TO REGULATE THE SALE OF HOSPITALS OPERATED BY NOT-FOR-PROFIT
ENTITIES COULD PREVENT US FROM ACQUIRING ADDITIONAL HOSPITALS AND EXECUTING OUR
BUSINESS STRATEGY.
Many states, including some where we have hospitals and others where we may
in the future acquire hospitals, have adopted legislation regarding the sale or
other disposition of hospitals operated by not-for-profit entities. In other
states that do not have specific legislation, the attorneys general have
demonstrated an interest in these transactions under their general obligations
to protect charitable assets from waste. These legislative and administrative
efforts focus primarily on the appropriate valuation of the assets divested and
the use of the proceeds of the sale by the non-profit seller. While these review
and, in some instances, approval processes can add additional time to the
closing of a hospital acquisition, we have not had any significant difficulties
or delays in completing acquisitions. However, future actions on the state level
could seriously delay or even prevent our ability to acquire hospitals.
STATE EFFORTS TO REGULATE THE CONSTRUCTION, ACQUISITION OR EXPANSION OF
HOSPITALS COULD PREVENT US FROM ACQUIRING ADDITIONAL HOSPITALS, RENOVATING OUR
FACILITIES OR EXPANDING THE BREADTH OF SERVICES WE OFFER.
Some states require prior approval for the construction or acquisition of
healthcare facilities and for the expansion of healthcare facilities and
services. In giving approval, these states consider the need for additional or
expanded healthcare facilities or services. In some states in which we operate,
we are
8
<PAGE>
required to obtain certificates of need, known as CONs, for capital expenditures
exceeding a prescribed amount, changes in bed capacity or services, and certain
other matters. Other states may adopt similar legislation. We may not be able to
obtain the required CONs or other prior approvals for additional or expanded
facilities in the future. In addition, at the time we acquire a hospital, we may
agree to replace or expand the facility we are acquiring. If we are not able to
obtain required prior approvals, we would not be able to acquire additional
hospitals and expand healthcare services.
OUR SIGNIFICANT INDEBTEDNESS COULD LIMIT OUR OPERATIONAL AND CAPITAL
FLEXIBILITY.
As of March 31, 2000, on a pro forma basis after giving effect to the use of
the net proceeds of the offering, we had total long term debt of
$1,184.7 million or approximately 70.0% of our total capitalization.
Our acquisition program requires substantial capital resources. In addition,
the operations of our existing hospitals require ongoing capital expenditures.
We may need to incur additional indebtedness to fund these acquisitions and
expenditures. However, we may be unable to obtain sufficient financing on terms
satisfactory to us.
The degree to which we are leveraged could have other important consequences
to holders of the common stock, including the following:
- we must dedicate a substantial portion of our cash flow from operations to
the payment of principal and interest on our indebtedness; this reduces
the funds available for our operations;
- a portion of our borrowings are at variable rates of interest, which makes
us vulnerable to increases in interest rates; and
- our indebtedness contains numerous financial and other restrictive
covenants, including restrictions on paying dividends, incurring
additional indebtedness, and selling assets.
IF WE ARE UNABLE TO EFFECTIVELY COMPETE FOR PATIENTS, LOCAL RESIDENTS COULD USE
OTHER HOSPITALS.
The hospital industry is highly competitive. In addition to the competition
we face for acquisitions and physicians, we must also compete with other
hospitals and healthcare providers for patients. The competition among hospitals
and other healthcare providers for patients has intensified in recent years. Our
hospitals are located in non-urban service areas. Most of our hospitals face no
direct competition because there are no other hospitals in their primary service
areas. However, these hospitals do face competition from hospitals outside of
their primary service area, including hospitals in urban areas that provide more
complex services. These facilities generally are located in excess of 25 miles
from our facilities. Patients in our primary service areas may travel to these
other hospitals for a variety of reasons. These reasons include physician
referrals or the need for services we do not offer. Patients who seek services
from these other hospitals may subsequently shift their preferences to those
hospitals for the services we do provide.
Some of our hospitals operate in primary service areas where they compete
with one other hospital. One of our hospitals competes with more than one other
hospital in its primary service area. Some of these competing hospitals use
equipment and services more specialized than those available at our hospitals.
In addition, some of the hospitals that compete with us are owned by
tax-supported governmental agencies or not-for-profit entities supported by
endowments and charitable contributions. These hospitals can make capital
expenditures without paying sales, property and income taxes. We also face
competition from other specialized care providers, including outpatient surgery,
orthopedic, oncology, and diagnostic centers.
We expect that these competitive trends will continue. Our inability to
compete effectively with other hospitals and other healthcare providers could
cause local residents to use other hospitals. See "Business of Community Health
Systems--Competition."
9
<PAGE>
IF WE BECOME SUBJECT TO SIGNIFICANT LEGAL ACTIONS, WE COULD BE SUBJECT TO
SUBSTANTIAL UNINSURED LIABILITIES.
In recent years, physicians, hospitals, and other healthcare providers have
become subject to an increasing number of legal actions alleging malpractice,
product liability, or related legal theories. Many of these actions involve
large claims and significant defense costs. To protect us from the cost of these
claims, we generally maintain professional malpractice liability insurance and
general liability insurance coverage in amounts and with deductibles that we
believe to be appropriate for our operations. However, our insurance coverage
may not cover all claims against us or continue to be available at a reasonable
cost for us to maintain adequate levels of insurance.
IF FUTURE CASH FLOWS ARE INSUFFICIENT TO RECOVER THE CARRYING VALUE OF OUR
GOODWILL, A MATERIAL NON-CASH CHARGE TO EARNINGS COULD RESULT.
The Forstmann Little partnerships acquired our predecessor company in 1996
principally for cash. We recorded a significant portion of the purchase price as
goodwill. We have also recorded as goodwill a portion of the purchase price for
our subsequent hospital acquisitions. At March 31, 2000, we had $876.7 million
of goodwill recorded on our books. We expect to recover the carrying value of
this goodwill through our future cash flows. On an ongoing basis, we evaluate,
based on projected undiscounted cash flows, whether we will be able to recover
all or a portion of the carrying value of goodwill. If future cash flows are
insufficient to recover the carrying value of our goodwill, we must write off a
portion of the unamortized balance of goodwill. In 1998, in connection with our
periodic review process, we determined that projected undiscounted cash flows
from seven of our hospitals were below the carrying value of the long-lived
assets associated with these hospitals. In accordance with generally accepted
accounting principles, we adjusted the carrying value of these assets to their
estimated fair value through an impairment charge of $164.8 million. Of this
charge, goodwill accounted for $134.3 million. This impairment charge arose from
various circumstances that were unique to each of the hospitals and adversely
affected their prospects. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
BECAUSE THE INITIAL PUBLIC OFFERING PRICE OF OUR COMMON STOCK EXCEEDS OUR NET
TANGIBLE BOOK DEFICIT PER SHARE, INVESTORS WILL EXPERIENCE IMMEDIATE AND
SUBSTANTIAL DILUTION.
As a result of this offering, purchasers of the common stock in the offering
will experience dilution in the amount of $21.56 per share. On a pro forma
basis, our net tangible book deficit at March 31, 2000 would have been
$414 million, or $5.56 per share of common stock. Present stockholders will
experience an immediate and substantial decrease in net tangible book deficit in
the amount of $6.90 per share of common stock.
IF OUR STOCK PRICE FLUCTUATES AFTER THE INITIAL OFFERING, YOU COULD LOSE A
SIGNIFICANT PART OF YOUR INVESTMENT.
Prior to the offering, there has been no public market for our common stock.
We will list our common stock on the NYSE. We do not know if an active trading
market will develop for our common stock or how the common stock will trade in
the future. Negotiations between the underwriters and us will determine the
initial public offering price. You may not be able to resell your shares at or
above the initial public offering price due to fluctuations in the market price
of our common stock due to changes in our operating performance or prospects.
In addition, the stock market in general has experienced extreme volatility
that often has been unrelated to the operating performance or prospects of
particular companies.
10
<PAGE>
BECAUSE FORSTMANN LITTLE AND OUR MANAGEMENT CONTROL US, THEY WILL BE ABLE TO
DETERMINE THE OUTCOME OF ALL MATTERS SUBMITTED TO OUR STOCKHOLDERS FOR APPROVAL,
REGARDLESS OF THE PREFERENCES OF THE MINORITY STOCKHOLDERS.
Following the offering, the Forstmann Little partnerships and our management
will together own approximately three-fourths of our outstanding common stock.
Accordingly, they will be able to:
- elect our entire board of directors;
- control our management and policies; and
- determine, without the consent of our other stockholders, the outcome of
any corporate transaction or other matter submitted to our stockholders
for approval, including mergers, consolidations and the sale of all or
substantially all of our assets.
The Forstmann Little partnerships and our management will also be able to
prevent or cause a change in control of us and will be able to amend our
certificate of incorporation and by-laws at any time. Their interests may
conflict with the interests of the other holders of common stock.
IF EXISTING STOCKHOLDERS SELL THEIR COMMON STOCK, YOU COULD LOSE A SIGNIFICANT
PART OF YOUR INVESTMENT.
Sales of a substantial number of shares of common stock into the public
market after the offering, or the perception that these sales could occur, could
have a material adverse effect on our stock price. As of April 30, 2000 and
giving effect to the recapitalization and the offering, there were 74,342,859
shares of common stock outstanding. We have granted to the Forstmann Little
partnerships six demand rights to cause us to file, at our expense, a
registration statement under the Securities Act covering resales of their
shares. These shares, along with shares held by others who can participate in
the registrations, will represent 74.78% of our outstanding common stock after
the offering. The Forstmann Little partnerships have no present intent to
exercise their demand registration rights, although they retain the right to do
so. These shares may also be sold under Rule 144 of the Securities Act,
depending on their holding period and subject to significant restrictions in the
case of shares held by persons deemed to be our affiliates.
IF PROVISIONS IN OUR CORPORATE DOCUMENTS AND DELAWARE LAW DELAY OR PREVENT A
CHANGE IN CONTROL OF OUR COMPANY, WE MAY BE UNABLE TO CONSUMMATE A TRANSACTION
THAT OUR STOCKHOLDERS CONSIDER FAVORABLE.
Our certificate of incorporation and by-laws may discourage, delay, or
prevent a merger or acquisition involving us that our stockholders may consider
favorable by:
- authorizing the issuance of preferred stock, the terms of which may be
determined at the sole discretion of the board of directors;
- providing for a classified board of directors, with staggered three-year
terms; and
- establishing advance notice requirements for nominations for election to
the board of directors or for proposing matters that can be acted on by
stockholders at meetings.
Delaware law may also discourage, delay or prevent someone from acquiring or
merging with us. For a description you should read "Description of Capital
Stock."
11
<PAGE>
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
THIS PROSPECTUS INCLUDES FORWARD-LOOKING STATEMENTS WHICH COULD DIFFER FROM
ACTUAL FUTURE RESULTS.
Some of the matters discussed in this prospectus include forward-looking
statements. Statements that are predictive in nature, that depend upon or refer
to future events or conditions or that include words such as "expects,"
"anticipates," "intends," "plans," "believes," "estimates," "thinks," and
similar expressions are forward-looking statements. These statements involve
known and unknown risks, uncertainties, and other factors that may cause our
actual results and performance to be materially different from any future
results or performance expressed or implied by these forward-looking statements.
These factors include the following:
- general economic and business conditions, both nationally and in the
regions in which we operate;
- demographic changes;
- existing governmental regulations and changes in, or the failure to comply
with, governmental regulations or our corporate compliance agreement;
- legislative proposals for healthcare reform;
- our ability, where appropriate, to enter into managed care provider
arrangements and the terms of these arrangements;
- changes in Medicare and Medicaid payment levels;
- liability and other claims asserted against us;
- competition;
- our ability to attract and retain qualified personnel, including
physicians;
- trends toward treatment of patients in lower acuity healthcare settings;
- changes in medical or other technology;
- changes in generally accepted accounting principles;
- the availability and terms of capital to fund additional acquisitions or
replacement facilities; and
- our ability to successfully acquire and integrate additional hospitals.
Although we believe that these statements are based upon reasonable
assumptions, we can give no assurance that our goals will be achieved. Given
these uncertainties, prospective investors are cautioned not to place undue
reliance on these forward-looking statements. These forward-looking statements
are made as of the date of this prospectus. We assume no obligation to update or
revise them or provide reasons why actual results may differ.
12
<PAGE>
USE OF PROCEEDS
We estimate our net proceeds from the offering, after deducting estimated
expenses and underwriting discounts and commissions of $21.0 million, to be
approximately $279.0 million. We will use these proceeds to repay senior debt
outstanding under our credit agreement with The Chase Manhattan Bank and other
lenders in the following priority: debt under our revolving credit facility;
debt under our acquisition loan facility; and our term loans. Based upon our
senior debt outstanding as of March 31, 2000, we will use these proceeds to
repay approximately $145.0 million of senior debt under our revolving credit
facility and $134.0 million of senior debt under our acquisition loan facility.
These amounts include approximately $60.3 million of senior debt held by
affiliates of the underwriters. The revolving credit facility and acquisition
loan facility expire December 31, 2002. As of March 31, 2000, the effective
interest rate for the revolving credit facility and acquisition loan facility
was 8.19%. The term loans expire on December 31, 2005. As of March 31, 2000, the
effective interest rate for the term loans was 9.49%.
Any net proceeds received by us from the exercise by the underwriters of
their over-allotment option will also be used to repay our senior debt in
accordance with the priority specified above.
We expect to borrow under the revolving credit facility as needed to fund
our working capital needs and for general corporate purposes. We also expect to
borrow under the acquisition loan facility as needed to fund the acquisition of
additional hospitals. See "Business of Community Health Systems--Our Business
Strategy--Grow Through Selective Acquisitions."
See "Management--Relationships and Transactions between Community Health
Systems and its Officers, Directors and 5% Beneficial Owners and their Family
Members" and "Description of Indebtedness."
DIVIDEND POLICY
We have not paid any cash dividends in the past, and we do not intend to pay
any cash dividends for the foreseeable future. We intend to retain earnings, if
any, for the future operation and expansion of our business. Any determination
to pay dividends in the future will be dependent upon results of operations,
financial condition, contractual restrictions, restrictions imposed by
applicable law, and other factors deemed relevant by our board of directors. Our
existing indebtedness limits our ability to pay dividends and make distributions
to stockholders.
13
<PAGE>
CAPITALIZATION
The following table sets forth our debt and capitalization as of March 31,
2000, on an actual basis and on a pro forma basis. The pro forma data reflect
the offering and the use of the estimated net proceeds from the offering to
repay a portion of the outstanding debt.
In addition, you should read the following table in conjunction with
Selected Consolidated Financial and Other Data, our consolidated financial
statements and the accompanying notes, Management's Discussion and Analysis of
Financial Condition and Results of Operations, and Description of Indebtedness,
which are contained later in this prospectus.
<TABLE>
<CAPTION>
AS OF MARCH 31, 2000
------------------------
ACTUAL PRO FORMA
---------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
LONG-TERM DEBT:
Credit facilities(a):
Revolving credit loans.................................. $ 145,000 $ --
Acquisition loans....................................... 159,951 25,951
Term loans.............................................. 619,307 619,307
Subordinated debentures................................... 500,000 500,000
Taxable bonds............................................. 28,800 28,800
Tax-exempt bonds.......................................... 8,000 8,000
Capital lease obligations and other debt.................. 23,547 23,547
---------- ----------
Total debt.............................................. 1,484,605 1,205,605
Less current maturities................................... (20,955) (20,955)
---------- ----------
Total long-term debt(b)................................. 1,463,650 1,184,650
---------- ----------
STOCKHOLDERS' EQUITY:
Preferred stock, $.01 par value per share, 100,000,000
shares authorized, none issued.......................... -- --
Common stock, $.01 par value per share, 300,000,000 shares
authorized; 56,793,516 shares issued and 55,592,859
outstanding actual; 75,543,516 shares issued and
74,342,859 outstanding pro forma........................ 568 755
Additional paid-in capital................................ 483,235 762,048
Accumulated deficit....................................... (244,431) (244,431)
Treasury stock, at cost, 1,200,657 shares................. (6,587) (6,587)
Notes receivable for common stock......................... (1,932) (1,932)
Unearned stock compensation............................... (159) (159)
---------- ----------
Total stockholders' equity............................ 230,694 509,694
---------- ----------
Total capitalization.................................. $1,694,344 $1,694,344
========== ==========
</TABLE>
- --------------------------
(a) These borrowings included amounts borrowed in connection with the
acquisitions we completed on April 1, 2000.
(b) We also had letters of credit issued, primarily in support of our taxable
and tax-exempt bonds, of approximately $43 million, reducing to $40 million
by December 31, 2000.
14
<PAGE>
DILUTION
At March 31, 2000, we had a net tangible book deficit of $693 million or
$12.46 per share. Net tangible book deficit is the difference between our total
tangible assets and our total liabilities. We determined the net tangible book
deficit per share by dividing our tangible net book deficit by the total number
of shares of common stock outstanding. After giving effect to the sale of the
18,750,000 shares of common stock offered by us in the offering at $16.00 per
share, the mid-point of the range of the initial public offering prices set
forth on the cover page of this prospectus, and after deducting estimated
underwriting discounts and commissions and offering expenses payable by us, our
pro forma net tangible book deficit would have been approximately $414 million,
or $5.56 per share of common stock. This represents an immediate increase in net
tangible book value of $6.90 per share to existing stockholders and an immediate
dilution of $21.56 per share to new investors purchasing shares of common stock
in the offering. The following table illustrates this dilution on a per share
basis:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share............. $ 16.00
Net tangible book deficit per share before the offering... $(12.46)
Increase in net tangible book value per share attributable
to new investors........................................ 6.90
-------
Pro forma net tangible book deficit per share after the
offering.................................................. (5.56)
-------
Dilution per share to new investors......................... $ 21.56
=======
</TABLE>
The following table sets forth, on a pro forma basis as of March 31, 2000,
the number of shares of common stock owned by existing stockholders and to be
owned by new investors, the total consideration paid and the average price per
share paid by our existing stockholders and to be paid by new investors in the
offering at $16.00, the mid-point of the range of the initial public offering
prices set forth on the cover page of this prospectus, and before deduction of
estimated underwriting discounts and commissions:
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION
---------------------- ----------------------- AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
----------- -------- ------------ -------- -------------
<S> <C> <C> <C> <C> <C>
Existing stockholders............... 55,592,859 74.78% $496,478,000 62.33% $ 8.93
New investors....................... 18,750,000 25.22% 300,000,000 37.67% 16.00
----------- ------- ------------ -------
Total........................... 74,342,859 100.00% $796,478,000 100.00%
=========== ======= ============ =======
</TABLE>
15
<PAGE>
SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA
You should read the selected consolidated historical financial and other
data below in conjunction with our consolidated financial statements and the
accompanying notes. You should also read Management's Discussion and Analysis of
Financial Condition and Results of Operations. All of these materials are
contained later in this prospectus. We derived the consolidated historical
financial data as of December 31, 1998 and 1999 and for the three years ended
December 31, 1999 from our consolidated financial statements. We derived the
historical data for the three months ended March 31, 1999 and March 31, 2000,
and as of March 31, 2000, from our unaudited interim condensed consolidated
financial statements. We adjusted the pro forma data for the offering and the
use of the estimated net proceeds from the offering to repay a portion of
outstanding debt as if these events had occurred on January 1, 1999 for the year
ended December 31, 1999 and on January 1, 2000 for the three months ended
March 31, 2000 with respect to the consolidated statement of operations data and
on December 31, 1999 and March 31, 2000 with respect to consolidated balance
sheet data. We derived the selected consolidated financial and other data as of
December 31, 1996 and 1997 for the period from July 1 through December 31, 1996
from our unaudited consolidated financial statements, which are not contained in
this prospectus. We derived the selected consolidated financial and other data
at December 31, 1995 and June 30, 1996 and for the year ended December 31, 1995
and the period from
16
<PAGE>
January 1, 1996 through June 30, 1996 from the unaudited consolidated financial
statements of our predecessor company, which are not contained in this
prospectus.
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C>
PREDECESSOR (a)
-------------------------
PERIOD
FROM PERIOD FROM
JANUARY 1 JULY 1 YEAR ENDED DECEMBER 31,
YEAR ENDED THROUGH THROUGH -----------------------------------------------------
DECEMBER 31, JUNE 30, DECEMBER 31, PRO FORMA
1995(b) 1996(c) 1996(d) 1997 1998 1999 1999(e)
------------ ---------- ------------ ----------- ----------- ----------- -----------
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
CONSOLIDATED STATEMENT OF OPERATIONS DATA
Net operating revenues.... $547,926 $ 294,166 $ 327,922 $ 742,350 $ 854,580 $ 1,079,953 $ 1,079,953
Operating expenses (f).... 453,173 291,712(g) 270,319 620,112 688,190 875,768 875,768
Depreciation and
amortization............ 35,944 17,558 18,858 43,753 49,861 56,943 56,943
Amortization of
goodwill................ 223 164 11,627 25,404 26,639 24,708 24,708
Impairment of long-lived
assets and relocation
costs................... 25,400 15,655 -- -- 164,833 -- --
Compliance settlement and
Year 2000 remediation
costs (h)............... -- -- -- -- 20,209 17,279 17,279
Loss from hospital
sales................... -- 3,146 -- -- -- -- --
-------- ---------- ----------- ----------- ----------- ----------- -----------
Income (loss) from
operations.............. 33,186 (34,069) 27,118 53,081 (95,152) 105,255 105,255
Interest expense, net..... 18,790 8,930 38,964 89,753 101,191 116,491 94,963
-------- ---------- ----------- ----------- ----------- ----------- -----------
Income (loss) before
cumulative effect of a
change in accounting
principle and income
taxes................... 14,396 (42,999) (11,846) (36,672) (196,343) (11,236) 10,292
Provision for (benefit
from) income taxes...... 4,443 (15,747) 1,256 (4,501) (13,405) 5,553 13,949
-------- ---------- ----------- ----------- ----------- ----------- -----------
Income (loss) before
cumulative effect of a
change in accounting
principle............... 9,953 (27,252) (13,102) (32,171) (182,938) (16,789) (3,657)
Cumulative effect of a
change in accounting
principle, net of
taxes................... -- -- -- -- (352) -- --
-------- ---------- ----------- ----------- ----------- ----------- -----------
Net income (loss)......... $ 9,953 $ (27,252) $ (13,102) $ (32,171) $ (183,290) $ (16,789) $ (3,657)
======== ========== =========== =========== =========== =========== ===========
Basic and diluted income
(loss) per common share:
Income (loss) before
cumulative effect of a
change in accounting
principle............. $ (0.24) $ (0.60) $ (3.39) $ (0.31) $ (0.05)
Cumulative effect of a
change in accounting
principle............. -- -- (0.01) -- --
----------- ----------- ----------- ----------- -----------
Net income (loss)....... $ (0.24) $ (0.60) $ (3.40) $ (0.31) $ (0.05)
=========== =========== =========== =========== ===========
Weighted-average number of
shares outstanding,
basic and diluted (i)... 53,317,547 53,568,891 53,892,388 54,258,465 73,008,481
=========== =========== =========== =========== ===========
CONSOLIDATED BALANCE SHEET
DATA (AS OF END OF PERIOD
OR YEAR)
Cash and cash
equivalents............. $ 14,282 $ 10,410 $ 26,588 $ 7,663 $ 6,719 $ 4,282 $ 4,282
Total assets.............. 547,910 506,323 1,630,630 1,643,521 1,747,016 1,895,084 1,895,084
Long-term obligations..... 258,779 246,216 1,009,698 1,053,450 1,273,502 1,430,099 1,171,754
Stockholders' equity...... 212,852 165,879 465,673 433,625 246,826 229,708 508,708
(CONTINUED ON FOLLOWING PAGE; FOOTNOTES BEGIN ON PAGE 18)
</TABLE>
17
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
PREDECESSOR (a)
------------------------------
PERIOD FROM PERIOD FROM
JANUARY 1 JULY 1
YEAR ENDED THROUGH THROUGH YEAR ENDED DECEMBER 31,
DECEMBER 31, JUNE 30, DECEMBER 31, ------------------------------------
1995(b) 1996(c) 1996(d) 1997 1998 1999
------------ --------------- ------------- ---------- ---------- ----------
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS)
SELECTED OPERATING DATA
Number of hospitals (j)................. 36 29 35 37 41 46
Licensed beds (j)(k).................... 3,298 2,641 3,222 3,288 3,644 4,115
Beds in service (j)(l).................. 2,519 2,005 2,311 2,543 2,776 3,123
Admissions (m).......................... 76,347 34,876 40,246 88,103 100,114 120,414
Adjusted admissions (n)................. 118,042 56,136 68,059 153,618 177,075 217,006
Patient days (o)........................ 404,453 168,995 183,809 399,012 416,845 478,658
Average length of stay (days) (p)....... 5.3 4.8 4.6 4.5 4.2 4.0
Occupancy rate (beds in service) (q).... 44.0% 46.3% 43.2% 43.1% 43.3% 44.1%
Net inpatient revenue as a % of total
net revenue........................... 63.0% 61.1% 58.3% 57.3% 55.7% 52.7%
Net outpatient revenue as a % of total
net revenue........................... 35.4% 37.5% 40.4% 41.5% 42.6% 45.5%
Adjusted EBITDA (r)..................... $ 94,753 $ 2,454(g) $ 57,603 $ 122,238 $ 166,390 $ 204,185
Adjusted EBITDA as a % of net revenue... 17.3% 0.8% 17.6% 16.5% 19.5% 18.9%
Net cash flows provided by (used in)
operating activities.................. $ 47,899 $ 30,081 $ 2,953 $ 21,544 $ 15,719 $ (11,746)
Net cash flows used in investing
activities............................ $(71,414) $ (25,067) $(1,259,268) $ (76,651) $ (236,553) $ (155,541)
Net cash flows provided by (used in)
financing activities.................. $ 5,659 $ (8,886) $ 1,282,903 $ 36,182 $ 219,890 $ 164,850
</TABLE>
<TABLE>
<CAPTION>
Three Months Ended March
31,
---------------------------------------
PRO FORMA
1999 2000 2000(e)
----------- ----------- -----------
<S> <C> <C> <C>
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND
PER SHARE DATA)
CONSOLIDATED STATEMENT OF OPERATIONS DATA
Net operating revenues.................................... $ 263,004 $ 308,651 $ 308,651
Operating expenses(f)..................................... 210,734 248,570 248,570
Depreciation and amortization............................. 13,033 16,380 16,380
Amortization of goodwill.................................. 5,677 6,168 6,168
Year 2000 remediation costs............................... 300 -- --
----------- ----------- -----------
Income from operations.................................... 33,260 37,533 37,533
Interest expense, net..................................... 26,762 32,683 26,943
----------- ----------- -----------
Income before income taxes................................ 6,498 4,850 10,590
Provision for income taxes................................ 4,580 3,929 6,168
----------- ----------- -----------
Net income................................................ $ 1,918 $ 921 $ 4,422
=========== =========== ===========
Net income per common share:
Basic................................................... $ 0.04 $ 0.02 $ 0.06
Diluted................................................. $ 0.03 $ 0.02 $ 0.06
Weighted average number of shares outstanding:
Basic................................................... 54,128,085 54,369,202 73,119,202
=========== =========== ===========
Diluted................................................. 55,607,631 55,857,980 74,607,980
=========== =========== ===========
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C>
CONSOLIDATED BALANCE SHEET DATA (AS OF END OF PERIOD)
Cash and cash equivalents................................. $ 10,885 $ 10,885
Total assets.............................................. 1,935,730 1,935,730
Long-term obligations..................................... 1,488,018 1,209,018
Stockholders' equity...................................... 230,694 509,694
(CONTINUED ON FOLLOWING PAGE; FOOTNOTES BEGIN ON FOLLOWING PAGE)
</TABLE>
18
<PAGE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
-------------------
1999 2000
-------- --------
(DOLLARS IN
THOUSANDS)
<S> <C> <C>
SELECTED OPERATING DATA
Number of hospitals (j)................................... 43 47
Licensed beds (j)(k)...................................... 3,903 4,223
Beds in service (j)(l).................................... 2,952 3,281
Admissions (m)............................................ 31,516 34,704
Adjusted admissions (m)................................... 53,637 62,309
Patient days (o).......................................... 131,698 138,473
Average length of stay (days) (p)......................... 4.2 4.0
Occupancy rate (beds in service) (q)...................... 51.4% 47.4%
Net inpatient revenue as a % of total net revenue......... 55.5% 52.4%
Net outpatient revenue as a % of total net revenue........ 43.0% 45.8%
Adjusted EBITDA (r)....................................... $ 52,270 $ 60,081
Adjusted EBITDA as a % of net revenue..................... 19.9% 19.5%
Net cash flows used in operating activities............... $(18,860) $ (4,945)
Net cash flows used in investing activities............... $(66,143) $(38,423)
Net cash flows provided by financing activities........... $ 89,595 $ 49,971
</TABLE>
- --------------------------
(a) Effective in July 1996, we acquired all of the outstanding common stock of
our principal subsidiary, CHS/ Community Health Systems, Inc. The
predecessor company had a substantially different capital structure compared
to ours. Because of the limited usefulness of the earnings per share
information for the predecessor company, these amounts have been excluded.
(b) Includes nine hospitals divested or held for divestiture in 1996.
(c) Includes two acquisitions.
(d) Includes six acquisitions.
(e) Reflects the offering, the application of the estimated net proceeds from
the offering to repay debt of $279.0 million based upon outstanding debt
balances as of December 31, 1999 and March 31, 2000, and the resultant
reduction of interest expense of $21.5 million as if these events had
occured on January 1, 1999 for the year ended December 31, 1999 and
$5.7 million as if these events had occurred on January 1, 2000 for the
three months ended March 31, 2000. Also reflects an increase in provision
for income taxes of $8.4 million for the year ended December 31, 1999 and
$2.2 million for the three months ended March 31, 2000, resulting from the
decrease in interest expense. See "Use of Proceeds." These adjustments are
detailed as follows:
(1) To adjust interest expense to reflect the following:
- For the year ended December 31, 1999, interest expense on the revolving
credit loans totaling $8.2 million has been excluded, giving effect to
the repayment of $109.8 million in outstanding borrowings with the
proceeds from the offering using an assumed weighted average interest
rate of 7.43%. For the three months ended March 31, 2000, interest
expense on the revolving credit loans totaling $3.0 million has been
excluded, giving effect to the repayment of $145.0 million in
outstanding borrowings with the proceeds from the offering using an
assumed weighted average interest rate of 8.27%.
- For the year ended December 31, 1999, interest expense on the
acquisition loans totaling $10.3 million has been excluded, giving
effect to the repayment of $138.5 million in outstanding borrowings
with proceeds from the offering using an assumed weighted average
interest rate of 7.43%. For the three months ended March 31, 2000,
interest expense on the acquisition loans totaling $2.7 million has
been excluded, giving effect to the repayment of $134.0 million in
outstanding borrowings with proceeds from the offering using an assumed
weighted average interest rate of 8.19%.
- For the year ended December 31, 1999, interest expense on the term
loans totaling $3.0 million has been excluded, giving effect to the
repayment of $30.7 million in outstanding borrowings with the proceeds
from the offering using an assumed weighted average interest rate of
10.03%.
(2) The adjustment to the pro forma provision for income taxes, computed
using a 39% statutory income tax rate, was $8.4 million for the year
ended December 31, 1999 and $2.2 million for the three months ended
March 31, 2000 for the tax effect of the above-noted pro forma
adjustments.
(FOOTNOTES CONTINUED ON FOLLOWING PAGE)
19
<PAGE>
(f) Operating expenses include salaries and benefits, provision for bad debts,
supplies, rent, and other operating expenses, and exclude the items that are
excluded for purposes of determining adjusted EBITDA as discussed in
footnote (r) below.
(g) Includes $47.5 million of expense resulting from the cancellation of stock
options associated with the acquisition of our principal subsidiary as
discussed in footnote (a).
(h) Includes Year 2000 remediation costs of $0.2 million in 1998 and
$3.3 million in 1999.
(i) See notes 10 and 14 to the consolidated financial statements.
(j) At end of period.
(k) Licensed beds are the number of beds for which the appropriate state agency
licenses a facility regardless of whether the beds are actually available
for patient use.
(l) Beds in service are the number of beds that are readily available for
patient use.
(m) Admissions represent the number of patients admitted for inpatient
treatment.
(n) Adjusted admissions is a general measure of combined inpatient and
outpatient volume. We computed adjusted admissions by multiplying admissions
by gross patient revenues and then dividing that number by gross inpatient
revenues.
(o) Patient days represent the total number of days of care provided to
inpatients.
(p) Average length of stay (days) represents the average number of days
inpatients stay in our hospitals.
(q) We calculated percentages by dividing the daily average number of inpatients
by the weighted average of beds in service.
(r) We define adjusted EBITDA as EBITDA adjusted to exclude cumulative effect of
a change in accounting principle, impairment of long-lived assets and
relocation costs, compliance settlement and Year 2000 remediation costs, and
loss from hospital sales. EBITDA consists of income (loss) before interest,
income taxes, depreciation and amortization, and amortization of goodwill.
EBITDA and adjusted EBITDA should not be considered as measures of financial
performance under generally accepted accounting principles. Items excluded
from EBITDA and adjusted EBITDA are significant components in understanding
and assessing financial performance. EBITDA and adjusted EBITDA are key
measures used by management to evaluate our operations and provide useful
information to investors. EBITDA and adjusted EBITDA should not be
considered in isolation or as alternatives to net income, cash flows
generated by operations, investing or financing activities, or other
financial statement data presented in the consolidated financial statements
as indicators of financial performance or liquidity. Because EBITDA and
adjusted EBITDA are not measurements determined in accordance with generally
accepted accounting principles and are thus susceptible to varying
calculations, EBITDA and adjusted EBITDA as presented may not be comparable
to other similarly titled measures of other companies.
20
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
You should read this discussion together with our consolidated financial
statements and the accompanying notes and Selected Consolidated Financial and
Other Data included elsewhere in this prospectus.
OVERVIEW
We are the largest non-urban provider of general hospital healthcare
services in the United States in terms of number of facilities and the second
largest in terms of revenues and EBITDA. As of December 31, 1999, we owned,
leased or operated 46 hospitals, geographically diversified across 20 states,
with an aggregate of 4,115 licensed beds. In over 80% of our markets, we are the
sole provider of general hospital healthcare services. In most of our other
markets, we are one of two providers of general hospital healthcare services.
For the fiscal year ended December 31, 1999, we generated $1.08 billion in net
operating revenues and $204.2 million in adjusted EBITDA. We achieved revenue
growth of 26.4% in 1999 and 15.1% in 1998. We also achieved growth in adjusted
EBITDA of 22.7% in 1999 and 36.1% in 1998.
ACQUISITIONS
On March 1, 2000, we acquired Southampton Memorial Hospital, a 105 bed
hospital located in Franklin, Virginia. On April 1, 2000, we acquired Lakeview
Community Hospital, a 74 bed hospital located in Eufaula, Alabama and
Northeastern Regional Hospital, a 50 bed hospital located in Las Vegas, New
Mexico. We acquired all three hospitals from tax-exempt entities for an
aggregate consideration of approximately $37 million, including working capital.
Each of these hospitals is the sole provider of general hospital services in its
community.
During 1999, we acquired, through three purchases and one capital lease
transaction, most of the assets, including working capital, of four hospitals.
The consideration for the four hospitals totaled $77.8 million. This
consideration consisted of $59.7 million in cash, which we borrowed under our
acquisition loan facility, and assumed liabilities of $18.1 million. We prepaid
the entire lease obligation relating to the lease transaction. We included the
prepayment as part of the cash consideration. We also opened one additional
hospital, after completion of construction, at a cost of $15.3 million. This
owned hospital replaced a hospital that we managed.
During 1998, we acquired, through two purchase and two capital lease
transactions, most of the assets, including working capital, of four hospitals.
The consideration for the four hospitals totaled $218.6 million. This
consideration consisted of $169.8 million in cash, which we borrowed under our
acquisition loan facility, and assumed liabilities of $48.8 million. We prepaid
the entire lease obligation relating to each lease transaction. We included the
prepayment as part of the cash consideration. Also, effective December 1, 1998,
we entered into an operating agreement relating to a 38 licensed bed hospital.
We also purchased the working capital accounts of that hospital. The cash
payment made for this hospital was $2.8 million. Pursuant to this operating
agreement, upon specified conditions being met, we will be obligated to
construct a replacement hospital and to purchase for $0.9 million the remaining
assets of the hospital. Upon completion, all rights of ownership and operation
will transfer to us.
During 1997, we exercised a purchase option under an operating lease and
acquired two hospitals through capital lease transactions. The consideration for
these three hospitals totaled $46.1 million, including working capital. This
consideration consisted of $36.3 million in cash, which we borrowed under our
acquisition loan facility, and assumed liabilities of $9.8 million. We prepaid
the entire lease obligation relating to each lease transaction. We included the
prepayment as part of the cash consideration.
20
<PAGE>
Goodwill from the acquisition of our predecessor company in 1996 was
$679.5 million and from subsequent hospital acquisitions was $197.2 million as
of March 31, 2000. Based on management's assessment of the goodwill's estimated
useful life, we generally amortize our goodwill over 40 years. Goodwill
represented 380% of our shareholders' equity as of March 31, 2000; the amount of
goodwill amortized equaled 16.4% of our income from operations for the
three-month period ended March 31, 2000. Significant adverse changes in facts
regarding our industry, markets and operations could cause our management to
shorten the estimated useful life used to amortize our goodwill. This could
result in material increases in amortization of goodwill, or cause impairments
to the carrying amount of such goodwill, resulting in a non-cash charge which
would reduce operating income.
In the future, we intend to acquire, on a selective basis, two to four
hospitals in our target markets annually. Because of the financial impact of
acquisitions, it is difficult to make meaningful comparisons between our
financial statements for the periods presented. Because EBITDA margins at
hospitals we acquire are, at the time of acquisition, lower than those of our
existing hospitals, acquisitions can negatively affect our EBITDA margins on a
consolidated basis.
At March 31, 2000, we segregated the carrying amounts of two of our
hospitals from our remaining assets. These carrying amounts are classified in
our unaudited interim condensed consolidated balance sheet as of March 31, 2000,
as long-term assets of facilities held for disposition. On May 1, 2000, we
divested one of these facilities. We do not expect the impact of any gain or
loss on our financial results to be material.
SOURCES OF REVENUE
Net operating revenues include amounts estimated by management to be
reimbursable by Medicare and Medicaid under prospective payment systems and
provisions of cost-reimbursement and other payment methods. Approximately 55% of
net operating revenues for the year ended December 31, 1997, 49% for the year
ended December 31, 1998, and 48% for the year ended December 31, 1999, are
related to services rendered to patients covered by the Medicare and Medicaid
programs. In addition, we are reimbursed by non-governmental payors using a
variety of payment methodologies. Amounts we receive for treatment of patients
covered by these programs are generally less than the standard billing rates. We
account for the differences between the estimated program reimbursement rates
and the standard billing rates as contractual adjustments, which we deduct from
gross revenues to arrive at net operating revenues. Final settlements under some
of these programs are subject to adjustment based on administrative review and
audit by third parties. We record adjustments to the estimated billings in the
periods that such adjustments become known. We account for adjustments to
previous program reimbursement estimates as contractual adjustments and report
them in future periods as final settlements are determined. Adjustments related
to final settlements or appeals that increased revenue were insignificant in
each of the years ended December 31, 1997, 1998 and 1999. Net amounts due to
third-party payors as of December 31, 1998 were $19.9 million and as of
December 31, 1999 were $9.1 million. We included these amounts in accrued
liabilities--other in the accompanying balance sheets. Substantially all
Medicare and Medicaid cost reports are final settled through 1996.
We expect the percentage of revenues received from the Medicare program to
increase due to the general aging of the population and the restoration of some
payments under the Balanced Budget Refinement Act of 1999. The payment rates
under the Medicare program for inpatients are based on a prospective payment
system, based upon the diagnosis of a patient. While these rates are indexed for
inflation annually, the increases have historically been less than actual
inflation. Reductions in the rate of increase in Medicare reimbursement may have
an adverse impact on our net operating revenue growth.
Based on our preliminary assessment of the recently released final
regulations implementing Medicare's new prospective payment system for
outpatient hospital care, we expect its impact to be
21
<PAGE>
favorable but not material to our future operating results. The Health Care
Financing Administration estimates that this new prospective payment system will
result in an overall 9.7% increase in projected outpatient payments starting
July 1, 2000, eliminating a projected 5.7% reduction in payments mandated by the
Balance Budget Act of 1997.
In addition, Medicaid programs, insurance companies, and employers are
actively negotiating the amounts paid to hospitals as opposed to their standard
rates. The trend toward increased enrollment in managed care may adversely
affect our net operating revenue growth.
RESULTS OF OPERATIONS
Our hospitals offer a variety of services involving a broad range of
inpatient and outpatient medical and surgical services. These include
orthopedics, cardiology, OB/GYN, occupational medicine, rehabilitation
treatment, home health, and skilled nursing. The strongest demand for hospital
services generally occurs during January through April and the weakest demand
for these services occurs during the summer months. Accordingly, eliminating the
effect of new acquisitions, our net operating revenues and earnings are
generally highest during the first quarter and lowest during the third quarter.
The following tables summarize, for the periods indicated, selected
operating data.
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
------------------------------------ ----------------------
1997 1998 1999 1999 2000
-------- -------- -------- -------- --------
(EXPRESSED AS A PERCENTAGE OF NET OPERATING
REVENUES)
<S> <C> <C> <C> <C> <C>
Net operating revenues............................. 100.0 100.0 100.0 100.0 100.0
Operating expenses (a)............................. (83.5) (80.5) (81.1) (80.1) (80.5)
----- ----- ----- ----- -----
Adjusted EBITDA (b)................................ 16.5 19.5 18.9 19.9 19.5
Depreciation and amortization...................... (5.9) (5.8) (5.3) (5.0) (5.3)
Amortization of goodwill........................... (3.4) (3.1) (2.3) (2.2) (2.0)
Impairment of long-lived assets.................... -- (19.3) -- -- --
Compliance settlement and Year 2000 remediation
costs (c)........................................ -- (2.4) (1.6) (0.1) --
----- ----- ----- ----- -----
Income (loss) from operations...................... 7.2 (11.1) 9.7 12.6 12.2
Interest, net...................................... (12.1) (11.8) (10.8) (10.2) (10.6)
----- ----- ----- ----- -----
Income (loss) before cumulative effect of a change
in accounting principle and income taxes......... (4.9) (22.9) (1.1) 2.4 1.6
Provision for (benefit from) income taxes.......... (0.6) (1.5) .5 (1.7) (1.3)
----- ----- ----- ----- -----
Income (loss) before cumulative effect of a change
in accounting principle.......................... (4.3) (21.4) (1.6) 0.7 0.3
===== ===== ===== ===== =====
</TABLE>
22
<PAGE>
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED ENDED
DECEMBER 31, MARCH 31,
---------------------- ------------
1998 1999 2000
-------- -------- ------------
(EXPRESSED IN PERCENTAGES)
<S> <C> <C> <C>
PERCENTAGE CHANGE FROM PRIOR PERIOD:
Net operating revenues.................................... 15.1 26.4 17.4
Admissions................................................ 13.6 20.3 10.1
Adjusted admissions (d)................................... 15.3 22.6 16.2
Average length of stay.................................... (6.7) (4.8) (4.8)
Adjusted EBITDA........................................... 36.1 22.7 14.9
SAME HOSPITALS PERCENTAGE CHANGE FROM PRIOR PERIOD (e):
Net operating revenues.................................... 2.5 7.6 8.0
Admissions................................................ 4.3 4.9 1.7
Adjusted admissions....................................... 6.4 7.7 6.5
Adjusted EBITDA........................................... 11.7 12.6 14.1
</TABLE>
- --------------------------
(a) Operating expenses include salaries and benefits, provision for bad debts,
supplies, rent, and other operating expenses, and exclude the items that are
excluded for purposes of determining adjusted EBITDA as discussed in
footnote (b) below.
(b) We define adjusted EBITDA as EBITDA adjusted to exclude cumulative effect of
a change in accounting principle, impairment of long-lived assets,
compliance settlement and Year 2000 remediation costs, and loss from
hospital sales. EBITDA consists of income (loss) before interest, income
taxes, depreciation and amortization, and amortization of goodwill. EBITDA
and adjusted EBITDA should not be considered as measures of financial
performance under generally accepted accounting principles. Items excluded
from EBITDA and adjusted EBITDA are significant components in understanding
and assessing financial performance. EBITDA and adjusted EBITDA are key
measures used by management to evaluate our operations and provide useful
information to investors. EBITDA and adjusted EBITDA should not be
considered in isolation or as alternatives to net income, cash flows
generated by operations, investing or financing activities, or other
financial statement data presented in the consolidated financial statements
as indicators of financial performance or liquidity. Because EBITDA and
adjusted EBITDA are not measurements determined in accordance with generally
accepted accounting principles and are thus susceptible to varying
calculations, EBITDA and adjusted EBITDA as presented may not be comparable
to other similarly titled measures of other companies.
(c) Includes Year 2000 remediation costs representing 0.0% in 1998 and 0.3% in
1999.
(d) Adjusted admissions is a general measure of combined inpatient and
outpatient volume. We computed adjusted admissions by multiplying admissions
by gross patient revenues and then dividing that number by gross inpatient
revenues.
(e) Includes acquired hospitals to the extent we operated them during comparable
periods in both years.
THREE MONTHS ENDED MARCH 31, 2000 COMPARED TO THREE MONTHS ENDED MARCH 31, 1999
Net operating revenues increased by 17.4% to $308.7 million for the three
months ended March 31, 2000 from $263.0 million for the three months ended
March 31, 1999. Of the $45.7 million increase in net operating revenues, the six
hospitals we acquired in 1999 and 2000 contributed approximately $25.4 million,
and hospitals we owned throughout both periods contributed $20.3 million, an
increase of 8.0%. The increase from hospitals owned throughout both periods was
attributable primarily to volume increases.
Inpatient admissions increased by 10.1%. Adjusted admissions increased by
16.2%. Adjusted admissions is a general measure of combined inpatient and
outpatient volume. We computed adjusted admissions by multiplying admissions by
gross patient revenues and then dividing that number by gross
23
<PAGE>
inpatient revenues. Average length of stay decreased by 4.8%. On a same-hospital
basis, inpatient admissions increased by 1.7% and adjusted admissions increased
by 6.5%. The increase in same hospital inpatient admissions and adjusted
admissions was due primarily to an increase in services offered, physician
relationship development efforts and the addition of physicians through our
focused recruitment program. We experienced this increase in inpatient
admissions notwithstanding a higher incidence of flu in the three months ended
March 31, 1999. On a same-hospital basis, net outpatient operating revenues
increased 14.5%. Outpatient growth reflects the continued trend toward a
preference for outpatient procedures, where appropriate, by patients,
physicians, and payors.
Operating expenses, as a percentage of net operating revenues, increased
from 80.1% for the three months ended March 31, 1999 to 80.5% for the three
months ended March 31, 2000, primarily due to higher operating expenses and
lower initial adjusted EBITDA margins associated with acquired hospitals and one
recently constructed hospital. Adjusted EBITDA margin decreased from 19.9% for
the three months ended March 31, 1999 to 19.5% for the three months ended
March 31, 2000. Operating expenses include salaries and benefits, provision for
bad debts, supplies, rent and other operating expenses. Salaries and benefits,
as a percentage of net operating revenues, increased to 39.0% from 38.6% for the
comparable periods, due to acquisitions of hospitals in 1999 and 2000 having
higher salaries and benefits as a percentage of net operating revenues.
Provisions for bad debts, as a percentage of net operating revenues, increased
to 9.1% from 8.6% for the comparable periods due to an increase in self-pay
revenues and payor remittance slowdowns in part caused by Year 2000 compliant
program conversions. Supplies, as a percentage of net operating revenues,
decreased to 11.7% from 12.1%. Rent and other operating expenses, as a
percentage of net operating revenues, decreased to 20.8% from 21.0% for the
comparable periods.
On a same-hospital basis, operating expenses as a percentage of net
operating revenues decreased from 80.4% for the three months ended March 31,
1999 to 79.3% for the three months ended March 31, 2000. We achieved these
efficiency and productivity gains by reaching target staffing ratios and
improving compliance with national purchasing contacts. Operating expenses
improved as a percentage of net operating revenues in every major category
except provision for bad debts.
Depreciation and amortization increased by $3.4 million from $13.0 million
for the three months ended March 31, 1999 to $16.4 million for the three months
ended March 31, 2000. The six hospitals acquired in 1999 and 2000 accounted for
$1.0 million of the increase and facility renovations and purchases of
equipment, including purchases of medical equipment and information systems
upgrades related to Year 2000, accounted for the remaining $2.4 million.
Amortization of goodwill increased by $0.5 million from $5.7 million for the
three months ended March 31, 1999 to $6.2 milion for the three months ended
March 31, 2000. The increase was related to the six hospitals acquired in 1999
and the first quarter of 2000.
Interest, net increased by $5.9 million from $26.8 million for the three
months ended March 31, 1999 to $32.7 million for the three months ended
March 31, 2000. The six hospitals acquired in 1999 and the first quarter of 2000
accounted for approximately $1.5 million of the increase and borrowings under
our credit agreement to finance capital expenditures and an increase in average
interest rates accounted for the remaining $4.4 million.
Income before income taxes decreased from $6.5 million for the three months
ended March 31, 1999 to $4.9 million for the three months ended March 31, 2000
primarily as a result of $0.8 million in additional depreciation expense related
to purchases of medical equipment and information systems upgrades related to
Year 2000, $2.9 million increase in interest expense related to an increase in
our average interest rates between the three months ended March 31, 1999 and the
comparable period of 2000, and $1.0 million in initial operating losses at a
recently constructed facility.
24
<PAGE>
Provision for income taxes decreased from $4.6 million for the three months
ended March 31, 1999 to $3.9 million for the three months ended March 31, 2000.
Net income was $0.9 million for the three months ended March 31, 2000
compared to $1.9 million for the three months ended March 31, 1999.
YEAR ENDED DECEMBER 31, 1999 COMPARED TO YEAR ENDED DECEMBER 31, 1998
Net operating revenues increased by 26.4% to $1,080.0 million in 1999 from
$854.6 million in 1998. Of the $225.4 million increase in net operating
revenues, the nine hospitals we acquired, including one constructed, in 1998 and
1999, contributed $160.6 million and nine hospitals we owned throughout both
periods contributed $64.8 million. The $64.8 million, or 7.6%, increase in same
hospitals net operating revenues was attributable primarily to inpatient and
outpatient volume increases, partially offset by a decrease in reimbursement. In
1999, we experienced an estimated $23 million of reductions from the Balanced
Budget Act of 1997. We have experienced lower payments from a number of payors,
resulting primarily from:
- reductions mandated by the Balanced Budget Act of 1997, particularly in
the areas of reimbursement for Medicare outpatient, capital, bad debts,
home health, and skilled nursing;
- reductions in various states' Medicaid programs; and
- reductions in length of stay for patients not reimbursed on an admission
basis.
We expect the Balanced Budget Refinement Act of 1999 to lessen the impact of
these reductions in future periods.
Inpatient admissions increased by 20.3%. Adjusted admissions increased by
22.6%. Average length of stay decreased by 4.8%. On a same hospitals basis,
inpatient admissions increased by 4.9% and adjusted admissions increased by
7.7%. The increase in same hospitals inpatient admissions and adjusted
admissions was due primarily to an increase in services offered, physician
relationship development efforts, and the addition of physicians through our
focused recruitment program. On a same hospitals basis, net outpatient operating
revenues increased 14.8%. Outpatient growth reflects the continued trend toward
a preference for outpatient procedures, where appropriate, by patients,
physicians, and payors.
Operating expenses, as a percentage of net operating revenues, increased
from 80.5% in 1998 to 81.1% in 1999 due to higher operating expenses and lower
initial adjusted EBITDA margins associated with acquired hospitals and one
recently constructed hospital. Adjusted EBITDA margin decreased from 19.5% in
1998 to 18.9% in 1999. Salaries and benefits, as a percentage of net operating
revenues, increased to 38.8% in 1999 from 38.4% in 1998, due to acquisitions of
hospitals in 1998 and 1999 having higher salaries and benefits as a percentage
of net operating revenues than our 1998 results. Provision for bad debts, as a
percentage of net operating revenues, increased to 8.8% in 1999 from 8.1% in
1998 due to an increase in self-pay revenues and payor remittance slowdowns in
part caused by Year 2000 conversions. Supplies, as a percentage of net operating
revenues, decreased to 11.7% in 1999 from 11.8% in 1998. Rent and other
operating expenses, as a percentage of net operating revenues, decreased to
21.7% in 1999 from 22.3% in 1998.
On a same hospitals basis, operating expenses as a percentage of net
operating revenues decreased from 81.1% in 1998 to 80.3% in 1999 and adjusted
EBITDA margin increased from 18.9% in 1998 to 19.7% in 1999. These efficiency
and productivity gains resulted from the achievement of target staffing ratios
and improved compliance with national purchasing contracts. Operating expenses
improved as a percentage of net operating revenues in every major category
except provision for bad debts.
Depreciation and amortization increased by $7 million from $49.9 million in
1998 to $56.9 million in 1999. The nine hospitals acquired in 1998 and 1999
accounted for $7.1 million of the increase and
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facility renovations and purchases of equipment accounted for the remaining
$3.3 million. These increases were offset by a $3.4 million reduction in
depreciation and amortization related to the 1998 impairment write-off of
certain assets.
Amortization of goodwill decreased by $1.9 million from $26.6 million in
1998 to $24.7 million in 1999. The 1998 impairment charge resulted in a
$3.6 million reduction in amortization of goodwill, offset by an increase of
$1.7 million primarily related to the nine hospitals acquired in 1998 and 1999.
Interest, net increased by $15.3 million from $101.2 million in 1998 to
$116.5 million in 1999. The nine hospitals acquired in 1998 and 1999 accounted
for $10.2 million of the increase, and borrowings under our credit agreement to
finance capital expenditures accounted for the remaining $5.1 million.
Loss before cumulative effect of a change in accounting principle and income
taxes for 1999 was $11.2 million compared to a loss of $196.3 million in 1998. A
majority of this variance was due to a $164.8 million charge for impairment of
long-lived assets recorded in 1998. In December 1998, in connection with our
periodic review process, we determined that as a result of adverse changes in
physician relationships, undiscounted cash flows from seven of our hospitals
were below the carrying value of long-lived assets associated with those
hospitals. Therefore, in accordance with Statement of Financial Accounting
Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed of," we adjusted the carrying value of the
related long-lived assets, primarily goodwill, to their estimated fair value. We
based the estimated fair values of these hospitals on specific market
appraisals.
The provision for income taxes in 1999 was $5.6 million compared to a
benefit of $13.4 million in 1998. Due to the non-deductible nature of certain
goodwill amortization and the goodwill portion of the 1998 impairment charge,
the resulting effective tax rate is in excess of the statutory rate.
Including the impairment of long-lived assets, compliance settlement costs,
Year 2000 remediation costs, and cumulative effect of a change in accounting
principle charges, net loss for 1999 was $16.8 million as compared to
$183.3 million net loss in 1998. In 1997, we initiated a voluntary review of
inpatient medical records to determine whether documentation supported the
inpatient codes billed to certain governmental payors for the years 1993 through
1997. We have executed a settlement agreement with the appropriate state and
federal governmental agencies for a negotiated settlement amount of
$31 million. The settlement agreement requires payment of the entire settlement
amount on May 22, 2000. We recorded as a charge to income, under the caption
"Compliance settlement costs," $20 million in 1998 and $14 million in 1999.
YEAR ENDED DECEMBER 31, 1998 COMPARED TO YEAR ENDED DECEMBER 31, 1997
Net operating revenues increased by 15.1% to $854.6 million in 1998 from
$742.4 million in 1997. Of the $112.2 million increase, the six hospitals we
acquired in 1997 and 1998 contributed approximately $93.3 million, and the
hospitals we owned throughout both periods contributed $18.9 million. The
$18.9 million, or 2.5%, increase in same hospital net operating revenues was
attributable primarily to inpatient and outpatient volume increases, partially
offset by a decrease in reimbursement. In 1998, we experienced an estimated
$14 million of reductions from the Balanced Budget Act of 1997. We have
experienced lower payments from a number of payors, resulting primarily from:
- reductions mandated by the Balanced Budget Act of 1997, particularly in
the areas of reimbursement for Medicare outpatient, capital, bad debts,
and home health;
- reductions in various states' Medicaid programs;
- reductions in length of stay for patients not reimbursed on an admission
basis; and
- a reduction in Medicare case-mix index.
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Inpatient admissions increased by 13.6%, adjusted admissions increased by
15.3%, and average length of stay decreased by 6.7%. On a same hospitals basis,
inpatient admissions increased by 4.3% and adjusted admissions increased by
6.4%. The increase in same hospitals inpatient admissions and adjusted
admissions was due primarily to an increase in services offered as a result of
our capital expenditure program, physician relationship development efforts, and
the addition of physicians through recruitment. On a same hospitals basis, net
outpatient operating revenues increased 7.6%. Outpatient growth reflects the
continued trend toward a preference for outpatient procedures, where
appropriate, by patients, physicians, and payors.
Operating expenses, as a percentage of net operating revenues, decreased
from 83.5% in 1997 to 80.5% in 1998. Adjusted EBITDA margin increased to 19.5%
in 1998 from 16.5% in 1997. Salaries and benefits, as a percentage of net
operating revenues, decreased to 38.4% in 1998 from 40.0% in 1997. Provision for
bad debts, as a percentage of net operating revenues, increased to 8.1% in 1998
from 7.7% in 1997 due to an increase in self pay revenues. Supplies, as a
percentage of net operating revenues, decreased to 11.8% in 1998 from 12.2% in
1997. Rent and other operating expenses, as a percentage of net operating
revenues, decreased to 22.3% in 1998 from 23.7% in 1997.
On a same hospitals basis, operating expenses as a percentage of net
operating revenues decreased from 82.4% in 1997 to 80.9% in 1998 and adjusted
EBITDA margin increased from 17.6% in 1997 to 19.1% in 1998. These efficiency
and productivity gains resulted in part from the achievement of target staffing
ratios. Operating expenses improved as a percentage of net operating revenues in
every major category except provision for bad debts.
Depreciation and amortization increased by $6.1 million from $43.8 million
in 1997 to $49.9 million in 1998. The six hospitals acquired in 1997 and 1998
accounted for $4.4 million of the increase, and facility renovations and
purchases of equipment accounted for the remaining $1.7 million.
Amortization of goodwill increased by $1.2 million from $25.4 million in
1997 to $26.6 million in 1998. The six hospitals acquired in 1997 and 1998
accounted for the majority of this increase.
Interest, net increased by $11.4 million from $89.8 million in 1997 to
$101.2 million in 1998. The six hospitals acquired in 1997 and 1998 accounted
for $8 million of the increase, and borrowings under our credit agreement to
finance capital expenditures accounted for the remaining $3.4 million.
Loss before cumulative effect of a change in accounting principle and income
taxes for 1998 was $196.3 million compared to a loss of $36.7 million in 1997. A
majority of this increase was due to a $164.8 million charge for impairment of
long-lived assets recorded in 1998. In December 1998, in connection with our
periodic review process, we determined that projected undiscounted cash flows
for seven of our hospitals were below the carrying value of the long-lived
assets associated with these hospitals. In accordance with Statement of
Financial Accounting Standards No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," we adjusted the
carrying value of these assets to their estimated fair values and recorded an
impairment charge of $164.8 million. $134.3 million of this charge was related
to goodwill, $27.1 million related to tangible property and $3.4 million related
to identifiable intangibles. Of the seven impaired hospitals, two are located in
Georgia; two are located in Texas; one is located in Florida; one is located in
Louisiana; and one is located in Kentucky. The events and circumstances leading
to the impairment charge were unique to each of the hospitals.
One of our Kentucky hospitals lost its only anesthesiologist due to
unexpected death and a leading surgeon due to illness. We have not been able to
successfully recruit a replacement surgeon. One of our Georgia hospitals lost a
key surgeon due to unexpected death and a leading specialist due to relocation
to another market. We have not been able to successfully recruit replacement
physicians. One of our Louisiana hospitals relies heavily on foreign physicians
and, following the departure of four foreign physicians from its market over a
short period of time, has had difficulties replacing these
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physicians because of regulatory changes in recruiting foreign physicians. The
skilled nursing and home health reimbursement for one of our Texas hospitals was
disproportionately and adversely affected by the Balanced Budget Act of 1997. In
addition, the market in which this hospital operates relies on foreign
physicians that have been difficult to recruit because of regulatory changes.
Our other Georgia hospital terminated an employed specialty surgeon who was
responsible for over 5% of the hospital's revenue. We have not been able to
replace the surgeon. In addition, this hospital's skilled nursing reimbursement
was disproportionately and adversely affected by the Balanced Budget Act of
1997. Our other Texas hospital lost market share and was excluded from several
key managed care contracts caused by the combination in 1998 of two larger
competing hospitals. This is our only hospital which competes with more than one
hospital in its primary service area. A Florida hospital we then owned
terminated discussions in 1998 with an unrelated hospital, located in a
contiguous county, to build a combined replacement facility. The short and
long-term success of this hospital was in our view dependent upon the
combination being effected.
Generally, we have not experienced difficulty in recruiting physicians and
specialists for our hospitals. However, for the four hospitals referred to above
we have experienced difficulty in recruiting physicians and specialists where
the number of physicians on staff is low. These four hospitals averaged 13
physicians per hospital as of December 31, 1998. The average number of
physicians on the medical staff of our other hospitals was 39 physicians at that
time. We continually monitor the relationships of our hospitals with their
physicians and any physician recruiting requirements. We have frequent
discussions with board members, chief executive officers and chief financial
officers of our hospitals. We are not aware of any significant adverse
relationships with physicians or any recurring physician recruitment needs that,
if not resolved in a timely manner, would have a material adverse effect on our
results of operations and financial position, either currently or in future
periods.
The provision for income taxes in 1998 was a benefit of $13.4 million
compared to a benefit of $4.5 million in 1997. Due to the non-deductible nature
of goodwill amortization and the goodwill portion of the 1998 impairment charge,
the resulting effective tax rate is in excess of the statutory rate.
Including the impairment of long-lived assets, compliance settlement costs,
Year 2000 remediation costs, and cumulative effect of a change in accounting
principle charges, net loss for 1998 was $183.3 million as compared to
$32.2 million net loss in 1997.
LIQUIDITY AND CAPITAL RESOURCES
THREE MONTHS ENDED MARCH 31, 2000 COMPARED TO THREE MONTHS ENDED MARCH 31, 1999
Net cash used in operating activities decreased $14 million from a use of
$18.9 million for the three months ended March 31, 1999 to a use of
$4.9 million for the three months ended March 31, 2000. The use of cash from
investing activities decreased from $66.1 million to $38.4 million for the
comparable periods. The cost of acquisitions for the three months ended
March 31, 2000 included $8.5 million for the acquisition of a hospital located
in Franklin, Virginia and $12.9 million for acquisitions located in Las Vegas,
New Mexico and Eufaula, Alabama that closed on April 1, 2000. The cost of
acquisitions during the comparable periods decreased $23.0 million and the cost
of construction and renovation projects decreased $3.9 million primarily as a
result of the completion of construction of a new facility which was opened in
October 1999. Net cash provided by financing activities decreased from
$89.6 million to $50.0 million for the comparable periods as a result of the
lower cost of acquired hospitals and reduction in construction and renovations
costs.
1999 COMPARED TO 1998
Net cash provided by operating activities decreased by $27.4 million, from
$15.7 million during 1998 to a use of $11.7 million during 1999 due primarily to
an increase in accounts receivable at both same hospitals and newly-acquired
hospitals. The use of cash in investing activities decreased from
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$236.6 million in 1998 to $155.5 million in 1999. The $81.1 million decrease was
due primarily to a decrease in cash used to finance hospital acquisitions of
$112.9 million during 1999. This decrease was offset by a $31.8 million increase
in cash used primarily to finance capital expenditures during 1999, including
approximately $15.0 million of Year 2000 expenditures. The 1998 use of cash to
acquire facilities, included four hospitals, two of which were larger
facilities. Net cash provided by financing activities decreased from
$219.9 million in 1998 to $164.9 million in 1999. Excluding the refinancing of
our credit facility, borrowings in 1999 would have been $186.3 million and
repayments would have been $20.9 million. This represents a $56.2 million
decrease compared to $242.5 million borrowed in 1998 and repayments of long-term
indebtedness of $20.9 million in 1999 compared to repayments of $18.8 million in
1998. The $56.2 million decrease in borrowings related to a lesser amount spent
on acquisition of facilities, partially offset by increased capital expenditures
and an increase in the accounts receivable balance.
1998 COMPARED TO 1997
Net cash provided by operating activities decreased by $5.8 million from
$21.5 million during 1997 to $15.7 million during 1998, due primarily to an
increase in accounts receivable at both same hospitals and newly-acquired
hospitals. The use of cash in investing activities increased from $76.7 million
in 1997 to $236.6 million in 1998. The $159.9 million increase was attributable
primarily to the four hospitals acquired in 1998, including two larger
facilities, as compared to two hospitals acquired in 1997. Net cash provided by
financing activities increased by $183.7 million to $219.9 million in 1998, as
compared to $36.2 million in 1997. The increase was due primarily to the
purchase of four hospitals in 1998.
CAPITAL EXPENDITURES
Our capital expenditures for 1999 totaled $64.8 million compared to
$51.3 million in 1998 and $48.8 million in 1997. Our capital expenditures for
1999 excludes $15.3 million of costs associated with the opening and
construction of one additional hospital. The increase in capital expenditures in
1999 was due primarily to an increase in purchases of medical equipment and
information systems upgrades related to Year 2000 compliance. The increase in
capital expenditures during 1998 as compared to 1997 was attributable primarily
to an increase in purchases of medical equipment and facility improvements.
As an obligation under hospital purchase agreements in effect as of
April 30, 2000, we are required to construct four replacement hospitals through
2005 with an aggregate estimated construction cost of approximately
$100 million. This includes our obligation under a purchase agreement relating
to a hospital we acquired on April 1, 2000. We expect total capital expenditures
of approximately $70 million in 2000, including $55 million for renovation and
equipment purchases and $15 million for construction of replacement hospitals.
CAPITAL RESOURCES
Net working capital was $100.8 million at March 31, 2000 compared to
$65.2 million at December 31, 1999. The $35.6 million increase from
December 31, 1999 to March 31, 2000 was attributable primarily to an increase in
cash and accounts receivable due to a combination of growth in same hospitals
revenues during 2000 and the addition of one hospital in 2000 and payments of
debt and related interest during 2000.
During March 1999, we amended our credit agreement. The amended credit
agreement provides for $644 million in term debt with quarterly amortization and
staggered maturities in 2000, 2001, 2002, 2003, 2004 and 2005. This agreement
also provides for revolving facility debt for working capital of $200 million
and acquisitions of $282.5 million. This revolving facility matures on
December 31, 2002. Borrowings under the facility bear interest at either LIBOR
or prime rate plus various applicable
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margins which are based upon financial covenant ratio tests. As of March 31,
2000, under our credit agreement, our weighted average interest rate was 8.49%.
As of March 31, 2000, we had availability to borrow an additional $12 million
under the working capital revolving facility and an additional $123 million
under the acquisition loan revolving facility.
We are required to pay a quarterly commitment fee at a rate which ranges
from .375% to .500% based on specified financial performance criteria. This fee
applies to unused commitments under the revolving credit facility and the
acquisition loan facility.
The terms of the credit agreement include various restrictive covenants.
These covenants include restrictions on additional indebtedness, investments,
asset sales, capital expenditures, dividends, sale and leasebacks, contingent
obligations, transactions with affiliates, and fundamental changes. The
covenants also require maintenance of various ratios regarding senior
indebtedness, senior interest, and fixed charges.
We believe that internally generated cash flows and borrowings under our
revolving credit facility and acquisition facility will be sufficient to finance
acquisitions, capital expenditures and working capital requirements through the
12 months following the date of this prospectus. If funds required for future
acquisitions exceed existing sources of capital, we will need to increase our
credit facilities or obtain additional capital by other means.
REIMBURSEMENT, LEGISLATIVE AND REGULATORY CHANGES
Legislative and regulatory action has resulted in continuing change in the
Medicare and Medicaid reimbursement programs which will continue to limit
payment increases under these programs. Within the statutory framework of the
Medicare and Medicaid programs, there are substantial areas subject to
administrative rulings, interpretations, and discretion which may further affect
payments made under those programs, and the federal and state governments might,
in the future, reduce the funds available under those programs or require more
stringent utilization and quality reviews of hospital facilities. Additionally,
there may be a continued rise in managed care programs and future restructuring
of the financing and delivery of healthcare in the United States. These events
could have an adverse effect on our future financial results.
INFLATION
The healthcare industry is labor intensive. Wages and other expenses
increase during periods of inflation and when labor shortages occur in the
marketplace. In addition, suppliers pass along rising costs to us in the form of
higher prices. We have implemented cost control measures, including our case and
resource management program, to curb increases in operating costs and expenses.
We have, to date, offset increases in operating costs by increasing
reimbursement for services and expanding services. However, we cannot predict
our ability to cover or offset future cost increases.
PREPARATION FOR YEAR 2000
As with most industries, hospitals and healthcare systems use information
systems that had the potential to misidentify dates beginning January 1, 2000,
which could have resulted in systems or equipment failures or miscalculations.
We engaged in a comprehensive project to upgrade computer software and hospital
equipment and systems to be Year 2000 compliant. This project was successfully
completed with no major difficulties encountered.
RECENT ACCOUNTING PRONOUNCEMENT NOT YET ADOPTED
During 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 133, "Accounting for Derivative
Instruments and Hedging Activities." This
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statement specifies how to report and display derivative instruments and hedging
activities and is effective for fiscal years beginning after June 15, 2000. We
are evaluating the impact, if any, of adopting SFAS No. 133.
FEDERAL INCOME TAX EXAMINATIONS
The Internal Revenue Service is examining our filed federal income tax
returns for the tax periods ended between December 31, 1993 and December 31,
1996. The Internal Revenue Service has indicated that it is considering a number
of adjustments, primarily involving temporary or timing differences. To date, a
revenue agent's report has not been issued in connection with the examination of
these tax periods. We do not expect that the ultimate outcome of the Internal
Revenue Service examinations will have a material effect on us.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to interest rate changes, primarily as a result of our credit
agreement which bears interest based on floating rates. We have not taken any
action to cover interest rate market risk, and are not a party to any interest
rate market risk management activities.
A 1% change in interest rates on variable rate debt would have resulted in
interest expense fluctuating approximately $6 million for 1998, $8 million for
1999, and $2 million for the three months ended March 31, 2000.
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BUSINESS OF COMMUNITY HEALTH SYSTEMS
OVERVIEW OF OUR COMPANY
We are the largest non-urban provider of general hospital healthcare
services in the United States in terms of number of facilities and the second
largest in terms of revenues and EBITDA. As of April 30, 2000, we owned, leased
or operated 49 hospitals, geographically diversified across 20 states, with an
aggregate of 4,348 licensed beds. In over 80% of our markets, we are the sole
provider of these services. In most of our other markets, we are one of two
providers of these services. For the fiscal year ended December 31, 1999, we
generated $1.08 billion in revenues and $204.2 million in adjusted EBITDA.
In July 1996, an affiliate of Forstmann Little & Co. acquired our
predecessor company from its public stockholders. The predecessor company was
formed in 1985. The aggregate purchase price for the acquisition was
$1,100.2 million. Wayne T. Smith, who has over 30 years of experience in the
healthcare industry, joined our company as President in January 1997, and we
named him Chief Executive Officer in April 1997. Under this new ownership and
leadership, we have:
- strengthened the senior management team in all key business areas;
- standardized and centralized our operations across key business areas;
- implemented a disciplined acquisition program;
- expanded and improved the services and facilities at our hospitals;
- recruited additional physicians to our hospitals;
- instituted a company-wide regulatory compliance program; and
- divested certain non-core assets.
As a result of these initiatives, we achieved revenue growth of 26.4% in 1999
and 15.1% in 1998. We also achieved growth in adjusted EBITDA of 22.7% in 1999
and 36.1% in 1998. Our adjusted EBITDA margins improved from 16.5% for 1997 to
18.9% for 1999.
Our hospitals typically have 50 to 200 beds and approximate annual revenues
ranging from $12 million to $70 million. They generally are located in non-urban
markets with populations of 20,000 to 80,000 people and economically diverse
employment bases. These facilities, together with their medical staffs, provide
a wide range of inpatient and outpatient general hospital services and a variety
of specialty services.
We target growing, non-urban healthcare markets because of their favorable
demographic and economic trends and competitive conditions. Because non-urban
service areas have smaller populations, there are generally fewer hospitals and
other healthcare service providers in these communities. We believe that smaller
populations result in less direct competition for hospital-based services. Also,
we believe that non-urban communities generally view the local hospital as an
integral part of the community. There is generally a lower level of managed care
presence in these markets.
OUR BUSINESS STRATEGY
The key elements of our business strategy are to:
- increase revenue at our facilities;
- grow through selective acquisitions;
- reduce costs; and
- improve quality.
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INCREASE REVENUE AT OUR FACILITIES
OVERVIEW. We seek to increase revenue at our facilities by providing a
broader range of services in a more attractive care setting, as well as by
supporting and recruiting physicians. We identify the healthcare needs of the
community by analyzing demographic data and patient referral trends. We also
work with local hospital boards, management teams, and medical staffs to
determine the number and type of additional physicians needed. Our initiatives
to increase revenue include:
- recruiting additional primary care physicians and specialists;
- expanding the breadth of services offered at our hospitals through
targeted capital expenditures to support the addition of more complex
services, including orthopedics, cardiology, OB/GYN, and occupational
medicine; and
- providing the capital to invest in technology and the physical plant at
the facilities, particularly in our emergency rooms.
By taking these actions, we believe that we can increase our share of the
healthcare dollars spent by local residents and limit inpatient and outpatient
migration to larger urban facilities. Total revenue for hospitals operated by us
for a full year increased by 7.6% from 1998 to 1999. Total inpatient admissions
increased by 4.9% over the same period.
PHYSICIAN RECRUITING. The primary method of adding or expanding medical
services is the recruitment of new physicians into the community. A core group
of primary care physicians is necessary as an initial contact point for all
local healthcare. The addition of specialists who offer services including
general surgery, OB/GYN, cardiology, and orthopedics completes the full range of
medical and surgical services required to meet a community's core healthcare
needs. When we acquire a hospital, we identify the healthcare needs of the
community by analyzing demographic data and patient referral trends. We are then
able to determine what we believe to be the optimum mix of primary care
physicians and specialists. We employ recruiters at the corporate level to
support the local hospital managers in their recruitment efforts. During the
past three years, we have increased the number of physicians affiliated with us
by 320, including 80 in 1997, 84 in 1998, and 156 in 1999. The percentage of
recruited physicians commencing practice that were surgeons or specialists grew
from 45% in 1997 to 52% in 1999. We do not employ most of our physicians, but
rather they are in private practice in their communities. We have been
successful in recruiting physicians because of the practice opportunities of
physicians in our markets, as well as the lower managed care penetration as
compared to urban areas. These physicians are able to earn incomes comparable to
incomes earned by physicians in urban centers. As of April 30, 2000,
approximately 1,700 physicians were affiliated with our hospitals.
To attract and retain qualified physicians, we provide recruited physicians
with various services to assist them in opening and operating their practices,
including:
- relocation assistance;
- physician practice management assistance, either through consulting advice
or training;
- access to medical office building space adjacent to our hospitals;
- joint marketing programs for community awareness of new services and
providers of care in the community;
- case management consulting for best practices; and
- access to a physician advisory board which communicates regularly with
physicians regarding a wide range of issues affecting the medical staffs
of our hospitals.
EMERGENCY ROOM INITIATIVES. Given that over 50% of our hospital admissions
originate in the emergency room, we systematically take steps to increase
patient flow in our emergency rooms as a
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means of optimizing utilization rates for our hospitals. Furthermore, the
impression of our overall operations by our customers is substantially
influenced by our emergency room since often that is their first experience with
our hospitals. The steps we take to increase patient flow in our emergency rooms
include renovating and expanding our emergency room facilities, improving
service, and reducing waiting times, as well as publicizing our emergency room
capabilities in the local community. We have expanded or renovated four of our
emergency room facilities since 1997 and are now in the process of upgrading an
additional nine emergency room facilities. Since 1997, we have entered into
approximately 20 new contracts with emergency room operating groups to improve
performance in our emergency rooms. We have implemented marketing campaigns that
emphasize the speed, convenience, and quality of our emergency rooms to enhance
each community's awareness of our emergency room services.
Our upgrades include the implementation of specialized software programs
designed to assist physicians in making diagnoses and determining treatments.
The software also benefits patients and hospital personnel by assisting in
proper documentation of patient records. It enables our nurses to provide more
consistent patient care and provides clear instructions to patients at time of
discharge to help them better understand their treatments.
EXPANSION OF SERVICES. To capture a greater portion of the healthcare
spending in our markets and to more efficiently utilize our hospital facilities,
we have added a broad range of emergency, outpatient, and specialty services to
our hospitals. Depending on the needs of the community, we identify
opportunities to expand into various specialties, including orthopedics,
cardiology, OB/GYN, and occupational medicine. In addition to expanding
services, we have completed major capital projects at selected facilities to
offer these types of services. For example, in 1999 we invested $1 million in a
new cardiac catheterization laboratory at our Crestview, Florida hospital. As a
result, this laboratory increased the number of procedures it performed by 84%,
from 122 in 1998 to 224 in 1999. In 1999, we initiated major capital projects at
many of our hospitals. These projects included renovations to nine emergency
rooms, two operating rooms, two OB/GYN facilities, and three intensive care
units at various hospitals. We believe that through these efforts we will reduce
patient migration to competing providers of healthcare services and increase
volume.
MANAGED CARE STRATEGY. Managed care has seen growth across the U.S. as
health plans expand service areas and membership. As we service primarily
non-urban markets, we have limited relationships with managed care
organizations. We have responded with a proactive and carefully considered
strategy developed specifically for each of our facilities. Our experienced
business development department reviews and approves all managed care contracts,
which are managed through a central database. The primary mission of this
department is to select and evaluate appropriate managed care opportunities,
manage existing reimbursement arrangements, negotiate increases, and educate our
physicians. We have terminated our only risk sharing capitated contract, which
we acquired through our acquisition of a California hospital.
GROW THROUGH SELECTIVE ACQUISITIONS
ACQUISITION CRITERIA. Each year we intend to acquire, on a selective basis,
two to four hospitals that fit our acquisition criteria. We pursue acquisition
candidates that:
- have a general service area population between 20,000 and 80,000 with a
stable or growing population base;
- are the sole or primary provider of acute care services in the community;
- are located more than 25 miles from a competing hospital;
- are not located in an area that is dependent upon a single employer or
industry; and
- have financial performance that we believe will benefit from our
management's operating skills.
34
<PAGE>
Most hospitals we have acquired are located in service areas having
populations within the lower to middle range of our criteria. However, we have
also acquired hospitals having service area populations in the upper range of
our criteria. For example, in 1998, we acquired a 162-bed facility in Roswell,
New Mexico which has a service area population of over 70,000 and is located 200
miles from the nearest urban centers in Albuquerque, New Mexico and Lubbock,
Texas. Facilities similar to the one located in Roswell offer even greater
opportunities to expand services given their larger service area populations.
Most of our acquisition targets are municipal and other not-for-profit
hospitals. We believe that our access to capital and ability to recruit
physicians make us an attractive partner for these communities. In addition, we
have found that communities located in states where we already operate a
hospital are more receptive to us when they consider selling their hospital
because they are aware of our operating track record with respect to our
facilities within the state.
ACQUISITION OPPORTUNITIES. We believe that there are significant
opportunities for growth through the acquisition of additional facilities. We
estimate that there are currently approximately 400 hospitals that meet our
acquisition criteria. These hospitals are primarily not-for-profit or
municipally owned. Many of these hospitals have experienced declining financial
performance, lack the resources necessary to maintain and improve facilities,
have difficulty attracting qualified physicians, and are challenged by the
changing healthcare industry. We believe that these circumstances will continue
and may encourage owners of these facilities to turn to companies, like ours,
that have greater management expertise and financial resources and can enhance
the local availability of healthcare.
After we acquire a hospital, we:
- improve hospital operations by implementing our standardized and
centralized programs and appropriate expense controls as well as by
managing staff levels;
- recruit additional primary care physicians and specialists;
- expand the breadth of services offered in the community to increase local
market share and reduce inpatient and outpatient migration to larger urban
hospitals; and
- implement appropriate capital expenditure programs to renovate the
facility, add new services, and upgrade equipment.
REPLACEMENT FACILITIES. In some cases, we enter into agreements with the
owners of hospitals to construct a new facility to be owned or leased by us that
will replace the existing facility. The new facilities offer many benefits to us
as well as the local community, including:
- state of the art technology, which attracts physicians trained in the
latest medical procedures;
- physical plant efficiencies designed to enhance the flow of services,
including emergency room and outpatient services;
- improved registration and business office functions; and
- local support for the institution.
As an obligation under hospital purchase agreements in effect as of
April 30, 2000, we are required to construct four replacement hospitals through
2005 with an aggregate estimated construction cost of approximately
$100 million.
DISCIPLINED ACQUISITION APPROACH. We have been disciplined in our approach
to acquisitions. We have a dedicated team of internal and external professionals
who complete a thorough review of the hospital's financial and operating
performance, the demographics of the market, and the state of the physical plant
of the facilities. Based on our historical experience, we then build a pro forma
financial
35
<PAGE>
model that reflects what we believe can be accomplished under our ownership.
Whether we buy or lease the existing facility or agree to construct a
replacement hospital, we have been disciplined in our approach to pricing. We
typically begin the acquisition process by entering into a non-binding letter of
intent with an acquisition candidate. After we complete business and financial
due diligence and financial modeling, we determine whether or not to enter into
a definitive agreement.
ACQUISITION EFFORTS. We have significantly enhanced our acquisition efforts
in the last three years in an effort to achieve our goals. We have focused on
identifying possible acquisition opportunities through expanding our internal
acquisition group and working with a broad range of financial advisors who are
active in the sale of hospitals, especially in the not-for-profit sector. Since
July 1996, we have acquired 20 hospitals through April 30, 2000, for an
aggregate investment of approximately $550 million, including working capital.
We have completed the following acquisitions since July 1996:
<TABLE>
<CAPTION>
YEAR OF LICENSED
ACQUISITION/LEASE BEDS
HOSPITAL NAME CITY STATE INCEPTION (a)
- ------------- ------------- -------- ----------------- ---------------------
<S> <C> <C> <C> <C>
Chesterfield General (b)........................ Cheraw SC 1996 66
Marlboro Park (b)............................... Bennettsville SC 1996 109
Northeast Medical (b)........................... Bonham TX 1996 75
Cleveland Regional (b).......................... Cleveland TX 1996 115
River West Medical (b).......................... Plaquemine LA 1996 80
Marion Memorial................................. Marion IL 1996 99
Lake Granbury Medical........................... Granbury TX 1997 56
Payson Regional................................. Payson AZ 1997 66
Eastern New Mexico.............................. Roswell NM 1998 162
Watsonville Community........................... Watsonville CA 1998 102
Martin General.................................. Williamston NC 1998 49
Fallbrook Hospital.............................. Fallbrook CA 1998 47
Greensville Memorial............................ Emporia VA 1999 114
Berwick Hospital................................ Berwick PA 1999 144
King's Daughters................................ Greenville MS 1999 137
Big Bend Regional (c)........................... Alpine TX 1999 40
Evanston Regional............................... Evanston WY 1999 42
Southampton Memorial............................ Franklin VA 2000 105
Northeastern Regional........................... Las Vegas NM 2000 54
Lakeview Community.............................. Eufaula AL 2000 74
Western Arizona Regional (d).................... Bullhead City AZ 2000 90
</TABLE>
- --------------------------
(a) Licensed beds are the number of beds for which the appropriate state agency
licenses a facility regardless of whether the beds are actually available
for patient use.
(b) Acquired in a single transaction from a private, for-profit company.
(c) New hospital constructed to replace existing facility that we managed.
(d) On May 15, 2000, we entered into a definitive agreement to acquire this
hospital from a tax exempt entity for total consideration of $66 million,
plus working capital. This facility is the sole provider of general hospital
services in its community. Subject to the terms and conditions of the
agreement, we expect to close this acquisition in July 2000.
Since 1998, we have also operated a hospital in Tooele, Utah under an
operating agreement pending our completion of the construction of a replacement
facility.
36
<PAGE>
REDUCE COSTS
OVERVIEW. To improve efficiencies and increase operating margins, we
implement cost containment programs and adhere to operating philosophies which
include:
- standardizing and centralizing our operations;
- optimizing resource allocation by utilizing our company-devised case and
resource management program, which assists in improving clinical care and
containing expenses;
- capitalizing on purchasing efficiencies through the use of company-wide
standardized purchasing contracts and terminating or renegotiating certain
vendor contracts;
- installing a standardized management information system, resulting in more
efficient billing and collection procedures; and
- managing staffing levels according to patient volumes and the appropriate
level of care.
In addition, each of our hospital management teams is supported by our
centralized operational, reimbursement, regulatory, and compliance expertise as
well as by our senior management team, which has an average of 20 years of
experience in the healthcare industry. Adjusted EBITDA margins on a same
hospitals basis improved from 18.9% in 1998 to 19.7% in 1999.
STANDARDIZATION AND CENTRALIZATION. Our standardization and centralization
initiatives encompass nearly every aspect of our business, from developing
standard policies and procedures with respect to patient accounting and
physician practice management, to implementing standard processes to initiate,
evaluate, and complete construction projects. Our standardization and
centralization initiatives have been a key element in improving our adjusted
EBITDA margins.
- BILLING AND COLLECTIONS. We have adopted standard policies and procedures
with respect to billing and collections. We have also automated and
standardized various components of the collection cycle, including
statement and collection letters and the movement of accounts through the
collection cycle. Upon completion of an acquisition, our management
information system team converts the hospital's existing information
system to our standardized system. This enables us to quickly implement
our business controls and cost containment initiatives.
- PHYSICIAN SUPPORT. We support our physicians to enhance their performance.
We have implemented physician practice management seminars and training.
We host these seminars at least quarterly. All newly recruited physicians
are required to attend a three-day introductory seminar. The subjects
covered in these comprehensive seminars include:
u our corporate structure and philosophy;
u provider applications, physician to physician relationships, and
performance standards;
u marketing and volume building techniques;
u medical records, equipment, and supplies;
u review of coding and documentation guidelines;
u compliance, legal, and regulatory issues;
u understanding financial statements;
u national productivity standards; and
u managed care.
37
<PAGE>
- MATERIALS MANAGEMENT. We have standardized and centralized our operations
with respect to medical supplies and equipment and pharmaceuticals used in
our hospitals. In 1997, after evaluating our vendor contract pricing, we
entered into an affiliation agreement with BuyPower, a group purchasing
organization owned by Tenet Healthcare Corporation. At the present time,
BuyPower is the source for a substantial portion of our medical supplies
and equipment and pharmaceuticals. We have reduced supply costs for
hospitals operated by us for a full year from 11.8% of our revenue in 1998
to 11.5% of our revenue in 1999.
- FACILITIES MANAGEMENT. We have standardized interiors, lighting, and
furniture programs. We have also implemented a standard process to
initiate, evaluate, and complete construction projects. Our corporate
staff monitors all construction projects and pays all construction project
invoices. Our initiatives in this area have reduced our construction costs
while maintaining the same level of quality and improving upon the time it
takes us to complete these projects.
- OTHER INITIATIVES. We have also improved margins by implementing standard
programs with respect to ancillary services support in areas including
pharmacy, laboratory imaging, home health, skilled nursing, emergency
medicine, and health information management. We have reduced costs
associated with these services by improving contract terms, standardizing
information systems, and encouraging adherence to best practices
guidelines.
CASE AND RESOURCE MANAGEMENT. Our case and resource management program is a
company-devised program developed in response to ongoing reimbursement changes
with the goal of improving clinical care and cost containment. The program
focuses on:
- appropriately treating patients along the care continuum;
- reducing inefficiently applied processes, procedures, and resources;
- developing and implementing standards for operational best practices; and
- using on-site clinical facilitators to train and educate care
practitioners on identified best practices.
Our case and resource management program integrates the functions of
utilization review, discharge planning, overall clinical management, and
resource management into a single effort to improve the quality and efficiency
of care. Issues evaluated in this process include patient treatment, patient
length of stay, and utilization of resources. The average length of inpatient
stays decreased from 4.5 days in 1997 to 4.0 days in 1999. We believe this
decrease was primarily a result of these initiatives.
Under our case and resource management program, patient care begins with a
clinical assessment of the appropriate level of care, discharge planning, and
medical necessity for planned services. Once a patient is admitted to the
hospital, we conduct a review for ongoing medical necessity using
appropriateness criteria. We reassess and adjust discharge plan options as the
needs of the patient change. We closely monitor cases to prevent delayed service
or inappropriate utilization of resources. Once the patient obtains clinical
improvement, we encourage the attending physician to consider alternatives to
hospitalization through discussions with the facility's physician advisor.
Finally, we refer the patient to the appropriate post-hospitalization resources.
IMPROVE QUALITY
We have implemented various programs to ensure improvement in the quality of
care provided. We have developed training programs for all senior hospital
management, chief nursing officers, quality directors, physicians and other
clinical staff. We share information among our hospital management to implement
best practices and assist in complying with regulatory requirements. We have
standardized accreditation documentation and requirements. Corporate support is
provided to each facility to assist with accreditation reviews. Several of our
facilities have received accreditation "with commendation"
38
<PAGE>
from the Joint Commission on Accreditation of Healthcare Organizations. All
hospitals conduct patient, physician, and staff satisfaction surveys to help
identify methods of improving the quality of care.
Each of our hospitals is governed by a board of trustees, which includes
members of the hospital's medical staff. The board of trustees establishes
policies concerning the hospital's medical, professional, and ethical practices,
monitors these practices, and is responsible for ensuring that these practices
conform to legally required standards. We maintain quality assurance programs to
support and monitor quality of care standards and to meet Medicare and Medicaid
accreditation and regulatory requirements. Patient care evaluations and other
quality of care assessment activities are reviewed and monitored continuously.
OUR FACILITIES
Our hospitals are general care hospitals offering a wide range of inpatient
and outpatient medical services. These services generally include internal
medicine, general surgery, cardiology, oncology, orthopedics, OB/GYN, diagnostic
and emergency room services, outpatient surgery, laboratory, radiology,
respiratory therapy, physical therapy, and rehabilitation services. In addition,
some of our hospitals provide skilled nursing and home health services based on
individual community needs.
For each of our hospitals, the following table shows its location, the date
of its acquisition or lease inception and the number of licensed beds as of
April 30, 2000:
<TABLE>
<CAPTION>
DATE OF
LICENSED ACQUISITION/LEASE OWNERSHIP
HOSPITAL CITY BEDS(a) INCEPTION TYPE
- -------- ------------- -------- ----------------- -------------
<S> <C> <C> <C> <C>
ALABAMA
Woodland Community Hospital............ Cullman 100 October, 1994 Owned
Parkway Medical Center Hospital........ Decatur 120 October, 1994 Owned
L.V. Stabler Memorial Hospital......... Greenville 72 October, 1994 Owned
Hartselle Medical Center............... Hartselle 150 October, 1994 Owned
Edge Regional Hospital................. Troy 97 December, 1994 Owned
Lakeview Community Hospital............ Eufaula 74 April, 2000 Owned
ARIZONA
Payson Regional Medical Center......... Payson 66 August, 1997 Leased
ARKANSAS
Harris Hospital........................ Newport 132 October, 1994 Owned
Randolph County Medical Center......... Pocahontas 50 October, 1994 Leased
CALIFORNIA
Barstow Community Hospital............. Barstow 56 January, 1993 Leased
Fallbrook Hospital..................... Fallbrook 47 November, 1998 Operated (b)
Watsonville Community Hospital......... Watsonville 102 September, 1998 Owned
FLORIDA
North Okaloosa Medical Center.......... Crestview 110 March, 1996 Owned
GEORGIA
Berrien County Hospital................ Nashville 71 October, 1994 Leased
Fannin Regional Hospital............... Blue Ridge 34 January, 1986 Owned
ILLINOIS
Crossroads Community Hospital.......... Mt. Vernon 55 October, 1994 Owned
Marion Memorial Hospital............... Marion 99 October, 1996 Leased
KENTUCKY
Parkway Regional Hospital.............. Fulton 70 May, 1992 Owned
Three Rivers Medical Center............ Louisa 90 May, 1993 Owned
Kentucky River Medical Center.......... Jackson 55 August, 1995 Leased
</TABLE>
(CONTINUED ON FOLLOWING PAGE)
39
<PAGE>
<TABLE>
<CAPTION>
DATE OF
LICENSED ACQUISITION/LEASE OWNERSHIP
HOSPITAL CITY BEDS(a) INCEPTION TYPE
- -------- ------------- -------- ----------------- -------------
<S> <C> <C> <C> <C>
LOUISIANA
Byrd Regional Hospital................. Leesville 70 October, 1994 Owned
Sabine Medical Center.................. Many 52 October, 1994 Owned
River West Medical Center.............. Plaquemine 80 August, 1996 Leased
MISSISSIPPI
The King's Daughters Hospital.......... Greenville 137 September, 1999 Owned
MISSOURI
Moberly Regional Medical Center........ Moberly 114 November, 1993 Owned
NEW MEXICO
Mimbres Memorial Hospital.............. Deming 49 March, 1996 Owned
Eastern New Mexico Medical Center...... Roswell 162 April, 1998 Owned
Northeastern Regional Hospital......... Las Vegas 50 April, 2000 Leased
NORTH CAROLINA
Martin General Hospital................ Williamston 49 November, 1998 Leased
PENNSYLVANIA
Berwick Hospital....................... Berwick 144 March, 1999 Owned
SOUTH CAROLINA
Marlboro Park Hospital................. Bennettsville 109 August, 1996 Leased
Chesterfield General Hospital.......... Cheraw 66 August, 1996 Leased
Springs Memorial Hospital.............. Lancaster 194 November, 1994 Owned
TENNESSEE
Lakeway Regional Hospital.............. Morristown 135 May, 1993 Owned
Scott County Hospital.................. Oneida 99 November, 1989 Leased
Cleveland Community Hospital........... Cleveland 100 October, 1994 Owned
White County Community Hospital........ Sparta 60 October, 1994 Owned
TEXAS
Big Bend Regional Medical Center....... Alpine 40 October, 1999 Owned
Northeast Medical Center............... Bonham 75 August, 1996 Owned
Cleveland Regional Medical Center...... Cleveland 115 August, 1996 Leased
Highland Medical Center................ Lubbock 123 September, 1986 Owned
Scenic Mountain Medical Center......... Big Spring 150 October, 1994 Owned
Hill Regional Hospital................. Hillsboro 92 October, 1994 Owned
Lake Granbury Medical Center........... Granbury 56 January, 1997 Leased
UTAH
Tooele Valley Regional Medical
Center............................... Tooele 38 November, 1998 Operated (c)
VIRGINIA
Greensville Memorial Hospital.......... Emporia 114 March, 1999 Leased
Russell County Medical Center.......... Lebanon 78 September, 1986 Owned
Southampton Memorial Hospital.......... Franklin 105 March, 2000 Leased
WYOMING
Evanston Regional Hospital............. Evanston 42 November, 1999 Owned
</TABLE>
- --------------------------
(a) Licensed beds are the number of beds for which the appropriate state agency
licenses a facility regardless of whether the beds are actually available
for patient use.
(b) We operate this hospital under a lease-leaseback and operating agreement. We
recognize all revenue and expenses associated with this hospital on our
financial statements.
(c) We operate this hospital pending our completion of the construction of a
replacement facility. Our fee is equal to the EBITDA of the facility. For
purposes of reporting our operating statistics, we have excluded this
facility.
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<PAGE>
SELECTED OPERATING DATA
The following table sets forth operating statistics for our hospitals for
each of the years presented. Statistics for 1997 include a full year of
operations for 36 hospitals, including one hospital acquired on January 1, 1997,
and a partial period for one hospital acquired during the year. Statistics for
1998 include a full year of operations for 37 hospitals and partial periods for
four hospitals acquired during the year. Statistics for 1999 include a full year
of operations for 41 hospitals and partial periods for four hospitals acquired,
and one hospital constructed and opened, during the year.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------
1997 1998 1999
-------- -------- --------
<S> <C> <C> <C>
Number of hospitals (a)................................ 37 41 46
Licensed beds (a)(b)................................... 3,288 3,644 4,115
Beds in service (a)(c)................................. 2,543 2,776 3,123
Admissions (d)......................................... 88,103 100,114 120,414
Adjusted admissions (e)................................ 153,618 177,075 217,006
Patient days (f)....................................... 399,012 416,845 478,658
Average length of stay (days) (g)...................... 4.5 4.2 4.0
Occupancy rate (beds in service) (h)................... 43.1% 43.3% 44.1%
Net inpatient revenue as a % of total net revenue...... 57.3% 55.7% 52.7%
Net outpatient revenue as a % of total net revenue..... 41.5% 42.6% 45.5%
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, PERCENTAGE
------------------------ INCREASE
1998 1999 (DECREASE)
--------- --------- ----------
<S> <C> <C> <C>
SAME HOSPITALS DATA (i)
Admissions (d)......................................... 100,114 105,053 4.9%
Adjusted admissions (e)................................ 177,075 190,661 7.7%
Patient days (f)....................................... 416,845 419,942 0.7%
Average length of stay (days) (g)...................... 4.2 4.0 (4.8%)
Occupancy rate (beds in service) (h)................... 43.3% 43.5%
</TABLE>
- --------------------------
(a) At end of period.
(b) Licensed beds are the number of beds for which the appropriate state agency
licenses a facility regardless of whether the beds are actually available
for patient use.
(c) Beds in service are the number of beds that are readily available for
patient use.
(d) Admissions represent the number of patients admitted for inpatient
treatment.
(e) Adjusted admissions is a general measure of combined inpatient and
outpatient volume. We computed adjusted admissions by multiplying admissions
by gross patient revenues and then dividing that number by gross inpatient
revenues.
(f) Patient days represent the total number of days of care provided to
inpatients.
(g) Average length of stay (days) represents the average number of days
inpatients stay in our hospitals.
(h) We calculated percentages by dividing the average daily number of inpatients
by the weighted average of beds in service.
(i) Includes acquired hospitals to the extent we operated them during comparable
periods in both years.
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<PAGE>
SOURCES OF REVENUE
We receive payment for healthcare services provided by our hospitals from:
- the federal Medicare program;
- state Medicaid programs;
- healthcare insurance carriers, health maintenance organizations or "HMOs,"
preferred provider organizations or "PPOs," and other managed care
programs; and
- patients directly.
The following table presents the approximate percentages of net revenue
received from private, Medicare, Medicaid and other sources for the periods
indicated. The data for the years presented are not strictly comparable due to
the significant effect that hospital acquisitions and dispositions have had on
these statistics.
<TABLE>
<CAPTION>
NET REVENUE BY PAYOR SOURCE 1997 1998 1999
- --------------------------- -------- -------- --------
<S> <C> <C> <C>
Medicare......................................... 43.9% 39.0% 36.2%
Medicaid......................................... 11.5% 10.2% 11.9%
Managed Care (HMO/PPO)........................... 7.7% 14.0% 14.3%
Private and Other................................ 36.9% 36.8% 37.6%
------ ------ ------
Total........................................ 100.0% 100.0% 100.0%
====== ====== ======
</TABLE>
As shown above, we receive a substantial portion of our revenue from the
Medicare and Medicaid programs.
Medicare is a federal program that provides medical insurance benefits to
persons age 65 and over, some disabled persons, and persons with end-stage renal
disease. Medicaid is a federal-state funded program, administered by the states,
which provides medical benefits to individuals who are unable to afford
healthcare. All of our hospitals are certified as providers of Medicare and
Medicaid services. Amounts received under the Medicare and Medicaid programs are
generally significantly less than the hospital's customary charges for the
services provided. In recent years, changes made to the Medicare and Medicaid
programs have further reduced payment to hospitals. We expect this trend to
continue. Since an important portion of our revenues comes from patients under
Medicare and Medicaid programs, our ability to operate our business successfully
in the future will depend in large measure on our ability to adapt to changes in
these programs.
In addition to government programs, we are paid by private payors, which
include insurance companies, HMOs, PPOs, other managed care companies, and
employers, as well as by patients directly. Patients are generally not
responsible for any difference between customary hospital charges and amounts
paid for hospital services by Medicare and Medicaid programs, insurance
companies, HMOs, PPOs, and other managed care companies, but are responsible for
services not covered by these programs or plans, as well as for deductibles and
co-insurance obligations of their coverage. The amount of these deductibles and
co-insurance obligations has increased in recent years. Collection of amounts
due from individuals is typically more difficult than collection of amounts due
from government or business payors. To further reduce their healthcare costs, an
increasing number of insurance companies, HMOs, PPOs, and other managed care
companies are negotiating discounted fee structures or fixed amounts for
hospital services performed, rather than paying healthcare providers the amounts
billed. We negotiate discounts with managed care companies which are typically
smaller than discounts under governmental programs. If an increased number of
insurance companies, HMOs, PPOs, and other managed care companies succeed in
negotiating discounted fee structures or fixed amounts, our results of
operations may be negatively affected. For more information on the payment
programs on which our revenues depend, see "--Payment."
42
<PAGE>
Hospital revenues depend upon inpatient occupancy levels, the volume of
outpatient procedures, and the charges or negotiated payment rates for hospital
services provided. Charges and payment rates for routine inpatient services vary
significantly depending on the type of service performed and the geographic
location of the hospital. In recent years, we have experienced a significant
increase in revenue received from outpatient services. We attribute this
increase to:
- advances in technology, which have permitted us to provide more services
on an outpatient basis; and
- pressure from Medicare or Medicaid programs, insurance companies, and
managed care plans to reduce hospital stays and to reduce costs by having
services provided on an outpatient rather than on an inpatient basis.
SUPPLY CONTRACTS
During fiscal 1997, we entered into an affiliation agreement with BuyPower,
a group purchasing organization owned by Tenet Healthcare Corporation. Our
affiliation with BuyPower combines the purchasing power of our hospitals with
the purchasing power of more than 600 other healthcare providers affiliated with
the program. This increased purchasing power has resulted in reductions in the
prices paid by our hospitals for medical supplies and equipment and
pharmaceuticals. In March 2000, we entered into an agreement with Broadlane
Inc., an affiliate of Tenet Healthcare Corporation, to use their e-commerce
marketplace as our exclusive internet purchasing portal.
INDUSTRY OVERVIEW
The U.S. Healthcare Financing Administration estimated that in 1999, total
U.S. healthcare expenditures grew by 6.0% to $1.2 trillion. It projects total
U.S. healthcare spending to grow by 7.1% in 2000 and by 6.5% annually from 2001
through 2008. By these estimates, healthcare expenditures will account for
approximately $2.2 trillion, or 16.2% of the total U.S. gross domestic product,
by 2008.
Hospital services, the market in which we operate, is the largest single
category of healthcare at 33.7% of total healthcare spending in 1999, or
$401.3 billion. The U.S. Healthcare Financing Administration projects the
hospital services category to grow by 5.7% per year through 2008. It expects
growth in hospital healthcare spending to continue due to the aging of the U.S.
population and consumer demand for expanded medical services. As hospitals
remain the primary setting for healthcare delivery, it expects hospital services
to remain the largest category of healthcare spending.
U.S. HOSPITAL INDUSTRY. The U.S. hospital industry is broadly defined to
include acute care, rehabilitation, and psychiatric facilities that are either
public (government owned and operated), not-for-profit private (religious or
secular), or for-profit institutions (investor owned). According to the American
Hospital Association, there are approximately 5,015 inpatient hospitals in the
U.S. which are not-for-profit owned, investor owned, or state or local
government owned. Of these hospitals, 44% are located in non-urban communities.
These facilities offer a broad range of healthcare services, including internal
medicine, general surgery, cardiology, oncology, neurosurgery, orthopedics,
OB/GYN, and emergency services. In addition, hospitals also offer other
ancillary services including psychiatric, diagnostic, rehabilitation, home
health, and outpatient surgery services.
URBAN VS. NON-URBAN HOSPITALS
According to the U.S. Census Bureau, 25% of the U.S. population lives in
communities designated as non-urban. In these non-urban communities, hospitals
are typically the primary source of healthcare and, in many cases, a single
hospital is the only provider of general healthcare services. According to the
American Hospital Association, in 1998, there were 2,199 non-urban hospitals in
the U.S. We believe that a majority of these hospitals are owned by
not-for-profit or governmental entities.
43
<PAGE>
FACTORS AFFECTING PERFORMANCE. Among the many factors that can influence a
hospital's financial and operating performance are:
- facility size and location;
- facility ownership structure (i.e., tax-exempt or investor owned);
- a facility's ability to participate in group purchasing organizations; and
- facility payor mix.
We believe that non-urban hospitals are generally able to obtain higher
operating margins than urban hospitals. Factors contributing to a non-urban
hospital's margin advantage include fewer patients with complex medical
problems, a lower cost structure, limited competition, and favorable Medicare
payment provisions. Patients needing the most complex care are more often served
by the larger and/or more specialized urban hospitals. A non-urban hospital's
lower cost structure results from its geographic location as well as the lower
number of patients treated who need the most highly advanced services.
Additionally, because non-urban hospitals are generally sole providers or one of
a small group of providers in their markets, there is limited competition. This
generally results in more favorable pricing with commercial payors. Medicare has
special payment provisions for "sole community hospitals." Under present law,
hospitals that qualify for this designation receive higher reimbursement rates
and are guaranteed capital reimbursement equal to 90% of capital costs. As of
December 31, 1999, 11 of our hospitals were "sole community hospitals." In
addition, we believe that non-urban communities are generally characterized by a
high level of patient and physician loyalty that fosters cooperative
relationships among the local hospitals, physicians, employees, and patients.
The type of third party responsible for the payment of services performed by
healthcare service providers is also an important factor which affects hospital
margins. These providers have increasingly exerted pressure on healthcare
service providers to reduce the cost of care. The most active providers in this
regard have been HMOs, PPOs, and other managed care organizations. The
characteristics of non-urban markets make them less attractive to these managed
care organizations. This is partly because the limited size of non-urban markets
and their diverse, non-national employer bases minimize the ability of managed
care organizations to achieve economies of scale. In 1999, approximately 14% of
our revenues were paid by managed care organizations.
HOSPITAL INDUSTRY TRENDS
DEMOGRAPHIC TRENDS. According to the U.S. Census Bureau, there are
approximately 35 million Americans aged 65 or older in the U.S. today, who
comprise approximately 13% of the total U.S. population. By the year 2030 the
number of elderly is expected to climb to 69 million, or 20% of the total
population. Due to the increasing life expectancy of Americans, the number of
people aged 85 years and older is also expected to increase from 4.3 million to
8.5 million by the year 2030. This increase in life expectancy will increase
demand for healthcare services and, as importantly, the demand for innovative,
more sophisticated means of delivering those services. Hospitals, as the largest
category of care in the healthcare market, will be among the main beneficiaries
of this increase in demand. Based on data compiled for us, the populations of
the service areas where our hospitals are located grew by 6.9% from 1990 to 1997
and are projected to grow by 4.6% from 1998 to 2002. The number of people aged
65 or older in these service areas grew by 16.4% from 1990 to 1997 and is
projected to grow by 5.7% from 1998 to 2002.
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CONSOLIDATION. During the late 1980s and early 1990s, there was significant
industry consolidation involving large, investor owned hospital companies
seeking to achieve economies of scale. While consolidation activity in the
hospital industry is continuing, the consolidation is currently primarily taking
place through mergers and acquisitions involving not-for-profit hospital
systems. Reasons for this activity include:
- limited access to capital;
- financial performance issues, including challenges associated with changes
in reimbursement;
- the desire to enhance the local availability of healthcare in the
community;
- the need and ability to recruit primary care physicians and specialists;
and
- the need to achieve general economies of scale and to gain access to
standardized and centralized functions, including favorable supply
agreements.
SHIFTING UTILIZATION TRENDS. Over the past decade, many procedures that had
previously required hospital visits with overnight stays have been performed on
an outpatient basis. This shift has been driven by cost containment efforts led
by private and government payors. The focus on cost containment has coincided
with advancements in medical technology that have allowed patients to be treated
with less invasive procedures that do not require overnight stays. According to
the American Hospital Association, the number of surgeries performed on an
inpatient basis declined from 1994 to 1998 at an average annual rate of 0.3%,
from 9.8 million in 1994 to 9.7 million in 1998. During the same period, the
number of outpatient surgeries increased at an average annual rate of 4.3%, from
13.2 million in 1994 to 15.6 million in 1998. The mix of inpatient as compared
to outpatient surgeries shifted from a ratio of 42.8% inpatient to 57.2%
outpatient in 1994 to a ratio of 38.4% inpatient to 61.6% outpatient in 1998.
These trends have led to a reduction in the average length of stay and, as a
result, inpatient utilization rates. According to the American Hospital
Association, the average length of stay in general hospitals has declined from
6.7 days in 1994 to 6.0 days in 1998.
GOVERNMENT REGULATION
OVERVIEW. The healthcare industry is required to comply with extensive
government regulation at the federal, state, and local levels. Under these
regulations, hospitals must meet requirements to be certified as hospitals and
qualified to participate in government programs, including the Medicare and
Medicaid programs. These requirements relate to the adequacy of medical care,
equipment, personnel, operating policies and procedures, maintenance of adequate
records, hospital use, rate-setting, compliance with building codes, and
environmental protection laws. There are also extensive regulations governing a
hospital's participation in these government programs. If we fail to comply with
applicable laws and regulations, we can be subject to criminal penalties and
civil sanctions, our hospitals can lose their licenses and we could lose our
ability to participate in these government programs. In addition, government
regulations may change. If that happens, we may have to make changes in our
facilities, equipment, personnel, and services so that our hospitals remain
certified as hospitals and qualified to participate in these programs. We
believe that our hospitals are in substantial compliance with current federal,
state, and local regulations and standards.
Hospitals are subject to periodic inspection by federal, state, and local
authorities to determine their compliance with applicable regulations and
requirements necessary for licensing and certification. All of our hospitals are
licensed under appropriate state laws and are qualified to participate in
Medicare and Medicaid programs. In addition, most of our hospitals are
accredited by the Joint Commission on Accreditation of Healthcare Organizations.
This accreditation indicates that a hospital satisfies the applicable health and
administrative standards to participate in Medicare and Medicaid programs.
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FRAUD AND ABUSE LAWS. Participation in the Medicare program is heavily
regulated by federal statute and regulation. If a hospital fails substantially
to comply with the requirements for participating in the Medicare program, the
hospital's participation in the Medicare program may be terminated and/or civil
or criminal penalties may be imposed. For example, a hospital may lose its
ability to participate in the Medicare program if it performs any of the
following acts:
- making claims to Medicare for services not provided or misrepresenting
actual services provided in order to obtain higher payments;
- paying money to induce the referral of patients where services are
reimbursable under a federal health program; or
- failing to provide treatment to any individual who comes to a hospital's
emergency room with an "emergency medical condition" or otherwise failing
to properly treat and transfer emergency patients.
The Health Insurance Portability and Accountability Act of 1996 broadened
the scope of the fraud and abuse laws by adding several criminal statutes that
are not related to receipt of payments from a federal healthcare program. The
Accountability Act created civil penalties for conduct, including upcoding and
billing for medically unnecessary goods or services. It established new
enforcement mechanisms to combat fraud and abuse. These include a bounty system,
where a portion of the payments recovered is returned to the government
agencies, as well as a whistleblower program. This law also expanded the
categories of persons that may be excluded from participation in federal
healthcare programs.
Another law regulating the healthcare industry is a section of the Social
Security Act, known as the "anti-kickback" or "fraud and abuse" statute. This
law prohibits some business practices and relationships under Medicare,
Medicaid, and other federal healthcare programs. These practices include the
payment, receipt, offer, or solicitation of money in connection with the
referral of patients covered by a federal or state healthcare program.
Violations of the anti-kickback statute may be punished by criminal and civil
fines, exclusion from federal healthcare programs, and damages up to three times
the total dollar amount involved.
The Office of Inspector General of the Department of Health and Human
Services is authorized to publish regulations outlining activities and business
relationships that would be deemed not to violate the anti-kickback statute.
These regulations are known as "safe harbor" regulations. However, the failure
of a particular activity to comply with the safe harbor regulations does not
mean that the activity violates the anti-kickback statute.
The Office of Inspector General is responsible for identifying fraud and
abuse activities in government programs. In order to fulfill its duties, the
Office of Inspector General performs audits, investigations, and inspections. In
addition, it provides guidance to healthcare providers by identifying types of
activities that could violate the anti-kickback statute. The Office of the
Inspector General has identified the following incentive arrangements as
potential violations:
- payment of any incentive by the hospital each time a physician refers a
patient to the hospital;
- use of free or significantly discounted office space or equipment for
physicians in facilities usually located close to the hospital;
- provision of free or significantly discounted billing, nursing, or other
staff services;
- free training for a physician's office staff including management and
laboratory techniques;
- guarantees which provide that if the physician's income fails to reach a
predetermined level, the hospital will pay any portion of the remainder;
- low-interest or interest-free loans, or loans which may be forgiven if a
physician refers patients to the hospital;
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- payment of the costs of a physician's travel and expenses for conferences;
or
- payment of services which require few, if any, substantive duties by the
physician, or payment for services in excess of the fair market value of
the services rendered.
We have a variety of financial relationships with physicians who refer
patients to our hospitals. Physicians own interests in a few of our facilities.
Physicians may also own our stock. These physicians may acquire some of these
shares from the reserved shares offered at the initial public offering price. We
also have contracts with physicians providing for a variety of financial
arrangements, including employment contracts, leases, management agreements, and
professional service agreements. We provide financial incentives to recruit
physicians to relocate to communities served by our hospitals. These incentives
include revenue guarantees and, in some cases, loans. Although we believe that
we have structured our arrangements with physicians in light of the "safe
harbor" rules, we cannot assure you that regulatory authorities will not
determine otherwise. If that happens, we would be subject to criminal and civil
penalties and/or exclusion from participating in Medicare, Medicaid, or other
government healthcare programs.
The Social Security Act also includes a provision commonly known as the
"Stark law." This law prohibits physicians from referring Medicare and Medicaid
patients to healthcare entities in which they or any of their immediate family
members have ownership or other financial interests. These types of referrals
are commonly known as "self referrals." Sanctions for violating the Stark law
include civil money penalties, assessments equal to twice the dollar value of
each service, and exclusion from Medicare and Medicaid programs. There are
ownership and compensation arrangement exceptions to the self-referral
prohibition. One exception allows a physician to make a referral to a hospital
if the physician owns the entire hospital, as opposed to an ownership interest
in a department of the hospital. Another exception allows a physician to refer
patients to a healthcare entity in which the physician has an ownership interest
if the entity is located in a rural area, as defined in the statute. There are
also exceptions for many of the customary financial arrangements between
physicians and providers, including employment contracts, leases, and
recruitment agreements. The federal government has not finalized its regulations
which will interpret several of the provisions included in the Stark law. We
have structured our financial arrangements with physicians to comply with the
statutory exceptions included in the Stark law. However, when the government
finalizes these regulations, it may interpret certain provisions of this law in
a manner different from the manner with which we have interpreted them. We
cannot predict the final form that such regulations will take or the effect
those regulations will have on us.
Many states in which we operate also have adopted, or are considering
adopting, similar laws. Some of these state laws apply even if the payment for
care does not come from the government. These statutes typically provide
criminal and civil penalties as well as loss of licensure. While there is little
precedent for the interpretation or enforcement of these state laws, we have
attempted to structure our financial relationships with physicians and others in
light of these laws. However, if we are found to have violated these state laws,
it could result in the imposition of criminal and civil penalties as well as
possible licensure revocation.
CORPORATE PRACTICE OF MEDICINE FEE-SPLITTING. Some states have laws that
prohibit unlicensed persons or business entities, including corporations, from
employing physicians. Some states also have adopted laws that prohibit direct or
indirect payments or fee-splitting arrangements between physicians and
unlicensed persons or business entities. Possible sanctions for violations of
these restrictions include loss of a physician's license, civil and criminal
penalties and rescission of business arrangements. These laws vary from state to
state, are often vague and have seldom been interpreted by the courts or
regulatory agencies. We structure our arrangements with healthcare providers to
comply with the relevant state law. However, we cannot assure you that
governmental officials charged with responsibility for enforcing these laws will
not assert that we, or transactions in which we are involved,
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are in violation of these laws. These laws may also be interpreted by the courts
in a manner inconsistent with our interpretations.
EMERGENCY MEDICAL TREATMENT AND ACTIVE LABOR ACT. The Emergency Medical
Treatment and Active Labor Act imposes requirements as to the care that must be
provided to anyone who comes to facilities providing emergency medical services
seeking care before they may be transferred to another facility or otherwise
denied care. Sanctions for failing to fulfill these requirements include
exclusion from participation in Medicare and Medicaid programs and civil money
penalties. In addition, the law creates private civil remedies which enable an
individual who suffers personal harm as a direct result of a violation of the
law to sue the offending hospital for damages and equitable relief. A medical
facility that suffers a financial loss as a direct result of another
participating hospital's violation of the law also has a similar right. Although
we believe that our practices are in compliance with the law, we can give no
assurance that governmental officials responsible for enforcing the law or
others will not assert we are in violation of these laws.
FALSE CLAIMS ACT. Another trend in healthcare litigation is the use of the
False Claims Act. This law has been used not only by the U.S. government, but
also by individuals who bring an action on behalf of the government under the
law's "qui tam" or "whistleblower" provisions. When a private party brings a qui
tam action under the False Claims Act, the defendant will generally not be aware
of the lawsuit until the government makes a determination whether it will
intervene and take a lead in the litigation.
Civil liability under the False Claims Act can be up to three times the
actual damages sustained by the government plus civil penalties for each
separate false claim. There are many potential bases for liability under the
False Claims Act. Although liability under the False Claims Act arises when an
entity knowingly submits a false claim for reimbursement to the federal
government, the False Claims Act defines the term "knowingly" broadly. Thus,
although simple negligence generally will not give rise to liability under the
False Claims Act, submitting a claim with reckless disregard to its truth or
falsity can constitute "knowingly" submitting a claim. See "--Legal Proceedings"
for a description of pending, unsealed False Claims Act litigation.
HEALTHCARE REFORM. The healthcare industry continues to attract much
legislative interest and public attention. In recent years, an increasing number
of legislative proposals have been introduced or proposed in Congress and in
some state legislatures that would effect major changes in the healthcare
system. Proposals that have been considered include cost controls on hospitals,
insurance market reforms to increase the availability of group health insurance
to small businesses, and mandatory health insurance coverage for employees. The
costs of implementing some of these proposals would be financed, in part, by
reductions in payments to healthcare providers under Medicare, Medicaid, and
other government programs. We cannot predict the course of future healthcare
legislation or other changes in the administration or interpretation of
governmental healthcare programs and the effect that any legislation,
interpretation, or change may have on us.
CONVERSION LEGISLATION. Many states, including some where we have hospitals
and others where we may in the future acquire hospitals, have adopted
legislation regarding the sale or other disposition of hospitals operated by
not-for-profit entities. In other states that do not have specific legislation,
the attorneys general have demonstrated an interest in these transactions under
their general obligations to protect charitable assets from waste. These
legislative and administrative efforts primarily focus on the appropriate
valuation of the assets divested and the use of the proceeds of the sale by the
not-for-profit seller. While these review and, in some instances, approval
processes can add additional time to the closing of a hospital acquisition, we
have not had any significant difficulties or delays in completing the process.
There can be no assurance, however, that future actions on the state level will
not seriously delay or even prevent our ability to acquire hospitals. If these
activities are widespread, they could have a negative impact on our ability to
acquire additional hospitals. See "--Our Business Strategy."
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CERTIFICATES OF NEED. The construction of new facilities, the acquisition
of existing facilities and the addition of new services at our facilities may be
subject to state laws that require prior approval by state regulatory agencies.
These certificate of need laws generally require that a state agency determine
the public need and give approval prior to the construction or acquisition of
facilities or the addition of new services. We operate hospitals in 11 states
that have adopted certificate of need laws. If we fail to obtain necessary state
approval, we will not be able to expand our facilities, complete acquisitions or
add new services in these states. Violation of these state laws may result in
the imposition of civil sanctions or the revocation of a hospital's licenses.
PAYMENT
MEDICARE. Under the Medicare program, we are paid for inpatient and
outpatient services performed by our hospitals.
Payments for inpatient acute services are generally made pursuant to a
prospective payment system, commonly known as "PPS." Under a PPS, our hospitals
are paid a prospectively determined amount for each hospital discharge based on
the patient's diagnosis. Specifically, each discharge is assigned to a
diagnosis-related group, commonly known as a "DRG," based upon the patient's
condition and treatment during the relevant inpatient stay. Each DRG is assigned
a payment rate that is prospectively set using national average costs per case
for treating a patient for a particular diagnosis. DRG payments do not consider
the actual costs incurred by a hospital in providing a particular inpatient
service. However, DRG payments are adjusted by a predetermined geographic
adjustment factor assigned to the geographic area in which the hospital is
located. While a hospital generally does not receive payment in addition to a
DRG payment, hospitals may qualify for an "outlier" payment when the relevant
patient's treatment costs are extraordinarily high and exceed a specified
threshold.
The DRG rates are adjusted by an update factor each federal fiscal year,
which begins on October 1. The update factor is determined, in part, by the
projected increase in the cost of goods and services that are purchased by
hospitals. For several years the annual update factor has been lower than the
projected increases in the costs of goods and services purchased by hospitals.
DRG rate increases were 1.1% for federal fiscal year 1995, 1.5% for federal
fiscal year 1996, and 2.0% for federal fiscal year 1997. For federal fiscal year
1998, there was no increase. The DRG rate was increased by the projected
increase in the cost of goods and services minus 1.9% for federal fiscal year
1999 and 1.8% for federal fiscal year 2000. For both federal fiscal years 2001
and 2002, the DRG rate will be increased by the projected increase in the cost
of goods and services minus 1.1%. Future legislation may decrease the rate of
increase for DRG payments, but we are not able to predict the amount of the
reduction or the effect that the reduction will have on us.
Outpatient services have traditionally been paid at the lower of customary
charges or on a reasonable cost basis. The Balanced Budget Act established a PPS
for outpatient hospital services that is scheduled to commence on July 1, 2000.
The Balanced Budget Refinement Act of 1999 eliminated the anticipated average
reduction of 5.7% for various Medicare outpatient business under the Balanced
Budget Act of 1997. Under the Balanced Budget Refinement Act of 1999, non-urban
hospitals with 100 beds or less are held harmless under Medicare outpatient PPS
through December 31, 2003. Thirty-three of our hospitals qualify for this
relief. Losses under Medicare outpatient PPS of non-urban hospitals with greater
than 100 beds and urban hospitals will be mitigated through a corridor
reimbursement approach, where a percentage of losses will be reimbursed through
December 31, 2003. Substantially all of our remaining hospitals qualify for
relief under this provision.
Skilled nursing facilities have historically been paid by Medicare on the
basis of actual costs, subject to limitations. The Balanced Budget Act
established a PPS for Medicare skilled nursing facilities. The new PPS commenced
in July 1998, and is being implemented progressively over a three year term. We
have experienced reductions in payments for our skilled nursing services.
However, the
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Balanced Budget Refinement Act of 1999 has established adjustments to the PPS
payments made to skilled nursing facilities which are scheduled to be
implemented on October 1, 2000.
The Balanced Budget Act also requires the Department of Health and Human
Services to establish a PPS for home health services. The Balanced Budget Act of
1997 put in place the interim payment system, commonly known as "IPS," until the
home health PPS could be implemented. The home health PPS is currently scheduled
to replace IPS on October 1, 2000. We have experienced reductions in payments
for our home health services and a decline in home health visits due to a
reduction in benefits by reason of the Balanced Budget Act.
MEDICAID. Most state Medicaid payments are made under a PPS or under
programs which negotiate payment levels with individual hospitals. Medicaid is
currently funded jointly by state and federal governments. The federal
government and many states are currently considering significantly reducing
Medicaid funding, while at the same time expanding Medicaid benefits. This could
adversely affect future levels of Medicaid payments received by our hospitals.
ANNUAL COST REPORTS. Hospitals participating in the Medicare and some
Medicaid programs, whether paid on a reasonable cost basis or under a PPS, are
required to meet certain financial reporting requirements. Federal and, where
applicable, state regulations require submission of annual cost reports
identifying medical costs and expenses associated with the services provided by
each hospital to Medicare beneficiaries and Medicaid recipients.
Annual cost reports required under the Medicare and some Medicaid programs
are subject to routine governmental audits. These audits may result in
adjustments to the amounts ultimately determined to be due to us under these
reimbursement programs. Finalization of these audits often takes several years.
Providers can appeal any final determination made in connection with an audit.
COMMERCIAL INSURANCE. Our hospitals provide services to individuals covered
by private healthcare insurance. Private insurance carriers pay our hospitals or
in some cases reimburse their policyholders based upon the hospital's
established charges and the coverage provided in the insurance policy.
Commercial insurers are trying to limit the costs of hospital services by
negotiating discounts, including PPS, which would reduce payments by commercial
insurers to our hospitals. Reductions in payments for services provided by our
hospitals to individuals covered by commercial insurers could adversely affect
us.
COMPETITION
The hospital industry is highly competitive. In addition to the competition
we face for acquisitions and physicians, we must also compete with other
hospitals and healthcare providers for patients. The competition among hospitals
and other healthcare providers for patients has intensified in recent years. Our
hospitals are located in non-urban service areas. Most of our hospitals face no
direct competition because there are no other hospitals in their primary service
areas. However, these hospitals do face competition from hospitals outside of
their primary service area, including hospitals in urban areas that provide more
complex services. These facilities are generally located in excess of 25 miles
from our facilities. Patients in our primary service areas may travel to these
other hospitals for a variety of reasons, including the need for services we do
not offer or physician referrals. Patients who are required to seek services
from these other hospitals may subsequently shift their preferences to those
hospitals for services we do provide.
Some of our hospitals operate in primary service areas where they compete
with one other hospital. One of our hospitals competes with more than one other
hospital in its primary service area. Some of these competing hospitals use
equipment and services more specialized than those available at our hospitals.
In addition, some of the hospitals that compete with us are owned by
tax-supported governmental agencies or not-for-profit entities supported by
endowments and charitable contributions. These hospitals can make capital
expenditures without paying sales, property and income taxes. We also
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face competition from other specialized care providers, including outpatient
surgery, orthopedic, oncology, and diagnostic centers.
The number and quality of the physicians on a hospital's staff is an
important factor in a hospital's competitive advantage. Physicians decide
whether a patient is admitted to the hospital and the procedures to be
performed. Admitting physicians may be on the medical staffs of other hospitals
in addition to those of our hospitals. We attempt to attract our physicians'
patients to our hospitals by offering quality services and facilities,
convenient locations, and state-of-the-art equipment.
COMPLIANCE PROGRAM
OUR COMPLIANCE PROGRAM. In early 1997, under our new management and
leadership, we voluntarily adopted a company-wide compliance program. The
program included the appointment of a compliance officer and committee, adoption
of an ethics and business conduct code, employee education and training,
implementation of an internal system for reporting concerns, auditing and
monitoring programs, and a means for enforcing the program's policies.
We take an operations team approach to compliance and utilize corporate
experts for program design efforts and facility leaders for employee-level
implementation. Compliance is another area that demonstrates our utilization of
standardization and centralization techniques and initiatives which yield
efficiencies and consistency throughout our facilities. We recognize that our
compliance with applicable laws and regulations depends on individual employee
actions as well as company operations. Our approach focuses on integrating
compliance responsibilities with operational function. This approach is intended
to reinforce our company-wide commitment to operate strictly in accordance with
the laws and regulations that govern our business.
Since its initial adoption, the compliance program continues to be expanded
and developed to meet the industry's expectations and our needs. Specific
written policies, procedures, training and educational materials and programs,
as well as auditing and monitoring activities have been prepared and implemented
to address the functional and operational aspects of our business. Included
within these functional areas are materials and activities for business
sub-units, including laboratory, radiology, pharmacy, emergency, surgery,
observation, home health, skilled nursing, and clinics. Specific areas
identified through regulatory interpretation and enforcement activities have
also been addressed in our program. Claims preparation and submission, including
coding, billing, and cost reports, comprise the bulk of these areas. Financial
arrangements with physicians and other referral sources, including anti-kickback
and Stark laws, emergency department treatment and transfer requirements, and
other patient disposition issues are also the focus of policy and training,
standardized documentation requirements, and review and audit.
INPATIENT CODING COMPLIANCE ISSUE. In August 1997, during a routine
internal audit at one of our facilities, we discovered inaccuracies in the DRG
coding for some of our inpatient medical records. At that time, this was the
primary auditing activity for our compliance program. These inaccuracies
involved inpatient coding practices that had been put in place prior to the time
we acquired our operating company in 1996.
Because of the concerns raised by the internal audit, we performed an
internal review of historical inpatient coding practices. At the completion of
this review in December 1997, we voluntarily disclosed the coding problems to
the Office of Inspector General of the U.S. Department of Health and Human
Services. After discussions with the Inspector General, we agreed to have an
independent consultant audit the coding for eight specific DRGs. This audit
ultimately involved a review by the consultant of approximately 1,500 patient
files. The audit procedures we followed generated a statistically valid estimate
of the dollar amounts related to coding errors for these DRGs at 36 of our
hospitals for the period 1993 to 1997.
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The results of this audit were reviewed by the Inspector General and the
Department of Justice, who also conducted their own investigation. We cooperated
fully with their investigation. The government agencies advised us of potential
liability under various legal theories, including the False Claims Act. Under
the False Claims Act, we could be liable for as much as treble damages and
penalties of between $5,000 and $10,000 per false claim submitted to Medicare
and Medicaid.
We have executed a settlement agreement with these federal government
agencies and the applicable state Medicaid programs. Pursuant to the settlement
agreement, we will pay approximately $31 million on May 22, 2000 and will be
released from all civil claims relating to the coding of the eight specific DRGs
for the hospitals and time periods covered in the audit. During 1998 and 1999,
we established a liability in our financial statements for this amount. We have
also agreed with the Inspector General to continue our existing voluntary
compliance program under a corporate compliance agreement and to adopt various
additional compliance measures for a period of three years. These additional
compliance measures include making various reports to the federal government and
having our actions pursuant to the compliance agreement reviewed annually by a
third party.
The compliance measures and reporting and auditing requirements contained in
the compliance agreement include:
- continuing the duties and activities of our corporate compliance officer,
corporate compliance work group, and facility compliance chairs and
committees;
- maintaining our written ethics and conduct policy, which sets out our
commitment to full compliance with all statutes, regulations, and
guidelines applicable to federal healthcare programs;
- maintaining our written policies and procedures addressing the operation
of our compliance program, including proper coding for inpatient hospital
stays;
- continuing our general training on the ethics and conduct policy and
adding training about our compliance program and the compliance agreement;
- continuing our specific training for the appropriate personnel on billing
and coding issues;
- continuing independent third party periodic audits of our facilities'
inpatient DRG coding;
- having an independent third party perform an annual review of our
compliance with the compliance agreement;
- continuing our confidential disclosure program and "ethics hotline" to
enable employees or others to disclose issues or questions regarding
possible inappropriate policies or behavior;
- enhancing our screening program to ensure that we do not hire or engage
employees or contractors who are ineligible persons for federal healthcare
programs;
- reporting any material deficiency which resulted in an overpayment to us
by a federal healthcare program; and
- submitting annual reports to the Inspector General which describe in
detail the operations of our corporate compliance program for the past
year.
Our substantial adherence to the terms and conditions of the compliance
agreement will constitute an element of our eligibility to participate in the
federal healthcare programs. Consequently, material, uncorrected violations of
the compliance agreement could lead to suspension or disbarment from these
federal programs. In addition, we will be subject to possible civil penalties
for a failure to substantially comply with the terms of the compliance
agreement, including stipulated penalties ranging between $1,000 to $2,500 per
day. We will also be subject to a stipulated penalty of $25,000 per day,
following notice and cure periods, for any deliberate and/or flagrant breach of
the material provisions of the compliance agreement.
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EMPLOYEES
At December 31, 1999, we employed 8,643 full time employees and 4,475
part-time employees. Of these employees, 1,056 are union members. We believe
that our labor relations are good.
PROFESSIONAL LIABILITY
As part of our business of owning and operating hospitals, we are subject to
legal actions alleging liability on our part. To cover claims arising out of the
operations of hospitals, we generally maintain professional malpractice
liability insurance and general liability insurance on a claims made basis in
amounts and with deductibles that we believe to be sufficient for our
operations. We also maintain umbrella liability coverage covering claims which,
due to their nature or amount, are not covered by our insurance policies. We
cannot assure you that professional liability insurance will cover all claims
against us or continue to be available at reasonable costs for us to maintain
adequate levels of insurance.
LEGAL PROCEEDINGS
We have executed a settlement agreement with the Inspector General, the
Department of Justice, and the applicable state Medicaid programs pursuant to
which we will pay approximately $31 million on May 22, 2000 in exchange for a
release of civil claims associated with possible inaccurate inpatient coding for
the period 1993 to 1997. For a description of the terms of the settlement
agreement as well as the events giving rise to the settlement agreement, see
"--Compliance Program" and "Risk Factors--If we fail to comply with the material
terms of our corporate compliance agreement, we could be excluded from
government healthcare programs."
In May 1999, we were served with a complaint in U.S. EX REL. BLEDSOE V.
COMMUNITY HEALTH SYSTEMS, INC., Case # 1-98-CV-0435-MHS (N.D. Ga.). This qui tam
action seeks treble damages and penalties under the False Claims Act against us.
The Department of Justice did not intervene in this action. The allegations in
the proposed complaint are extremely general, but appear to involve Medicare
billing at our White County Community Hospital in Sparta, Tennessee. No
discovery has occurred in this action. Based on our review of the complaint, we
do not believe that this lawsuit is meritorious and we intend to vigorously
defend ourselves against this action. However, because of the uncertain nature
of litigation, we cannot predict the outcome of this matter.
The Department of Justice also has notified us of the existence of U.S. EX
REL. SMITH V. COMMUNITY HEALTH SYSTEMS, INC., filed in September 1999 in the
federal court in Nashville, Tennessee. This qui tam lawsuit was brought against
us by a former employee of our Lakeway Regional Hospital. The complaint alleges
violations of the False Claims Act in connection with alleged inflated costs
caused by incorrect allocation of employee salaries to Lakeway Regional
Hospital's rehabilitation unit, as well as improper Medicare reimbursement for
patients readmitted to that hospital from the rehabilitation unit. Our initial
review indicates that the allegations relating to the reimbursement for the
readmitted patients lack factual support. In addition, our initial review
indicates that any inaccuracies in salary allocations to the rehabilitation
unit's cost reports were relatively minimal in amount. This litigation is at a
very preliminary stage and we have not been served with the complaint. The
Department of Justice has informed us that it has not made a decision to
intervene. We intend to assert a number of factual and legal defenses to these
allegations.
The Department of Justice also has notified us of the existence of U.S. EX
REL. KOWATLI V. RUSSELL COUNTY MEDICAL CENTER, ET AL., filed in January 1999 in
the federal court in Abingdon, Virginia. This lawsuit was brought by a physician
who formerly had privileges at Russell County Medical Center. The complaint is
filed under the False Claims Act against various individual doctors as well as
Russell County Medical Center and us. The complaint alleges that the defendants
engaged in unnecessary and unsafe medical procedures, tests and
hospitalizations. The physician had previously filed two antitrust actions
against the doctors and hospital which were both found to be without merit and
dismissed by
53
<PAGE>
the courts. Because we have only recently been notified of this complaint, we
have not done any investigation into the substance of these specific
allegations. We have not been served with the complaint, and the Department of
Justice has not made a decision to intervene.
During the past year, we have received federal grand jury subpoenas from the
U.S. Attorney's Office for the Eastern District of Arkansas seeking documents
from our Harris Hospital facility relating to its mammography department.
Investigators from the Food and Drug Administration and the State of Arkansas
also have sought documents and interviewed employees relating to the activities
of the Harris Hospital mammography department. We have cooperated with the
government's investigation and made documents and individuals available. The
U.S. Attorney's Office has not disclosed to us the specific nature of its
investigation. We are unable to determine if the government intends to go
forward on this matter against us and, if so, whether it will proceed civilly or
criminally.
We have also received various inquiries or subpoenas from state regulators,
fiscal intermediaries, and the Department of Justice regarding various Medicare
and Medicaid issues. In addition, we are subject to other claims and lawsuits
arising in the ordinary course of our business. Plaintiffs in these lawsuits
generally request punitive or other damages that by state law may not be able to
be covered by insurance. We are not aware of any pending or threatened
litigation which we believe would have a material adverse impact on us.
ENVIRONMENTAL MATTERS
We are subject to various federal, state, and local laws and regulations
governing the use, discharge, and disposal of hazardous materials, including
medical waste products. Compliance with these laws and regulations is not
expected to have a material adverse effect on us. It is possible, however, that
environmental issues may arise in the future which we cannot now predict.
54
<PAGE>
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The following sets forth information regarding our executive officers and
directors as of April 30, 2000. Unless otherwise indicated, each of our
executive officers holds an identical position with CHS/ Community Health
Systems, Inc., our wholly owned subsidiary:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- -------- ------------------------------------------
<S> <C> <C>
Wayne T. Smith............................ 54 President and Chief Executive Officer and
Director (Class III)
W. Larry Cash............................. 51 Executive Vice President and Chief
Financial Officer
David L. Miller........................... 51 Group Vice President
Gary D. Newsome........................... 42 Group Vice President
Michael T. Portacci....................... 41 Group Vice President
John A. Fromhold.......................... 46 Group Vice President
Martin G. Schweinhart..................... 45 Vice President Operations
T. Mark Buford............................ 48 Vice President and Corporate Controller
Rachel A. Seifert......................... 41 Vice President, Secretary and General
Counsel
Sheila P. Burke........................... 49 Director (Class III)
Robert J. Dole............................ 76 Director (Class I)
J. Anthony Forstmann...................... 62 Director (Class I)
Nicholas C. Forstmann..................... 53 Director (Class II)
Theodore J. Forstmann..................... 60 Director (Class III)
Dale F. Frey.............................. 67 Director (Class II)
Sandra J. Horbach......................... 39 Director (Class II)
Thomas H. Lister.......................... 36 Director (Class III)
Michael A. Miles.......................... 60 Chairman of the Board (Class II)
Samuel A. Nunn............................ 61 Director (Class I)
</TABLE>
WAYNE T. SMITH is the President and Chief Executive Officer. Mr. Smith
joined us in January 1997 as President. In April 1997 we also named him our
Chief Executive Officer and a member of the Board of Directors. Prior to joining
us, Mr. Smith spent 23 years at Humana Inc., most recently as President and
Chief Operating Officer, and as a director, from 1993 to mid-1996. He is also a
director of Almost Family.
W. LARRY CASH is the Executive Vice President and Chief Financial Officer.
Mr. Cash joined us in September 1997 as Executive Vice President and Chief
Financial Officer. Prior to joining Community Health Systems, he served as Vice
President and Group Chief Financial Officer of Columbia/HCA Healthcare
Corporation from September 1996 to August 1997. Prior to Columbia/HCA, Mr. Cash
spent 23 years at Humana Inc., most recently as Senior Vice President of Finance
and Operations from 1993 to 1996.
DAVID L. MILLER is a Group Vice President. Mr. Miller joined us in
November 1997 as a Group Vice President, managing hospitals in Alabama, Florida,
North Carolina, South Carolina, and Virginia. Prior to joining us, he served as
a Divisional Vice President for Health Management Associates, Inc. from January
1996 to October 1997. From July 1994 to December 1995, Mr. Miller was the Chief
Executive Officer of the Lake Norman Regional Medical Center in Mooresville,
North Carolina, which is owned by Health Management Associates, Inc.
GARY D. NEWSOME is a Group Vice President. Mr. Newsome joined us in February
1998 as Group Vice President, managing hospitals in Arkansas, Kentucky,
Louisiana, Mississippi, Wyoming, Pennsylvania, Tennessee, and Utah. Prior to
joining us, he was a Divisional Vice President of Health Management
Associates, Inc. in Midwest City, Oklahoma from January 1996 to February 1998.
From January 1995 to January 1996, Mr. Newsome served as Assistant Vice
President/Operations and Group
55
<PAGE>
Operations Vice President responsible for facilities of Health Management
Associates, Inc. in Oklahoma, Arkansas, Kentucky, and West Virginia.
MICHAEL T. PORTACCI is a Group Vice President. Mr. Portacci joined us in
1987 as a hospital administrator and became a Group Director in 1991. In 1994,
he became Group Vice President, managing facilities in Arizona, California,
Illinois, Missouri, New Mexico, and Texas.
JOHN A. FROMHOLD is a Group Vice President. Mr. Fromhold joined us in
June 1998 as a Group Vice President, managing hospitals in Florida, Georgia, and
Texas. Prior to joining us, he served as Chief Executive Officer of Columbia
Medical Center of Arlington, Texas from 1995 to 1998.
MARTIN G. SCHWEINHART is Vice President Operations. Mr. Schweinhart joined
us in June 1997 and has served as the Vice President Operations. From 1994 to
1997 he served as Chief Financial Officer of the Denver and Kentucky divisional
markets of Columbia/HCA Healthcare Corporation. Prior to that time he spent 18
years with Humana Inc. and Columbia/HCA in various management capacities.
T. MARK BUFORD is Vice President and Corporate Controller. Mr. Buford has
served as our Corporate Controller since 1986 and as Vice President since 1988.
RACHEL A. SEIFERT is Vice President, Secretary and General Counsel.
Ms. Seifert joined us in January 1998. From 1992 to 1997, she was Associate
General Counsel of Columbia/HCA Healthcare Corporation and became Vice
President-Legal Operations in 1994. Prior to joining Columbia/HCA in 1992, she
was in private practice in Dallas, Texas.
SHEILA P. BURKE has been a director since 1997. She has been Executive Dean
of the John F. Kennedy School of Government, Harvard University since 1996.
Previously in 1996, Ms. Burke was senior advisor to the Dole for President
Campaign. From 1986 until June 1996, Ms. Burke served as the chief of staff to
former Senator Robert Dole and, in that capacity, was actively involved in
writing some of the healthcare legislation in effect today. She is a director of
WellPoint Health Networks Inc. and The Chubb Corporation.
ROBERT J. DOLE has been a director since 1997. He was a U.S. Senator from
1968 to 1996, during which time he served as Senate majority leader, minority
leader and chairman of the Senate Finance Committee. Mr. Dole was also a U.S.
Representative from 1960 to 1968. He has been a special counsel with Verner,
Liipfert, Bernhard, McPherson and Hand since 1997. He is also a director of TB
Woods Corp.
J. ANTHONY FORSTMANN has been a director since 1996. He has been a Managing
Director of J.A. Forstmann & Co., a merchant banking firm, since October 1987.
Mr. Forstmann was President of The National Registry Inc. from October 1991 to
August 1993 and from September 1994 to March 1995 and Chief Executive Officer
from October 1991 to August 1993 and from September 1994 to December 1995. In
1968, he co-founded Forstmann-Leff Associates, an institutional money management
firm with $6 billion in assets. He is also a special limited partner of one of
the Forstmann Little partnerships.
NICHOLAS C. FORSTMANN has been a director since 1996. He has been a general
partner of FLC XXIX Partnership, L.P. since he co-founded Forstmann Little & Co.
in 1978. He is also a director of The Yankee Candle Company, Inc. and NEXTLINK
Communications, Inc.
THEODORE J. FORSTMANN has been a director since 1996. He has been a general
partner of FLC XXIX Partnership, L.P. since he co-founded Forstmann Little & Co.
in 1978. He is also a director of The Yankee Candle Company, Inc. and McLeodUSA
Incorporated.
DALE F. FREY has been a director since 1997. Mr. Frey currently is retired.
From 1984 until 1997, Mr. Frey was the Chairman of the Board and President of
General Electric Investment Corp. From 1980 until 1997, he was also Vice
President of General Electric Company. Mr. Frey is also a director of
Praxair, Inc., Roadway Express Inc., and Aftermarket Technology Corp.
56
<PAGE>
SANDRA J. HORBACH has been a director since 1996. She has been a general
partner of FLC XXIX Partnership, L.P. since 1993. She is also a director of The
Yankee Candle Company, Inc. and NEXTLINK Communications, Inc.
THOMAS H. LISTER has been a director since April 2000. He has been a general
partner of FLC XXX Partnership, L.P. since 1997. He joined Forstmann Little &
Co. in 1993 as an associate.
MICHAEL A. MILES has been a director since 1997 and has served as Chairman
of the Board since March 1998. Mr. Miles currently is retired. Mr. Miles served
as Chairman and Chief Executive Officer of Philip Morris from 1991 to 1994. He
is also a director of Dell Computer Corp., Morgan Stanley Dean Witter, Sears
Roebuck and Co., Time Warner Inc., Allstate Inc., and the Interpublic Group of
Companies. He is a special limited partner of one of the Forstmann Little
partnerships.
SAMUEL A. NUNN has been a director since 1997. Mr. Nunn has been a partner
at the law firm of King & Spalding since 1997. Prior to joining King & Spalding,
he was a United States Senator from 1972 to 1997. He is also a director of The
Coca Cola Company, Dell Computer Corporation, General Electric Company, Internet
Security Systems Group, Inc., National Service Industries, Inc., Scientific-
Atlanta, Inc., Texaco, Inc., and Total System Services, Inc. He has continued
his service in the public policy arena as Chairman of the Board of the Center
for Strategic and International Studies.
THE BOARD OF DIRECTORS
Our certificate of incorporation will provide for a classified board of
directors consisting of three classes. Each class will consist, as nearly as
possible, of one-third of the total number of directors constituting the entire
board. The term of the initial Class I directors will terminate on the date of
the 2001 annual meeting of stockholders; the term of the initial Class II
directors will terminate on the date of the 2002 annual meeting of stockholders;
and the term of the initial Class III directors will terminate on the date of
the 2003 annual meeting of stockholders. Beginning in 2001, at each annual
meeting of stockholders, successors to the class of directors whose term expires
at that annual meeting will be elected for a three-year term and until their
respective successors are elected and qualified. A director may only be removed
with cause by the affirmative vote of the holders of a majority of the
outstanding shares of capital stock entitled to vote in the election of
directors. The Forstmann Little partnerships have a contractual right to elect
two directors until they no longer own any shares of our common stock.
Directors who are neither our executive officers nor general partners in the
Forstmann Little partnerships have been granted options to purchase common stock
in connection with their election to our board of directors. Directors do not
receive any fees for serving on our board, but are reimbursed for their
out-of-pocket expenses arising from attendance at meetings of the board and
committees. See "--Outside Director Stock Options."
The board has three committees: Executive, Compensation, and Audit and
Compliance. The Executive Committee consists of Theodore J. Forstmann, Sandra J.
Horbach, Michael A. Miles, and Wayne T. Smith. The Compensation Committee
consists of Michael A. Miles, J. Anthony Forstmann, and Nicholas C. Forstmann.
The Audit and Compliance Committee consists of Dale F. Frey, Michael A. Miles,
and Sheila P. Burke.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The current members of the Compensation Committee of our board of directors
are: Michael A. Miles, J. Anthony Forstmann, and Nicholas C. Forstmann. During
1999, the Compensation Committee consisted of Theodore J. Forstmann and Sandra
J. Horbach. Sandra J. Horbach formerly served as one of our officers but
received no compensation for her services. None of the other members of the
current or former Compensation Committees are current or former executive
officers or employees of us or any of our subsidiaries. Each of Theodore J.
Forstmann, Nicholas C. Forstmann, and Sandra J. Horbach are general partners in
partnerships affiliated with the Forstmann Little partnerships. See
"--Relationships and Transactions between Community Health Systems and its
Officers, Directors and
57
<PAGE>
5% Beneficial Owners and their Family Members" for a description of the 1996
acquisition of our principal subsidiary by the Forstmann Little partnerships and
members of our management.
EXECUTIVE COMPENSATION
The following table sets forth certain summary information with respect to
compensation for 1999 paid by us for services to our Chief Executive Officer and
our four other most highly paid executive officers who were serving as executive
officers at December 31, 1999.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION
---------------------------------------
OTHER
ANNUAL ALL
COMPENSATION OTHER
NAME AND POSITION SALARY ($) BONUS ($) (a) COMPENSATION ($)
- ----------------- ---------- --------- -------------- ----------------
<S> <C> <C> <C> <C>
Wayne T. Smith 475,002 427,500 -- 11,947 (b)
President and Chief
Executive Officer
W. Larry Cash 375,000 318,750 -- 10,764 (c)
Executive Vice President and
Chief Financial Officer
Michael T. Portacci 216,000 145,800 -- 5,735 (d)
Group Vice President
David L. Miller 235,000 137,475 -- 6,635 (e)
Group Vice President
Gary D. Newsome 216,000 163,080 -- 32,352 (f)
Group Vice President
</TABLE>
- --------------------------
(a) The amount of other annual compensation is not required to be reported since
the aggregate amount of perquisites and other personal benefits was less
than $50,000 or 10% of the total annual salary and bonus reported for each
named executive officer.
(b) Amount consists of additional long-term disability premiums and payments
made to the Supplemental Survivors Accumulation Plan of $4,822, employer
matching contributions to the 401(k) plan of $2,400 and matching
contributions to the deferred compensation plan of $4,725.
(c) Amount consists of additional long-term disability premiums and payments
made to the Supplemental Survivors Accumulation Plan of $5,139, employer
matching contributions to the 401(k) plan of $2,400, and employer matching
contributions to the deferred compensation plan of $3,225.
(d) Amount consists of additional long-term disability premiums and payments
made to the Supplemental Survivors Accumulation Plan of $3,335 and employer
matching contributions to the 401(k) plan of $2,400.
(e) Amount consists of additional long-term disability premiums and payments
made to the Supplemental Survivors Accumulation Plan of $4,235 and employer
matching contributions to the 401(k) plan of $2,400.
(f) Amount consists of additional long-term disability premiums and payments
made to the Supplemental Survivors Accumulation Plan totaling $3,502,
relocation expense reimbursement of $26,758, and employer matching
contributions to the 401(k) plan of $2,092.
58
<PAGE>
OPTION GRANTS IN LAST FISCAL YEAR
There were no stock options granted to any of our executive officers or
directors during the year ended December 31, 1999.
AGGREGATED OPTION VALUES AS OF DECEMBER 31, 1999
The executive officers named in the summary compensation table did not
exercise any stock options during the year ended December 31, 1999. The
following table sets forth the stock option values as of December 31, 1999 for
these persons.
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS
OPTIONS AT FISCAL YEAR-END (#) AT FISCAL YEAR-END ($)(a)
------------------------------ ------------------------------
EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Wayne T. Smith...................... -- -- $ -- $ --
Larry W. Cash....................... -- -- -- --
David L. Miller..................... 3,562 5,342 56,992 85,472
Gary D. Newsome..................... 3,562 5,342 56,992 85,472
Michael T. Portacci................. 5,342 3,562 85,472 56,992
</TABLE>
- --------------------------
(a) Sets forth values for options that represent the positive spread between the
respective exercise prices of outstanding stock options and the value of the
common stock as of December 31, 1999, based on the mid-point of the range of
initial public offering prices set forth on the cover page of this
prospectus.
COMMUNITY HEALTH SYSTEMS STOCK OPTION PLAN
The Community Health Systems Employee Stock Option Plan provides for the
granting of options to purchase shares of common stock of our company to any
employee of our company or our subsidiaries. These options are not intended to
qualify as incentive stock options. The plan is currently administered by the
Compensation Committee of our Board of Directors. As of April 14, 2000, options
to purchase 548,462 shares of common stock have been issued. No additional
grants will be made under this plan.
STOCK OPTION AGREEMENTS. Options are granted pursuant to stock option
agreements. To exercise an option, the optionee must pay for the shares in full
and execute the stockholder's agreement described below. One-fifth of the
options generally vest and become exercisable on each of the first, second,
third, fourth and fifth anniversaries of the grant date. Unvested options expire
on the date of the optionee's termination of employment and vested options
expire after the termination of employment as described below.
Each option expires, unless earlier terminated, on the earliest of:
- the tenth anniversary of the date of grant; and
- the exercise in full of the option.
If an optionee's employment is terminated for any reason, the options will
terminate to the extent they were not exercisable at the time of termination of
employment. The optionee has a 60-day period from the date of our notification
to exercise the vested portion of the option. These options are generally
exercisable only by an optionee during the optionee's lifetime and are not
transferable.
59
<PAGE>
The stock option agreements provide that we will notify the optionee prior
to a total sale or a partial sale. A total sale includes:
- the merger or consolidation of us into another corporation, other than a
merger or consolidation in which we are the surviving corporation and
which does not result in a capital reorganization, reclassification or
other change in the then outstanding common stock;
- the liquidation of us;
- the sale to a third party of all or substantially all of our assets; or
- the sale to a third party of common stock, other than through a public
offering;
but only if the Forstmann Little partnerships cease to own any shares of the
voting stock of our Company.
A partial sale means a sale by the Forstmann Little partnerships of all or a
portion of their shares of common stock to a third party, including through a
public offering, other than a total sale. This offering constitutes neither a
total sale nor a partial sale.
The optionee may exercise his or her options only for purposes of
participating in the partial sale, whether or not the options were otherwise
exercisable, with respect to the excess, if any, of
- the number of shares with respect to which the optionee would be entitled
to participate in the partial sale under the stockholder's agreement which
permits proportional participation with the Forstmann Little partnerships
in a public offering or sale to a third party, as described below, over
- the number of shares previously issued upon exercise of such options and
not previously disposed of in a partial sale.
Upon receipt of a notice of a total sale, the optionee may exercise all or
part of his or her options, whether or not such options were otherwise
exercisable, within five days of receiving such notice, or a shorter time as
determined by the committee.
In connection with a total sale involving the merger, consolidation or
liquidation of us or the sale of common stock by the Forstmann Little
partnerships, we may redeem the unexercised portion of the options, for a price
equal to the price received per share of common stock in the total sale, less
the exercise price of the options, in lieu of permitting the optionee to
exercise the options. Any unexercised portion of an option will terminate upon
the completion of a total sale, unless we provide for its continuation.
In the event a total sale or partial sale is not completed, any option that
the optionee had exercised in connection with the total sale or partial sale
will be deemed not to have been exercised and will be exercisable after the
total sale or partial sale only to the extent it would have been exercisable if
notice of the total sale or partial sale had not been given to the optionee. The
optionee has no independent right to require us to register the shares of common
stock underlying the options under the Securities Act.
The stock option agreements permit us to terminate all of an optionee's
options if the optionee engages in prohibited or competitive activities,
including:
- disclosing confidential information about us;
- soliciting any of our employees within eighteen months of being
terminated;
- publishing any statement critical of us;
60
<PAGE>
- engaging in any competitive activities; or
- being convicted of a crime against us.
The number and class of shares underlying, and the terms of, outstanding
options may be adjusted in certain events, such as a merger, consolidation,
stock split or stock dividend.
STOCKHOLDER'S AGREEMENT. Upon exercise of an option under the plan, an
optionee is required to enter into a stockholder's agreement with us in the form
then in effect. The stockholder's agreement governs the optionee's rights and
obligations as a stockholder. The stockholder's agreement provides that,
generally, the shares issued upon exercise of the options may not be sold,
assigned or otherwise transferred. The description below summarizes the terms of
the form of the stockholder's agreement currently in effect.
If one or more partial sales result in the Forstmann Little partnerships
owning, in the aggregate, less than 25% of our then outstanding voting stock,
the stockholder is entitled to sell, transfer or hold his or her shares of
common stock free of the restrictions and rights contained in the stockholder's
agreement.
The stockholder's agreement provides that the stockholder may participate
proportionately in any sale by the Forstmann Little partnerships of all or a
portion of their shares of common stock to any person who is not a partner or
affiliate of the Forstmann Little partnerships. In addition, the stockholder
shall be entitled to (and may be required to) participate proportionately in a
public offering of shares of common stock by the Forstmann Little partnerships,
by selling the same percentage of the stockholder's shares that the Forstmann
Little partnerships are selling of their shares. The sale of shares of common
stock in such a transaction must be for the same price and otherwise on the same
terms and conditions as the sale by the Forstmann Little partnerships. If the
Forstmann Little partnerships sell or exchange all or a portion of their common
stock in a bona fide arm's-length transaction, the Forstmann Little partnerships
may require the stockholder to sell a proportionate amount of his or her shares
for the same price and on the same terms and conditions as the sale of common
stock by the Forstmann Little partnerships and, if stockholder approval of the
transaction is required, to vote his or her shares in favor of the sale or
exchange.
The stockholder's agreement permits us to repurchase all the shares of
common stock then held by a stockholder if the stockholder engages in any
prohibited activity or competitive activity or is convicted of a crime against
us.
OUTSIDE DIRECTOR STOCK OPTIONS
Six directors, Messrs. Dole, J. Anthony Forstmann, Frey, Miles, and Nunn and
Ms. Burke, have options which were granted pursuant to individual stock option
agreements. Each of the director optionees other than Mr. Miles has options to
purchase 29,679 shares of common stock at $9.04 per share. Mr. Miles has options
to purchase 41,550 shares of common stock at $9.04 per share. These options are
not intended to qualify as incentive stock options and were not issued pursuant
to the plan.
One-third of the options generally become exercisable on each of the first,
second and third anniversaries of the date of the grant. Each option expires on
the earliest of:
- the tenth anniversary of the date of grant;
- the date the director optionee ceases to serve as one of our directors;
and
- the exercise in full of the option.
The director optionees may not sell or otherwise transfer their options.
61
<PAGE>
The director option agreements provide that we will notify the director
optionees prior to a total sale or a partial sale. Upon receipt of a notice of a
partial sale, a director optionee may exercise his or her options only for
purposes of participating in the partial sale, whether or not the options were
otherwise exercisable, with respect to the excess, if any, of:
- the number of shares with respect to which the director optionee would be
entitled to participate in the partial sale under the director
stockholder's agreements described below, over
- the number of shares previously issued upon exercise of the options and
not previously disposed of in a partial sale.
Upon receipt of a notice of a total sale, a director optionee may exercise
all or part of his options, whether or not the options were otherwise
exercisable.
In connection with a total sale, we may redeem the unexercised portion of
the director optionee's options. Any unexercised portion of a director
optionee's options will terminate upon the completion of a total sale, unless we
provide for continuation of the options.
In the event a total sale or partial sale is not completed, any option which
a director optionee had exercised in connection with the sale will be
exercisable after the sale only to the extent it would have been exercisable if
notice of the sale had not been given to the director optionee. The offering
constitutes neither a total sale nor a partial sale.
The director option agreements provide that, if the Forstmann Little
partnerships sell shares of common stock in a bona fide arm's-length
transaction, at our election, a director optionee may be required to:
- proportionately exercise the director optionee's options and to sell all
of the shares of common stock purchased under the exercise in the same
transaction and on the same terms as the shares sold by the Forstmann
Little partnerships, or if unwilling to do so; or
- forfeit the portion of the option required to be exercised.
The director optionees have no independent right to require us to register
the shares of common stock underlying the options under the Securities Act.
The number and class of shares underlying and the terms of outstanding
options may be adjusted in certain events, such as a merger, consolidation,
stock split or stock dividend.
DIRECTOR STOCKHOLDER'S AGREEMENTS. Upon exercise of a director option, a
director optionee is required to enter into a director stockholder's agreement
with us in the form then in effect. The form of director stockholder's agreement
currently in effect is substantially the same as the form of employee
stockholder's agreement currently in effect.
STOCKHOLDER'S AGREEMENTS
Currently, 23 members of our management and other employees or former
employees own an aggregate of 2,275,312 shares of our common stock, excluding
shares issuable upon exercise of options. These shares were purchased pursuant
to the terms of stockholder agreements. The stockholder agreements contain
transfer provisions substantially similar to those in the form of stockholder's
agreements that the employee and director optionees must execute upon exercise
of options.
Upon termination of employment, we have the right, at our option, to
purchase all of the unvested shares of common stock held by the stockholder. The
stock vests at a rate of 20% per year, beginning after one year. The
stockholders have no independent right to require us to register their shares
under the Securities Act.
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<PAGE>
THE COMMUNITY HEALTH SYSTEMS 2000 STOCK OPTION AND AWARD PLAN
Our Board of Directors adopted the 2000 Stock Option and Award Plan in
April, 2000, and the stockholders approved it in April, 2000. The stock plan
provides for the grant of incentive stock options intended to qualify under
Section 422 of the Internal Revenue Code and stock options which do not so
qualify, stock appreciation rights, restricted stock, performance units and
performance shares, phantom stock awards, and share awards. Persons are eligible
to receive grants under the stock plan include our directors, officers,
employees, and consultants. The stock plan is designed to comply with the
requirements for "performance-based compensation" under Section 162(m) of the
Internal Revenue Code, and the conditions for exemption from the short-swing
profit recovery rules under Rule 16b-3 under the Securities Exchange Act.
The stock plan is administered by a committee that consists of at least two
nonemployee outside board members. The Compensation Committee of the board
currently serves as the committee. Generally, the committee has the right to
grant options and other awards to eligible individuals and to determine the
terms and conditions of options and awards, including the vesting schedule and
exercise price of options and awards. The stock plan authorizes the issuance of
6% of the outstanding shares of common stock determined on a fully diluted basis
as of April 25, 2000, with adjustments to give effect to this offering and our
recapitalization and in the case of changes in capitalization affecting the
options.
At the completion of this offering, we intend to grant stock options to
various employees, including our executive officers, under the 2000 Stock Option
and Award Plan. An aggregate of 3,000,000 shares of common stock would be
issuable upon the exercise of these options, and the exercise price of these
options will be the initial public offering price. The following table sets
forth the number of shares of our common stock underlying these options:
<TABLE>
<S> <C>
Wayne Smith ................................................ 750,000
President and Chief Executive Officer
Larry Cash ................................................. 500,000
Executive Vice President and Chief Financial Officer
David Miller ............................................... 200,000
Group Vice President
Gary Newsome ............................................... 200,000
Group Vice President
Michael Portacci ........................................... 200,000
Group Vice President
Executive officers as a group excluding named executive
officers (12 persons)..................................... 500,000
Other employees as a group.................................. 650,000
</TABLE>
The stock plan provides that the term of any option may not exceed ten
years, except in the case of the death of an optionee in which event the option
may be exercised for up to one year following the date of death even if it
extends beyond ten years from the date of grant. If a participant's employment,
or service as a director, is terminated following a change in control, any
options or stock appreciation rights become immediately and fully vested at that
time and will remain outstanding until the earlier of the six-month anniversary
of termination and the expiration of the option term.
THE COMMUNITY HEALTH SYSTEMS 2000 EMPLOYEE STOCK PURCHASE PLAN
We adopted the 2000 Employee Stock Purchase Plan in April, 2000. After the
initial public offering, the plan allows our employees to purchase additional
shares of our common stock on the
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NYSE at the then current market price. Employees who elect to participate in the
program will pay for these purchases with funds that we will withhold from their
paychecks.
RELATIONSHIPS AND TRANSACTIONS BETWEEN COMMUNITY HEALTH SYSTEMS AND ITS
OFFICERS, DIRECTORS AND 5% BENEFICIAL OWNERS AND THEIR FAMILY MEMBERS
In July 1996, we were formed by two Forstmann Little partnerships and
members of our management to acquire CHS/Community Health Systems, Inc., which
was then a publicly owned company named Community Health Systems, Inc. We
financed the acquisition by issuing our common stock to the Forstmann Little
partnerships and members of management, by incurring indebtedness under credit
facilities, and by issuing an aggregate of $500 million of subordinated
debentures to one of the Forstmann Little partnerships, Forstmann Little & Co.
Subordinated Debt and Equity Management Buyout Partnership-VI, L.P. ("MBO-VI").
MBO-VI immediately distributed the subordinated debentures to its limited
partners. The subordinated debentures are our general senior subordinated
obligations, are not subject to mandatory redemption and mature in three equal
annual installments beginning June 30, 2007, with the final payment due on
June 30, 2009. The debentures bear interest at a fixed rate of 7.50% which is
payable semi-annually in January and July. The balance of debentures outstanding
at December 31, 1999 was $500 million. Total interest expense for the debentures
was $37.5 million for each of the years ended December 31, 1997, 1998 and 1999.
We have engaged Greenwood Marketing and Management Services to provide
oversight for our Senior Circle Association, which is a community affinity
organization with local chapters sponsored by each of our hospitals. Greenwood
Marketing and Management is a company owned and operated by Anita Greenwood
Cash, the spouse of W. Larry Cash. In 1999, we paid Greenwood Marketing and
Management Services $268,000 for marketing services, postage, magazines,
handbooks, sales brochures, training manuals, and membership services.
The law firm of King & Spalding, of which Mr. Samuel A. Nunn is a partner,
has in the past provided, and may continue to provide, legal services to us and
our subsidiaries.
The following executive officers of our company were indebted to us in
amounts greater than $60,000 since January 1, 1999 under full recourse
promissory notes. These notes were delivered in partial payment for the purchase
of our common stock. The promissory notes are secured by the shares to which
they relate. The highest amounts outstanding under these notes since January 1,
1999 and the amounts outstanding at December 31, 1999 were as follows:
<TABLE>
<CAPTION>
SINCE JANUARY 1, AT DECEMBER 31,
1999 1999 INTEREST RATE
----------------- --------------- -------------
<S> <C> <C> <C>
W. Larry Cash....................................... $ 697,771 $697,771 6.84%
David L. Miller..................................... 344,620 344,620 6.84%
Gary D. Newsome..................................... 221,707 221,707 6.84%
Michael T. Portacci................................. 82,065 82,065 6.84%
John A. Fromhold.................................... 224,250 224,250 6.84%
Rachel A. Seifert................................... 75,000 72,157 6.84%
</TABLE>
In connection with the relocation of our corporate office from Houston to
Nashville in May 1996, we lent $100,000 to Mr. T. Mark Buford, our Vice
President and Corporate Controller. This loan is due on December 15, 2000 and
bears no interest.
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PRINCIPAL STOCKHOLDERS
The following table sets forth certain information regarding the beneficial
ownership of our common stock immediately prior to the consummation of the
offering and as adjusted to reflect the sale of the shares of common stock
pursuant to the offering. The table includes:
- each person who is known by us to be the beneficial owner of more than 5%
of the outstanding common stock;
- each of our directors;
- each executive officer named in the summary compensation table; and
- all directors and executive officers as a group.
Except as otherwise indicated, the persons or entities listed below have
sole voting and investment power with respect to all shares of common stock
beneficially owned by them, except to the extent such power may be shared with a
spouse.
<TABLE>
<CAPTION>
PERCENT BENEFICIALLY
OWNED (a)
SHARES BENEFICIALLY ---------------------
OWNED PRIOR TO BEFORE AFTER
NAME OFFERING (a) OFFERING OFFERING
- ---- ------------------- --------- ---------
<S> <C> <C> <C>
5% STOCKHOLDERS:
Forstmann Little & Co. Equity Partnership-V, L.P. (b)....... 31,101,972 55.9% 41.8%
Forstmann Little & Co. Subordinated Debt and Equity
Management Buyout Partnership-VI, L.P. (b)................ 22,215,575 40.0% 29.9%
DIRECTORS:
Sheila P. Burke............................................. 19,786(c) * *
Robert J. Dole.............................................. 29,679(d) * *
J. Anthony Forstmann(b)..................................... 118,715(e) * *
Nicholas C. Forstmann(b).................................... 53,317,547 95.9% 71.7%
Theodore J. Forstmann(b).................................... 53,317,547 95.9% 71.7%
Dale F. Frey(b)............................................. 29,679(f) * *
Sandra J. Horbach(b)........................................ 53,317,547 95.9% 71.7%
Thomas H. Lister(b)......................................... 31,101,972 55.9% 41.8%
Michael A. Miles(b)......................................... 108,571(g) * *
Samuel A. Nunn(b)........................................... 29,679(h) * *
Wayne T. Smith.............................................. 717,440 1.3% 1.0%
OTHER NAMED EXECUTIVE OFFICERS:
W. Larry Cash............................................... 219,797 * *
David L. Miller............................................. 113,460(i) * *
Gary D. Newsome............................................. 66,592(j) * *
Michael T. Portacci......................................... 109,737(k) * *
All Directors and Executive Officers as a Group
(19 persons).............................................. 54,914,912(l) 98.4% 73.7%
</TABLE>
- --------------------------
* Less than 1%.
(a) For purposes of this table, information as to the shares of common stock
assumes that the recapitalization has been effected and, in the case of the
column "After Offering," that the underwriters' over-allotment option is not
exercised. In addition, a person or group of persons is deemed to have
"beneficial ownership" of any shares of common stock when such person or
persons has the right to acquire them within 60 days after the date of this
prospectus. For purposes of computing the percentage of outstanding shares
of common stock held by each person or group of persons named above, any
shares which such person or persons have the right to acquire within
60 days after the date of this prospectus is deemed to be outstanding but is
not deemed to be outstanding for the purpose of computing the percentage
ownership of any other person.
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(b) The general partner of Forstmann Little & Co. Equity Partnership-V, L.P., a
Delaware limited partnership ("Equity-V"), is FLC XXX Partnership, L.P. a
New York limited partnership of which Theodore J. Forstmann, Nicholas C.
Forstmann, Sandra J. Horbach, Thomas H. Lister, Winston W. Hutchins, Erskine
B. Bowles (through Tywana LLC, a North Carolina limited liability company
having its principal business office at 2012 North Tryon Street, Suite 2450,
Charlotte, N.C. 28202), Jamie C. Nicholls and S. Joshua Lewis are general
partners. The general partner of Forstmann Little & Co. Subordinated Debt
and Equity Management Buyout Partnership-VI, L.P., a Delaware limited
partnership ("MBO-VI"), is FLC XXIX Partnership, L.P., a New York limited
partnership of which Theodore J. Forstmann, Nicholas C. Forstmann, Sandra J.
Horbach, Thomas H. Lister, Winston W. Hutchins, Erskine B. Bowles (through
Tywana LLC), Jamie C. Nicholls and S. Joshua Lewis are general partners.
Accordingly, each of the individuals named above, other than Mr. Lister,
with respect to MBO-VI, and Mr. Bowles, Ms. Nicholls and Mr. Lewis, with
respect to Equity-V and MBO-VI, for the reasons described below, may be
deemed the beneficial owners of shares owned by MBO-VI and Equity-V and, for
purposes of this table, beneficial ownership is included. Mr. Lister, with
respect to MBO-VI, and Mr. Bowles, Ms. Nicholls and Mr. Lewis, with respect
to Equity-V and MBO-VI, do not have any voting or investment power with
respect to, or any economic interest in, the shares of common stock of the
company held by MBO-VI or Equity-V; and, accordingly, Mr. Lister,
Mr. Bowles, Ms. Nicholls and Mr. Lewis are not deemed to be the beneficial
owners of these shares. Theodore J. Forstmann, Nicholas C. Forstmann and J.
Anthony Forstmann are brothers. Messrs. Frey, Miles and Nunn are members of
the Forstmann Little Advisory Board and, as such, have economic interests in
the Forstmann Little partnerships. FLC XXX Partnership is a limited partner
of Equity-V. Each of Messrs. J. Anthony Forstmann and Michael A. Miles is a
special limited partner in one of the Forstmann Little partnerships. None of
the other limited partners in each of MBO-VI and Equity-V is otherwise
affiliated with Community Health Systems. The address of Equity-V and MBO-VI
is c/o Forstmann Little & Co., 767 Fifth Avenue, New York, New York 10153.
(c) Includes 19,786 shares subject to options which are currently exercisable or
exercisable within 60 days of the date of this prospectus.
(d) Includes 29,679 shares subject to options which are currently exercisable or
exercisable within 60 days of the date of this prospectus.
(e) Includes 29,679 shares subject to options which are currently exercisable or
exercisable within 60 days of the date of this prospectus. The remaining
shares are held through a limited partnership interest in the Forstmann
Little partnerships.
(f) Includes 29,679 shares subject to options which are currently exercisable or
exercisable within 60 days of the date of this prospectus.
(g) Includes 41,550 shares subject to options which are currently exercisable or
exercisable within 60 days of the date of this prospectus. The remaining
shares are held through a limited partnership interest in the Forstmann
Little partnerships.
(h) Includes 29,679 shares subject to options which are currently exercisable or
exercisable within 60 days of the date of this prospectus.
(i) Includes 3,561 shares subject to options which are currently exercisable or
exercisable within 60 days of the date of this prospectus.
(j) Includes 3,561 shares subject to options which are currently exercisable or
exercisable within 60 days of the date of this prospectus.
(k) Includes 5,342 shares subject to options which are currently exercisable or
exercisable within 60 days of the date of this prospectus.
(l) Includes 204,892 shares subject to options which are currently exercisable
or exercisable within 60 days of the date of this prospectus.
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DESCRIPTION OF INDEBTEDNESS
THE CREDIT AGREEMENT
We and our wholly owned subsidiary, CHS/Community Health Systems, Inc., are
parties to a credit facility with a syndicate of banks and other financial
institutions led by The Chase Manhattan Bank, as a lender and administrative
agent, under which our subsidiary has, and may in the future, borrow. We have
guaranteed the performance of our subsidiary under this credit facility. The
credit facility consists of the following:
<TABLE>
<CAPTION>
BALANCE OUTSTANDING
(AS OF MARCH 31, 2000)
----------------------
<S> <C>
Revolving credit facility.............................. $145,000,000
Acquisition loan facility.............................. $159,951,000
Tranche A term loan.................................... $ 27,250,000
Tranche B term loan.................................... $127,000,000
Tranche C term loan.................................... $127,000,000
Tranche D term loan.................................... $338,056,500
</TABLE>
The loans bear interest, at our option, at either of the following rates:
(a) the highest of:
- the rate from time to time publicly announced by The Chase Manhattan
Bank in New York as its prime rate;
- the secondary market rate for three-month certificates of deposit from
time to time plus 1%; and
- the federal funds rate from time to time, plus 1/2 of 1%;
in each case plus an applicable margin which is:
- based on a pricing grid depending on our leverage ratio at that time
for the revolving credit loans, acquisition loans and the tranche A
term loan;
- 2.00% for the tranche B term loan;
- 2.50% for the tranche C term loan;
- 2.75% for the tranche D term loan; or
(b) a Eurodollar rate plus an applicable margin which is:
- based on a pricing grid depending on our leverage ratio at that time,
for revolving credit loans, acquisition loans and the tranche A term
loan;
- 3.00% for the tranche B loan;
- 3.50% for the tranche C loan;
- 3.75% for the tranche D loan.
The term loans are repayable in quarterly installments pursuant to a
predetermined payment schedule through December 31, 2005.
We also pay a commitment fee for the daily average unused commitment under
the revolving credit commitment and available acquisition loan commitment. The
commitment fee is based on a pricing grid depending on the applicable margin in
effect for Eurodollar revolving credit loans. The commitment fee is payable
quarterly in arrears and on the revolving credit termination date with respect
to the available revolving credit commitments and on the acquisition loan
termination date with
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respect to available acquisition loan commitments. In addition, we will pay fees
for each letter of credit issued under the credit facility.
Loans under the revolving credit facility can be made at any time prior to
December 31, 2002, provided that no loan taken pursuant to the revolving credit
facility can mature later than December 31, 2002. The total borrowings we may
have outstanding at any time under our revolving credit facility is $200
million.
The acquisition facility is a reducing revolving credit facility that will
be permanently reduced on predetermined anniversaries in accordance with a
schedule. Once reduced, outstanding acquisition loans must be repaid to the
extent they exceed the reduced level. The acquisition loan termination date is
December 31, 2002. The total borrowings we may have outstanding at any time
under our acquisition facility is $282.5 million.
The loans must be prepaid with the net proceeds in excess of $20 million in
the aggregate of specified asset sales and issuances of additional indebtedness
not constituting permitted indebtedness in the credit facility. These net
proceeds will be applied first to prepay the outstanding balances of the term
loans and the acquisition loans and then to repay outstanding balances of the
revolving credit loans. The commitments under the acquisition loans and
revolving credit loans will be permanently reduced by the amount of the
repayment of these facilities.
The credit facility contains covenants and provisions that restrict, among
other things, our ability to change the business we are conducting, declare
dividends, grant liens, incur additional indebtedness, exceed a specified
leverage ratio, fall below a minimum interest coverage ratio and make capital
expenditures. Our wholly owned subsidiary, CHS/Community Health Systems, Inc.,
is prohibited from paying dividends or making other distributions to us except
to the extent necessary to pay taxes, fees, and expenses to maintain our
corporate existence and to conduct our activities as permitted by our guarantee
of the obligations under the credit facility.
We will use the net proceeds of the offering to prepay indebtedness under
this credit facility. See "Use of Proceeds."
SUBORDINATED DEBT
We issued an aggregate of $500 million of subordinated debentures to MBO-VI
in connection with the July 1996 acquisition of our subsidiary. MBO-VI
immediately distributed the subordinated debentures to its limited partners. The
subordinated debentures are divided into three equal series, due on June 30,
2007, June 30, 2008 and June 30, 2009. The subordinated debentures provide for
interest at a rate of 7 1/2%, payable semi-annually. The subordinated debentures
may be prepaid by us at any time without premium, penalty or charge and are
subordinate to our credit agreement and other senior obligations. We have a
right of first refusal on the transfer of the debentures.
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DESCRIPTION OF CAPITAL STOCK
OVERVIEW
Immediately before the closing of the offering, we will be recapitalized as
follows:
- each outstanding share of Class B common stock will be exchanged for .488
of a share of Class A common stock;
- each outstanding option to purchase a share of Class C common stock will
be exchanged for an option to purchase .750 of a share of Class A common
stock;
- the Class A common stock will be redesignated as common stock and adjusted
for a stock split on a 118.7148-for-1 basis; and
- the certificate of incorporation will be amended and restated to reflect a
single class of common stock, par value $.01 per share, and the number of
authorized shares of common stock and preferred stock will be increased.
After giving effect to these changes to our certificate of incorporation,
our authorized capital stock will consist of 300,000,000 shares of common stock,
$.01 par value per share, and 100,000,000 shares of preferred stock, $.01 par
value per share.
After giving effect to these changes to our certificate of incorporation and
the 118.7148-for-1 stock split, but before the closing of the offering, based on
share information as of April 30, 2000, there will be 55,592,859 shares of
common stock outstanding and no shares of preferred stock outstanding. After the
closing of the offering, there will be 74,342,859 shares of common stock
outstanding.
After the closing of the offering, the Forstmann Little partnerships and our
management will beneficially own approximately 74.78% of the outstanding common
stock, 75.03% on a fully diluted basis. As long as the Forstmann Little
partnerships and our management continue to own in the aggregate more than 50%
of the outstanding shares of common stock, they will collectively have the power
to:
- elect our entire board of directors;
- determine without the consent of other stockholders, the outcome of any
corporate transaction or other matter submitted to the stockholders for
approval, including mergers, consolidations and the sale of all or
substantially all of our assets;
- prevent or cause a change in control; and
- approve substantially all amendments to our certificate of incorporation.
The Forstmann Little partnerships have a contractual right to elect two
directors until such time as they no longer own any of our shares of common
stock.
The following summary contains material information relating to provisions
of our common stock, preferred stock, certificate of incorporation and by-laws
is not intended to be complete and is qualified by reference to the provisions
of applicable law and to our certificate of incorporation and by-laws included
as exhibits to the registration statement of which this prospectus is a part.
COMMON STOCK
Holders of common stock are entitled to one vote for each share held on all
matters submitted to a vote of stockholders and do not have cumulative voting
rights. Accordingly, holders of a majority of the outstanding shares of common
stock entitled to vote in any election of directors may elect all of the
directors standing for election. Holders of common stock are entitled to receive
ratably such dividends, if any, as may be declared by the board of directors out
of legally available funds. Upon our
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liquidation, dissolution or winding-up, holders of common stock are entitled to
receive ratably our net assets available for distribution after the payment of
all of our liabilities and the payment of any required amounts to the holders of
any outstanding preferred stock. Holders of common stock have no preemptive,
subscription, redemption or conversion rights. The outstanding shares of common
stock are, and the shares sold in the offering will be, when issued and paid
for, validly issued, fully paid and nonassessable. The rights, preferences and
privileges of holders of common stock are subject to, and may be adversely
affected by, the rights of holders of shares of any series of preferred stock
that may designate and issue in the future.
PREFERRED STOCK
Our board of directors is authorized, subject to any limitations prescribed
by law, without further stockholder approval, to establish from time to time one
or more classes or series of preferred stock covering up to an aggregate of
100,000,000 shares of preferred stock, and to issue such shares of preferred
stock. Each class or series of preferred stock will cover such number of shares
and will have such preferences, voting powers, qualifications and special or
relative rights or privileges as is determined by the board of directors, which
may include, among others, dividend rights, liquidation preferences, voting
rights, conversion rights, preemptive rights, and redemption rights.
The purpose of authorizing the board of directors to establish preferred
stock is to eliminate delays associated with a stockholders vote on the creation
of a particular class or series of preferred stock. The rights of the holders of
common stock will be subject to the rights of holders of any preferred stock
issued in the future. The issuance of preferred stock, while providing desirable
flexibility in connection with possible acquisitions and other corporate
purposes, could have the effect of discouraging, delaying or preventing an
acquisition of our company at a price which many stockholders find attractive.
These provisions could also make it more difficult for our stockholders to
effect certain corporate actions, including the election of directors. We have
no present plans to issue any shares of preferred stock.
LIMITATION ON LIABILITY AND INDEMNIFICATION MATTERS
Our certificate of incorporation limits the liability of our directors to us
and our stockholders to the fullest extent permitted by Delaware law.
Specifically, our directors will not be personally liable for money damages for
breach of fiduciary duty as a director, except for liability
- for any breach of the director's duty of loyalty to us or our
stockholders;
- for acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law;
- under Section 174 of the Delaware General Corporation Law, which concerns
unlawful payments of dividends, stock purchases, or redemptions; and
- for any transaction from which the director derived an improper personal
benefit.
Our certificate of incorporation and by-laws will also contain provisions
indemnifying our directors and officers to the fullest extent permitted by
Delaware law. The indemnification permitted under Delaware law is not exclusive
of any other rights to which such persons may be entitled.
In addition, we maintain directors' and officers' liability insurance to
provide our directors and officers with insurance coverage for losses arising
from claims based on breaches of duty, negligence, error and other wrongful
acts.
We have entered into, or intend to enter into, indemnification agreements
with our directors and executive officers. These agreements contain provisions
that may require us, among other things, to indemnify these directors and
executive officers against certain liabilities that may arise because of their
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status or service as directors or executive officers, advance their expenses
incurred as a result of any proceeding against them as to which they could be
indemnified and obtain directors' and officers' liability insurance.
At present there is no pending litigation or proceeding involving any
director or officer, as to which indemnification is required or permitted. We
are not aware of any threatened litigation or proceeding which may result in a
claim for such indemnification.
ANTI-TAKEOVER EFFECTS OF OUR CERTIFICATE OF INCORPORATION AND BY-LAWS AND
PROVISIONS OF DELAWARE LAW
A number of provisions in our certificate of incorporation, by-laws and
Delaware law may make it more difficult to acquire control of us. These
provisions could deprive the stockholders of opportunities to realize a premium
on the shares of common stock owned by them. In addition, these provisions may
adversely affect the prevailing market price of the common stock. These
provisions are intended to:
- enhance the likelihood of continuity and stability in the composition of
the board and in the policies formulated by the board;
- discourage certain types of transactions which may involve an actual or
threatened change in control of our company;
- discourage certain tactics that may be used in proxy fights; and
- encourage persons seeking to acquire control of our company to consult
first with the board of directors to negotiate the terms of any proposed
business combination or offer.
STAGGERED BOARD. Our certificate of incorporation and by-laws will provide
that the number of our directors shall be fixed from time to time by a
resolution of a majority of our board of directors. Our certificate of
incorporation and by-laws also provide that the board of directors shall be
divided into three classes. The members of each class of directors will serve
for staggered three-year terms. In accordance with the Delaware General
Corporation Law, directors serving on classified boards of directors may only be
removed from office for cause. The classification of the board has the effect of
requiring at least two annual stockholder meetings, instead of one, to replace a
majority of the members of the board. Subject to the rights of the holders of
any outstanding series of preferred stock, vacancies on the board of directors
may be filled only by a majority of the remaining directors, or by the sole
remaining director, or by the stockholders if the vacancy was caused by removal
of the director by the stockholders. This provision could prevent a stockholder
from obtaining majority representation on the board by enlarging the board of
directors and filling the new directorships with its own nominees.
ADVANCE NOTICE PROCEDURES FOR STOCKHOLDER PROPOSALS AND DIRECTOR
NOMINATIONS. Our by-laws will provide that stockholders seeking to bring
business before an annual meeting of stockholders, or to nominate candidates for
election as directors at an annual meeting of stockholders, must provide timely
notice thereof in writing. To be timely, a stockholder's notice generally must
be delivered to or mailed and received at our principal executive offices not
less than 45 or more than 75 days prior to the first anniversary of the date on
which we first mailed our proxy materials for the preceding year's annual
meeting of stockholders. However, if the date of the annual meeting is advanced
more than 30 days prior to or delayed by more than 30 days after the anniversary
of the preceding year's annual meeting, to be timely, notice by the stockholder
must be delivered not later than the close of business on the later of the 90th
day prior to the annual meeting or the 10th day following the day on which
public announcement of the date of the meeting is first made. The by-laws will
also specify certain requirements as to the form and content of a stockholder's
notice. These provisions may preclude stockholders from bringing matters before
an annual meeting of stockholders or from making nominations for directors at an
annual meeting of stockholders.
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STOCKHOLDER ACTION BY WRITTEN CONSENT. Our by-laws provide that
stockholders may take action by written consent.
PREFERRED STOCK. The ability of our board to establish the rights and issue
substantial amounts of preferred stock without the need for stockholder
approval, while providing desirable flexibility in connection with possible
acquisitions, financings, and other corporate transactions, may among other
things, discourage, delay, defer, or prevent a change in control of the company.
AUTHORIZED BUT UNISSUED SHARES OF COMMON STOCK. The authorized but unissued
shares of common stock are available for future issuance without stockholder
approval. These additional shares may be utilized for a variety of corporate
purposes, including future public offerings to raise additional capital,
corporate acquisitions, and employee benefit plans. The existence of authorized
but unissued shares of common stock could render more difficult or discourage an
attempt to obtain control of us by means of a proxy contest, tender offer,
merger or otherwise.
WE HAVE OPTED OUT OF SECTION 203 OF THE DELAWARE GENERAL CORPORATION
LAW. Our certificate of incorporation provides that we have opted out of the
provisions of Section 203 of the Delaware General Corporation Law. In general,
Section 203 prohibits a publicly held Delaware corporation from engaging in a
"business combination" with an "interested stockholder" for a period of three
years after the date of the transaction in which the person became an interested
stockholder, unless the business combination is approved in a prescribed manner.
Because we have opted out in the manner permitted under Delaware law, the
restrictions of this provision will not apply to us.
SHARES ELIGIBLE FOR FUTURE SALE
RULE 144 SECURITIES
Upon the consummation of the offering, we will have 74,342,859 shares of
common stock outstanding. Of these shares, only the 18,750,000 shares of common
stock sold in the offering will be freely tradable without registration under
the Securities Act and without restriction by persons other than our
"affiliates." The 55,592,859 shares of common stock held by the Forstmann Little
partnerships and our directors and executive officers and other existing
shareholders after the offering will be "restricted" securities under the
meaning of Rule 144 under the Securities Act and may not be sold in the absence
of registration under the Securities Act, unless an exemption from registration
is available, including exemptions pursuant to Rule 144 or Rule 144A under the
Securities Act.
In general, under Rule 144 as currently in effect, beginning 90 days after
the date of this prospectus, a person who has beneficially owned shares of our
common stock for at least one year would be entitled to sell within any
three-month period a number of shares that does not exceed the greater of either
of the following:
- 1% of the number of shares of common stock then outstanding, which will
equal approximately the number of shares outstanding immediately after the
offering, or
- the average weekly trading volume of the common stock on the NYSE during
the four calendar weeks preceding the filing of a notice on Form 144 with
respect to such sale.
Sales under Rule 144 are also subject to certain manner of sale provisions
and notice requirements and to the availability of current public information
about us.
Under Rule 144(k), a person who is not deemed to have been one of our
"affiliates" at any time during the 90 days preceding a sale, and who has
beneficially owned the shares proposed to be sold for at least two years,
including the holding period of any prior owner other than an "affiliate," is
entitled to sell its shares without complying with the manner of sale, public
information, volume limitation or notice provisions of Rule 144. Therefore,
unless otherwise restricted, "144(k) shares" may be sold
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immediately upon the completion of the offering. The sale of these shares, or
the perception that sales will be made, could adversely affect the price of our
common stock after the offering because a greater supply of shares would be, or
would be perceived to be, available for sale in the public market.
We and our executive officers and directors and all existing stockholders
have agreed that, without the prior written consent of Merrill Lynch & Co. on
behalf of the underwriters, it will not, during the period ended 180 days after
the date of this prospectus, sell shares of common stock or take certain related
actions, subject to limited exceptions, all as described under "Underwriting."
REGISTRATION RIGHTS
We have entered into a registration rights agreement with the Forstmann
Little partnerships, pursuant to which we have granted to the Forstmann Little
partnerships six demand rights to cause us to file a registration statement
under the Securities Act covering resales of all shares of common stock held by
the Forstmann Little partnerships, and to cause the registration statement to
become effective. The registration rights agreement also grants "piggyback"
registration rights permitting the Forstmann Little partnerships to include its
registrable securities in a registration of securities by us. Under the
agreement, we will pay the expenses of such registrations.
In addition, pursuant to the stockholder's and subscription agreements, we
have granted "piggyback" registration rights to all of our employees and
directors who have purchased shares of common stock and/or that have been
awarded options to purchase shares of common stock. These registration rights
are exercisable only upon registration by us of shares of common stock held by
the Forstmann Little partnerships. The holders of common stock entitled to these
registration rights are entitled to notice of any proposal to register shares
held by the Forstmann Little partnerships and to include their shares in such
registration. We will pay the expenses of these piggyback registrations.
UNITED STATES FEDERAL TAX CONSIDERATIONS FOR NON-UNITED STATES HOLDERS
The following is a general discussion of the principal United States federal
income and estate tax consequences of the ownership and disposition of our
common stock by a non-U.S. holder. As used in this discussion, the term
"non-U.S. holder" means a beneficial owner of our common stock that is not, for
U.S. federal income tax purposes:
- an individual who is a citizen or resident of the United States;
- a corporation or partnership created or organized in or under the laws of
the United States or of any political subdivision of the United States,
other than a partnership treated as foreign under U.S. Treasury
regulations;
- an estate whose income is includible in gross income for U.S. federal
income tax purposes regardless of its source; or
- a trust, in general, if a U.S. court is able to exercise primary
supervision over the administration of the trust and one or more U.S.
persons have authority to control all substantial decisions of the trust.
An individual may be treated as a resident of the United States in any
calendar year for U.S. federal income tax purposes, instead of a nonresident,
by, among other ways, being present in the United States on at least 31 days in
that calendar year and for an aggregate of at least 183 days during a three-year
period ending in the current calendar year. For purposes of this calculation,
you would count all of the days present in the current year, one-third of the
days present in the immediately preceding year and one-sixth of the days present
in the second preceding year. Residents are taxed for U.S. federal income
purposes as if they were U.S. citizens.
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This discussion does not consider:
- U.S. state and local or non-U.S. tax consequences;
- specific facts and circumstances that may be relevant to a particular
non-U.S. holder's tax position, including, if the non-U.S. holder is a
partnership that the U.S. tax consequences of holding and disposing of our
common stock may be affected by certain determinations made at the partner
level;
- the tax consequences for the shareholders, partners or beneficiaries of a
non-U.S. holder;
- special tax rules that may apply to particular non-U.S. holders, such as
financial institutions, insurance companies, tax-exempt organizations,
U.S. expatriates, broker-dealers, and traders in securities; or
- special tax rules that may apply to a non-U.S. holder that holds our
common stock as part of a "straddle," "hedge," "conversion transaction,"
"synthetic security" or other integrated investment.
The following discussion is based on provisions of the U.S. Internal Revenue
Code of 1986, as amended, applicable U.S. Treasury regulations and
administrative and judicial interpretations, all as in effect on the date of
this prospectus, and all of which are subject to change, retroactively or
prospectively. The following summary assumes that a non-U.S. holder holds our
common stock as a capital asset. EACH NON-U.S. HOLDER SHOULD CONSULT A TAX
ADVISOR REGARDING THE U.S. FEDERAL, STATE, LOCAL, AND NON-U.S. INCOME AND OTHER
TAX CONSEQUENCES OF ACQUIRING, HOLDING, AND DISPOSING OF SHARES OF OUR COMMON
STOCK.
DIVIDENDS
We do not anticipate paying cash dividends on our common stock in the
foreseeable future. See "Dividend Policy." In the event, however, that we pay
dividends on our common stock, we will have to withhold a U.S. federal
withholding tax at a rate of 30%, or a lower rate under an applicable income tax
treaty, from the gross amount of the dividends paid to a non-U.S. holder.
Non-U.S. holders should consult their tax advisors regarding their entitlement
to benefits under a relevant income tax treaty.
Dividends paid prior to 2001 to an address in a foreign country are
presumed, absent actual knowledge to the contrary, to be paid to a resident of
such country for purposes of the withholding discussed above and for purposes of
determining the applicability of a tax treaty rate. For dividends paid after
2000:
- a non-U.S. holder who claims the benefit of an applicable income tax
treaty rate generally will be required to satisfy applicable certification
and other requirements;
- in the case of common stock held by a foreign partnership, the
certification requirement will generally be applied to the partners of the
partnership and the partnership will be required to provide certain
information, including a U.S. taxpayer identification number; and
- look-through rules will apply for tiered partnerships.
A non-U.S. holder that is eligible for a reduced rate of U.S. federal
withholding tax under an income tax treaty may obtain a refund or credit of any
excess amounts withheld by filing an appropriate claim for a refund with the
U.S. Internal Revenue Service.
Dividends that are effectively connected with a non-U.S. holder's conduct of
a trade or business in the United States or, if an income tax treaty applies,
attributable to a permanent establishment in the United States, are taxed on a
net income basis at the regular graduated rates and in the manner applicable to
U.S. persons. In that case, we will not have to withhold U.S. federal
withholding tax if the
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non-U.S. holder complies with applicable certification and disclosure
requirements. In addition, a "branch profits tax" may be imposed at a 30% rate,
or a lower rate under an applicable income tax treaty, on dividends received by
a foreign corporation that are effectively connected with the conduct of a trade
or business in the United States.
GAIN ON DISPOSITION OF COMMON STOCK
A non-U.S. holder generally will not be taxed on gain recognized on a
disposition of our common stock unless:
- the gain is effectively connected with the non-U.S. holder's conduct of a
trade or business in the United States or, alternatively, if an income tax
treaty applies, is attributable to a permanent establishment maintained by
the non-U.S. holder in the United States; in these cases, the gain will be
taxed on a net income basis at the regular graduated rates and in the
manner applicable to U.S. persons and, if the non-U.S. holder is a foreign
corporation, the "branch profits tax" described above may also apply;
- the non-U.S. holder is an individual who holds our common stock as a
capital asset, is present in the United States for more than 182 days in
the taxable year of the disposition and meets other requirements; or
- we are or have been a "U.S. real property holding corporation" for U.S.
federal income tax purposes at any time during the shorter of the
five year period ending on the date of disposition or the period that the
non-U.S. holder held our common stock.
In general, we will be treated as a "U.S. real property holding corporation"
if the fair market value of our "U.S. real property interests" equals or exceeds
50% of the sum of the fair market value of our worldwide real property interests
and our other assets used or held for use in a trade or business. Currently, it
is our best estimate that the fair market value of our U.S. real property
interests is, and has been for at least the previous five years, less than 50%
of the sum of the fair market value of our worldwide real property interests and
our other assets, including goodwill, used or held for use in a trade or
business. Therefore, we believe that we are not currently a U.S. real property
holding corporation. Nor do we anticipate becoming a U.S. real property holding
corporation in the future.
However, even if we are or have been a U.S. real property holding
corporation, a non-U.S. holder which did not beneficially own, directly or
indirectly, more than 5% of the total fair market value of our common stock at
any time during the shorter of the five-year period ending on the date of
disposition or the period that our common stock was held by the non-U.S. holder
(a "non-5% holder") and which is not otherwise taxed under any other
circumstances described above, generally will not be taxed on any gain realized
on the disposition of our common stock if, at any time during the calendar year
of the disposition, our common stock was regularly traded on an established
securities market within the meaning of the applicable U.S. Treasury
regulations.
We have applied to have our common stock listed on the NYSE. Although not
free from doubt, our common stock should be considered to be regularly traded on
an established securities market for any calendar quarter during which it is
regularly quoted on the NYSE by brokers or dealers which hold themselves out to
buy or sell our common stock at the quoted price. If our common stock were not
considered to be regularly traded on the NYSE at any time during the applicable
calendar year, then a non-5% holder would be taxed for U.S. federal income tax
purposes on any gain realized on the disposition of our common stock on a net
income basis as if the gain were effectively connected with the conduct of a
U.S. trade or business by the non-5% holder during the taxable year and, in such
case, the person acquiring our common stock from a non-5% holder generally would
have to withhold 10% of the amount of the proceeds of the disposition. Such
withholding may be reduced or eliminated pursuant to a withholding certificate
issued by the U.S. Internal Revenue Service in accordance with
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applicable U.S. Treasury regulations. We urge all non-U.S. holders to consult
their own tax advisors regarding the application of these rules to them.
FEDERAL ESTATE TAX
Common stock owned or treated as owned by an individual who is a non-U.S.
holder at the time of death will be included in the individual's gross estate
for U.S. federal estate tax purposes, unless an applicable estate tax or other
treaty provides otherwise and, therefore, may be subject to U.S. federal estate
tax.
INFORMATION REPORTING AND BACKUP WITHHOLDING TAX
We must report annually to the U.S. Internal Revenue Service and to each
non-U.S. holder the amount of dividends paid to that holder and the tax withheld
from those dividends. Copies of the information returns reporting those
dividends and withholding may also be made available to the tax authorities in
the country in which the non-U.S. holder is a resident under the provisions of
an applicable income tax treaty or agreement.
Under some circumstances, U.S. Treasury regulations require additional
information reporting and backup withholding at a rate of 31% on some payments
on common stock. Under currently applicable law, non-U.S. holders generally will
be exempt from these additional information reporting requirements and from
backup withholding on dividends paid prior to 2001 if we either were required to
withhold a U.S. federal withholding tax from those dividends or we paid those
dividends to an address outside the United States. After 2000, however, the
gross amount of dividends paid to a non-U.S. holder that fails to certify its
non-U.S. holder status in accordance with applicable U.S. Treasury regulations
generally will be reduced by backup withholding at a rate of 31%.
The payment of the proceeds of the disposition of common stock by a non-U.S.
holder to or through the U.S. office of a broker or a non-U.S. office of a U.S.
broker generally will be reported to the U.S. Internal Revenue Service and
reduced by backup withholding at a rate of 31% unless the non-U.S. holder either
certifies its status as a non-U.S. holder under penalties of perjury or
otherwise establishes an exemption and the broker has no actual knowledge to the
contrary. The payment of the proceeds of the disposition of common stock by a
non-U.S. holder to or through a non-U.S. office of a non-U.S. broker will not be
reduced by backup withholding or reported to the U.S. Internal Revenue Service
unless the non-U.S. broker has certain enumerated connections with the United
States. In general, the payment of proceeds from the disposition of common stock
by or through a non-U.S. office of a broker that is a U.S. person or has certain
enumerated connections with the United States will be reported to the U.S.
Internal Revenue Service and, after 2000, may be reduced by backup withholding
at a rate of 31%, unless the broker receives a statement from the non-U.S.
holder, signed under penalty of perjury, certifying its non-U.S. status or the
broker has documentary evidence in its files that the holder is a non-U.S.
holder and the broker has no actual knowledge to the contrary.
Non-U.S. holders should consult their own tax advisors regarding the
application of the information reporting and backup withholding rules to them,
including changes to these rules that will become effective after 2000.
Any amounts withheld under the backup withholding rules from a payment to a
non-U.S. holder will be refunded, or credited against the holder's U.S. federal
income tax liability, if any, provided that the required information is
furnished to the U.S. Internal Revenue Service.
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UNDERWRITING
We intend to offer the shares in the U.S. and Canada through the U.S.
underwriters and elsewhere through the international managers. Merrill Lynch,
Pierce, Fenner & Smith Incorporated, Banc of America Securities LLC, Chase
Securities Inc., Credit Suisse First Boston Corporation, Goldman, Sachs & Co.,
and Morgan Stanley & Co. Incorporated are acting as U.S. representatives of the
U.S. underwriters named below. Subject to the terms and conditions described in
a U.S. purchase agreement between us and the U.S. underwriters, and concurrently
with the sale of 2,812,500 shares to the international managers, we have agreed
to sell to the U.S. underwriters, and the U.S. underwriters severally have
agreed to purchase from us, the number of shares listed opposite their names
below.
<TABLE>
<CAPTION>
NUMBER
U.S. UNDERWRITER OF SHARES
<S> <C>
Merrill Lynch, Pierce, Fenner & Smith
Incorporated......................................
Banc of America Securities LLC..............................
Chase Securities Inc........................................
Credit Suisse First Boston Corporation......................
Goldman, Sachs & Co.........................................
Morgan Stanley & Co. Incorporated...........................
----------
Total............................................. 15,937,500
==========
</TABLE>
We have also entered into an international purchase agreement with the
international managers for sale of the shares outside the U.S. and Canada for
whom Merrill Lynch International, Bank of America International Limited, Chase
Manhattan International Limited, Credit Suisse First Boston (Europe) Limited,
Goldman Sachs International, and Morgan Stanley & Co. International Limited are
acting as lead managers. Subject to the terms and conditions in the
international purchase agreement, and concurrently with the sale of 15,937,500
shares to the U.S. underwriters pursuant to the U.S. purchase agreement, we have
agreed to sell to the international managers, and the international managers
severally have agreed to purchase 2,812,500 shares from us. The initial public
offering price per share and the total underwriting discount per share are
identical under the U.S. purchase agreement and the international purchase
agreement.
The U.S. underwriters and the international managers have agreed to purchase
all of the shares sold under the U.S. and international purchase agreements if
any of these shares are purchased. If an underwriter defaults, the U.S. and
international purchase agreements provide that the purchase commitments of the
nondefaulting underwriters may be increased or the purchase agreements may be
terminated. The closings for the sale of shares to be purchased by the U.S.
underwriters and the international managers are conditioned on one another.
We have agreed to indemnify the U.S. underwriters and the international
managers against certain liabilities, including liabilities under the Securities
Act, or to contribute to payments the U.S. underwriters and international
managers may be required to make in respect of those liabilities.
The underwriters are offering the shares, subject to prior sale, when, as,
and if issued to and accepted by them, subject to approval of legal matters by
their counsel, including the validity of the shares, and other conditions
contained in the purchase agreements, such as the receipt by the underwriters of
officer's certificates and legal opinions. The underwriters reserve the right to
withdraw, cancel, or modify offers to the public and to reject orders in whole
or in part.
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COMMISSIONS AND DISCOUNTS
The U.S. representatives have advised us that the U.S. underwriters propose
initially to offer the shares to the public at the initial public offering price
on the cover page of this prospectus and to dealers at that price less a
concession not in excess of $ per share. The U.S. underwriters may allow,
and the dealers may reallow, a discount not in excess of $ per share to
other dealers. After the initial public offering, the public offering price,
concession, and discount may be changed.
The following table shows the public offering price, underwriting discount
and proceeds before our expenses. The information assumes either no exercise or
full exercise by the U.S. underwriters and the international managers of their
over-allotment options.
<TABLE>
<CAPTION>
PER SHARE WITHOUT OPTION WITH OPTION
--------- -------------- -----------
<S> <C> <C> <C>
Public offering price............................. $ $ $
Underwriting discount............................. $ $ $
Proceeds before expenses to Community
Health Systems.................................. $ $ $
</TABLE>
The expenses of the offering, not including the underwriting discount, are
estimated at $ and are payable by us.
OVER-ALLOTMENT OPTION
We have granted options to the U.S. underwriters to purchase up to 2,390,625
additional shares at the public offering price less the underwriting discount.
The U.S. underwriters may exercise these options for 30 days from the date of
this prospectus solely to cover any overallotments. If the U.S. underwriters
exercise these options, each will be obligated, subject to conditions contained
in the purchase agreements, to purchase a number of additional shares
proportionate to that U.S. underwriter's initial amount reflected in the above
table.
We have also granted options to the international managers, exercisable for
30 days from the date of this prospectus, to purchase up to 421,875 additional
shares to cover any over-allotments on terms similar to those granted to the
U.S. underwriters.
INTERSYNDICATE AGREEMENT
The U.S. underwriters and the international managers have entered into an
intersyndicate agreement that provides for the coordination of their activities.
Under the intersyndicate agreement, the U.S. underwriters and the international
managers may sell shares to each other for purposes of resale at the initial
public offering price, less an amount not greater than the selling concession.
Under the intersyndicate agreement, the U.S. underwriters and any dealer to whom
they sell shares will not offer to sell or sell shares to persons who are
non-U.S. or non-Canadian persons or to persons they believe intend to resell to
persons who are non-U.S. or non-Canadian persons, except in the case of
transactions under the intersyndicate agreement. Similarly, the international
managers and any dealer to whom they sell shares will not offer to sell or sell
shares to U.S. persons or Canadian persons or to persons they believe intend to
resell to U.S. or Canadian persons, except in the case of transactions under the
intersyndicate agreement.
RESERVED SHARES
At our request, the underwriters have reserved for sale, at the initial
public offering price, up to 5% of the shares offered for sale in the offering
for sale to some of our directors, officers, employees, business associates, and
related persons. These persons include physicians who maintain staff privileges
at some of our hospitals. If these persons purchase reserved shares, this will
reduce the number of shares available for sale to the general public. Any
reserved shares that are not orally confirmed for purchase within one day of the
pricing of the offering will be offered by the underwriters to the general
public on the same terms as the other shares offered by this prospectus. There
is no expectation or
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requirement that any person who purchases reserved shares will refer, either
directly or indirectly, any patients to our hospitals.
NO SALES OF SIMILAR SECURITIES
We and our executive officers and directors and all existing stockholders
have agreed, with exceptions, not to sell or transfer any common stock for
180 days after the date of this prospectus without first obtaining the written
consent of Merrill Lynch. Specifically, we and these other individuals have
agreed not to directly or indirectly
- offer, pledge, sell or contract to sell any common stock;
- sell any option or contract to purchase any common stock;
- purchase any option or contract to sell any common stock;
- grant any option, right or warrant for the sale of any common stock;
- lend or otherwise dispose of or transfer any common stock;
- request or demand that we file a registration statement related to the
common stock; or
- enter into any swap or other agreement that transfers, in whole or in
part, the economic consequence of ownership of any common stock whether
any such swap or transaction is to be settled by delivery of shares or
other securities, in cash or otherwise.
This lockup provision applies to common stock and to securities convertible
into or exchangeable or exercisable for or repayable with common stock. It also
applies to common stock owned now or acquired later by the person executing the
agreement or for which the person executing the agreement later acquires the
power of disposition. This lockup provision does not limit our ability to grant
options to purchase common stock under stock option plans or to issue common
stock under our employee stock purchase plan.
NEW YORK STOCK EXCHANGE LISTING
The shares have been approved for listing on the NYSE under the symbol
"CYH." In order to meet the requirements for listing on that exchange, the U.S.
underwriters and the international managers have undertaken to sell a minimum
number of shares to a minimum number of beneficial owners as required by that
exchange.
Before the offering, there has been no public market for our common stock.
The initial public offering price will be determined through negotiations among
us and the U.S. representatives and lead managers. In addition to prevailing
market conditions, the factors to be considered in determining the initial
public offering price are
- the valuation multiples of publicly traded companies that the U.S.
representatives and the lead managers believe to be comparable to us;
- our financial information;
- the history of, and the prospects for, us and the industry in which we
compete;
- an assessment of our management, its past and present operations, and the
prospects for, and timing of, our future revenues;
- the present state of our development; and
- the above factors in relation to market values and various valuation
measures of other companies engaged in activities similar to ours.
An active trading market for the shares may not develop. It is also possible
that after the offering the shares will not trade in the public market at or
above the initial public offering price.
The underwriters do not expect to sell more than 5% of the shares in the
aggregate to accounts over which they exercise discretionary authority.
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NASD REGULATIONS
It is anticipated that more than ten percent of the proceeds of the offering
will be applied to pay down debt obligations owed to affiliates of Chase
Securities Inc., Banc of America Securities LLC, Merrill Lynch, Pierce, Fenner &
Smith Incorporated, and Morgan Stanley & Co. Incorporated. Because more than ten
percent of the net proceeds of the offering may be paid to members or affiliates
of members of the National Association of Securities Dealers, Inc. participating
in the offering, the offering will be conducted in accordance with NASD Conduct
Rule 2710(c)(8). This rule requires that the public offering price of an equity
security be no higher than the price recommended by a qualified independent
underwriter which has participated in the preparation of the registration
statement and performed its usual standard of due diligence with respect to that
registration statement. Merrill Lynch, Pierce, Fenner & Smith Incorporated has
agreed to act as qualified independent underwriter for the offering. The price
of the shares will be no higher than that recommended by Merrill Lynch, Pierce,
Fenner & Smith Incorporated.
PRICE STABILIZATION, SHORT POSITIONS, AND PENALTY BIDS
Until the distribution of the shares is completed, Commission rules may
limit underwriters and selling group members from bidding for and purchasing our
common stock. However, the U.S. representatives may engage in transactions that
stabilize the price of the common stock, such as bids or purchases to peg, fix
or maintain that price.
If the underwriters create a short position in the common stock in
connection with the offering, i.e., if they sell more shares than are listed on
the cover of this prospectus, the U.S. representatives may reduce that short
position by purchasing shares in the open market. The U.S. representatives may
also elect to reduce any short position by exercising all or part of the
over-allotment option described above. Purchases of the common stock to
stabilize its price or to reduce a short position may cause the price of the
common stock to be higher than it might be in the absence of such purchases.
The U.S. representatives may also impose a penalty bid on underwriters. This
means that if the U.S. representatives purchase shares in the open market to
reduce the underwriter's short position or to stabilize the price of such
shares, they may reclaim the amount of the selling concession from the
underwriters who sold those shares. The imposition of a penalty bid may also
affect the price of the shares in that it discourages resales of those shares.
Neither we nor any of the underwriters makes any representation or
prediction as to the direction or magnitude of any effect that the transactions
described above may have on the price of the common stock. In addition, neither
we nor any of the underwriters makes any representation that the U.S.
representatives or the lead managers will engage in these transactions or that
these transactions, once commenced, will not be discontinued without notice.
OTHER RELATIONSHIPS
Some of the underwriters and their affiliates have engaged in, and may in
the future engage in, investment banking and other commercial dealings in the
ordinary course of business with us. They have received customary fees and
commissions for these transactions. In particular, an affiliate of Chase
Securities Inc. acts as administrative agent for our credit facility and
affiliates of Chase Securities Inc., Banc of America Securities LLC, Merrill
Lynch, Pierce, Fenner & Smith Incorporated, and Morgan Stanley & Co. are lenders
under our credit facility. Michael A. Miles, our Chairman of the Board, is a
director of Morgan Stanley Dean Witter and receives customary compensation for
serving in this position.
Merrill Lynch will be facilitating internet distribution for the offering to
some of its internet subscription customers. Merrill Lynch intends to allocate a
limited number of shares for sale to its online brokerage customers. An
electronic prospectus is available on the website maintained by Merrill Lynch.
Other than the prospectus in electronic format, the information on the Merrill
Lynch website relating to the offering is not a part of this prospectus.
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LEGAL MATTERS
The validity of the shares of common stock offered by this prospectus will
be passed upon for us by Fried, Frank, Harris, Shriver & Jacobson (a partnership
including professional corporations), New York, New York. Certain legal matters
related to the offering will be passed upon for the underwriters by Debevoise &
Plimpton, New York, New York. Fried, Frank, Harris, Shriver & Jacobson has in
the past provided, and may continue to provide, legal services to Forstmann
Little and its affiliates.
EXPERTS
The consolidated financial statements as of December 31, 1998 and 1999 and
for each of the three years in the period ended December 31, 1999 included in
this prospectus and the related financial statement schedule included elsewhere
in the registration statement have been audited by Deloitte & Touche LLP,
independent auditors, as stated in their reports appearing herein and elsewhere
in the registration statement, and have been so included in reliance upon the
reports of such firm given upon their authority as experts in accounting and
auditing.
WHERE YOU CAN FIND MORE INFORMATION
We have filed with the Commission a registration statement on Form S-1,
which includes amendments, exhibits, schedules and supplements, under the
Securities Act and the rules and regulations under the Securities Act, for the
registration of the common stock offered by this prospectus. Although this
prospectus, which forms a part of the registration statement, contains all
material information included in the registration statement, parts of the
registration statement have been omitted from this prospectus as permitted by
the rules and regulations of the Commission. For further information with
respect to us and the common stock offered by this prospectus, please refer to
the registration statement. Statements contained in this prospectus as to the
contents of any contracts or other document referred to in this prospectus are
not necessarily complete and, where such contract or other document is an
exhibit to the registration statement, each such statement is qualified in all
respects by the provisions of such exhibit, to which reference is now made. The
registration statement can be inspected and copied at prescribed rates at the
public reference facilities maintained by the Commission at Room 1024, 450 Fifth
Street, N.W., Washington, D.C. 20549, and at the Commission's regional offices
at Seven World Trade Center, 13th Floor, New York, New York 10048 and
Northwestern Atrium Center, 500 West Madison Street, Suite 1400, Chicago,
Illinois 60661. The public may obtain information regarding the Washington, D.C.
Public Reference Room by calling the Commission at 1-800-SEC-0330. In addition,
the registration statement is publicly available through the Commission's site
on the Internet's World Wide Web, located at: http://www.sec.gov. Following the
offering, our future public filings are expected to be available for inspection
at the offices of the New York Stock Exchange, Inc., 20 Broad Street, New York,
New York 10005.
After the offering, we will be subject to the full informational
requirements of the Securities Exchange Act. To comply with these requirements,
we will file periodic reports, proxy statements and other information with the
Commission.
------------------------
You should rely only on the information contained in this prospectus. We
have not, and the underwriters have not, authorized anyone to provide you with
information different from that contained in this prospectus. If anyone provides
you with different information you should not rely on it. We are offering to
sell, and seeking offers to buy, shares of common stock only in jurisdictions
where offers and sales are permitted. The information contained in this
prospectus is accurate only as of the date of this prospectus regardless of the
time of delivery of this prospectus or of any sale of common stock. Our
business, financial condition, results of operations, and prospects may have
changed since that date.
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INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Independent Auditors' Report................................ F-2
Consolidated Balance Sheets as of December 31, 1998 and
1999...................................................... F-3
Consolidated Statements of Operations for the years ended
December 31, 1997, 1998 and 1999.......................... F-4
Consolidated Statements of Stockholders' Equity for the
years ended December 31, 1997, 1998 and 1999.............. F-5
Consolidated Statements of Cash Flows for the years ended
December 31, 1997, 1998 and 1999.......................... F-6
Notes to Consolidated Financial Statements.................. F-7
Unaudited Interim Condensed Consolidated Balance Sheet as of
March 31, 2000............................................ F-24
Unaudited Interim Condensed Consolidated Statements of
Operations for the three months ended March 31, 1999 and
2000...................................................... F-25
Unaudited Interim Condensed Consolidated Statements of Cash
Flows for the three months ended March 31, 1999 and
2000...................................................... F-26
Notes to Unaudited Interim Condensed Consolidated Financial
Statements................................................ F-27
</TABLE>
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
Community Health Systems, Inc.
Brentwood, Tennessee
We have audited the accompanying consolidated balance sheets of Community
Health Systems, Inc. (formerly Community Health Systems Holdings Corp.) and
subsidiaries as of December 31, 1998 and 1999, and the related consolidated
statements of operations, stockholders' equity, and cash flows for each of the
three years in the period ended December 31, 1999. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the consolidated financial position of Community Health
Systems, Inc. and subsidiaries as of December 31, 1998 and 1999, and the results
of their operations and their cash flows for each of the three years in the
period ended December 31, 1999, in conformity with accounting principles
generally accepted in the United States of America.
Nashville, Tennessee
February 25, 2000 (May , 2000 as to Notes 9, 10, 14 and a portion of Note 1)
THE ACCOMPANYING CONSOLIDATED FINANCIAL STATEMENTS GIVE EFFECT TO THE
RECAPITALIZATION OF THE COMPANY WHICH INCLUDES THE EXCHANGE OF CLASS B COMMON
STOCK FOR CLASS A COMMON STOCK, THE EXCHANGE OF OPTIONS TO ACQUIRE CLASS C
COMMON STOCK FOR OPTIONS TO ACQUIRE CLASS A COMMON STOCK, THE REDESIGNATION OF
CLASS A COMMON STOCK AS COMMON STOCK AND A 118.7148-FOR-1 STOCK SPLIT OF THE
COMMON STOCK. THE FOREGOING REPORT IS THE FORM WHICH WILL BE FURNISHED BY
DELOITTE & TOUCHE LLP UPON COMPLETION OF THE RECAPITALIZATION AND EXCHANGE
DESCRIBED IN NOTE 14 TO THE CONSOLIDATED FINANCIAL STATEMENTS AND ASSUMING THAT
FROM DECEMBER 31, 1999 TO THE DATE OF SUCH COMPLETION NO OTHER MATERIAL EVENTS
HAVE OCCURRED THAT WOULD AFFECT THE ACCOMPANYING CONSOLIDATED FINANCIAL
STATEMENTS OR REQUIRED DISCLOSURES THEREIN.
/s/ Deloitte & Touche LLP
Nashville, Tennessee
February 25, 2000
F-2
<PAGE>
COMMUNITY HEALTH SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
------------------------
1998 1999
---------- ----------
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents................................. $ 6,719 $ 4,282
Patient accounts receivable, net of allowance for doubtful
accounts of $28,771 and $34,499 in 1998 and 1999,
respectively............................................ 168,652 226,350
Supplies.................................................. 26,037 32,134
Prepaid and current deferred income taxes................. 7,564 5,862
Prepaid expenses.......................................... 7,456 9,846
Other current assets...................................... 13,683 22,022
---------- ----------
Total current assets.................................. 230,111 300,496
---------- ----------
PROPERTY AND EQUIPMENT
Land and improvements..................................... 35,804 41,327
Buildings and improvements................................ 402,853 470,856
Equipment and fixtures.................................... 184,472 219,659
---------- ----------
623,129 731,842
Less accumulated depreciation and amortization............ (70,114) (108,499)
---------- ----------
Property and equipment, net........................... 553,015 623,343
---------- ----------
GOODWILL, NET OF ACCUMULATED AMORTIZATION OF $73,058 AND
$97,766 IN 1998 AND 1999, RESPECTIVELY.................... 878,416 877,890
---------- ----------
OTHER ASSETS, NET OF ACCUMULATED AMORTIZATION OF $27,343 AND
$34,265 IN 1998 AND 1999, RESPECTIVELY.................... 85,474 93,355
---------- ----------
TOTAL ASSETS................................................ $1,747,016 $1,895,084
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Current maturities of long-term debt...................... $ 21,248 $ 27,029
Accounts payable.......................................... 63,843 57,392
Compliance settlement payable............................. 20,000 30,900
Accrued liabilities
Employee compensation................................. 36,524 49,346
Interest.............................................. 25,523 19,451
Other................................................. 59,550 51,159
---------- ----------
Total current liabilities............................. 226,688 235,277
---------- ----------
LONG-TERM DEBT.............................................. 1,246,594 1,407,604
---------- ----------
OTHER LONG-TERM LIABILITIES................................. 26,908 22,495
---------- ----------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Preferred stock, $.01 par value per share, 100,000,000
shares authorized, none issued.......................... -- --
Common stock, $.01 par value per share, 300,000,000 shares
authorized; 56,793,516 shares issued and 55,607,632 and
55,592,859 shares outstanding at December 31, 1998 and
1999, respectively...................................... 568 568
Additional paid-in capital................................ 482,086 483,235
Accumulated deficit....................................... (228,563) (245,352)
Treasury stock, at cost, 1,185,884 and 1,200,657 shares at
December 31, 1998 and 1999, respectively................ (5,555) (6,587)
Notes receivable for common stock......................... (1,710) (1,997)
Unearned stock compensation............................... -- (159)
---------- ----------
Total stockholders' equity............................ 246,826 229,708
---------- ----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY.................. $1,747,016 $1,895,084
========== ==========
</TABLE>
See notes to consolidated financial statements.
F-3
<PAGE>
COMMUNITY HEALTH SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------
1997 1998 1999
----------- ----------- -----------
<S> <C> <C> <C>
NET OPERATING REVENUES................................ $ 742,350 $ 854,580 $ 1,079,953
----------- ----------- -----------
OPERATING COSTS AND EXPENSES
Salaries and benefits............................... 296,779 328,264 419,320
Provision for bad debts............................. 57,376 69,005 95,149
Supplies............................................ 90,391 100,633 126,693
Rent................................................ 20,281 22,344 25,522
Other operating expenses............................ 155,285 167,944 209,084
Depreciation and amortization....................... 43,753 49,861 56,943
Amortization of goodwill............................ 25,404 26,639 24,708
Impairment of long-lived assets..................... -- 164,833 --
Compliance settlement and Year 2000 remediation
costs............................................. -- 20,209 17,279
----------- ----------- -----------
TOTAL OPERATING COSTS AND EXPENSES.................... 689,269 949,732 974,698
----------- ----------- -----------
INCOME (LOSS) FROM OPERATIONS......................... 53,081 (95,152) 105,255
INTEREST EXPENSE, NET OF INTEREST INCOME OF $71, $261,
AND $288 IN 1997, 1998 AND 1999, RESPECTIVELY....... 89,753 101,191 116,491
----------- ----------- -----------
LOSS BEFORE CUMULATIVE EFFECT OF A CHANGE IN
ACCOUNTING PRINCIPLE AND INCOME TAXES............... (36,672) (196,343) (11,236)
PROVISION FOR (BENEFIT FROM) INCOME TAXES............. (4,501) (13,405) 5,553
----------- ----------- -----------
LOSS BEFORE CUMULATIVE EFFECT OF A CHANGE IN
ACCOUNTING PRINCIPLE................................ (32,171) (182,938) (16,789)
CUMULATIVE EFFECT OF A CHANGE IN ACCOUNTING PRINCIPLE,
NET OF TAXES OF $189................................ -- (352) --
----------- ----------- -----------
NET LOSS.............................................. $ (32,171) $ (183,290) $ (16,789)
=========== =========== ===========
BASIC AND DILUTED LOSS PER COMMON SHARE:
Loss before cumulative effect of a change in
accounting principle.............................. $ (0.60) $ (3.39) $ (0.31)
Cumulative effect of a change in accounting
principle......................................... -- (0.01) --
----------- ----------- -----------
Net loss............................................ $ (0.60) $ (3.40) $ (0.31)
=========== =========== ===========
WEIGHTED-AVERAGE NUMBER OF SHARES OUTSTANDING, BASIC
AND DILUTED......................................... 53,568,891 53,892,388 54,258,465
=========== =========== ===========
Pro forma information (unaudited):
Pro forma basic and diluted loss per common share... $ (.05)
Pro forma weighted-average number of shares
outstanding, basic and diluted.................... 73,008,481
===========
</TABLE>
See notes to consolidated financial statements.
F-4
<PAGE>
COMMUNITY HEALTH SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL TREASURY STOCK NOTES RECEIVABLE
--------------------- PAID-IN ACCUMULATED --------------------- FOR
SHARES AMOUNT CAPITAL DEFICIT SHARES AMOUNT COMMON STOCK
---------- -------- ---------- ------------ ---------- -------- -----------------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE, January 1, 1997.... 56,320,089 $563 $479,126 $ (13,102) -- $ -- $ (904)
Issuance of common stock.. 210,354 2 1,308 -- -- -- (634)
Common stock purchased for
treasury, at cost....... -- -- -- -- (168,527) (1,041) 450
Payments on notes
receivable.............. -- -- -- -- -- -- 38
Net loss.................. -- -- -- (32,171) -- -- --
---------- ---- -------- --------- ---------- ------- -------
BALANCE, December 31,
1997...................... 56,530,443 565 480,434 (45,273) (168,527) (1,041) (1,050)
Issuance of common stock.. 263,073 3 1,652 -- 186,139 1,120 (900)
Common stock purchased for
treasury, at cost....... -- -- -- -- (1,203,496) (5,634) 204
Payments on notes
receivable.............. -- -- -- -- -- -- 36
Net loss.................. -- -- -- (183,290) -- -- --
---------- ---- -------- --------- ---------- ------- -------
BALANCE, December 31,
1998...................... 56,793,516 568 482,086 (228,563) (1,185,884) (5,555) (1,710)
Issuance of common stock.. -- -- 907 -- 390,004 1,748 (440)
Common stock purchased for
treasury, at cost....... -- -- -- -- (404,777) (2,780) --
Payments on notes
receivable.............. -- -- -- -- -- -- 153
Unearned stock
compensation............ -- -- 242 -- -- -- --
Earned stock
compensation............ -- -- -- -- -- -- --
Net loss.................. -- -- -- (16,789) -- -- --
---------- ---- -------- --------- ---------- ------- -------
BALANCE, December 31,
1999...................... 56,793,516 $568 $483,235 $(245,352) (1,200,657) $(6,587) $(1,997)
========== ==== ======== ========= ========== ======= =======
<CAPTION>
UNEARNED
STOCK
COMPENSATION TOTAL
------------- ---------
<S> <C> <C>
BALANCE, January 1, 1997.... $ -- $ 465,683
Issuance of common stock.. -- 676
Common stock purchased for
treasury, at cost....... -- (591)
Payments on notes
receivable.............. -- 38
Net loss.................. -- (32,171)
----- ---------
BALANCE, December 31,
1997...................... -- 433,635
Issuance of common stock.. -- 1,875
Common stock purchased for
treasury, at cost....... -- (5,430)
Payments on notes
receivable.............. -- 36
Net loss.................. -- (183,290)
----- ---------
BALANCE, December 31,
1998...................... -- 246,826
Issuance of common stock.. -- 2,215
Common stock purchased for
treasury, at cost....... -- (2,780)
Payments on notes
receivable.............. -- 153
Unearned stock
compensation............ (242) --
Earned stock
compensation............ 83 83
Net loss.................. -- (16,789)
----- ---------
BALANCE, December 31,
1999...................... $(159) $ 229,708
===== =========
</TABLE>
See notes to consolidated financial statements.
F-5
<PAGE>
COMMUNITY HEALTH SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------
1997 1998 1999
-------- --------- ---------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss.................................................. $(32,171) $(183,290) $ (16,789)
Adjustments to reconcile net loss to net cash provided by
(used in) operating activities:
Depreciation and amortization........................... 69,157 76,500 81,651
Deferred income taxes................................... (5,751) (14,797) (3,799)
Impairment charge....................................... -- 164,833 --
Compliance settlement costs............................. -- 20,000 14,000
Stock compensation expense.............................. -- -- 83
Other non-cash (income) expenses, net................... 146 (528) (570)
Changes in operating assets and liabilities, net of
effects of acquisitions and divestitures:
Patient accounts receivable......................... 4,526 (33,908) (42,973)
Supplies, prepaid expenses and other current
assets............................................ 11,076 (7,724) (17,598)
Accounts payable, accrued liabilities and income
taxes............................................. (17,184) 4,461 (28,071)
Other............................................... (8,255) (9,828) 2,320
-------- --------- ---------
Net cash provided by (used in) operating activities....... 21,544 15,719 (11,746)
-------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Acquisitions of facilities, pursuant to purchase
agreements.............................................. (36,296) (172,597) (59,699)
Proceeds from sale of facilities.......................... 18,750 -- --
Purchases of property and equipment....................... (49,422) (52,880) (80,255)
Proceeds from sale of equipment........................... 596 1,531 121
Increase in other assets.................................. (10,279) (12,607) (15,708)
-------- --------- ---------
Net cash used in investing activities................... (76,651) (236,553) (155,541)
-------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of common stock.................... 676 1,875 2,215
Common stock purchased for treasury....................... (1,041) (5,634) (2,780)
Borrowings under credit agreement......................... 73,404 242,491 436,300
Repayments of long-term indebtedness...................... (36,857) (18,842) (270,885)
-------- --------- ---------
Net cash provided by financing activities............... 36,182 219,890 164,850
-------- --------- ---------
NET CHANGE IN CASH AND CASH EQUIVALENTS..................... (18,925) (944) (2,437)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD............ 26,588 7,663 6,719
-------- --------- ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD.................. $ 7,663 $ 6,719 $ 4,282
======== ========= =========
</TABLE>
See notes to consolidated financial statements.
F-6
<PAGE>
COMMUNITY HEALTH SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BACKGROUND AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BUSINESS. In June 1996, Community Health Systems Inc. (formerly Community
Health Systems Holding Corp.) (the "Company") through its wholly-owned
subsidiary, FLCH Acquisition Corp. ("Acquisition Corp."), corporations formed by
affiliates of Forstmann Little & Co. ("FL&Co."), entered into an agreement to
acquire (the "Acquisition") all of the outstanding common stock of CHS/
Community Health Systems, Inc. ("CHS"). The aggregate purchase price for the
Acquisition was $1,100.2 million. The purchase price, the refinancing of certain
CHS debt obligations ($140.8 million) and payments for cancellation of CHS stock
options ($47.5 million) were funded by the issuance of $482.1 million of common
stock, $500 million of subordinated debentures and $415 million of Term Loans
under the Credit Agreement (see Note 5).
The Company owns, leases and operates acute care hospitals that are the
principal providers of primary healthcare services in non-urban communities. As
of December 31, 1999, the Company owned, leased or operated 46 hospitals,
licensed for 4,115 beds in 20 states.
USE OF ESTIMATES. The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
PRINCIPLES OF CONSOLIDATION. The consolidated financial statements include
the accounts of the Company and its subsidiaries. All significant intercompany
accounts and transactions have been eliminated. Certain of the subsidiaries have
minority stockholders. The amount of minority interest in equity and minority
interest in income or loss is not material and is included in other long-term
liabilities and other operating expenses.
CASH EQUIVALENTS. The Company considers highly liquid investments with
original maturities of three months or less to be cash equivalents.
SUPPLIES. Supplies, principally medical supplies, are stated at the lower
of cost (first-in, first-out basis) or market.
PROPERTY AND EQUIPMENT. Property and equipment are recorded at cost.
Depreciation is recognized using the straight-line method over the estimated
useful lives of the land improvements (2 to 15 years; weighted average useful
life is 11 years), buildings and improvements (5 to 40 years; weighted average
useful life is 33 years) and equipment and fixtures (5 to 20 years; weighted
average useful life is 7 years). Costs capitalized as construction in progress
were $17.9 million and $27.2 million at December 31, 1998 and 1999,
respectively, and are included in buildings and improvements. Expenditures for
renovations and other significant improvements are capitalized; however,
maintenance and repairs which do not improve or extend the useful lives of the
respective assets are charged to operations as incurred. Interest capitalized in
accordance with Statement of Financial Accounting Standards ("SFAS") No. 34,
"Capitalization of Interest Cost," was $0.6 million, $0.7 million and
$1.4 million for the years ended December 31, 1997, 1998, and 1999,
respectively.
The Company also leases certain facilities and equipment under capital
leases (see Notes 2 and 7). Such assets are amortized on a straight-line basis
over the lesser of the terms of the respective leases, or the remaining useful
lives of the assets.
F-7
<PAGE>
COMMUNITY HEALTH SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. BACKGROUND AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
GOODWILL. Goodwill represents the excess of cost over the fair value of net
assets acquired and is amortized on a straight-line basis ranging from 18 to
40 years. Annually, as required by Accounting Principles Board ("APB") Opinion
No. 17, the Company reviews its total enterprise goodwill for possible
impairment, by comparing total projected undiscounted cash flows to the total
carrying amount of goodwill.
OTHER ASSETS. Other assets consist primarily of the noncurrent portion of
deferred income taxes and costs associated with the issuance of debt which are
amortized over the life of the related debt using the effective interest method.
Amortization of deferred financing costs is included in interest expense.
THIRD-PARTY REIMBURSEMENT. Net operating revenues include amounts estimated
by management to be reimbursable by Medicare and Medicaid under prospective
payment systems, provisions of cost-reimbursement and other payment methods.
Approximately 55% of net operating revenues for the year ended December 31,
1997, 49% for the year ended December 31, 1998, and 48% for the year ended
December 31, 1999, are related to services rendered to patients covered by the
Medicare and Medicaid programs. In addition, the Company is reimbursed by
non-governmental payors using a variety of payment methodologies. Amounts
received by the Company for treatment of patients covered by such programs are
generally less than the standard billing rates. The differences between the
estimated program reimbursement rates and the standard billing rates are
accounted for as contractual adjustments, which are deducted from gross revenues
to arrive at net operating revenues. Final settlements under certain of these
programs are subject to adjustment based on administrative review and audit by
third parties. Adjustments to the estimated billings are recorded in the periods
that such adjustments become known. Adjustments to previous program
reimbursement estimates are accounted for as contractual adjustments and
reported in future periods as final settlements are determined. Adjustments
related to final settlements or appeals increased revenue by an insignificant
amount in each of the years ended December 31, 1997, 1998 and 1999. Net amounts
due to third-party payors as of December 31, 1998 were $19.9 million and as of
December 31, 1999 were $9.1 million and are included in accrued
liabilities--other in the accompanying balance sheets. Substantially all
Medicare and Medicaid cost reports are final settled through 1996.
CONCENTRATIONS OF CREDIT RISK. The Company grants unsecured credit to its
patients, most of whom reside in the service area of the Company's facilities
and are insured under third-party payor agreements. Because of the geographic
diversity of the Company's facilities and non-governmental third-party payors,
Medicare and Medicaid represent the Company's only significant concentrations of
credit risk.
NET OPERATING REVENUES. Net operating revenues are recorded net of
provisions for contractual adjustments of approximately $586 million,
$829 million and $1,157 million in 1997, 1998 and 1999, respectively. Net
operating revenues are recognized when services are provided. In the ordinary
course of business the Company renders services to patients who are financially
unable to pay for hospital care. The value of these services to patients who are
unable to pay is not material to the Company's consolidated results of
operations.
PROFESSIONAL LIABILITY INSURANCE CLAIMS. The Company accrues, on a
quarterly basis, for estimated losses resulting from professional liability
claims to the extent they are not covered by insurance. The accrual, which
includes an estimate for incurred but not reported claims, is based on
historical loss
F-8
<PAGE>
COMMUNITY HEALTH SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. BACKGROUND AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
patterns and annual actual projections. To the extent that subsequent claims
information varies from management's estimates, the liability is adjusted
currently.
ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS. In accordance with SFAS
No. 121, "Accounting for Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed Of," whenever events or changes in circumstances indicate
that the carrying values of certain long-lived assets and related intangible
assets may be impaired, the Company projects the undiscounted cash flows
expected to be generated by these assets. If the projections indicate that the
reported amounts are not expected to be recovered, such amounts are reduced to
their estimated fair value based on a quoted market price, if available, or an
estimate based on valuation techniques available in the circumstances.
INCOME TAXES. The Company accounts for income taxes under the asset and
liability method, in which deferred income tax assets and liabilities are
recognized for the tax consequences of "temporary differences" by applying
enacted statutory tax rates applicable to future years to differences between
the financial statement carrying amounts and the tax bases of existing assets
and liabilities. The effect on deferred taxes of a change in tax rates is
recognized in the statement of operations during the period in which the tax
rate change becomes law.
COMPREHENSIVE INCOME. In June 1997, the Financial Accounting Standards
Board ("FASB") issued SFAS No. 130, "Reporting Comprehensive Income," which is
effective for fiscal years beginning after December 15, 1997. Comprehensive
income is defined as the change in equity of a business enterprise during a
period from transactions and other events and circumstances from non-owner
sources. Comprehensive loss for 1997, 1998 and 1999 is equal to the net loss
reported.
STOCK-BASED COMPENSATION. The Company accounts for stock-based compensation
using the intrinsic value method prescribed in APB Opinion No. 25, "Accounting
for Stock Issued to Employees" and related interpretations. Compensation cost,
if any, is measured as the excess of the fair value of the Company's stock at
the date of grant over the amount an employee must pay to acquire the stock.
SFAS No. 123, "Accounting for Stock-Based Compensation," established accounting
and disclosure requirements using a fair value based method of accounting for
stock-based employee compensation plans; however, it allows an entity to
continue to measure compensation for those plans using the intrinsic value
method of accounting prescribed by APB Opinion No. 25. The Company has elected
to continue to measure compensation under the method of accounting as described
above, and has adopted the disclosure requirements of SFAS No. 123.
SEGMENT REPORTING. In June 1997, the FASB issued SFAS No. 131, "Disclosures
About Segments of an Enterprise and Related Information," which is effective for
fiscal years ending after December 15, 1997. This statement requires that a
public company report annual and interim financial and descriptive information
about its reportable operating segments. Operating segments, as defined, are
components of an enterprise about which separate financial information is
available that is evaluated regularly by the chief operating decision maker in
deciding how to allocate resources and in assessing performance. SFAS No. 131
allows aggregation of similar operating segments into a single operating segment
if the businesses have similar economic characteristics and are considered
similar under the criteria established by SFAS No. 131. The Company owns, leases
and operates 46 acute care hospitals in 46 different non-urban communities. All
of these hospitals have similar services, have similar types of patients,
operate in a consistent manner and have similar economic and regulatory
characteristics. Therefore, the Company has one reportable segment.
F-9
<PAGE>
COMMUNITY HEALTH SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. BACKGROUND AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
RECENT ACCOUNTING PRONOUNCEMENT NOT YET ADOPTED. During 1998, the FASB
issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities." This statement specifies how to report and display derivative
instruments and hedging activities and is effective for fiscal years beginning
after June 15, 2000. The Company is currently evaluating the impact, if any, of
adopting SFAS No. 133.
PRO FORMA ADJUSTMENTS. The pro forma financial information gives effect to
the use of net proceeds from the offering to repay debt of $279.0 million, the
resultant reduction of interest expense of $21.5 million and an increase in the
provision for income taxes of $8.4 million resulting from the decrease in
interest expense, as if these events had occurred on January 1, 1999.
2. LONG-TERM LEASES AND PURCHASES OF HOSPITALS
During 1997, the Company exercised a purchase option under an existing
operating lease, effective in August, and acquired two hospitals through capital
lease transactions, effective in January and August, respectively. The
consideration for the three hospitals totaled $46.1 million, including working
capital. The consideration consisted of $36.3 million in cash, which was
borrowed under the acquisition loan facilities, and assumed liabilities of $9.8
million. The entire lease obligation relating to each lease transaction was
prepaid. The prepayment was included as part of the cash consideration. Licensed
beds at the two hospitals acquired totaled 122 beds.
During 1998, the Company acquired, through two purchase transactions,
effective in April and September, respectively, and two capital lease
transactions, effective in November, most of the assets, including working
capital, of four hospitals. The consideration for the four hospitals totaled
$218.6 million. The consideration consisted of $169.8 million in cash, which was
borrowed under the acquisition loan facilities, and assumed liabilities of $48.8
million. The entire lease obligation relating to each lease transaction was
prepaid. The prepayment was included as part of the cash consideration. Licensed
beds at these four hospitals totaled 360.
Also, effective December 1, 1998, the Company entered into an operating
agreement relating to, and purchased certain working capital accounts, primarily
accounts receivable, supplies and accounts payable, of a 38 licensed bed
hospital, for a cash payment of $2.8 million. Pursuant to this agreement, upon
certain conditions being met, the Company will be obligated to construct a
replacement hospital and to purchase for $0.9 million the remaining assets of
the hospital. Upon completion, all rights of ownership and operations will
transfer to the Company.
During 1999, the Company acquired, through three purchase transactions,
effective in March, September, and November, respectively, and one capital lease
transaction, effective in March, most of the assets, including working capital,
of four hospitals. The consideration for the four hospitals totaled
$77.8 million. The consideration consisted of $59.7 million in cash, which was
borrowed under the acquisition loan facilities, and assumed liabilities of $18.1
million. The entire lease obligation relating to the lease transaction was
prepaid. The prepayment was included as part of the cash consideration. The
Company also constructed and opened an additional hospital at a cost of
$15.3 million, which replaced a hospital we managed. Licensed beds at the four
hospitals acquired totaled 477.
The foregoing acquisitions were accounted for using the purchase method of
accounting. The allocation of the purchase price for acquisition transactions
closed in 1999 has been determined by the Company based upon available
information and is subject to obtaining final asset valuations prepared by
independent appraisers, and settling amounts related to purchased working
capital. Independent
F-10
<PAGE>
COMMUNITY HEALTH SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. LONG-TERM LEASES AND PURCHASES OF HOSPITALS (CONTINUED)
asset valuations are generally completed within 120 days of the date of
acquisition; working capital settlements are generally made within 180 days of
the date of acquisition. Adjustments to the purchase price allocation are not
expected to be material.
The table below summarizes the allocations of the purchase price (including
assumed liabilities) for these acquisitions (in thousands):
<TABLE>
<CAPTION>
1997 1998 1999
-------- -------- --------
<S> <C> <C> <C>
Current assets.................................. $ 4,309 $ 40,680 $15,514
Property and equipment.......................... 29,848 116,443 55,170
Goodwill........................................ 11,988 61,441 22,393
</TABLE>
The operating results of the foregoing hospitals have been included in the
consolidated statements of operations from their respective dates of
acquisition. The following pro forma combined summary of operations of the
Company gives effect to using historical information of the operations of the
hospitals purchased in 1998 and 1999 as if the acquisitions had occurred as of
January 1, 1998 (in thousands except per share data):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------
1998 1999
----------- -----------
<S> <C> <C>
Net operating revenue................................ $1,046,568 $1,119,664
Loss before cumulative effect of a change in
accounting principle............................... (190,174) (21,498)
Net loss............................................. (189,846) (21,498)
Net loss per share:
Total basic and diluted............................ $ (3.52) $ (0.40)
</TABLE>
3. IMPAIRMENT OF LONG-LIVED ASSETS
In December 1998, in connection with the Company's periodic review process,
it was determined that primarily as a result of adverse changes in physician
relationships, undiscounted cash flows from seven of the Company's hospitals
were below the carrying value of long-lived assets associated with those
hospitals. Therefore, in accordance with SFAS No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of",
the Company adjusted the carrying value of the related long-lived assets to
their estimated fair value. The estimated fair values of these hospitals were
based on independently prepared specific market appraisals. The impairment
charge of $164.8 million was comprised of reductions to goodwill of
$134.3 million, tangible property of $27.1 million and identifiable intangibles
of $3.4 million.
Of the seven impaired hospitals, two are located in Georgia; two are located
in Texas; one is located in Florida; one is located in Louisiana; and one is
located in Kentucky. The events and circumstances leading to the impairment
charge were unique to each of the hospitals.
One of our Kentucky hospitals lost its only anesthesiologist due to
unexpected death and a leading surgeon due to illness. We have not been able to
successfully recruit a replacement surgeon. One of our Georgia hospitals lost a
key surgeon due to unexpected death and a leading specialist due to relocation
to another market. We have not been able to successfully recruit replacement
physicians.
F-11
<PAGE>
COMMUNITY HEALTH SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. IMPAIRMENT OF LONG-LIVED ASSETS (CONTINUED)
One of our Louisiana hospitals relies heavily on foreign physicians and,
following the departure of four foreign physicians from its market over a short
period of time, has had difficulties replacing these physicians because of
regulatory changes in recruiting foreign physicians. The skilled nursing and
home health reimbursement for one of our Texas hospitals was disproportionately
and adversely affected by the Balanced Budget Act of 1997. In addition, the
market in which this hospital operates relies on foreign physicians that have
been difficult to recruit because of regulatory changes. Our other Georgia
hospitals terminated an employed specialty surgeon who was responsible for over
5% of the hospital's revenue. We have not been able to replace the surgeon. In
addition, this hospital's skilled nursing reimbursement was disproportionately
and adversely affected by the Balanced Budget Act of 1997. Our other Texas
hospital lost market share and was excluded from several key managed care
contracts caused by the combination in 1998 of two larger competing hospitals.
This is our only hospital which competes with more than one hospital in its
primary service area. A Florida hospital we then owned terminated discussions in
1998 with an unrelated hospital, located in a contiguous county, to build a
combined replacement facility. The short and long-term success of this hospital
was in our view dependent upon the combination being effected.
Generally, we have not experienced difficulty in recruiting physicians and
specialists for our hospitals. However, for the four hospitals referred to above
we have experienced difficulty in recruiting physicians and specialists where
the number of physicians on staff is low. These four hospitals averaged
13 physicians per hospital as of December 31, 1998. The average number of
physicians on the medical staff of our other hospitals was 39 physicians at that
time. We continually monitor the relationships of our hospitals with their
physicians and any physician recruiting requirements. We have frequent
discussions with board members, chief executive officers and chief financial
officers of our hospitals. We are not aware of any significant adverse
relationships with physicians or any recurring physician recruitment needs that,
if not resolved in a timely manner, would have a material adverse effect on our
results of operations and financial position, either currently or in future
periods.
F-12
<PAGE>
COMMUNITY HEALTH SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. INCOME TAXES
The provision for (benefit from) income taxes consists of the following (in
thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------
1997 1998 1999
-------- -------- --------
<S> <C> <C> <C>
Current
Federal........................................ $ 80 $ -- $ --
State.......................................... 1,170 1,204 2,815
------- -------- ------
1,250 1,204 2,815
Deferred
Federal........................................ (4,740) (11,036) 3,163
State.......................................... (1,011) (3,573) (425)
------- -------- ------
(5,751) (14,609) 2,738
------- -------- ------
Total provision for (benefit from) income
taxes.......................................... $(4,501) $(13,405) $5,553
======= ======== ======
</TABLE>
The following table reconciles the differences between the statutory federal
income tax rate and the effective tax rate (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------------------------------
1997 1998 1999
------------------- ------------------- -------------------
AMOUNT % AMOUNT % AMOUNT %
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Benefit from income
taxes at statutory
federal rate.......... $(12,835) 35.0% $(68,843) 35.0% $(3,933) 35.0%
State income taxes, net
of federal income tax
benefit............... 456 (1.2) (1,379) 0.7 2,389 (21.3)
Non-deductible goodwill
amortization.......... 7,774 (21.2) 7,859 (4.0) 6,751 (60.1)
Impairment charge--
goodwill.............. -- -- 41,652 (21.2) -- --
Other................... 104 (0.3) 7,306 (3.7) 346 (3.0)
-------- ----- -------- ----- ------- -----
Provision for (benefit
from) income taxes and
effective tax rate.... $ (4,501) 12.3% $(13,405) 6.8% $ 5,553 (49.4)%
======== ===== ======== ===== ======= =====
</TABLE>
F-13
<PAGE>
COMMUNITY HEALTH SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. INCOME TAXES (CONTINUED)
Deferred income taxes are based on the estimated future tax effects of
differences between the financial statement and tax bases of assets and
liabilities under the provisions of the enacted tax laws. Deferred income taxes
as of December 31, consist of (in thousands):
<TABLE>
<CAPTION>
1998 1999
---------------------- ----------------------
ASSETS LIABILITIES ASSETS LIABILITIES
-------- ----------- -------- -----------
<S> <C> <C> <C> <C>
Net operating loss and credit
carryforwards...................... $ 68,269 $ -- $ 76,798 $ --
Property and equipment............... -- 28,567 -- 40,020
Self-insurance liabilities........... 7,740 -- 6,212 --
Intangibles.......................... -- 4,148 -- 9,385
Other liabilities.................... 2,368 -- -- 1,828
Long-term debt and interest.......... -- 4,476 -- 4,373
Accounts receivable.................. 2,173 -- 5,362 --
Accrued expenses..................... 9,311 -- 15,975 --
Other................................ 3,558 2,942 2,538 1,578
-------- ------- -------- -------
93,419 40,133 106,885 57,184
Valuation allowance.................. (18,260) -- (18,474) --
-------- ------- -------- -------
Total deferred income taxes.......... $ 75,159 $40,133 $ 88,411 $57,184
======== ======= ======== =======
</TABLE>
Management believes that the net deferred tax assets will ultimately be
realized, except as noted below. Management's conclusion is based on its
estimate of future taxable income and the expected timing of temporary
difference reversals. The Company has federal net operating loss carryforwards
of $150.4 million which expire from 2000 to 2019 and state net operating loss
carryforwards of $298.1 million which expire from 2000 to 2019.
The valuation allowance recognized at the date of the Acquisition
($13.2 million) relates primarily to state net operating losses and other tax
attributes. Any future decrease in this valuation allowance will be recorded as
a reduction in goodwill recorded in connection with the Acquisition. The
valuation allowance increased by $2.7 million and $0.2 million during the years
ended December 31, 1998 and 1999, respectively. These increases are primarily
related to net operating losses in certain state income tax jurisdictions not
expected to be realized.
The Company received refunds, net of payments, of $14 million during 1997
and paid income taxes, net of refunds received, of $0.3 million, and
$1.4 million during 1998 and 1999, respectively.
FEDERAL INCOME TAX EXAMINATIONS. The Internal Revenue Service ("IRS") is
examining the Company's filed federal income tax returns for the tax periods
between December 31, 1993 and December 31, 1996. The IRS has indicated that it
is considering a number of adjustments primarily involving "temporary" or timing
differences. To date, a Revenue Agent's Report has not been issued in connection
with the examination of these tax periods. In management's opinion, the ultimate
outcome of the IRS examinations will not have a material effect on the Company's
results of operations, financial condition or cash flows.
F-14
<PAGE>
COMMUNITY HEALTH SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. LONG-TERM DEBT
Long-term debt consists of the following (in thousands):
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
-----------------------
1998 1999
---------- ----------
<S> <C> <C>
Credit Facilities:
Revolving Credit Loans............................. $ 104,199 $ 109,750
Acquisition Loans.................................. 202,251 138,551
Term Loans......................................... 394,000 624,345
Subordinated debentures.............................. 500,000 500,000
Taxable bonds........................................ 33,400 29,700
Tax-exempt bonds..................................... 8,000 8,000
Capital lease obligations (see Note 7)............... 21,948 20,828
Other................................................ 4,044 3,459
---------- ----------
Total debt......................................... 1,267,842 1,434,633
Less current maturities.............................. (21,248) (27,029)
---------- ----------
Total long-term debt............................... $1,246,594 $1,407,604
========== ==========
</TABLE>
CREDIT FACILITIES. In connection with the Acquisition, a $900 million
credit agreement was entered into with a consortium of creditors (the "Credit
Agreement"). The financing under the Credit Agreement consists of (i) a 6 1/2
year term loan facility (the "Tranche A Loan") in an aggregate principal amount
equal to $50 million, (ii) a 7 1/2 year term loan facility (the "Tranche B
Loan") in an aggregate principal amount equal to $132.5 million, (iii) an 8 1/2
year term loan facility (the "Tranche C Loan") in an aggregate principal amount
equal to $132.5 million, (iv) a 9 1/2 year term loan facility (the "Tranche D
Loan") in an original aggregate principal amount equal to $100 million and
amended to an aggregate principal amount of $350 million in March 1999
(collectively, the "Term Loans"), (v) a revolving credit facility (the
"Revolving Credit Loans") in an aggregate principal amount equal to
$200 million, of which up to $90 million may be used, to the extent available,
for standby and commercial letters of credit and up to $25 million is available
to the Company pursuant to a swingline facility and (vi) a reducing acquisition
loan facility (the "Acquisition Loans") in an aggregate principal amount of
$285 million, reduced to $282.5 million in July 1999.
The Term Loans are scheduled to be paid in consecutive quarterly
installments with aggregate principal payments for future years as follows (in
thousands):
<TABLE>
<S> <C>
2000........................................................ $ 20,655
2001........................................................ 21,155
2002........................................................ 48,905
2003........................................................ 129,655
2004........................................................ 169,662
2005........................................................ 234,313
--------
Total....................................................... $624,345
========
</TABLE>
Revolving Credit Loans may be made, and letters of credit may be issued, at
any time during the period between July 22, 1996, the loan origination date (the
"Origination Date"), and December 31,
F-15
<PAGE>
COMMUNITY HEALTH SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. LONG-TERM DEBT (CONTINUED)
2002 (the "Termination Date"). No letter of credit will have an expiration date
after the Termination Date. The Acquisition Loans may be made at any time during
the period preceding the Termination Date.
The Acquisition Loans facility will automatically be reduced and the
Acquisition Loans will be repaid to the following levels on each of the
following anniversaries of the Origination Date: fourth anniversary,
$263.2 million; fifth anniversary, $215.3 million; sixth anniversary,
$139.0 million; with payment of any remaining balance on the Termination Date.
The Company may elect that all or a portion of the borrowings under the
Credit Agreement bear interest at a rate per annum equal to (a) an annual
benchmark rate, which will be equal to the greatest of (i) "Prime Rate,"
(ii) the "Base" CD Rate plus 1% or (iii) the Federal Funds effective rate plus
50 basis points (the "ABR") or (b) the Eurodollar Rate, in each case increased
by the applicable margin (the "Applicable Margin") which will vary between 1.50%
and 3.75% per annum. The applicable margin on the Revolving Credit Loans,
Acquisition Loans and Tranche A Loan is subject to a reduction based on
achievement of certain levels of total senior indebtedness to annualized
consolidated EBITDA, as defined in the Credit Agreement. To date, the Company
has not achieved a level that provides for a reduction of the Applicable Margin.
Interest based on the ABR is payable on the last day of each calendar
quarter and interest based on the Eurodollar Rate is payable on set maturity
dates. The borrowings under the Credit Agreement bore interest at rates ranging
from 7.44% to 11.25% as of December 31, 1999.
The Company is also required to pay a quarterly commitment fee at a rate
which ranges from .375% to .500% based on the Eurodollar Applicable Margin for
Revolving Credit Loans. This rate is applied to unused commitments under the
Revolving Credit Loans and the Acquisition Loans.
The Company is also required to pay letters of credit fees at rates which
vary from 1.625% to 2.625%.
All or a portion of the outstanding borrowings under the Credit Agreement
may be prepaid at any time and the unutilized portion of the facility for the
Revolving Credit Loans or the Acquisition Loans may be terminated, in whole or
in part at the Company's option. Repaid Term Loans and permanent reductions to
the Acquisition Loans and Revolving Credit Loans may not be reborrowed.
Credit Facilities generally are required to be prepaid with the net proceeds
(in excess of $20 million) of certain permitted asset sales and the issuances of
debt obligations (other than certain permitted indebtedness) of the Company or
any of its subsidiaries.
Generally, prepayments of Term Loans will be applied to principal payments
due during the next twelve months with any excess being applied pro rata to
scheduled principal payments thereafter.
The terms of the Credit Agreement include certain restrictive covenants.
These covenants include restrictions on indebtedness, investments, asset sales,
capital expenditures, dividends, sale and leasebacks, contingent obligations,
transactions with affiliates, and fundamental change. The covenants also require
maintenance of certain ratios regarding senior indebtedness, senior interest,
and fixed charges. The Company was in compliance with all debt covenants at
December 31, 1999.
Under an amendment dated February 24, 2000, in the event of an initial
public offering of common stock, the Company is obligated to apply the first
$300 million of proceeds (net of expenses and underwriting commissions) and
proceeds in excess of $450 million first to repay the Acquisition and Revolving
Credit Loans and then to reduce the Term Loans. The proceeds in excess of
F-16
<PAGE>
COMMUNITY HEALTH SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. LONG-TERM DEBT (CONTINUED)
$300 million and less than $450 million may, under the terms of the Credit
Agreement, be applied to repay subordinated debentures if certain financial
covenants are met. In connection with any subsequent registered public offering,
the Company may, under the terms of the Credit Agreement, apply the proceeds to
the repayment of subordinated debentures if certain financial covenants are met.
As of December 31, 1998 and 1999, the Company had letters of credit issued,
primarily in support of its Taxable Bonds and Tax-Exempt Bonds, of approximately
$55 million and $43 million, respectively. Availability at December 31, 1998 and
1999 under the Revolving Credit Loans facility was approximately $41 million and
$47 million and under the Acquisition Loans facility was approximately $83
million and $144 million, respectively.
SUBORDINATED DEBENTURES. In connection with the Acquisition, the Company
issued its subordinated debentures to an affiliate of Forstmann Little & Co. for
$500 million in cash. The debentures are a general senior subordinated
obligation of the Company, are not subject to mandatory redemption and mature in
three equal annual installments beginning June 30, 2007, with the final payment
due on June 30, 2009. The debentures bear interest at a fixed rate of 7.50%
which is payable semi-annually in January and July. Total interest expense for
the debentures was $37.5 million for each of the years ended December 31, 1997,
1998 and 1999.
TAXABLE BONDS AND TAX-EXEMPT BONDS. Taxable Bonds bear interest at a
floating rate which averaged 5.73% and 5.29% during 1998 and 1999, respectively.
These bonds are subject to mandatory annual redemptions with the final payment
of $17.4 million due on October 1, 2003. Tax-Exempt Bonds bear interest at
floating rates which averaged 3.58% and 3.36% during 1998 and 1999,
respectively. These bonds are not subject to mandatory annual redemptions under
the bond provisions and are due in 2010. Taxable Bonds and Tax-Exempt Bonds are
both guaranteed by letters of credit
OTHER DEBT. As of December 31, 1999, other debt consisted primarily of an
industrial revenue bond and other obligations maturing in various installments
through 2014.
As of December 31, 1999, the scheduled maturities of long-term debt
outstanding including capital leases for each of the next five years and
thereafter are as follows (in thousands):
<TABLE>
<S> <C>
2000........................................................ $ 27,029
2001........................................................ 27,107
2002........................................................ 54,495
2003........................................................ 150,010
2004........................................................ 170,188
Thereafter.................................................. 1,005,804
----------
$1,434,633
==========
</TABLE>
The Company paid interest of $87 million, $101 million and $118 million on
borrowings during the years ended December 31, 1997, 1998 and 1999,
respectively.
6. FAIR VALUES OF FINANCIAL INSTRUMENTS
The fair value of financial instruments has been estimated by the Company
using available market information as of December 31, 1998 and 1999, and
valuation methodologies considered appropriate.
F-17
<PAGE>
COMMUNITY HEALTH SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. FAIR VALUES OF FINANCIAL INSTRUMENTS (CONTINUED)
The estimates presented are not necessarily indicative of amounts the Company
could realize in a current market exchange (in thousands):
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
---------------------------------------------
1998 1999
--------------------- ---------------------
CARRYING ESTIMATED CARRYING ESTIMATED
AMOUNT FAIR VALUE VALUE FAIR VALUE
-------- ---------- -------- ----------
<S> <C> <C> <C> <C>
Assets:
Cash and cash equivalents......................... $ 6,719 $ 6,719 $ 4,282 $ 4,282
Liabilities:
Credit facilities................................. 700,450 692,045 872,646 862,174
Taxable Bonds..................................... 33,400 33,400 29,700 29,700
Tax-exempt Bonds.................................. 8,000 8,000 8,000 8,000
</TABLE>
Cash and cash equivalents: The carrying amount approximates fair value due
to the short term maturity of these instruments (less than three months).
Credit facilities: Estimated fair value is based on communications with the
Company's bankers regarding relevant pricing for trading activity among the
Company's lending institutions.
Taxable and Tax-exempt Bonds: The carrying amount approximates fair value as
a result of the weekly interest rate reset feature of these publically traded
instruments.
The Company believes that it is not practicable to estimate the fair value
of the subordinated debentures because of (i) the fact that the subordinated
debentures were issued in connection with the issuance of the original equity of
the Company at the date of Acquisition as an investment unit, (ii) the related
party nature of the subordinated debentures, (iii) the lack of comparable
securities, and (iv) the lack of a credit rating of the Company by an
established rating agency.
7. LEASES
The Company leases hospitals, medical office buildings, and certain
equipment under capital and operating lease agreements. All lease agreements
generally require the Company to pay maintenance, repairs, property taxes and
insurance costs. Commitments relating to noncancellable operating and capital
leases for each of the next five years and thereafter are as follows (in
thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, OPERATING CAPITAL
- ----------------------- --------- --------
<S> <C> <C>
2000..................................................... $16,306 $ 3,140
2001..................................................... 14,237 4,110
2002..................................................... 11,332 3,504
2003..................................................... 8,968 2,959
2004..................................................... 8,408 2,600
Thereafter............................................... 20,769 27,525
------- -------
Total minimum future payments............................ $80,020 43,838
=======
Less debt discounts...................................... (23,010)
-------
20,828
Less current portion..................................... (2,472)
-------
Long-term capital lease obligations...................... $18,356
=======
</TABLE>
F-18
<PAGE>
COMMUNITY HEALTH SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. LEASES (CONTINUED)
Assets capitalized under capital leases as reflected in the accompanying
consolidated balance sheets were $5.1 million of land and improvements, and
$39.4 million of buildings and improvements, and $17.4 million of equipment and
fixtures as of December 31, 1998 and $5.8 million of land and improvements,
$55.7 million of buildings and improvements and $19.2 million of equipment and
fixtures as of December 31, 1999. The accumulated depreciation related to assets
under capital leases was $11.7 million and $15.1 million as of December 31, 1998
and 1999, respectively. Depreciation of assets under capital leases is included
in depreciation and amortization and amortization of debt discounts on capital
lease obligations is included in interest expense in the consolidated statements
of operations.
8. EMPLOYEE BENEFIT PLANS
The Company has a defined contribution plan that is qualified under
Section 401(k) of the Internal Revenue Code, which covers all eligible employees
at its hospitals, clinics, and the corporate offices. Participants may
contribute a portion of their compensation not exceeding a limit set annually by
the Internal Revenue Service. This plan includes a provision for the Company to
match a portion of employee contributions. The Company also provides a defined
contribution welfare benefit plan for post-termination benefits to executive and
middle management employees. Total expense under the 401(k) plan was
$2.2 million for each of the years ended December 31, 1997 and 1998 and $2.9
million for the year ended December 31, 1999. Total expense under the welfare
benefit plan was $0.8 million, $0.9 million and $0.8 million for the years ended
December 31, 1997, 1998 and 1999, respectively.
9. STOCKHOLDERS' EQUITY
Authorized capital shares of the Company include 400,000,000 shares of
capital stock consisting of 300,000,000 shares of common stock and 100,000,000
shares of Preferred Stock. Each of the aforementioned classes of capital stock
has a par value of $.01 per share. Shares of Preferred Stock, of which none are
outstanding as of December 31, 1999, may be issued in one or more series having
such rights, preferences and other provisions as determined by the Board of
Directors without approval by the holders of common stock.
Common shares held by employees are the subject of a stockholder's agreement
under which each share, until vested, is subject to repurchase, upon termination
of employment. Shares vest, on a cumulative basis, each year at a rate of 20% of
the total shares issued beginning after the first anniversary date of the
purchase. Further, under the stockholder's agreement shares of common stock held
by stockholders other than FL&Co. will only be transferable together with shares
transferred by FL&Co. until FL&Co.'s ownership falls below 25%.
During 1997, the Company granted options to purchase 189,944 shares of
common stock to non-employee directors at an exercise price of $9.04 per share.
One-third of such options are exercisable each year on a cumulative basis
beginning on the first anniversary of the date of grant and expiring ten years
from the date of grant. As of December 31, 1999, 126,669 non-employee director
options to purchase common stock were exercisable with a weighted average
remaining contractual life of 7.47 years.
In November 1996, the Board of Directors approved an Employee Stock Option
Plan (the "Plan") to provide incentives to key employees of the Company. Options
to purchase up to 801,325 shares of common stock are authorized under the Plan.
All options granted pursuant to the Plan are generally
F-19
<PAGE>
COMMUNITY HEALTH SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. STOCKHOLDERS' EQUITY (CONTINUED)
exercisable each year on a cumulative basis at a rate of 20% of the total number
of common shares covered by the option beginning one year from the date of grant
and expiring ten years from the date of grant. As of December 31, 1999, there
were 218,584 shares of unissued common stock reserved for issuance under the
Plan.
The options granted are "nonqualified" for tax purposes. For financial
reporting purposes, the exercise price of certain option grants were considered
to be below the fair value of the stock at the time of grant. The fair value was
determined based on an appraisal conducted by an independent appraisal firm as
of the relevant date. The aggregate differences between fair value and the
exercise price is being charged to compensation expense over the relevant
vesting periods. In 1999, such expense aggregated $83,000.
A summary of the number of shares of common stock issuable upon the exercise
of options under the Company's Employee Stock Option Plan for fiscal 1997, 1998
and 1999 and changes during those years is presented below:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------
1997 1998 1999
-------- -------- --------
<S> <C> <C> <C>
Outstanding at the beginning of the year.................... -- 456,755 646,848
Granted..................................................... 593,891 316,969 95,714
Exercised................................................... -- -- --
Forfeited or canceled....................................... (137,116) (126,876) (159,820)
-------- -------- --------
Outstanding at the end of the year.......................... 456,755 646,848 582,742
======== ======== ========
</TABLE>
Of the options outstanding as of December 31, 1997, 1998 and 1999, none,
65,976 and 155,368, respectively, were exercisable. As of December 31, 1999, the
outstanding options had a weighted-average remaining contractual life of 7.84
years. All employee options outstanding as of December 31, 1999 had an exercise
price of $6.60 per share.
Under SFAS No. 123, the fair value of each option grant is estimated on the
date of grant using the Black-Scholes option-pricing model. The weighted-average
fair value of each option granted during 1997, 1998 and 1999 were $2.05, $1.94,
and $4.82, respectively. In 1997 and 1998, the exercise price of options granted
was the same as the fair value of the related stock. In 1999, the exercise price
of options granted was less than the fair value of the related stock. The
following weighted-average assumptions were used for grants in fiscal 1997, 1998
and 1999: risk-free interest rate of 6.10%, 5.14% and 5.49%; expected volatility
of the Company's common stock based on peer companies in the healthcare industry
of 35%, 34% and 45%, respectively; no dividend yields; and weighted-average
expected life of the options of 3 years for all years.
F-20
<PAGE>
COMMUNITY HEALTH SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. STOCKHOLDERS' EQUITY (CONTINUED)
Had the fair value of the options granted been recognized as compensation
expense on a straight-line basis over the vesting period of the grant, the
Company's net loss and loss per share would have been reduced to the pro forma
amounts indicated below (in thousands except per share data):
<TABLE>
<CAPTION>
1997 1998 1999
-------- --------- --------
<S> <C> <C> <C>
Net loss:
As reported............................................... $(32,171) $(183,290) $(16,789)
Pro forma................................................. $(32,333) $(183,513) $(17,010)
Net loss per share:
As reported--basic and diluted............................ $ (0.60) $ (3.40) $ (0.31)
Pro forma--basic and diluted.............................. $ (0.60) $ (3.41) $ (0.31)
</TABLE>
10. EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted earnings
per share (in thousands, except share data):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------
1997 1998 1999
----------- ----------- -----------
<S> <C> <C> <C>
NUMERATOR:
Loss before cumulative effect of a
change in accounting principle.... $ (32,171) $ (182,938) $ (16,789)
Cumulative effect of a change in
accounting principle.............. -- (352) --
----------- ----------- -----------
Net loss available to common--basic
and diluted....................... $ (32,171) $ (183,290) $ (16,789)
=========== =========== ===========
DENOMINATOR:
Weighted-average number of shares
outstanding--basic.................. 53,568,891 53,892,388 54,258,465
Effect of dilutive securities:
none................................ -- -- --
----------- ----------- -----------
Weighted-average number of shares
outstanding--diluted................ 53,568,891 53,892,388 54,258,465
=========== =========== ===========
Dilutive securities outstanding not
included in the computation of
earnings (loss) per share because
their effect is antidilutive:
Non-employee director options....... 189,944 189,944 189,944
Unvested common shares.............. 2,353,289 1,537,943 1,279,736
Employee options.................... 456,755 646,848 582,742
</TABLE>
11. ACCOUNTING CHANGE
In 1998, the Company adopted The American Institute of Certified Public
Accountants Statement of Position 98-5, "Reporting on the Costs of Start-Up
Activities," which affects the accounting for
F-21
<PAGE>
COMMUNITY HEALTH SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
11. ACCOUNTING CHANGE (CONTINUED)
start-up costs. The change involved expensing these costs as incurred, rather
than capitalizing and subsequently amortizing such costs. The cumulative effect
of the change on the accumulated deficit as of the beginning of 1998 is
reflected as a charge of $0.5 million ($0.4 million net of taxes) to 1998
earnings. The effect of the change to the new method on net loss or loss per
share for both Class A and Class B in 1997, 1998 and 1999 was not material.
12. COMMITMENTS AND CONTINGENCIES
CONSTRUCTION COMMITMENTS. As of December 31, 1999, the Company has
obligations under certain hospital agreements to construct three hospitals
through 2004 with an aggregate estimated construction cost of approximately
$85 million.
PROFESSIONAL LIABILITY RISKS. Substantially all of the Company's
professional and general liability risks are subject to a $0.5 million per
occurrence deductible (with an annual deductible cap of $5 million). The
Company's insurance is underwritten on a "claims-made basis." The Company
accrues an estimated liability for its uninsured exposure and self-insured
retention based on historical loss patterns and actuarial projections. The
Company's estimated liability for the self-insured portion of professional and
general liability claims was $15.7 million and $16.4 million as of December 31,
1998 and 1999, respectively. These estimated liabilities represent the present
value of estimated future professional liability claims payments based on
expected loss patterns using a discount rate of 4.51% and 5.72% in 1998 and
1999, respectively. The discount rate is based on an estimate of the risk-free
interest rate for the duration of the expected claim payments. The estimated
undiscounted claims liability was $18.3 million and $18.9 million as of
December 31, 1998 and 1999, respectively. The effect of discounting professional
and general liability claims was a $0.2 million increase in expense in 1997 and
a $0.1 million decrease to expense in both 1998 and 1999.
COMPLIANCE SETTLEMENT AND YEAR 2000 REMEDIATION COSTS. Year 2000
remediation costs totaled $0.2 million and $3.3 million for 1998 and 1999,
respectively. In regard to compliance settlement costs, the Company initiated a
voluntary review in 1997 of its inpatient medical records in order to determine
the extent it may have had coding inaccuracies under certain government
programs. At December 31, 1998, an estimate of the settlement was accrued based
on information available and additional costs were accrued at December 31, 1999.
In March 2000, the Company reached a settlement with appropriate governmental
agencies pursuant to which the Company agreed to pay approximately $31 million
to settle potential liabilities related to coding inaccuracies occurring from
October 1993 through September 1997.
LEGAL MATTERS. The Company is a party to legal proceedings incidental to
its business. In the opinion of management, any ultimate liability with respect
to these actions will not have a material adverse effect on the Company's
consolidated financial position, cash flows or results of operations.
13. RELATED PARTY TRANSACTIONS
Notes receivable for common shares held by employees, as disclosed on the
consolidated balance sheets, represent the outstanding balance of notes accepted
by the Company as partial payment for the purchase of the common shares from
senior management employees. These notes bear interest at 6.84%, are full
recourse promissory notes and are secured by the shares to which they relate.
Each of the full recourse promissory notes mature on the fifth anniversary date
of the note, with accelerated
F-22
<PAGE>
COMMUNITY HEALTH SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
13. RELATED PARTY TRANSACTIONS (CONTINUED)
maturities in case of employee termination, Company stock repurchases, or
stockholder's sale of common stock. Employees have fully paid for purchases of
common stock by cash or by a combination of cash and full recourse promissory
notes.
In 1999, the Company purchased marketing services and materials at a cost of
$268,000 from a company owned by the spouse of one of the Company's officers.
In 1996, in connection with the Company's relocation from Houston to
Nashville, the Company lent $100,000 to one of its executives. This loan is due
December 15, 2000 and bears no interest.
14. SUBSEQUENT EVENTS (UNAUDITED)
The Company currently is pursuing an initial public offering, which is
expected to be completed during the second quarter of 2000. In connection with
this contemplated public offering, the Company expects to effect a
recapitalization immediately prior to, or simultaneously with, the closing as
follows:
- each outstanding share of Class B common stock will be exchanged for .488
of a share of Class A common stock;
- each outstanding option to purchase a share of Class C common stock will
be exchanged for an option to purchase .750 of a share of Class A common
stock;
- the Class A common stock will be redesignated as common stock and adjusted
for a stock split on a 118.7148-for-1 basis; and
- the certificate of incorporation will be amended and restated to reflect a
single class of common stock, par value $.01 per share, and increase
authorized shares of common stock to 300,000,000 and preferred stock to
100,000,000.
- Vesting, repurchase and transfer provisions related to Class B and
Class C common shares will not be affected by the recapitalization.
The Company is obligated in connection with an initial public offering to
apply the first $300 million of proceeds (net of expenses and underwriting
commissions) and proceeds in excess of $450 million first to repay the Revolving
and Acquisition Credit Loans and then to reduce the Term Loans. The proceeds in
excess of $300 million and less than $450 million may, under the terms of the
Credit Agreement, be applied to repay subordinated debentures if certain
financial covenants are met. In connection with any subsequent registered public
offering, the Company may, under the terms of the Credit Agreement, apply the
proceeds to the repayment of subordinated debentures if certain financial
covenants are met.
All share and per share amounts have been restated to give effect to these
transactions. If the value of the Company changes significantly at the time of
the offering, the share and exchange amounts above will change.
F-23
<PAGE>
COMMUNITY HEALTH SYSTEMS, INC. AND SUBSIDIARIES
UNAUDITED INTERIM CONDENSED CONSOLIDATED BALANCE SHEET
AS OF MARCH 31, 2000
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<S> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents................................. $ 10,885
Patient accounts receivable, net.......................... 231,448
Supplies, prepaid expenses and other current assets....... 73,780
Prepaid and current deferred income taxes................. 1,688
----------
Total current assets.................................. 317,801
----------
PROPERTY AND EQUIPMENT...................................... 725,922
Less accumulated depreciation and amortization............ (101,594)
----------
Property and equipment, net........................... 624,328
----------
GOODWILL, NET............................................... 876,716
----------
OTHER ASSETS, NET........................................... 116,885
----------
TOTAL ASSETS................................................ $1,935,730
==========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Current maturities of long-term debt...................... $ 20,955
Accounts payable.......................................... 58,557
Compliance settlement payable............................. 30,900
Interest payable.......................................... 10,685
Accrued liabilities....................................... 95,921
----------
Total current liabilities............................. 217,018
----------
LONG-TERM DEBT.............................................. 1,463,650
----------
OTHER LONG-TERM LIABILITIES................................. 24,368
----------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Preferred stock, $.01 par value per share, 100,000,000
shares authorized, none issued.......................... --
Common stock, $.01 par value per share, 300,000,000 shares
authorized; 56,793,516 shares issued and 55,592,859
shares outstanding at March 31, 2000.................... 568
Additional paid-in capital................................ 483,235
Accumulated deficit....................................... (244,431)
Treasury stock, at cost, 1,200,657 shares................. (6,587)
Notes receivable for common stock......................... (1,932)
Unearned stock compensation............................... (159)
----------
Total stockholders' equity............................ 230,694
----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY.................. $1,935,730
==========
</TABLE>
See notes to unaudited interim condensed consolidated financial statements.
F-24
<PAGE>
COMMUNITY HEALTH SYSTEMS, INC. AND SUBSIDIARIES
UNAUDITED INTERIM CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
-----------------------------
1999 2000
----------- -----------
<S> <C> <C>
NET OPERATING REVENUES...................................... $ 263,004 $ 308,651
----------- -----------
OPERATING COSTS AND EXPENSES:
Salaries and benefits..................................... 101,493 120,407
Provision for bad debts................................... 22,555 27,955
Supplies.................................................. 31,746 35,979
Other operating expenses.................................. 49,128 57,130
Rent...................................................... 6,112 7,099
Depreciation and amortization............................. 13,033 16,380
Amortization of goodwill.................................. 5,677 6,168
----------- -----------
Total operating cost and expenses....................... 229,744 271,118
----------- -----------
INCOME FROM OPERATIONS...................................... 33,260 37,533
INTEREST EXPENSE, NET....................................... 26,762 32,683
----------- -----------
INCOME BEFORE INCOME TAXES.................................. 6,498 4,850
PROVISION FOR INCOME TAXES.................................. 4,580 3,929
----------- -----------
NET INCOME.................................................. $ 1,918 $ 921
=========== ===========
BASIC AND DILUTED NET INCOME PER COMMON SHARE:
Basic..................................................... $ 0.04 $ 0.02
=========== ===========
Diluted................................................... $ 0.03 $ 0.02
=========== ===========
WEIGHTED-AVERAGE NUMBER OF SHARES OUTSTANDING:
Basic..................................................... 54,128,085 54,369,202
=========== ===========
Diluted................................................... 55,607,631 55,857,980
=========== ===========
PRO FORMA INFORMATION:
Pro forma income per share:
Basic................................................... $ 0.06
===========
Diluted................................................. $ 0.06
===========
Pro forma weighted-average number of shares outstanding:
Basic................................................... 73,119,202
===========
Diluted................................................. 74,607,980
===========
</TABLE>
See notes to unaudited interim condensed consolidated financial statements.
F-25
<PAGE>
COMMUNITY HEALTH SYSTEMS, INC. AND SUBSIDIARIES
UNAUDITED INTERIM CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
--------------------
1999 2000
--------- --------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income................................................ $ 1,918 $ 921
Adjustments to reconcile net income to net cash used in
operating activities:
Depreciation and amortization........................... 18,710 22,548
Changes in operating assets and liabilities, net of
effects of acquisitions and divestitures:
Patient accounts receivable......................... (24,206) (2,511)
Supplies, prepaid expenses and other current
assets............................................ 2,117 (4,595)
Accounts payable, accrued liabilities and income
taxes............................................. 472 (16,275)
Other............................................... (17,871) (5,033)
--------- --------
Net cash used in operating activities..................... (18,860) (4,945)
--------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Acquisitions of facilities, pursuant to purchase
agreements.............................................. (44,347) (21,392)
Purchases of property and equipment....................... (19,215) (12,002)
Proceeds from sale of equipment........................... 22 7
Increase in other assets.................................. (2,603) (5,036)
--------- --------
Net cash used in investing activities................... (66,143) (38,423)
--------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Borrowings under credit agreement......................... 339,100 67,400
Repayments of long-term indebtedness...................... (249,505) (17,429)
--------- --------
Net cash provided by financing activities............... 89,595 49,971
--------- --------
NET CHANGE IN CASH AND CASH EQUIVALENTS..................... 4,592 6,603
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD............ 6,719 4,282
--------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD.................. $ 11,311 $ 10,885
========= ========
</TABLE>
See notes to unaudited interim condensed consolidated financial statements.
F-26
<PAGE>
COMMUNITY HEALTH SYSTEMS, INC.
NOTES TO UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The unaudited interim condensed consolidated financial statements of
Community Health Systems, Inc. and its subsidiaries (the "Company") as of and
for the three month periods ended March 31, 1999 and March 31, 2000, have been
prepared in accordance with generally accepted accounting principles. In the
opinion of management, such information contains all adjustments, consisting
only of normal recurring adjustments, necessary for a fair presentation of the
results for such periods. All intercompany transactions and balances have been
eliminated. The results of operations for the three months ended March 31, 2000
are not necessarily indicative of the results to be expected for the full fiscal
year ending December 31, 2000.
Certain information and disclosures normally included in the notes to
consolidated financial statements have been condensed or omitted as permitted by
the rules and regulations of the Securities and Exchange Commission, although
the Company believes the disclosure is adequate to make the information
presented not misleading. The accompanying unaudited financial statements should
be read in conjunction with the financial statements of the Company for the year
ended December 31, 1999.
The pro forma financial information gives effect to the use of net proceeds
from the offering to repay debt of $279.0 million, the resultant reduction of
interest expense of $5.7 million and an increase in the provision for income
taxes of $2.2 million resulting from the decrease in interest expense, as if
these events had occurred on January 1, 2000.
2. USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management of the Company to make
estimates and assumptions that affect the amounts reported in the consolidated
financial statements. Actual results could differ from the estimates.
3. PURCHASE OF HOSPITAL
Effective March 1, 2000, the Company acquired through a purchase transaction
the assets and working capital of a 105 bed hospital for aggregate consideration
of $13.4 million including liabilities assumed.
4. EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted earnings
per share (in thousands, except share and per share data):
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
-----------------------------
1999 2000
----------- -----------
<S> <C> <C>
NUMERATOR:
Net income............................................ $ 1,918 $ 921
=========== ===========
DENOMINATOR:
Weighted-average number of shares
outstanding--basic.................................. 54,128,085 54,369,202
Effect of dilutive options............................ 1,479,546 1,488,778
----------- -----------
Weighted-average number of shares
outstanding--diluted................................ 55,607,631 55,857,980
=========== ===========
Basic earnings per share................................ $ 0.04 $ 0.02
=========== ===========
Diluted earnings per share.............................. $ 0.03 $ 0.02
=========== ===========
</TABLE>
F-27
<PAGE>
COMMUNITY HEALTH SYSTEMS, INC.
NOTES TO UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
5. SUBSEQUENT EVENTS
Effective April 1, 2000, the Company acquired through separate purchase
transactions, the assets and working capital of two hospitals for aggregate
consideration of approximately $22.0 million. Licensed beds at these two
facilities totaled 124.
The Company currently is pursuing an initial public offering, which is
expected to be completed during the second quarter of 2000. In connection with
this contemplated public offering, the Company expects to effect a
recapitalization immediately prior to, or simultaneously with, the closing as
follows:
- each outstanding share of Class B common stock will be exchanged for .488
of a share of Class A common stock;
- each outstanding option to purchase a share of Class C common stock will
be exchanged for an option to purchase .750 of a share of Class A common
stock;
- the Class A common stock will be redesignated as common stock and adjusted
for a stock split on a 118.7148-for-1 basis;
- the certificate of incorporation will be amended and restated to reflect a
single class of common stock, par value $.01 per share, and increase
authorized shares of common stock to 300,000,000 and preferred stock to
100,000,000; and
- vesting, repurchase and transfer provisions related to Class B and
Class C common shares will not be affected by the recapitalization.
The Company is obligated in connection with an initial public offering to
apply the first $300 million of proceeds (net of expenses and underwriting
commissions) and proceeds in excess of $450 million first to repay the Revolving
and Acquisition Credit Loans and then to reduce the Term Loans. The proceeds in
excess of $300 million and less than $450 million may, under the terms of the
Credit Agreement, be applied to repay subordinated debentures if certain
financial covenants are met. In connection with any subsequent registered public
offering, the Company may, under the terms of the Credit Agreement, apply the
proceeds to the repayment of subordinated debentures if certain financial
covenants are met.
All share and per share amounts have been restated to give effect to these
transactions. If the value of the Company changes significantly at the time of
the offering, the share and exchange amounts above will change.
F-28
<PAGE>
[INSIDE BACK COVER PAGE]
[Description of artwork:
Photographs of four of our facilities:
Eastern New Mexico Medical Center,
Moberly Regional Medical Center,
Springs Memorial Hospital, and
North Okaloosa Medical Center]
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Through and including 2000 (the 25(th) day after the date of
this prospectus), all dealers effecting transactions in these securities,
whether or not participating in this offering, may be required to deliver a
prospectus. This is in addition to the dealers' obligation to deliver a
prospectus when acting as underwriters and with respect to their unsold
allotments or subscriptions.
18,750,000 SHARES
[LOGO]
COMMON STOCK
------------------
P R O S P E C T U S
------------------
MERRILL LYNCH & CO.
BANC OF AMERICA SECURITIES LLC
CHASE H&Q
CREDIT SUISSE FIRST BOSTON
GOLDMAN, SACHS & CO.
MORGAN STANLEY DEAN WITTER
, 2000
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
The information in this prospectus is not complete and may be changed. We may
not sell these securities until the registration statement filed with the
Securities and Exchange Commission is effective. This prospectus is not an offer
to sell these securities and it is not soliciting an offer to buy these
securities in any state where the offer or sale is not permitted.
<PAGE>
SUBJECT TO COMPLETION
PRELIMINARY PROSPECTUS DATED MAY 17, 2000
PROSPECTUS
18,750,000 SHARES
[LOGO]
COMMON STOCK
--------------
This is Community Health Systems, Inc.'s initial public offering. We are
selling all of the shares. The international managers are offering 2,812,500
shares outside the U.S. and Canada and the U.S. underwriters are offering
15,937,500 shares in the U.S. and Canada.
We expect the public offering price to be between $15.00 and $17.00 per
share. Currently, no public market exists for the shares. After pricing of the
offering, the shares will trade on the New York Stock Exchange under the symbol
"CYH."
INVESTING IN THE COMMON STOCK INVOLVES RISKS WHICH ARE DESCRIBED IN THE
"RISK FACTORS" SECTION BEGINNING ON PAGE 7 OF THIS PROSPECTUS.
-----------------
<TABLE>
<CAPTION>
PER SHARE TOTAL
--------- -----
<S> <C> <C>
Public offering price....................................... $ $
Underwriting discount....................................... $ $
Proceeds before expenses to Community Health Systems........ $ $
</TABLE>
The international managers may also purchase up to an additional 421,875
shares from us at the public offering price, less the underwriting discount,
within 30 days from the date of this prospectus to cover over-allotments. The
U.S. underwriters may similarly purchase up to an additional 2,390,625 shares
from us.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if this
prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.
The shares will be ready for delivery on or about , 2000.
-------------------
MERRILL LYNCH INTERNATIONAL
BANK OF AMERICA INTERNATIONAL LIMITED
CHASE H&Q
CREDIT SUISSE FIRST BOSTON
GOLDMAN SACHS INTERNATIONAL
MORGAN STANLEY DEAN WITTER
-------------------
The date of this prospectus is , 2000.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
--------
<S> <C>
Prospectus Summary.......................................... 1
Risk Factors................................................ 7
Special Note Regarding Forward-Looking Statements........... 12
Use of Proceeds............................................. 13
Dividend Policy............................................. 13
Capitalization.............................................. 14
Dilution.................................................... 15
Selected Consolidated Financial and Other Data.............. 16
Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 20
Business of Community Health Systems........................ 32
Management.................................................. 55
Principal Stockholders...................................... 65
Description of Indebtedness................................. 67
Description of Capital Stock................................ 69
Shares Eligible for Future Sale............................. 72
United States Federal Tax Considerations for Non-United
States Holders............................................ 73
Underwriting................................................ 77
Legal Matters............................................... 82
Experts..................................................... 82
Where You Can Find More Information......................... 82
Index to Consolidated Financial Statements.................. F-1
</TABLE>
i
<PAGE>
UNDERWRITING
We intend to offer the shares outside the U.S. and Canada through the
international managers and in the U.S. and Canada through the U.S. underwriters.
Merrill Lynch International, Bank of America International Limited, Chase
Manhattan International Limited, Credit Suisse First Boston (Europe) Limited,
Goldman Sachs International, and Morgan Stanley & Co. International Limited are
acting as lead managers for the international managers named below. Subject to
the terms and conditions described in an international purchase agreement
between us and the international managers, and concurrently with the sale of
15,937,500 shares to the U.S. underwriters, we have agreed to sell to the
international managers, and the international managers severally have agreed to
purchase from us, the number of shares listed opposite their names below.
<TABLE>
<CAPTION>
NUMBER
INTERNATIONAL MANAGER OF SHARES
- --------------------- ---------
<S> <C>
Merrill Lynch International.................................
Bank of America International Limited.......................
Chase Manhattan International Limited.......................
Credit Suisse First Boston (Europe) Limited.................
Goldman Sachs International.................................
Morgan Stanley & Co. International Limited..................
---------
Total............................................. 2,812,500
=========
</TABLE>
We have also entered into a U.S. purchase agreement with the U.S.
underwriters for sale of the shares in the U.S. and Canada for whom Merrill
Lynch, Pierce, Fenner & Smith Incorporated, Banc of America Securities LLC,
Chase Securities Inc., Credit Suisse First Boston Corporation, Goldman, Sachs &
Co., and Morgan Stanley & Co. Incorporated are acting as U.S. representatives.
Subject to the terms and conditions in the U.S. purchase agreement, and
concurrently with the sale of 2,812,500 shares to the pursuant to the
international purchase agreement, we have agreed to sell to the U.S.
underwriters, and U.S. underwriters severally have agreed to purchase 15,937,500
shares from us. The initial public offering price per share and the total
underwriting discount per share are identical under the international purchase
agreement and the U.S. purchase agreement.
The international managers and the U.S. underwriters have agreed to purchase
all of the shares sold under the international and U.S. purchase agreements if
any of these shares are purchased. If an underwriter defaults, the international
purchase agreements provide that the purchase commitments of the nondefaulting
underwriters may be increased or the purchase agreements may be terminated. The
closings for the sale of shares to be purchased by the international managers
and the U.S. underwriters are conditioned on one another.
We have agreed to indemnify the international managers and the U.S.
underwriters against certain liabilities, including liabilities under the
Securities Act, or to contribute to payments the international managers and U.S.
underwriters may be required to make in respect of those liabilities.
The underwriters are offering the shares, subject to prior sale, when, as,
and if issued to and accepted by them, subject to approval of legal matters by
their counsel, including the validity of the shares, and other conditions
contained in the purchase agreements, such as the receipt by the underwriters of
officer's certificates and legal opinions. The underwriters reserve the right to
withdraw, cancel or modify offers to the public and to reject orders in whole or
in part.
77
<PAGE>
COMMISSIONS AND DISCOUNTS
The lead managers have advised us that the international managers propose
initially to offer the shares to the public at the initial public offering price
on the cover page of this prospectus and to dealers at that price less a
concession not in excess of $ per share. The international managers may
allow, and the dealers may reallow, a discount not in excess of $ per
share to other dealers. After the initial public offering, the public offering
price, concession and discount may be changed.
The following table shows the public offering price, underwriting discount,
and proceeds before our expenses. The information assumes either no exercise or
full exercise by the international managers and the U.S. underwriters of their
over-allotment options.
<TABLE>
<CAPTION>
PER SHARE WITHOUT OPTION WITH OPTION
--------- -------------- -----------
<S> <C> <C> <C>
Public offering price.................... $ $ $
Underwriting discount.................... $ $ $
Proceeds before expenses to Community
Health Systems......................... $ $ $
</TABLE>
The expenses of the offering, not including the underwriting discount, are
estimated at $ and are payable by us.
OVER-ALLOTMENT OPTION
We have granted options to the international managers to purchase up to
421,875 additional shares at the public offering price less the underwriting
discount. The international managers may exercise these options for 30 days from
the date of this prospectus solely to cover any overallotments. If the
international managers exercise these options, each will be obligated, subject
to conditions contained in the purchase agreements, to purchase a number of
additional shares proportionate to that international managers initial amount
reflected in the above table.
We have also granted options to the U.S. underwriters, exercisable for
30 days from the date of this prospectus, to purchase up to 2,390,625 additional
shares to cover any over-allotments on terms similar to those granted to the
international managers.
INTERSYNDICATE AGREEMENT
The international managers and the U.S. underwrites have entered into an
intersyndicate agreement that provides for the coordination of their activities.
Under the intersyndicate agreement, the international managers and the U.S.
underwriters may sell shares to each other for purposes of resale at the initial
public offering price, less an amount not greater than the selling concession.
Under the intersyndicate agreement, the international managers and any dealer to
whom they sell shares will not offer to sell or sell shares to persons who are
U.S. or Canadian persons or to persons they believe intend to resell to persons
who are U.S. or Canadian persons, except in the case of transactions under the
intersyndicate agreement. Similarly, the U.S. underwriters and any dealer to
whom they sell shares will not offer to sell or sell shares to non-U.S. persons
or non-Canadian persons or to persons they believe intend to resell to non-U.S.
or non-Canadian persons, except in the case of transactions under the
intersyndicate agreement.
RESERVED SHARES
At our request, the underwriters have reserved for sale, at the initial
public offering price, up to 5% of the shares offered for sale in this offering
for sale to some of our directors, officers, employees, business associates, and
related persons. If these persons purchase reserved shares, this will reduce the
78
<PAGE>
number of shares available for sale to the general public. Any reserved shares
that are not orally confirmed for purchase within one day of the pricing of this
offering will be offered by the underwriters to the general public on the same
terms as the other shares offered by this prospectus.
NO SALES OF SIMILAR SECURITIES
We and our executive officers and directors and all existing stockholders
have agreed, with exceptions, not to sell or transfer any common stock for
180 days after the date of this prospectus without first obtaining the written
consent of Merrill Lynch. Specifically, we and these other individuals have
agreed not to directly or indirectly
- offer, pledge, sell, or contract to sell any common stock;
- sell any option or contract to purchase any common stock;
- purchase any option or contract to sell any common stock;
- grant any option, right, or warrant for the sale of any common stock;
- lend or otherwise dispose of or transfer any common stock;
- request or demand that we file a registration statement related to the
common stock; or
- enter into any swap or other agreement that transfers, in whole or in
part, the economic consequence of ownership of any common stock whether
any such swap or transaction is to be settled by delivery of shares or
other securities, in cash or otherwise.
This lockup provision applies to common stock and to securities convertible
into or exchangeable or exercisable for or repayable with common stock. It also
applies to common stock owned now or acquired later by the person executing the
agreement or for which the person executing the agreement later acquires the
power of disposition. This lockup provision does not limit our ability to grant
options to purchase common stock under stock option plans or to issue common
stock under our employee stock purchase plan.
NEW YORK STOCK EXCHANGE LISTING
The shares have been approved for listing on the New York Stock Exchange
under the symbol "CYH." In order to meet the requirements for listing on that
exchange, the international managers and the U.S. underwriters have undertaken
to sell a minimum number of shares to a minimum number of beneficial owners as
required by that exchange.
Before this offering, there has been no public market for our common stock.
The initial public offering price will be determined through negotiations among
us and the U.S. representatives and lead managers. In addition to prevailing
market conditions, the factors to be considered in determining the initial
public offering price are
- the valuation multiples of publicly traded companies that the U.S.
representatives and the lead managers believe to be comparable to us;
- our financial information;
- the history of, and the prospects for, our company and the industry in
which we compete;
- an assessment of our management, its past and present operations, and the
prospects for, and timing of, our future revenues;
- the present state of our development; and
79
<PAGE>
- the above factors in relation to market values and various valuation
measures of other companies engaged in activities similar to ours.
An active trading market for the shares may not develop. It is also possible
that after the offering the shares will not trade in the public market at or
above the initial public offering price.
The underwriters do not expect to sell more than 5% of the shares in the
aggregate to accounts over which they exercise discretionary authority.
PRICE STABILIZATION, SHORT POSITIONS AND PENALTY BIDS
Until the distribution of the shares is completed, SEC rules may limit
underwriters and selling group members from bidding for and purchasing our
common stock. However, the U.S. representatives and the lead managers may engage
in transactions that stabilize the price of the common stock, such as bids or
purchases to peg, fix, or maintain that price.
If the underwriters create a short position in the common stock in
connection with the offering, i.e., if they sell more shares than are listed on
the cover of this prospectus, the U.S. representatives and the lead managers may
reduce that short position by purchasing shares in the open market. The U.S.
representatives and the lead managers may also elect to reduce any short
position by exercising all or part of the over-allotment option described above.
Purchases of the common stock to stabilize its price or to reduce a short
position may cause the price of the common stock to be higher than it might be
in the absence of such purchases.
The U.S. representatives and the lead managers may also impose a penalty bid
on underwriters. This means that if the U.S. representatives and the lead
managers purchase shares in the open market to reduce the underwriter's short
position or to stabilize the price of such shares, they may reclaim the amount
of the selling concession from the underwriters who sold those shares. The
imposition of a penalty bid may also affect the price of the shares in that it
discourages resales of those shares.
Neither we nor any of the underwriters makes any representation or
prediction as to the direction or magnitude of any effect that the transactions
described above may have on the price of the common stock. In addition, neither
we nor any of the underwriters makes any representation that the U.S.
representatives or the lead managers will engage in these transactions or that
these transactions, once commenced, will not be discontinued without notice.
UK SELLING RESTRICTIONS
Each international manager has agreed that
- it has not offered or sold and will not offer or sell any shares of common
stock to persons in the United Kingdom, except to persons whose ordinary
activities involve them in acquiring, holding, managing, or disposing of
investments (as principal or agent) for the purposes of their businesses
or otherwise in circumstances which do not constitute an offer to the
public in the United Kingdom with the meaning of the Public Offers of
Securities Regulations 1995;
- it has complied and will comply with all applicable provisions of the
Financial Services Act 1986 with respect to anything done by it in
relation to the common stock in, from, or otherwise involving the United
Kingdom; and
- it has only issued or passed on and will only issue or pass on in the
United Kingdom any document received by it in connection with the issuance
of common stock to a person who is of a kind described in Article 11(3) of
the Financial Services Act 1986 (Investment Advertisements)(Exemptions)
Order 1996 as amended by the Financial Services Act of 1986 (Investment
Advertisements)(Exemptions) Order 1997 or is a person to whom such
document may otherwise lawfully be issued or passed on.
80
<PAGE>
NO PUBLIC OFFERING OUTSIDE THE UNITED STATES
No action has been or will be taken in any jurisdiction (except in the
United States) that would permit a public offering of the shares of common
stock, or the possession, circulation, or distribution of this prospectus or any
other material relating to our company, or shares of our common stock in any
jurisdiction where action for that purpose is required. Accordingly, the shares
of our common stock may not be offered or sold, directly or indirectly, and
neither this prospectus nor any other offering materials or advertisements in
connection with the shares of common stock may be distributed or published, in
or from any country or jurisdiction except in compliance with any applicable
rules and regulations or any such country or jurisdiction.
Purchasers or the shares offered by this prospectus may be required to pay
stamp taxes and other charges in accordance with the laws and practices of the
country of purchase in addition to the offering price on the cover page of this
prospects.
NASD REGULATIONS
It is anticipated that more than ten percent of the proceeds of the offering
will be applied to pay down debt obligations owed to affiliates of Chase
Securities Inc., Bank of America International Limited, Merrill Lynch
International, and Morgan Stanley & Co. International Limited. Because more than
ten percent of the net proceeds of the offering may be paid to members or
affiliates of members of the National Association of Securities Dealers, Inc.
participating in the offering, the offering will be conducted in accordance with
NASD Conduct Rule 2710(c)(8). This rule requires that the public offering price
of an equity security be no higher than the price recommended by a qualified
independent underwriter which has participated in the preparation of the
registration statement and performed its usual standard of due diligence with
respect to that registration statement. Merrill Lynch, Pierce, Fenner & Smith
Incorporated has agreed to act as qualified independent underwriter for the
offering. The price of the shares will be no higher than that recommended by
Merrill Lynch, Pierce, Fenner & Smith Incorporated.
OTHER RELATIONSHIPS
Some of the underwriters and their affiliates have engaged in, and may in
the future engage in, investment banking and other commercial dealings in the
ordinary course of business with us. They have received customary fees and
commissions for these transactions. In particular, an affiliate of Chase
Securities Inc. acts as an administrative agent for our credit facility and
affiliates of Chase Securities Inc., Banc of America Securities LLC, Merrill
Lynch, Pierce, Fenner & Smith Incorporated, and Morgan Stanley & Co.
Incorporated are lenders under our credit facility. Michael A. Miles, our
Chairman of the Board, is a director of Morgan Stanley Dean Witter and receives
customary compensation therefrom.
Merrill Lynch will be facilitating Internet distribution for this offering
to certain of its internet subscription customers. Merrill Lynch intends to
allocate a limited number of shares for sale to its online brokerage customers.
An electronic prospectus is available on the website maintained by Merrill
Lynch. Other than the prospectus in electronic format, the information on the
Merrill Lynch website relating to this offering is not a part of this
prospectus.
81
<PAGE>
LEGAL MATTERS
The validity of the shares of common stock offered by this prospectus will
be passed upon for us by Fried, Frank, Harris, Shriver & Jacobson (a partnership
including professional corporations), New York, New York. Certain legal matters
related to the offering will be passed upon for the underwriters by Debevoise &
Plimpton, New York, New York. Fried, Frank, Harris, Shriver & Jacobson has in
the past provided, and may continue to provide, legal services to Forstmann
Little and its affiliates.
EXPERTS
The consolidated financial statements as of December 31, 1998 and 1999 and
for each of the three years in the period ended December 31, 1999 included in
this prospectus and the related financial statement schedule included elsewhere
in the registration statement have been audited by Deloitte & Touche LLP,
independent auditors, as stated in their reports appearing herein and elsewhere
in the registration statement, and have been so included in reliance upon the
reports of such firm given upon their authority as experts in accounting and
auditing.
WHERE YOU CAN FIND MORE INFORMATION
We have filed with the Commission a registration statement on Form S-1,
which includes amendments, exhibits, schedules and supplements, under the
Securities Act and the rules and regulations under the Securities Act, for the
registration of the common stock offered by this prospectus. Although this
prospectus, which forms a part of the registration statement, contains all
material information included in the registration statement, parts of the
registration statement have been omitted from this prospectus as permitted by
the rules and regulations of the Commission. For further information with
respect to us and the common stock offered by this prospectus, please refer to
the registration statement. Statements contained in this prospectus as to the
contents of any contracts or other document referred to in this prospectus are
not necessarily complete and, where such contract or other document is an
exhibit to the registration statement, each such statement is qualified in all
respects by the provisions of such exhibit, to which reference is now made. The
registration statement can be inspected and copied at prescribed rates at the
public reference facilities maintained by the Commission at Room 1024, 450 Fifth
Street, N.W., Washington, D.C. 20549, and at the Commission's regional offices
at Seven World Trade Center, 13th Floor, New York, New York 10048 and
Northwestern Atrium Center, 500 West Madison Street, Suite 1400, Chicago,
Illinois 60661. The public may obtain information regarding the Washington, D.C.
Public Reference Room by calling the Commission at 1-800-SEC-0330. In addition,
the registration statement is publicly available through the Commission's site
on the Internet's World Wide Web, located at: http://www.sec.gov. Following the
offering, our future public filings are expected to be available for inspection
at the offices of the New York Stock Exchange, Inc., 20 Broad Street, New York,
New York 10005.
After the offering, we will be subject to the full informational
requirements of the Securities Exchange Act. To comply with these requirements,
we will file periodic reports, proxy statements and other information with the
Commission.
------------------------
You should rely only on the information contained in this prospectus. We
have not, and the underwriters have not, authorized anyone to provide you with
information different from that contained in this prospectus. If anyone provides
you with different information you should not rely on it. We are offering to
sell, and seeking offers to buy, shares of common stock only in jurisdictions
where offers and sales are permitted. The information contained in this
prospectus is accurate only as of the date of this prospectus regardless of the
time of delivery of this prospectus or of any sale of common stock. Our
business, financial condition, results of operations, and prospects may have
changed since that date.
82
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Through and including 2000 (the 25(th) day after the date of this
prospectus), all dealers effecting transactions in these securities, whether or
not participating in this offering, may be required to deliver a prospectus.
This is in addition to the dealers' obligation to deliver a prospectus when
acting as underwriters and with respect to their unsold allotments or
subscriptions.
18,750,000 SHARES
[LOGO]
COMMON STOCK
------------------
P R O S P E C T U S
------------------
MERRILL LYNCH INTERNATIONAL
BANK OF AMERICA INTERNATIONAL LIMITED
CHASE H&Q
CREDIT SUISSE FIRST BOSTON
GOLDMAN SACHS INTERNATIONAL
MORGAN STANLEY DEAN WITTER
, 2000
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the expenses expected to be incurred in
connection with the issuance and distribution of common stock registered hereby,
all of which expenses, except for the Securities and Exchange Commission
registrant fee, the National Association of Securities Dealers, Inc. filing fee,
and the New York Stock Exchange listing application fee, are estimated.
<TABLE>
<S> <C>
Securities and Exchange Commission registration fee......... $ 96,773
National Association of Securities Dealers, Inc. filing
fee....................................................... 30,500
New York Stock Exchange listing application fee............. 160,000
Printing and engraving fees and expenses.................... 675,000
Legal fees and expenses..................................... 1,050,000
Accounting fees and expenses................................ 1,350,000
Blue Sky fees and expenses.................................. 5,000
Transfer Agent and Registrar fees and expenses.............. 20,000
Miscellaneous expenses...................................... 362,727
----------
Total..................................................... $3,750,000
==========
</TABLE>
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Certificate of Incorporation and By-Laws provide that the directors and
officers of the Registrant shall be indemnified by the Registrant to the fullest
extent authorized by Delaware law, as it now exists or may in the future be
amended, against all expenses and liabilities reasonably incurred in connection
with service for or on behalf of the Registrant, except with respect to any
matter that such director or officer has been adjudicated not to have acted in
good faith or in the reasonable belief that his action was in the best interests
of the Registrant.
The Registrant has entered into agreements to indemnify its directors and
officers in addition to the indemnification provided for in the Certificate of
Incorporation and By-Laws. These agreements, among other things, indemnify
directors and officers of the Registrant to the fullest extent permitted by
Delaware law for certain expenses (including attorneys' fees), liabilities,
judgments, fines and settlement amounts incurred by such person arising out of
or in connection with such person's service as a director or officer of the
Registrant or an affiliate of the Registrant.
Policies of insurance are maintained by the Registrant under which its
directors and officers are insured, within the limits and subject to the
limitations of the policies, against certain expenses in connection with the
defense of, and certain liabilities which might be imposed as a result of,
actions, suits or proceedings to which they are parties by reason of being or
having been such directors or officers.
The form of Underwriting Agreement filed as Exhibit 1.1 hereto provides for
the indemnification of the registrant, its controlling persons, its directors
and certain of its officers by the underwriters against certain liabilities,
including liabilities under the Securities Act.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers or persons controlling the
Registrant pursuant to the foregoing provisions, the Registrant has been
informed that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Act and is
therefore unenforceable.
II-1
<PAGE>
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
During the three years preceding the filing of this registration statement,
the Registrant has not sold shares of its common stock without registration
under the Securities Act of 1933, except as described below.
During 1997, the Registrant sold an aggregate of 3,631 shares of its
Class B common stock to employees of the Registrant for an aggregate purchase
price of $1,310,317. During 1998, the Registrant sold an aggregate of 7,754
shares of its Class B common stock to employees of the Registrant for an
aggregate purchase price of $2,774,691.36. During 1999, the Registrant sold an
aggregate of 6,733 shares of its Class B common stock to employees of the
Registrant for an aggregate purchase price of $2,654,848. These issuances were
exempt from registration under the Securities Act pursuant to section 4(2)
thereof because they did not involve a public offering as the shares were
offered and sold only to a small group of employees.
Immediately before the closing of this offering, we will be recapitalized as
follows:
- each outstanding share of Class B common stock will be exchanged for .488
of a share of Class A common stock;
- each outstanding option to purchase a share of Class C common stock will
be exchanged for an option to purchase .750 of a share of Class A common
stock;
- the Class A common stock will be redesignated as common stock and adjusted
for a stock split on a 118.7148-for-1 basis; and
- the certificate of incorporation will be amended and restated to reflect a
single class of common stock, par value $.01 per share, and the number of
authorized shares of common stock and preferred stock will be increased.
Registration under the Securities Act will not be required in respect of
issuances pursuant to this recapitalization because they will be made
exclusively to existing holders of our securities and will not involve any
solicitation. Therefore, these issuances will be exempt from registration under
the Securities Act pursuant to section 3(a)(9) of the Securities Act.
No other sales of our securities have taken place within the last three
years.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits
The following exhibits are filed with this registration statement.
<TABLE>
<CAPTION>
NO. DESCRIPTION
- --- -----------
<C> <S>
1.1 Form of U.S. Purchase Agreement, by and among the
Registrant, CHS/Community Health Systems, Inc. and the
underwriters named therein.**
1.2 Form of International Purchase Agreement, by and among the
Registrant, CHS/Community Health Systems, Inc. and the
underwriters named therein.**
2.1 Agreement and Plan of Merger between the Registrant, FLCH
Acquisition Corp. and Community Health Systems, Inc. (now
known as CHS/Community Health Systems, Inc.), dated June 9,
1996*
3.1 Form of Restated Certificate of Incorporation of the
Registrant.*
3.2 Form of Restated By-laws of the Registrant.*
</TABLE>
II-2
<PAGE>
<TABLE>
<CAPTION>
NO. DESCRIPTION
- --- -----------
<C> <S>
4.1 Form of Common Stock Certificate.*
5.1 Opinion of Fried, Frank, Harris, Shriver & Jacobson.**
10.1 Form of outside director Stock Option Agreement.*
10.2 Form of Stockholder's Agreement between the Registrant and
outside directors.*
10.3 Form of Employee Stockholder's Agreement.*
10.4 The Registrant's Employee Stock Option Plan and form of
Stock Option Agreement.*
10.5 The Registrant's 2000 Stock Option and Award Plan.*
10.6 Form of Stockholder's Agreement between the Registrant and
employees.*
10.7 Registration Rights Agreement, dated July 9, 1996, among the
Registrant, FLCH Acquisition Corp., Forstmann Little & Co.
Equity Partnership--V, L.P. and Forstmann Little & Co.
Subordinated Debt and Equity Management Buyout
Partnership--VI, L.P.*
10.8 Form of Indemnification Agreement between the Registrant and
its directors and executive officers.*
10.9 Amended and Restated Credit Agreement, dated as of March 26,
1999, among Community Health Systems, Inc. (now known as
CHS/Community Health Systems, Inc.), the Registrant, certain
lenders, The Chase Manhattan Bank, as Administrative Agent,
and Nationsbank, N.A. and The Bank of Nova Scotia, as
Co-Agents.*
10.10 First Amendment, dated February 24, 2000, to the Amended and
Restated Credit Agreement, dated as of March 26, 1999, among
Community Health Systems, Inc. (now known as CHS/ Community
Health Systems, Inc.), the Registrant, certain lenders, The
Chase Manhattan Bank, as Administrative Agent, and
Nationsbank, N.A. and The Bank of Nova Scotia, as
Co-Agents.*
10.11 Form of Management Rights Letter between the Registrant and
the partnerships affiliated with Forstmann Little & Co.*
10.12 Form of Series A 7 1/2% Subordinated Debenture.*
10.13 Form of Series B 7 1/2% Subordinated Debenture.*
10.14 Form of Series C 7 1/2% Subordinated Debenture.*
10.15 Corporate Compliance Agreement between the Office of
Inspector General of the Department of Health and Human
Services and the Registrant.**
10.16 Tenet BuyPower Purchasing Assistance Agreement, dated
June 13, 1997, between Community Health Systems, Inc. and
Tenet HealthSystem Inc., Addendum, dated September 19, 1997
and First Amendment, dated March 15, 2000.*
10.17 The Registrant's 2000 Employee Stock Purchase Plan.*
10.18 Settlement Agreement between the United States of America,
the states of Illinois, New Mexico, South Carolina,
Tennessee, Texas, West Virginia and the Registrant.**
21 List of subsidiaries.*
23.1 Consent of Fried, Frank, Harris, Shriver & Jacobson
(included in the opinion filed as Exhibit 5.1).**
23.2 Consent of Deloitte & Touche LLP.**
</TABLE>
II-3
<PAGE>
<TABLE>
<CAPTION>
NO. DESCRIPTION
- --- -----------
<C> <S>
24 Powers of Attorney.*
27 Financial Data Schedule.*
</TABLE>
- ------------------------
* Previously filed.
** Filed herewith.
(b) Financial Statement Schedules
Auditors' Report on Schedule
Schedule II--Valuation and Qualifying Accounts
All schedules not identified above have been omitted because they are not
required, are not applicable or the information is included in the selected
consolidated financial data or notes contained in this Registration Statement.
ITEM 17. UNDERTAKINGS
(a) The undersigned registrant hereby undertakes to provide to the
underwriters at the closing specified in the underwriting agreement,
certificates in such denominations and registered in such names as required by
the underwriters to permit prompt delivery to each purchaser.
(b) Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Securities Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the registrant of expenses
incurred or paid by the director, officer or controlling person of the
registrant in the successful defense of any action, suit or proceeding) is
asserted by such director, officer or controlling person in connection with the
securities being registered, the registrant will, unless in the opinion of its
counsel the matter has been settled by controlling precedent, submit to a court
of appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Securities Act and will be governed by
the final adjudication of such issue.
(c) The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act,
the information omitted from the form of prospectus filed as part of
this registration statement in reliance upon Rule 430A and contained
in a form of prospectus filed by the registrant pursuant to
Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be
deemed to be part of this registration statement as of the time it
was declared effective.
(2) For the purpose of determining any liability under the Securities
Act, each post-effective amendment that contains a form of prospectus
shall be deemed to be a new registration statement relating to the
securities offered therein, and the offering of such securities at
that time shall be deemed to be the initial bona fide offering
thereof.
II-4
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this registration statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Brentwood, State of
Tennessee, on the 17th day of May, 2000.
<TABLE>
<S> <C> <C>
COMMUNITY HEALTH SYSTEMS, INC.
By: /s/ WAYNE T. SMITH
-----------------------------------------
Wayne T. Smith
President and Chief Executive Officer
</TABLE>
Pursuant to the requirements of the Securities Act of 1933, this Amendment
No. 3 to the registration statement has been signed below by the following
persons in the capacities indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ----------------------------------------------------- ------------------------------- --------------
<C> <S> <C>
/s/ WAYNE T. SMITH President and Chief Executive
------------------------------------------- Officer and Director May 17, 2000
Wayne T. Smith (principal executive officer)
* Executive Vice President and
------------------------------------------- Chief Financial Officer May 17, 2000
W. Larry Cash (principal financial officer)
Vice President and Corporate
* Controller
------------------------------------------- (principal accounting May 17, 2000
T. Mark Buford officer)
*
------------------------------------------- Director May 17, 2000
Sheila P. Burke
*
------------------------------------------- Director May 17, 2000
Robert J. Dole
*
------------------------------------------- Director May 17, 2000
J. Anthony Forstmann
*
------------------------------------------- Director May 17, 2000
Nicholas C. Forstmann
</TABLE>
II-5
<PAGE>
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ----------------------------------------------------- ------------------------------- --------------
<C> <S> <C>
*
------------------------------------------- Director May 17, 2000
Theodore J. Forstmann
*
------------------------------------------- Director May 17, 2000
Dale F. Frey
*
------------------------------------------- Director May 17, 2000
Sandra J. Horbach
*
------------------------------------------- Director May 17, 2000
Thomas H. Lister
*
------------------------------------------- Director May 17, 2000
Michael A. Miles
*
------------------------------------------- Director May 17, 2000
Samuel A. Nunn
*By: /s/ WAYNE T. SMITH
Wayne T. Smith
as Attorney-in-Fact
</TABLE>
II-6
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
Community Health Systems, Inc.
Brentwood, Tennessee
We have audited the consolidated financial statements of Community Health
Systems, Inc. (formerly Community Health Systems Holdings Corp.) and
subsidiaries as of December 31, 1998 and 1999, and for each of the three years
in the period ended December 31, 1999, and have issued our report thereon dated
February 25, 2000 (May , 2000 as to Notes 9, 10, 14 and a portion of Note 1)
(included elsewhere in this Registration Statement). Our audits also included
the consolidated financial statement schedule listed in Item 16 of this
Registration Statement. The consolidated financial statement schedule is the
responsibility of the Company's management. Our responsibility is to express an
opinion based on our audits. In our opinion, the consolidated financial
statement schedule, when considered in relation to the basic consolidated
financial statement taken as a whole, presents fairly in all material respects
the information set forth therein.
Nashville, Tennessee
February 25, 2000 (May , 2000 as to Notes 9, 10, 14 and a portion of Note 1)
The foregoing Report on Schedule is in the form which will be furnished by
Deloitte & Touche LLP upon completion of the recapitalization and exchange
described in Note 14 to the consolidated financial statements and assuming that
from December 31, 1999 to the date of such completion no other material events
have occurred that would affect the accompanying consolidated financial
statements or required disclosures therein.
/s/ Deloitte & Touche LLP
Nashville, Tennessee
February 25, 2000
<PAGE>
COMMUNITY HEALTH SYSTEMS, INC. AND SUBSIDIARIES
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
(IN THOUSANDS)
<TABLE>
<CAPTION>
BALANCE AT CHARGED TO BALANCE
BEGINNING COSTS AND AT END
DESCRIPTION OF YEAR EXPENSES WRITE-OFFS OF YEAR
----------- ---------- ---------- ---------- --------
<S> <C> <C> <C> <C>
Year ended December 31, 1999 allowance for
doubtful accounts......................... $ 28,771 $ 95,149 $ (89,421) $ 34,499
Year ended December 31, 1998 allowance for
doubtful accounts......................... 20,873 69,005 (61,107) 28,771
Year ended December 31, 1997 allowance for
doubtful accounts......................... 33,200 57,376 (69,703) 20,873
</TABLE>
S-1
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
NO. DESCRIPTION PAGE
- --------------------- ----------- --------
<C> <S> <C>
1.1 Form of U.S. Purchase Agreement, by and among the
Registrant, CHS/Community Health Systems, Inc. and the
underwriters named therein.**
1.2 Form of International Purchase Agreement, by and among the
Registrant, CHS/ Community Health Systems, Inc. and the
underwriters named therein.**
2.1 Agreement and Plan of Merger between the Registrant, FLCH
Acquisition Corp. and Community Health Systems, Inc. (now
known as CHS/Community Health Systems, Inc.) dated June 9,
1996*
3.1 Form of Restated Certificate of Incorporation of the
Registrant*
3.2 Form of Restated By-laws of the Registrant*
4.1 Form of Common Stock Certificate.*
5.1 Opinion of Fried, Frank, Harris, Shriver & Jacobson.**
10.1 Form of outside director Stock Option Agreement.*
10.2 Form of Stockholder's Agreement between the Registrant and
outside directors.*
10.3 Form of Employee Stockholder's Agreement.*
10.4 The Registrant's Employee Stock Option Plan and form of
Stock Option Agreement.*
10.5 The Registrant's 2000 Stock Option and Award Plan.*
10.6 Form of Stockholder's Agreement between the Registrant and
employees.*
10.7 Registration Rights Agreement, dated July 9, 1996, among the
Registrant, FLCH Acquisition Corp., Forstmann Little & Co.
Equity Partnership--V, L.P. and Forstmann Little & Co.
Subordinated Debt and Equity Management Buyout
Partnership--VI, L.P.*
10.8 Form of Indemnification Agreement between the Registrant and
its directors and executive officers.*
10.9 Amended and Restated Credit Agreement, dated as of March 26,
1999, among Community Health Systems, Inc. (now known as
CHS/Community Health Systems, Inc.), the Registrant, certain
lenders, The Chase Manhattan Bank, as Administrative Agent,
and Nationsbank, N.A. and The Bank of Nova Scotia, as
Co-Agents.*
10.10 First Amendment, dated February 24, 2000, to the Amended and
Restated Credit Agreement, dated as of March 26, 1999, among
Community Health Systems, Inc. (now known as CHS/Community
Health Systems, Inc.), the Registrant, certain lenders, The
Chase Manhattan Bank, as Administrative Agent, and
Nationsbank, N.A. and The Bank of Nova Scotia, as
Co-Agents.*
10.11 Form of Management Rights Letter between the Registrant and
the partnerships affiliated with Forstmann Little & Co.*
10.12 Form of Series A 7 1/2% Subordinated Debenture.*
10.13 Form of Series B 7 1/2% Subordinated Debenture.*
10.14 Form of Series C 7 1/2% Subordinated Debenture.*
10.15 Corporate Compliance Agreement between the Office of
Inspector General of the Department of Health and Human
Services and the Registrant.**
10.16 Tenet BuyPower Purchasing Assistance Agreement, dated
June 13, 1997, between Community Health Systems, Inc. and
Tenet HealthSystem Inc., Addendum, dated September 19, 1997
and First Amendment, dated March 15, 2000.*
10.17 The Registrant's 2000 Employee Stock Purchase Plan.*
10.18 Settlement Agreement between the United States of America,
the states of Illinois, New Mexico, South Carolina,
Tennessee, Texas, West Virginia and the Registrant.**
21 List of subsidiaries.*
23.1 Consent of Fried, Frank, Harris, Shriver & Jacobson
(included in the opinion filed as Exhibit 5.1).**
23.2 Consent of Deloitte & Touche LLP.**
24 Powers of Attorney.*
27 Financial Data Schedule.*
</TABLE>
- ------------------------
* Previously filed.
** Filed herewith.
<PAGE>
Draft -- April 19, 2000
==============================================================================
COMMUNITY HEALTH SYSTEMS, INC.
(a Delaware corporation)
o Shares of Common Stock
U.S. PURCHASE AGREEMENT
Dated: o, 2000
==============================================================================
<PAGE>
TABLE OF CONTENTS
U.S. PURCHASE AGREEMENT......................................................1
SECTION 1. Representations and Warranties...........................4
(a) Representations and Warranties by the Company............4
(b) Officer's Certificates..................................15
SECTION 2. Sale and Delivery to U.S. Underwriters; Closing.........15
(a) Initial Securities......................................15
(b) Option Securities.......................................15
(c) Payment.................................................16
(d) Denominations; Registration.............................16
SECTION 3. Covenants of the Company................................17
(a) Compliance with Securities Regulations and
Commission Requests.....................................17
(b) Filing of Amendments....................................17
(c) Delivery of Registration Statements.....................17
(d) Delivery of Prospectuses................................18
(e) Continued Compliance with Securities Laws...............18
(f) Blue Sky Qualifications.................................18
(g) Rule 158................................................19
(h) Use of Proceeds.........................................19
(i) Listing.................................................19
(j) Restriction on Sale of Securities.......................19
(k) Reporting Requirements..................................19
(l) Compliance with NASD Rules..............................20
(m) Compliance with Rule 463................................20
SECTION 4. Payment of Expenses.....................................20
(a) Expenses................................................20
(b) Termination of Agreement................................20
SECTION 5. Conditions of U.S. Underwriters' Obligations............21
(a) Effectiveness of Registration Statement.................21
(b) Opinion of Counsel for the Company......................21
(c) Opinion of Counsel for the U.S. Underwriters............21
(d) Officers' Certificate...................................21
(e) Accountant's Comfort Letter.............................22
(f) Bring-down Comfort Letter...............................22
(g) Approval of Listing.....................................22
(h) No Objection............................................22
(i) Lock-up Agreements......................................22
(j) Purchase of Initial International Securities............22
(k) Recapitalization........................................23
(l) Conditions to Purchase of U.S. Option Securities........23
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(m) Additional Documents....................................23
(n) Termination of Agreement................................24
SECTION 6. Indemnification.........................................24
(a) Indemnification of the U.S. Underwriters................24
(b) Indemnification of Company, Directors and Officers......25
(c) Actions against Parties; Notification...................26
(d) Settlement without Consent if Failure to Reimburse......26
(e) Indemnification for Reserved Securities.................26
SECTION 7. Contribution............................................27
SECTION 8. Representations, Warranties and Agreements to Survive
Delivery........................................................28
SECTION 9. Termination of Agreement................................28
(a) Termination; General....................................28
(b) Liabilities.............................................29
SECTION 10. Default by One or More of the U.S. Underwriters.........29
SECTION 11. Notices.................................................30
SECTION 12. Parties.................................................30
SECTION 13. GOVERNING LAW AND TIME..................................30
SECTION 14. Effect of Headings......................................30
SCHEDULES
Schedule A - List of Underwriters..........................Sch A-1
Schedule B - Pricing Information...........................Sch B-1
Schedule C - List of Persons subject to Lock-up............Sch C-1
ii
<PAGE>
EXHIBITS
Exhibit A-1 - Form of Opinion of Company's General Counsel....A-1-1
Exhibit A-2 - Form of Opinion of Fried, Frank, Harris, Shriver
& Jacobson......................................A-2-1
Exhibit B - Form of Lock-up Letter.............................B-1-1
iii
<PAGE>
COMMUNITY HEALTH SYSTEMS, INC.
(a Delaware corporation)
o Shares of Common Stock
(Par Value $.01 Per Share)
U.S. PURCHASE AGREEMENT
o, 2000
MERRILL LYNCH & CO.
Merrill Lynch, Pierce, Fenner & Smith
Incorporated
Banc of America Securities LLC
Chase Securities Inc.
Credit Suisse First Boston Corporation
Goldman, Sachs & Co.
Morgan Stanley & Co. Incorporated
as U.S. Representatives of the several U.S. Underwriters
c/o Merrill Lynch & Co.
Merrill Lynch, Pierce, Fenner & Smith
Incorporated
North Tower
World Financial Center
New York, New York 10281-1209
Ladies and Gentlemen:
Community Health Systems, Inc. (formerly known as Community Health Systems
Holding Corp.), a Delaware corporation (the "Company"), and CHS/Community Health
Systems, Inc. (formerly known as Community Health Systems, Inc.), a Delaware
corporation ("CHS"), confirm their agreement with Merrill Lynch & Co., Merrill
Lynch, Pierce, Fenner & Smith Incorporated ("Merrill Lynch") and each of the
other U.S. Underwriters named in Schedule A hereto (collectively, the "U.S.
Underwriters", which term shall also include any underwriter substituted as
hereinafter provided in Section 10 hereof), for whom Merrill Lynch, Banc of
America Securities LLC, Chase Securities Inc., Credit Suisse First Boston
Corporation, Goldman, Sachs & Co. and Morgan Stanley & Co. Incorporated are
acting as representatives (in such capacity, the "U.S. Representatives"), with
respect to the issue and sale by the Company and the purchase by the U.S.
Underwriters, acting severally and not jointly, of the respective numbers of
shares of Common Stock, par value $.01 per share, of the Company ("Common
Stock") set forth in said Schedule A, and with respect to the grant by the
Company to the U.S. Underwriters, acting severally and not jointly, of the
option described in Section 2(b) hereof to purchase all or any part
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of up to o additional shares of Common Stock to cover over-allotments, if any.
The aforesaid o shares of Common Stock (the "Initial U.S. Securities") to be
purchased by the U.S. Underwriters and all or any part of the o shares of Common
Stock subject to the option described in Section 2(b) hereof (the "U.S. Option
Securities") are hereinafter called, collectively, the "U.S. Securities".
It is understood that the Company and CHS are concurrently entering into
an agreement dated the date hereof (the "International Purchase Agreement")
providing for the offering by the Company of an aggregate of o shares of Common
Stock (the "Initial International Securities") through arrangements with certain
underwriters outside the United States and Canada (the "International Managers")
for which Merrill Lynch International, Bank of America International Limited,
Chase Securities Inc., Credit Suisse First Boston (Europe) Limited, Goldman
Sachs International and Morgan Stanley & Co. International Limited are acting as
lead managers (the "Lead Managers") and the grant by the Company to the
International Managers, acting severally and not jointly, of an option to
purchase all or any part of the International Managers' pro rata portion of up
to o additional shares of Common Stock solely to cover overallotments, if any
(the "International Option Securities" and, together with the U.S. Option
Securities, the "Option Securities"). The Initial International Securities and
the International Option Securities are hereinafter called the "International
Securities". It is understood that the Company is not obligated to sell, and the
U.S. Underwriters are not obligated to purchase, any Initial U.S. Securities
unless all of the Initial International Securities are contemporaneously
purchased by the International Managers.
The U.S. Underwriters and the International Managers are hereinafter
collectively called the "Underwriters", the Initial U.S. Securities and the
Initial International Securities are hereinafter collectively called the
"Initial Securities", and the U.S. Securities and the International Securities
are hereinafter collectively called the "Securities".
The Underwriters will concurrently enter into an Intersyndicate Agreement
dated the date hereof (the "Intersyndicate Agreement") providing for the
coordination of certain transactions among the Underwriters under the direction
of Merrill Lynch (in such capacity, the "Global Coordinator").
The Company and CHS understand that the U.S. Underwriters propose to make
a public offering of the U.S. Securities as soon as the U.S. Representatives
deem advisable after this Agreement has been executed and delivered.
The Company, CHS and the U.S. Underwriters agree that up to ! shares of
the Initial U.S. Securities to be purchased by the U.S. Underwriters and that up
to ! shares of the Initial International Securities to be purchased by the
International Managers (collectively, the "Reserved Securities") shall be
reserved for sale by the Underwriters to some of the Company's directors,
officers, employees, business associates and related persons (collectively,
"Eligible Persons"), as part of the distribution of the Securities by the
Underwriters, subject to the terms of this Agreement, the International Purchase
Agreement, the applicable rules, regulations and
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<PAGE>
interpretations of the National Association of Securities Dealers, Inc. (the
"NASD"), the 1933 Act (as defined below), the 1933 Act Regulations (as defined
below) and all other applicable laws, rules and regulations. To the extent that
such Reserved Securities are not orally confirmed for purchase by such Eligible
Persons by the end of the first business day after the date of this Agreement,
such Reserved Securities may be offered to the public as part of the public
offering contemplated hereby.
The Company has filed with the Securities and Exchange Commission (the
"Commission") a registration statement on Form S-1 (No. 333-M) covering the
registration of the Securities under the Securities Act of 1933, as amended (the
"1933 Act"), including the related preliminary prospectus or prospectuses.
Promptly after execution and delivery of this Agreement, the Company will
prepare and file a prospectus in accordance with the provisions of Rule 430A
("Rule 430A") of the rules and regulations of the Commission under the 1933 Act
(the "1933 Act Regulations") and paragraph (b) of Rule 424 ("Rule 424(b)") of
the 1933 Act Regulations. Two forms of prospectus are to be used in connection
with the offering and sale of the Securities: one relating to the U.S.
Securities (the "Form of U.S. Prospectus") and one relating to the International
Securities (the "Form of International Prospectus"). The Form of International
Prospectus is identical to the Form of U.S. Prospectus, except for the front
cover and back cover pages and the information under the caption "Underwriting."
The information included in any such prospectus that was omitted from such
registration statement at the time it became effective but that is deemed to be
part of such registration statement at the time it became effective pursuant to
paragraph (b) of Rule 430A is referred to as "Rule 430A Information." Each Form
of U.S. Prospectus and Form of International Prospectus used before such
registration statement became effective, and any prospectus that omitted the
Rule 430A Information that was used after such effectiveness and prior to the
execution and delivery of this Agreement, is herein called a "preliminary
prospectus." Such registration statement, including the exhibits thereto and
schedules thereto at the time it became effective and including the Rule 430A
Information, is herein called the "Registration Statement." Any registration
statement filed pursuant to Rule 462(b) of the 1933 Act Regulations is herein
referred to as the "Rule 462(b) Registration Statement," and after such filing
the term "Registration Statement" shall include the Rule 462(b) Registration
Statement. The final Form of U.S. Prospectus and the final Form of International
Prospectus in the forms first furnished to the Underwriters for use in
connection with the offering of the Securities are herein called the "U.S.
Prospectus" and the "International Prospectus," respectively, and collectively,
the "Prospectuses." For purposes of this Agreement, all references to the
Registration Statement, any preliminary prospectus, the U.S. Prospectus, the
International Prospectus or any amendment or supplement to any of the foregoing
shall be deemed to include the copy filed with the Commission pursuant to its
Electronic Data Gathering, Analysis and Retrieval system ("EDGAR").
Immediately prior to the consummation of the offering of the Securities,
(i) each outstanding share of the Company's Class B common stock will be
exchanged pursuant to the Company's certificate of incorporation for o
shares of the Company's Class A common stock; (ii) each outstanding option to
purchase a share of the Company's Class C common stock will be exchanged for an
option to purchase o shares of the Company's Class A common stock; (iii) the
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<PAGE>
Class A common stock will be redesignated as Common Stock; (iv) the Company will
effect a o-for-o stock split with respect to the Common Stock; and (v) the
Company's certificate of incorporation will be amended and restated to reflect a
single class of common stock (which is the Common Stock), and to increase the
number of authorized shares of Common Stock and preferred stock (collectively,
(i) through (v) are referred to as the "Recapitalization").
SECTION 1. REPRESENTATIONS AND WARRANTIES.
(a) REPRESENTATIONS AND WARRANTIES BY THE COMPANY. The Company and CHS
represent and warrant to each U.S. Underwriter as of the date hereof, as of the
Closing Time referred to in Section 2(c) hereof, and if any U.S. Option
Securities are purchased, as of each Date of Delivery referred to in Section
2(b) hereof, and agrees with each U.S. Underwriter, as follows:
(i) COMPLIANCE WITH REGISTRATION REQUIREMENTS. Each of the
Registration Statement and any Rule 462(b) Registration Statement has
become effective under the 1933 Act and no stop order suspending the
effectiveness of the Registration Statement or any Rule 462(b)
Registration Statement has been issued under the 1933 Act and no
proceedings for that purpose have been instituted or are pending or, to
the knowledge of the Company, are contemplated by the Commission, and any
request on the part of the Commission for additional information has been
complied with in all material respects.
At the respective times the Registration Statement, any Rule 462(b)
Registration Statement and any post-effective amendments thereto became
effective and at the Closing Time (and, if any U.S. Option Securities are
purchased, at the Date of Delivery), the Registration Statement, the Rule
462(b) Registration Statement and any amendments and supplements thereto
complied and will comply in all material respects with the requirements of
the 1933 Act and the 1933 Act Regulations and did not and will not contain
an untrue statement of a material fact or omit to state a material fact
required to be stated therein or necessary to make the statements therein
not misleading, and the Prospectuses, any preliminary prospectuses and any
supplement thereto or prospectus wrapper prepared in connection therewith,
at their respective times of issuance and at the Closing Time, complied
and will comply in all material respects with any applicable laws or
regulations of foreign jurisdictions in which the Prospectuses and such
preliminary prospectuses, as amended or supplemented, if applicable, are
distributed in connection with the offer and sale of Reserved Securities.
Neither of the Prospectuses nor any amendments or supplements thereto
(including any prospectus wrapper), at the time the Prospectuses or any
amendments or supplements thereto were issued and at the Closing Time
(and, if any U.S. Option Securities are purchased, at each Date of
Delivery), included or will include an untrue statement of a material fact
or omitted or will omit to state a material fact necessary in order to
make the statements therein, in the light of the circumstances under which
they were made, not misleading. The representations and warranties in this
subsection shall not apply to statements in or omissions from the
Registration Statement or the U.S. Prospectus made in reliance upon and in
conformity
4
<PAGE>
with information furnished to the Company in writing by any U.S.
Underwriter through the U.S. Representative expressly for use in the
Registration Statement or the U.S. Prospectus.
Each preliminary prospectus and the prospectuses filed as part of
the Registration Statement as originally filed or as part of any amendment
thereto, or filed pursuant to Rule 424 under the 1933 Act, complied when
so filed in all material respects with the 1933 Act Regulations and each
preliminary prospectus and the Prospectuses delivered to the Underwriters
for use in connection with this offering was identical to the
electronically transmitted copies thereof filed with the Commission
pursuant to EDGAR, except to the extent permitted by Regulation S-T.
(ii) INDEPENDENT ACCOUNTANTS. The accountants who certified the
financial statements and supporting schedules included in the Registration
Statement are independent public accountants as required by the 1933 Act
and the 1933 Act Regulations.
(iii) FINANCIAL STATEMENTS. The consolidated financial statements
included in the Registration Statement and the Prospectuses, together with
the related schedules and notes, present fairly, in all material respects,
the financial position of the Company and its consolidated subsidiaries at
the dates indicated and the statement of operations, stockholders' equity
and cash flows of the Company and its consolidated subsidiaries for the
periods specified; said financial statements have been prepared in
conformity with generally accepted accounting principles ("GAAP") applied,
except as set forth in the notes to the financial statements, on a
consistent basis throughout the periods involved. The supporting schedules
included in the Registration Statement present fairly, in all material
respects, in accordance with GAAP the information required to be stated
therein. The selected consolidated financial and other data and the
summary consolidated financial and other data included in the Prospectuses
present fairly, in all material respects, the information shown therein
and have been compiled on a basis consistent with that of the audited
consolidated financial statements included in the Registration Statement.
The pro forma financial information included in the Registration Statement
and the Prospectuses present fairly, in all material respects, the
information shown therein, and have been properly compiled on the bases
described therein, and the assumptions used in the preparation thereof are
reasonable and the adjustments used therein are appropriate to give effect
to the transactions and circumstances referred to therein.
(iv) NO MATERIAL ADVERSE CHANGE IN BUSINESS. Since the respective
dates as of which information is given in the Registration Statement and
the Prospectuses, except as otherwise stated therein, (A) there has been
no material adverse change in the condition, financial or otherwise, or in
the earnings, business affairs or business prospects of the Company and
its subsidiaries considered as one enterprise, whether or not arising in
the ordinary course of business (a "Material Adverse Effect"), (B) there
have been no transactions entered into by the Company or any of its
subsidiaries, other than those in the ordinary course of business, which
are material with respect to the Company and its
5
<PAGE>
subsidiaries considered as one enterprise, and (C) there has been no
dividend or distribution of any kind declared, paid or made by the Company
on any class of its capital stock.
(v) GOOD STANDING OF THE COMPANY. The Company has been duly
organized and is validly existing as a corporation in good standing under
the laws of the State of Delaware and has corporate power and authority to
own, lease and operate its properties and to conduct its business as
described in the Prospectuses and to enter into and perform its
obligations under this Agreement; and the Company is duly qualified as a
foreign corporation to transact business and is in good standing in each
other jurisdiction in which such qualification is required, whether by
reason of the ownership or leasing of property or the conduct of business,
except where the failure so to qualify or to be in good standing could not
result in a Material Adverse Effect.
(vi) GOOD STANDING OF SUBSIDIARIES. (A) Each "significant
subsidiary" of the Company (as such term is defined in Rule 1-02 of
Regulation S-X) and CHS, Community Health Investment Corporation, CHS
Professional Service Corporation and Hallmark Healthcare Corporation and
each other subsidiary which is a hospital holding company or an operating
hospital (each a "Subsidiary" and, collectively, the "Subsidiaries") has
been duly organized and is validly existing as a corporation in good
standing under the laws of the jurisdiction of its incorporation, has
corporate power and authority to own, lease and operate its properties and
to conduct its business as described in the Prospectuses and is duly
qualified as a foreign corporation to transact business and is in good
standing in each jurisdiction in which such qualification is required,
whether by reason of the ownership or leasing of property or the conduct
of business, except where the failure so to qualify or to be in good
standing would not reasonably be expected to result in a Material Adverse
Effect. Except as otherwise disclosed in Exhibit 21 to the Registration
Statement, all of the issued and outstanding capital stock of each such
Subsidiary has been duly authorized and validly issued, is fully paid and
non-assessable and is owned by the Company, directly or through
subsidiaries, free and clear of any security interest, mortgage, pledge,
lien, encumbrance, claim or equity and none of the outstanding shares of
capital stock of any Subsidiary was issued in violation of the preemptive
or similar rights of any securityholder of such Subsidiary. The only
subsidiaries of the Company are (a) the subsidiaries listed on Exhibit 21
to the Registration Statement and (b) certain other subsidiaries which,
considered in the aggregate as a single Subsidiary, do not constitute a
"significant subsidiary" as defined in Rule 1-02 of Regulation S-X.
(B) Except to the extent disclosed in Exhibit 21 to the Registration
Statement, each of the hospitals described in the Prospectuses as owned or
leased by the Company is owned or leased and operated by a Subsidiary of
which the Company directly or indirectly owns 100% of the outstanding
ownership interests. Except as disclosed in the Prospectuses, there are no
encumbrances or restrictions on the ability of any Subsidiary (i) to pay
any dividends or make any distributions on such Subsidiary's capital
stock, (ii) to make any loans or
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advances to, or investments in, the Company, CHS or any other Subsidiary,
or (iii) to transfer any of its property or assets to the Company, CHS or
any other Subsidiary.
(vii) CAPITALIZATION. The authorized, issued and outstanding capital
stock of the Company is as set forth in the Prospectuses in the column
entitled "Actual" under the caption "Capitalization" (except for
subsequent issuances, if any, pursuant to this Agreement, pursuant to
reservations, agreements or employee benefit plans referred to in the
Prospectuses or pursuant to the exercise of convertible securities or
options referred to in the Prospectuses). The shares of issued and
outstanding capital stock of the Company have been duly authorized and
validly issued and are fully paid and non-assessable; none of the
outstanding shares of capital stock of the Company was issued in violation
of the preemptive or other similar rights of any securityholder of the
Company. The shares of issued and outstanding capital stock of the Company
have been issued in compliance, in all material respects, with all federal
and state securities laws. Except as disclosed in the Prospectuses, there
are no outstanding options or warrants to purchase, or any preemptive
rights or other rights to subscribe for or to purchase, any securities or
obligations convertible into, or any contracts or commitments to issue or
sell, shares of the Company=s capital stock or any such options, warrants,
rights, convertible securities or obligations. The description of the
Company=s stock option and purchase plans and the options or other rights
granted and exercised thereunder set forth in the Prospectuses accurately
and fairly describe, in all material respects, the information required to
be shown with respect to such plans, arrangements, options and rights.
(viii) AUTHORIZATION OF AGREEMENT. This Agreement and the
International Purchase Agreement have been duly authorized, executed and
delivered by the Company.
(ix) AUTHORIZATION AND DESCRIPTION OF SECURITIES. The Securities to
be purchased by the U.S. Underwriters and the International Managers from
the Company have been duly authorized for issuance and sale to the U.S.
Underwriters pursuant to this Agreement and the International Managers
pursuant to the International Purchase Agreement, respectively, and, when
issued and delivered by the Company pursuant to this Agreement and the
International Purchase Agreement, respectively, against payment of the
consideration set forth herein and the International Purchase Agreement,
respectively, will be validly issued, fully paid and non-assessable; the
Common Stock conforms, in all material respects, to all statements
relating thereto contained in the Prospectuses and such description
conforms to the rights set forth in the Company's Restated Certificate of
Incorporation to be in effect following this offering, no holder of the
Securities will be subject to personal liability by reason of being such a
holder; and the issuance of the Securities is not subject to the
preemptive or other similar rights of any securityholder of the Company.
(x) The consummation of the Recapitalization has been duly
authorized by the Company's board of directors and security holders, and
no other corporate proceedings on the part of the Company are needed to
authorize the Recapitalization.
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(xi) ABSENCE OF DEFAULTS AND CONFLICTS. Neither the Company nor any
of its subsidiaries is in violation of its charter or by-laws or in
default in the performance or observance of any obligation, agreement,
covenant or condition contained in any contract, indenture, mortgage, deed
of trust, loan or credit agreement, note, lease or other agreement or
instrument to which the Company or any of its subsidiaries is a party or
by which it or any of them may be bound, or to which any of the property
or assets of the Company or any subsidiary is subject (collectively,
"Agreements and Instruments"), except for such defaults under Agreements
and Instruments that would not reasonably be expected to result in a
Material Adverse Effect; and the execution, delivery and performance of
this Agreement and the International Purchase Agreement and the
consummation of the transactions contemplated in this Agreement, the
International Purchase Agreement and in the Registration Statement
(including the issuance and sale of the Securities and the use of the
proceeds from the sale of the Securities as described in the Prospectuses
under the caption "Use of Proceeds" and the completion of the
Recapitalization) and compliance by the Company and CHS with their
obligations under this Agreement and the International Purchase Agreement
have been duly authorized by all necessary corporate action and, after
giving effect to the use of proceeds as contemplated in the Prospectuses
under the caption "Use of Proceeds," do not and will not, whether with or
without the giving of notice or passage of time or both, conflict with or
constitute a breach of, or default or Repayment Event (as defined below)
under, or result in the creation or imposition of any lien, charge or
encumbrance upon any property or assets of the Company, CHS or any of
their subsidiaries pursuant to, the Agreements and Instruments (except for
such conflicts, breaches or defaults or liens, charges or encumbrances
that would not reasonably be expected to result in a Material Adverse
Effect), nor will such action result in any violation of the provisions of
the charter or by-laws of the Company, CHS or any of their subsidiaries
or, any applicable law, statute, rule, regulation, judgment, order, writ
or decree of any government, government instrumentality or court, domestic
or foreign, having jurisdiction over the Company, CHS or any of their
subsidiaries or any of their assets, properties or operations. As used
herein, a "Repayment Event" means any event or condition which gives the
holder of any note, debenture or other evidence of indebtedness (or any
person acting on such holder's behalf) the right to require the
repurchase, redemption or repayment of all or a portion of such
indebtedness by the Company, CHS or any of their subsidiaries.
(xii) ABSENCE OF LABOR DISPUTE. No material labor dispute with the
employees of the Company, CHS or any of their subsidiaries exists or, to
the knowledge of the Company or CHS, is imminent, and neither the Company
nor CHS is aware of any existing or imminent labor disturbance by the
employees of any of their or any of their subsidiaries' principal
suppliers or contractors, which would reasonably be expected to result in
a Material Adverse Effect.
(xiii) ABSENCE OF PROCEEDINGS. There is no action, suit, proceeding,
inquiry or investigation before or brought by any court or governmental
agency or body, domestic or foreign, now pending (other than any sealed
"qui tam" actions of which neither the
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Company nor CHS has any knowledge), or, to the knowledge of the Company or
CHS, threatened, against or affecting the Company, CHS or any of their
subsidiaries, which is required to be disclosed in the Registration
Statement (other than as disclosed therein), or which would reasonably be
expected to result in a Material Adverse Effect, or which could materially
and adversely affect the properties or assets thereof or the consummation
of the transactions contemplated in this Agreement and the International
Purchase Agreement or the Recapitalization, or the performance by the
Company or CHS of their obligations hereunder or thereunder; the aggregate
of all pending legal or governmental proceedings to which the Company, CHS
or any of their subsidiaries is a party or of which any of their
respective property or assets is the subject which are not described in
the Registration Statement, including ordinary routine litigation
incidental to the business, would not reasonably be expected to result in
a Material Adverse Effect.
(xiv) ACCURACY OF EXHIBITS. There are no contracts or documents
which are required to be described in the Registration Statement or the
Prospectuses or to be filed as exhibits to the Registration Statement
which have not been so described and/or filed as required.
(xv) POSSESSION OF INTELLECTUAL PROPERTY. The Company, CHS and their
subsidiaries own or possess, or can acquire on reasonable terms, adequate
patents, patent rights, licenses, inventions, copyrights, know-how
(including trade secrets and other unpatented and/or unpatentable
proprietary or confidential information, systems or procedures),
trademarks, service marks, trade names or other intellectual property
(collectively, "Intellectual Property") necessary to carry on in all
material respects the business now operated by them, and none of the
Company, CHS or any of their subsidiaries has received any notice or is
otherwise aware of any infringement of or conflict with asserted rights of
others with respect to any Intellectual Property or of any facts or
circumstances which could render any Intellectual Property invalid or
inadequate to protect the interest of the Company, CHS or any of their
subsidiaries therein, except for such infringements or conflicts (if the
subject of any unfavorable decision, ruling or finding) or invalidities or
inadequacies which would not, singly or in the aggregate, reasonably be
expected to result in a Material Adverse Effect.
(xvi) ABSENCE OF FURTHER REQUIREMENTS. No filing with, or
authorization, approval, consent, license, order, registration,
qualification or decree of, any court or governmental authority or agency
is necessary or required for the performance by the Company or CHS of
their obligations hereunder, in connection with the offering, issuance or
sale of the Securities under this Agreement and the International Purchase
Agreement, the consummation of the Recapitalization or the transactions
contemplated by this Agreement and the International Purchase Agreement,
except (i) such as have been already obtained or as may be required under
the 1933 Act or the 1933 Act Regulations and foreign or state securities
or blue sky laws and (ii) such as have been obtained under the laws and
regulations of jurisdictions outside the United States in which the
Reserved Securities are offered.
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(xvii) POSSESSION OF LICENSES AND PERMITS. The Company, CHS and
their subsidiaries possess such permits, licenses, provider numbers,
certificates, approvals (including, without limitation, certificate of
need approvals), consents, orders, certifications (including, without
limitation, certification under the Medicare and Medicaid programs),
accreditations (including, without limitation, accreditation by the Joint
Commission on Accreditation of Healthcare Organizations) and other
authorizations (collectively, "Governmental Licenses") issued by, and have
made all declarations and filings with, the appropriate federal, state,
local or foreign regulatory agencies or bodies necessary to conduct the
business now operated by them (including, without limitation, Governmental
Licenses as are required (i) under such federal and state healthcare laws
as are applicable to the Company, CHS and their subsidiaries and (ii) with
respect to those facilities operated by the Company, CHS or any of their
subsidiaries that participate in the Medicare and/or Medicaid programs, to
receive reimbursement thereunder), except where the failure to poses such
Government Licenses or to make such declarations and filings would not
reasonably be expected to result in a Material Adverse Effect; the
Company, CHS and their subsidiaries are in compliance with the terms and
conditions of all such Governmental Licenses, except where the failure so
to comply would not, singly or in the aggregate, reasonably be expected to
result in a Material Adverse Effect; all of the Governmental Licenses are
valid and in full force and effect, except when the invalidity of such
Governmental Licenses or the failure of such Governmental Licenses to be
in full force and effect would not reasonably be expected to result in a
Material Adverse Effect; and none of the Company, CHS or any of their
subsidiaries has received any notice of proceedings relating to the
revocation or modification of any such Governmental Licenses which, singly
or in the aggregate, if the subject of an unfavorable decision, ruling or
finding, would reasonably be expected to result in a Material Adverse
Effect. All of the hospitals operated by the Company, CHS and their
subsidiaries are "providers of services" as defined in the Social Security
Act and the regulations promulgated thereunder and are eligible to
participate in the Medicare and Medicaid programs (it being understood
that this representation and warranty is to the best of the Company's and
CHS's knowledge with respect to the five hospitals acquired by the Company
since September 1, 1999).
(xviii) ACCOUNTS RECEIVABLE. The accounts receivable of the Company,
CHS and their subsidiaries have been and will continue to be adjusted to
reflect material changes in the reimbursement policies of third party
payors such as Medicare, Medicaid, private insurance companies, health
maintenance organizations, preferred provider organizations, managed care
systems and other third party payors (including, without limitation, Blue
Cross plans). The accounts receivable, after giving effect to the
allowance for doubtful accounts, relating to such third party payors do
not and shall not materially exceed amounts the Company, CHS and their
subsidiaries are entitled to receive.
(xix) COMPLIANCE WITH SOCIAL SECURITY ACT AND OTHER FEDERAL
ENFORCEMENT INITIATIVES. Neither the Company and CHS nor, to the knowledge
of the Company and CHS, any officers, directors or stockholders, employees
or other agents of the Company, CHS or any of their subsidiaries or the
hospitals operated by them, has engaged in any
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activities which are prohibited under Federal Medicare and Medicaid
statutes including, but not limited to, 42 U.S.C. " 1320a-7 (Program
Exclusion), 1320a-7a (Civil Monetary Penalties), 1320a-7b (the
Anti-kickback Statute), 42 U.S.C. ' 1395nn and 1396b (the "Stark" law,
prohibiting certain self-referrals), or any other federal law, including,
but not limited to, the federal TRICARE statute, 10 U.S.C. '1071 ET SEQ.,
the Federal Civil False Claims Act, 31 U.S.C. " 3729-32, Federal Criminal
False Claims Act, 18 U.S.C. ' 287, False Statements Relating to Health
Care Matters, 18 U.S.C. ' 1035, Health Care Fraud, 18 U.S.C. ' 1347, or
the federal Food, Drug & Cosmetics Act, 21 U.S.C. ' 360aaa, or any
regulations promulgated pursuant to such statutes, or related state or
local statutes or regulations or any rules of professional conduct,
including but not limited to the following: (i) knowingly and willfully
making or causing to be made a false statement or representation of a
material fact in any applications for any benefit or payment under the
Medicare or Medicaid program or from any third party (where applicable
federal or state law prohibits such payments to third parties); (ii)
knowingly and willfully making or causing to be made any false statement
or representation of a material fact for use in determining rights to any
benefit or payment under the Medicare or Medicaid program or from any
third party (where applicable federal or state law prohibits such payments
to third parties); (iii) failing to disclose knowledge by a claimant of
the occurrence of any event affecting the initial or continued right to
any benefit or payment under the Medicare or Medicaid program or from any
third party (where applicable federal or state law prohibits such payments
to third parties) on its own behalf or on behalf of another, with intent
to secure such benefit or payment fraudulently; (iv) knowingly and
willfully offering, paying, soliciting or receiving any remuneration
(including any kickback, bribe or rebate), directly or indirectly, overtly
or covertly, in cash or in kind (a) in return for referring an individual
to a Person for the furnishing or arranging for the furnishing of any item
or service for which payment may be made in whole or in part by Medicare
or Medicaid or any third party (where applicable federal or state law
prohibits such payments to third parties), or (b) in return for
purchasing, leasing or ordering or arranging for or recommending the
purchasing, leasing or ordering of any good, facility, service, or item
for which payment may be made in whole or in part by Medicare or Medicaid
or any third party (where applicable federal or state law prohibits such
payments to third parties); (v) knowingly and willfully referring an
individual to a person with which they have ownership or certain other
financial arrangements (where applicable federal law prohibits such
referrals); and (vi) knowingly and willfully violating any enforcement
initiative instituted by any governmental agency (including, without
limitation, the Office of the Inspector General and the Department of
Justice), except for any such activities which are specifically described
in the Prospectus or which would not, singly or in the aggregate,
reasonably be expected to result in a Material Adverse Effect.
(xx) REGULATORY FILINGS. None of the Company, CHS or any of their
subsidiaries or any of the hospitals operated by any of them has failed to
file with applicable regulatory authorities any statement, report,
information or form required by any applicable law, regulation or order,
except where the failure to be so in compliance could not, individually or
in the aggregate, have a Material Adverse Effect. Except as described in
the
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Prospectus, all such filings or submissions were in compliance with
applicable laws when filed and no deficiencies have been asserted by any
regulatory commission, agency or authority with respect to any such
filings or submissions, except for any such failures to be in compliance
or deficiencies which would not, singly or in the aggregate, reasonably be
expected to have a Material Adverse Effect.
(xxi) TITLE TO PROPERTY. The Company, CHS and their subsidiaries
have good and marketable title to all real property owned by them and good
title to all other properties owned by them, in each case, free and clear
of all mortgages, pledges, liens, security interests, claims, restrictions
or encumbrances of any kind except such as (a) are described in the
Prospectuses or (b) do not, singly or in the aggregate, in a manner that
would reasonably be expected to result in a Material Adverse Effect,
affect the value of such property or interfere with the use made or
proposed to be made of such property by the Company, CHS or any of their
subsidiaries; and all of the leases and subleases of the Company and their
subsidiaries, considered as one enterprise, and under which the Company,
CHS or any of their subsidiaries holds properties described in the
Prospectuses, are in full force and effect, and none of the Company, CHS
or any of their subsidiaries has any notice of any claim of any sort that
has been asserted by anyone adverse to the rights of the Company, CHS or
any of their subsidiaries under any of the leases or subleases mentioned
above, or affecting or questioning the rights of the Company, CHS or such
subsidiary to the continued possession of the leased or subleased premises
under any such lease or sublease, except where the failure to be in full
force and effect or such claim would not reasonably be expected to have a
Material Adverse Effect.
(xxii) INVESTMENT COMPANY ACT. None of the Company, CHS or their
subsidiaries is, and upon the issuance and sale of the Securities as
herein contemplated and the application of the net proceeds therefrom as
described in the Prospectuses none of them will be, an "investment
company" or an entity "controlled" by an "investment company" as such
terms are defined in the Investment Company Act of 1940, as amended (the
"1940 Act").
(xxiii) ENVIRONMENTAL LAWS. Except as described in the Registration
Statement and except as would not, singly or in the aggregate, reasonably
be expected to result in a Material Adverse Effect, (A) none of the
Company, CHS, their subsidiaries or any of the hospitals owned, leased or
operated by them is in violation of any federal, state, local or foreign
statute, law, rule, regulation, standard, guide, ordinance, code, policy
or rule of common law or any judicial or administrative interpretation
thereof, including any judicial or administrative order, consent, decree
or judgment, relating to pollution or protection of human health or
safety, the environment (including, without limitation, ambient air,
surface water, groundwater, land surface or subsurface strata) or
wildlife, including, without limitation, laws and regulations relating to
the release or threatened release of chemicals, pollutants, contaminants,
wastes, toxic substances, hazardous substances (including, without
limitation, asbestos, polychlorinated biphenyls, urea-formaldehyde
insulation, petroleum or petroleum products) (collectively, "Hazardous
Materials") or to
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the manufacture, processing, distribution, use, treatment, storage,
disposal, transport or handling, release or threatened release of
Hazardous Materials (collectively, "Environmental Laws"), (B) the Company,
CHS, their subsidiaries and each of the hospitals owned, leased or
operated by them have all permits, authorizations and approvals required
under any applicable Environmental Laws and are each in compliance with
their requirements, (C) there are no pending or threatened administrative,
regulatory or judicial actions, suits, demands, demand letters, claims,
liens, notices of noncompliance or violation, investigation or proceedings
relating to any Environmental Law against the Company, CHS, their
subsidiaries or any of the hospitals owned, leased or operated by them and
(D) there are no events or circumstances that might reasonably be expected
to form the basis of an order for clean-up or remediation, or an action,
suit or proceeding by any private party or governmental body or agency,
against or affecting the Company, CHS, any of their subsidiaries or any of
the hospitals owned, leased or operated by them relating to Hazardous
Materials or any Environmental Laws.
(xxiv) REGISTRATION RIGHTS. Except as disclosed in the Prospectuses
under the caption "Shares Eligible for Future SaleBRegistration Rights,"
there are no persons with registration rights or other similar rights to
have any securities of the Company, CHS or any of their subsidiaries
registered pursuant to the Registration Statement or otherwise registered
by the Company or any other person under the 1933 Act.
(xxv) INSURANCE. The Company, CHS and each of their subsidiaries and
each of the hospitals owned, leased or operated by them are insured by
insurers of recognized financial responsibility against such loses and
risks and in such amounts as are prudent and customary in the healthcare
industry; none of the Company, CHS, their subsidiaries or any of the
hospitals owned, leased or operated by them has been refused any material
insurance coverage sought or applied for since January 1, 1999; and
neither the Company nor CHS has any reason to believe that it or any of
the hospitals owned, leased or operated by them, will not be able to renew
its existing insurance coverage as and when such coverage expires or to
obtain similar coverage from similar insurers as may be necessary to
continue its operations except where the failure to renew or maintain such
coverage would not reasonably be expected to result in a Material Adverse
Effect. The officers and directors of the Company are insured by insurers
of recognized financial responsibility against such losses and risks and
in such amounts as the Company believes are prudent and customary for
officers= and directors= liability insurance of a public company and as
the Company believes would cover claims which would reasonably be expected
to be made in connection with the issuance of the Securities; and the
Company has no reason to believe that it will not be able to renew its
existing directors= and officers= liability insurance coverage as and when
such coverage expires or to obtain similar coverage from similar insurers
as may be necessary to cover its officers and directors.
(xxvi) TAX RETURNS AND PAYMENT OF TAXES. The Company, CHS and their
subsidiaries have timely filed all federal, state, local and foreign tax
returns that are required to be filed or has duly requested extensions
thereof and all such tax returns are
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true, correct and complete, except to the extent that any failure to file
or request an extension, or any incorrectness would not reasonably be
expected to result in a Material Adverse Effect. The Company, CHS and
their subsidiaries have timely paid all taxes shown as due on such filed
tax returns (including any related assessments, fines or penalties),
except to the extent that any such taxes are being contested in good faith
and by appropriate proceedings, or to the extent that any failure to pay
would not reasonably be expected to result in a Material Adverse Effect;
and adequate charges, accruals and reserves have been provided for in the
financial statements referred to in Section 1(a)(iii) above in accordance
with GAAP in respect of all Federal, state, local and foreign taxes for
all periods as to which the tax liability of the Company, CHS and their
subsidiaries has not been finally determined or remains open to
examination by applicable taxing authorities except (A) for taxes incurred
after the date of the financial statements referred to in Section
1(a)(iii) or (B) where the failure to provide for such charges, accruals
and reserves would not reasonably be expected to result in a Material
Adverse Effect. None of the Company, CHS or their subsidiaries is a
"United States real property holding corporation" within the meaning of
Section 897(c)(2) of the Internal Revenue Code of 1986, as amended (the
"Code").
(xxvii) NO STABILIZATION OR MANIPULATION. None of the Company, CHS
or their subsidiaries or, to the best of their knowledge, any of their
directors, officers or affiliates has taken or will take, directly or
indirectly, any action designed to, or that could be reasonably expected
to, cause or result in stabilization or manipulation of the price of the
Securities in violation of Regulation o under the Securities Exchange Act
of 1934, as amended (the "1934 Act").
(xxviii) CERTAIN TRANSACTIONS. Except as disclosed in the
Prospectuses, there are no outstanding loans, advances, or guarantees of
indebtedness by the Company, CHS or any of their subsidiaries to or for
the benefit of any of the executive officers or directors of the Company
or any of the members of the families of any of them that would be
required to be so disclosed under the 1933 Act, the 1933 Act Regulations
or Form S-1.
(xxix) STATISTICAL AND MARKET DATA. The statistical and
market-related data included in the Prospectuses are derived from sources
which the Company and CHS reasonably and in good faith believe to be
accurate, reasonable and reliable in all material respects and the
statistical and market-related data included in the Prospectuses agrees
with the sources from which it was derived in all material respects.
(xxx) ACCOUNTING AND OTHER CONTROLS. The Company has established a
system of internal accounting controls sufficient to provide reasonable
assurances that (i) transactions were, are and will be executed in
accordance with management=s general or specific authorization; (ii)
transactions were, are and will be recorded as necessary to permit
preparation of financial statements in conformity with GAAP and to
maintain accountability for assets; (iii) access to assets was, is and
will be permitted only in accordance with a management=s general or
specific authorizations; and (iv) the recorded
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accountability for assets was, is and will be compared with existing
assets at reasonable intervals and appropriate action was, is and will be
taken with respect to any differences.
(xxxi) YEAR 2000. The Company and CHS have reviewed their operations
and those of the hospitals owned, leased or operated by them to evaluate
the extent to which the business or operations or any of the hospitals
owned, leased or operated by them will be affected by the Year 2000
Problem. The Company does not anticipate incurring operating expenses or
costs material to the financial position or results of operations of the
Company and the hospitals owned, leased or operated by it in connection
the Year 2000 Problem. As a result of the aforementioned review, the
Company has no reason to believe that the Year 2000 Problem would
reasonably be expected to have a Material Adverse Effect. The "Year 2000
Problem" as used herein means any risk that computer hardware or software
used in the receipt, transmission, processing, manipulation, storage,
retrieval, retransmission or other utilization of data or in the operation
of mechanical or electrical systems of any kind will not, in the case of
dates or time periods occurring after December 31, 1999, function at least
as effectively as in the case of dates or time periods occurring prior to
January 1, 2000.
(b) OFFICER'S CERTIFICATES. Any certificate signed by any officer of the
Company, CHS or any of their subsidiaries delivered to the Global Coordinator,
the U.S. Representatives or to counsel for the U.S. Underwriters shall be deemed
a representation and warranty by the Company to each U.S.
Underwriter as to the matters covered thereby.
SECTION 2. SALE AND DELIVERY TO U.S. UNDERWRITERS; CLOSING.
(a) INITIAL SECURITIES. On the basis of the representations and warranties
herein contained and subject to the terms and conditions herein set forth, the
Company agrees to sell to each U.S. Underwriter, severally and not jointly, and
each U.S. Underwriter, severally and not jointly, agrees to purchase from the
Company, at the price per share set forth in Schedule B, the number of Initial
U.S. Securities set forth in Schedule A opposite the name of such U.S.
Underwriter, plus any additional number of Initial U.S. Securities which such
Underwriter may become obligated to purchase pursuant to the provisions of
Section 10 hereof.
(b) OPTION SECURITIES. In addition, on the basis of the representations
and warranties herein contained and subject to the terms and conditions herein
set forth, the Company hereby grants an option to the U.S. Underwriters,
severally and not jointly, to purchase up to an additional o shares of Common
Stock at the price per share set forth in Schedule B, less an amount per share
equal to any dividends or distributions declared by the Company and payable on
the Initial U.S. Securities but not payable on the U.S. Option Securities. The
option hereby granted will expire 30 days after the date hereof and may be
exercised in whole or in part from time to time only for the purpose of covering
over-allotments which may be made in connection with the offering and
distribution of the Initial U.S. Securities upon notice by the Global
Coordinator to the Company setting forth the number of U.S. Option Securities as
to which the several U.S. Underwriters are then exercising the option and the
time and date of payment and
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delivery for such U.S. Option Securities. Any such time and date of delivery for
the U.S. Option Securities (a "Date of Delivery") shall be determined by the
Global Coordinator, but shall not be later than seven full business days after
the exercise of said option, nor in any event prior to the Closing Time, as
hereinafter defined. If the option is exercised as to all or any portion of the
U.S. Option Securities, each of the U.S. Underwriters, acting severally and not
jointly, will purchase that proportion of the total number of U.S. Option
Securities then being purchased which the number of Initial U.S. Securities set
forth in Schedule A opposite the name of such U.S. Underwriter bears to the
total number of Initial U.S. Securities, subject in each case to such
adjustments as the Global Coordinator in its discretion shall make to eliminate
any sales or purchases of fractional shares.
(c) PAYMENT. Payment of the purchase price for, and delivery of
certificates for, the Initial Securities shall be made at the offices of
Debevoise & Plimpton, 875 Third Avenue, New York, New York 10022, or at such
other place as shall be agreed upon by the Global Coordinator and the Company,
at 9:00 A.M. (Eastern time) on the third (fourth, if the pricing occurs after
4:30 P.M. (Eastern time) on any given day) business day after the date hereof
(unless postponed in accordance with the provisions of Section 10), or such
other time not later than ten business days after such date as shall be agreed
upon by the Global Coordinator and the Company (such time and date of payment
and delivery being herein called "Closing Time").
In addition, in the event that any or all of the U.S. Option Securities
are purchased by the U.S. Underwriters, payment of the purchase price for, and
delivery of certificates for, such U.S. Option Securities shall be made at the
above-mentioned offices, or at such other place as shall be agreed upon by the
Global Coordinator and the Company, on each Date of Delivery as specified in the
notice from the Global Coordinator to the Company.
Payment shall be made to the Company by wire transfer of immediately
available funds to a bank account designated by the Company, against delivery to
the U.S. Representatives for the respective accounts of the U.S. Underwriters of
certificates for the U.S. Securities to be purchased by them. It is understood
that each U.S. Underwriter has authorized the U.S. Representatives, for its
account, to accept delivery of, receipt for, and make payment of the purchase
price for, the Initial U.S. Securities and the U.S. Option Securities, if any,
which it has agreed to purchase. Merrill Lynch, individually and not as
representative of the U.S. Underwriters, may (but shall not be obligated to)
make payment of the purchase price for the Initial U.S. Securities or the U.S.
Option Securities, if any, to be purchased by any U.S. Underwriter whose funds
have not been received by the Closing Time or the relevant Date of Delivery, as
the case may be, but such payment shall not relieve such U.S. Underwriter from
its obligations hereunder.
(d) DENOMINATIONS; REGISTRATION. Certificates for the Initial U.S.
Securities and the U.S. Option Securities, if any, shall be in such
denominations and registered in such names as the U.S. Representatives may
request in writing at least one full business day before the Closing Time or the
relevant Date of Delivery, as the case may be. The certificates for the Initial
U.S. Securities and the U.S. Option Securities, if any, will be made available
for examination and
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packaging by the U.S. Representatives in The City of New York not later than
10:00 A.M. (Eastern time) on the business day prior to the Closing Time or the
relevant Date of Delivery, as the case may be.
(e) APPOINTMENT OF QUALIFIED INDEPENDENT UNDERWRITER. The Company hereby
confirms its engagement of Merrill Lynch as, and Merrill Lynch hereby confirms
its agreement with the Company to render services as, a "qualified independent
underwriter" within the meaning of Rule 2720 of the Conduct Rules of the
National Association of Securities Dealers, Inc. with respect to the offering
and sale of the U.S. Securities. Merrill Lynch, solely in its capacity as
qualified independent underwriter and not otherwise, is referred to herein as
the "Independent Underwriter".
SECTION 3. COVENANTS OF THE COMPANY. The Company covenants with each
U.S. Underwriter as follows:
(a) COMPLIANCE WITH SECURITIES REGULATIONS AND COMMISSION REQUESTS.
The Company, subject to Section 3(b), will comply with the requirements of
Rule 430A and will notify the Global Coordinator immediately, and confirm
the notice in writing, (i) when any post-effective amendment to the
Registration Statement shall become effective, or any supplement to the
Prospectuses or any amended Prospectuses shall have been filed, (ii) of
the receipt of any comments from the Commission, (iii) of any request by
the Commission for any amendment to the Registration Statement or any
amendment or supplement to the Prospectuses or for additional information,
and (iv) of the issuance by the Commission of any stop order suspending
the effectiveness of the Registration Statement or of any order preventing
or suspending the use of any preliminary prospectus, or of the suspension
of the qualification of the Securities for offering or sale in any
jurisdiction, or of the initiation or threatening of any proceedings for
any of such purposes. The Company will promptly effect the filings
necessary pursuant to Rule 424(b) and will take such steps as it deems
necessary to ascertain promptly whether the form of prospectus transmitted
for filing under Rule 424(b) was received for filing by the Commission
and, in the event that it was not, it will promptly file such prospectus.
The Company will make every reasonable effort to prevent the issuance of
any stop order and, if any stop order is issued, to obtain the lifting
thereof at the earliest possible moment.
(b) FILING OF AMENDMENTS. The Company will give the Global
Coordinator notice of its intention to file or prepare any amendment to
the Registration Statement (including any filing under Rule 462(b)), or
any amendment, supplement or revision to either the prospectus included in
the Registration Statement at the time it became effective or to the
Prospectuses, will furnish the Global Coordinator with copies of any such
documents a reasonable amount of time prior to such proposed filing or
use, as the case may be, and will not file or use any such document to
which the Global Coordinator or counsel for the U.S.
Underwriters shall reasonably object.
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(c) DELIVERY OF REGISTRATION STATEMENTS. The Company has furnished
or will deliver to the U.S. Representatives and counsel for the U.S.
Underwriters, without charge, signed copies of the Registration Statement
as originally filed and of each amendment thereto (including exhibits
filed therewith or incorporated by reference therein) and signed copies of
all consents and certificates of experts, and will also deliver to the
U.S. Representatives, without charge, a conformed copy of the Registration
Statement as originally filed and of each amendment thereto (without
exhibits) for each of the U.S. Underwriters. The copies of the
Registration Statement and each amendment thereto furnished to the U.S.
Underwriters will be identical to the electronically transmitted copies
thereof filed with the Commission pursuant to EDGAR, except to the extent
permitted by Regulation S-T.
(d) DELIVERY OF PROSPECTUSES. The Company has delivered to each U.S.
Underwriter, without charge, as many copies of each preliminary prospectus
as such U.S. Underwriter reasonably requested, and the Company hereby
consents to the use of such copies for purposes permitted by the 1933 Act.
The Company will furnish to each U.S. Underwriter, without charge, during
the period when the U.S. Prospectus is required to be delivered under the
1933 Act or the 1934 Act, such number of copies of the U.S. Prospectus (as
amended or supplemented) as such U.S. Underwriter may reasonably request.
The U.S. Prospectus and any amendments or supplements thereto furnished to
the U.S. Underwriters will be identical to the electronically transmitted
copies thereof filed with the Commission pursuant to EDGAR, except to the
extent permitted by Regulation S-T.
(e) CONTINUED COMPLIANCE WITH SECURITIES LAWS. The Company will
comply with the 1933 Act and the 1933 Act Regulations so as to permit the
completion of the distribution of the Securities as contemplated in this
Agreement, the International Purchase Agreement and in the Prospectuses.
If at any time when a prospectus is required by the 1933 Act to be
delivered in connection with sales of the Securities, any event shall
occur or condition shall exist as a result of which it is necessary, in
the opinion of counsel for the U.S. Underwriters or for the Company, to
amend the Registration Statement or amend or supplement any Prospectus in
order that the Prospectuses will not include any untrue statement of a
material fact or omit to state a material fact necessary in order to make
the statements therein not misleading in the light of the circumstances
existing at the time it is delivered to a purchaser, or if it shall be
necessary, in the opinion of such counsel, at any such time to amend the
Registration Statement or amend or supplement any Prospectus in order to
comply with the requirements of the 1933 Act or the 1933 Act Regulations,
the Company will promptly prepare and file with the Commission, subject to
Section 3(b), such amendment or supplement as may be necessary to correct
such statement or omission or to make the Registration Statement or the
Prospectuses comply with such requirements, and the Company will furnish
to the U.S. Underwriters such number of copies of such amendment or
supplement as the U.S. Underwriters may reasonably request.
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(f) BLUE SKY QUALIFICATIONS. The Company will use its best efforts,
in cooperation with the U.S. Underwriters, to qualify the Securities for
offering and sale under the applicable securities laws of such states and
other jurisdictions (domestic or foreign) as the Global Coordinator may
designate and to maintain such qualifications in effect for a period of
not less than one year from the later of the effective date of the
Registration Statement and any Rule 462(b) Registration Statement;
provided, however, that the Company shall not be obligated to file any
general consent to service of process or to qualify as a foreign
corporation or as a dealer in securities in any jurisdiction in which it
is not so qualified or to subject itself to taxation in respect of doing
business in any jurisdiction in which it is not otherwise so subject. In
each jurisdiction in which the Securities have been so qualified, the
Company will file such statements and reports as may be required by the
laws of such jurisdiction to continue such qualification of the Securities
in effect for a period of not less than one year from the effective date
of the Registration Statement and any Rule 462(b) Registration Statement.
(g) RULE 158. The Company will timely file such reports pursuant to
the 1934 Act as are necessary in order to make generally available to its
securityholders as soon as practicable an earnings statement for the
purposes of, and to provide the benefits contemplated by, the last
paragraph of Section 11(a) of the 1933 Act.
(h) USE OF PROCEEDS. The Company will use the net proceeds received
by it from the sale of the Securities in the manner specified in the
Prospectuses under "Use of Proceeds".
(i) LISTING. The Company will use its best efforts to effect and
maintain the quotation of the Common Stock (including the Securities) on
the New York Stock Exchange.
(j) RESTRICTION ON SALE OF SECURITIES. During a period of 180 days
from the date of the Prospectuses, the Company will not, without the prior
written consent of the Global Coordinator, (i) directly or indirectly,
offer, pledge, sell, contract to sell, sell any option or contract to
purchase, purchase any option or contract to sell, grant any option, right
or warrant to purchase or otherwise transfer or dispose of any share of
Common Stock or any securities convertible into or exercisable or
exchangeable for Common Stock or file any registration statement under the
1933 Act with respect to any of the foregoing or (ii) enter into any swap
or any other agreement or any transaction that transfers, in whole or in
part, directly or indirectly, the economic consequence of ownership of the
Common Stock, whether any such swap or transaction described in clause (i)
or (ii) above is to be settled by delivery of Common Stock or such other
securities, in cash or otherwise. The foregoing sentence shall not apply
to (A) the Securities to be sold hereunder or under the International
Purchase Agreement, (B) any shares of Common Stock issued by the Company
upon the exercise of an option or warrant or the conversion of a security
outstanding on the date hereof and referred to in the Prospectuses, (C)
any shares of Common Stock issued or options to purchase Common Stock
granted pursuant to employee
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benefit plans of the Company referred to in the Prospectuses, (D) any
shares of Common Stock issued pursuant to any non-employee director stock
plan or dividend reinvestment plan, or (E) the issuance by the Company of
shares of Common Stock pursuant to the Recapitalization.
(k) REPORTING REQUIREMENTS. The Company, during the period when the
Prospectuses are required to be delivered under the 1933 Act or the 1934
Act, will file all documents required to be filed with the Commission
pursuant to the 1934 Act within the time periods required by the 1934 Act
and the rules and regulations of the Commission thereunder.
(l) COMPLIANCE WITH NASD RULES. The Company hereby agrees that it
will ensure that the Reserved Securities will be restricted as required by
the NASD rules from sale, transfer, assignment, pledge or hypothecation
for a period of three months following the date of this Agreement. The
Underwriters will notify the Company as to which persons will need to be
so restricted. At the request of the Underwriters, the Company will direct
the transfer agent to place a stop transfer restriction upon such
securities for such period of time. Should the Company release, or seek to
release, from such restrictions any of the Reserved Securities, the
Company agrees to reimburse the Underwriters for any reasonable expenses
(including, without limitation, legal expenses) they incur in connection
with such release.
(m) COMPLIANCE WITH RULE 463. The Company will comply with the
requirements of Rule 463 of the 1933 Act Regulations.
SECTION 4. PAYMENT OF EXPENSES. (a) EXPENSES. The Company and CHS will pay
all expenses incident to the performance of their obligations under this
Agreement, including (i) the preparation, printing and filing of the
Registration Statement (including financial statements and exhibits) as
originally filed and of each amendment thereto, (ii) the preparation, printing
and delivery to the Underwriters of this Agreement, any Agreement among
Underwriters and such other documents as may be required in connection with the
offering, purchase, sale, issuance or delivery of the Securities, (iii) the
preparation, issuance and delivery of the certificates for the Securities to the
Underwriters, including any stock or other transfer taxes and any stamp or other
duties payable upon the sale, issuance or delivery of the Securities to the
Underwriters and the transfer of the Securities between the U.S. Underwriters
and the International Managers, (iv) the fees and disbursements of the Company's
counsel, accountants and other advisors, (v) the qualification of the Securities
under securities laws in accordance with the provisions of Section 3(f) hereof,
including filing fees and the reasonable fees and disbursements of
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counsel for the Underwriters in connection therewith and in connection with the
preparation of the Blue Sky Survey and any supplement thereto, (vi) the printing
and delivery to the Underwriters of copies of each preliminary prospectus and of
the Prospectuses and any amendments or supplements thereto, (vii) the
preparation, printing and delivery to the Underwriters of copies of the Blue Sky
Survey and any supplement thereto, (viii) the fees and expenses of any transfer
agent or registrar for the Securities, (ix) the filing fees incident to, and the
reasonable fees and disbursements of counsel to the Underwriters in connection
with, the review by the NASD of the terms of the sale of the Securities, (x) the
fees and expenses incurred in connection with the listing of the Securities on
the New York Stock Exchange, (xi) all costs and expenses of the Underwriters,
including the fees and disbursements of counsel for the Underwriters, in
connection with matters related to the Reserved Securities which are designated
by the Company for sale to Eligible Persons who have expressed an interest in
purchasing the Reserved Securities and (xii) the expenses of the Independent
Underwriter.
(b) TERMINATION OF AGREEMENT. If this Agreement is terminated by the U.S.
Representatives in accordance with the provisions of Section 5 or Section
9(a)(i) hereof, the Company and CHS shall reimburse the U.S. Underwriters for
all of their out-of-pocket expenses, including the reasonable fees and
disbursements of counsel for the U.S. Underwriters.
SECTION 5. CONDITIONS OF U.S. UNDERWRITERS' OBLIGATIONS. The obligations
of the several U.S. Underwriters hereunder are subject to the accuracy of the
representations and warranties of the Company and CHS contained in Section 1
hereof or in certificates of any officer of the Company, CHS or any of their
subsidiaries delivered pursuant to the provisions hereof, to the performance by
the Company of their covenants and other obligations hereunder, and to the
following further conditions:
(a) EFFECTIVENESS OF REGISTRATION STATEMENT. The Registration
Statement, including any Rule 462(b) Registration Statement, has become
effective and at Closing Time no stop order suspending the effectiveness
of the Registration Statement shall have been issued under the 1933 Act or
proceedings therefor initiated or threatened by the Commission, and any
request on the part of the Commission for additional information shall
have been complied with to the reasonable satisfaction of counsel to the
U.S. Underwriters. A prospectus containing the Rule 430A Information shall
have been filed with the Commission in accordance with Rule 424(b) (or a
post-effective amendment providing such information shall have been filed
and declared effective in accordance with the requirements of Rule 430A).
(b) OPINION OF COUNSEL FOR THE COMPANY. At Closing Time, the U.S.
Representatives shall have received the favorable opinion, dated as of
Closing Time, of:
(i) Rachel A. Seifert, Vice President, Secretary and General Counsel
of the Company, in form and substance reasonably satisfactory to
counsel for the U.S. Underwriters, together with signed or
reproduced copies of such letter for each of the other U.S.
Underwriters to the effect set forth in Exhibit A-1 hereto and to
such further effect as counsel to the U.S. Underwriters may
reasonably request; and
(ii) Fried, Frank, Harris, Shriver & Jacobson, special counsel for
the Company, in form and substance reasonably satisfactory to
counsel for the U.S. Underwriters, together with signed or
reproduced copies of such letter for each of the other U.S.
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Underwriters to the effect set forth in Exhibit A-2 hereto and to
such further effect as counsel to the U.S. Underwriters may
reasonably request.
(c) OPINION OF COUNSEL FOR THE U.S. UNDERWRITERS. At Closing Time,
the U.S. Representatives shall have received the favorable opinion, dated
as of Closing Time, of Debevoise & Plimpton, counsel for the U.S.
Underwriters, together with signed or reproduced copies of such letter for
each of the other U.S. Underwriters in form and substance reasonably
satisfactory to the U.S. Underwriters.
(d) OFFICERS' CERTIFICATE. At Closing Time, there shall not have
been, since the date hereof or since the respective dates as of which
information is given in the Prospectuses, any material adverse change in
the condition, financial or otherwise, or in the earnings, business
affairs or business prospects of the Company, CHS and their subsidiaries
considered as one enterprise, whether or not arising in the ordinary
course of business, and the U.S. Representatives shall have received a
certificate of the President and Chief Executive Officer and the Executive
Vice President and Chief Financial Officer of the Company, dated as of
Closing Time, to the effect that (i) there has been no such material
adverse change, (ii) the representations and warranties in Section 1(a)
hereof are true and correct with the same force and effect as though
expressly made at and as of Closing Time, (iii) the Company and CHS have
complied with all agreements and satisfied all conditions on their part to
be performed or satisfied at or prior to Closing Time, and (iv) no stop
order suspending the effectiveness of the Registration Statement has been
issued and, to such person's knowledge after due inquiry, no proceedings
for that purpose have been instituted or are pending or are contemplated
by the Commission.
(e) ACCOUNTANT'S COMFORT LETTER. At the time of the execution of
this Agreement, the U.S. Representatives shall have received from Deloitte
& Touche LLP a letter, dated such date, in form and substance reasonably
satisfactory to the U.S. Representatives, together with signed or
reproduced copies of such letter for each of the other U.S. Underwriters,
containing statements and information of the type ordinarily included in
accountants' "comfort letters" to underwriters with respect to the
financial statements and certain financial information contained in the
Registration Statement and the Prospectuses.
(f) BRING-DOWN COMFORT LETTER. At Closing Time, the Representatives
shall have received from Deloitte & Touche LLP a letter, dated as of
Closing Time, to the effect that they reaffirm the statements made in the
letter furnished pursuant to subsection (e) of this Section, except that
the specified date referred to shall be a date not more than three
business days prior to Closing Time.
(g) APPROVAL OF LISTING. At Closing Time, the Securities shall have
been approved for listing on the New York Stock Exchange, subject only to
official notice of issuance.
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(h) NO OBJECTION. The NASD has confirmed that it has not raised any
objection with respect to the fairness and reasonableness of the
underwriting terms and arrangements with respect to the Securities.
(i) LOCK-UP AGREEMENTS. At the date of this Agreement, the U.S.
Representatives shall have received an agreement substantially in the form
of Exhibit B hereto signed by the persons listed on Schedule C hereto.
(j) PURCHASE OF INITIAL INTERNATIONAL SECURITIES. Contemporaneously
with the purchase by the U.S. Underwriters of the Initial U.S. Securities
under this Agreement, the International Managers shall have purchased the
Initial International Securities under the International Purchase
Agreement.
(k) RECAPITALIZATION. Prior to the purchase of the Securities by the
Underwriters, the Recapitalization shall have been consummated.
(l) CONDITIONS TO PURCHASE OF U.S. OPTION SECURITIES. In the event
that the U.S. Underwriters exercise their option provided in Section 2(b)
hereof to purchase all or any portion of the U.S. Option Securities, the
representations and warranties of the Company contained herein and the
statements in any certificates furnished by the Company or any subsidiary
of the Company hereunder shall be true and correct as of each Date of
Delivery and, at the relevant Date of Delivery, the U.S. Representatives
shall have received:
(i) OFFICERS' CERTIFICATE. A certificate, dated such Date of
Delivery, of the President and Chief Executive Officer, and of the
Executive Vice President and Chief Financial Officer of the Company,
confirming that the certificate delivered at the Closing Time
pursuant to Section 5(d) hereof remains true and correct as of such
Date of Delivery.
(ii) OPINION OF COUNSEL FOR COMPANY. The favorable opinion of Fried,
Frank, Harris, Shriver & Jacobson, special counsel for the Company,
together with the favorable opinion of Rachel A. Siefert, Vice
President, Secretary and General Counsel of the Company, each in
form and substance reasonably satisfactory to counsel for the U.S.
Underwriters, dated such Date of Delivery, relating to the U.S.
Option Securities to be purchased on such Date of Delivery and
otherwise to the same effect as the opinions required by Section
5(b) hereof.
(iii) OPINION OF COUNSEL FOR U.S. UNDERWRITERS. The favorable
opinion of Debevoise & Plimpton, counsel for the U.S. Underwriters,
dated such Date of Delivery, relating to the U.S. Option Securities
to be purchased on such Date of Delivery and otherwise to the same
effect as the opinion required by Section 5(c) hereof.
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(iv) BRING-DOWN COMFORT LETTER. A letter from Deloitte & Touche LLP,
in form and substance reasonably satisfactory to the U.S.
Representatives and dated such Date of Delivery, substantially in
the same form and substance as the letter furnished to the U.S.
Representatives pursuant to Section 5(f) hereof, except that the
"specified date" in the letter furnished pursuant to this paragraph
shall be a date not more than five days prior to such Date of
Delivery.
(m) ADDITIONAL DOCUMENTS. At Closing Time and at each Date of Delivery,
counsel for the U.S. Underwriters shall have been furnished with such documents
and opinions as they may reasonably require for the purpose of enabling them to
pass upon the issuance and sale of the Securities as herein contemplated, or in
order to evidence the accuracy of any of the representations or warranties, or
the fulfillment of any of the conditions, herein contained; and all proceedings
taken by the Company in connection with the issuance and sale of the Securities
as herein contemplated shall be reasonably satisfactory in form and substance to
the U.S. Representatives and counsel for the U.S. Underwriters.
(n) TERMINATION OF AGREEMENT. If any condition specified in this Section
shall not have been fulfilled when and as required to be fulfilled, this
Agreement, or, in the case of any condition to the purchase of U.S. Option
Securities on a Date of Delivery which is after the Closing Time, the
obligations of the several U.S. Underwriters to purchase the relevant Option
Securities, may be terminated by the U.S. Representatives by notice to the
Company at any time at or prior to Closing Time or such Date of Delivery, as the
case may be, and such termination shall be without liability of any party to any
other party except as provided in Section 4 and except that Sections 1, 6, 7 and
8 shall survive any such termination and remain in full force and effect.
SECTION 6. INDEMNIFICATION.
(a) INDEMNIFICATION OF THE U.S. UNDERWRITERS. (1) The Company and
CHS jointly and severally agree to indemnify and hold harmless each U.S.
Underwriter and each person, if any, who controls any U.S. Underwriter within
the meaning of Section 15 of the 1933 Act or Section 20 of the 1934 Act as
follows:
(i) against any and all loss, liability, claim, damage and expense
whatsoever, as incurred, arising out of any untrue statement or alleged
untrue statement of a material fact contained in the Registration
Statement (or any amendment thereto), including the Rule 430A Information,
or the omission or alleged omission therefrom of a material fact required
to be stated therein or necessary to make the statements therein not
misleading or arising out of any untrue statement or alleged untrue
statement of a material fact included in any preliminary prospectus or the
Prospectuses (or any amendment or supplement thereto), or the omission or
alleged omission therefrom of a material fact necessary in order to make
the statements therein, in the light of the circumstances under which they
were made, not misleading;
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(ii) against any and all loss, liability, claim, damage and expense
whatsoever, as incurred, arising out of (A) the violation of any
applicable laws or regulations of any jurisdiction where Reserved
Securities have been offered and (B) any untrue statement or alleged
untrue statement of a material fact included in the supplement or
prospectus wrapper material distributed in any jurisdiction in connection
with the reservation and sale of the Reserved Securities to employees,
directors and other persons with relationships with the Company who have
expressed an interest in purchasing the Reserved Securities or the
omission or alleged omission therefrom of a material fact necessary to
make the statements therein, when considered in conjunction with the
Prospectuses or preliminary prospectuses, not misleading;
(iii) against any and all loss, liability, claim, damage and expense
whatsoever, as incurred, to the extent of the aggregate amount paid in
settlement of any litigation, or any investigation or proceeding by any
governmental agency or body, commenced or threatened, or of any claim
whatsoever based upon any such untrue statement or omission, or any such
alleged untrue statement or omission or in connection with any violation
of the nature referred to in Section 6(a)(1)(ii)(A) hereof; provided that
(subject to Section 6(d) below) any such settlement is effected with the
written consent of the Company; and
(iv) against any and all expense whatsoever, as incurred (including
the fees and disbursements of counsel chosen by Merrill Lynch), reasonably
incurred in investigating, preparing or defending against any litigation,
or any investigation or proceeding by any governmental agency or body,
commenced or threatened, or any claim whatsoever based upon any such
untrue statement or omission, or any such alleged untrue statement or
omission or in connection with any violation of the nature referred to in
Section 6(a)(1)(ii)(A) hereof, to the extent that any such expense is not
paid under (i), or (ii) or (iii) above;
PROVIDED, HOWEVER, that this indemnity agreement shall not apply to any loss,
liability, claim, damage or expense to the extent (x) arising out of any untrue
statement or omission or alleged untrue statement or omission made in reliance
upon and in conformity with written information furnished to the Company by any
U.S. Underwriter through the U.S. Representatives expressly for use in the
Registration Statement (or any amendment thereto), including the Rule 430A
Information, or any preliminary prospectus or the U.S. Prospectus (or any
amendment or supplement thereto) or (y) resulting from the fact that a court of
competent jurisdiction shall have made a final, non-appealable determination
that (1) the untrue statement or omission was corrected in the U.S. Prospectus,
(2) that at a time sufficiently prior to the Closing Time, the Company furnished
copies of the U.S. Prospectus in sufficient quantities to such Underwriter, (3)
that such Underwriter failed to send or give a copy of the U.S. Prospectus to
the person asserting such loss, liability, claim, damage or expense prior to the
written confirmation or the sale of Securities to such person by such
Underwriter as required by the 1933 Act or the 1933 Act Regulations, and (4)
that the sending of the U.S. Prospectus to the person asserting such loss,
liability, claim, damage or expense would have constituted a defense to the
claim asserted by such person or persons.
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(2) In addition to and without limitation of the Company's obligation to
indemnify Merrill Lynch as an Underwriter, the Company also agrees to indemnify
and hold harmless the Independent Underwriter and each person, if any, who
controls the Independent Underwriter within the meaning of Section 15 of the
1933 Act or Section 20 of the 1934 Act, from and against any and all loss,
liability, claim, damage and expense whatsoever, as incurred, incurred as a
result of the Independent Underwriter's participation as a "qualified
independent underwriter" within the meaning of Rule 2720 of the Conduct Rules of
the National Association of Securities Dealers, Inc. in connection with the
offering of the U.S. Securities.
(3) Insofar as this indemnity agreement may permit indemnification for
liabilities under the 1933 Act of any person who is a partner of a U.S.
Underwriter or who controls an underwriter within the meaning of Section 15 of
the 1933 Act or Section 20 of the 1934 Act and who, at the date of this
Agreement, is a director or officer of the Company or controls the Company
within the meaning of Section 15 of the 1933 Act or Section 20 of the 1934 Act,
such indemnity agreement is subject to the undertaking of the Company in the
Registration Statement under Item.
(b) INDEMNIFICATION OF COMPANY, DIRECTORS AND OFFICERS. Each U.S.
Underwriter severally agrees to indemnify and hold harmless the Company, CHS and
their respective directors, each of the officers of the Company who signed the
Registration Statement, and each person, if any, who controls the Company within
the meaning of Section 15 of the 1933 Act or Section 20 of the 1934 Act against
any and all loss, liability, claim, damage and expense described in the
indemnity contained in subsection (a)(1) of this Section, as incurred, but only
with respect to untrue statements or omissions, or alleged untrue statements or
omissions, made in the Registration Statement (or any amendment thereto),
including the Rule 430A Information, or any preliminary U.S. prospectus or the
U.S. Prospectus (or any amendment or supplement thereto) in reliance upon and in
conformity with written information furnished to the Company by such U.S.
Underwriter through the U.S. Representatives expressly for use in the
Registration Statement (or any amendment thereto) or such preliminary prospectus
or the U.S. Prospectus (or any amendment or supplement thereto).
(c) ACTIONS AGAINST PARTIES; NOTIFICATION. Each indemnified party shall
give notice as promptly as reasonably practicable to each indemnifying party of
any action commenced against it in respect of which indemnity may be sought
hereunder, but failure to so notify an indemnifying party shall not relieve such
indemnifying party from any liability hereunder to the extent it is not
materially prejudiced as a result thereof and in any event shall not relieve it
from any liability which it may have otherwise than on account of this indemnity
agreement. In the case of parties indemnified pursuant to Section 6(a)(1) above,
counsel to the indemnified parties shall be selected by Merrill Lynch, and, in
the case of parties indemnified pursuant to Section 6(b) above, counsel to the
indemnified parties shall be selected by the Company. An indemnifying party may
participate at its own expense in the defense of any such action; provided,
however, that counsel to the indemnifying party shall not (except with the
consent of the indemnified party) also be counsel to the indemnified party. In
no event shall the indemnifying parties be liable for fees and expenses of more
than one counsel (in addition to any local counsel) separate from their own
counsel for all indemnified parties in connection with any one action or
separate but similar or
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related actions in the same jurisdiction arising out of the same general
allegations or circumstances; provided, that, if indemnity is sought pursuant to
Section 6(a)(2), then, in addition to the fees and expenses of such counsel for
the indemnified parties, the indemnifying party shall be liable for the
reasonable fees and expenses of not more than one counsel (in addition to any
local counsel) separate from its own counsel and that of the other indemnified
parties for the Independent Underwriter in its capacity as a "qualified
independent underwriter" and all persons, if any, who control the Independent
Underwriter within the meaning of Section 15 of the 1933 Act or Section 20 of
1934 Act in connection with any one action or separate but similar or related
actions in the same jurisdiction arising out of the same general allegations or
circumstances if, in the reasonable judgment of the Independent Underwriter,
there may exist a conflict of interest between the Independent Underwriter and
the other indemnified parties. Any such separate counsel for the Independent
Underwriter and such control persons of the Independent Underwriter shall be
designated in writing by the Independent Underwriter. No indemnifying party
shall, without the prior written consent of the indemnified parties, settle or
compromise or consent to the entry of any judgment with respect to any
litigation, or any investigation or proceeding by any governmental agency or
body, commenced or threatened, or any claim whatsoever in respect of which
indemnification or contribution could be sought under this Section 6 or Section
7 hereof (whether or not the indemnified parties are actual or potential parties
thereto), unless such settlement, compromise or consent (i) includes an
unconditional release of each indemnified party from all liability arising out
of such litigation, investigation, proceeding or claim and (ii) does not include
a statement as to or an admission of fault, culpability or a failure to act by
or on behalf of any indemnified party.
(d) SETTLEMENT WITHOUT CONSENT IF FAILURE TO REIMBURSE. If at any time an
indemnified party shall have requested an indemnifying party to reimburse the
indemnified party for fees and expenses of counsel, such indemnifying party
agrees that it shall be liable for any settlement of the nature contemplated by
Section 6(a)(1)(iii) effected without its written consent if (i) such settlement
is entered into more than 45 days after receipt by such indemnifying party of
the aforesaid request, (ii) such indemnifying party shall have received notice
of the terms of such settlement at least 30 days prior to such settlement being
entered into and (iii) such indemnifying party shall not have reimbursed such
indemnified party in accordance with such request prior to the date of such
settlement.
(e) INDEMNIFICATION FOR RESERVED SECURITIES. In connection with the offer
and sale of the Reserved Securities, the Company and CHS jointly and severally
agree, promptly upon a request, in writing, to indemnify and hold harmless the
Underwriters from and against any and all losses, liabilities, claims, damages
and expenses incurred by them as a result of the failure of Eligible Persons who
have expressed an interest in purchasing the Reserved Securities to pay for and
accept delivery of Reserved Securities which, by the end of the first business
day following the date of this Agreement, were subject to a properly confirmed
agreement to purchase.
SECTION 7. CONTRIBUTION. If the indemnification provided for in Section 6
hereof is for any reason unavailable to or insufficient to hold harmless an
indemnified party in respect of any losses, liabilities, claims, damages or
expenses referred to therein, then each indemnifying party
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shall contribute to the aggregate amount of such losses, liabilities, claims,
damages and expenses incurred by such indemnified party, as incurred, (i) in
such proportion as is appropriate to reflect the relative benefits received by
the Company and CHS on the one hand and the U.S. Underwriters on the other hand
from the offering of the Securities pursuant to this Agreement or (ii) if the
allocation provided by clause (i) is not permitted by applicable law, in such
proportion as is appropriate to reflect not only the relative benefits referred
to in clause (i) above but also the relative fault of the Company and CHS on the
one hand and of the U.S. Underwriters on the other hand in connection with the
statements or omissions, or in connection with any violation of the nature
referred to in Section 6(a)(1)(ii)(A) hereof, which resulted in such losses,
liabilities, claims, damages or expenses, as well as any other relevant
equitable considerations.
The relative benefits received by the Company and CHS on the one hand and
the U.S. Underwriters on the other hand in connection with the offering of the
U.S. Securities pursuant to this Agreement shall be deemed to be in the same
respective proportions as the total net proceeds from the offering of the U.S.
Securities pursuant to this Agreement (before deducting expenses) received by
the Company and the total underwriting discount received by the U.S.
Underwriters, in each case as set forth on the cover of the U.S. Prospectus bear
to the aggregate initial public offering price of the U.S.
Securities as set forth on such cover.
The relative fault of the Company, and CHS on the one hand and the U.S.
Underwriters on the other hand shall be determined by reference to, among other
things, whether any such untrue or alleged untrue statement of a material fact
or omission or alleged omission to state a material fact relates to information
supplied by the Company or by the U.S. Underwriters and the parties' relative
intent, knowledge, access to information and opportunity to correct or prevent
such statement or omission or any violation of the nature referred to in Section
6(a)(1)(ii)(A) hereof.
The Company, CHS and the U.S. Underwriters agree that Merrill Lynch will
not receive any additional benefits hereunder for serving as the Independent
Underwriter in connection with the offering and sale of the U.S.
Securities.
The Company, CHS and the U.S. Underwriters agree that it would not be just
and equitable if contribution pursuant to this Section 7 were determined by pro
rata allocation (even if the U.S. Underwriters were treated as one entity for
such purpose) or by any other method of allocation which does not take account
of the equitable considerations referred to above in this Section 7. The
aggregate amount of losses, liabilities, claims, damages and expenses incurred
by an indemnified party and referred to above in this Section 7 shall be deemed
to include any legal or other expenses reasonably incurred by such indemnified
party in investigating, preparing or defending against any litigation, or any
investigation or proceeding by any governmental agency or body, commenced or
threatened, or any claim whatsoever based upon any such untrue or alleged untrue
statement or omission or alleged omission.
Notwithstanding the provisions of this Section 7, no U.S. Underwriter
shall be required to contribute any amount in excess of the amount by which the
total price at which the U.S.
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<PAGE>
Securities underwritten by it and distributed to the public were offered to the
public exceeds the amount of any damages which such U.S. Underwriter has
otherwise been required to pay by reason of any such untrue or alleged untrue
statement or omission or alleged omission.
No person guilty of fraudulent misrepresentation (within the meaning of
Section 11(f) of the 1933 Act) shall be entitled to contribution from any person
who was not guilty of such fraudulent misrepresentation.
For purposes of this Section 7, each person, if any, who controls a U.S.
Underwriter within the meaning of Section 15 of the 1933 Act or Section 20 of
the 1934 Act shall have the same rights to contribution as such U.S.
Underwriter, and each director of the Company or CHS, each officer of the
Company who signed the Registration Statement, and each person, if any, who
controls the Company within the meaning of Section 15 of the 1933 Act or Section
20 of the 1934 Act shall have the same rights to contribution as the Company and
CHS. The U.S. Underwriters' respective obligations to contribute pursuant to
this Section 7 are several in proportion to the number of Initial U.S.
Securities set forth opposite their respective names in Schedule A hereto and
not joint.
SECTION 8. REPRESENTATIONS, WARRANTIES AND AGREEMENTS TO SURVIVE DELIVERY.
All representations, warranties and agreements contained in this Agreement or in
certificates of officers of the Company, CHS or any of their subsidiaries
submitted pursuant hereto, shall remain operative and in full force and effect,
regardless of any investigation made by or on behalf of any U.S. Underwriter or
controlling person, or by or on behalf of the Company, and shall survive
delivery of the Securities to the U.S. Underwriters.
SECTION 9. TERMINATION OF AGREEMENT.
(a) TERMINATION; GENERAL. The U.S. Representatives may terminate this
Agreement, by notice to the Company, at any time at or prior to Closing Time (i)
if there has been, since the time of execution of this Agreement or since the
respective dates as of which information is given in the U.S. Prospectus, any
material adverse change in the condition, financial or otherwise, or in the
earnings, business affairs or business prospects of the Company and its
subsidiaries considered as one enterprise, whether or not arising in the
ordinary course of business, or (ii) if there has occurred any material adverse
change in the financial markets in the United States or the international
financial markets, any outbreak of hostilities or escalation thereof or other
calamity or crisis or any change or development involving a prospective change
in national or international political, financial or economic conditions, in
each case the effect of which is such as to make it, in the judgment of the U.S.
Representatives, impracticable to market the Securities or to enforce contracts
for the sale of the Securities, or (iii) if trading in any securities of the
Company has been suspended or materially limited by the Commission or the New
York Stock Exchange, or if trading generally on the American Stock Exchange or
the New York Stock Exchange or in the Nasdaq National Market has been suspended
or materially limited, or minimum or maximum prices for trading have been fixed,
or maximum ranges for prices have been required, by any of said exchanges or by
such system or by order of the Commission, the National Association of
29
<PAGE>
Securities Dealers, Inc. or any other governmental authority, or (iv) if a
banking moratorium has been declared by either Federal or New York authorities.
(b) LIABILITIES. If this Agreement is terminated pursuant to this Section,
such termination shall be without liability of any party to any other party
except as provided in Section 4 hereof, and provided further that Sections 1, 6,
7 and 8 shall survive such termination and remain in full force and effect.
SECTION 10. DEFAULT BY ONE OR MORE OF THE U.S. UNDERWRITERS. If one or
more of the U.S. Underwriters shall fail at Closing Time or a Date of Delivery
to purchase the Securities which it or they are obligated to purchase under this
Agreement (the "Defaulted Securities"), the U.S. Representatives shall have the
right, within 24 hours thereafter, to make arrangements for one or more of the
non-defaulting U.S. Underwriters, or any other underwriters, to purchase all,
but not less than all, of the Defaulted Securities in such amounts as may be
agreed upon and upon the terms herein set forth; if, however, the U.S.
Representatives shall not have completed such arrangements within such 24-hour
period, then:
(a) if the number of Defaulted Securities does not exceed 10% of the
number of U.S. Securities to be purchased on such date, each of the
non-defaulting U.S. Underwriters shall be obligated, severally and not
jointly, to purchase the full amount thereof in the proportions that their
respective underwriting obligations hereunder bear to the underwriting
obligations of all non-defaulting U.S. Underwriters, or
(b) if the number of Defaulted Securities exceeds 10% of the number
of U.S. Securities to be purchased on such date, this Agreement or, with
respect to any Date of Delivery which occurs after Closing Time, the
obligation of the U.S. Underwriters to purchase and of the Company to sell
the Option Securities to be purchased and sold on such Date of Delivery,
shall terminate without liability on the part of any non-defaulting U.S.
Underwriter.
No action taken pursuant to this Section shall relieve any defaulting U.S.
Underwriter from liability in respect of its default.
In the event of any such default which does not result in a termination of
this Agreement or, in the case of a Date of Delivery which occurs after Closing
Time, which does not result in a termination of the obligation of the U.S.
Underwriters to purchase and the Company to sell the relevant U.S. Option
Securities, as the case may be, either the U.S. Representatives or the Company
shall have the right to postpone Closing Time or the relevant Date of Delivery,
as the case may be, for a period not exceeding seven days in order to effect any
required changes in the Registration Statement or Prospectus or in any other
documents or arrangements. As used herein, the term "U.S. Underwriter" includes
any person substituted for a U.S. Underwriter under this Section 10.
30
<PAGE>
SECTION 11. NOTICES. All notices and other communications hereunder shall
be in writing and shall be deemed to have been duly given if mailed or
transmitted by any standard form of telecommunication. Notices to the U.S.
Underwriters shall be directed to the U.S. Representatives at North Tower, World
Financial Center, New York, New York 10281-1201, attention of Syndicate
Operations, with a copy to Debevoise & Plimpton, 875 Third Avenue, New York, New
York, attention of Michael W. Blair; and notices to the Company or CHS shall be
directed to them at 155 Franklin Road, Suite 400, Brentwood, Tennessee 37027,
attention of Rachel A. Seifert, Vice President, Secretary and General Counsel,
with a copy to Fried, Frank, Harris, Shriver & Jacobson, One New York Plaza, New
York, New York 10004, attention of Jeffrey Bagner.
SECTION 12. PARTIES. This Agreement shall inure to the benefit of and be
binding upon the U.S. Underwriters and the Company and their respective
successors. Nothing expressed or mentioned in this Agreement is intended or
shall be construed to give any person, firm or corporation, other than the U.S.
Underwriters and the Company and CHS and their respective successors and the
controlling persons and officers and directors referred to in Sections 6 and 7
and their heirs and legal representatives, any legal or equitable right, remedy
or claim under or in respect of this Agreement or any provision herein
contained. This Agreement and all conditions and provisions hereof are intended
to be for the sole and exclusive benefit of the U.S. Underwriters and the
Company and their respective successors, and said controlling persons and
officers and directors and their heirs and legal representatives, and for the
benefit of no other person, firm or corporation. No purchaser of Securities from
any U.S. Underwriter shall be deemed to be a successor by reason merely of such
purchase.
SECTION 13. GOVERNING LAW AND TIME. THIS AGREEMENT SHALL BE GOVERNED BY
AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK WITHOUT
GIVING EFFECT TO CONFLICTS OF LAW PRINCIPLES THEREOF. EXCEPT AS OTHERWISE SET
FORTH HEREIN, SPECIFIED TIMES OF DAY REFER TO NEW YORK CITY TIME.
SECTION 14. EFFECT OF HEADINGS. The Article and Section headings herein
and the Table of Contents are for convenience only and shall not affect the
construction hereof.
31
<PAGE>
If the foregoing is in accordance with your understanding of our
agreement, please sign and return to the Company a counterpart hereof, whereupon
this instrument, along with all counterparts, will become a binding agreement
between the U.S. Underwriters, the Company and CHS in accordance with its terms.
Very truly yours,
COMMUNITY HEALTH SYSTEMS, INC.
By
-----------------------------
Name:
Title:
CHS/COMMUNITY HEALTH SYSTEMS, INC.
BY
---------------------------
Name:
Title:
CONFIRMED AND ACCEPTED,
as of the date first above written:
MERRILL LYNCH & CO.
MERRILL LYNCH, PIERCE, FENNER
& SMITH INCORPORATED
BANC OF AMERICA SECURITIES LLC
CHASE SECURITIES INC.
CREDIT SUISSE FIRST BOSTON CORPORATION
GOLDMAN, SACHS & CO.
MORGAN STANLEY & CO. INCORPORATED
BY: MERRILL LYNCH, PIERCE, FENNER
& SMITH INCORPORATED
By _________________________________
Authorized Signatory
For themselves and as U.S. Representatives of the
other U.S. Underwriters named in Schedule A hereto.
32
<PAGE>
SCHEDULE A
Number of
Initial U.S.
NAME OF U.S. UNDERWRITER Securities
------------------------ ----------
Merrill Lynch, Pierce, Fenner & Smith
Incorporated.....................................
Banc of America Securities LLC
Chase Securities Inc.
Credit Suisse First Boston Corporation
Goldman, Sachs & Co.
Morgan Stanley & Co. Incorporated...........................
--------
Total....................................................... o
=========
Sch A - 1
<PAGE>
SCHEDULE B
COMMUNITY HEALTH SYSTEMS, INC.
o Shares of Common Stock
(Par Value $.01 Per Share)
1. The initial public offering price per share for the Securities,
determined as provided in said Section 2, shall be $o.
2. The purchase price per share for the U.S. Securities to be paid
by the several U.S. Underwriters shall be $o, being an amount equal to the
initial public offering price set forth above less $o per share; provided
that the purchase price per share for any U.S. Option Securities purchased
upon the exercise of the over-allotment option described in Section 2(b)
shall be reduced by an amount per share equal to any dividends or
distributions declared by the Company and payable on the Initial U.S.
Securities but not payable on the U.S. Option Securities.
Sch B - 1
<PAGE>
SCHEDULE C
Sheila P. Burke
Robert J. Dole
J. Anthony Forstmann
Nicholas C. Forstmann
Theodore J. Forstmann
Dale F. Frey
Sandra A. Horbach
Thomas H. Lister
Michael A. Miles
Samuel A. Nunn
Wayne T. Smith
W. Larry Cash
John Fromhold
David Miller
Gary Newsome
Michael T. Portacci
Rachael A. Seifert
All Other Class B Stockholders
Sch C - 1
<PAGE>
Exhibit A-1
FORM OF OPINION OF COMPANY'S GENERAL COUNSEL
TO BE DELIVERED PURSUANT TO
SECTION 5(b)(i)
_________________, 2000
Merrill Lynch & Co.
Merrill Lynch, Pierce, Fenner & Smith
Incorporated
Banc of America Securities LLC
Chase Securities Inc.
Credit Suisse First Boston Corporation
Goldman, Sachs & Co.
Morgan Stanley & Co. Incorporated
As U.S. Representatives of the several U.S. Underwriters
c/o Merrill Lynch & Co.
Merrill Lynch, Pierce, Fenner & Smith
Incorporated
North Tower
World Financial Center
New York, New York 10281-1209
Merrill Lynch International
Bank of America International Limited
Chase Securities Inc.
Credit Suisse First Boston (Europe) Limited
Goldman Sachs International
Morgan Stanley & Co. International Limited
As Lead Managers of the several International Managers
c/o Merrill Lynch International
Ropemaker Place
25 Ropemaker Street
London, England EC2Y 9LY
Ladies and Gentlemen:
I am Vice President, Secretary and General Counsel of Community Health
Systems, Inc., a Delaware corporation (the "Company"), and CHS/Community Health
Systems, Inc., a Delaware corporation and a wholly owned subsidiary of the
Company ("CHS"). I am delivering this opinion pursuant to (i) Section 5(b)(i) of
the U.S. Purchase Agreement, dated __________, 2000 (the "U.S. Purchase
Agreement"), among the Company, CHS and Merrill Lynch & Co., Merrill Lynch,
Pierce, Fenner & Smith Incorporated, Banc of America Securities LLC, Chase
Securities Inc., Credit Suisse First Boston Corporation, Goldman, Sachs & Co.
and Morgan Stanley & Co. Incorporated, as
<PAGE>
Merrill Lynch & Co. et al.
2 ______________, 2000
U.S. Representatives of the several U.S. Underwriters named in Schedule A
thereto, and (ii) Section 5(b)(i) of the International Purchase Agreement, dated
_________, 2000 (the "International Purchase Agreement," and together with the
U.S. Purchase Agreement, the "Purchase Agreements"), among the Company, CHS and
Merrill Lynch International, Bank of America International Limited, Chase
Securities Inc., Credit Suisse First Boston (Europe) Limited, Goldman Sachs
International and Morgan Stanley & Co. International Limited, as Lead Managers
of the several International Managers named in Schedule A thereto. All
capitalized terms used herein that are defined in, or by reference in, the
Purchase Agreements have the meanings assigned to such terms therein, or by
reference therein, unless otherwise defined herein. With your permission, all
assumptions and statements of reliance expressly set forth herein have been made
without any independent investigation or verification on my part except to the
extent otherwise expressly stated, and, except to the extent otherwise expressly
stated, I express no opinion with respect to the subject matter or accuracy of
such assumptions or items relied upon.
In connection with this opinion, I have (i) investigated such questions
of law, (ii) examined originals or certified, conformed or reproduction copies
of such agreements, instruments, documents and records of the Company and CHS,
such certificates of public officials and such other documents and (iii)
received such information from officers and representatives of the Company, CHS
and others, in each case as I have deemed necessary or appropriate for the
purposes of this opinion.
In all such examinations, I have assumed the legal capacity of all
natural persons, the genuineness of all signatures, the authenticity of original
and certified documents and the conformity to original or certified copies of
all copies submitted to me as conformed or reproduction copies. As to various
questions of fact relevant to the opinions expressed herein, I have relied upon,
and assume the accuracy of, the representations and warranties contained in the
Purchase Agreements and certificates and oral or written statements and other
information of or from public officials, officers or representatives of the
Company, CHS and others and assume compliance on the part of all parties to the
Purchase Agreements with the covenants and agreements contained therein.
Based upon the foregoing, and subject to the limitations,
qualifications and assumptions set forth herein, I am of the opinion that:
1. The Company is duly qualified as a foreign corporation to transact
business and is in good standing in each jurisdiction in which such
qualification is required, whether by reason of the ownership or leasing of
property or the conduct of business, except where the failure so to qualify or
to be in good standing would not result in a Material Adverse Effect.
2. Each subsidiary of the Company has been duly incorporated and is
validly existing as a corporation in good standing under the laws of the
jurisdiction of its incorporation, has corporate power and authority to own,
lease and operate its properties
<PAGE>
Merrill Lynch & Co. et al.
3 ______________, 2000
and to conduct its business as described in the Prospectuses and is duly
qualified as a foreign corporation to transact business and is in good standing
in each jurisdiction in which such qualification is required, whether by reason
of the ownership or leasing of property or the conduct of business, except where
the failure so to qualify or to be in good standing would not result in a
Material Adverse Effect.
3. Except as otherwise disclosed in the Registration Statement, all of
the issued and outstanding capital stock of each Subsidiary has been duly
authorized and validly issued, is fully paid and non-assessable and, to the best
of my knowledge, is owned by the Company, directly or through subsidiaries, free
and clear of any security interest, mortgage, pledge, lien, encumbrance, claim
or equity; none of the outstanding shares of capital stock of any Subsidiary was
issued in violation of the preemptive or similar rights of any securityholder of
such Subsidiary.
4. All descriptions in the Prospectuses of contracts and other
documents to which the Company, CHS or their subsidiaries are a party are
accurate in all material respects; to the best of my knowledge, there are no
franchises, contracts, indentures, mortgages, loan agreements, notes, leases or
other instruments required to be described or referred to in the Registration
Statement or to be filed as exhibits thereto other than those described or
referred to therein or filed as exhibits thereto, and the descriptions thereof
or references thereto are correct in all material respects.
5. None of the Company or CHS is in violation of its charter or
by-laws.
6. The Company, CHS and each of their subsidiaries and each of the
hospitals owned, leased or operated by any of them have all necessary permits,
licenses, certificates, approvals (including, without limitation, certification
under the Medicare and Medicaid programs), accreditations (including, without
limitation, accreditation by the Joint Commission on Accreditation of Healthcare
Organizations) and other authorizations ("Governmental Licenses") (except where
the failure to have such Governmental Licenses, individually or in the
aggregate, would not reasonably be expected to have a material adverse effect on
the business, operations or financial condition of the Company, CHS and their
subsidiaries taken as a whole), to own their respective properties and to
conduct their respective businesses as now being conducted.
7. No filing, consent, approval, authorization, order, registration or
qualification of or with any Tennessee court or governmental agency or body is
required by or on behalf of the Company for the sale of the Securities or the
consummation by the Company and CHS of the transactions contemplated by the
Purchase Agreements, expect for such consents, approvals, authorizations,
orders, registrations or qualifications as may be required under state or
foreign securities or Blue Sky laws, rules and regulations in connection with
the purchase and distribution of the Securities by the Underwriters.
<PAGE>
Merrill Lynch & Co. et al.
4 ______________, 2000
8. There is not pending or, to my knowledge, threatened any action,
suit, proceeding, inquiry or investigation to which the Company or any
subsidiary is a party, or to which the property of the Company or any subsidiary
is subject, before or brought by any court or governmental agency or body,
domestic or foreign, which would reasonably result in a Material Adverse Effect,
or which might reasonably be expected to materially and adversely affect the
consummation of the Recapitalization, the transactions contemplated in the
Purchase Agreements or the performance by the Company of its obligations
thereunder; it being understood that I express no opinion with respect to any
"qui tam" action as to which I have no knowledge of its pendency.
9. The statements in the Prospectuses under "Business - Legal
Proceedings," "Business - Government Regulations", Business - Payment" and
"Business - Compliance Program," in so far as they constitute summaries of legal
matters or documents referred to therein, fairly summarize in all material
respects the matters referred to therein.
In the course of the preparation by the Company of the Registration
Statement and the Prospectuses, I attended conferences with certain of the
officers and representatives of the Company and CHS, representatives of the
independent public accountants for the Company and CHS and representatives of
the Underwriter, at which the contents of the Registration Statement and the
Prospectuses were discussed. Between the date of effectiveness of the
Registration Statement and the time of delivery of this opinion, I attended
additional conferences with certain of the officers and representatives of, and
the independent public accountants for, the Company and CHS, at which the
contents of the Prospectuses were discussed to a limited extent. Given the
limitations inherent in the independent verification of factual matters and the
character of determinations involved in the registration process, I am not
passing upon and do not assume any responsibility for the accuracy, completeness
or fairness of the statements contained in the Registration Statement and the
Prospectuses, other than as set forth in paragraph 5 above. Subject to the
foregoing and on the basis of the information I gained in the performance of the
services referred to above, including information obtained from officers and
other representatives of, and the independent accountants for, the Company and
CHS, nothing has come to my attention that causes me to believe that, as of the
time it became effective, the Registration Statement contained an untrue
statement of a material fact or omitted to state a material fact required to be
stated therein or necessary to make the statements therein not misleading, or
that the Prospectuses as of their dates contained any untrue statement of a
material fact or omitted to state a material fact required to be stated therein
or necessary in order to make the statements therein, in light of the
circumstances under which they were made, not misleading. Also, subject to the
foregoing, nothing has come to my attention in the course of proceedings
described in the second sentence of this paragraph that causes me to believe
that the Prospectuses on the date and time of delivery of this letter contain an
untrue statement of a material fact or omit to state a material fact necessary
to make the statements therein, in light of the circumstances under
<PAGE>
Merrill Lynch & Co. et al.
5 ______________, 2000
which they were made, not misleading. I express no view or belief, however, with
respect to the financial statements, related notes and schedules thereto and
other financial data included in or omitted from the Registration Statement or
the Prospectuses.
The opinions expressed herein are limited to the federal laws of the
United States of America, the laws of the State of Tennessee and, to the extent
relevant to the opinions expressed herein, the General Corporation Law of the
State of Delaware, each as currently in effect. The opinions expressed herein
are given as of the date hereof, and I undertake no obligation to supplement
this letter if any applicable laws change after the date hereof or if I become
aware of any facts that might change the opinions expressed herein after the
date hereof or for any other reason.
The opinions expressed herein are solely for your benefit in connection
with the Purchase Agreements and may not be relied on in any manner or for any
purpose by any other person or entity and may not be quoted in whole or in part
without my prior written consent.
Very truly yours,
Rachel A. Seifert
Vice President, Secretary
and General Counsel
<PAGE>
<PAGE>
Exhibit A-2
FORM OF OPINION OF FRIED, FRANK,
HARRIS, SHRIVER & JACOBSON
TO BE DELIVERED PURSUANT TO
SECTION 5(b)(ii)
212-859-8136
_________, 2000 (FAX: 212-859-8586)
Merrill Lynch & Co.
Merrill Lynch, Pierce, Fenner & Smith
Incorporated
Banc of America Securities LLC
Chase Securities Inc.
Credit Suisse First Boston Corporation
Goldman, Sachs & Co.
Morgan Stanley & Co. Incorporated
As U.S. Representatives of the several U.S. Underwriters
c/o Merrill Lynch & Co.
Merrill Lynch, Pierce, Fenner & Smith
Incorporated
North Tower
World Financial Center
New York, New York 10281-1209
Merrill Lynch International
Bank of America International Limited
Chase Securities Inc.
Credit Suisse First Boston (Europe) Limited
Goldman Sachs International
Morgan Stanley & Co. International Limited
As Lead Managers of the several International Managers
c/o Merrill Lynch International
Ropemaker Place
25 Ropemaker Street
London, England EC2Y 9LY
Ladies and Gentlemen:
We are acting as special counsel to Community Health Systems, Inc., a
Delaware corporation (the "Company"), and CHS/Community Health Systems, Inc., a
Delaware corporation and a wholly owned subsidiary of the Company ("CHS"), in
<PAGE>
Merrill Lynch & Co. et al.
2 _____________,2000
connection with the underwritten public offering of ________ shares (the
"Securities") of common stock, par value $.01 per share (the "Common Stock"), of
the Company. This opinion is delivered to you at the Company's request pursuant
to (i) Section 5(b)(ii) of the U.S. Purchase Agreement, dated __________, 2000
(the "U.S. Purchase Agreement"), among the Company, CHS and Merrill Lynch & Co.,
Merrill Lynch, Pierce, Fenner & Smith Incorporated, Banc of America Securities
LLC, Chase Securities Inc., Credit Suisse First Boston Corporation, Goldman,
Sachs & Co. and Morgan Stanley & Co. Incorporated, as U.S. Representatives of
the several U.S. Underwriters named in Schedule A thereto, and (ii) Section
5(b)(ii) of the International Purchase Agreement, dated _________, 2000 (the
"International Purchase Agreement," and together with the U.S. Purchase
Agreement, the "Purchase Agreements"), among the Company, CHS and Merrill Lynch
International, Bank of America International Limited, Chase Securities Inc.,
Credit Suisse First Boston (Europe) Limited, Goldman Sachs International and
Morgan Stanley & Co. International Limited, as Lead Managers of the several
International Managers named in Schedule A thereto. All capitalized terms used
herein that are defined in, or by reference in, the Purchase Agreements have the
meanings assigned to such terms therein, or by reference therein, unless
otherwise defined herein. With your permission, all assumptions and statements
of reliance expressly set forth herein have been made without any independent
investigation or verification on our part except to the extent otherwise
expressly stated, and, except to the extent otherwise expressly stated, we
express no opinion with respect to the subject matter or accuracy of such
assumptions or items relied upon.
In connection with this opinion, we have (i) investigated such
questions of law, (ii) examined originals or certified, conformed or
reproduction copies of such agreements, instruments, documents and records of
the Company and CHS, such certificates of public officials and such other
documents and (iii) received such information from officers and representatives
of the Company, CHS and others, in each case as we have deemed necessary or
appropriate for the purposes of this opinion.
In all such examinations, we have assumed the legal capacity of all
natural persons, the genuineness of all signatures, the authenticity of original
and certified documents and the conformity to original or certified copies of
all copies submitted to us as conformed or reproduction copies. As to various
questions of fact relevant to the opinions expressed herein, we have relied
upon, and assume the accuracy of, the representations and warranties contained
in the Purchase Agreements and certificates and oral or written statements and
other information of or from public officials, officers or representatives of
the Company, CHS and others, and assume compliance on the part of all parties to
the Purchase Agreements with the covenants and agreements contained therein.
Insofar as statements herein are based upon our knowledge, such phrase means and
is limited to the conscious awareness of facts or other information by lawyers
in this Firm who gave substantive attention to the representation of the Company
and CHS in connection with the Purchase Agreements.
<PAGE>
Merrill Lynch & Co. et al.
3 _____________,2000
With respect to the opinion expressed in the second sentence of
paragraph 3 below, we have relied solely on the stock transfer books of the
Company. With respect to the opinions expressed in paragraphs 10 and 11 below,
our opinions are is limited to our review of only those laws and regulations
that, in our experience, are normally applicable to transactions of the type
contemplated in the Purchase Agreements. With respect to the opinion expressed
in paragraph 7, we have relied solely on the oral advice of the Staff of the
Securities and Exchange Commission (the "Commission") that the Commission has
issued an order declaring the registration under the 1933 Act of the U.S.
Securities effective and as to the absence of any stop order or any proceeding
relating thereto.
Based upon the foregoing, and subject to the limitations,
qualifications and assumptions set forth herein, we are of the opinion that:
1. The Company has been duly incorporated and is validly existing as a
corporation in good standing under the laws of the State of Delaware. CHS has
been incorporated and is validly existing as a corporation in good standing
under the laws of the State of Delaware.
2. Each of the Company and CHS has the corporate power and authority to
own, lease and operate its properties and to conduct its business as described
in the Prospectuses and to enter into and perform its obligations under the
Purchase Agreements.
3. The Company has an authorized capitalization as set forth in the
Prospectuses under the caption "Capitalization". The outstanding shares of
Common Stock have been duly authorized and validly issued and are fully paid and
non-assessable. None of the outstanding shares of Common Stock were issued in
violation of the preemptive or other similar rights of any securityholder of the
Company.
4. The Securities to be purchased by the Underwriters from the Company
pursuant to the Purchase Agreements have been duly authorized for issuance and
sale to the Underwriters and, when issued and delivered by the Company pursuant
to the Purchase Agreements against payment of the consideration set forth in the
Purchase Agreements, will be duly authorized, validly issued, fully paid and
non-assessable and no holder of the Securities will be subject to personal
liability under the Delaware General Corporation Law by reason of being such a
holder.
5. The issuance and sale of the Securities by the Company is not
subject to preemptive or other similar rights arising under (i) the Delaware
General Corporation Law, (ii) the Restated Certificate of Incorporation or
By-laws of the Company, or (iii) any indenture, mortgage, deed of trust, loan
agreement, other agreement or instrument, or court decree or order (including,
without limitation, any settlement agreement)
<PAGE>
Merrill Lynch & Co. et al.
4 _____________,2000
which has been filed as an exhibit to the Registration Statement or otherwise
identified to us in a certificate provided by the Chief Financial Officer and
the General Counsel of the Company as material to the Company and its
subsidiaries taken as a whole (collectively, the "Identified Documents").
6. Each of the Purchase Agreements has been duly authorized, executed
and delivered by the Company and CHS.
7. The Registration Statement[, including any Rule 462(b) Registration
Statement,] has been declared effective under the 1933 Act and no stop order
suspending the effectiveness of the Registration Statement has been issued under
the 1933 Act and no proceedings for that purpose have been instituted or are
pending or threatened by the Commission. Any required filing of the Prospectuses
pursuant to Rule 424(b) has been made in the manner and within the time period
required by Rule 424(b).
8. The Registration Statement[, including any Rule 462(b) Registration
Statement,] the Prospectuses[, and each amendment or supplement to the
Registration Statement and the Prospectuses,] as of their respective effective
or issue dates (other than the financial statements, related notes, supporting
schedules and other financial data included therein or omitted therefrom, as to
which we express no opinion) appeared on their face to be responsive as to form
in all material respects with the requirements of the 1933 Act and the 1933 Act
Regulations.
9. The statements in the Prospectuses under "Description of Capital
Stock," "Description of our Indebtedness," "Shares Eligible for Future Sale" and
"United States Federal Income Tax Considerations for Non-United States Holders"
and the statements in the Registration Statement under Item 14, in so far as
they constitute summaries of legal matters or documents referred to therein,
fairly summarize in all material respects the matters referred to therein.
10. No filing, consent, approval, authorization, order, registration or
qualification of or with any United States, New York or, with respect to matters
arising under the Delaware General Corporation Law, Delaware court or
governmental agency or body is required by or on behalf of the Company for the
sale of the Securities or the consummation by the Company and CHS of the
transactions contemplated by the Purchase Agreements, except the registration
under the 1933 Act of the Securities and such consents, approvals,
authorizations, orders, registrations or qualifications as may be required under
state or foreign securities or Blue Sky laws, rules and regulations in
connection with the purchase and distribution of the Securities by the
Underwriters.
<PAGE>
Merrill Lynch & Co. et al.
5 _____________,2000
11. The execution, delivery and performance by the Company and CHS with
all of the provisions of the Purchase Agreements and the consummation of the
transactions contemplated by the Purchase Agreements and the Recapitalization do
not and will not conflict with, or result in a breach or violation of, any of
the terms or provisions of, or constitute a default or a Repayment Event under,
or result in the creation or imposition of any lien, charge or encumbrance upon
any property or assets of the Company, CHS or any of their subsidiaries pursuant
to, (i) any indenture, mortgage, deed of trust, loan agreement or other
agreement or instrument to which the Company or any of its subsidiaries is a
party or by which the Company or any of its subsidiaries is bound or to which
any of the property or assets of the Company or any of its subsidiaries is
subject, (ii) the provisions of the Restated Certificate of Incorporation or
By-laws of the Company, (iii) the Delaware General Corporation Law or any
present law, or present regulation of any government agency or authority, of the
State of New York or the United States of America known by us to be applicable
to the Company or any of its subsidiaries or their respective properties or (iv)
any court decree or order binding upon the Company or any of its subsidiaries or
their respective properties (it being understood that with respect to the
opinions in clauses (i) and (iv) of this paragraph, such opinions are limited to
the Identified Documents.
12. Other than as disclosed in the Prospectuses, to our knowledge,
there are no persons with registration rights or other similar rights to have
any securities of the Company registered pursuant to the Registration Statement
or otherwise registered by the Company under the 1933 Act.
13. The Company is not an "investment company," as such term is defined
in the Investment Company Act of 1940, as amended.
14. The Recapitalization was duly authorized by the Company's Board of
Directors and stockholders and has been consummated in accordance with its
terms.
In the course of our engagement to represent or to advise the Company,
we have not become aware of any pending legal proceeding before, or pending
investigation by, any court or administrative agency or authority or any
arbitration tribunal of the United States or the State of New York against or
directly affecting the Company, CHS or any of their respective subsidiaries or
properties which seeks to enjoin or otherwise prevent the consummation of, or to
recover any damages or obtain relief in connection with or which would
materially adversely affect the legality, validity or enforceability of, the
Purchase Agreements, the Recapitalization or the transactions contemplated
thereby. In making the foregoing statement, we have endeavored, to the extent we
have believed necessary, to determine from lawyers currently in our Firm who
have performed substantive legal services for the Company, whether such services
involved substantive attention in the form of legal representation concerning
pending legal proceedings or pending investigations of the nature referred to
above. Beyond that, we have not made any
<PAGE>
Merrill Lynch & Co. et al.
6 _____________,2000
review, search or investigation of public files or records or files or records
of the Company, CHS or any of their respective subsidiaries or of their
transactions, or any other investigation or inquiry with respect to the
foregoing statement.
In the course of the preparation by the Company of the Registration
Statement and the Prospectuses, we attended conferences with certain of the
officers and other representatives of the Company and CHS, representatives of
the independent public accountants for the Company and CHS and representatives
of the Underwriters, at which the contents of the Registration Statement and the
Prospectuses were discussed. Between the date of effectiveness of the
Registration Statement and the time of delivery of this opinion, we attended
additional conferences with certain of the officers and representatives of, and
the independent public accountants for, the Company and CHS, at which the
contents of the Prospectuses were discussed to a limited extent. Given the
limitations inherent in the independent verification of factual matters and the
character of determinations involved in the registration process, we are not
passing upon and do not assume any responsibility for the accuracy,
completenesss or fairness of the statements contained in the Registration
Statement and the Prospectuses, other than as set forth in paragraph 9 above.
Subject to the foregoing and on the basis of the information we gained in the
performance of the services referred to above, including information obtained
from officers and other representatives of, and the independent accountants for,
the Company and CHS, nothing has come to our attention that causes us to believe
that, as of the time it became effective, the Registration Statement contained
an untrue statement of a material fact or omitted to state a material fact
required to be stated therein or necessary to make the statements therein not
misleading, or that the Prospectuses as of their dates contained any untrue
statement of a material fact or omitted to state a material fact required to be
stated therein or necessary in order to make the statements therein, in light of
the circumstances under which they were made, not misleading. Also, subject to
the foregoing, nothing has come to our attention in the course of proceedings
described in the second sentence of this paragraph that causes us to believe
that the Prospectuses on the date and time of delivery of this letter contain an
untrue statement of a material fact or omit to state a material fact necessary
to make the statements therein, in light of the circumstances under which they
were made, not misleading. We express no view or belief, however, with respect
to the financial statements, related notes and schedules thereto and other
financial data included in or omitted from the Registration Statement or the
Prospectuses.
<PAGE>
Merrill Lynch & Co. et al.
7 _____________,2000
The opinions set forth above are subject to the following
qualifications:
A. With respect to the opinion expressed in paragraph 11 above: (i) we
have made no independent investigation as to whether the Identified Documents
identified to us in the Officer's Certificate, which are governed by the laws of
any jurisdiction other than the State of New York, will be enforced as written
under the laws of such jurisdiction; and (ii) we express no opinion with respect
to any conflict with or any breach or violation of, or default under, any
Identified Document (x) not readily ascertainable from the face of such
document, (y) arising under or based upon any cross-default provisions insofar
as such conflict, breach, violation or default relates to a default under a
document which is not an Identified Document, or (z) arising under or based upon
any covenant of a financial or numerical nature or which requires arithmetic
computation.
B. We express no opinion as to the indemnity, contribution or governing
law provisions of any agreement.
C. The opinions expressed above are subject to the effect of, and we
express no opinions herein as to, the application of state or foreign securities
or Blue Sky laws or any rules and regulations thereunder.
The opinions expressed herein are limited to the federal laws of the
United States of America, the laws of the State of New York and, to the extent
relevant to the opinions expressed herein, the General Corporation Law of the
State of Delaware, each as currently in effect. The opinions expressed herein
are given as of the date hereof, and we undertake no obligation to supplement
this letter if any applicable laws change after the date hereof or if we become
aware of any facts that might change the opinions expressed herein after the
date hereof or for any other reason.
<PAGE>
Merrill Lynch & Co. et al.
8 _____________,2000
The opinions expressed herein are solely for your benefit in connection
with the Purchase Agreements and may not be relied on in any manner or for any
purpose by any other person or entity and may not be quoted in whole or in part
without our prior written consent.
Very truly yours,
FRIED, FRANK, HARRIS, SHRIVER & JACOBSON
By:
--------------------------------------
Jeffrey Bagner
<PAGE>
[FORM OF LOCK-UP AGREEMENT FROM DIRECTORS, OFFICERS OR
OTHER STOCKHOLDERS PURSUANT TO SECTION 5(I)]
Exhibit B
MERRILL LYNCH & CO.
Merrill Lynch, Pierce, Fenner & Smith
Incorporated
Banc of America Securities LLC
Chase Securities Inc.
Credit Suisse First Boston Corporation
Goldman, Sachs & Co.
Morgan Stanley & Co. Incorporated
as U.S. Representatives of the several
U.S. Underwriters to be named in the
within-mentioned U.S. Purchase Agreement
Merrill Lynch International
Bank of America International Limited
Chase Manhattan International Limited
Credit Suisse First Boston (Europe) Limited
Goldman Sachs International
Morgan Stanley & Co. International Limited
c/o Merrill Lynch & Co.
Merrill Lynch, Pierce, Fenner & Smith
Incorporated
North Tower
World Financial Center
New York, New York 10281-1209
Re: PROPOSED PUBLIC OFFERING BY COMMUNITY HEALTH SYSTEMS
Dear Sirs:
The undersigned, a stockholder and/or an officer and/or a director of Community
Health Systems, Inc. a Delaware corporation (the "Company"), understands that
(i) Merrill Lynch & Co., Merrill Lynch, Pierce, Fenner & Smith Incorporated
("Merrill Lynch") and Banc of America Securities LLC, Chase Securities Inc.,
Credit Suisse First Boston Corporation, Goldman, Sachs & Co. and Morgan Stanley
& Co. Incorporated propose to enter into a U.S. Purchase Agreement (the "U.S.
Purchase Agreement") with the Company providing for the public offering of
shares (the "Securities") of the Company's common stock, par value $.01 per
share (the "Common Stock") and (ii) Merrill Lynch International, Bank of America
International Limited, Chase Manhattan International Limited, Credit Suisse
First Boston (Europe) Limited, Goldman Sachs International and Morgan Stanley &
Co. International Limited propose to enter into an International Purchase
Agreement with the Company providing for the public offering of the Common Stock
of the Company (together with the U.S. Purchase Agreement, the "Purchase
Agreements"). In recognition of the benefit that such an offering will confer
upon the
<PAGE>
undersigned as a stockholder and/or an officer and/or a director of the Company,
and for other good and valuable consideration, the receipt and sufficiency of
which are hereby acknowledged, the undersigned agrees with each underwriter to
be named in the Purchase Agreements that, during a period of 180 days from the
date of the Purchase Agreements, the undersigned will not, without the prior
written consent of Merrill Lynch, directly or indirectly, (i) offer, pledge,
sell, contract to sell, sell any option or contract to purchase, purchase any
option or contract to sell, grant any option, right or warrant for the sale of,
or otherwise dispose of or transfer any shares of the Company's Common Stock or
any securities convertible into or exchangeable or exercisable for Common Stock,
whether now owned or hereafter acquired by the undersigned or with respect to
which the undersigned has or hereafter acquires the power of disposition, or
file any registration statement under the Securities Act of 1933, as amended,
with respect to any of the foregoing or (ii) enter into any swap or any other
agreement or any transaction that transfers, in whole or in part, directly or
indirectly, the economic consequence of ownership of the Common Stock, whether
any such swap or transaction is to be settled by delivery of Common Stock or
other securities, in cash or otherwise.
Notwithstanding the foregoing, the undersigned may transfer shares of Common
Stock (i) as a BONA FIDE gift or gifts, provided that prior to such transfer the
donee or donees thereof agree in writing to be bound by the restrictions set
forth herein, (ii) to any trust for the direct or indirect benefit of the
undersigned or the immediate family of the undersigned, provided that prior to
such transfer the trustee of the trust agrees in writing to be bound by the
restrictions set forth herein, and provided further that any such transfer shall
not involve a disposition for value or (iii) if such transfer occurs by
operation of law, such as rules of descent and distribution, statutes governing
the effects of a merger or a qualified domestic order, provided that prior to
such transfer the transferee executes an agreement stating that the transferee
is receiving and holding the shares subject to the provisions of this agreement.
For purposes of this Lock-Up Agreement, "immediate family" shall mean any
relationship by blood, marriage or adoption, not more remote than first cousin.
Very truly yours,
Signature:
Print Name:
- 2 -
<PAGE>
Exhibit 1.2
''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''
COMMUNITY HEALTH SYSTEMS, INC.
(a Delaware corporation)
__ Shares of Common Stock
INTERNATIONAL PURCHASE AGREEMENT
Dated:____, 2000
''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''
<PAGE>
TABLE OF CONTENTS
<TABLE>
<S> <C> <C> <C>
INTERNATIONAL PURCHASE AGREEMENT..................................................................1
SECTION 1. Representations and Warranties..................................................4
(a) Representations and Warranties by the Company...................................4
(b) Officer's Certificates.........................................................15
SECTION 2. Sale and Delivery to U.S. Underwriters; Closing................................15
(a) Initial Securities.............................................................15
(b) Option Securities..............................................................15
(c) Payment........................................................................16
(d) Denominations; Registration....................................................16
SECTION 3. Covenants of the Company.......................................................17
(a) Compliance with Securities Regulations and
Commission Requests............................................................17
(b) Filing of Amendments...........................................................17
(c) Delivery of Registration Statements............................................17
(d) Delivery of Prospectuses.......................................................18
(e) Continued Compliance with Securities Laws......................................18
(f) Blue Sky Qualifications........................................................18
(g) Rule 158.......................................................................19
(h) Use of Proceeds................................................................19
(i) Listing........................................................................19
(j) Restriction on Sale of Securities..............................................19
(k) Reporting Requirements.........................................................19
(l) Compliance with NASD Rules.....................................................20
(m) Compliance with Rule 463.......................................................20
SECTION 4. Payment of Expenses ...........................................................20
(a) Expenses.......................................................................20
(b) Termination of Agreement.......................................................20
SECTION 5. Conditions of U.S. Underwriters' Obligations...................................21
(a) Effectiveness of Registration Statement........................................21
(b) Opinion of Counsel for the Company.............................................21
(c) Opinion of Counsel for the U.S. Underwriters...................................21
(d) Officers' Certificate..........................................................21
(e) Accountant's Comfort Letter....................................................22
(f) Bring-down Comfort Letter......................................................22
(g) Approval of Listing............................................................22
(h) No Objection...................................................................22
(i) Lock-up Agreements.............................................................22
(j) Purchase of Initial International Securities...................................22
(k) Recapitalization...............................................................23
(l) Conditions to Purchase of U.S. Option Securities...............................23
</TABLE>
<PAGE>
<TABLE>
<S> <C> <C> <C>
(m) Additional Documents...........................................................23
(n) Termination of Agreement.......................................................24
SECTION 6. Indemnification ...............................................................24
(a) Indemnification of the U.S. Underwriters.......................................24
(b) Indemnification of Company, Directors and Officers.............................25
(c) Actions against Parties; Notification..........................................26
(d) Settlement without Consent if Failure to Reimburse.............................26
(e) Indemnification for Reserved Securities........................................26
SECTION 7. Contribution ..................................................................27
SECTION 8. Representations, Warranties and Agreements to Survive Delivery.................28
SECTION 9. Termination of Agreement.......................................................28
(a) Termination; General...........................................................28
(b) Liabilities....................................................................29
SECTION 10. Default by One or More of the U.S. Underwriters................. ..............29
SECTION 11. Notices .......................................................................30
SECTION 12. Parties .......................................................................30
SECTION 13. GOVERNING LAW AND TIME ........................................................30
SECTION 14. Effect of Headings ............................................................30
</TABLE>
<PAGE>
<TABLE>
<S> <C> <C>
SCHEDULES
Schedule A - List of Underwriters......................................................Sch A-1
Schedule B - Pricing Information.......................................................Sch B-1
Schedule C - List of Persons subject to Lock-up........................................Sch C-1
</TABLE>
<PAGE>
<TABLE>
<S> <C> <C>
EXHIBITS
Exhibit A-1 - Form of Opinion of Company's General Counsel.........................A-1-1
Exhibit A-2 - Form of Opinion of Fried, Frank, Harris, Shriver
& Jacobson.........................................................A-2-1
Exhibit B - Form of Lock-up Letter..........................................B-1-1
</TABLE>
<PAGE>
COMMUNITY HEALTH SYSTEMS, INC.
(a Delaware corporation)
_ Shares of Common Stock
(Par Value $.01 Per Share)
INTERNATIONAL PURCHASE AGREEMENT
_, 2000
MERRILL LYNCH INTERNATIONAL
Bank of America International Limited
Chase Manhattan International Limited
Credit Suisse First Boston (Europe) Limited
Goldman Sachs International
Morgan Stanley & Co. International Limited
as Lead Underwriters of the several International Managers
c/o Merrill Lynch International
North Tower
World Financial Center
New York, New York 10281-1209
Ladies and Gentlemen:
Community Health Systems, Inc. (formerly known as Community
Health Systems Holding Corp.), a Delaware corporation (the "Company"), and
CHS/Community Health Systems, Inc. (formerly known as Community Health Systems,
Inc.), a Delaware corporation ("CHS"), confirm their agreement with Merrill
Lynch International and each of the other International Managers named in
Schedule A hereto (collectively, the "International Managers", which term shall
also include any underwriter substituted as hereinafter provided in Section 10
hereof), for whom Merrill Lynch, Bank of America International Limited, Chase
Securities Inc., Credit Suisse First Boston (Europe) Limited, Goldman Sachs
International and Morgan Stanley & Co. International Limited are acting as
representatives (in such capacity, the "Lead Managers"), with respect to the
issue and sale by the Company and the purchase by the International Managers,
acting severally and not jointly, of the respective numbers of shares of Common
Stock, par value $.01 per share, of the Company ("Common Stock") set forth in
said Schedule A, and with respect to the grant by the Company to the
International Managers, acting severally and not jointly, of the option
described in Section 2(b) hereof to purchase all or any part of up to _
additional shares of Common Stock to cover over-allotments, if any. The
aforesaid _ shares of Common Stock (the "Initial International Securities") to
be purchased by the International Managers and all or any part of the _ shares
of Common Stock subject to the option described in Section 2(b) hereof (the
"International Option Securities") are hereinafter called, collectively, the
"International Securities".
1
<PAGE>
It is understood that the Company and CHS are concurrently entering
into an agreement dated the date hereof (the "U.S. Purchase Agreement")
providing for the offering by the Company of an aggregate of _ shares of Common
Stock (the "Initial U.S. Securities") through arrangements with certain
underwriters in the United States and Canada (the "U.S. Underwriters") for which
Merrill Lynch & Co., Merrill Lynch, Pierce, Fenner & Smith Incorporated
(AMerrill Lynch@), Banc of America Securities LLC, Chase Securities Inc., Credit
Suisse First Boston Corporation, Goldman, Sachs & Co. and Morgan Stanley & Co.
Incorporated are acting as representatives (the "U.S. Representatives") and the
grant by the Company to the U.S. Underwriters, acting severally and not jointly,
of an option to purchase all or any part of the U.S. Underwriters' pro rata
portion of up to _ additional shares of Common Stock solely to cover
overallotments, if any (the "U.S. Option Securities" and, together with the
International Option Securities, the "Option Securities"). The Initial U.S.
Securities and the U.S. Option Securities are hereinafter called the "U.S.
Securities". It is understood that the Company is not obligated to sell, and the
International Managers are not obligated to purchase, any Initial International
Securities unless all of the Initial U.S. Securities are contemporaneously
purchased by the U.S. Underwriters.
The International Managers and the U.S. Underwriters are hereinafter
collectively called the "Underwriters", the Initial International Securities and
the Initial U.S. Securities are hereinafter collectively called the "Initial
Securities", and the International Securities and the U.S. Securities are
hereinafter collectively called the "Securities".
The Underwriters will concurrently enter into an Intersyndicate
Agreement dated the date hereof (the "Intersyndicate Agreement") providing for
the coordination of certain transactions among the Underwriters under the
direction of Merrill Lynch (in such capacity, the "Global Coordinator").
The Company and CHS understand that the International Managers propose
to make a public offering of the International Securities as soon as the Lead
Managers deem advisable after this Agreement has been executed and delivered.
The Company, CHS and the International Managers agree that up to _
shares of the Initial International Securities to be purchased by the
International Managers and that up to _ shares of the Initial U.S. Securities to
be purchased by the U.S. Underwriters (collectively, the "Reserved Securities")
shall be reserved for sale by the Underwriters to some of the Company's
directors, officers, employees, business associates and related persons
(collectively, "Eligible Persons"), as part of the distribution of the
Securities by the Underwriters, subject to the terms of this Agreement, the U.S.
Purchase Agreement, the applicable rules, regulations and interpretations of the
National Association of Securities Dealers, Inc. (the "NASD"), the 1933 Act (as
defined below), the 1933 Act Regulations (as defined below) and all other
applicable laws, rules and regulations. To the extent that such Reserved
Securities are not orally confirmed for purchase by such Eligible Persons by the
end of the first business day after the date of this Agreement, such Reserved
Securities may be offered to the public as part of the public offering
contemplated hereby.
2
<PAGE>
The Company has filed with the Securities and Exchange Commission (the
"Commission") a registration statement on Form S-1 (No. 333-_) covering the
registration of the Securities under the Securities Act of 1933, as amended (the
"1933 Act"), including the related preliminary prospectus or prospectuses.
Promptly after execution and delivery of this Agreement, the Company will
prepare and file a prospectus in accordance with the provisions of Rule 430A
("Rule 430A") of the rules and regulations of the Commission under the 1933 Act
(the "1933 Act Regulations") and paragraph (b) of Rule 424 ("Rule 424(b)") of
the 1933 Act Regulations. Two forms of prospectus are to be used in connection
with the offering and sale of the Securities: one relating to the International
Securities (the "Form of International Prospectus") and one relating to the U.S.
Securities (the "Form of U.S. Prospectus"). The Form of U.S. Prospectus is
identical to the Form of International Prospectus, except for the front cover
and back cover pages and the information under the caption "Underwriting." The
information included in any such prospectus that was omitted from such
registration statement at the time it became effective but that is deemed to be
part of such registration statement at the time it became effective pursuant to
paragraph (b) of Rule 430A is referred to as "Rule 430A Information." Each Form
of International Prospectus and Form of U.S. Prospectus used before such
registration statement became effective, and any prospectus that omitted the
Rule 430A Information that was used after such effectiveness and prior to the
execution and delivery of this Agreement, is herein called a "preliminary
prospectus." Such registration statement, including the exhibits thereto and
schedules thereto at the time it became effective and including the Rule 430A
Information, is herein called the "Registration Statement." Any registration
statement filed pursuant to Rule 462(b) of the 1933 Act Regulations is herein
referred to as the "Rule 462(b) Registration Statement," and after such filing
the term "Registration Statement" shall include the Rule 462(b) Registration
Statement. The final Form of International Prospectus and the final Form of U.S.
Prospectus in the forms first furnished to the Underwriters for use in
connection with the offering of the Securities are herein called the
"International Prospectus" and the "U.S. Prospectus," respectively, and
collectively, the "Prospectuses." For purposes of this Agreement, all references
to the Registration Statement, any preliminary prospectus, the International
Prospectus, the U.S. Prospectus or any amendment or supplement to any of the
foregoing shall be deemed to include the copy filed with the Commission pursuant
to its Electronic Data Gathering, Analysis and Retrieval system ("EDGAR").
Immediately prior to the consummation of the offering of the
Securities, (I) each outstanding share of the Company's Class B common stock
will be exchanged pursuant to the Company's certificate of incorporation for _
shares of the Company's Class A common stock; (ii) each outstanding option to
purchase a share of the Company's Class C common stock will be exchanged for an
option to purchase _ shares of the Company's Class A common STOCK; (iii) the
Class A common stock will be redesignated as Common Stock; (IV) the Company will
effect a _-for-_ stock split with respect to the Common Stock; aNd (v) the
Company's certificate of incorporation will be amended and restaTED to reflect a
single class of common stock (which is the Common Stock), and to increase the
number of authorized shares of Common Stock and preferred stock (collectively,
(i) through (v) are referred to as the "Recapitalization").
3
<PAGE>
SECTION 1. REPRESENTATIONS AND WARRANTIES.
(a) REPRESENTATIONS AND WARRANTIES BY THE COMPANY. The Company and CHS
represent and warrant to each International Manager as of the date hereof, as of
the Closing Time referred to in Section 2(c) hereof, and if any International
Option Securities are purchased, as of each Date of Delivery referred to in
Section 2(b) hereof, and agrees with each International Manager, as follows:
(i) COMPLIANCE WITH REGISTRATION REQUIREMENTS. Each of the
Registration Statement and any Rule 462(b) Registration Statement has
become effective under the 1933 Act and no stop order suspending the
effectiveness of the Registration Statement or any Rule 462(b)
Registration Statement has been issued under the 1933 Act and no
proceedings for that purpose have been instituted or are pending or,
to the knowledge of the Company, are contemplated by the Commission,
and any request on the part of the Commission for additional
information has been complied with in all material respects.
At the respective times the Registration Statement, any Rule
462(b) Registration Statement and any post-effective amendments
thereto became effective and at the Closing Time (and, if any
International Option Securities are purchased, at the Date of
Delivery), the Registration Statement, the Rule 462(b) Registration
Statement and any amendments and supplements thereto complied and will
comply in all material respects with the requirements of the 1933 Act
and the 1933 Act Regulations and did not and will not contain an
untrue statement of a material fact or omit to state a material fact
required to be stated therein or necessary to make the statements
therein not misleading, and the Prospectuses, any preliminary
prospectuses and any supplement thereto or prospectus wrapper prepared
in connection therewith, at their respective times of issuance and at
the Closing Time, complied and will comply in all material respects
with any applicable laws or regulations of foreign jurisdictions in
which the Prospectuses and such preliminary prospectuses, as amended
or supplemented, if applicable, are distributed in connection with the
offer and sale of Reserved Securities. Neither of the Prospectuses nor
any amendments or supplements thereto (including any prospectus
wrapper), at the time the Prospectuses or any amendments or
supplements thereto were issued and at the Closing Time (and, if any
International Option Securities are purchased, at each Date of
Delivery), included or will include an untrue statement of a material
fact or omitted or will omit to state a material fact necessary in
order to make the statements therein, in the light of the
circumstances under which they were made, not misleading. The
representations and warranties in this subsection shall not apply to
statements in or omissions from the Registration Statement or the
International Prospectus made in reliance upon and in conformity with
information furnished to the Company in writing by any International
Manager through the Lead Managers expressly for use in the
Registration Statement or the International Prospectus.
Each preliminary prospectus and the prospectuses filed as part of
the Registration Statement as originally filed or as part of any
amendment thereto, or filed pursuant to Rule 424 under the 1933 Act,
complied when so filed in all material respects with the 1933 Act
Regulations and each preliminary prospectus and the Prospectuses
delivered to the
4
<PAGE>
Underwriters for use in connection with this offering was identical to
the electronically transmitted copies thereof filed with the
Commission pursuant to EDGAR, except to the extent permitted by
Regulation S-T.
(ii) INDEPENDENT ACCOUNTANTS. The accountants who certified the
financial statements and supporting schedules included in the
Registration Statement are independent public accountants as required
by the 1933 Act and the 1933 Act Regulations.
(iii) FINANCIAL STATEMENTS. The consolidated financial statements
included in the Registration Statement and the Prospectuses, together
with the related schedules and notes, present fairly, in all material
respects, the financial position of the Company and its consolidated
subsidiaries at the dates indicated and the statement of operations,
stockholders' equity and cash flows of the Company and its
consolidated subsidiaries for the periods specified; said financial
statements have been prepared in conformity with generally accepted
accounting principles ("GAAP") applied, except as set forth in the
notes to the financial statements, on a consistent basis throughout
the periods involved. The supporting schedules included in the
Registration Statement present fairly, in all material respects, in
accordance with GAAP the information required to be stated therein.
The selected consolidated financial and other data and the summary
consolidated financial and other data included in the Prospectuses
present fairly, in all material respects, the information shown
therein and have been compiled on a basis consistent with that of the
audited consolidated financial statements included in the Registration
Statement. The pro forma financial information included in the
Registration Statement and the Prospectuses present fairly, in all
material respects, the information shown therein, and have been
properly compiled on the bases described therein, and the assumptions
used in the preparation thereof are reasonable and the adjustments
used therein are appropriate to give effect to the transactions and
circumstances referred to therein.
(iv) NO MATERIAL ADVERSE CHANGE IN BUSINESS. Since the respective
dates as of which information is given in the Registration Statement
and the Prospectuses, except as otherwise stated therein, (A) there
has been no material adverse change in the condition, financial or
otherwise, or in the earnings, business affairs or business prospects
of the Company and its subsidiaries considered as one enterprise,
whether or not arising in the ordinary course of business (a "Material
Adverse Effect"), (B) there have been no transactions entered into by
the Company or any of its subsidiaries, other than those in the
ordinary course of business, which are material with respect to the
Company and its subsidiaries considered as one enterprise, and (C)
there has been no dividend or distribution of any kind declared, paid
or made by the Company on any class of its capital stock.
(v) GOOD STANDING OF THE COMPANY. The Company has been duly
organized and is validly existing as a corporation in good standing
under the laws of the State of Delaware and has corporate power and
authority to own, lease and operate its properties and to conduct its
business as described in the Prospectuses and to enter into and
perform its obligations under this Agreement; and the Company is duly
qualified as a foreign
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corporation to transact business and is in good standing in each other
jurisdiction in which such qualification is required, whether by
reason of the ownership or leasing of property or the conduct of
business, except where the failure so to qualify or to be in good
standing could not result in a Material Adverse Effect.
(vi) GOOD STANDING OF SUBSIDIARIES. (A) Each "significant
subsidiary" of the Company (as such term is defined in Rule 1-02 of
Regulation S-X) and CHS, Community Health Investment Corporation, CHS
Professional Service Corporation and Hallmark Healthcare Corporation
and each other subsidiary which is a hospital holding company or an
operating hospital (each a "Subsidiary" and, collectively, the
"Subsidiaries") has been duly organized and is validly existing as a
corporation in good standing under the laws of the jurisdiction of its
incorporation, has corporate power and authority to own, lease and
operate its properties and to conduct its business as described in the
Prospectuses and is duly qualified as a foreign corporation to
transact business and is in good standing in each jurisdiction in
which such qualification is required, whether by reason of the
ownership or leasing of property or the conduct of business, except
where the failure so to qualify or to be in good standing would not
reasonably be expected to result in a Material Adverse Effect. Except
as otherwise disclosed in Exhibit 21 to the Registration Statement,
all of the issued and outstanding capital stock of each such
Subsidiary has been duly authorized and validly issued, is fully paid
and non-assessable and is owned by the Company, directly or through
subsidiaries, free and clear of any security interest, mortgage,
pledge, lien, encumbrance, claim or equity and none of the outstanding
shares of capital stock of any Subsidiary was issued in violation of
the preemptive or similar rights of any securityholder of such
Subsidiary. The only subsidiaries of the Company are (a) the
subsidiaries listed on Exhibit 21 to the Registration Statement and
(b) certain other subsidiaries which, considered in the aggregate as a
single Subsidiary, do not constitute a "significant subsidiary" as
defined in Rule 1-02 of Regulation S-X.
(B) Except to the extent disclosed in Exhibit 21 to the
Registration Statement, each of the hospitals described in the
Prospectuses as owned or leased by the Company is owned or leased and
operated by a Subsidiary of which the Company directly or indirectly
owns 100% of the outstanding ownership interests. Except as disclosed
in the Prospectuses, there are no encumbrances or restrictions on the
ability of any Subsidiary (i) to pay any dividends or make any
distributions on such Subsidiary's capital stock, (ii) to make any
loans or advances to, or investments in, the Company, CHS or any other
Subsidiary, or (iii) to transfer any of its property or assets to the
Company, CHS or any other Subsidiary.
(vii) CAPITALIZATION. The authorized, issued and outstanding
capital stock of the Company is as set forth in the Prospectuses in
the column entitled "Actual" under the caption "Capitalization"
(except for subsequent issuances, if any, pursuant to this Agreement,
pursuant to reservations, agreements or employee benefit plans
referred to in the Prospectuses or pursuant to the exercise of
convertible securities or options referred to in the Prospectuses).
The shares of issued and outstanding capital stock of the Company have
been duly authorized and validly issued and are fully paid and
non-assessable; none of the outstanding shares of capital stock of the
Company was issued in violation of the
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preemptive or other similar rights of any securityholder of the
Company. The shares of issued and outstanding capital stock of the
Company have been issued in compliance, in all material respects, with
all federal and state securities laws. Except as disclosed in the
Prospectuses, there are no outstanding options or warrants to
purchase, or any preemptive rights or other rights to subscribe for or
to purchase, any securities or obligations convertible into, or any
contracts or commitments to issue or sell, shares of the Company's
capital stock or any such options, warrants, rights, convertible
securities or obligations. The description of the Company's stock
option and purchase plans and the options or other rights granted and
exercised thereunder set forth in the Prospectuses accurately and
fairly describe, in all material respects, the information required to
be shown with respect to such plans, arrangements, options and rights.
(viii) AUTHORIZATION OF AGREEMENT. This Agreement and the U.S.
Purchase Agreement have been duly authorized, executed and delivered
by the Company.
(ix) AUTHORIZATION AND DESCRIPTION OF SECURITIES. The Securities
to be purchased by the International Managers and the U.S.
Underwriters from the Company have been duly authorized for issuance
and sale to the International Managers pursuant to this Agreement and
the U.S. Underwriters pursuant to the U.S. Purchase Agreement,
respectively, and, when issued and delivered by the Company pursuant
to this Agreement and the U.S. Purchase Agreement, respectively,
against payment of the consideration set forth herein and the U.S.
Purchase Agreement, respectively, will be validly issued, fully paid
and non-assessable; the Common Stock conforms, in all material
respects, to all statements relating thereto contained in the
Prospectuses and such description conforms to the rights set forth in
the Company's Restated Certificate of Incorporation to be in effect
following this offering, no holder of the Securities will be subject
to personal liability by reason of being such a holder; and the
issuance of the Securities is not subject to the preemptive or other
similar rights of any securityholder of the Company.
(x) The consummation of the Recapitalization has been duly
authorized by the Company's board of directors and security holders,
and no other corporate proceedings on the part of the Company are
needed to authorize the Recapitalization.
(xi) ABSENCE OF DEFAULTS AND CONFLICTS. Neither the Company nor
any of its subsidiaries is in violation of its charter or by-laws or
in default in the performance or observance of any obligation,
agreement, covenant or condition contained in any contract, indenture,
mortgage, deed of trust, loan or credit agreement, note, lease or
other agreement or instrument to which the Company or any of its
subsidiaries is a party or by which it or any of them may be bound, or
to which any of the property or assets of the Company or any
subsidiary is subject (collectively, "Agreements and Instruments"),
except for such defaults under Agreements and Instruments that would
not reasonably be expected to result in a Material Adverse Effect; and
the execution, delivery and performance of this Agreement and the U.S.
Purchase Agreement and the consummation of the transactions
contemplated in this Agreement, the U.S. Purchase Agreement and in the
Registration Statement (including the issuance and sale of the
Securities and the use of the proceeds
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from the sale of the Securities as described in the Prospectuses under
the caption "Use of Proceeds" and the completion of the
Recapitalization) and compliance by the Company and CHS with their
obligations under this Agreement and the U.S. Purchase Agreement have
been duly authorized by all necessary corporate action and, after
giving effect to the use of proceeds as contemplated in the
Prospectuses under the caption "Use of Proceeds," do not and will not,
whether with or without the giving of notice or passage of time or
both, conflict with or constitute a breach of, or default or Repayment
Event (as defined below) under, or result in the creation or
imposition of any lien, charge or encumbrance upon any property or
assets of the Company, CHS or any of their subsidiaries pursuant to,
the Agreements and Instruments (except for such conflicts, breaches or
defaults or liens, charges or encumbrances that would not reasonably
be expected to result in a Material Adverse Effect), nor will such
action result in any violation of the provisions of the charter or
by-laws of the Company, CHS or any of their subsidiaries or, any
applicable law, statute, rule, regulation, judgment, order, writ or
decree of any government, government instrumentality or court,
domestic or foreign, having jurisdiction over the Company, CHS or any
of their subsidiaries or any of their assets, properties or
operations. As used herein, a "Repayment Event" means any event or
condition which gives the holder of any note, debenture or other
evidence of indebtedness (or any person acting on such holder's
behalf) the right to require the repurchase, redemption or repayment
of all or a portion of such indebtedness by the Company, CHS or any of
their subsidiaries.
(xii) ABSENCE OF LABOR DISPUTE. No material labor dispute with
the employees of the Company, CHS or any of their subsidiaries exists
or, to the knowledge of the Company or CHS, is imminent, and neither
the Company nor CHS is aware of any existing or imminent labor
disturbance by the employees of any of their or any of their
subsidiaries' principal suppliers or contractors, which would
reasonably be expected to result in a Material Adverse Effect.
(xiii) ABSENCE OF PROCEEDINGS. There is no action, suit,
proceeding, inquiry or investigation before or brought by any court or
governmental agency or body, domestic or foreign, now pending (other
than any sealed "qui tam" actions of which neither the Company nor CHS
has any knowledge), or, to the knowledge of the Company or CHS,
threatened, against or affecting the Company, CHS or any of their
subsidiaries, which is required to be disclosed in the Registration
Statement (other than as disclosed therein), or which would reasonably
be expected to result in a Material Adverse Effect, or which could
materially and adversely affect the properties or assets thereof or
the consummation of the transactions contemplated in this Agreement
and the U.S. Purchase Agreement or the Recapitalization, or the
performance by the Company or CHS of their obligations hereunder or
thereunder; the aggregate of all pending legal or governmental
proceedings to which the Company, CHS or any of their subsidiaries is
a party or of which any of their respective property or assets is the
subject which are not described in the Registration Statement,
including ordinary routine litigation incidental to the business,
would not reasonably be expected to result in a Material Adverse
Effect.
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(xiv) ACCURACY OF EXHIBITS. There are no contracts or documents
which are required to be described in the Registration Statement or
the Prospectuses or to be filed as exhibits to the Registration
Statement which have not been so described and/or filed as required.
(xv) POSSESSION OF INTELLECTUAL PROPERTY. The Company, CHS and
their subsidiaries own or possess, or can acquire on reasonable terms,
adequate patents, patent rights, licenses, inventions, copyrights,
know-how (including trade secrets and other unpatented and/or
unpatentable proprietary or confidential information, systems or
procedures), trademarks, service marks, trade names or other
intellectual property (collectively, "Intellectual Property")
necessary to carry on in all material respects the business now
operated by them, and none of the Company, CHS or any of their
subsidiaries has received any notice or is otherwise aware of any
infringement of or conflict with asserted rights of others with
respect to any Intellectual Property or of any facts or circumstances
which could render any Intellectual Property invalid or inadequate to
protect the interest of the Company, CHS or any of their subsidiaries
therein, except for such infringements or conflicts (if the subject of
any unfavorable decision, ruling or finding) or invalidities or
inadequacies which would not, singly or in the aggregate, reasonably
be expected to result in a Material Adverse Effect.
(xvi) ABSENCE OF FURTHER REQUIREMENTS. No filing with, or
authorization, approval, consent, license, order, registration,
qualification or decree of, any court or governmental authority or
agency is necessary or required for the performance by the Company or
CHS of their obligations hereunder, in connection with the offering,
issuance or sale of the Securities under this Agreement and the U.S.
Purchase Agreement, the consummation of the Recapitalization or the
transactions contemplated by this Agreement and the U.S. Purchase
Agreement, except (i) such as have been already obtained or as may be
required under the 1933 Act or the 1933 Act Regulations and foreign or
state securities or blue sky laws and (ii) such as have been obtained
under the laws and regulations of jurisdictions outside the United
States in which the Reserved Securities are offered.
(xvii) POSSESSION OF LICENSES AND PERMITS. The Company, CHS and
their subsidiaries possess such permits, licenses, provider numbers,
certificates, approvals (including, without limitation, certificate of
need approvals), consents, orders, certifications (including, without
limitation, certification under the Medicare and Medicaid programs),
accreditations (including, without limitation, accreditation by the
Joint Commission on Accreditation of Healthcare Organizations) and
other authorizations (collectively, "Governmental Licenses") issued
by, and have made all declarations and filings with, the appropriate
federal, state, local or foreign regulatory agencies or bodies
necessary to conduct the business now operated by them (including,
without limitation, Governmental Licenses as are required (i) under
such federal and state healthcare laws as are applicable to the
Company, CHS and their subsidiaries and (ii) with respect to those
facilities operated by the Company, CHS or any of their subsidiaries
that participate in the Medicare and/or Medicaid programs, to receive
reimbursement thereunder), except where the failure to poses such
Government Licenses or to make such declarations and filings would not
reasonably be expected to result in a
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Material Adverse Effect; the Company, CHS and their subsidiaries are
in compliance with the terms and conditions of all such Governmental
Licenses, except where the failure so to comply would not, singly or
in the aggregate, reasonably be expected to result in a Material
Adverse Effect; all of the Governmental Licenses are valid and in full
force and effect, except when the invalidity of such Governmental
Licenses or the failure of such Governmental Licenses to be in full
force and effect would not reasonably be expected to result in a
Material Adverse Effect; and none of the Company, CHS or any of their
subsidiaries has received any notice of proceedings relating to the
revocation or modification of any such Governmental Licenses which,
singly or in the aggregate, if the subject of an unfavorable decision,
ruling or finding, would reasonably be expected to result in a
Material Adverse Effect. All of the hospitals operated by the Company,
CHS and their subsidiaries are "providers of services" as defined in
the Social Security Act and the regulations promulgated thereunder and
are eligible to participate in the Medicare and Medicaid programs (it
being understood that this representation and warranty is to the best
of the Company's and CHS's knowledge with respect to the five
hospitals acquired by the Company since September 1, 1999).
(xviii) ACCOUNTS RECEIVABLE. The accounts receivable of the
Company, CHS and their subsidiaries have been and will continue to be
adjusted to reflect material changes in the reimbursement policies of
third party payors such as Medicare, Medicaid, private insurance
companies, health maintenance organizations, preferred provider
organizations, managed care systems and other third party payors
(including, without limitation, Blue Cross plans). The accounts
receivable, after giving effect to the allowance for doubtful
accounts, relating to such third party payors do not and shall not
materially exceed amounts the Company, CHS and their subsidiaries are
entitled to receive.
(xix) COMPLIANCE WITH SOCIAL SECURITY ACT AND OTHER FEDERAL
ENFORCEMENT INITIATIVES. Neither the Company and CHS nor, to the
knowledge of the Company and CHS, any officers, directors or
stockholders, employees or other agents of the Company, CHS or any of
their subsidiaries or the hospitals operated by them, has engaged in
any activities which are prohibited under Federal Medicare and
Medicaid statutes including, but not limited to, 42 U.S.C. Sections
1320a-7 (Program Exclusion), 1320a-7a (Civil Monetary Penalties),
1320a-7b (the Anti-kickback Statute), 42 U.S.C. Section 1395nn and
1396b (the "Stark" law, prohibiting certain self-referrals), or any
other federal law, including, but not limited to, the federal TRICARE
statute, 10 U.S.C. Section 1071 ET SEQ., the Federal Civil False
Claims Act, 31 U.S.C. Sections 3729-32, Federal Criminal False Claims
Act, 18 U.S.C. Section 287, False Statements Relating to Health Care
Matters, 18 U.S.C. Section 1035, Health Care Fraud, 18 U.S.C. Section
1347, or the federal Food, Drug & Cosmetics Act, 21 U.S.C. Section
360aaa, or any regulations promulgated pursuant to such statutes, or
related state or local statutes or regulations or any rules of
professional conduct, including but not limited to the following: (i)
knowingly and willfully making or causing to be made a false statement
or representation of a material fact in any applications for any
benefit or payment under the Medicare or Medicaid program or from any
third party (where applicable federal or state
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law prohibits such payments to third parties); (ii) knowingly and
willfully making or causing to be made any false statement or
representation of a material fact for use in determining rights to any
benefit or payment under the Medicare or Medicaid program or from any
third party (where applicable federal or state law prohibits such
payments to third parties); (iii) failing to disclose knowledge by a
claimant of the occurrence of any event affecting the initial or
continued right to any benefit or payment under the Medicare or
Medicaid program or from any third party (where applicable federal or
state law prohibits such payments to third parties) on its own behalf
or on behalf of another, with intent to secure such benefit or payment
fraudulently; (iv) knowingly and willfully offering, paying,
soliciting or receiving any remuneration (including any kickback,
bribe or rebate), directly or indirectly, overtly or covertly, in cash
or in kind (a) in return for referring an individual to a Person for
the furnishing or arranging for the furnishing of any item or service
for which payment may be made in whole or in part by Medicare or
Medicaid or any third party (where applicable federal or state law
prohibits such payments to third parties), or (b) in return for
purchasing, leasing or ordering or arranging for or recommending the
purchasing, leasing or ordering of any good, facility, service, or
item for which payment may be made in whole or in part by Medicare or
Medicaid or any third party (where applicable federal or state law
prohibits such payments to third parties); (v) knowingly and willfully
referring an individual to a person with which they have ownership or
certain other financial arrangements (where applicable federal law
prohibits such referrals); and (vi) knowingly and willfully violating
any enforcement initiative instituted by any governmental agency
(including, without limitation, the Office of the Inspector General
and the Department of Justice), except for any such activities which
are specifically described in the Prospectus or which would not,
singly or in the aggregate, reasonably be expected to result in a
Material Adverse Effect.
(xx) REGULATORY FILINGS. None of the Company, CHS or any of their
subsidiaries or any of the hospitals operated by any of them has
failed to file with applicable regulatory authorities any statement,
report, information or form required by any applicable law, regulation
or order, except where the failure to be so in compliance could not,
individually or in the aggregate, have a Material Adverse Effect.
Except as described in the Prospectus, all such filings or submissions
were in compliance with applicable laws when filed and no deficiencies
have been asserted by any regulatory commission, agency or authority
with respect to any such filings or submissions, except for any such
failures to be in compliance or deficiencies which would not, singly
or in the aggregate, reasonably be expected to have a Material Adverse
Effect.
(xxi) TITLE TO PROPERTY. The Company, CHS and their subsidiaries
have good and marketable title to all real property owned by them and
good title to all other properties owned by them, in each case, free
and clear of all mortgages, pledges, liens, security interests,
claims, restrictions or encumbrances of any kind except such as (a)
are described in the Prospectuses or (b) do not, singly or in the
aggregate, in a manner that would reasonably be expected to result in
a Material Adverse Effect, affect the value of such property or
interfere with the use made or proposed to be made of such property by
the Company, CHS or any of their subsidiaries; and all of the leases
and subleases of the Company and their subsidiaries, considered as one
enterprise, and under which the Company, CHS or any of their
subsidiaries holds properties described in the Prospectuses, are in
full force and effect, and none of the Company, CHS or any of their
subsidiaries has any notice of any claim of any sort that has been
asserted by anyone adverse to the rights
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of the Company, CHS or any of their subsidiaries under any of the
leases or subleases mentioned above, or affecting or questioning the
rights of the Company, CHS or such subsidiary to the continued
possession of the leased or subleased premises under any such lease or
sublease, except where the failure to be in full force and effect or
such claim would not reasonably be expected to have a Material Adverse
Effect.
(xxii) INVESTMENT COMPANY ACT. None of the Company, CHS or their
subsidiaries is, and upon the issuance and sale of the Securities as
herein contemplated and the application of the net proceeds therefrom
as described in the Prospectuses none of them will be, an "investment
company" or an entity "controlled" by an "investment company" as such
terms are defined in the Investment Company Act of 1940, as amended
(the "1940 Act").
(xxiii) ENVIRONMENTAL LAWS. Except as described in the
Registration Statement and except as would not, singly or in the
aggregate, reasonably be expected to result in a Material Adverse
Effect, (A) none of the Company, CHS, their subsidiaries or any of the
hospitals owned, leased or operated by them is in violation of any
federal, state, local or foreign statute, law, rule, regulation,
standard, guide, ordinance, code, policy or rule of common law or any
judicial or administrative interpretation thereof, including any
judicial or administrative order, consent, decree or judgment,
relating to pollution or protection of human health or safety, the
environment (including, without limitation, ambient air, surface
water, groundwater, land surface or subsurface strata) or wildlife,
including, without limitation, laws and regulations relating to the
release or threatened release of chemicals, pollutants, contaminants,
wastes, toxic substances, hazardous substances (including, without
limitation, asbestos, polychlorinated biphenyls, urea-formaldehyde
insulation, petroleum or petroleum products) (collectively, "Hazardous
Materials") or to the manufacture, processing, distribution, use,
treatment, storage, disposal, transport or handling, release or
threatened release of Hazardous Materials (collectively,
"Environmental Laws"), (B) the Company, CHS, their subsidiaries and
each of the hospitals owned, leased or operated by them have all
permits, authorizations and approvals required under any applicable
Environmental Laws and are each in compliance with their requirements,
(C) there are no pending or threatened administrative, regulatory or
judicial actions, suits, demands, demand letters, claims, liens,
notices of noncompliance or violation, investigation or proceedings
relating to any Environmental Law against the Company, CHS, their
subsidiaries or any of the hospitals owned, leased or operated by them
and (D) there are no events or circumstances that might reasonably be
expected to form the basis of an order for clean-up or remediation, or
an action, suit or proceeding by any private party or governmental
body or agency, against or affecting the Company, CHS, any of their
subsidiaries or any of the hospitals owned, leased or operated by them
relating to Hazardous Materials or any Environmental Laws.
(xxiv) REGISTRATION RIGHTS. Except as disclosed in the
Prospectuses under the caption "Shares Eligible for Future
SaleBRegistration Rights," there are no persons with registration
rights or other similar rights to have any securities of the Company,
CHS or
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any of their subsidiaries registered pursuant to the Registration
Statement or otherwise registered by the Company or any other person
under the 1933 Act.
(xxv) INSURANCE. The Company, CHS and each of their subsidiaries
and each of the hospitals owned, leased or operated by them are
insured by insurers of recognized financial responsibility against
such loses and risks and in such amounts as are prudent and customary
in the healthcare industry; none of the Company, CHS, their
subsidiaries or any of the hospitals owned, leased or operated by them
has been refused any material insurance coverage sought or applied for
since January 1, 1999; and neither the Company nor CHS has any reason
to believe that it or any of the hospitals owned, leased or operated
by them, will not be able to renew its existing insurance coverage as
and when such coverage expires or to obtain similar coverage from
similar insurers as may be necessary to continue its operations except
where the failure to renew or maintain such coverage would not
reasonably be expected to result in a Material Adverse Effect. The
officers and directors of the Company are insured by insurers of
recognized financial responsibility against such losses and risks and
in such amounts as the Company believes are prudent and customary for
officers' and directors' liability insurance of a public company and
as the Company believes would cover claims which would reasonably be
expected to be made in connection with the issuance of the Securities;
and the Company has no reason to believe that it will not be able to
renew its existing directors' and officers' liability insurance
coverage as and when such coverage expires or to obtain similar
coverage from similar insurers as may be necessary to cover its
officers and directors.
(xxvi) TAX RETURNS AND PAYMENT OF TAXES. The Company, CHS and
their subsidiaries have timely filed all federal, state, local and
foreign tax returns that are required to be filed or has duly
requested extensions thereof and all such tax returns are true,
correct and complete, except to the extent that any failure to file or
request an extension, or any incorrectness would not reasonably be
expected to result in a Material Adverse Effect. The Company, CHS and
their subsidiaries have timely paid all taxes shown as due on such
filed tax returns (including any related assessments, fines or
penalties), except to the extent that any such taxes are being
contested in good faith and by appropriate proceedings, or to the
extent that any failure to pay would not reasonably be expected to
result in a Material Adverse Effect; and adequate charges, accruals
and reserves have been provided for in the financial statements
referred to in Section 1(a)(iii) above in accordance with GAAP in
respect of all Federal, state, local and foreign taxes for all periods
as to which the tax liability of the Company, CHS and their
subsidiaries has not been finally determined or remains open to
examination by applicable taxing authorities except (A) for taxes
incurred after the date of the financial statements referred to in
Section 1(a)(iii) or (B) where the failure to provide for such
charges, accruals and reserves would not reasonably be expected to
result in a Material Adverse Effect. None of the Company, CHS or their
subsidiaries is a "United States real property holding corporation"
within the meaning of Section 897(c)(2) of the Internal Revenue Code
of 1986, as amended (the "Code").
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(xxvii) NO STABILIZATION OR MANIPULATION. None of the Company,
CHS or their subsidiaries or, to the best of their knowledge, any of
their directors, officers or affiliates has taken or will take,
directly or indirectly, any action designed to, or that could be
reasonably expected to, cause or result in stabilization or
manipulation of the price of the Securities in violation of Regulation
M under the Securities Exchange Act of 1934, as amended (the "1934
Act").
(xxviii) CERTAIN TRANSACTIONS. Except as disclosed in the
Prospectuses, there are no outstanding loans, advances, or guarantees
of indebtedness by the Company, CHS or any of their subsidiaries to or
for the benefit of any of the executive officers or directors of the
Company or any of the members of the families of any of them that
would be required to be so disclosed under the 1933 Act, the 1933 Act
Regulations or Form S-1.
(xxix) STATISTICAL AND MARKET DATA. The statistical and
market-related data included in the Prospectuses are derived from
sources which the Company and CHS reasonably and in good faith believe
to be accurate, reasonable and reliable in all material respects and
the statistical and market-related data included in the Prospectuses
agrees with the sources from which it was derived in all material
respects.
(xxx) ACCOUNTING AND OTHER CONTROLS. The Company has established
a system of internal accounting controls sufficient to provide
reasonable assurances that (i) transactions were, are and will be
executed in accordance with management's general or specific
authorization; (ii) transactions were, are and will be recorded as
necessary to permit preparation of financial statements in conformity
with GAAP and to maintain accountability for assets; (iii) access to
assets was, is and will be permitted only in accordance with a
management's general or specific authorizations; and (iv) the recorded
accountability for assets was, is and will be compared with existing
assets at reasonable intervals and appropriate action was, is and will
be taken with respect to any differences.
(xxxi) YEAR 2000. The Company and CHS have reviewed their
operations and those of the hospitals owned, leased or operated by
them to evaluate the extent to which the business or operations or any
of the hospitals owned, leased or operated by them will be affected by
the Year 2000 Problem. The Company does not anticipate incurring
operating expenses or costs material to the financial position or
results of operations of the Company and the hospitals owned, leased
or operated by it in connection the Year 2000 Problem. As a result of
the aforementioned review, the Company has no reason to believe that
the Year 2000 Problem would reasonably be expected to have a Material
Adverse Effect. The "Year 2000 Problem" as used herein means any risk
that computer hardware or software used in the receipt, transmission,
processing, manipulation, storage, retrieval, retransmission or other
utilization of data or in the operation of mechanical or electrical
systems of any kind will not, in the case of dates or time periods
occurring after December 31, 1999, function at least as effectively as
in the case of dates or time periods occurring prior to January 1,
2000.
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(b) OFFICER'S CERTIFICATES. Any certificate signed by any officer of
the Company, CHS or any of their subsidiaries delivered to the Global
Coordinator, the Lead Managers or to counsel for the International Managers
shall be deemed a representation and warranty by the Company to each
International Manager as to the matters covered thereby.
SECTION 2. SALE AND DELIVERY TO U.S. UNDERWRITERS; CLOSING.
(a) INITIAL SECURITIES. On the basis of the representations and
warranties herein contained and subject to the terms and conditions herein set
forth, the Company agrees to sell to each International Manager, severally and
not jointly, and each International Manager, severally and not jointly, agrees
to purchase from the Company, at the price per share set forth in Schedule B,
the number of Initial International Securities set forth in Schedule A opposite
the name of such International Manager, plus any additional number of Initial
International Securities which such Underwriter may become obligated to purchase
pursuant to the provisions of Section 10 hereof.
(b) OPTION SECURITIES. In addition, on the basis of the
representations and warranties herein contained and subject to the terms and
conditions herein set forth, the Company hereby grants an option to the
International Managers, severally and not jointly, to purchase up to an
additional _ shares of Common Stock at the price per share set forth in Schedule
B, less an amount per share equal to any dividends or distributions declared by
the Company and payable on the Initial International Securities but not payable
on the International Option Securities. The option hereby granted will expire 30
days after the date hereof and may be exercised in whole or in part from time to
time only for the purpose of covering over-allotments which may be made in
connection with the offering and distribution of the Initial International
Securities upon notice by the Global Coordinator to the Company setting forth
the number of International Option Securities as to which the several
International Managers are then exercising the option and the time and date of
payment and delivery for such International Option Securities. Any such time and
date of delivery for the International Option Securities (a "Date of Delivery")
shall be determined by the Global Coordinator, but shall not be later than seven
full business days after the exercise of said option, nor in any event prior to
the Closing Time, as hereinafter defined. If the option is exercised as to all
or any portion of the International Option Securities, each of the International
Managers, acting severally and not jointly, will purchase that proportion of the
total number of International Option Securities then being purchased which the
number of Initial International Securities set forth in Schedule A opposite the
name of such International Manager bears to the total number of Initial
International Securities, subject in each case to such adjustments as the Global
Coordinator in its discretion shall make to eliminate any sales or purchases of
fractional shares.
(c) PAYMENT. Payment of the purchase price for, and delivery of
certificates for, the Initial Securities shall be made at the offices of
Debevoise & Plimpton, 875 Third Avenue, New York, New York 10022, or at such
other place as shall be agreed upon by the Global Coordinator and the Company,
at 9:00 A.M. (Eastern time) on the third (fourth, if the pricing occurs after
4:30 P.M. (Eastern time) on any given day) business day after the date hereof
(unless postponed in accordance with the provisions of Section 10), or such
other time not later than ten business
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days after such date as shall be agreed upon by the Global Coordinator and the
Company (such time and date of payment and delivery being herein called "Closing
Time").
In addition, in the event that any or all of the International Option
Securities are purchased by the International Managers, payment of the purchase
price for, and delivery of certificates for, such International Option
Securities shall be made at the above-mentioned offices, or at such other place
as shall be agreed upon by the Global Coordinator and the Company, on each Date
of Delivery as specified in the notice from the Global Coordinator to the
Company.
Payment shall be made to the Company by wire transfer of immediately
available funds to a bank account designated by the Company, against delivery to
the Lead Managers for the respective accounts of the International Managers of
certificates for the International Securities to be purchased by them. It is
understood that each International Manager has authorized the Lead Managers, for
its account, to accept delivery of, receipt for, and make payment of the
purchase price for, the Initial International Securities and the International
Option Securities, if any, which it has agreed to purchase. Merrill Lynch,
individually and not as representative of the International Managers, may (but
shall not be obligated to) make payment of the purchase price for the Initial
International Securities or the International Option Securities, if any, to be
purchased by any International Manager whose funds have not been received by the
Closing Time or the relevant Date of Delivery, as the case may be, but such
payment shall not relieve such International Manager from its obligations
hereunder.
(d) DENOMINATIONS; REGISTRATION. Certificates for the Initial
International Securities and the International Option Securities, if any, shall
be in such denominations and registered in such names as the Lead Managers may
request in writing at least one full business day before the Closing Time or the
relevant Date of Delivery, as the case may be. The certificates for the Initial
International Securities and the International Option Securities, if any, will
be made available for examination and packaging by the Lead Managers in The City
of New York not later than 10:00 A.M. (Eastern time) on the business day prior
to the Closing Time or the relevant Date of Delivery, as the case may be.
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(e) APPOINTMENT OF QUALIFIED INDEPENDENT UNDERWRITER. The Company
hereby confirms its engagement of Merrill Lynch as, and Merrill Lynch hereby
confirms its agreement with the Company to render services as, a "qualified
independent underwriter" within the meaning of Rule 2720 of the Conduct Rules of
the National Association of Securities Dealers, Inc. with respect to the
offering and sale of the International Securities. Merrill Lynch, solely in its
capacity as qualified independent underwriter and not otherwise, is referred to
herein as the "Independent Underwriter".
SECTION 3. COVENANTS OF THE COMPANY. The Company covenants with each
International Manager as follows:
(a) COMPLIANCE WITH SECURITIES REGULATIONS AND COMMISSION
REQUESTS. The Company, subject to Section 3(b), will comply with the
requirements of Rule 430A and will notify the Global Coordinator
immediately, and confirm the notice in writing, (i) when any
post-effective amendment to the Registration Statement shall become
effective, or any supplement to the Prospectuses or any amended
Prospectuses shall have been filed, (ii) of the receipt of any
comments from the Commission, (iii) of any request by the Commission
for any amendment to the Registration Statement or any amendment or
supplement to the Prospectuses or for additional information, and (iv)
of the issuance by the Commission of any stop order suspending the
effectiveness of the Registration Statement or of any order preventing
or suspending the use of any preliminary prospectus, or of the
suspension of the qualification of the Securities for offering or sale
in any jurisdiction, or of the initiation or threatening of any
proceedings for any of such purposes. The Company will promptly effect
the filings necessary pursuant to Rule 424(b) and will take such steps
as it deems necessary to ascertain promptly whether the form of
prospectus transmitted for filing under Rule 424(b) was received for
filing by the Commission and, in the event that it was not, it will
promptly file such prospectus. The Company will make every reasonable
effort to prevent the issuance of any stop order and, if any stop
order is issued, to obtain the lifting thereof at the earliest
possible moment.
(b) FILING OF AMENDMENTS. The Company will give the Global
Coordinator notice of its intention to file or prepare any amendment
to the Registration Statement (including any filing under Rule
462(b)), or any amendment, supplement or revision to either the
prospectus included in the Registration Statement at the time it
became effective or to the Prospectuses, will furnish the Global
Coordinator with copies of any such documents a reasonable amount of
time prior to such proposed filing or use, as the case may be, and
will not file or use any such document to which the Global Coordinator
or counsel for the International Managers shall reasonably object.
(c) DELIVERY OF REGISTRATION STATEMENTS. The Company has
furnished or will deliver to the Lead Managers and counsel for the
International Managers, without charge, signed copies of the
Registration Statement as originally filed and of each amendment
thereto (including exhibits filed therewith or incorporated by
reference therein) and signed copies of all consents and certificates
of experts, and will also deliver to the Lead Managers, without
charge, a conformed copy of the Registration Statement as originally
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filed and of each amendment thereto (without exhibits) for each of the
International Managers. The copies of the Registration Statement and
each amendment thereto furnished to the U.S. Underwriters will be
identical to the electronically transmitted copies thereof filed with
the Commission pursuant to EDGAR, except to the extent permitted by
Regulation S-T.
(d) DELIVERY OF PROSPECTUSES. The Company has delivered to each
International Manager, without charge, as many copies of each
preliminary prospectus as such International Manager reasonably
requested, and the Company hereby consents to the use of such copies
for purposes permitted by the 1933 Act. The Company will furnish to
each International Manager, without charge, during the period when the
International Prospectus is required to be delivered under the 1933
Act or the 1934 Act, such number of copies of the International
Prospectus (as amended or supplemented) as such International Manager
may reasonably request. The International Prospectus and any
amendments or supplements thereto furnished to the International
Manager will be identical to the electronically transmitted copies
thereof filed with the Commission pursuant to EDGAR, except to the
extent permitted by Regulation S-T.
(e) CONTINUED COMPLIANCE WITH SECURITIES LAWS. The Company will
comply with the 1933 Act and the 1933 Act Regulations so as to permit
the completion of the distribution of the Securities as contemplated
in this Agreement, the U.S. Purchase Agreement and in the
Prospectuses. If at any time when a prospectus is required by the 1933
Act to be delivered in connection with sales of the Securities, any
event shall occur or condition shall exist as a result of which it is
necessary, in the opinion of counsel for the International Managers or
for the Company, to amend the Registration Statement or amend or
supplement any Prospectus in order that the Prospectuses will not
include any untrue statement of a material fact or omit to state a
material fact necessary in order to make the statements therein not
misleading in the light of the circumstances existing at the time it
is delivered to a purchaser, or if it shall be necessary, in the
opinion of such counsel, at any such time to amend the Registration
Statement or amend or supplement any Prospectus in order to comply
with the requirements of the 1933 Act or the 1933 Act Regulations, the
Company will promptly prepare and file with the Commission, subject to
Section 3(b), such amendment or supplement as may be necessary to
correct such statement or omission or to make the Registration
Statement or the Prospectuses comply with such requirements, and the
Company will furnish to the International Managers such number of
copies of such amendment or supplement as the International Managers
may reasonably request.
(f) BLUE SKY QUALIFICATIONS. The Company will use its best
efforts, in cooperation with the International Managers, to qualify
the Securities for offering and sale under the applicable securities
laws of such states and other jurisdictions (domestic or foreign) as
the Global Coordinator may designate and to maintain such
qualifications in effect for a period of not less than one year from
the later of the effective date of the Registration Statement and any
Rule 462(b) Registration Statement; provided, however, that the
Company shall not be obligated to file any general consent to service
of process
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or to qualify as a foreign corporation or as a dealer in securities in
any jurisdiction in which it is not so qualified or to subject itself
to taxation in respect of doing business in any jurisdiction in which
it is not otherwise so subject. In each jurisdiction in which the
Securities have been so qualified, the Company will file such
statements and reports as may be required by the laws of such
jurisdiction to continue such qualification of the Securities in
effect for a period of not less than one year from the effective date
of the Registration Statement and any Rule 462(b) Registration
Statement.
(g) RULE 158. The Company will timely file such reports pursuant
to the 1934 Act as are necessary in order to make generally available
to its securityholders as soon as practicable an earnings statement
for the purposes of, and to provide the benefits contemplated by, the
last paragraph of Section 11(a) of the 1933 Act.
(h) USE OF PROCEEDS. The Company will use the net proceeds
received by it from the sale of the Securities in the manner specified
in the Prospectuses under "Use of Proceeds".
(i) LISTING. The Company will use its best efforts to effect and
maintain the quotation of the Common Stock (including the Securities)
on the New York Stock Exchange.
(j) RESTRICTION ON SALE OF SECURITIES. During a period of 180
days from the date of the Prospectuses, the Company will not, without
the prior written consent of the Global Coordinator, (i) directly or
indirectly, offer, pledge, sell, contract to sell, sell any option or
contract to purchase, purchase any option or contract to sell, grant
any option, right or warrant to purchase or otherwise transfer or
dispose of any share of Common Stock or any securities convertible
into or exercisable or exchangeable for Common Stock or file any
registration statement under the 1933 Act with respect to any of the
foregoing or (ii) enter into any swap or any other agreement or any
transaction that transfers, in whole or in part, directly or
indirectly, the economic consequence of ownership of the Common Stock,
whether any such swap or transaction described in clause (i) or (ii)
above is to be settled by delivery of Common Stock or such other
securities, in cash or otherwise. The foregoing sentence shall not
apply to (A) the Securities to be sold hereunder or under the U.S.
Purchase Agreement, (B) any shares of Common Stock issued by the
Company upon the exercise of an option or warrant or the conversion of
a security outstanding on the date hereof and referred to in the
Prospectuses, (C) any shares of Common Stock issued or options to
purchase Common Stock granted pursuant to employee benefit plans of
the Company referred to in the Prospectuses, (D) any shares of Common
Stock issued pursuant to any non-employee director stock plan or
dividend reinvestment plan, or (E) the issuance by the Company of
shares of Common Stock pursuant to the Recapitalization.
(k) REPORTING REQUIREMENTS. The Company, during the period when
the Prospectuses are required to be delivered under the 1933 Act or
the 1934 Act, will file all documents required to be filed with the
Commission pursuant to the 1934 Act within the
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time periods required by the 1934 Act and the rules and regulations of
the Commission thereunder.
(l) COMPLIANCE WITH NASD RULES. The Company hereby agrees that it
will ensure that the Reserved Securities will be restricted as
required by the NASD rules from sale, transfer, assignment, pledge or
hypothecation for a period of three months following the date of this
Agreement. The Underwriters will notify the Company as to which
persons will need to be so restricted. At the request of the
Underwriters, the Company will direct the transfer agent to place a
stop transfer restriction upon such securities for such period of
time. Should the Company release, or seek to release, from such
restrictions any of the Reserved Securities, the Company agrees to
reimburse the Underwriters for any reasonable expenses (including,
without limitation, legal expenses) they incur in connection with such
release.
(m) COMPLIANCE WITH RULE 463. The Company will comply with the
requirements of Rule 463 of the 1933 Act Regulations.
SECTION 4. PAYMENT OF EXPENSES. (a) EXPENSES. The Company and CHS will
pay all expenses incident to the performance of their obligations under this
Agreement, including (i) the preparation, printing and filing of the
Registration Statement (including financial statements and exhibits) as
originally filed and of each amendment thereto, (ii) the preparation, printing
and delivery to the Underwriters of this Agreement, any Agreement among
Underwriters and such other documents as may be required in connection with the
offering, purchase, sale, issuance or delivery of the Securities, (iii) the
preparation, issuance and delivery of the certificates for the Securities to the
Underwriters, including any stock or other transfer taxes and any stamp or other
duties payable upon the sale, issuance or delivery of the Securities to the
Underwriters and the transfer of the Securities between the International
Managers and the U.S. Underwriters, (iv) the fees and disbursements of the
Company's counsel, accountants and other advisors, (v) the qualification of the
Securities under securities laws in accordance with the provisions of Section
3(f) hereof, including filing fees and the reasonable fees and disbursements of
counsel for the Underwriters in connection therewith and in connection with the
preparation of the Blue Sky Survey and any supplement thereto, (vi) the printing
and delivery to the Underwriters of copies of each preliminary prospectus and of
the Prospectuses and any amendments or supplements thereto, (vii) the
preparation, printing and delivery to the Underwriters of copies of the Blue Sky
Survey and any supplement thereto, (viii) the fees and expenses of any transfer
agent or registrar for the Securities, (ix) the filing fees incident to, and the
reasonable fees and disbursements of counsel to the Underwriters in connection
with, the review by the NASD of the terms of the sale of the Securities, (x) the
fees and expenses incurred in connection with the listing of the Securities on
the New York Stock Exchange, (xi) all costs and expenses of the Underwriters,
including the fees and disbursements of counsel for the Underwriters, in
connection with matters related to the Reserved Securities which are designated
by the Company for sale to Eligible Persons who have expressed an interest in
purchasing the Reserved Securities and (xii) the expenses of the Independent
Underwriter.
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(b) TERMINATION OF AGREEMENT. If this Agreement is terminated by the
Lead Managers in accordance with the provisions of Section 5 or Section
9(a)(i) hereof, the Company and CHS shall reimburse the International
Manager for all of their out-of-pocket expenses, including the reasonable
fees and disbursements of counsel for the International Managers.
SECTION 5. CONDITIONS OF INTERNATIONAL MANAGERS' OBLIGATIONS. The
obligations of the several International Managers hereunder are subject to the
accuracy of the representations and warranties of the Company and CHS contained
in Section 1 hereof or in certificates of any officer of the Company, CHS or any
of their subsidiaries delivered pursuant to the provisions hereof, to the
performance by the Company of their covenants and other obligations hereunder,
and to the following further conditions:
(a) EFFECTIVENESS OF REGISTRATION STATEMENT. The Registration
Statement, including any Rule 462(b) Registration Statement, has become
effective and at Closing Time no stop order suspending the effectiveness of
the Registration Statement shall have been issued under the 1933 Act or
proceedings therefor initiated or threatened by the Commission, and any
request on the part of the Commission for additional information shall have
been complied with to the reasonable satisfaction of counsel to the
International Managers. A prospectus containing the Rule 430A Information
shall have been filed with the Commission in accordance with Rule 424(b)
(or a post-effective amendment providing such information shall have been
filed and declared effective in accordance with the requirements of Rule
430A).
(b) OPINION OF COUNSEL FOR THE COMPANY. At Closing Time, the
International Managers shall have received the favorable opinion, dated as
of Closing Time, of:
(i) Rachel A. Seifert, Vice President, Secretary and General Counsel
of the Company, in form and substance reasonably satisfactory to
counsel for the International Managers, together with signed or
reproduced copies of such letter for each of the other International
Managers to the effect set forth in Exhibit A-1 hereto and to such
further effect as counsel to the International Managers may reasonably
request; and
(ii) Fried, Frank, Harris, Shriver & Jacobson, special counsel for the
Company, in form and substance reasonably satisfactory to counsel for
the International Managers, together with signed or reproduced copies
of such letter for each of the other International Managers to the
effect set forth in Exhibit A-2 hereto and to such further effect as
counsel to the International Managers may reasonably request.
(c) OPINION OF COUNSEL FOR THE INTERNATIONAL MANAGERS. At Closing
Time, the Lead Managers shall have received the favorable opinion, dated as
of Closing Time, of Debevoise & Plimpton, counsel for the International
Managers, together with signed or reproduced copies of such letter for each
of the other International Managers in form and substance reasonably
satisfactory to the International Managers.
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(d) OFFICERS' CERTIFICATE. At Closing Time, there shall not have been,
since the date hereof or since the respective dates as of which information is
given in the Prospectuses, any material adverse change in the condition,
financial or otherwise, or in the earnings, business affairs or business
prospects of the Company, CHS and their subsidiaries considered as one
enterprise, whether or not arising in the ordinary course of business, and the
Lead Managers shall have received a certificate of the President and Chief
Executive Officer and the Executive Vice President and Chief Financial Officer
of the Company, dated as of Closing Time, to the effect that (i) there has been
no such material adverse change, (ii) the representations and warranties in
Section 1(a) hereof are true and correct with the same force and effect as
though expressly made at and as of Closing Time, (iii) the Company and CHS have
complied with all agreements and satisfied all conditions on their part to be
performed or satisfied at or prior to Closing Time, and (iv) no stop order
suspending the effectiveness of the Registration Statement has been issued and,
to such person's knowledge after due inquiry, no proceedings for that purpose
have been instituted or are pending or are contemplated by the Commission.
(e) ACCOUNTANT'S COMFORT LETTER. At the time of the execution of this
Agreement, the Lead Managers shall have received from Deloitte & Touche LLP a
letter, dated such date, in form and substance reasonably satisfactory to the
Lead Managers, together with signed or reproduced copies of such letter for each
of the other International Managers, containing statements and information of
the type ordinarily included in accountants' "comfort letters" to underwriters
with respect to the financial statements and certain financial information
contained in the Registration Statement and the Prospectuses.
(f) BRING-DOWN COMFORT LETTER. At Closing Time, the Representatives shall
have received from Deloitte & Touche LLP a letter, dated as of Closing Time, to
the effect that they reaffirm the statements made in the letter furnished
pursuant to subsection (e) of this Section, except that the specified date
referred to shall be a date not more than three business days prior to Closing
Time.
(g) APPROVAL OF LISTING. At Closing Time, the Securities shall have been
approved for listing on the New York Stock Exchange, subject only to official
notice of issuance.
(h) NO OBJECTION. The NASD has confirmed that it has not raised any
objection with respect to the fairness and reasonableness of the underwriting
terms and arrangements with respect to the Securities.
(i) LOCK-UP AGREEMENTS. At the date of this Agreement, the Lead Managers
shall have received an agreement substantially in the form of Exhibit B hereto
signed by the persons listed on Schedule C hereto.
(j) PURCHASE OF INITIAL U.S. SECURITIES. Contemporaneously with the
purchase by the International Managers of the Initial International Securities
under this Agreement,
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the U.S. Underwriters shall have purchased the Initial U.S. Securities under the
U.S. Purchase Agreement.
(k) RECAPITALIZATION. Prior to the purchase of the Securities by the
Underwriters, the Recapitalization shall have been consummated.
(l) CONDITIONS TO PURCHASE OF INTERNATIONAL OPTION SECURITIES. In the event
that the International Managers exercise their option provided in Section 2(b)
hereof to purchase all or any portion of the International Option Securities,
the representations and warranties of the Company contained herein and the
statements in any certificates furnished by the Company or any subsidiary of the
Company hereunder shall be true and correct as of each Date of Delivery and, at
the relevant Date of Delivery, the U.S. Representatives shall have received:
(i) OFFICERS' CERTIFICATE. A certificate, dated such Date of Delivery,
of the President and Chief Executive Officer, and of the Executive Vice
President and Chief Financial Officer of the Company, confirming that the
certificate delivered at the Closing Time pursuant to Section 5(d) hereof
remains true and correct as of such Date of Delivery.
(ii) OPINION OF COUNSEL FOR COMPANY. The favorable opinion of Fried,
Frank, Harris, Shriver & Jacobson, special counsel for the Company,
together with the favorable opinion of Rachel A. Siefert, Vice President,
Secretary and General Counsel of the Company, each in form and substance
reasonably satisfactory to counsel for the International Managers, dated
such Date of Delivery, relating to the International Option Securities to
be purchased on such Date of Delivery and otherwise to the same effect as
the opinions required by Section 5(b) hereof.
(iii) OPINION OF COUNSEL FOR INTERNATIONAL MANAGERS. The favorable
opinion of Debevoise & Plimpton, counsel for the International Managers,
dated such Date of Delivery, relating to the International Option
Securities to be purchased on such Date of Delivery and otherwise to the
same effect as the opinion required by Section 5(c) hereof.
(iv) BRING-DOWN COMFORT LETTER. A letter from Deloitte & Touche LLP,
in form and substance reasonably satisfactory to the Lead Managers and
dated such Date of Delivery, substantially in the same form and substance
as the letter furnished to the Lead Managers pursuant to Section 5(f)
hereof, except that the "specified date" in the letter furnished pursuant
to this paragraph shall be a date not more than five days prior to such
Date of Delivery.
(m) ADDITIONAL DOCUMENTS. At Closing Time and at each Date of Delivery,
counsel for the International Managers shall have been furnished with such
documents and opinions as they may reasonably require for the purpose of
enabling them to pass upon the issuance and sale of the Securities as herein
contemplated, or in order to evidence the accuracy of any of the
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representations or warranties, or the fulfillment of any of the conditions,
herein contained; and all proceedings taken by the Company in connection with
the issuance and sale of the Securities as herein contemplated shall be
reasonably satisfactory in form and substance to the Lead Managers and counsel
for the International Managers.
(n) TERMINATION OF AGREEMENT. If any condition specified in this Section
shall not have been fulfilled when and as required to be fulfilled, this
Agreement, or, in the case of any condition to the purchase of International
Option Securities on a Date of Delivery which is after the Closing Time, the
obligations of the several International Managers to purchase the relevant
Option Securities, may be terminated by the Lead Managers by notice to the
Company at any time at or prior to Closing Time or such Date of Delivery, as the
case may be, and such termination shall be without liability of any party to any
other party except as provided in Section 4 and except that Sections 1, 6, 7 and
8 shall survive any such termination and remain in full force and effect.
SECTION 6. INDEMNIFICATION.
(a) INDEMNIFICATION OF THE INTERNATIONAL MANAGERS. (1) The Company and CHS
jointly and severally agree to indemnify and hold harmless each International
Manager and each person, if any, who controls any International Manager within
the meaning of Section 15 of the 1933 Act or Section 20 of the 1934 Act as
follows:
(i) against any and all loss, liability, claim, damage and expense
whatsoever, as incurred, arising out of any untrue statement or alleged
untrue statement of a material fact contained in the Registration Statement
(or any amendment thereto), including the Rule 430A Information, or the
omission or alleged omission therefrom of a material fact required to be
stated therein or necessary to make the statements therein not misleading
or arising out of any untrue statement or alleged untrue statement of a
material fact included in any preliminary prospectus or the Prospectuses
(or any amendment or supplement thereto), or the omission or alleged
omission therefrom of a material fact necessary in order to make the
statements therein, in the light of the circumstances under which they were
made, not misleading;
(ii) against any and all loss, liability, claim, damage and expense
whatsoever, as incurred, arising out of (A) the violation of any applicable
laws or regulations of any jurisdiction where Reserved Securities have been
offered and (B) any untrue statement or alleged untrue statement of a
material fact included in the supplement or prospectus wrapper material
distributed in any jurisdiction in connection with the reservation and sale
of the Reserved Securities to employees, directors and other persons with
relationships with the Company who have expressed an interest in purchasing
the Reserved Securities or the omission or alleged omission therefrom of a
material fact necessary to make the statements therein, when considered in
conjunction with the Prospectuses or preliminary prospectuses, not
misleading;
(iii) against any and all loss, liability, claim, damage and expense
whatsoever, as incurred, to the extent of the aggregate amount paid in
settlement of any litigation, or
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any investigation or proceeding by any governmental agency or body,
commenced or threatened, or of any claim whatsoever based upon any such
untrue statement or omission, or any such alleged untrue statement or
omission or in connection with any violation of the nature referred to in
Section 6(a)(1)(ii)(A) hereof; provided that (subject to Section 6(d)
below) any such settlement is effected with the written consent of the
Company; and
(iv) against any and all expense whatsoever, as incurred (including
the fees and disbursements of counsel chosen by Merrill Lynch), reasonably
incurred in investigating, preparing or defending against any litigation,
or any investigation or proceeding by any governmental agency or body,
commenced or threatened, or any claim whatsoever based upon any such untrue
statement or omission, or any such alleged untrue statement or omission or
in connection with any violation of the nature referred to in Section
6(a)(1)(ii)(A) hereof, to the extent that any such expense is not paid
under (i), or (ii) or (iii) above;
PROVIDED, HOWEVER, that this indemnity agreement shall not apply to any loss,
liability, claim, damage or expense to the extent (x) arising out of any untrue
statement or omission or alleged untrue statement or omission made in reliance
upon and in conformity with written information furnished to the Company by any
International Manager through the Lead Managers expressly for use in the
Registration Statement (or any amendment thereto), including the Rule 430A
Information, or any preliminary prospectus or the International Prospectus (or
any amendment or supplement thereto) or (y) resulting from the fact that a court
of competent jurisdiction shall have made a final, non-appealable determination
that (1) the untrue statement or omission was corrected in the International
Prospectus, (2) that at a time sufficiently prior to the Closing Time, the
Company furnished copies of the International Prospectus in sufficient
quantities to such International Manager, (3) that such International Manager
failed to send or give a copy of the International Prospectus to the person
asserting such loss, liability, claim, damage or expense prior to the written
confirmation or the sale of Securities to such person by such International
Manager as required by the 1933 Act or the 1933 Act Regulations, and (4) that
the sending of the International Prospectus to the person asserting such loss,
liability, claim, damage or expense would have constituted a defense to the
claim asserted by such person or persons.
(2) In addition to and without limitation of the Company's obligation to
indemnify Merrill Lynch as an Underwriter, the Company also agrees to indemnify
and hold harmless the Independent Underwriter and each person, if any, who
controls the Independent Underwriter within the meaning of Section 15 of the
1933 Act or Section 20 of the 1934 Act, from and against any and all loss,
liability, claim, damage and expense whatsoever, as incurred, incurred as a
result of the Independent Underwriter's participation as a "qualified
independent underwriter" within the meaning of Rule 2720 of the Conduct Rules of
the National Association of Securities Dealers, Inc. in connection with the
offering of the International Securities.
(3) Insofar as this indemnity agreement may permit indemnification for
liabilities under the 1933 Act of any person who is a partner of a International
Manager or who controls an underwriter within the meaning of Section 15 of the
1933 Act or Section 20 of the 1934 Act and who, at the date of this Agreement,
is a director or officer of the Company or controls the
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<PAGE>
Company within the meaning of Section 15 of the 1933 Act or Section 20 of the
1934 Act, such indemnity agreement is subject to the undertaking of the Company
in the Registration Statement under Item.
(b) INDEMNIFICATION OF COMPANY, DIRECTORS AND OFFICERS. Each International
Manager severally agrees to indemnify and hold harmless the Company, CHS and
their respective directors, each of the officers of the Company who signed the
Registration Statement, and each person, if any, who controls the Company within
the meaning of Section 15 of the 1933 Act or Section 20 of the 1934 Act against
any and all loss, liability, claim, damage and expense described in the
indemnity contained in subsection (a)(1) of this Section, as incurred, but only
with respect to untrue statements or omissions, or alleged untrue statements or
omissions, made in the Registration Statement (or any amendment thereto),
including the Rule 430A Information, or any preliminary International prospectus
or the International Prospectus (or any amendment or supplement thereto) in
reliance upon and in conformity with written information furnished to the
Company by such International Manager through the Lead Managers expressly for
use in the Registration Statement (or any amendment thereto) or such preliminary
prospectus or the International Prospectus (or any amendment or supplement
thereto).
(c) ACTIONS AGAINST PARTIES; NOTIFICATION. Each indemnified party shall
give notice as promptly as reasonably practicable to each indemnifying party of
any action commenced against it in respect of which indemnity may be sought
hereunder, but failure to so notify an indemnifying party shall not relieve such
indemnifying party from any liability hereunder to the extent it is not
materially prejudiced as a result thereof and in any event shall not relieve it
from any liability which it may have otherwise than on account of this indemnity
agreement. In the case of parties indemnified pursuant to Section 6(a)(1) above,
counsel to the indemnified parties shall be selected by Merrill Lynch, and, in
the case of parties indemnified pursuant to Section 6(b) above, counsel to the
indemnified parties shall be selected by the Company. An indemnifying party may
participate at its own expense in the defense of any such action; provided,
however, that counsel to the indemnifying party shall not (except with the
consent of the indemnified party) also be counsel to the indemnified party. In
no event shall the indemnifying parties be liable for fees and expenses of more
than one counsel (in addition to any local counsel) separate from their own
counsel for all indemnified parties in connection with any one action or
separate but similar or related actions in the same jurisdiction arising out of
the same general allegations or circumstances; provided, that, if indemnity is
sought pursuant to Section 6(a)(2), then, in addition to the fees and expenses
of such counsel for the indemnified parties, the indemnifying party shall be
liable for the reasonable fees and expenses of not more than one counsel (in
addition to any local counsel) separate from its own counsel and that of the
other indemnified parties for the Independent Underwriter in its capacity as a
"qualified independent underwriter" and all persons, if any, who control the
Independent Underwriter within the meaning of Section 15 of the 1933 Act or
Section 20 of 1934 Act in connection with any one action or separate but similar
or related actions in the same jurisdiction arising out of the same general
allegations or circumstances if, in the reasonable judgment of the Independent
Underwriter, there may exist a conflict of interest between the Independent
Underwriter and the other indemnified parties. Any such separate counsel for the
Independent Underwriter and such control persons of the Independent Underwriter
shall be designated in writing by the Independent Underwriter. No indemnifying
party shall,
26
<PAGE>
without the prior written consent of the indemnified parties, settle or
compromise or consent to the entry of any judgment with respect to any
litigation, or any investigation or proceeding by any governmental agency or
body, commenced or threatened, or any claim whatsoever in respect of which
indemnification or contribution could be sought under this Section 6 or Section
7 hereof (whether or not the indemnified parties are actual or potential parties
thereto), unless such settlement, compromise or consent (i) includes an
unconditional release of each indemnified party from all liability arising out
of such litigation, investigation, proceeding or claim and (ii) does not include
a statement as to or an admission of fault, culpability or a failure to act by
or on behalf of any indemnified party.
(d) SETTLEMENT WITHOUT CONSENT IF FAILURE TO REIMBURSE. If at any time an
indemnified party shall have requested an indemnifying party to reimburse the
indemnified party for fees and expenses of counsel, such indemnifying party
agrees that it shall be liable for any settlement of the nature contemplated by
Section 6(a)(1)(iii) effected without its written consent if (i) such settlement
is entered into more than 45 days after receipt by such indemnifying party of
the aforesaid request, (ii) such indemnifying party shall have received notice
of the terms of such settlement at least 30 days prior to such settlement being
entered into and (iii) such indemnifying party shall not have reimbursed such
indemnified party in accordance with such request prior to the date of such
settlement.
(e) INDEMNIFICATION FOR RESERVED SECURITIES. In connection with the offer
and sale of the Reserved Securities, the Company and CHS jointly and severally
agree, promptly upon a request, in writing, to indemnify and hold harmless the
Underwriters from and against any and all losses, liabilities, claims, damages
and expenses incurred by them as a result of the failure of Eligible Persons who
have expressed an interest in purchasing the Reserved Securities to pay for and
accept delivery of Reserved Securities which, by the end of the first business
day following the date of this Agreement, were subject to a properly confirmed
agreement to purchase.
SECTION 7. CONTRIBUTION. If the indemnification provided for in Section 6
hereof is for any reason unavailable to or insufficient to hold harmless an
indemnified party in respect of any losses, liabilities, claims, damages or
expenses referred to therein, then each indemnifying party shall contribute to
the aggregate amount of such losses, liabilities, claims, damages and expenses
incurred by such indemnified party, as incurred, (i) in such proportion as is
appropriate to reflect the relative benefits received by the Company and CHS on
the one hand and the International Managers on the other hand from the offering
of the Securities pursuant to this Agreement or (ii) if the allocation provided
by clause (i) is not permitted by applicable law, in such proportion as is
appropriate to reflect not only the relative benefits referred to in clause (i)
above but also the relative fault of the Company and CHS on the one hand and of
the International Managers on the other hand in connection with the statements
or omissions, or in connection with any violation of the nature referred to in
Section 6(a)(1)(ii)(A) hereof, which resulted in such losses, liabilities,
claims, damages or expenses, as well as any other relevant equitable
considerations.
The relative benefits received by the Company and CHS on the one hand and
the International Managers on the other hand in connection with the offering of
the International Securities pursuant to this Agreement shall be deemed to be in
the same respective proportions
27
<PAGE>
as the total net proceeds from the offering of the International Securities
pursuant to this Agreement (before deducting expenses) received by the Company
and the total underwriting discount received by the International Managers, in
each case as set forth on the cover of the International Prospectus bear to the
aggregate initial public offering price of the International Securities as set
forth on such cover.
The relative fault of the Company, and CHS on the one hand and the
International Managers on the other hand shall be determined by reference to,
among other things, whether any such untrue or alleged untrue statement of a
material fact or omission or alleged omission to state a material fact relates
to information supplied by the Company or by the International Managers and the
parties' relative intent, knowledge, access to information and opportunity to
correct or prevent such statement or omission or any violation of the nature
referred to in Section 6(a)(1)(ii)(A) hereof.
The Company, CHS and the International Managers agree that Merrill Lynch
will not receive any additional benefits hereunder for serving as the
Independent Underwriter in connection with the offering and sale of the
International Securities.
The Company, CHS and the International Managers agree that it would not be
just and equitable if contribution pursuant to this Section 7 were determined by
pro rata allocation (even if the International Managers were treated as one
entity for such purpose) or by any other method of allocation which does not
take account of the equitable considerations referred to above in this Section
7. The aggregate amount of losses, liabilities, claims, damages and expenses
incurred by an indemnified party and referred to above in this Section 7 shall
be deemed to include any legal or other expenses reasonably incurred by such
indemnified party in investigating, preparing or defending against any
litigation, or any investigation or proceeding by any governmental agency or
body, commenced or threatened, or any claim whatsoever based upon any such
untrue or alleged untrue statement or omission or alleged omission.
Notwithstanding the provisions of this Section 7, no International Manager
shall be required to contribute any amount in excess of the amount by which the
total price at which the International Securities underwritten by it and
distributed to the public were offered to the public exceeds the amount of any
damages which such International Manager has otherwise been required to pay by
reason of any such untrue or alleged untrue statement or omission or alleged
omission.
No person guilty of fraudulent misrepresentation (within the meaning of
Section 11(f) of the 1933 Act) shall be entitled to contribution from any person
who was not guilty of such fraudulent misrepresentation.
For purposes of this Section 7, each person, if any, who controls a
International Manager within the meaning of Section 15 of the 1933 Act or
Section 20 of the 1934 Act shall have the same rights to contribution as such
International Manager, and each director of the Company or CHS, each officer of
the Company who signed the Registration Statement, and each person, if any, who
controls the Company within the meaning of Section 15 of the 1933 Act or Section
20
28
<PAGE>
of the 1934 Act shall have the same rights to contribution as the Company and
CHS. The International Managers= respective obligations to contribute pursuant
to this Section 7 are several in proportion to the number of Initial
International Securities set forth opposite their respective names in Schedule A
hereto and not joint.
SECTION 8. REPRESENTATIONS, WARRANTIES AND AGREEMENTS TO SURVIVE DELIVERY.
All representations, warranties and agreements contained in this Agreement or in
certificates of officers of the Company, CHS or any of their subsidiaries
submitted pursuant hereto, shall remain operative and in full force and effect,
regardless of any investigation made by or on behalf of any International
Manager or controlling person, or by or on behalf of the Company, and shall
survive delivery of the Securities to the International Managers.
SECTION 9. TERMINATION OF AGREEMENT.
(a) TERMINATION; GENERAL. The Lead Managers may terminate this Agreement,
by notice to the Company, at any time at or prior to Closing Time (i) if there
has been, since the time of execution of this Agreement or since the respective
dates as of which information is given in the International Prospectus, any
material adverse change in the condition, financial or otherwise, or in the
earnings, business affairs or business prospects of the Company and its
subsidiaries considered as one enterprise, whether or not arising in the
ordinary course of business, or (ii) if there has occurred any material adverse
change in the financial markets in the United States or the international
financial markets, any outbreak of hostilities or escalation thereof or other
calamity or crisis or any change or development involving a prospective change
in national or international political, financial or economic conditions, in
each case the effect of which is such as to make it, in the judgment of the Lead
Managers, impracticable to market the Securities or to enforce contracts for the
sale of the Securities, or (iii) if trading in any securities of the Company has
been suspended or materially limited by the Commission or the New York Stock
Exchange, or if trading generally on the American Stock Exchange or the New York
Stock Exchange or in the Nasdaq National Market has been suspended or materially
limited, or minimum or maximum prices for trading have been fixed, or maximum
ranges for prices have been required, by any of said exchanges or by such system
or by order of the Commission, the National Association of Securities Dealers,
Inc. or any other governmental authority, or (iv) if a banking moratorium has
been declared by either Federal or New York authorities.
(b) LIABILITIES. If this Agreement is terminated pursuant to this Section,
such termination shall be without liability of any party to any other party
except as provided in Section 4 hereof, and provided further that Sections 1, 6,
7 and 8 shall survive such termination and remain in full force and effect.
SECTION 10. DEFAULT BY ONE OR MORE OF THE INTERNATIONAL MANAGERS. If one or
more of the International Managers shall fail at Closing Time or a Date of
Delivery to purchase the Securities which it or they are obligated to purchase
under this Agreement (the "Defaulted Securities"), the Lead Managers shall have
the right, within 24 hours thereafter, to make arrangements for one or more of
the non-defaulting International Managers, or any other underwriters, to
purchase all, but not less than all, of the Defaulted Securities in such amounts
29
<PAGE>
as may be agreed upon and upon the terms herein set forth; if, however, the Lead
Mangers shall not have completed such arrangements within such 24-hour period,
then:
(a) if the number of Defaulted Securities does not exceed 10% of the
number of International Securities to be purchased on such date, each of
the non-defaulting International Managers shall be obligated, severally and
not jointly, to purchase the full amount thereof in the proportions that
their respective underwriting obligations hereunder bear to the
underwriting obligations of all non-defaulting International Managers, or
(b) if the number of Defaulted Securities exceeds 10% of the number of
International Securities to be purchased on such date, this Agreement or,
with respect to any Date of Delivery which occurs after Closing Time, the
obligation of the International Managers to purchase and of the Company to
sell the Option Securities to be purchased and sold on such Date of
Delivery, shall terminate without liability on the part of any
non-defaulting International Manager.
No action taken pursuant to this Section shall relieve any defaulting
International Manager from liability in respect of its default.
In the event of any such default which does not result in a termination of
this Agreement or, in the case of a Date of Delivery which occurs after Closing
Time, which does not result in a termination of the obligation of the
International Managers to purchase and the Company to sell the relevant
International Option Securities, as the case may be, either the Lead Managers or
the Company shall have the right to postpone Closing Time or the relevant Date
of Delivery, as the case may be, for a period not exceeding seven days in order
to effect any required changes in the Registration Statement or Prospectus or in
any other documents or arrangements. As used herein, the term "International
Manager" includes any person substituted for a International Manager under this
Section 10.
SECTION 11. NOTICES. All notices and other communications hereunder shall
be in writing and shall be deemed to have been duly given if mailed or
transmitted by any standard form of telecommunication. Notices to the
International Managers shall be directed to the Lead Managers at North Tower,
World Financial Center, New York, New York 10281-1201, attention of Syndicate
Operations, with a copy to Debevoise & Plimpton, 875 Third Avenue, New York, New
York, attention of Michael W. Blair; and notices to the Company or CHS shall be
directed to them at 155 Franklin Road, Suite 400, Brentwood, Tennessee 37027,
attention of Rachel A. Seifert, Vice President, Secretary and General Counsel,
with a copy to Fried, Frank, Harris, Shriver & Jacobson, One New York Plaza, New
York, New York 10004, attention of Jeffrey Bagner.
SECTION 12. PARTIES. This Agreement shall inure to the benefit of and be
binding upon the International Managers and the Company and their respective
successors. Nothing expressed or mentioned in this Agreement is intended or
shall be construed to give any person, firm or corporation, other than the
International Managers and the Company and CHS and their respective successors
and the controlling persons and officers and directors referred to in Sections 6
and 7
30
<PAGE>
and their heirs and legal representatives, any legal or equitable right, remedy
or claim under or in respect of this Agreement or any provision herein
contained. This Agreement and all conditions and provisions hereof are intended
to be for the sole and exclusive benefit of the International Managers and the
Company and their respective successors, and said controlling persons and
officers and directors and their heirs and legal representatives, and for the
benefit of no other person, firm or corporation. No purchaser of Securities from
any International Manager shall be deemed to be a successor by reason merely of
such purchase.
SECTION 13. GOVERNING LAW AND TIME. THIS AGREEMENT SHALL BE GOVERNED BY AND
CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK WITHOUT GIVING
EFFECT TO CONFLICTS OF LAW PRINCIPLES THEREOF. EXCEPT AS OTHERWISE SET FORTH
HEREIN, SPECIFIED TIMES OF DAY REFER TO NEW YORK CITY TIME.
SECTION 14. EFFECT OF HEADINGS. The Article and Section headings herein and
the Table of Contents are for convenience only and shall not affect the
construction hereof.
31
<PAGE>
If the foregoing is in accordance with your understanding of our agreement,
please sign and return to the Company a counterpart hereof, whereupon this
instrument, along with all counterparts, will become a binding agreement between
the International Managers, the Company and CHS in accordance with its terms.
Very truly yours,
COMMUNITY HEALTH SYSTEMS, INC.
By _____________________________
Name:
Title:
CHS/COMMUNITY HEALTH SYSTEMS, INC.
BY _____________________________
Name:
Title:
CONFIRMED AND ACCEPTED,
as of the date first above written:
MERRILL LYNCH INTERNATIONAL
BANK OF AMERICA INTERNATIONAL
LIMITED
CHASE SECURITIES INC.
CREDIT SUISSE FIRST BOSTON (EUROPE)
LIMITED
GOLDMAN SACHS INTERNATIONAL
MORGAN STANLEY & CO.
INTERNATIONAL LIMITED
BY: MERRILL LYNCH INTERNATIONAL
By _____________________________
Authorized Signatory
For themselves and as Lead Mangers of the
other International Managers named in
Schedule A hereto.
SCHEDULE A
32
<PAGE>
Number of
NAME OF Initial International
INTERNATIONAL SECURITIES
MANAGER
Merrill Lynch International
Bank of America International Limited
Chase Securities Inc.
Credit Suisse First Boston (Europe) Limited
Goldman Sachs International
Morgan Stanley & Co. International Limited
----------
Total _
----------
Sch A - 2
<PAGE>
SCHEDULE B
COMMUNITY HEALTH SYSTEMS, INC.
_ Shares of Common Stock
(Par Value $.01 Per Share)
1. The initial public
offering price per share for
the Securities, determined as
provided in said Section 2,
shall be $_.
2. The purchase price per
share for the International
Securities to be paid by the
several International Managers
shall be $_, being an amount
equal to the initial public
offering price set forth above
less $_ per share; provided that
the purchase price per share for
any International Option Securities
purchased upon the exercise of the
over-allotment option described in
Section 2(b) shall be reduced by an
amount per share equal to any dividends
or distributions declared by the
Company and payable on the Initial
International Securities but not
payable on the International
Option Securities.
Sch B - 1
<PAGE>
SCHEDULE C
Sheila P. Burke
Robert J. Dole
J. Anthony Forstmann
Nicholas C. Forstmann
Theodore J. Forstmann
Dale F. Frey
Sandra A. Horbach
Thomas H. Lister
Michael A. Miles
Samuel A. Nunn
Wayne T. Smith
W. Larry Cash
John Fromhold
David Miller
Gary Newsome
Michael T. Portacci
Rachael A. Seifert
All other Class B Stockholders
Sch C - 1
<PAGE>
Exhibit A-1
FORM OF OPINION OF COMPANY'S GENERAL COUNSEL
TO BE DELIVERED PURSUANT TO
SECTION 5(b)(i)
_________________, 2000
Merrill Lynch & Co.
Merrill Lynch, Pierce, Fenner & Smith
Incorporated
Banc of America Securities LLC
Chase Securities Inc.
Credit Suisse First Boston Corporation
Goldman, Sachs & Co.
Morgan Stanley & Co. Incorporated
As U.S. Representatives of the several U.S. Underwriters
c/o Merrill Lynch & Co.
Merrill Lynch, Pierce, Fenner & Smith
Incorporated
North Tower
World Financial Center
New York, New York 10281-1209
Merrill Lynch International
Bank of America International Limited
Chase Securities Inc.
Credit Suisse First Boston (Europe) Limited
Goldman Sachs International
Morgan Stanley & Co. International Limited
As Lead Managers of the several International Managers
c/o Merrill Lynch International
Ropemaker Place
25 Ropemaker Street
London, England EC2Y 9LY
Ladies and Gentlemen:
I am Vice President, Secretary and General Counsel of Community Health
Systems, Inc., a Delaware corporation (the "Company"), and CHS/Community Health
Systems, Inc., a Delaware corporation and a wholly owned subsidiary of the
Company ("CHS"). I am delivering this opinion pursuant to (i) Section 5(b)(i) of
the U.S. Purchase Agreement, dated __________, 2000 (the "U.S. Purchase
Agreement"), among the Company, CHS and Merrill Lynch & Co., Merrill Lynch,
Pierce, Fenner & Smith Incorporated, Banc of America Securities LLC, Chase
Securities Inc., Credit Suisse First Boston Corporation, Goldman, Sachs & Co.
and Morgan Stanley & Co. Incorporated, as
<PAGE>
Merrill Lynch & Co. et al.
2
_________________, 2000
U.S. Representatives of the several U.S. Underwriters named in Schedule A
thereto, and (ii) Section 5(b)(i) of the International Purchase Agreement, dated
_________, 2000 (the "International Purchase Agreement," and together with the
U.S. Purchase Agreement, the "Purchase Agreements"), among the Company, CHS and
Merrill Lynch International, Bank of America International Limited, Chase
Securities Inc., Credit Suisse First Boston (Europe) Limited, Goldman Sachs
International and Morgan Stanley & Co. International Limited, as Lead Managers
of the several International Managers named in Schedule A thereto. All
capitalized terms used herein that are defined in, or by reference in, the
Purchase Agreements have the meanings assigned to such terms therein, or by
reference therein, unless otherwise defined herein. With your permission, all
assumptions and statements of reliance expressly set forth herein have been made
without any independent investigation or verification on my part except to the
extent otherwise expressly stated, and, except to the extent otherwise expressly
stated, I express no opinion with respect to the subject matter or accuracy of
such assumptions or items relied upon.
In connection with this opinion, I have (i) investigated such
questions of law, (ii) examined originals or certified, conformed or
reproduction copies of such agreements, instruments, documents and records of
the Company and CHS, such certificates of public officials and such other
documents and (iii) received such information from officers and representatives
of the Company, CHS and others, in each case as I have deemed necessary or
appropriate for the purposes of this opinion.
In all such examinations, I have assumed the legal capacity of all
natural persons, the genuineness of all signatures, the authenticity of original
and certified documents and the conformity to original or certified copies of
all copies submitted to me as conformed or reproduction copies. As to various
questions of fact relevant to the opinions expressed herein, I have relied upon,
and assume the accuracy of, the representations and warranties contained in the
Purchase Agreements and certificates and oral or written statements and other
information of or from public officials, officers or representatives of the
Company, CHS and others and assume compliance on the part of all parties to the
Purchase Agreements with the covenants and agreements contained therein.
Based upon the foregoing, and subject to the limitations,
qualifications and assumptions set forth herein, I am of the opinion that:
1. The Company is duly qualified as a foreign corporation to transact
business and is in good standing in each jurisdiction in which such
qualification is required, whether by reason of the ownership or leasing of
property or the conduct of business, except where the failure so to qualify or
to be in good standing would not result in a Material Adverse Effect.
2. Each subsidiary of the Company has been duly incorporated and is
validly existing as a corporation in good standing under the laws of the
jurisdiction of its incorporation, has corporate power and authority to own,
lease and operate its properties
<PAGE>
Merrill Lynch & Co. et al.
3
_________________, 2000
and to conduct its business as described in the Prospectuses and is duly
qualified as a foreign corporation to transact business and is in good standing
in each jurisdiction in which such qualification is required, whether by reason
of the ownership or leasing of property or the conduct of business, except where
the failure so to qualify or to be in good standing would not result in a
Material Adverse Effect.
3. Except as otherwise disclosed in the Registration Statement, all of
the issued and outstanding capital stock of each Subsidiary has been duly
authorized and validly issued, is fully paid and non-assessable and, to the best
of my knowledge, is owned by the Company, directly or through subsidiaries, free
and clear of any security interest, mortgage, pledge, lien, encumbrance, claim
or equity; none of the outstanding shares of capital stock of any Subsidiary was
issued in violation of the preemptive or similar rights of any securityholder of
such Subsidiary.
4. All descriptions in the Prospectuses of contracts and other
documents to which the Company, CHS or their subsidiaries are a party are
accurate in all material respects; to the best of my knowledge, there are no
franchises, contracts, indentures, mortgages, loan agreements, notes, leases or
other instruments required to be described or referred to in the Registration
Statement or to be filed as exhibits thereto other than those described or
referred to therein or filed as exhibits thereto, and the descriptions thereof
or references thereto are correct in all material respects.
5. None of the Company or CHS is in violation of its charter or
by-laws.
6. The Company, CHS and each of their subsidiaries and each of the
hospitals owned, leased or operated by any of them have all necessary permits,
licenses, certificates, approvals (including, without limitation, certification
under the Medicare and Medicaid programs), accreditations (including, without
limitation, accreditation by the Joint Commission on Accreditation of Healthcare
Organizations) and other authorizations ("Governmental Licenses") (except where
the failure to have such Governmental Licenses, individually or in the
aggregate, would not reasonably be expected to have a material adverse effect on
the business, operations or financial condition of the Company, CHS and their
subsidiaries taken as a whole), to own their respective properties and to
conduct their respective businesses as now being conducted.
7. No filing, consent, approval, authorization, order, registration or
qualification of or with any Tennessee court or governmental agency or body is
required by or on behalf of the Company for the sale of the Securities or the
consummation by the Company and CHS of the transactions contemplated by the
Purchase Agreements, expect for such consents, approvals, authorizations,
orders, registrations or qualifications as may be required under state or
foreign securities or Blue Sky laws, rules and regulations in connection with
the purchase and distribution of the Securities by the Underwriters.
<PAGE>
Merrill Lynch & Co. et al.
4
_________________, 2000
8. There is not pending or, to my knowledge, threatened any
action, suit, proceeding, inquiry or investigation to which the Company or any
subsidiary is a party, or to which the property of the Company or any subsidiary
is subject, before or brought by any court or governmental agency or body,
domestic or foreign, which would reasonably result in a Material Adverse Effect,
or which might reasonably be expected to materially and adversely affect the
consummation of the Recapitalization, the transactions contemplated in the
Purchase Agreements or the performance by the Company of its obligations
thereunder; it being understood that I express no opinion with respect to any
"qui tam" action as to which I have no knowledge of its pendency.
9. The statements in the Prospectuses under "Business - Legal
Proceedings," "Business - Government Regulations", Business - Payment" and
"Business - Compliance Program," in so far as they constitute summaries of legal
matters or documents referred to therein, fairly summarize in all material
respects the matters referred to therein.
In the course of the preparation by the Company of the Registration
Statement and the Prospectuses, I attended conferences with certain of the
officers and representatives of the Company and CHS, representatives of the
independent public accountants for the Company and CHS and representatives of
the Underwriter, at which the contents of the Registration Statement and the
Prospectuses were discussed. Between the date of effectiveness of the
Registration Statement and the time of delivery of this opinion, I attended
additional conferences with certain of the officers and representatives of, and
the independent public accountants for, the Company and CHS, at which the
contents of the Prospectuses were discussed to a limited extent. Given the
limitations inherent in the independent verification of factual matters and the
character of determinations involved in the registration process, I am not
passing upon and do not assume any responsibility for the accuracy, completeness
or fairness of the statements contained in the Registration Statement and the
Prospectuses, other than as set forth in paragraph 5 above. Subject to the
foregoing and on the basis of the information I gained in the performance of the
services referred to above, including information obtained from officers and
other representatives of, and the independent accountants for, the Company and
CHS, nothing has come to my attention that causes me to believe that, as of the
time it became effective, the Registration Statement contained an untrue
statement of a material fact or omitted to state a material fact required to be
stated therein or necessary to make the statements therein not misleading, or
that the Prospectuses as of their dates contained any untrue statement of a
material fact or omitted to state a material fact required to be stated therein
or necessary in order to make the statements therein, in light of the
circumstances under which they were made, not misleading. Also, subject to the
foregoing, nothing has come to my attention in the course of proceedings
described in the second sentence of this paragraph that causes me to believe
that the Prospectuses on the date and time of delivery of this letter contain an
untrue statement of a material fact or omit to state a material fact necessary
to make the statements therein, in light of the circumstances under
<PAGE>
Merrill Lynch & Co. et al.
5
_________________, 2000
which they were made, not misleading. I express no view or belief, however, with
respect to the financial statements, related notes and schedules thereto and
other financial data included in or omitted from the Registration Statement or
the Prospectuses.
The opinions expressed herein are limited to the federal laws of the
United States of America, the laws of the State of Tennessee and, to the extent
relevant to the opinions expressed herein, the General Corporation Law of the
State of Delaware, each as currently in effect. The opinions expressed herein
are given as of the date hereof, and I undertake no obligation to supplement
this letter if any applicable laws change after the date hereof or if I become
aware of any facts that might change the opinions expressed herein after the
date hereof or for any other reason.
The opinions expressed herein are solely for your benefit in
connection with the Purchase Agreements and may not be relied on in any manner
or for any purpose by any other person or entity and may not be quoted in whole
or in part without my prior written consent.
Very truly yours,
Rachel A. Seifert
Vice President, Secretary
and General Counsel
<PAGE>
Exhibit A-2
FORM OF OPINION OF FRIED, FRANK,
HARRIS, SHRIVER & JACOBSON
TO BE DELIVERED PURSUANT TO
SECTION 5(b)(ii)
212-859-8136
(FAX: 212-859-8586)
_________, 2000
Merrill Lynch & Co.
Merrill Lynch, Pierce, Fenner & Smith
Incorporated
Banc of America Securities LLC
Chase Securities Inc.
Credit Suisse First Boston Corporation
Goldman, Sachs & Co.
Morgan Stanley & Co. Incorporated
As U.S. Representatives of the several U.S. Underwriters
c/o Merrill Lynch & Co.
Merrill Lynch, Pierce, Fenner & Smith
Incorporated
North Tower
World Financial Center
New York, New York 10281-1209
Merrill Lynch International
Bank of America International Limited
Chase Securities Inc.
Credit Suisse First Boston (Europe) Limited
Goldman Sachs International
Morgan Stanley & Co. International Limited
As Lead Managers of the several International Managers
c/o Merrill Lynch International
Ropemaker Place
25 Ropemaker Street
London, England EC2Y 9LY
A-2-4
<PAGE>
Ladies and Gentlemen:
We are acting as special counsel to Community Health Systems, Inc., a
Delaware corporation (the "Company"), and CHS/Community Health Systems, Inc., a
Delaware corporation and a wholly owned subsidiary of
the Company ("CHS"), in connection with the underwritten public offering of
________ shares (the "Securities") of common stock, par value $.01 per share
(the "Common Stock"), of the Company. This opinion is delivered to you at the
Company's request pursuant to (i) Section 5(b)(ii) of the U.S. Purchase
Agreement, dated __________, 2000 (the "U.S. Purchase Agreement"), among the
Company, CHS and Merrill Lynch & Co., Merrill Lynch, Pierce, Fenner & Smith
Incorporated, Banc of America Securities LLC, Chase Securities Inc., Credit
Suisse First Boston Corporation, Goldman, Sachs & Co. and Morgan Stanley & Co.
Incorporated, as U.S. Representatives of the several U.S. Underwriters named in
Schedule A thereto, and (ii) Section 5(b)(ii) of the International Purchase
Agreement, dated _________, 2000 (the "International Purchase Agreement," and
together with the U.S. Purchase Agreement, the "Purchase Agreements"), among the
Company, CHS and Merrill Lynch International, Bank of America International
Limited, Chase Securities Inc., Credit Suisse First Boston (Europe) Limited,
Goldman Sachs International and Morgan Stanley & Co. International Limited, as
Lead Managers of the several International Managers named in Schedule A thereto.
All capitalized terms used herein that are defined in, or by reference in, the
Purchase Agreements have the meanings assigned to such terms therein, or by
reference therein, unless otherwise defined herein. With your permission, all
assumptions and statements of reliance expressly set forth herein have been made
without any independent investigation or verification on our part except to the
extent otherwise expressly stated, and, except to the extent otherwise expressly
stated, we express no opinion with respect to the subject matter or accuracy of
such assumptions or items relied upon.
In connection with this opinion, we have (i) investigated such questions of
law, (ii) examined originals or certified, conformed or reproduction copies of
such agreements, instruments, documents and records of the Company and CHS, such
certificates of public officials and such other documents and (iii) received
such information from officers and representatives of the Company, CHS and
others, in each case as we have deemed necessary or appropriate for the purposes
of this opinion.
In all such examinations, we have assumed the legal capacity of all natural
persons, the genuineness of all signatures, the authenticity of original and
certified documents and the conformity to original or certified copies of all
copies submitted to us as conformed or reproduction copies. As to various
questions of fact relevant to the opinions expressed herein, we have relied
upon, and assume the accuracy of, the representations and warranties contained
in the Purchase Agreements and certificates and oral or written statements and
other information of or from public officials, officers or representatives of
the Company, CHS and others, and assume compliance on the part of all parties to
the Purchase Agreements with the covenants and agreements contained therein.
Insofar as statements herein are based upon our knowledge, such phrase means and
is limited to the conscious awareness of facts or other information by lawyers
in this Firm who gave substantive attention to the representation of the Company
and CHS in connection with the Purchase Agreements.
With respect to the opinion expressed in the second sentence
of paragraph 3 below, we have relied solely on the stock transfer books of the
Company. With respect to the opinions expressed in paragraphs 10 and 11 below,
our opinions are is limited to our review of only those laws and
A-2-5
<PAGE>
regulations that, in our experience, are normally applicable to transactions of
the type contemplated in the Purchase Agreements. With respect to the opinion
expressed in paragraph 7, we have relied solely on the oral advice of the Staff
of the Securities and Exchange Commission (the "Commission") that the Commission
has issued an order declaring the registration under the 1933 Act of the U.S.
Securities effective and as to the absence of any stop order or any proceeding
relating thereto.
Based upon the foregoing, and subject to the limitations, qualifications
and assumptions set forth herein, we are of the opinion that:
1. The Company has been duly incorporated and is validly existing as a
corporation in good standing under the laws of the State of Delaware. CHS has
been incorporated and is validly existing as a corporation in good standing
under the laws of the State of Delaware.
2. Each of the Company and CHS has the corporate power and authority to
own, lease and operate its properties and to conduct its business as described
in the Prospectuses and to enter into and perform its obligations under the
Purchase Agreements.
3. The Company has an authorized capitalization as set forth in the
Prospectuses under the caption "Capitalization". The outstanding shares of
Common Stock have been duly authorized and validly issued and are fully paid and
non-assessable. None of the outstanding shares of Common Stock were issued in
violation of the preemptive or other similar rights of any securityholder of the
Company.
4. The Securities to be purchased by the Underwriters from the Company
pursuant to the Purchase Agreements have been duly authorized for issuance and
sale to the Underwriters and, when issued and delivered by the Company pursuant
to the Purchase Agreements against payment of the consideration set forth in the
Purchase Agreements, will be duly authorized, validly issued, fully paid and
non-assessable and no holder of the Securities will be subject to personal
liability under the Delaware General Corporation Law by reason of being such a
holder.
5. The issuance and sale of the Securities by the Company is not subject
to preemptive or other similar rights arising under (i) the Delaware General
Corporation Law, (ii) the Restated Certificate of Incorporation or By-laws of
the Company, or (iii) any indenture, mortgage, deed of trust, loan agreement,
other agreement or instrument, or court decree or order (including, without
limitation, any settlement agreement) which has been filed as an exhibit to the
Registration Statement or otherwise identified to us in a certificate provided
by the Chief Financial Officer and the General Counsel of the Company as
material to the Company and its subsidiaries taken as a whole (collectively, the
"Identified Documents").
6. Each of the Purchase Agreements has been duly authorized, executed and
delivered by the Company and CHS.
7. The Registration Statement[, including any Rule 462(b) Registration
Statement,] has been declared effective under the 1933 Act and no stop order
suspending the effectiveness of the
A-2-6
<PAGE>
Registration Statement has been issued under the 1933 Act and no proceedings for
that purpose have been instituted or are pending or threatened by the
Commission. Any required filing of the Prospectuses pursuant to Rule 424(b) has
been made in the manner and within the time period required by Rule 424(b).
8. The Registration Statement[, including any Rule 462(b) Registration
Statement,] the Prospectuses[, and each amendment or supplement to the
Registration Statement and the Prospectuses,] as of their respective effective
or issue dates (other than the financial statements, related notes, supporting
schedules and other financial data included therein or omitted therefrom, as to
which we express no opinion) appeared on their face to be responsive as to form
in all material respects with the requirements of the 1933 Act and the 1933 Act
Regulations.
9. The statements in the Prospectuses under "Description of Capital Stock,"
"Description of our Indebtedness," "Shares Eligible for Future Sale" and "United
States Federal Income Tax Considerations for Non-United States Holders" and the
statements in the Registration Statement under Item 14, in so far as they
constitute summaries of legal matters or documents referred to therein, fairly
summarize in all material respects the matters referred to therein.
10. No filing, consent, approval, authorization, order, registration or
qualification of or with any United States, New York or, with respect to matters
arising under the Delaware General Corporation Law, Delaware court or
governmental agency or body is required by or on behalf of the Company for the
sale of the Securities or the consummation by the Company and CHS of the
transactions contemplated by the Purchase Agreements, except the registration
under the 1933 Act of the Securities and such consents, approvals,
authorizations, orders, registrations or qualifications as may be required under
state or foreign securities or Blue Sky laws, rules and regulations in
connection with the purchase and distribution of the Securities by the
Underwriters.
11. The execution, delivery and performance by the Company and CHS with all
of the provisions of the Purchase Agreements and the consummation of the
transactions contemplated by the Purchase Agreements and the Recapitalization do
not and will not conflict with, or result in a breach or violation of, any of
the terms or provisions of, or constitute a default or a Repayment Event under,
or result in the creation or imposition of any lien, charge or encumbrance upon
any property or assets of the Company, CHS or any of their subsidiaries pursuant
to, (i) any indenture, mortgage, deed of trust, loan agreement or other
agreement or instrument to which the Company or any of its subsidiaries is a
party or by which the Company or any of its subsidiaries is bound or to which
any of the property or assets of the Company or any of its subsidiaries is
subject, (ii) the provisions of the Restated Certificate of Incorporation or
By-laws of the Company, (iii) the Delaware General Corporation Law or any
present law, or present regulation of any government agency or authority, of the
State of New York or the United States of America known by us to be applicable
to the Company or any of its subsidiaries or their respective properties or (iv)
any court decree or order binding upon the Company or any of its subsidiaries or
their respective properties (it being understood that with respect to the
opinions in clauses (i) and (iv) of this paragraph, such opinions are limited to
the Identified Documents.
A-2-7
<PAGE>
12. Other than as disclosed in the Prospectuses, to our knowledge, there
are no persons with registration rights or other similar rights to have any
securities of the Company registered pursuant to the Registration Statement or
otherwise registered by the Company under the 1933 Act.
13. The Company is not an "investment company," as such term is defined in
the Investment Company Act of 1940, as amended.
14. The Recapitalization was duly authorized by the Company's Board of
Directors and stockholders and has been consummated in accordance with its
terms.
In the course of our engagement to represent or to advise the Company, we
have not become aware of any pending legal proceeding before, or pending
investigation by, any court or administrative agency or authority or any
arbitration tribunal of the United States or the State of New York against or
directly affecting the Company, CHS or any of their respective subsidiaries or
properties which seeks to enjoin or otherwise prevent the consummation of, or to
recover any damages or obtain relief in connection with or which would
materially adversely affect the legality, validity or enforceability of, the
Purchase Agreements, the Recapitalization or the transactions contemplated
thereby. In making the foregoing statement, we have endeavored, to the extent we
have believed necessary, to determine from lawyers currently in our Firm who
have performed substantive legal services for the Company, whether such services
involved substantive attention in the form of legal representation concerning
pending legal proceedings or pending investigations of the nature referred to
above. Beyond that, we have not made any review, search or investigation of
public files or records or files or records of the Company, CHS or any of their
respective subsidiaries or of their transactions, or any other investigation or
inquiry with respect to the foregoing statement.
In the course of the preparation by the Company of the Registration
Statement and the Prospectuses, we attended conferences with certain of the
officers and other representatives of the Company and CHS, representatives of
the independent public accountants for the Company and CHS and representatives
of the Underwriters, at which the contents of the Registration Statement and the
Prospectuses were discussed. Between the date of effectiveness of the
Registration Statement and the time of delivery of this opinion, we attended
additional conferences with certain of the officers and representatives of, and
the independent public accountants for, the Company and CHS, at which the
contents of the Prospectuses were discussed to a limited extent. Given the
limitations inherent in the independent verification of factual matters and the
character of determinations involved in the registration process, we are not
passing upon and do not assume any responsibility for the accuracy,
completenesss or fairness of the statements contained in the Registration
Statement and the Prospectuses, other than as set forth in paragraph 9 above.
Subject to the foregoing and on the basis of the information we gained in the
performance of the services referred to above, including information obtained
from officers and other representatives of, and the independent accountants for,
the Company and CHS, nothing has come to our attention that causes us to believe
that, as of the time it became effective, the Registration Statement contained
an untrue statement of a material fact or omitted to state a material fact
required to be stated therein or necessary to make the statements therein not
misleading, or that the Prospectuses as of their dates contained any untrue
statement of a material fact or omitted to state a material fact required to be
stated therein or necessary in order to make the statements therein, in light of
the circumstances under which they were made, not misleading. Also, subject to
the foregoing, nothing
A-2-8
<PAGE>
has come to our attention in the course of proceedings described in the second
sentence of this paragraph that causes us to believe that the Prospectuses on
the date and time of delivery of this letter contain an untrue statement of a
material fact or omit to state a material fact necessary to make the statements
therein, in light of the circumstances under which they were made, not
misleading. We express no view or belief, however, with respect to the financial
statements, related notes and schedules thereto and other financial data
included in or omitted from the Registration Statement or the Prospectuses.
The opinions set forth above are subject to the following qualifications:
A. With respect to the opinion expressed in paragraph 11 above: (i) we have
made no independent investigation as to whether the Identified Documents
identified to us in the Officer's Certificate, which are governed by the laws of
any jurisdiction other than the State of New York, will be enforced as written
under the laws of such jurisdiction; and (ii) we express no opinion with respect
to any conflict with or any breach or violation of, or default under, any
Identified Document (x) not readily ascertainable from the face of such
document, (y) arising under or based upon any cross-default provisions insofar
as such conflict, breach, violation or default relates to a default under a
document which is not an Identified Document, or (z) arising under or based upon
any covenant of a financial or numerical nature or which requires arithmetic
computation.
B. We express no opinion as to the indemnity, contribution or governing law
provisions of any agreement.
C. The opinions expressed above are subject to the effect of, and we
express no opinions herein as to, the application of state or foreign securities
or Blue Sky laws or any rules and regulations thereunder. The opinions expressed
herein are limited to the federal laws of the United States of America, the laws
of the State of New York and, to the extent relevant to the opinions expressed
herein, the General Corporation Law of the State of Delaware, each as currently
in effect. The opinions expressed herein are given as of the date hereof, and we
undertake no obligation to supplement this letter if any applicable laws change
after the date hereof or if we become aware of any facts that might change the
opinions expressed herein after the date hereof or for any other reason.
A-2-9
<PAGE>
The opinions expressed herein are solely for your benefit in connection
with the Purchase Agreements and may not be relied on in any manner or for any
purpose by any other person or entity and may not be quoted in whole or in part
without our prior written consent.
Very truly yours,
FRIED, FRANK, HARRIS, SHRIVER & JACOBSON
By:______________________________________
Jeffrey Bagner
<PAGE>
[FORM OF LOCK-UP AGREEMENT FROM DIRECTORS, OFFICERS OR
OTHER STOCKHOLDERS PURSUANT TO SECTION 5(I)]
Exhibit B
MERRILL LYNCH & CO.
Merrill Lynch, Pierce, Fenner & Smith
Incorporated
Banc of America Securities LLC
Chase Securities Inc.
Credit Suisse First Boston Corporation
Goldman, Sachs & Co.
Morgan Stanley & Co. Incorporated
as U.S. Representatives of the several
U.S. Underwriters to be named in the
within-mentioned U.S. Purchase Agreement
Merrill Lynch International
Bank of America International Limited
Chase Manhattan International Limited
Credit Suisse First Boston (Europe) Limited
Goldman Sachs International
Morgan Stanley & Co. International Limited
c/o Merrill Lynch & Co.
Merrill Lynch, Pierce, Fenner & Smith
Incorporated
North Tower
World Financial Center
New York, New York 10281-1209
Re: PROPOSED PUBLIC OFFERING BY COMMUNITY HEALTH SYSTEMS
Dear Sirs:
The undersigned, a stockholder and/or an officer and/or a director of
Community Health Systems, Inc. a Delaware corporation (the "Company"),
understands that (i) Merrill Lynch & Co., Merrill Lynch, Pierce, Fenner &
Smith Incorporated ("Merrill Lynch") and Banc of America Securities LLC,
Chase Securities Inc., Credit Suisse First Boston Corporation, Goldman,
Sachs & Co. and Morgan Stanley & Co. Incorporated propose to enter into a
U.S. Purchase Agreement (the "U.S. Purchase Agreement") with the Company
providing for the public offering of shares (the "Securities") of the
Company's common stock, par value $.01 per share (the "Common Stock") and
(ii) Merrill Lynch International, Bank of America International Limited,
Chase Manhattan International Limited, Credit Suisse First Boston (Europe)
Limited, Goldman Sachs International and Morgan Stanley & Co. International
Limited propose to enter into an International Purchase Agreement with the
Company providing for the public offering of the Common Stock of the
Company (together with the U.S. Purchase Agreement, the "Purchase
Agreements"). In recognition of the benefit that such an offering will
confer upon the
<PAGE>
undersigned as a stockholder and/or an officer and/or a director of the
Company, and for other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the undersigned agrees with
each underwriter to be named in the Purchase Agreements that, during a
period of 180 days from the date of the Purchase Agreements, the
undersigned will not, without the prior written consent of Merrill Lynch,
directly or indirectly, (i) offer, pledge, sell, contract to sell, sell any
option or contract to purchase, purchase any option or contract to sell,
grant any option, right or warrant for the sale of, or otherwise dispose of
or transfer any shares of the Company's Common Stock or any securities
convertible into or exchangeable or exercisable for Common Stock, whether
now owned or hereafter acquired by the undersigned or with respect to which
the undersigned has or hereafter acquires the power of disposition, or file
any registration statement under the Securities Act of 1933, as amended,
with respect to any of the foregoing or (ii) enter into any swap or any
other agreement or any transaction that transfers, in whole or in part,
directly or indirectly, the economic consequence of ownership of the Common
Stock, whether any such swap or transaction is to be settled by delivery of
Common Stock or other securities, in cash or otherwise.
Notwithstanding the foregoing, the undersigned may transfer shares of
Common Stock (i) as a BONA FIDE gift or gifts, provided that prior to such
transfer the donee or donees thereof agree in writing to be bound by the
restrictions set forth herein, (ii) to any trust for the direct or indirect
benefit of the undersigned or the immediate family of the undersigned,
provided that prior to such transfer the trustee of the trust agrees in
writing to be bound by the restrictions set forth herein, and provided
further that any such transfer shall not involve a disposition for value or
(iii) if such transfer occurs by operation of law, such as rules of descent
and distribution, statutes governing the effects of a merger or a qualified
domestic order, provided that prior to such transfer the transferee
executes an agreement stating that the transferee is receiving and holding
the shares subject to the provisions of this agreement. For purposes of
this Lock-Up Agreement, "immediate family" shall mean any relationship by
blood, marriage or adoption, not more remote than first cousin.
Very truly yours,
Signature:
-------------------------------
Print Name:
-------------------------------
- 2 -
<PAGE>
EXHIBIT 5.1
[Fried, Frank, Harris, Shriver & Jacobson Letterhead]
212-859-8136
(FAX: 212-859-8586)
May 17, 2000
Community Health Systems, Inc.
155 Franklin Road, Suite 400
Brentwood, Tennessee 37027
RE: Registration Statement on Form S-1 (No. 333-31790)
Ladies and Gentlemen:
We have acted as special counsel for Community Health Systems, Inc., a
Delaware corporation (the "Company"), in connection with the underwritten public
offering (the "Offering") by the Company of shares (the "Shares") of common
stock, par value $.01 per share, of the Company, including Shares which may be
offered and sold upon the exercise of any over-allotment option granted to the
underwriters. The Shares are to be offered to the public (i) in the United
States and Canada pursuant to a purchase agreement to be entered into by and
among the Company, CHS/Community Health Systems, Inc., Merrill Lynch & Co., Banc
of America Securities LLC, Chase H&Q, Credit Suisse First Boston, Goldman, Sachs
& Co. and Morgan Stanley Dean Witter as representatives of the underwriters (the
"U.S. Purchase Agreement") and (ii) outside of the United States and Canada
pursuant to a purchase agreement to be entered into by and among the Company,
CHS/Community Health Systems, Inc., Merrill Lynch International, Bank of America
International Limited, Chase H&Q, Credit Suisse First Boston (Europe) Limited,
Goldman Sachs International and Morgan Stanley Dean Witter as representatives of
the underwriters (together with the U.S. Purchase Agreement, the "Purchase
Agreements"). The opinion set forth below is based on the assumption that, prior
to the sale of the Shares pursuant to the Purchase Agreements, the Company's
Restated Certificate of Incorporation will have become effective substantially
in the form filed as Exhibit 3.1 to the Registration Statement, as amended, of
the Company on Form S-1 (No. 333-31790) (the "Registration Statement"), and that
at least par value will be paid for the Shares.
<PAGE>
Community Health Systems, Inc. -2- May 17, 2000
With your permission, all assumptions and statements of reliance herein
have been made without any independent investigation or verification on our part
except to the extent otherwise expressly stated, and we express no opinion with
respect to the subject matter or accuracy of such assumptions or items relied
upon.
In connection with this opinion, we have (i) investigated such
questions of law, (ii) examined originals or certified, conformed or
reproduction copies of such agreements, instruments, documents and records of
the Company, such certificates of public officials and such other documents, and
(iii) received such information from officers and representatives of the Company
as we have deemed necessary or appropriate for the purposes of this opinion. In
all examinations, we have assumed the legal capacity of all natural persons
executing documents, the genuineness of all signatures, the authenticity of
original and certified documents and the conformity to original or certified
copies of all copies submitted to us as conformed or reproduction copies. As to
various questions of fact relevant to the opinions expressed herein, we have
relied upon, and assume the accuracy of, representations and warranties
contained in the Purchase Agreements and certificates and oral or written
statements and other information of or from representatives of the Company and
others and assume compliance on the part of all parties to the Purchase
Agreements with their covenants and agreements contained therein.
Based upon the foregoing and subject to the limitations and assumptions
set forth herein, we are of the opinion that the Shares to be registered
pursuant to the Registration Statement (when issued, delivered and paid for
in accordance with the terms of the Purchase Agreements) will be duly
authorized, validly issued, fully paid and non-assessable.
The opinion expressed herein is limited to the General Corporation Law
of the State of Delaware (the "GCLD") and applicable provisions of the Delaware
Constitution, in each case as currently in effect, and reported judicial
decisions interpreting the GCLD and the Delaware Constitution.
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement and to the reference to this Firm under the caption
"Legal Matters" in the Prospectuses forming part of the Registration Statement.
In giving such consent, we do not hereby admit that we are in the category of
such persons whose consent is required under Section 7 of the Securities Act of
1933, as amended.
<PAGE>
Community Health Systems, Inc. -3- May 17, 2000
Very truly yours,
FRIED, FRANK, HARRIS, SHRIVER & JACOBSON
By: /s/ Jeffrey Bagner
--------------------------------------
Jeffrey Bagner
<PAGE>
EXHIBIT 10.15
CORPORATE COMPLIANCE AGREEMENT
BETWEEN THE
OFFICE OF INSPECTOR GENERAL
OF THE
DEPARTMENT OF HEALTH AND HUMAN SERVICES
AND
COMMUNITY HEALTH SYSTEMS, INC.
I. PREAMBLE
Community Health Systems, Inc. ("Community Health") hereby enters into
this Corporate Compliance Agreement ("CCA") with the Office of Inspector General
("OIG") of the United States Department of Health and Human Services ("HHS") on
behalf of itself and any and all subsidiary hospitals of Community Health. For
the purposes of the CCA, Community Health and each of its subsidiary hospitals
shall hereinafter individually and collectively be referred to as "CHS."
Community Health enters into this CCA to ensure compliance by CHS and all
employees, contractors and agents of CHS with the requirements of Medicare,
Medicaid and all other Federal health care programs (as defined in 42 U.S.C. ss.
1320a-7b(f) (hereinafter collectively referred to as the "Federal health care
programs"). CHS's compliance with the terms and conditions in this CCA shall
constitute an element of CHS's present responsibility with regard to
participation in the Federal health care programs. Contemporaneously with this
CCA, Community Health is entering into a settlement agreement with the United
States (the "Settlement Agreement"), and this CCA is incorporated by reference
into the Settlement Agreement.
Community Health represents that, prior to this CCA, Community Health
voluntarily established a Corporate Compliance Program which provides, inter
alia, for a Corporate Compliance Officer, various compliance committees, a
compliance training and education program, a confidential reporting hotline, and
auditing and monitoring activities, and which includes various policies and
procedures aimed at ensuring that CHS's participation in the Federal health care
programs conforms to all federal laws, state laws, and Federal health care
program requirements. The present version of Community Health's Corporate
Compliance Program was set forth in a formal document dated April 28, 1999
(hereinafter, the "Corporate Compliance Program").
Pursuant to this CCA, Community Health agrees to operate its Corporate
Compliance Program consistent with the requirements of this CCA and to adopt
or modify any components of the Corporate Compliance Program as needed to be
in compliance with all of the corporate integrity obligations undertaken by
CHS under this CCA.
II. TERM OF THE CCA
The period of the compliance obligations assumed by CHS under this CCA
shall be three (3) years from the effective date of this CCA (unless otherwise
specified). The effective date of this CCA will be the date on which the final
signatory of this CCA executes this CCA.
1
<PAGE>
III. CORPORATE INTEGRITY OBLIGATIONS
CHS shall comply with the following corporate integrity obligations
and shall ensure that the obligations specified below are incorporated into
or met by the Corporate Compliance Program.
A. CORPORATE COMPLIANCE OFFICER AND COMMITTEE
1. CORPORATE COMPLIANCE OFFICER. Community Health has appointed a
Corporate Compliance Officer. Within 120 days of the effective date of this CCA,
Community Health shall ensure that, pursuant to the Corporate Compliance
Program, the Corporate Compliance Officer (i) will provide regular (at least
quarterly) reports regarding compliance matters directly to the CEO and/or the
Board of Directors of Community Health, and shall be authorized to report to the
Board of Directors at any time; (ii) shall be responsible for developing and
implementing policies, procedures, and practices designed to ensure compliance
with the requirements set forth in this CCA and with the requirements of the
Federal health care programs; and (iii) shall be responsible for monitoring the
day-to-day activities engaged in by CHS to further its compliance objectives as
well as for any reporting obligations created under this CCA. In the event a new
Corporate Compliance Officer is appointed during the term of this CCA, CHS shall
notify OIG, in writing, within fifteen (15) days of such a change.
2. CORPORATE COMPLIANCE WORK GROUP. Community Health has
appointed a Corporate Compliance Work Group. Within 120 days of the effective
date of this CCA, CHS shall ensure that, pursuant to the Corporate Compliance
Plan, (i) the Corporate Compliance Work Group, at a minimum, includes the
Corporate Compliance Officer and any other appropriate officers as necessary to
meet the requirements of this CCA within Community Health's corporate structure
(e.g., senior executives of each major department, such as billing, human
resources, audit, and operations); and (ii) the Corporate Compliance Officer
shall chair the Corporate Compliance Work Group and the Corporate Compliance
Work Group shall support the Corporate Compliance Officer in fulfilling his or
her responsibilities.
3. FACILITY COMPLIANCE CHAIRS AND COMMITTEES. The Corporate
Compliance Program provides for a Facility Compliance Committee and a Facility
Compliance Chair at each CHS hospital. Within 120 days of the effective date of
this CCA, CHS shall ensure that, pursuant to the Corporate Compliance Program,
(i) each CHS hospital has appointed a Facility Compliance Committee and a
Facility Compliance Chair; (ii) the responsibilities of the Facility Compliance
Chair shall include those responsibilities set forth as the "delegated
responsibilities of the Facility Compliance Committees" on pages five and six of
Community Health's Corporate Compliance Program, as adopted on April 28, 1999;
and (iii) the Facility Compliance Committee includes, at a minimum, a Facility
Compliance Chair and any other appropriate officers as necessary to meet the
requirements of this CCA within the hospital's management structure (e.g.,
senior managers of each major department). The Facility Compliance Chairs shall
report to the Corporate Compliance Officer and shall chair the Facility
Compliance Committees, and the Facility Compliance Committees shall support the
Facility Compliance Chairs in fulfilling their duties.
2
<PAGE>
B. WRITTEN STANDARDS
1. BUSINESS ETHICS AND STANDARDS OF CONDUCT POLICY. Community
Health has developed and implemented a Business Ethics and Standards of Conduct
Policy (the "Ethics and Conduct Policy"). Within 120 days of the effective date
of this CCA, CHS shall amend the Ethics and Conduct Policy to be consistent with
the terms of this CCA and to meet the requirements set forth below. Within 120
days of the effective date of this CCA, the Ethics and Conduct Policy, as
amended, shall be distributed to all employees, all physicians with medical
staff privileges at any CHS hospital, and all contractors and agents of CHS with
direct responsibility for the delivery, billing, or coding of health care
services, (hereinafter collectively referred to as "Covered Persons"). The
Ethics and Conduct Policy, shall, at a minimum, set forth:
a. CHS's commitment to full compliance with all
statutes, regulations, and guidelines applicable to
Federal health care programs, including its
commitment to prepare and submit accurate billings
consistent with Federal health care program
regulations and procedures or instructions otherwise
communicated by appropriate regulatory agencies,
e.g., the Health Care Financing Administration
("HCFA"), and/or their agents;
b. CHS's requirement that all of its Covered Persons shall
be expected to comply with all statutes, regulations,
and guidelines applicable to Federal health care
programs and with CHS's own Policies and Procedures
(including the requirements of this CCA);
c. the requirement that all of CHS's Covered Persons shall
be expected to report suspected violations of any
statute, regulation, or guideline applicable to Federal
health care programs or of CHS's own Policies and
Procedures;
d. the possible consequences to both CHS and Covered
Persons of failure to comply with all statutes,
regulations, and guidelines applicable to Federal health
care programs and with CHS's own Policies and Procedures
or of failure to report such non-compliance; and
e. the right of all Covered Persons to use the Confidential
Disclosure Program, as well as CHS's commitment to
confidentiality and non-retaliation with respect to
disclosures.
CHS shall make the promotion of, and adherence to, the Ethics and Conduct
Policy an element in evaluating the performance of managers, supervisors, and
all other employees.
Within 120 days of the effective date of the CCA, and except as excused
in sections III.C.3-4, below, each Covered Person shall affirm, in writing, that
he or she has received, read,
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understands, and will abide by CHS's Ethics and Conduct Policy. New Covered
Persons shall receive the Ethics and Conduct Policy and shall complete the
required affirmation within one week after becoming a Covered Person or within
120 days of the effective date of the CCA, whichever is later.
CHS will annually review the Ethics and Conduct Policy and will make any
necessary revisions. These revisions shall be distributed within 30 days of
completing such a change. Covered Persons shall affirm on an annual basis that
they have received, read, understand and will abide by the Ethics and Conduct
Policy.
2. POLICIES AND PROCEDURES. Community Health has developed
written Policies and Procedures as part of its Corporate Compliance Program.
Within 120 days of the effective date of this CCA, CHS shall ensure that the
Policies and Procedures of the Corporate Compliance Program (i) address the
operation of CHS's compliance program and its compliance with all federal and
state health care statutes, regulations, and guidelines, including the
requirements of the Federal health care programs; (ii) specifically address, at
a minimum, proper coding for hospital stays; and (iii) include disciplinary
guidelines and methods for employees and other individuals to make disclosures
or otherwise report on compliance issues to CHS management through the
Confidential Disclosure Program required by Section III.E. CHS shall assess and
update as necessary the Policies and Procedures at least annually and more
frequently, as appropriate. A summary of the Policies and Procedures will be
provided to OIG in the first Annual Report. The Policies and Procedures will be
available to OIG upon request.
Within 120 days of the effective date of the CCA, CHS shall ensure that
pursuant to the Corporate Compliance Program, the relevant portions of the
Policies and Procedures, as amended to meet the requirements of this section,
shall be distributed to all members of the Compliance Work Group and of the
Facility Compliance Committees. In addition, within 120 days of the effective
date of this CCA, the relevant portions of the Policies and Procedures, as
amended to meet the requirements of this section, shall be made available to all
appropriate Covered Persons. Compliance staff or supervisors should be available
to explain any and all Policies and Procedures.
C. TRAINING AND EDUCATION
1. GENERAL TRAINING. Within 120 days of the effective date of
this CCA, CHS shall provide at least one (1) hour of training to each Covered
Person (the "General Training"). This General Training shall explain CHS's:
a. Corporate Compliance Agreement requirements;
b. Compliance Program (including the Policies and
Procedures as they pertain to general compliance
issues); and
c. Ethics and Conduct Policy.
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New Covered Persons shall receive the General Training described above
within 30 days of becoming a Covered Person or within 120 days after the
effective date of this CCA, whichever is later. Each Covered Person shall
receive such General Training on an annual basis. All training materials used
for the General Training shall be made available to OIG upon request.
2. SPECIFIC TRAINING. Within 120 days of the effective date of
this CCA, each Covered Person who is a physician or is involved in the
preparation or submission of claims for reimbursement (including, but not
limited to, coding and billing) from any Federal health care program shall
receive at least four (4) hours of training (the "Specific Training") in
addition to the General Training required above. CHS shall ensure that, pursuant
to the Corporate Compliance Program, and as appropriate to the Covered Person's
individual responsibilities, the Specific Training includes a discussion of:
a. the submission of accurate bills for services
rendered to Federal health care program patients;
b. policies, procedures and other requirements applicable
to the documentation of medical records;
c. the personal obligation of each individual involved in
the billing process to ensure that such billings are
accurate;
d. applicable reimbursement statutes, regulations, and
program requirements and directives;
e. the legal sanctions for improper billings; and
f. examples of proper and improper billing practices.
Persons providing the Specific Training must be knowledgeable about the subject
area.
Affected new Covered Persons shall receive the Specific Training within
30 days of becoming a Covered Person or within 120 days of the effective date of
this CCA, whichever is later. If a new Covered Person who is a physician or is
involved in the preparation or submission of claims for reimbursement
(including, but not limited to, coding and billing) from any Federal health care
program has any responsibility for the delivery of patient care, the preparation
or submission of claims, and/or the assignment of procedure codes prior to
completing this Specific Training, a Covered Person who has completed the
Specific Training shall review all of the untrained person's work regarding the
delivery of patient care, the preparation or submission of claims, and the
assignment of procedure codes.
Covered Persons who have received the above-required Specific Training,
or its equivalent, within 12 months prior to the effective date of this CCA are
exempted from the above four (4) hour Specific Training requirement for the
first year of this CCA only. CHS shall maintain records sufficient to support a
listing of those Covered Persons for whom CHS is
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claiming such an exemption as well as the date(s) and topics of the training
received by those Covered Persons.
Every Covered Person who is a physician or is involved in the preparation
or submission of claims for reimbursement (including, but not limited to, coding
and billing) from any Federal health care program shall receive at least four
(4) hours of such Specific Training on an annual basis. All training materials
used for the Specific Training shall be made available to OIG upon request.
3. EXCEPTION FOR PHYSICIANS WITH MEDICAL STAFF PRIVILEGES.
Notwithstanding any other provision of this CCA, CHS shall make the General
Training and the Specific Training, where appropriate, available to all
physicians with medical staff privileges at any CHS hospital, and shall use its
best efforts to encourage their attendance and participation. The Facility
Compliance Officer at each CHS hospital shall maintain records of the percentage
of all physicians with medical staff privileges at his or her hospital who
attend such training.
4. EXCEPTION FOR PRE-EXISTING CONTRACTORS. The term "Pre-Existing
Contractors" shall refer to Covered Persons who are independent contractors with
whom CHS has an existing contract on the effective date of this CCA that has not
been renewed or modified after the effective date of this CCA. Once CHS
renegotiates, modifies, or renews a contract with an existing contractor, that
contractor ceases to be a Pre-Existing Contractor as that term is used for the
purposes of this CCA, and CHS will have full responsibility for the
certification and training compliance obligations as pertain to that contractor.
Notwithstanding any other provision of this CCA, the following are CHS's only
obligations hereunder with respect to training and certification for
Pre-Existing Contractors: (a) CHS shall attempt to renegotiate its contracts
with Pre-Existing Contractors to require such contractors to meet all of the
certification and training requirements of this CCA that apply to such
contractors, and (b) CHS shall make the General Training and the Specific
Training, where appropriate, available to all Pre-Existing Contractors, and
shall use its best efforts to encourage their attendance and participation. The
Facility Compliance Officer at each CHS hospital shall keep a record of all
Pre-Existing Contractors with contracts with his or her hospital who attend such
training.
5. CERTIFICATION. Each individual who is required to attend
training shall certify, in writing, that he or she has attended the required
training. The certification shall specify the type of training received and the
date received. The Facility Compliance Chair for each CHS hospital shall retain
the certifications for all Covered Persons for his or her hospital, along with
the specific course materials utilized. The Corporate Compliance Officer shall
retain the certifications for all Covered Persons not affiliated with a specific
CHS hospital, along with the specific course materials utilized. The
certifications and the materials shall be made available to OIG upon request.
D. REVIEW PROCEDURES
CHS shall retain one or more entities, such as an accounting, auditing or
consulting firms, (hereinafter "Independent Review Organization" or "IRO") to
perform review procedures to
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assist CHS in assessing the adequacy of its billing and compliance practices
pursuant to this CCA. The IROs must have expertise in the billing, coding,
reporting and other requirements of the Federal health care programs from which
CHS seeks reimbursement.
The Independent Review Organizations will conduct two separate
engagements. One will be an analysis of the inpatient ICD-9 and diagnosis
related group ("DRG") coding of each CHS hospital (the "DRG Review") to assist
the CHS and OIG in determining compliance with all applicable statutes,
regulations, and directives/guidance (the "DRG Review"). The second engagement
will determine whether CHS is in compliance with this CCA (the "Compliance
Engagement").
1. DRG REVIEW. Community Health represents that it has engaged,
and will continue to engage for the term of this CCA, an Independent Review
Organization to review the inpatient DRG coding of each CHS hospital. Within 120
days after the effective date of this CCA, CHS shall ensure that, pursuant to
the Corporate Compliance Program, (i) the IRO has expertise in the billing,
coding, reporting and other requirements of the Federal health care programs
from which CHS seeks reimbursement; and (ii) the protocol for the DRG Review
meets the following requirements:
a. each quarter, for each hospital, 40% of all DRG
discharges shall be reviewed;
b. the discharges selected for review must be selected
through random number sampling. To generate the random
sample, CHS or the IRO shall use OIG's Office of Audit
Services Statistical Sampling Software, also known as
"RAT-STATS," which is available through the Internet at
"www.hhs.gov/oig/oas/ratstat.htm];
c. at each hospital, for any billing errors or inaccuracies
found, the coding personnel at that hospital shall
receive training regarding the errors or inaccuracies;
d. if a hospital achieves an error rate of 3% or less,
based on total number of discharges reviewed, then CHS
may elect to skip that hospital in the next quarterly
review, however that hospital shall be included in the
following quarter's review;
e. if a hospital maintains an error rate of 3% or less for
two successive reviews, then CHS may elect to skip that
hospital for the next three quarterly reviews; and
f. in no event will a CHS hospital be subjected to a DRG
review less frequently than once per year.
For the purposes of this CCA, the "error rate" shall be defined as the
gross financial error rate, i.e., the percentage of amounts paid for the sample
discharges that were overpayments (with
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no reduction for underpayments). The 3% error rate threshold, as used in this
section, is solely the criteria for whether CHS may elect to skip a hospital's
quarterly DRG review. Nothing in this section relieves CHS of its responsibility
to correct inaccuracies identified for any claim selected as part of any DRG
review.
CHS shall continue to engage an IRO to perform these quarterly DRG
Reviews for the term of this CCA.
A detailed summary of the reports prepared pursuant to the IRO's DRG
Reviews, including the percentage error rates for each DRG reviewed at each
hospital and a description of the methodologies used, shall be included in each
of CHS's Annual Reports to OIG. The IRO's complete DRG Review reports shall be
maintained by CHS and provided to the OIG upon request.
2. COMPLIANCE ENGAGEMENT. An Independent Review Organization
shall also conduct a Compliance Engagement, that shall provide findings
regarding whether CHS's program, policies, procedures, and operations comply
with the terms of this CCA. The Compliance Engagement shall include section by
section findings regarding the requirements of this CCA. The Compliance
Engagement shall be performed annually and cover each of the one-year periods
beginning on the effective date of this CCA or the anniversary of that date.
Based on the results of the first Compliance Engagement and on the
results of the DRG Reviews for the first year of the term of this CCA, OIG may,
at its sole discretion, relieve CHS of its obligation to retain and IRO to
conduct a Compliance Engagement for the second and third years of this CCA.
A complete copy of the Independent Review Organization's Compliance
Engagement report shall be included in each of CHS's Annual Reports to OIG.
3. VERIFICATION/VALIDATION. In the event that the OIG has
reason to believe that CHS's DRG Review fails to conform materially to its
obligations under the CCA or indicates improper billings not otherwise
adequately addressed in the DRG Review report, and thus determines that it is
necessary to conduct an independent review to determine whether or the extent
to which CHS is complying with its obligations under this CCA, CHS agrees to
pay for the reasonable cost of any such review or engagement by the OIG or
any of its designated agents.
E. CONFIDENTIAL DISCLOSURE PROGRAM
Community Health represents that prior to the effective date of this CCA,
it had established an "Ethics HOTLINE." Within 120 days after the effective date
of this CCA, CHS shall ensure that, pursuant to its Corporate Compliance
Program, it has established a Confidential Disclosure Program, which includes
measures (e.g., the Ethics HOTLINE) to enable employees, contractors, agents or
other individuals to disclose, to the Corporate Compliance Officer or some other
person who is not in the disclosing individual's chain of command, any
identified issues or questions associated with CHS's policies, practices or
procedures with respect to a Federal health care program, believed by the
individual to be inappropriate. CHS shall publicize the existence
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of the Ethics HOTLINE (e.g., e-mail to employees or post hotline number in
prominent common areas).
Pursuant to the Corporate Compliance Program, the Confidential Disclosure
Program shall emphasize a non-retribution, non-retaliation policy, and shall
include a reporting mechanism for anonymous, confidential communication. Upon
receipt of a disclosure, the Corporate Compliance Officer (or designee) shall
gather the information in such a way as to elicit all relevant information from
the disclosing individual. The Corporate Compliance Officer (or designee) shall
make a preliminary good faith inquiry into the allegations set forth in every
disclosure to ensure that he or she has obtained all of the information
necessary to determine whether a further review should be conducted. For any
disclosure that is sufficiently specific so that it reasonably (i) permits a
determination of the appropriateness of the alleged improper practice; and (ii)
provides an opportunity for taking corrective action, CHS shall conduct an
internal review of the allegations set forth in such a disclosure and ensure
that proper follow-up is conducted.
The Corporate Compliance Officer shall maintain a Confidential
Disclosure Log, which shall include a record and summary of each allegation
received, the status of the respective investigations, and any corrective
action taken in response to the investigation.
F. INELIGIBLE PERSONS
1. DEFINITION. For purposes of this CCA, an "Ineligible Person"
shall be any individual or entity who: (i) is currently excluded, suspended,
debarred or otherwise ineligible to participate in the Federal health care
programs; or (ii) has been convicted of a criminal offense related to the
provision of health care items or services and has not been reinstated in the
Federal health care programs after a period of exclusion, suspension, debarment,
or ineligibility.
2. SCREENING REQUIREMENTS. CHS shall not hire or engage as
contractors any Ineligible Person. To prevent hiring or contracting with any
Ineligible Person, CHS shall screen all prospective employees and prospective
contractors prior to engaging their services by: (i) requiring applicants to
disclose whether they are Ineligible Persons, and (ii) reviewing the General
Services Administration's List of Parties Excluded from Federal Programs
(available through the internet at http://www.arnet.gov/epls) and the HHS/OIG
List of Excluded Individuals/Entities (available through the Internet at
http://www.dhhs.gov/oig) (these lists will hereinafter be referred to as the
"Exclusion Lists").
3. REVIEW AND REMOVAL REQUIREMENT. Within 120 days of the
effective date of this CCA, CHS will review its list of current employees and
contractors against the Exclusion Lists. Thereafter, CHS will review the list
annually. If CHS has notice that an employee or contractor has become an
Ineligible Person, CHS will remove such person from responsibility for, or
involvement with, CHS's business operations related to the Federal health care
programs and shall remove such person from any position for which the person's
salary or the items or services rendered, ordered, or prescribed by the person
are paid in whole or part, directly or indirectly, by Federal health care
programs or otherwise with Federal funds at least until such time as the person
is reinstated into participation in the Federal health care programs.
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4. PHYSICIANS WITH STAFF PRIVILEGES. Prior to allowing a
physician to begin performing services at a CHS hospital after the effective
date of this CCA, CHS shall screen in the manner described in section III.F.2
above to determine if the physician is an Ineligible Person. Furthermore, CHS
shall review its list of physicians who are allowed to perform services at any
CHS hospital against the Exclusion Lists within 120 days of the effective date
of this CCA and at least annually thereafter. If such a physician is an
Ineligible Person, CHS shall ensure that the physician does not provide, order,
or prescribe any items or services payable in whole or in part by any Federal
health care program. In addition to any other appropriate measures, CHS shall
ensure that any physician who is an Ineligible Person is not "on call" at any
CHS hospital.
5. PENDING CHARGES AND PROPOSED EXCLUSIONS. If CHS has notice
that an employee or contractor is charged with a criminal offense related to any
Federal health care program, or is proposed for exclusion during his or her
employment or contract, CHS shall take all appropriate actions to ensure that
the responsibilities of that employee or contractor do not adversely affect the
quality of care rendered to any patient or resident, or the accuracy of any
claims submitted to any Federal health care program.
G. NOTIFICATION OF PROCEEDINGS
Within 30 days of discovery, CHS shall notify OIG, in writing, of any
ongoing investigation or legal proceeding conducted or brought by a governmental
entity or its agents involving an allegation that CHS has committed a crime or
has engaged in fraudulent activities or any other knowing misconduct. This
notification shall include a description of the allegation, the identity of the
investigating or prosecuting agency, and the status of such investigation or
legal proceeding. CHS shall also provide written notice to OIG within 30 days of
the resolution of the matter, and shall provide OIG with a description of the
findings and/or results of the proceedings, if any.
H. REPORTING
1. REPORTING OF OVERPAYMENTS. If, at any time, CHS identifies or
learns of any billing, coding or other policies, procedures and/or practices
that result in an overpayment, CHS shall notify the payer (e.g., Medicare fiscal
intermediary or carrier) within 30 days of discovering the overpayment and take
remedial steps within 60 days of discovery (or such additional time as may be
agreed to by the payor) to correct the problem, including preventing the
underlying problem and the overpayments from recurring. Notification to the
payor should be done pursuant to a form similar to the Overpayment Refund Form,
provided as Attachment A to this CCA.
2. REPORTING OF MATERIAL DEFICIENCIES. If CHS determines that
there is a material deficiency, CHS shall notify the OIG within 30 days of
making the determination that the material deficiency exists. The report to the
OIG shall include the following information:
a. If the material deficiency results in an overpayment,
the report to the OIG shall be made at the same time as
the notification to the
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payor required in Section H.1, and shall include all of
the information on the Overpayment Refund Form, as well
as:
(i) the payor's name, address, and contact person
where the overpayment was sent; and
(ii) the date of the check and identification number
(or electronic transaction number) on which the
overpayment was repaid;
b. a complete description of the material deficiency,
including the relevant facts, persons involved, and
legal and program authorities;
c. CHS's actions to correct the material deficiency, and
d. any further steps CHS plans to take to address such
material deficiency and prevent it from recurring.
3. DEFINITION OF "OVERPAYMENT." For purposes of this CCA, an
"overpayment" shall mean the amount of money CHS has received in excess of the
amount due and payable under the Federal health care programs' statutes,
regulations or program directives, including carrier and intermediary
instructions.
4. DEFINITION OF "MATERIAL DEFICIENCY." For purposes of this CCA,
a "material deficiency" means anything that involves:
a. a substantial overpayment relating to any Federal
health care program; or
b. a matter that a reasonable person would consider a
potential violation of criminal, civil, or
administrative laws applicable to any Federal health
care program.
A material deficiency may be the result of an isolated event or a series
of occurrences.
IV. NEW BUSINESS UNITS OR LOCATIONS
In the event that CHS purchases or establishes new business units after
the effective date of this CCA, CHS shall notify OIG of this fact within 30 days
of the date of purchase or establishment. This notification shall include the
location of the new operation(s), telephone number, facsimile number, Federal
health care program provider number(s) (if any), and the corresponding payor(s)
(contractor specific) that has issued each provider number. All Covered Persons
at such locations shall be subject to the requirements in this CCA that apply to
new Covered Persons (e.g., completing affirmations and certifications and
undergoing training).
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V. ANNUAL REPORTS
CHS shall submit to OIG Annual Reports with respect to the status and
findings of CHS's compliance activities.
A. FIRST ANNUAL REPORT
The first Annual Report shall include:
1. any change in the name, address, telephone number and position
description of the Corporate Compliance Officer required by
Section III.A.1 from the information provided on pages three
and four of Community Heath's Corporate Compliance Program as
adopted on April 28, 1999 or from the information provided in
Section VI of this CCA;
2. any change in the names and positions of the members of the
Corporate Compliance Work Group required by Section III.A.2
from the information provided on page five of Community
Health's Corporate Compliance Program as adopted on April
28, 1999;
3. a copy of the Ethics and Conduct Policy required by Section
III.B.1;
4. a summary of the Policies and Procedures required by Section
III.B.2;
5. a description of the training programs required by Section
III.C including a description of the targeted audiences and
a schedule of when the training sessions were held, as well
as a list of Covered Persons exempted from the Specific
Training requirements who have received the above-required
Specific Training, or its equivalent, within 12 months
prior to the effective date of this CCA as well as the
date(s) and topics of the training received by those
Covered Persons;
6. a certification by the Corporate Compliance Officer that:
a. all Covered Persons have completed the Ethics and
Conduct Policy affirmation required by Section
III.B.1;
b. the Policies and Procedures required by Section III.B.2
have been developed, are being implemented, and have
been distributed to all members of the Corporate
Compliance Working Group and to all members of the
Facility Compliance Committees;
c. all Covered Persons (other than those exempted and
identified through item 5 of the First Annual Report,
above) have completed the training and executed the
certifications required by Section III.C; and
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d. CHS has complied with its obligations under the
Settlement Agreement: (i) not to resubmit to any
Federal health care program payors any previously
denied claims related to the conduct addressed in the
Settlement Agreement, and its obligation not to
appeal any such denials of claims, and (ii) not to
charge to or otherwise seek payment from federal or
state payors for unallowable costs (as defined in the
Settlement Agreement) and its obligation to identify
and adjust any past charges of unallowable costs;
7. a copy of CHS's policies regarding the Confidential Disclosure
Program required by Section III.H;
8. the identity of the Independent Review Organization(s) engaged
by CHS for the DRG Reviews and a detailed summary of the
reports prepared pursuant to the DRG Reviews, including the
percentage error rates for each DRG reviewed at each hospital
and a description of the methodologies used;
9. the identity of the Independent Review Organization engaged
for the Compliance Engagement and complete copy of the report
prepared pursuant to the Compliance Engagement, including a
copy of the methodology used;
10. CHS's response/corrective action plan to any issues raised by
the Independent Review Organization(s);
11. a summary of material deficiencies, and corresponding
corrective action plans, identified and reported throughout
the course of the previous twelve (12) months pursuant to
III.H;
12. a report of the aggregate overpayments that have been returned
to the Federal health care programs. Overpayment amounts
should be broken down into the following categories: Medicare,
Medicaid (report each applicable state separately), and other
Federal health care programs;
13. a copy of the Confidential Disclosure Log required by Section
III.E;
14. a description of any personnel actions (other than hiring)
taken by CHS as a result of the obligations in Section III.F,
and the name, title, and responsibilities of any person that
falls within the ambit of Section III.F.4, and the actions
taken in response to the obligations set forth in that
Section;
15. a summary describing any ongoing investigation or legal
proceeding conducted or brought by a governmental entity
involving an allegation that
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CHS has committed a crime or has engaged in fraudulent
activities, which have been reported pursuant to Section
III.G. The statement shall include a description of the
allegation, the identity of the investigating or prosecuting
agency, and the status of such investigation, legal proceeding
or requests for information; and
16. a list of all of CHS's locations (including locations and
mailing addresses), the corresponding name under which each
location is doing business, the corresponding telephone
numbers and facsimile numbers, each location's Federal health
care program supplier number(s), and the name, address, and
telephone number of the payor (specific contractor) that
issued each provider identification number.
B. SECOND AND THIRD ANNUAL REPORTS
The second and third Annual Reports shall include the following:
1. any change in the identity or position description of the
Corporate Compliance Officer or the members of the
Corporate Compliance Working Group described in Section
III.A;
2. a certification by the Corporate Compliance Officer that:
a. all Covered Persons have completed the annual Ethics and
Conduct Policy affirmation required by Section III.B.1;
b. all Covered Persons have completed the training and
executed the certification required by Section III.C; and
c. CHS has complied with its obligations under the
Settlement Agreement: (i) not to resubmit to any Federal
health care program payors any previously denied claims
related to the conduct addressed in the Settlement
Agreement, and its obligation not to appeal any such
denials of claims, and (ii) not to charge to or otherwise
seek payment from federal or state payors for unallowable
costs (as defined in the Settlement Agreement) and its
obligation to identify and adjust any past charges of
unallowable costs;
3. notification of any changes or amendments to the Policies and
Procedures required by Section III.B and the reasons for such
changes (E.G., change in contractor policy);
4. the identity of the Independent Review Organization(s)
engaged by CHS for the DRG Reviews and a detailed summary
of the reports prepared pursuant to the DRG Reviews,
including the percentage error rates for each DRG reviewed
at each hospital and a description of the
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methodologies used, and a complete copy of the report
prepared pursuant to the Compliance Engagement (if
required), including a copy of the methodology used;
5. CHS's response/corrective action plan to any issues raised by
the Independent Review Organization(s);
6. a summary of material deficiencies, and corresponding
corrective action plans, identified and reported throughout
the course of the previous twelve (12) months pursuant to
III.H;
7. a report of the aggregate overpayments that have been returned
to the Federal health care programs. Overpayment amounts
should be broken down into the following categories: Medicare,
Medicaid (report each applicable state separately) and other
Federal health care programs;
8. a copy of the Confidential Disclosure Log required by Section
III.E;
9. a description of any personnel actions (other than hiring)
taken by CHS as a result of the obligations in Section III.F,
and the name, title, and responsibilities of any person that
falls within the ambit of Section III.F.4, and the actions
taken in response to the obligations set forth in that
Section;
10. a summary describing any ongoing investigation or legal
proceeding conducted or brought by a governmental entity
involving an allegation that CHS has committed a crime or
has engaged in fraudulent activities, which have been
reported pursuant to Section III.G. The statement shall
include a description of the allegation, the identity of
the investigating or prosecuting agency, and the status of
such investigation, legal proceeding or requests for
information;
11. a description of all changes to the most recently provided
list (as updated) of CHS's locations (including locations
and mailing addresses), the corresponding name under which
each location is doing business, the corresponding phone
numbers and fax numbers, each location's Federal health
care program provider identification number(s), and the
payor (specific contractor) that issued each provider
identification number,
C. CERTIFICATIONS
All Annual Reports shall include a certification by the Corporate
Compliance Officer under penalty of perjury, that: (1) CHS is in compliance
with all of the requirements of this CCA, to the best of his or her
knowledge; and (2) the Corporate Compliance Officer has reviewed the Report
and has made reasonable inquiry regarding its content and believes that, upon
such inquiry, the information is accurate and truthful.
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D. ANNUAL REPORT DUE DATES
The first Annual Report shall be received by the OIG no later than one
year and 30 days after the effective date of this CCA. The second and third
Annual Reports shall be received by the OIG no later than two years and 30
days, and three years and 30 days, respectively, after the effective date of
this CCA.
VI. NOTIFICATIONS AND SUBMISSION OF REPORTS
Unless otherwise stated in writing subsequent to the effective date of
this CCA, all notifications and reports required under this CCA shall be
submitted to the entities listed below:
OIG:
Civil Recoveries Branch - Compliance Unit
Office of Counsel to the Inspector General
Office of Inspector General
U.S, Department of Health and Human Services
Cohen Building, Room 5527
330 Independence Avenue, SW
Washington, DC 20201
Telephone: (202) 619-2078
Facsimile: (202) 205-0604
CHS:
Martin G. Schweinhart
Corporate Compliance Officer
Community Health Systems, Inc.
155 Franklin Road, Suite 400
Brentwood, TN 37027-4600
Telephone: (615) 376-3412
Facsimile: (615) 309-5142
VII. OIG INSPECTION, AUDIT AND REVIEW RIGHTS
In addition to any other rights OIG may have by statute, regulation, or
contract, OIG or its duly authorized representative(s), may examine CHS's books,
records, and other documents and supporting materials and/or conduct an on-site
review of any of CHS's locations for the purpose of verifying and evaluating:
(a) CHS's compliance with the terms of this CCA; and (b) CHS's compliance with
the requirements of the Federal health care programs in which it participates.
The documentation described above shall be made available by CHS to OIG or its
duly authorized representative(s) at all reasonable times for inspection, audit
or reproduction. Furthermore, for purposes of this provision, OIG or its duly
authorized representative(s) may interview any of CHS's employees, contractors,
or agents who consent to be interviewed at the individual's place of business
during normal business hours or at such other place and time as may be mutually
agreed upon between the individual and OIG. CHS agrees to assist OIG in
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contacting and arranging interviews with such individuals upon OIG's request.
CHS's employees may elect to be interviewed with or without a representative of
CHS present.
VIII. DOCUMENT AND RECORD RETENTION
Pursuant to the Corporate Compliance Program, CHS shall maintain for
inspection all documents and records relating to reimbursement from the
Federal health care programs or to compliance with this CCA, for four (4)
years (or longer if otherwise required).
IX. DISCLOSURES
Subject to HHS's Freedom of Information Act ("FOIA") procedures, set
forth in 45 C.F.R. Part 5; the OIG shall make a reasonable effort to notify CHS
prior to any release by OIG of information submitted by CHS pursuant to its
obligations under this CCA and identified upon submission by CHS as trade
secrets, commercial or financial information and privileged and confidential
under the FOIA rules. CHS shall refrain from identifying any information as
trade secrets, commercial or financial information and privileged and
confidential that does not meet the criteria for exemption from disclosure under
FOIA.
X. BREACH AND DEFAULT PROVISIONS
CHS is expected to fully and timely comply with all of the obligations
herein throughout the term of this CCA or other time frames herein agreed to.
A. STIPULATED PENALTIES FOR FAILURE TO COMPLY WITH CERTAIN OBLIGATIONS
As a contractual remedy, Community Health and OIG hereby agree that
failure to comply with certain obligations set forth in this CCA may lead to the
imposition of the following monetary penalties (hereinafter referred to as
"Stipulated Penalties") in accordance with the following provisions,
1. A Stipulated Penalty of $2,500 (which shall begin to accrue on
the day after the date the obligation became due) for each day, beginning 120
days after the effective date of this CCA and concluding at the end of the term
of this CCA, CHS fails to have in place any of the following:
a. a Corporate Compliance Officer;
b. a Corporate Compliance Working Group;
c. Facility Compliance Chairs and Facility Compliance
Committees at each CHS hospital;
d. a written Ethics and Conduct Policy;
e. written Policies and Procedures;
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f. a training program, and
g. a Confidential Disclosure Program;
2. A Stipulated Penalty of $2,500 (which shall begin to accrue on
the day after the date the obligation became due) for each day CHS fails to meet
any of the deadlines to submit the Annual Reports to the OIG.
3. A Stipulated Penalty of $2,000 (which shall begin to accrue on
the date the failure to comply began) for each day:
a. after CHS hires or enters into a contract with an
Ineligible Person after that person has been listed by a federal agency as
excluded, debarred, suspended or otherwise ineligible for participation in the
Medicare, Medicaid or any other Federal health care program (as defined in 42
U.S.C. ss. 1320a-7b(f) (this Stipulated Penalty shall not be demanded for any
time period during which CHS can demonstrate that it did not discover the
person's exclusion or other ineligibility after making a reasonable inquiry (as
described in Section III.F) as to the status of the person);
b. CHS employs or contracts with an Ineligible Person and that
person: (i) has responsibility for, or involvement with, CHS's business
operations related to the Federal health care programs or (ii) is in a position
for which the person's salary or the items or services rendered, ordered, or
prescribed by the person are paid in whole or part, directly or indirectly, by
Federal health care programs or otherwise with Federal funds (this Stipulated
Penalty shall not be demanded for any time period during which CHS can
demonstrate that it did not discover the person's exclusion or other
ineligibility after making a reasonable inquiry (as described in Section III.F)
as to the status of the person); or
c. a physician who performs services at any CHS hospital who
is an Ineligible Person provides, orders, or prescribes any items or services
payable in whole or in part by any Federal health care program to CHS (this
Stipulated Penalty shall not be demanded for any time period during which CHS
can demonstrate that it did not discover the physician's exclusion or other
ineligibility after making a reasonable inquiry (as described in section III.F.)
as to the status of the physician).
4. A Stipulated Penalty of $1,500 (which shall begin to accrue on
the date the CHS fails to grant access) for each day CHS fails to grant access
to the information or documentation as required in Section VII of this CCA.
5. A Stipulated Penalty of $1,000 (which shall begin to accrue 10
days after the date that OIG provides notice to CHS of the failure to comply; no
penalties shall be imposed under this section X.A.5 if CHS complies fully and
adequately with its obligations within 10 days of the OIG's notice of the
failure to comply) for each day CHS fails to comply fully and adequately with
any obligation of this CCA. In its notice to CHS, the OIG shall state the
specific grounds for its determination that CHS has failed to comply fully and
adequately with the CCA obligation(s) at issue.
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B. PAYMENT OF STIPULATED PENALTIES
1. DEMAND LETTER. Upon a finding that CHS has failed to comply
with any of the obligations described in Section X-A and determining that
Stipulated Penalties are appropriate, OIG shall notify CHS by personal service
or certified mail of (a) CHS's failure to comply; and (b) the OIG's exercise of
its contractual right to demand payment of the Stipulated Penalties (this
notification is hereinafter referred to as the "Demand Letter").
Within fifteen (15) days of the date of the Demand Letter, CHS shall
either (a) cure the breach to the OIG's satisfaction and pay the applicable
stipulated penalties: or (b) request a hearing before an HHS administrative law
judge ("ALJ") to dispute the OIG' s determination of noncompliance, pursuant to
the agreed upon provisions set forth below in Section X.D. In the event CHS
elects to request an ALJ hearing, the Stipulated Penalties shall continue to
accrue until CHS Cures, to the OIG's satisfaction, the alleged breach in
dispute, Failure to respond to the Demand Letter in one of these two manners
within the allowed time period shall be considered a material breach of this CCA
and shall be grounds for exclusion under Section X.C.
2. TIMELY WRITTEN REQUESTS FOR EXTENSIONS. CHS may submit a
timely written request for an extension of time to perform any act or file any
notification or report required by this CCA. Notwithstanding any other provision
in this Section, if OIG grants the timely written request with respect to an
act, notification, or report, Stipulated Penalties for failure to perform the
act or file the notification or report shall not begin to accrue until one day
after CHS fails to meet the revised deadline set by the OIG. Notwithstanding any
other provision in this Section, if OIG denies such a timely written request,
Stipulated Penalties for failure to perform the act or file the notification or
report shall not begin to accrue until two (2) business days after CHS receives
OIG's written denial of such request. A "timely written request" is defined as a
request in writing received by OIG at least five (5) business days prior to the
date by which any act is due to be performed or any notification or report is
due to be filed.
3. FORM OF PAYMENT. Payment of the Stipulated Penalties shall be
made by certified or cashier's check, payable to "Secretary of the Department of
Health and Human Services," and submitted to OIG at the address set forth in
Section VI.
4. INDEPENDENCE FROM MATERIAL BREACH DETERMINATION. Except as
otherwise noted, these provisions for payment of Stipulated Penalties shall not
affect or otherwise set a standard for the OIG's determination that CHS has
materially breached this CCA, which decision shall be made at the OIG's
discretion and governed by the provisions in Section X.C, below.
C. MONETARY PENALTY FOR MATERIAL BREACH OF THIS CCA
1. DEFINITION OF "MATERIAL BREACH." A material breach of this CCA
means:
a. a failure by CHS to report a material deficiency,
take corrective action and pay the appropriate
refunds, as provided in Section III.H;
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b. repeated or flagrant violations of the obligations under
this CCA, including, but not limited to, the obligations
addressed in Section X.A of this CCA;
c. a failure to respond to a Demand Letter concerning the
payment of Stipulated Penalties in accordance with
Section X.B above; or
d. a failure to retain and use an Independent Review
Organization for review purposes in accordance with
Section III.D.
2. NOTICE OF MATERIAL BREACH AND INTENT TO COLLECT MATERIAL
BREACH PENALTY. Community Health and OIG agree that a material breach of this
CCA by CHS constitutes grounds for OIG to impose an enhanced stipulated penalty
that is separate and apart from the Stipulated Penalties described in Sections
X.A-B, above. This monetary penalty (hereinafter referred to as the "Material
Breach Penalty") shall be $25,000 per day. Upon a determination by OIG that CHS
has materially breached this CCA and that a Material Breach Penalty should be
imposed, the OIG shall notify CHS by certified mail of (a) CHS's material
breach; and (b) OIG's intent to exercise its contractual right to impose the
Material Breach Penalty (this notification is hereinafter referred to as the
"Notice of Material Breach").
3. OPPORTUNITY TO CURE. CHS shall have thirty five (35) days from
the date of the Notice of Material Breach to demonstrate to the OIG's
satisfaction that:
a. CHS is in full compliance with this CCA;
b. the alleged material breach has been cured; or
c. the alleged material breach cannot be cured within the
35-day period, but that: (i) CHS has begun to take
action to cure the material breach, (ii) CHS is pursuing
such action with due diligence, and (iii) CHS has
provided to OIG a reasonable timetable for curing the
material breach.
4. PENALTY LETTER. If at the conclusion of the thirty five (35)
day period, CHS fails to satisfy the requirements of Section X.C.3, OIG may
impose the Material Breach Penalty on CHS, and the Material Breach Penalty shall
begin to accrue on that day. OIG will notify CHS in writing of its determination
to impose the Material Breach Penalty (this letter shall be referred to
hereinafter as the "Material Breach Penalty Letter"). Within fifteen (15) days
of receipt of the Material Breach Penalty Letter, CHS shall either: (a) cure the
material breach to OIG's satisfaction and pay the applicable Material Breach
Penalty; or (b) request a hearing before an HHS administrative law judge ("ALJ")
to dispute OIG's determination of material breach, pursuant to the agreed upon
provisions set forth below in Section X.D.
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D. DISPUTE RESOLUTION
1. REVIEW RIGHTS. Upon OIG's delivery to CHS of its Demand Letter
or of its Material Breach Penalty Letter, and as an agreed-upon contractual
remedy for the resolution of disputes arising under the obligation of this CCA,
CHS shall be afforded certain review rights comparable to the ones that are
provided in 42 U.S.C. ss. 1320a-7(f) and 42 C.F.R. Part 1005 as if they applied
to the Stipulated Penalty or Material Breach Penalty sought pursuant to this
CCA. Specifically, OIG's determination to demand payment of a Stipulated Penalty
or of a Material Breach Penalty shall be subject to review by an ALJ and, in the
event of an appeal, the Departmental Appeals Board ("DAB"), in a manner
consistent with the provisions in 42 C.F.R. ss.ss. 1005.2-1005.21.
Notwithstanding the language in 42 C.F.R. ss. 1005.2(c), the request for a
hearing involving a Stipulated Penalty or a Material Breach Penalty shall be
made within fifteen (15) days of the date of the Demand Letter or the Material
Breach Penalty Letter.
2. STIPULATED PENALTIES REVIEW. Notwithstanding any provision of
Title 42 of the United States Code or Chapter 42 of the Code of Federal
Regulations, the only issues in a proceeding for stipulated penalties under this
CCA shall be (a) whether CHS was in full and timely compliance with the
obligations of this CCA for which OIG demands payment; and (b) the period of
noncompliance, CHS shall have the burden of proving its full and timely
compliance and the steps taken to cure the noncompliance, if any. If the ALJ
finds for OIG with regard to a finding of a breach of this CCA and orders CHS to
pay Stipulated Penalties, such Stipulated Penalties shall become due and payable
20 days after the ALJ issues such a decision notwithstanding that CHS may
request review of the ALJ decision by the DAB,
3. MATERIAL BREACH REVIEW. Notwithstanding any provision of Title
42 of the United States Code or Chapter 42 of the Code of Federal Regulations,
the only issues in a proceeding regarding imposition of a Material Breach
Penalty shall be: (a) whether CHS was in material breach of this CCA; (b)
whether such breach was continuing on the date of the Material Breach Penalty
Letter, (c) the number of days that CHS was in material breach of this CCA; and
(d) whether the alleged material breach could not have been cured within the 35
day period, but that (i) CHS had begun to take action to cure the material
breach within that period, (ii) CHS has pursued and is pursuing such action with
due diligence, and (iii) CHS provided to OIG within that period a reasonable
timetable for curing the material breach.
If the ALJ finds for OIG with regard to a finding of a material breach of
this CCA and orders CHS to pay a Material Breach Penalty, such Material Breach
Penalty shall become due and payable 20 days after the ALJ issues such a
decision notwithstanding that CHS may request review of the ALJ decision by the
DAB.
4. FINALITY OF DECISION. The review by an ALJ or DAB provided for
above shall not be considered to be an appeal right arising under any statutes
or regulations. Consequently, the parties to this CCA agree that the DAB's
decision (or the ALJ's decision if not appealed) shall be considered final for
all purposes under this CCA and CHS agrees to waive any right it may have to
appeal the decision administratively, judicially or otherwise seek review by any
court or other adjudicative forum.
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XI. EFFECTIVE AND BINDING AGREEMENT
Consistent with the provisions in the Settlement Agreement pursuant to
which this CCA is entered, and into which this CCA is incorporated, CHS and OIG
agree as follows:
A. This CCA shall be binding on the successors, assigns, and
transferees of Community Health;
B. This CCA shall become final and binding on the date the final
signature is obtained on the CCA;
C. Any modifications to this CCA shall be made with the prior written
consent of the parties to this CCA; and
D. The undersigned Community Health signatories represent and warrant
that they are authorized to execute this CCA. The undersigned OIG signatory
represents that he is signing this CCA in his official capacity and that he is
authorized to execute this CCA.
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ON BEHALF OF COMMUNITY HEALTH SYSTEMS, INC.
- ----------------------------------- --------------------------------
WAYNE T. SMITH DATE
Chief Executive Officer
Community Health Systems, Inc.
- ----------------------------------- --------------------------------
RACHEL A. SEIFERT, ESQ. DATE
Vice President and General Counsel
Community Health Systems, Inc.
- ----------------------------------- --------------------------------
RICHARD SAUBER, ESQ. DATE
Fried, Frank, Shriver & Jacobson
Counsel for Community Health Systems, Inc.
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ON BEHALF OF THE OFFICE OF INSPECTOR GENERAL
OF THE DEPARTMENT OF HEALTH AND HUMAN SERVICES
- ----------------------------------- --------------------------------
LEWIS MORRIS DATE
Assistant Inspector General for Legal Affairs
Office of Inspector General
U. S. Department of Health and Human Services
<PAGE>
Exhibit 10.18
SETTLEMENT AGREEMENT
I. PARTIES
This Settlement Agreement ("Agreement") is entered into between the
United States of America, acting through the United States Department of Justice
and on behalf of the Office of Inspector General ("OIG-HHS") of the Department
of Health and Human Services ("HHS"), and TRICARE Management Activity ("TMA")
through its General Counsel (collectively the "United States"); the States of
Illinois, New Mexico, South Carolina, Tennessee, Texas, and West Virginia
(collectively the "participating States"); and Community Health Systems, Inc.
("CHS"). Collectively, all of the above will be referred to as "the Parties."
II. PREAMBLE
As a preamble to this Agreement, the Parties agree to the following:
A. CHS is a health care provider that owns and operates hospitals, and
submitted or caused to be submitted, claims to Medicare, Medicaid, and TRICARE
for the inpatient treatment of Medicare, Medicaid, and TRICARE beneficiaries.
B. CHS submitted or caused to be submitted claims for payment to the
Medicare Program ("Medicare"), Title XVIII of the Social Security Act, 42 U.S.C.
ss.ss. 1395-1395ggg(1999); the Medicaid Program, 42 U.S.C. ss.ss. 1396-1396v
(1997); and the TRICARE program (formerly known as the Civilian Health and
Medical Program of the Uniformed Services (CHAMPUS)), 10 U.S.C. ss.ss.
1071-1106.
C. The Medicare, participating States' Medicaid, and TRICARE programs
make payments to a hospital for inpatient treatment rendered to a beneficiary
generally based upon the beneficiary's "principal diagnosis," as set forth by
the hospital.
D. The Medicare, participating States' Medicaid, and TRICARE programs
rely upon participating hospitals to properly indicate the principal diagnosis
through the use of standard diagnosis codes.
<PAGE>
E. In December 1997, CHS contacted the OIG-HHS and disclosed possible
coding problems at CHS.
F. CHS engaged in discussions with OIG-HHS to develop procedures for
CHS to perform a self-audit of inpatient payment claims submitted by CHS to the
Medicare program that grouped to the following DRGs: 014, 079, 087, 132, 138,
296, 416, and 475 (the "covered DRGs"). CHS then undertook the self-audit and
extrapolated the findings.
G. CHS provided the results of its self-audit and extrapolations
relating to the covered DRGs to the United States, and the United States has
reviewed these results.
H. The United States and the participating States (as to Medicaid)
conducted an investigation into inpatient payment claims submitted to Medicare,
Medicaid, and TRICARE by CHS hospitals that grouped to the covered DRGs.
I. The United States contends that it has certain civil claims against
CHS under the False Claims Act, 31 U.S.C. ss.ss. 3729-3733, and other federal
statutes and/or common law doctrines as more specifically identified in
Paragraph 5 below, for engaging in the following alleged conduct: the CHS
hospitals listed on Attachment A, for the time periods described in Attachment
A, submitted or caused to be submitted to Medicare, Medicaid, and TRICARE claims
for certain ICD-9-CM diagnosis codes for inpatient admissions grouping to the
covered DRGs that were not supported by the patients' medical records and as a
consequence received greater reimbursement than that to which the hospitals were
otherwise entitled for those admissions (hereinafter referred to as the "Covered
Conduct"). The Covered Conduct refers only to those hospitals listed in
Attachment A for the time periods described therein.
J. The United States also contends that it has certain administrative
claims against CHS under the provisions for permissive exclusion from Medicare,
Medicaid and other federal health care programs, 42 U.S.C. ss. 1320a-7(b), and
the provisions for civil monetary penalties, 42 U.S.C. ss. 1320a-7a, for the
Covered Conduct.
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K. The participating States also contend that they have certain claims
against CHS under their respective laws for claims to the Medicaid program
concerning the Covered Conduct.
L. CHS has provided documents and information to the United States in
response to the government's investigation of the Covered Conduct, and CHS
represents that such response has been truthful, accurate, and complete to the
best of its knowledge and ability.
M. This Settlement Agreement is made in compromise of disputed claims.
Neither this Settlement Agreement nor any action taken pursuant to this
Agreement shall constitute an admission of wrongdoing or fault of any kind on
the part of CHS.
N. CHS does not admit the contentions of the United States or the
participating States as set forth above.
O. To avoid the delay, uncertainty, inconvenience and expense of
protracted litigation of these claims, the Parties reach a full and final
settlement as set forth below.
III. TERMS AND CONDITIONS
NOW, THEREFORE, in consideration of the mutual promises, covenants, and
obligations set forth below, and for good and valuable consideration as stated
herein, the Parties agree as follows:
1. CHS agrees to pay to the United States $30,494,749.51 plus interest
as follows: CHS agrees to make payment by electronic funds transfer pursuant to
written instructions to be provided by the Commercial Litigation Branch, Civil
Division, Department of Justice. CHS agrees to make this electronic funds
transfer no later than ten (10) business days after the date that the United
States hand-delivers to the District of Columbia offices of Fried, Frank,
Harris, Shriver & Jacobson, as counsel to CHS, a copy of the fully-executed
Agreement. CHS agrees to pay an additional amount of $409,876.05 plus interest
representing recovery for the participating States' share of Medicaid; such
payment shall be made no later than ten (10) business days after the date that
the United States hand-delivers to the District of Columbia offices of Fried,
Frank,
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Harris, Shriver & Jacobson, as counsel to CHS, a copy of the fully-executed
Agreement and pursuant to written instructions provided by the National
Association of Medicaid Fraud Control Units. Interest shall be at the
post-judgment interest rate (as set forth in 28 U.S.C. ss. 1961(a)) in effect as
of February 3, 2000, and shall be computed from December 1, 1999 through the
date of payment under this Paragraph. The payment to the United States and to
the participating States together, including interest, constitutes the
"Settlement Amount."
2. CHS agrees to cooperate fully and in good faith with the United
States in the administrative, civil or criminal investigation or prosecution of
any person concerning the Covered Conduct, and concerning similar matters
involving other hospitals and others, by providing accurate, truthful, and
complete information whenever, wherever, to whomever and in whatever form the
United States reasonably may request. Upon reasonable notice, CHS will make
reasonable efforts to facilitate access to, and encourage the cooperation of,
its directors, officers, and employees for interviews and testimony, consistent
with the rights and privileges of such individuals, and will furnish to the
United States, upon reasonable request, all non-privileged documents and records
in its possession, custody or control relating to the Covered Conduct. Nothing
in this Paragraph, however, affects any privilege that might be available to CHS
or any regulatory or statutory obligation of CHS, or CHS's ability to object to
the request on the grounds of such privilege or obligation; the United States
reserves its right to contest the assertion of any such privilege or obligation
by CHS.
3. CHS has entered into a Corporate Compliance Agreement with OIG-HHS,
attached as Attachment B, which is incorporated into this Agreement by
reference. CHS will implement its obligations under the Corporate Compliance
Agreement as set forth in the Corporate Compliance Agreement.
4. CHS releases the United States, HHS, TRICARE, the participating
States and each of their agencies, officers, agents, employees, and contractors
and their employees, from any and all claims, causes of action, adjustments, and
set-offs of any
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kind arising out of or pertaining to the Covered Conduct, including the
investigation of the Covered Conduct and this Agreement.
5. Subject to the exceptions in Paragraphs 10 and 15 below, in
consideration of the obligations of CHS set forth in this Agreement, conditioned
upon CHS's payment in full of the Settlement Amount, the United States (on
behalf of itself, its officers, agents, and its agencies and departments
referenced above in Paragraph 4), agrees to release CHS, its predecessors,
successors, assigns, and affiliates and those hospitals listed in Attachment A
(collectively, "the Released Parties") from any civil or administrative monetary
claim the United States has or may have for the Covered Conduct for the time
period specified for each facility listed in Attachment A under the False Claims
Act, 31 U.S.C. ss.ss. 3729-3733; the Civil Monetary Penalties Law, 42 U.S.C. ss.
1320a-7a; the Program Fraud Civil Remedies Act, 31 U.S.C. ss.ss. 3801-3812; or
the common law theories of payment by mistake, unjust enrichment, breach of
contract and fraud. The United States expressly reserves any claims against any
entities and individuals other than claims against the Released Parties for the
Covered Conduct.
6. Subject to the exceptions in Paragraphs 10 and 15 below, in
consideration of the obligations of CHS set forth in this Agreement, conditioned
upon CHS's payment in full of the Settlement Amount, the participating States
(on behalf of themselves, their officers, agents, and their agencies and
departments) agree to release the Released Parties from any civil or
administrative monetary claim the participating States have or may have under
State law for the time period specified for each facility listed in Attachment A
for the Covered Conduct, including any claim under a state false claims or
whistleblower law or any other common law, statutory or administrative theory.
The participating States expressly reserve any claims against any entities and
individuals other than claims against the Released Parties for the Covered
Conduct.
7. In consideration of the obligations of CHS set forth in this
Agreement, including the Corporate Compliance Agreement at Attachment B, and
conditioned upon CHS's payment in full of the Settlement Amount, the OIG-HHS
agrees to release and
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refrain from instituting, directing or maintaining any administrative claim or
any action seeking exclusion from Medicare, Medicaid or other federal health
care programs (as defined in 42 U.S.C. ss. 1320a-7b(f)) against the Released
Parties under 42 U.S.C. ss. 1320a-7a (Civil Monetary Penalties Law), or 42
U.S.C. ss. 1320a-7(b) (permissive exclusion), for the time period specified for
each facility listed in Attachment A for the Covered Conduct, except as reserved
in this Paragraph. The OIG-HHS expressly reserves all rights to comply with any
statutory obligations to exclude CHS or others from Medicare, Medicaid or other
federal health care programs under 42 U.S.C. ss. 1320a-7(a) (mandatory
exclusion). Nothing in this Paragraph precludes the OIG-HHS from taking action
against entities or persons, or for conduct and practices, for which civil
claims have been reserved in Paragraph 10 or 15, below. The OIG-HHS expressly
reserves any claims against any entities and individuals other than the Released
Parties for the Covered Conduct.
8. In consideration of the obligations of CHS set forth in this
Agreement, and conditioned upon CHS's payment in full of the Settlement Amount,
the TMA agrees to release and refrain from instituting, directing, or
maintaining any administrative claim or any action seeking exclusion from the
TRICARE Program against CHS under 32 C.F.R. ss. 199.9 for the time period
specified for each facility listed in Attachment A for the Covered Conduct,
except as reserved in Paragraph 10 or 15 below. The TMA expressly reserves
authority to exclude CHS from the TRICARE program under 32 C.F.R. H 199.9
(f)(1)(i)(A), (f)(1)(i)(B), (f)(1)(i)(D), and (f)(1)(iii), based upon the
Covered Conduct. Nothing in this Paragraph precludes the TRICARE program from
taking action against entities or persons, or for conduct and practices, for
which civil claims have been reserved in Paragraph 10 or 15, below. The TMA
expressly reserves any claims against any entities and individuals other than
the Released Parties for the Covered Conduct.
9. The participating States recognize that this Agreement is intended
to allow CHS to continue to participate in the Medicaid program and is intended
as a bar to any action initiated by the participating States to impose Medicaid
program exclusion upon
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CHS on the basis of the Covered Conduct for the time period specified for each
facility listed in Attachment A, except as reserved in Paragraph 10 or 15 below.
The Parties recognize, however, that participation in the Tennessee
Medicaid/TennCare program is dependent upon acceptance into a network by a
Managed Care Organization ("MCO") and that MCOs have discretion, so long as
consistent with federal and state law, to set policies for participation in
their networks. The Office of the Tennessee Attorney General will not attempt to
influence any MCO to exclude CHS from participation in an MCO network due to the
Covered Conduct. The State of Tennessee states that it does not have the
authority to release CHS from any claims or actions for debarment or otherwise
which may be asserted by private insurers or similar entities such as MCOs and
Behavioral Health Organizations that are paid on a capitated basis for providing
health care to the State's Medicaid/TennCare recipients. However, Department of
Health, TennCare Bureau will not exclude CHS from participation in the
Medicaid/TennCare program based upon the Covered Conduct unless required to do
so by the United States Department of Health and Human Services.
10. Notwithstanding any term of this Agreement, specifically reserved
and excluded from the scope and terms of this Agreement as to any entity or
person (including the Released Parties) are any and all of the following:
(a) Any civil, criminal or administrative claims arising under
Title 26, U.S. Code (Internal Revenue Code) or any state revenue laws;
(b) Any criminal liability;
(c) Except as explicitly otherwise stated in this Agreement,
any administrative liability, including mandatory exclusion from federal health
care programs;
(d) Any liability to the United States (or its agencies) for
any conduct other than the Covered Conduct;
(e) Any claims based upon such obligations as are created by
this Agreement;
- 7 -
<PAGE>
(f) Any express or implied warranty claims or other claims for
defective or deficient products or services, including quality of goods and
services, provided by CHS;
(g) Any claims based on a failure to deliver items or services
billed;
(h) Any claims against any individuals, including officers and
employees; however, if such individuals are legally entitled to repayment from
CHS, by claim for indemnification, contribution, reimbursement or otherwise as a
result of a claim brought by the United States or any other party to this
Agreement for the Covered Conduct, the releases provided in Paragraphs 5 and 6
above shall apply to such individuals with respect to that claim;
(i) Claims under any consumer protection Acts or regulations,
licensing, certificate of need or similar state regulatory proceedings other
than Medicaid recoupment of the participating States; and
(j) Claims asserted in UNITED STATES EX REL. SMITH v.
COMMUNITY HEALTH SYSTEMS, INC., Civil Action No. 3-99 0869 (M.D. Tenn.); UNITED
STATES EX REL. BLEDSOE v. COMMUNITY HEALTH SYSTEMS, INC., Civil Action No.
1:98-cv-0435-MHS (N.D. Ga.); and the sealed matter identified in the letter
dated March 28, 2000 from the United States Department of Justice, Civil
Division, to Fried, Frank, Harris, Shriver & Jacobson as attorneys for CHS.
11. CHS waives and will not assert any defenses it may have to any
criminal prosecution or administrative action relating to the Covered Conduct,
which defenses may be based in whole or in part on a contention that, under the
Double Jeopardy or Excessive Fines Clause of the Constitution, this settlement
bars a remedy sought in such criminal prosecution or administrative action. CHS
agrees that this settlement is not punitive in purpose or effect. Nothing in
this Paragraph or any other provision of this Agreement constitutes an agreement
by the United States concerning the characterization of the Settlement Amount
for purposes of the Internal Revenue Laws, Title 26 of the United States Code or
state tax or revenue laws.
- 8 -
<PAGE>
12. The Settlement Amount that CHS must pay pursuant to this Agreement
by electronic wire transfer pursuant to Paragraph 1 above, will not be decreased
as a result of the denial of claims for payment now being withheld from payment
by any Medicare carrier or intermediary, TRICARE or any State payer (including
state Medicaid Managed Care Organizations ("MCO")), related to the Covered
Conduct or the self audit; and CHS agrees not to resubmit to any Medicare
carrier or intermediary, TRICARE or any State payer or MCO any previously denied
claims related to the Covered Conduct or the self audit, and agrees not to
appeal any such denials of claims.
13. CHS agrees that all costs (as defined in the Federal Acquisition
Regulations ("FAR") ss. 31.205-47 and in Titles XVIII and XIX of the Social
Security Act, 42 U.S.C. ss.ss. 1395-1395ggg (1999) and 1396-1396v(1997), and the
regulations promulgated thereunder) incurred by or on behalf of CHS or any of
its subsidiaries in connection with: (a) the matters covered by this Agreement,
(b) the Government's audit(s) and civil and any criminal investigation(s) of the
matters covered by this Agreement, (c) CHS's investigation, self audit, defense,
and corrective actions undertaken in response to the Government's audit(s) and
civil and any criminal investigation(s) in connection with the matters covered
by this Agreement (including attorney's fees and the obligations undertaken
pursuant to the Corporate Compliance Agreement incorporated in this Settlement
Agreement), (d) the negotiation of this Agreement, including the Corporate
Compliance Agreement, and (e) the payments made pursuant to this Agreement, are
unallowable costs on Government contracts and under the Medicare Program,
Medicaid Program, TRICARE Program, Veterans Affairs Program, and Federal
Employee Health Benefits Program (hereafter, "unallowable costs"). These
unallowable costs will be separately estimated and accounted for by CHS, and CHS
and its subsidiaries will not charge such unallowable costs directly or
indirectly to any contracts with the United States or any state Medicaid
program, or seek payment for such unallowable costs through any cost report,
cost statement, information statement or payment request
- 9 -
<PAGE>
submitted by CHS or any of its subsidiaries to the Medicare, Medicaid, TRICARE,
VA or FEHBP programs.
14. CHS further agrees that within 60 days of the effective date of
this Agreement it will identify to applicable Medicare and TRICARE fiscal
intermediaries, carriers and/or contractors, and Medicaid, VA and FEHBP fiscal
agents, any unallowable costs (as defined in Paragraph 13) included in payments
previously sought from the United States, or any State Medicaid Program or MCO,
including, but not limited to, payments sought in any cost reports, cost
statements, information reports, or payment requests already submitted by CHS or
any of its subsidiaries, and will request, and agree, that such cost reports,
cost statements, information reports or payment requests, even if already
settled, be adjusted to account for the effect of the inclusion of the
unallowable costs. CHS agrees that the United States and participating States
will be entitled to recoup from CHS or its subsidiaries any overpayment as a
result of the inclusion of such unallowable costs on previously-submitted cost
reports, information reports, cost statements or requests for payment. Any
payments due after the adjustments have been made shall be paid to the United
States or participating States pursuant to the direction of the Department of
Justice, and/or the affected agencies or States. The United States and
participating States reserve their rights to disagree with any calculations
submitted by CHS or any of its subsidiaries on the effect of inclusion of
unallowable costs (as defined in Paragraph 13) on CHS or any of its
subsidiaries' cost reports, cost statements or information reports. Nothing in
this Agreement shall constitute a waiver of the rights of the United States or
participating States to examine or reexamine the unallowable costs described in
this Paragraph and Paragraph 13.
15. This Agreement is intended to be for the benefit of the Parties
only, and by this instrument the Parties do not release any claims against any
other person or entity.
16. CHS agrees that it will not seek payment for any of the health care
billings covered by this Agreement or the self audit from any health care
beneficiaries or their parents or sponsors. CHS waives any causes of action
against these beneficiaries or their
- 10 -
<PAGE>
parents or sponsors based upon the claims for payment covered by this Agreement
or the self audit.
17. Each party to this Agreement will bear its own legal and other
costs incurred in connection with this matter, including the preparation and
performance of this Agreement.
18. CHS represents that this Agreement is freely and voluntarily
entered into without any degree of duress or compulsion whatsoever.
19. This Agreement is governed by the laws of the United States. The
Parties agree that the exclusive jurisdiction and venue for any dispute arising
between the United States and CHS under this Agreement will be the United States
District Court for the District of Columbia, except that disputes arising under
the Corporate Compliance Agreement (attached as Attachment B) shall be resolved
exclusively under the dispute resolution provisions set forth in that agreement.
The Parties further agree that jurisdiction and venue for any dispute arising
between CHS and any participating State will be the State involved in the
dispute.
20. This Agreement, including Attachments A and B which are
incorporated by reference, constitutes the complete agreement among the Parties
and supersedes all prior agreements as to the same subject matter, and such
prior agreements shall be null and void and shall have no effect. This Agreement
may not be amended except by written consent of the Parties, except that only
CHS and the OIG-HHS must agree in writing to modification of the Corporate
Compliance Agreement contained in Attachment B.
21. The undersigned individuals signing this Agreement on behalf of CHS
represent and warrant that they are authorized to execute this Agreement on
behalf of CHS. The undersigned United States signatories and signatories of the
participating States represent that they are signing this Agreement in their
official capacities and that they are authorized to execute this Agreement.
22. This Agreement is binding on successors, transferees, and assigns.
- 11 -
<PAGE>
23. This Agreement may be executed in counterparts, each of which
constitutes an original and all of which constitute one and the same agreement.
24. This Agreement is effective on the date on which the last signatory
to the Agreement signs the Agreement.
THE UNITED STATES OF AMERICA
DATED: BY:
----------------------------- -----------------------------
MICHAEL F. HERTZ
JOYCE R. BRANDA
JAMIE ANN YAVELBERG
TRACY L. HILMER
Civil Division
U.S. Department of Justice
DATED: BY:
----------------------------- -----------------------------
LEWIS MORRIS
Assistant Inspector General
Office of Counsel to the
Inspector General
Office of Inspector General
United States Department of
Health and Human Services
DATED: BY:
----------------------------- -----------------------------
ROBERT L. SHEPHERD
Deputy General Counsel
TRICARE Management Activity
- 12 -
<PAGE>
PARTICIPATING STATES
ILLINOIS:
DATED: BY:
----------------------------- -----------------------------
ROBERT SPENCE
Assistant Attorney General
DATED: BY:
----------------------------- -----------------------------
Ann Patla, Director
Illinois Dept. of Public Aid
NEW MEXICO:
DATED: BY:
----------------------------- -----------------------------
Sandra K. Watts, Director
Medicaid Fraud Control Unit
DATED: BY:
----------------------------- -----------------------------
Rumaldo R. Armijo
General Counsel
Human Services Dept.
SOUTH CAROLINA:
DATED: CHARLES MOLONY CONDON
----------------------------- Attorney General
DATED: BY:
----------------------------- -----------------------------
Richard G. Hepfer
Deputy General Counsel
Dept. of Health and Human
Services
DATED: BY:
----------------------------- -----------------------------
Charles W. Gambrell, Jr.
Assistant Deputy Attorney General
Director, Medicaid Fraud Control
Unit
- 13 -
<PAGE>
TENNESSEE:
DATED: BY:
----------------------------- -----------------------------
Paul G. Summers
Attorney General
DATED: BY:
----------------------------- -----------------------------
Dennis J. Garvey
Deputy Attorney General
TEXAS:
DATED: BY:
----------------------------- -----------------------------
Andy Taylor
Assistant Attorney General
DATED: BY:
----------------------------- -----------------------------
Scott E. Stephenson, Director
Medicaid Fraud Control Unit
DATED: BY:
----------------------------- -----------------------------
Don Gilbert, Commissioner
Texas Health and Human Services
Commission
DATED: BY:
----------------------------- -----------------------------
Marina Henderson
Executive Deputy Commissioner
Legislative and Legal Affairs
Texas Health and Human Services
Commission
Medicaid Fraud Control Unit
- 14 -
<PAGE>
WEST VIRGINIA:
DATED: BY:
----------------------------- -----------------------------
Samuel P. Cook, Director,
Office of Inspector General
Dept. of Health and Human
Services
DATED: BY:
----------------------------- -----------------------------
Elizabeth S. Lawton, Commissioner
Bureau for Medical Services
Dept. of Health and Human
Services
CHS:
DATED: BY:
----------------------------- -----------------------------
COMMUNITY HEALTH SYSTEMS, INC.
DATED: BY:
----------------------------- -----------------------------
FRIED, FRANK, HARRIS, SHRIVER &
JACOBSON
Attorneys for CHS
- 15 -
<PAGE>
ATTACHMENT A
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------
PROVIDER NUMBER HOSPITAL NAME STATE START DATE END DATE
- -----------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
050298 Barstow Community Hospital CA 1/1/94 12/31/97
- -----------------------------------------------------------------------------------
110112 Berrien County Hospital GA 10/1/94 12/31/97
- -----------------------------------------------------------------------------------
190164 Byrd Regional Memorial Hospital LA 10/1/94 12/31/97
- -----------------------------------------------------------------------------------
450296 Charter Reg. Med. Ctr. (Cleveland) TX 8/1/96 12/31/97
- -----------------------------------------------------------------------------------
420062 Chesterfield General Hospital GA 8/1/96 12/31/97
- -----------------------------------------------------------------------------------
440185 Cleveland Community Hospital TN 10/1/94 12/31/97
- -----------------------------------------------------------------------------------
140294 Crossroads Community Hospital IL 10/1/94 12/31/97
- -----------------------------------------------------------------------------------
100078 Doctors Memorial Hospital FL 10/1/94 12/31/97
- -----------------------------------------------------------------------------------
010126 Edge Regional Medical Center AL 12/1/94 12/31/97
- -----------------------------------------------------------------------------------
110189 Fannin Regional Hospital GA 1/1/94 12/31/97
- -----------------------------------------------------------------------------------
040080 Harris Hospital AR 10/1/94 12/31/97
- -----------------------------------------------------------------------------------
010009 Hartselle Medical Center AL 10/1/94 12/31/97
- -----------------------------------------------------------------------------------
450162 Highland Medical Center TX 1/1/94 12/31/97
- -----------------------------------------------------------------------------------
450192 Hill Regional Hospital TX 10/1/94 12/31/97
- -----------------------------------------------------------------------------------
450596 Hood General Hospital (Granbury) TX 1/1/97 12/31/97
- -----------------------------------------------------------------------------------
180139 Kentucky River Medical Center KY 7/1/95 12/31/97
- -----------------------------------------------------------------------------------
440067 Lakeway Regional Hospital TN 1/1/94 12/31/97
- -----------------------------------------------------------------------------------
010150 LV Stabler Memorial Hospital AL 10/1/94 12/31/97
- -----------------------------------------------------------------------------------
140184 Marion Memorial Hospital IL 11/1/96 12/31/97
- -----------------------------------------------------------------------------------
420054 Marlboro Park Hospital GA 8/1/96 12/31/97
- -----------------------------------------------------------------------------------
320014 Mimbres Memorial Hospital NM 3/1/96 12/31/97
- -----------------------------------------------------------------------------------
260074 Moberly Regional Medical Center MO 1/1/94 12/31/97
- -----------------------------------------------------------------------------------
100122 North Okaloosa Medical Center FL 3/1/96 12/31/97
- -----------------------------------------------------------------------------------
Page 1 of 2
<PAGE>
<CAPTION>
- -----------------------------------------------------------------------------------
PROVIDER NUMBER HOSPITAL NAME STATE START DATE END DATE
- -----------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
- -----------------------------------------------------------------------------------
450623 Northeast Medical Center TX 8/1/96 12/31/97
- -----------------------------------------------------------------------------------
010054 Parkway Medical Center AL 10/1/94 12/31/97
- -----------------------------------------------------------------------------------
180117 Parkway Regional Hospital KY 1/1/94 12/31/97
- -----------------------------------------------------------------------------------
040047 Randolph County Medical Center AR 10/1/94 12/31/97
- -----------------------------------------------------------------------------------
190131 River West Medical Center TX 8/1/96 12/31/97
- -----------------------------------------------------------------------------------
490002 Russell County Medical Center VA 1/1/94 12/31/97
- -----------------------------------------------------------------------------------
190047 Sabine Medical Center LA 10/1/94 12/31/97
- -----------------------------------------------------------------------------------
450653 Scenic Mountain Medical Center TX 10/1/94 12/31/97
- -----------------------------------------------------------------------------------
440052 Scott County Hospital TN 1/1/94 12/31/97
- -----------------------------------------------------------------------------------
420036 Springs Memorial Hospital GA 11/1/94 12/31/97
- -----------------------------------------------------------------------------------
180128 Three Rivers Medical Center KY 1/1/94 12/31/97
- -----------------------------------------------------------------------------------
440192 White County Community Hospital TN 10/1/94 12/31/97
- -----------------------------------------------------------------------------------
010143 Woodland Community Hospital AL 10/1/94 12/31/97
- -----------------------------------------------------------------------------------
</TABLE>
Page 2 of 2
<PAGE>
EXHIBIT 23.2
INDEPENDENT AUDITORS' CONSENT
We consent to the use in this Amendment No. 3 to Registration Statement
No. 333-31790 of Community Health Systems, Inc. and subsidiaries of our report
dated February 25, 2000 (May , 2000 as to Notes 9, 10, 14 and a portion of
Note 1), appearing in the Prospectus, which is a part of this Registration
Statement, and of our report dated February 25, 2000 (May , 2000 as to
Notes 9, 10, 14 and a portion of Note 1) relating to the consolidated financial
statement schedule appearing elsewhere in this Registration Statement.
We also consent to the reference to us under the heading "Experts" in such
Prospectus.
Nashville, Tennessee
May , 2000
The foregoing Consent is in the form which will be furnished by Deloitte &
Touche LLP upon completion of the recapitalization and exchange described in
Note 14 to the consolidated financial statements and assuming that from
December 31, 1999 to the date of such completion no other material events have
occurred that would affect the accompanying consolidated financial statements or
required disclosures therein.
/s/ Deloitte & Touche LLP
Nashville, Tennessee
May 17, 2000
