<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON OCTOBER 12, 2000
REGISTRATION NO. 333-47354
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
------------------------
AMENDMENT NO. 1
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. / /
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 14,400,000 shares of common stock. The second prospectus relates to
a concurrent offering outside the United States and Canada of an aggregate of
3,600,000 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 OCTOBER 11, 2000
PROSPECTUS
18,000,000 SHARES
[LOGO]
COMMON STOCK
--------------
Community Health Systems, Inc. is selling 10,000,000 shares and the selling
stockholders are selling 8,000,000 shares. The U.S. underwriters are offering
14,400,000 shares in the U.S. and Canada and the international managers are
offering 3,600,000 shares outside the U.S. and Canada.
The shares trade on the New York Stock Exchange under the symbol "CYH." On
October 10, 2000, the last sale price of the shares as reported on the New York
Stock Exchange was $27 3/8 per share.
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...... $ $
Proceeds, before expenses, to the selling stockholders...... $ $
</TABLE>
The U.S. underwriters may also purchase up to an additional 2,160,000 shares
from the selling stockholders, 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 540,000 shares from the selling stockholders.
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. CREDIT SUISSE FIRST BOSTON
BANC OF AMERICA SECURITIES LLC
CHASE H&Q
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
Price Range of Common Stock................................. 14
Capitalization.............................................. 15
Dilution.................................................... 16
Selected Consolidated Financial and Other Data.............. 17
Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 22
Business of Community Health Systems........................ 34
Management.................................................. 57
Principal and Selling Stockholders.......................... 67
Description of Indebtedness................................. 69
Description of Capital Stock................................ 71
Shares Eligible for Future Sale............................. 74
United States Federal Tax Considerations for Non-United
States Holders............................................ 75
Underwriting................................................ 79
Legal Matters............................................... 82
Experts..................................................... 83
Where You Can Find More Information......................... 83
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 October 1, 2000, we owned, leased or
operated 51 hospitals, geographically diversified across 20 states, with an
aggregate of 4,524 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 six additional hospitals for an
aggregate consideration of approximately $143 million, increasing the number of
hospitals we own, lease, or operate to 51 as of October 1, 2000. The sellers of
each of these hospitals are tax-exempt or local government entities. Each of
these hospitals is the sole provider of general hospital services in its
community.
On June 14, 2000, we completed the initial public offering of our common
shares at an initial public offering price of $13.00 per share. In our initial
public offering, we issued an aggregate of 20,425,717 common shares, including
shares issued pursuant to the exercise of the underwriters' over-allotment
option.
We have not finalized our financial results for the third quarter of 2000,
which ended on September 30. Based upon preliminary information, our admissions
for the third quarter were approximately 27% higher than our admissions for the
third quarter of 1999. In addition, our admissions were approximately 11% higher
for the third quarter of 2000 as compared to the third quarter of 1999 for
hospitals we operated during both of these quarters. Our adjusted admissions for
the third quarter were approximately 25% higher than our adjusted admissions for
the third quarter of 1999. Our same hospital adjusted admissions for the third
quarter 2000 were approximately 9% higher than our adjusted admissions for the
third quarter 1999.
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.
------------------------
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............................ 8,000,000 shares
International offering................... 2,000,000 shares
---------------
Total.................................. 10,000,000 shares
By the selling stockholders
U.S. offering............................ 6,400,000 shares
International offering................... 1,600,000 shares
---------------
Total.................................. 8,000,000 shares
Common stock to be outstanding after the
offering................................... 86,046,524 shares (a)
Use of proceeds.............................. We estimate that our net proceeds from the
offering, assuming an offering price of
$27.38 per share, will be approximately
$261.4 million. We intend to use these
proceeds to repay senior debt, including
approximately $53.6 million of senior debt
held by affiliates of the underwriters. We
will not receive any of the proceeds from the
sale of shares by the selling stockholders.
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 5,246,218 shares of common stock we have reserved for issuance
under our stock option plans. Of these reserved shares, 4,488,629 shares are
issuable upon exercise of outstanding stock options at an average exercise
price of $12.25. In connection with the offering, selling stockholders may
exercise options to purchase up to 103,266 of these shares, or 107,573 of
these shares if the underwriters' over-allotment option is exercised. These
shares, if issued, would be sold in the offering by the selling
stockholders.
Unless we specifically state otherwise, the information in this prospectus
does not take into account the sale of up to 2,700,000 shares of common stock
which the underwriters have the option to purchase from the selling stockholders
to cover over-allotments or the exercise of any stock options underlying shares
of common stock being sold in this offering.
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 six months ended June 30, 1999 and
June 30, 2000, and as of June 30, 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 application of the net proceeds from
the initial public offering, including the exercise of the underwriters'
over-allotment option, and the estimated net proceeds from this offering to
repay a portion of outstanding debt as if these events had occurred on
January 1, 1999. The pro forma consolidated balance sheet data give effect to
these events as if they had occurred on June 30, 2000.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, SIX MONTHS ENDED JUNE 30,
--------------------------------------------------------- ---------------------------------------
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 $ 524,825 $ 625,787 $ 625,787
Operating expenses (b).... 620,112 688,190 875,768 875,768 422,576 505,931 505,931
Depreciation and
amortization............ 43,753 49,861 56,943 56,943 26,962 33,910 33,910
Amortization of
goodwill................ 25,404 26,639 24,708 24,708 11,954 12,378 12,378
Impairment of long-lived
assets.................. -- 164,833 -- -- -- -- --
Compliance settlement and
Year 2000 remediation
costs (c)............... -- 20,209 17,279 17,279 900 -- --
----------- ------------ ----------- ----------- ----------- ----------- -----------
Income (loss) from
operations.............. 53,081 (95,152) 105,255 105,255 62,433 73,568 73,568
Interest expense, net..... 89,753 101,191 116,491 95,217 55,681 65,305 48,430
----------- ------------ ----------- ----------- ----------- ----------- -----------
Income (loss) before
cumulative effect of a
change in accounting
principle and income
taxes................... (36,672) (196,343) (11,236) 10,038 6,752 8,263 25,138
Provision for (benefit
from) income taxes...... (4,501) (13,405) 5,553 13,850 6,677 7,164 13,745
----------- ------------ ----------- ----------- ----------- ----------- -----------
Income (loss) before
cumulative effect of a
change in accounting
principle............... (32,171) (182,938) (16,789) (3,812) 75 1,099 11,393
Cumulative effect of a
change in accounting
principle, net of
taxes................... -- (352) -- -- -- -- --
----------- ------------ ----------- ----------- ----------- ----------- -----------
Net income (loss)......... $ (32,171) $ (183,290) $ (16,789) $ (3,812) $ 75 $ 1,099 $ 11,393
=========== ============ =========== =========== =========== =========== ===========
Basic income (loss) per
common share:
Income (loss) before
cumulative effect of a
change in accounting
principle............. $ (0.60) $ (3.37) $ (0.31) $ (0.04) $ 0.00 $ 0.02 $ 0.13
Cumulative effect of a
change in accounting
principle............. -- (0.01) -- -- -- -- --
----------- ------------ ----------- ----------- ----------- ----------- -----------
Net income (loss)....... $ (0.60) $ (3.38) $ (0.31) $ (0.04) $ 0.00 $ 0.02 $ 0.13
=========== ============ =========== =========== =========== =========== ===========
Diluted income (loss) per
common share:
Income (loss) before
cumulative effect of a
change in accounting
principle............. $ (0.60) $ (3.37) $ (0.31) $ (0.04) $ 0.00 $ 0.02 $ 0.13
Cumulative effect of a
change in accounting
principle............. -- (0.01) -- -- -- -- --
----------- ------------ ----------- ----------- ----------- ----------- -----------
Net income (loss)....... $ (0.60) $ (3.38) $ (0.31) $ (0.04) $ 0.00 $ 0.02 $ 0.13
=========== ============ =========== =========== =========== =========== ===========
Weighted-average number of
shares outstanding (d):
Basic................... 53,989,089 54,249,895 54,545,030 84,970,747 54,497,950 56,423,677 85,098,020
=========== ============ =========== =========== =========== =========== ===========
Diluted................. 53,989,089 54,249,895 54,545,030 84,970,747 55,632,717 57,554,519 86,228,862
=========== ============ =========== =========== =========== =========== ===========
</TABLE>
(FOOTNOTES BEGIN ON PAGE 6)
4
<PAGE>
<TABLE>
<CAPTION>
AS OF
JUNE 30, 2000
-------------------------
PRO
ACTUAL FORMA(A)
----------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
CONSOLIDATED BALANCE SHEET DATA (AS OF END OF PERIOD)
Cash and cash equivalents............................... $ 5,990 $ 5,990
Total assets............................................ 1,975,799 1,975,799
Long-term obligations................................... 1,316,869 1,158,176
Stockholders' equity.................................... 456,216 738,141
</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 six
months ended June 30, 1999 include operations for 41 hospitals and partial
periods for two hospitals acquired during the six month period. Statistics for
the six months ended June 30, 2000 include operations for 45 hospitals and
partial periods for four hospitals acquired.
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
------------------------------------------ ---------------------
1997 1998 1999 1999 2000
---------- ---------- ---------- --------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Number of hospitals (e)......................... 37 41 46 43 49
Licensed beds (e)(f)............................ 3,288 3,644 4,115 3,892 4,401
Beds in service (e)(g).......................... 2,543 2,776 3,123 2,930 3,355
Admissions (h).................................. 88,103 100,114 120,414 59,817 68,314
Adjusted admissions (i)......................... 153,618 177,075 217,006 105,417 126,137
Patient days (j)................................ 399,012 416,845 478,658 244,355 267,060
Average length of stay (days) (k)............... 4.5 4.2 4.0 4.1 3.9
Occupancy rate (beds in service) (l)............ 43.1% 43.3% 44.1% 46.6% 45.0%
Net inpatient revenue as a % of total net
revenue....................................... 57.3% 55.7% 52.7% 53.9% 50.6%
Net outpatient revenue as a % of total net
revenue....................................... 41.5% 42.6% 45.5% 44.4% 47.6%
Adjusted EBITDA (m)............................. $122,238 $ 166,390 $ 204,185 $ 102,249 $ 119,856
Adjusted EBITDA as a % of net revenue........... 16.5% 19.5% 18.9% 19.5% 19.2%
Net cash flows provided by (used in) operating
activities.................................... $ 21,544 $ 15,719 $ (11,746) $ (10,665) $ (34,399)
Net cash flows used in investing activities..... $(76,651) $(236,553) $(155,541) $ (88,045) $ (74,261)
Net cash flows provided by financing
activities.................................... $ 36,182 $ 219,890 $ 164,850 $ 93,847 $ 110,368
</TABLE>
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, PERCENTAGE JUNE 30, 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% 58,474 61,132 4.5%
Adjusted admissions (i)........... 177,075 190,661 7.7% 103,028 111,799 8.5%
Patient days (j).................. 416,845 419,942 0.7% 238,682 238,495 (0.1%)
Average length of stay (days)
(k)............................. 4.2 4.0 (4.8%) 4.1 3.9 (4.9%)
Occupancy rate (beds in
service) (l).................... 43.3% 43.5% 47.3% 45.9%
Net revenue....................... $850,980 $915,811 7.6% $ 509,033 $ 555,986 9.2%
Adjusted EBITDA (m)............... $160,611 $180,794 12.6% $ 98,371 $ 112,793 14.7%
Adjusted EBITDA, as a % of net
revenue......................... 18.9% 19.7% 19.3% 20.3%
</TABLE>
(FOOTNOTES BEGIN ON FOLLOWING PAGE)
5
<PAGE>
(FOOTNOTES FOR TABLES FROM PAGES 4 AND 5)
(a) Reflects the application of the net proceeds from the initial public
offering, including the exercise of the underwriters' over-allotment option,
and the estimated net proceeds from this offering to repay debt of
$281.3 million and $179.8 million based upon outstanding debt balances as of
December 31, 1999 and June 30, 2000, respectively, as well as
$225.2 million repaid on June 14, 2000 and the resultant reduction of
interest expense of $21.3 million for the year ended December 31, 1999 as if
these events had occurred on January 1, 1999 and $16.9 million for the six
months ended June 30, 2000 as if these events had occurred on January 1,
1999. Also reflects an increase in provision for income taxes of
$8.3 million for the year ended December 31, 1999 and $6.6 million for the
six months ended June 30, 2000 resulting from the decrease in interest
expense. For purposes of computing pro forma interest expense, the assumed
debt repayments exclude $225.8 million as of December 31, 1999 and
$102.1 million as of June 30, 2000 to be used to repay indebtedness incurred
subsequent to the respective period end dates. See "Use of Proceeds."
(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 the assignment of billing codes for inpatient services and
reimbursements we received from the U.S. government programs from 1993 to 1997.
We entered into a settlement agreement under which we paid approximately
$31.8 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. 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
7
<PAGE>
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 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
8
<PAGE>
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 June 30, 2000, on a pro forma basis after giving effect to the use of
the net proceeds from the exercise on July 3, 2000 of the underwriters'
over-allotment option in our initial public offering and the estimated net
proceeds of this offering, we had total long term debt of $1,137.7 million or
approximately 60.7% 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 June 30, 2000, we had $874 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 PRICE OF OUR COMMON STOCK IN THE OFFERING 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 $29.54 per share. On a pro forma
basis, our net tangible book deficit at June 30, 2000 would have been
$186 million, or $2.16 per share of common stock. Present stockholders will
experience an immediate and substantial decrease in net tangible book deficit in
the amount of $4.13 per share of common stock.
IF OUR STOCK PRICE FLUCTUATES AFTER THE OFFERING, YOU COULD LOSE A SIGNIFICANT
PART OF YOUR INVESTMENT.
Our common stock is listed on the NYSE. We do not know if an active trading
market will continue to exist for our common stock or how the common stock will
trade in the future. You may not be able to resell your shares at or above the
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 54.9% 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 September 30, 2000 and
giving effect to the offering, there were 86,046,524 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 55.5% 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.
The Forstmann Little partnerships intend to participate in this offering and
will sell 7,639,805 shares in this offering, or 10,248,787 shares if the
underwriters' over-allotment option is exercised in full. To the extent other
potential selling stockholders elect not to participate in this offering, the
Forstmann Little partnerships intend to sell the shares that those stockholders
would have been entitled to sell pursuant to this offering.
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 this offering, after deducting estimated
expenses and underwriting discounts and commissions of $12.4 million, to be
approximately $261.4 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 debt under our term loans. In
accordance with the provisions of our credit agreement, the prepayments we make
on our term loans will be applied first to the scheduled installments due on the
term loans for the twelve months following the date of the prepayment, and then
to the remaining term loans on a pro rata basis. Based upon our senior debt
outstanding as of September 30, 2000 and assuming the repayment of an
outstanding $42.6 million promissory note signed in connection with our
acquisition of Western Arizona Medical Center from our revolving credit
facility, we will use these proceeds to repay approximately $67.5 million of
senior debt under our revolving credit facility, $160.9 million of senior debt
under our acquisition loan facility, $10.2 million of senior debt under our
tranche A term loan, $4.5 million of senior debt under our tranche B term loan,
$4.5 million of senior debt under our tranche C term loan and $13.8 million of
senior debt under our tranche D term loan. These amounts include approximately
$53.6 million of senior debt held by affiliates of the underwriters.
The revolving credit facility and acquisition loan facility expire
December 31, 2002. As of June 30, 2000, the effective interest rate for the
revolving credit facility and acquisition loan facility was 8.79%. The term
loans are repayable in quarterly installments pursuant to a predetermined
payment schedule through December 31, 2005. As of June 30, 2000, the effective
interest rate was 8.79% for the tranche A term loan, 9.29% for the tranche
B term loan, 9.79% for the tranche C term loan and 10.04% for the tranche D term
loan.
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."
We will not receive any of the proceeds from the sale of common stock by the
selling stockholders. Some of the selling stockholders will use the net proceeds
received by them, after taxes, to reduce promissory notes issued by them to us.
These notes were issued as partial payment for the purchase price of common
stock acquired by those stockholders from us.
In connection with the offering, our directors, officers and employees may
exercise stock options to purchase up to 103,266 shares of common stock from us
for an aggregate exercise price of approximately $0.7 million. All of those
shares, if issued, would be sold in the offering by the selling stockholders.
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>
PRICE RANGE OF COMMON STOCK
Our common stock began trading on the New York Stock Exchange on June 9,
2000, under the symbol "CYH." The following table sets forth for the indicated
periods the high and low sale prices of our common stock as reported by the New
York Stock Exchange.
<TABLE>
<CAPTION>
HIGH LOW
----------- ----------
<S> <C> <C>
Fiscal Year Ended December 31, 2000
Second Quarter (beginning June 9, 2000)................... $ 16 5/16 $ 13
Third Quarter............................................. 32 1/2 15 5/8
Fourth Quarter (through October 10, 2000)................. 33 7/8 26 1/8
</TABLE>
On October 10, 2000, the last reported sale price of our common stock on the
NYSE was $27 3/8.
14
<PAGE>
CAPITALIZATION
The following table sets forth our debt and capitalization as of June 30,
2000, on an actual basis and on a pro forma basis. The pro forma data reflect
this offering and the exercise, on July 3, 2000, of the underwriters'
over-allotment option in our initial public offering as well as the use of the
estimated net proceeds from this offering and the net proceeds from the
underwriters' over-allotment option in our initial public offering to repay a
portion of our 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 JUNE 30, 2000
--------------------------
ACTUAL PRO FORMA (A)
---------- -------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
LONG-TERM DEBT:
Credit facilities:
Revolving credit loans.................................. $ 20,000 $ --
Acquisition loans(b).................................... 126,851 --
Term loans.............................................. 614,268 581,271
Subordinated debentures................................... 500,000 500,000
Taxable bonds............................................. 27,900 27,900
Tax-exempt bonds.......................................... 8,000 8,000
Capital lease obligations and other debt.................. 26,362 26,362
---------- ----------
Total debt.............................................. 1,323,381 1,143,533
Less current maturities................................... 26,987 5,832
---------- ----------
Total long-term debt(c)................................. 1,296,394 1,137,701
---------- ----------
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; 75,338,787 shares issued and 74,370,807
outstanding actual(d); 87,014,504 shares issued and
86,046,524 outstanding pro forma........................ 753 870
Additional paid-in capital................................ 708,273 990,081
Accumulated deficit....................................... (244,253) (244,253)
Treasury stock, at cost, 967,980 shares................... (6,587) (6,587)
Notes receivable for common stock......................... (1,854) (1,854)
Unearned stock compensation............................... (116) (116)
---------- ----------
Total stockholders' equity............................ 456,216 738,141
---------- ----------
Total capitalization.................................. $1,752,610 $1,875,842
========== ==========
</TABLE>
--------------------------
(a) Pro forma amounts do not reflect the use of $102.1 million of proceeds to
repay indebtedness incurred after June 30, 2000, including the
$76.6 million of borrowings referred to in footnote (b) below.
(b) These borrowings exclude $34 million borrowed in connection with the Western
Arizona Regional Medical Center acquisition we completed on July 1, 2000,
and a $42.6 million promissory note signed at the closing of the Western
Arizona Regional Medical Center transaction. This promissory note will be
repaid by us prior to the completion of the offering. We will fund this
repayment with borrowings under our revolving credit facility.
(c) We also had letters of credit issued, primarily in support of our taxable
and tax-exempt bonds, of approximately $42 million, reducing to $40 million
by December 31, 2000.
(d) Does not include 1,675,717 shares issued on July 3, 2000 upon the exercise
of the underwriters' over-allotment option in our initial public offering.
15
<PAGE>
DILUTION
At June 30, 2000, we had a net tangible book deficit of $468 million or
$6.29 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 on
July 3, 2000 of 1,675,717 shares at $13.00 per share related to the
underwriters' over-allotment option in our initial public offering and the sale
of the 10,000,000 shares of common stock offered by us in this offering at an
assumed offering price of $27.38 per share, 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 $186 million,
or $2.16 per share of common stock. This represents an immediate increase in net
tangible book value of $4.13 per share to existing stockholders and an immediate
dilution of $29.54 per share to new investors purchasing shares of common stock
in this offering. The following table illustrates this dilution on a per share
basis:
<TABLE>
<S> <C> <C>
Assumed offering price per share............................ $ 27.38
Net tangible book deficit per share before this
offering................................................ $ (6.29)
Increase in net tangible book value per share attributable
to new investors........................................ 4.13
-------
Pro forma net tangible book deficit per share after this
offering.................................................. (2.16)
-------
Dilution per share to new investors......................... $ 29.54
=======
</TABLE>
16
<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 six months ended June 30, 1999 and June 30, 2000, and as
of June 30, 2000, from our unaudited interim condensed consolidated financial
statements. We adjusted the pro forma data for the application of the net
proceeds from the initial public offering, including the exercise of the
underwriters' overallotment option, and the estimated net proceeds from this
offering to repay a portion of outstanding debt as if these events had occurred
on January 1, 1999 with respect to the consolidated statement of operations data
and on December 31, 1999 and June 30, 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 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 PERIOD FROM
FROM JULY 1
YEAR ENDED JANUARY 1 THROUGH YEAR ENDED DECEMBER 31,
DECEMBER THROUGH DECEMBER -----------------------------------------------------
31, JUNE 30, 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 95,217
-------- ---------- ----------- ----------- ----------- ----------- -----------
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) 10,038
Provision for (benefit from)
income taxes.............. 4,443 (15,747) 1,256 (4,501) (13,405) 5,553 13,850
-------- ---------- ----------- ----------- ----------- ----------- -----------
Income (loss) before
cumulative effect of a
change in accounting
principle................. 9,953 (27,252) (13,102) (32,171) (182,938) (16,789) (3,812)
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) (3,812)
======== ========== =========== =========== =========== =========== ===========
(CONTINUED ON FOLLOWING PAGE; FOOTNOTES BEGIN ON PAGE 19)
</TABLE>
17
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C>
PREDECESSOR (a)
------------------------
PERIOD PERIOD FROM
FROM JULY 1
YEAR ENDED JANUARY 1 THROUGH YEAR ENDED DECEMBER 31,
DECEMBER THROUGH DECEMBER -----------------------------------------------------
31, JUNE 30, 31, PRO FORMA
1995(b) 1996(c) 1996(d) 1997 1998 1999 1999(e)
----------- ---------- ----------- ----------- ----------- ----------- -----------
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C>
Basic and diluted income
(loss) per common share:
Income (loss) before
cumulative effect of a
change in accounting
principle............... $ (0.24) $ (0.60) $ (3.37) $ (0.31) $ (0.04)
Cumulative effect of a
change in accounting
principle............... -- -- (0.01) -- --
----------- ----------- ----------- ----------- -----------
Net income (loss)......... $ (0.24) $ (0.60) $ (3.38) $ (0.31) $ (0.04)
=========== =========== =========== =========== ===========
Weighted-average number of
shares outstanding: (i)
Basic and diluted......... 53,786,432 53,989,089 54,249,895 54,545,030 84,970,747
=========== =========== =========== =========== ===========
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 1,169,456
Stockholders' equity........ 212,852 165,879 465,673 433,625 246,826 229,708 736,833
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
PREDECESSOR (a)
----------------------------
PERIOD FROM PERIOD FROM
YEAR ENDED JANUARY 1 JULY 1
DECEMBER THROUGH THROUGH YEAR ENDED DECEMBER 31,
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>
(CONTINUED ON FOLLOWING PAGE; FOOTNOTES BEGIN ON PAGE 19)
18
<PAGE>
<TABLE>
<CAPTION>
Six Months Ended June 30,
---------------------------------------
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.................................... $ 524,825 $ 625,787 $ 625,787
Operating expenses(f)..................................... 422,576 505,931 505,931
Depreciation and amortization............................. 26,962 33,910 33,910
Amortization of goodwill.................................. 11,954 12,378 12,378
Year 2000 remediation costs............................... 900 -- --
----------- ----------- -----------
Income from operations.................................... 62,433 73,568 73,568
Interest expense, net..................................... 55,681 65,305 48,430
----------- ----------- -----------
Income before income taxes................................ 6,752 8,263 25,138
Provision for income taxes................................ 6,677 7,164 13,745
----------- ----------- -----------
Net income................................................ $ 75 $ 1,099 $ 11,393
=========== =========== ===========
Net income per common share:
Basic................................................... $ 0.00 $ 0.02 $ 0.13
Diluted................................................. $ 0.00 $ 0.02 $ 0.13
Weighted average number of shares outstanding:
Basic................................................... 54,497,950 56,423,677 85,098,020
=========== =========== ===========
Diluted................................................. 55,632,717 57,554,519 86,228,862
=========== =========== ===========
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C>
CONSOLIDATED BALANCE SHEET DATA (AS OF END OF PERIOD)
Cash and cash equivalents................................................ $ 5,990 $ 5,990
Total assets............................................................. 1,975,799 1,975,799
Long-term obligations.................................................... 1,316,869 1,158,176
Stockholders' equity..................................................... 456,216 738,141
</TABLE>
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
-----------------------
1999 2000
---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
SELECTED OPERATING DATA
Number of hospitals (j)................................... 43 49
Licensed beds (j)(k)...................................... 3,892 4,401
Beds in service (j)(l).................................... 2,930 3,355
Admissions (m)............................................ 59,817 68,314
Adjusted admissions (m)................................... 105,417 126,137
Patient days (o).......................................... 244,355 267,060
Average length of stay (days) (p)......................... 4.1 3.9
Occupancy rate (beds in service) (q)...................... 46.6% 45.0%
Net inpatient revenue as a % of total net revenue......... 53.9% 50.6%
Net outpatient revenue as a % of total net revenue........ 44.4% 47.6%
Adjusted EBITDA (r)....................................... $102,249 $119,856
Adjusted EBITDA as a % of net revenue..................... 19.5% 19.2%
Net cash flows used in operating activities............... $(10,665) $(34,399)
Net cash flows used in investing activities............... $(88,045) $(74,261)
Net cash flows provided by financing activities........... $ 93,847 $110,368
</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.
(FOOTNOTES CONTINUED ON FOLLOWING PAGE)
19
<PAGE>
(b) Includes nine hospitals divested or held for divestiture in 1996.
(c) Includes two acquisitions.
(d) Includes six acquisitions.
(e) Reflects the application of the net proceeds from the initial public
offering, including the exercise of the underwriters' over-allotment option,
and the estimated net proceeds from this offering to repay debt of
$281.3 million and $179.8 million based upon outstanding debt balances as of
December 31, 1999 and June 30, 2000, respectively, and $225.2 million repaid
on June 14, 2000 and the resultant reduction of interest expense of
$21.3 million as if these events had occured on January 1, 1999 for the year
ended December 31, 1999 and $16.9 million as if these events had occurred on
January 1, 1999 for the six months ended June 30, 2000. Also reflects an
increase in provision for income taxes of $8.3 million for the year ended
December 31, 1999 and $6.6 million for the six months ended June 30, 2000,
resulting from the decrease in interest expense. For purposes of computing
pro forma interest expense, the assumed debt repayments exclude
$225.8 million as of December 31, 1999 and $102.1 million as of June 30,
2000 to be used to repay indebtedness incurred subsequent to the respective
period end dates. 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 initial public offering, including the exercise of
the underwriters' over-allotment option, and the estimated net proceeds
from this offering, using an assumed weighted average interest rate of
7.43%. For the six months ended June 30, 2000, interest expense on the
revolving credit loans totaling $6.8 million has been excluded, giving
effect to the repayment of $165.0 million in outstanding borrowings
with the proceeds from the initial public offering, including the
exercise of the underwriters' over-allotment option, using an assumed
weighted average interest rate of 9.0%.
- 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 $138.6 million in outstanding borrowings
with proceeds from the initial public offering, including the exercise
of the underwriters' over-allotment option, and the estimated net
proceeds from this offering, using an assumed weighted average interest
rate of 7.43%. For the six months ended June 30, 2000, interest expense
on the acquisition loans totaling $8.5 million has been excluded,
giving effect to the repayment of $80.2 million in outstanding
borrowings with proceeds from the initial public offering and
$126.9 million from this offering, using an assumed weighted average
interest rate of 8.52%.
- For the year ended December 31, 1999, interest expense on the
tranche A loan totaling $0.8 million has been excluded, giving effect
to the repayment of $10.2 million on outstanding borrowings with the
proceeds from the initial public offering, including the exercise of
the underwriters' over-allotment option, and the estimated net proceeds
from this offering, using an assumed weighted average interest rate of
7.72%. For the six months ended June 30, 2000, interest expense on the
tranche A loan totaling $0.5 million has been excluded, giving effect
to the repayment of $10.2 million in outstanding borrowings with the
proceeds from the initial public offering, including the exercise of
the underwriters' over-allotment option, and the estimated net proceeds
from this offering, using an assumed interest rate of 8.86%.
- For the year ended December 31, 1999, interest expense on the
tranche B loan totaling $0.4 million has been excluded, giving effect
to the repayment of $4.5 million on outstanding borrowings with the
proceeds from the initial public offering, including the exercise of
the underwriters' over-allotment option, and the estimated net proceeds
from this offering, using an assumed weighted average interest rate of
8.33%. For the six months ended June 30, 2000, interest expense on the
tranche B loan totaling $0.2 million has been excluded, giving effect
to the repayment of $4.5 million in outstanding borrowings with the
proceeds from the initial public offering, including the exercise of
the underwriters' over-allotment option, and the estimated net proceeds
from this offering, using an assumed interest rate of 9.19%.
- For the year ended December 31, 1999, interest expense on the
tranche C loan totaling $0.4 million has been excluded, giving effect
to the repayment of $4.5 million on outstanding borrowings with the
proceeds from the initial public offering, including the exercise of
the underwriters' over-allotment option, and the estimated net proceeds
from this offering, using an assumed weighted average interest rate of
8.83%. For the six months ended June 30, 2000, interest expense on the
tranche C loan totaling
(FOOTNOTES CONTINUED ON FOLLOWING PAGE)
20
<PAGE>
$0.2 million has been excluded, giving effect to the repayment of
$4.5 million in outstanding borrowings with the proceeds from the
initial public offering, including the exercise of the underwriters'
over-allotment option, and the estimated net proceeds from this
offering, using an assumed interest rate of 9.70%.
- For the year ended December 31, 1999, interest expense on the
tranche D loan totaling $1.3 million has been excluded, giving effect
to the repayment of $13.8 million on outstanding borrowings with the
proceeds from the initial public offering, including the exercise of
the underwriters' over-allotment option, and the estimated net proceeds
from this offering, using an assumed weighted average interest rate of
9.18%. For the six months ended June 30, 2000, interest expense on the
tranche D loan totaling $0.7 million has been excluded, giving effect
to the repayment of $13.8 million in outstanding borrowings with the
proceeds from the initial public offering, including the exercise of
the underwriters' over-allotment option, and the estimated net proceeds
from this offering, using an assumed interest rate of 9.95%.
(2) The adjustment to the pro forma provision for income taxes, computed
using a 39% statutory income tax rate, was $8.3 million for the year
ended December 31, 1999 and $6.6 million for the six months ended
June 30, 2000 for the tax effect of the above-noted pro forma
adjustments.
(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.
21
<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. On June 8, we acquired South Baldwin Regional Hospital, an 82 bed
hospital located in Foley, Alabama. On July 1, 2000, we acquired Western Arizona
Regional Hospital, a 90 bed hospital located in Bullhead City, Arizona. As of
October 1, 2000, we acquired Tooele Valley Regional Medical Center. Prior to
this acquisition, we operated this hospital under a management agreement since
November 1998. We acquired all six hospitals from tax-exempt or local government
entities for an aggregate consideration of approximately $143 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,
22
<PAGE>
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.
Goodwill from the acquisition of our predecessor company in 1996 was
$663.4 million and from subsequent hospital acquisitions was $210.8 million as
of June 30, 2000. Based on management's assessment of the goodwill's estimated
useful life, we generally amortize our goodwill over 40 years. Goodwill
represented 191.6% of our shareholders' equity as of June 30, 2000; the amount
of goodwill amortized equaled 16.8% of our income from operations for the
six-month period ended June 30, 2000. Significant adverse changes in facts
regarding our industry, markets and operations could cause our management to
shorten the estimated useful life used to amortize our goodwill. This could
result in material increases in amortization of goodwill, or cause impairments
to the carrying amount of such goodwill, resulting in a non-cash charge which
would reduce operating income.
In the future, we intend to acquire, on a selective basis, two to four
hospitals in our target markets annually. Because of the financial impact of
acquisitions, it is difficult to make meaningful comparisons between our
financial statements for the periods presented. Because EBITDA margins at
hospitals we acquire are, at the time of acquisition, lower than those of our
existing hospitals, acquisitions can negatively affect our EBITDA margins on a
consolidated basis.
On May 1, 2000, we terminated the lease of a hospital previously held for
disposition. At June 30, 2000, the carrying amounts of one of our hospitals were
segregated from our remaining assets. The carrying amount of long-term assets of
a facility held for disposition are classified in other assets, net in our
unaudited interim condensed consolidated balance sheet as of June 30, 2000. We
do not expect the impact of any gain or loss on our financial results to be
material.
SOURCES OF REVENUE
Net operating revenues include amounts estimated by management to be
reimbursable by Medicare and Medicaid under prospective payment systems and
provisions of cost-reimbursement and other payment methods. Approximately 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
23
<PAGE>
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 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 August 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>
SIX MONTHS
ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
------------------------------------ ----------------------
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) (80.5) (80.8)
----- ----- ----- ----- -----
Adjusted EBITDA (b)................................ 16.5 19.5 18.9 19.5 19.2
Depreciation and amortization...................... (5.9) (5.8) (5.3) (5.1) (5.4)
Amortization of goodwill........................... (3.4) (3.1) (2.3) (2.3) (2.0)
Impairment of long-lived assets.................... -- (19.3) -- -- --
Compliance settlement and Year 2000 remediation
costs (c)........................................ -- (2.4) (1.6) (0.2) --
----- ----- ----- ----- -----
Income (loss) from operations...................... 7.2 (11.1) 9.7 11.9 11.8
Interest, net...................................... (12.1) (11.8) (10.8) (10.6) (10.4)
----- ----- ----- ----- -----
Income (loss) before cumulative effect of a change
in accounting principle and income taxes......... (4.9) (22.9) (1.1) 1.3 1.3
Provision for (benefit from) income taxes.......... (0.6) (1.5) .5 (1.3) (1.1)
----- ----- ----- ----- -----
Income (loss) before cumulative effect of a change
in accounting principle.......................... (4.3) (21.4) (1.6) 0.0 0.2
===== ===== ===== ===== =====
</TABLE>
24
<PAGE>
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED ENDED
DECEMBER 31, JUNE 30,
---------------------- ----------
1998 1999 2000
-------- -------- ----------
(EXPRESSED IN PERCENTAGES)
<S> <C> <C> <C>
PERCENTAGE CHANGE FROM PRIOR PERIOD:
Net operating revenues.................................... 15.1 26.4 19.2
Admissions................................................ 13.6 20.3 14.2
Adjusted admissions (d)................................... 15.3 22.6 19.7
Average length of stay.................................... (6.7) (4.8) (4.9)
Adjusted EBITDA........................................... 36.1 22.7 17.2
SAME HOSPITALS PERCENTAGE CHANGE FROM PRIOR PERIOD (e):
Net operating revenues.................................... 2.5 7.6 9.2
Admissions................................................ 4.3 4.9 4.5
Adjusted admissions....................................... 6.4 7.7 8.5
Adjusted EBITDA........................................... 11.7 12.6 14.7
</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.
SIX MONTHS ENDED JUNE 30, 2000 COMPARED TO SIX MONTHS ENDED JUNE 30, 1999
Net operating revenues increased 19.2% to $625.8 million for the six months
ended June 30, 2000 from $524.8 million for the six months ended June 30, 1999.
Of the $101.0 million increase in net revenues, the nine hospitals we acquired
in 1999 and 2000 contributed approximately $54.0 million, and hospitals we owned
throughout both periods contributed $47.0 million, an increase of 9.2%. The
increase from hospitals owned throughout both periods was attributable primarily
to volume increases.
Inpatient admissions increased by 14.2%. Adjusted admissions increased by
19.7%. Average length of stay decreased by 4.9%. On a same hospital basis,
inpatient admissions increased by 4.5% and adjusted admissions increased by
8.5%. The increase in same hospital inpatient admissions and adjusted admissions
was due primarily to an increase in services offered, physician relationship
development
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efforts and the addition of physicians through our focused recruitment program.
On a same hospital basis, net outpatient revenues increased by 15.4%.
Operating expenses as a percentage of net operating revenues, increased from
80.5% for the six months ended June 30, 1999 to 80.8% for the six months ended
June 30, 2000, primarily due to higher operating expenses and lower initial
adjusted EBITDA margins associated with acquired hospitals during the first year
of our ownership and one recently constructed hospital. Operating expenses
include salaries and benefits, provision for bad debts, supplies, rent and other
operating expenses. Salaries and benefits, as a percentage of net revenues
increased to 39.0% from 38.9% for the comparable periods due to acquisition of
hospitals in 1999 and 2000 having higher salary and benefits as a percentage of
net revenues, offset by the savings beginning to be realized from improvements
at the hospitals acquired in 1999. Adjusted EBITDA margin decreased from 19.5%
for the six months ended June 30, 1999 to 19.2% for the six months ended June
30, 2000. Provisions for bad debts, as a percentage of net revenues, increased
to 9.0% from 8.5% for the comparable periods due primarily to an increase in
self-pay revenues. Supplies as a percentage of net revenues decreased from 11.8%
to 11.6%. Rent and other operating expenses, as a percentage of net revenues,
decreased to 21.2% from 21.3% for the comparable periods.
On a same hospital basis, operating expenses as a percentage of net
operating revenues decreased from 80.7% for the six months ended June 30, 1999
to 79.7% for the six months ended June 30, 2000. We achieved these efficiencies
and productivity gains in payroll and other operating expenses offset by an
increase in bad debt expense.
Depreciation and amortization increased by $6.9 million from $27.0 million
for the six months ended June 30, 1999 to $33.9 million for the six months ended
June 30, 2000. The nine hospitals acquired in 1999 and 2000 accounted for
$2.0 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 $4.9 million.
Amortization of goodwill increased by $0.4 million from $12.0 million for
the six months ended June 30, 1999 to $12.4 million for the six months ended
June 30, 2000. The increase was related to the hospitals acquired in 1999 and
2000.
Interest, net increased by $9.6 million from $55.7 million for the six
months ended June 30, 1999 to $65.3 million for the six months ended June 30,
2000. The nine hospitals acquired in 1999 and 2000 accounted for approximately
$4.7 million of the increase and borrowings under our credit agreement to
finance capital expenditures, compliance settlement costs and an increase in
average interest rates account for the remaining $5.9 million, net of benefit of
$1.0 million interest savings from the proceeds of our initial public offering
completed on June 14, 2000.
Income before income taxes increased from $6.8 million for the six months
ended June 30, 1999 to $8.3 million for the six months ended June 30, 2000
primarily as a result of the absence of $0.9 of Year 2000 remediation costs
incurred during the six months ended June 30, 1999 and improved profitability
obtained through the continuing execution of our operating strategy and the
realization of increased admissions at hospitals owned during both periods.
Provision for income taxes increased from $6.7 million for the six months
ended June 30, 1999 to $7.2 million for the six months ended June 30, 2000.
Net income increased from $0.1 million for the six months ended June 30,
1999 to $1.1 million for the six months ended June 30, 2000.
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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 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.
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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 executed a settlement agreement with the appropriate state and federal
governmental agencies for a negotiated settlement amount of approximately
$31.8 million, which we paid in May 2000. We recorded as a charge to income,
under the caption "Compliance settlement 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.
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
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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 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
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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
SIX MONTHS ENDED JUNE 30, 2000 COMPARED TO SIX MONTHS ENDED JUNE 30, 1999
Net cash used in operating activities increased $23.7 million from a use of
$10.7 million for the six months ended June 30, 1999 to a use of $34.4 million
for the six months ended June 30, 2000. This increase represents the payment for
settlement of compliance cost of $31.8 million offset by an increase in
operating cash flows of $8.1 million. The use of cash from investing activities
decreased from $88.0 million to $74.3 million for the comparable periods. The
cash paid for acquisitions for the six months ended June 30, 2000 included
$8.5 million for the acquisition of a hospital located in Franklin, Virginia
that closed on March 1, 2000, $12.9 million for acquisitions located in Las
Vegas, New Mexico and Eufaula, Alabama that closed on April 1, 2000 and
$18.7 million for the acquisition of a hospital located in Foley, Alabama that
closed on June 1, 2000. The cost of acquisitions during the comparable periods
decreased $3.7 million and the cost of construction and renovation projects
decreased $13.9 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 increased $16.5 million from $93.8 million to
$110.4 million for the comparable periods as a result of borrowing to pay the
compliance settlement offset by a decrease in expenditures related to hospital
acquisitions and a reduction in construction and renovation 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 June 30,
2000, we are required to construct four replacement hospitals through 2005 with
an aggregate estimated construction cost, including equipment, of approximately
$120 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 $60 million in 2000, including approximately $55 million for
renovation and equipment purchases and approximately $5 million for construction
of replacement hospitals.
CAPITAL RESOURCES
Net working capital was $133.4 million at June 30, 2000 compared to
$65.2 million at December 31, 1999. The $68.2 million increase from
December 31, 1999 to June 30, 2000 was attributable primarily to an increase in
accounts receivable due to a combination of growth in same hospitals revenues
during 2000 and the addition of four hospitals in 2000 as well as the payment of
approximately $31.8 million related to the compliance settlement, which was
borrowed against the acquisition loan facility.
During March 1999, we amended our credit agreement. The amended credit
agreement provides for $644 million in term debt with quarterly amortization and
staggered maturities in 2000, 2001, 2002, 2003, 2004 and 2005. This agreement
also provides for revolving facility debt for working capital of up to $200
million and for acquisitions of up to $263.2 million. This revolving facility
matures on
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December 31, 2002. Borrowings under the facility bear interest at either LIBOR
or the higher of the prime rate, the three month certificate of deposit rate
plus 1% of the federal funds rate plus 1/2 of 1%, plus in all cases various
applicable margins. Some of these margins are fixed and others are based upon
financial covenant ratio tests. As of June 30, 2000, under our credit agreement,
our weighted average interest rate was 9.45%. As of June 30, 2000, we had
availability to borrow an additional $138.3 million under the working capital
revolving facility and an additional $155.6 million under the acquisition loan
revolving facility.
We are required to pay a quarterly commitment fee at a rate which ranges
from .375% to .500% based on specified financial performance criteria. This fee
applies to unused commitments under the revolving credit facility and the
acquisition loan facility.
The terms of the credit agreement include various restrictive covenants.
These covenants include restrictions on additional indebtedness, investments,
asset sales, capital expenditures, dividends, sale and leasebacks, contingent
obligations, transactions with affiliates, and fundamental changes. The
covenants also require maintenance of various ratios regarding senior
indebtedness, senior interest, and fixed charges.
We believe that internally generated cash flows and borrowings under our
revolving credit facility and acquisition facility will be sufficient to finance
acquisitions, capital expenditures and working capital requirements through the
next 12 months. If funds required for future acquisitions exceed existing
sources of capital, we will need to increase our credit facilities or obtain
additional capital by other means.
REIMBURSEMENT, LEGISLATIVE AND REGULATORY CHANGES
Legislative and regulatory action has resulted in continuing change in the
Medicare and Medicaid reimbursement programs which will continue to limit
payment increases under these programs. Within the statutory framework of the
Medicare and Medicaid programs, there are substantial areas subject to
administrative rulings, interpretations, and discretion which may further affect
payments made under those programs, and the federal and state governments might,
in the future, reduce the funds available under those programs or require more
stringent utilization and quality reviews of hospital facilities. Additionally,
there may be a continued rise in managed care programs and future restructuring
of the financing and delivery of healthcare in the United States. These events
could have an adverse effect on our future financial results.
INFLATION
The healthcare industry is labor intensive. Wages and other expenses
increase during periods of inflation and when labor shortages occur in the
marketplace. In addition, suppliers pass along rising costs to us in the form of
higher prices. We have implemented cost control measures, including our 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.
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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 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 $4 million for the six months ended June 30, 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 October 1, 2000, we owned, leased
or operated 51 hospitals, geographically diversified across 20 states, with an
aggregate of 4,524 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.
34
<PAGE>
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 September 30, 2000,
approximately 1,900 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.
35
<PAGE>
EMERGENCY ROOM INITIATIVES. Given that over 50% of our hospital admissions
originate in the emergency room, we systematically take steps to increase
patient flow in our emergency rooms as a means of optimizing utilization rates
for our hospitals. Furthermore, the impression of our overall operations by our
customers is substantially influenced by our emergency room since often that is
their 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
36
<PAGE>
- have financial performance that we believe will benefit from our
management's operating skills.
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
September 30, 2000, we are required to construct four replacement hospitals
through 2005 with an aggregate estimated construction cost, including equipment,
of approximately $120 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
37
<PAGE>
physical plant of the facilities. Based on our historical experience, we then
build a pro forma financial 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 23 hospitals through October 1, 2000, for an
aggregate investment of approximately $677 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
South Baldwin Regional.......................... Foley AL 2000 82
Western Arizona Regional........................ Bullhead City AZ 2000 90
Tooele Valley Regional Medical Center (d)....... Tooele UT 2000 38
</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) We acquired this hospital as of October 1, 2000. Prior to the acquisition,
we operated this hospital under a management agreement and did not include
the operating statistics of this hospital in our consolidated statistics.
During the term of the management agreement, our fee was equal to the excess
of the hospital's net revenue over expenses.
38
<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.
39
<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"
40
<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
October 1, 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
South Baldwin Regional................ Foley 82 June, 2000 Leased
ARIZONA
Payson Regional Medical Center........ Payson 66 August, 1997 Leased
Western Arizona Regional.............. Bullhead City 90 July, 2000 Owned
ARKANSAS
Harris Hospital....................... Newport 132 October, 1994 Owned
Randolph County Medical Center........ Pocahontas 50 October, 1994 Leased
CALIFORNIA
Barstow Community Hospital............ Barstow 56 January, 1993 Leased
Fallbrook Hospital.................... Fallbrook 47 November, 1998 Operated (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
</TABLE>
(CONTINUED ON FOLLOWING PAGE)
41
<PAGE>
<TABLE>
<CAPTION>
DATE OF
LICENSED ACQUISITION/LEASE OWNERSHIP
HOSPITAL CITY BEDS(a) INCEPTION TYPE
-------- ------------- -------- ----------------- -------------
<S> <C> <C> <C> <C>
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
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 54 April, 2000 Leased
NORTH CAROLINA
Martin General Hospital............... Williamston 49 November, 1998 Leased
PENNSYLVANIA
Berwick Hospital...................... Berwick 144 March, 1999 Owned
SOUTH CAROLINA
Marlboro Park Hospital................ Bennettsville 109 August, 1996 Leased
Chesterfield General Hospital......... Cheraw 66 August, 1996 Leased
Springs Memorial Hospital............. Lancaster 194 November, 1994 Owned
TENNESSEE
Lakeway Regional Hospital............. Morristown 135 May, 1993 Owned
Scott County Hospital................. Oneida 99 November, 1989 Leased
Cleveland Community Hospital.......... Cleveland 100 October, 1994 Owned
White County Community Hospital....... Sparta 60 October, 1994 Owned
TEXAS
Big Bend Regional Medical Center...... Alpine 40 October, 1999 Owned
Northeast Medical Center.............. Bonham 75 August, 1996 Owned
Cleveland Regional Medical Center..... Cleveland 115 August, 1996 Leased
Highland Medical Center............... Lubbock 123 September, 1986 Owned
Scenic Mountain Medical Center........ Big Spring 150 October, 1994 Owned
Hill Regional Hospital................ Hillsboro 92 October, 1994 Owned
Lake Granbury Medical Center.......... Granbury 56 January, 1997 Leased
UTAH
Tooele Valley Regional Medical
Center.............................. Tooele 38 October, 2000 Owned (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 acquired this hospital as of October 1, 2000. Prior to the acquisition,
we operated this hospital under a management agreement and did not include
the operating statistics of this hospital in our consolidated statistics.
During the term of the management agreement, our fee was equal to the excess
of the hospital's net revenue over expenses.
42
<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.
43
<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."
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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.
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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;
- payment of services which require few, if any, substantive duties by the
physician, or payment for services in excess of the fair market value of
the services rendered; or
- purchasing goods or services from physicians at prices in excess of their
fair market value.
We have a variety of financial relationships with physicians who refer
patients to our hospitals. Physicians own interests in a few of our facilities.
Physicians may also own our stock. We also have contracts with physicians
providing for a variety of financial arrangements, including employment
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. Regulations have recently been adopted, but not yet implemented,
that expand the areas within a facility that must provide emergency treatment.
Sanctions for failing to 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
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delay or even prevent our ability to acquire hospitals. If these activities are
widespread, they could have a negative impact on our ability to acquire
additional hospitals. See "--Our Business Strategy."
CERTIFICATES OF NEED. The construction of new facilities, the acquisition
of existing facilities and the addition of new services at our facilities may be
subject to state laws that require prior approval by state regulatory agencies.
These certificate of need laws generally require that a state agency determine
the public need and give approval prior to the construction or acquisition of
facilities or the addition of new services. We operate hospitals in 11 states
that have adopted certificate of need laws. If we fail to 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 commenced on August 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
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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 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. As of October 1, 2000, the home health PPS
replaced IPS. We have experienced reductions in payments for our home health
services and a decline in home health visits due to a reduction in benefits by
reason of the Balanced Budget Act.
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
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governmental agencies or not-for-profit entities supported by endowments and
charitable contributions. These hospitals can make capital expenditures without
paying sales, property and income taxes. We also face competition from other
specialized care providers, including outpatient surgery, orthopedic, oncology,
and diagnostic centers.
The number and quality of the physicians on a hospital's staff is an
important factor in a hospital's competitive advantage. Physicians decide
whether a patient is admitted to the hospital and the procedures to be
performed. Admitting physicians may be on the medical staffs of other hospitals
in addition to those of our hospitals. We attempt to attract our physicians'
patients to our hospitals by offering quality services and facilities,
convenient locations, and state-of-the-art equipment.
COMPLIANCE PROGRAM
OUR COMPLIANCE PROGRAM. In early 1997, under our new management and
leadership, we voluntarily adopted a company-wide compliance program. The
program included the appointment of a compliance officer and committee, adoption
of an ethics and business conduct code, employee education and training,
implementation of an internal system for reporting concerns, auditing and
monitoring programs, and a means for enforcing the program's policies.
We take an operations team approach to compliance and utilize corporate
experts for program design efforts and facility leaders for employee-level
implementation. Compliance is another area that demonstrates our utilization of
standardization and centralization techniques and initiatives which yield
efficiencies and consistency throughout our facilities. We recognize that our
compliance with applicable laws and regulations depends on individual employee
actions as well as company operations. Our approach focuses on integrating
compliance responsibilities with operational function. This approach is intended
to reinforce our company-wide commitment to operate strictly in accordance with
the laws and regulations that govern our business.
Since its initial adoption, the compliance program continues to be expanded
and developed to meet the industry's expectations and our needs. Specific
written policies, procedures, training and educational materials and programs,
as well as auditing and monitoring activities have been prepared and implemented
to address the functional and operational aspects of our business. Included
within these functional areas are materials and activities for business
sub-units, including laboratory, radiology, pharmacy, emergency, surgery,
observation, home health, skilled nursing, and clinics. Specific areas
identified through regulatory interpretation and enforcement activities have
also been addressed in our program. Claims preparation and submission, including
coding, billing, and cost reports, comprise the bulk of these areas. Financial
arrangements with physicians and other referral sources, including anti-kickback
and Stark laws, emergency department treatment and transfer requirements, and
other patient disposition issues are also the focus of policy and training,
standardized documentation requirements, and review and audit.
INPATIENT CODING COMPLIANCE ISSUE. In August 1997, during a routine
internal audit at one of our facilities, we discovered inaccuracies in the DRG
coding for some of our inpatient medical records. At that time, this was the
primary auditing activity for our compliance program. These inaccuracies
involved inpatient coding practices that had been put in place prior to the time
we acquired our operating company in 1996.
Because of the concerns raised by the internal audit, we performed an
internal review of historical inpatient coding practices. At the completion of
this review in December 1997, we voluntarily disclosed the coding problems to
the Office of Inspector General of the U.S. Department of Health and Human
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
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<PAGE>
estimate of the dollar amounts related to coding errors for these DRGs at 36 of
our hospitals for the period 1993 to 1997.
The results of this audit were reviewed by the Inspector General and the
Department of Justice, who also conducted their own investigation. We cooperated
fully with their investigation. The government agencies advised us of potential
liability under various legal theories, including the False Claims Act. Under
the False Claims Act, we could be liable for as much as treble damages and
penalties of between $5,000 and $10,000 per false claim submitted to Medicare
and Medicaid.
We have entered into a settlement agreement with these federal government
agencies and the applicable state Medicaid programs. Pursuant to the settlement
agreement, we paid approximately $31.4 million in May 2000 and were released
from all civil claims relating to the coding of the eight specific DRGs for the
hospitals and time periods covered in the audit. We funded this payment from our
acquisition loan facility. During 1998 and 1999, we established a liability in
our financial statements for this amount. We have also agreed with the Inspector
General to continue our existing voluntary compliance program under a corporate
compliance agreement and to adopt various additional compliance measures for a
period of three years. These additional compliance measures include making
various reports to the federal government and having our actions pursuant to the
compliance agreement reviewed annually by a third party.
The compliance measures and reporting and auditing requirements contained in
the compliance agreement include:
- continuing the duties and activities of our corporate compliance officer,
corporate compliance work group, and facility compliance chairs and
committees;
- maintaining our written ethics and conduct policy, which sets out our
commitment to full compliance with all statutes, regulations, and
guidelines applicable to federal healthcare programs;
- maintaining our written policies and procedures addressing the operation
of our compliance program, including proper coding for inpatient hospital
stays;
- continuing our general training on the ethics and conduct policy and
adding training about our compliance program and the compliance agreement;
- continuing our specific training for the appropriate personnel on billing
and coding issues;
- continuing independent third party periodic audits of our facilities'
inpatient DRG coding;
- having an independent third party perform an annual review of our
compliance with the compliance agreement;
- continuing our confidential disclosure program and "ethics hotline" to
enable employees or others to disclose issues or questions regarding
possible inappropriate policies or behavior;
- enhancing our screening program to ensure that we do not hire or engage
employees or contractors who are ineligible persons for federal healthcare
programs;
- reporting any material deficiency which resulted in an overpayment to us
by a federal healthcare program; and
- submitting annual reports to the Inspector General which describe in
detail the operations of our corporate compliance program for the past
year.
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
54
<PAGE>
$1,000 to $2,500 per day. We will also be subject to a stipulated penalty of
$25,000 per day, following notice and cure periods, for any deliberate and/or
flagrant breach of the material provisions of the compliance agreement.
EMPLOYEES
At December 31, 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 entered into a settlement agreement with the Inspector General, the
Department of Justice, and the applicable state Medicaid programs pursuant to
which we paid approximately $31.8 million in exchange for a release of civil
claims associated with possible inaccurate inpatient coding for the period 1993
to 1997. For a description of the terms of the settlement agreement as well as
the events giving rise to the settlement agreement, see "--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 amended complaint are extremely general, but involve Medicare billing at our
White County Community Hospital in Sparta, Tennessee. In September 2000, the
court granted our motion to transfer this case to federal court in Tennessee. 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. 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 review
indicates that the allegations relating to the reimbursement for the readmitted
patients lack factual support. In addition, our review indicates that any
inaccuracies in salary allocations to the rehabilitation unit's cost reports
were relatively minimal in amount. This litigation is at a very preliminary
stage and we have not been formally 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
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<PAGE>
lawsuit was brought by a physician who formerly had privileges at Russell County
Medical Center. The complaint is filed under the False Claims Act against
various individual doctors as well as Russell County Medical Center and us. The
complaint alleges that the defendants engaged in unnecessary and unsafe medical
procedures, tests and hospitalizations. The physician had previously filed two
antitrust actions against the doctors and hospital which were both found to be
without merit and dismissed by the courts. Based upon our preliminary
investigation into the allegations, we do not believe this lawsuit has any
merit. We have not been served with the complaint, and the Department of Justice
has not made a decision to intervene.
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.
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MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The following sets forth information regarding our executive officers and
directors as of September 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........................... 52 Group Vice President
Gary D. Newsome........................... 42 Group Vice President
Michael T. Portacci....................... 42 Group Vice President
John A. Fromhold.......................... 47 Group Vice President
Martin G. Schweinhart..................... 46 Vice President Operations
T. Mark Buford............................ 47 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............................ 77 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.............................. 68 Director (Class II)
Sandra J. Horbach......................... 40 Director (Class II)
Thomas H. Lister.......................... 36 Director (Class III)
Michael A. Miles.......................... 61 Chairman of the Board (Class II)
Samuel A. Nunn............................ 62 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
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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 the Under
Secretary for American Museums and National Programs at the Smithsonian
Institution since June 2000. Previously, she was Executive Dean of the John F.
Kennedy School of Government, Harvard University from 1996 until June 2000.
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 XO
Communications.
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.
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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 XO Communications.
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 AMR Corporation, 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 provides for a classified board of
directors consisting of three classes. Each class consists, 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
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"--Relationships and Transactions between Community Health Systems and its
Officers, Directors and 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 $2,092.
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<PAGE>
OPTION GRANTS IN LAST FISCAL YEAR
There were no stock options granted to any of our executive officers or
directors during the year ended December 31, 1999.
AGGREGATED OPTION VALUES AS OF DECEMBER 31, 1999
The executive officers named in the summary compensation table did not
exercise any stock options during the year ended December 31, 1999. The
following table sets forth the stock option values as of December 31, 1999 for
these persons.
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS
OPTIONS AT FISCAL YEAR-END (#) AT FISCAL YEAR-END ($)(a)
------------------------------ ------------------------------
EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Wayne T. Smith...................... -- -- $ -- $ --
W. Larry Cash....................... -- -- -- --
David L. Miller..................... 3,363 5,044 92,079 138,105
Gary D. Newsome..................... 3,363 5,044 92,079 138,105
Michael T. Portacci................. 5,044 3,363 138,105 92,079
</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. Since the common stock was not
publicly traded on December 31, 1999, we have used the closing price of our
common stock on October 10, 2000.
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 September 30, 2000,
options to purchase 491,815 shares of common stock were outstanding. 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.
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<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;
- engaging in any competitive activities; or
- being convicted of a crime against us.
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<PAGE>
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 29,940 shares of common stock at $8.96 per share. Mr. Miles has options
to purchase 41,916 shares of common stock at $8.96 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.
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
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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
Prior to our initial public offering in June, 2000, members of our
management and other employees purchased shares of our common stock pursuant to
the terms of stockholder agreements. Currently, 23 members of our management and
other employees or former employees own an aggregate of 1,834,375 shares of our
common stock, excluding shares issuable upon exercise of options, that were
purchased pursuant to the terms of these 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 granted under the Community Health Systems
Stock Option Plan and the Outside Directors Stock Options Plans.
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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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
4,562,791 shares of common stock.
In connection with our initial public offering in June, 2000, we granted
stock options to various employees, including our executive officers, under the
2000 Stock Option and Award Plan. Additional stock option grants were made on
August 8, 2000. An aggregate of 3,805,200 shares of common stock are issuable
upon the exercise of these options, at an average exercise price of $13.09 per
share. The options granted in connection with our initial public offering were
granted at $13.00 per share, the public offering price in our initial public
offering. Subsequent options were granted at the closing market price on the
date of the grant. These options will have a term of 10 years. They will become
exercisable over a three-year period. The following table sets forth the number
of shares of our common stock underlying these options:
<TABLE>
<S> <C>
Wayne T. Smith ............................................. 1,000,000
President and Chief Executive Officer
W. Larry Cash .............................................. 700,000
Executive Vice President and Chief Financial Officer
David L. Miller ............................................ 300,000
Group Vice President
Gary D. Newsome ............................................ 300,000
Group Vice President
Michael T. Portacci ........................................ 300,000
Group Vice President
Executive officers as a group excluding named executive
officers (12 persons)..................................... 550,000
Other employees as a group.................................. 655,200
</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. The plan
allows our employees to purchase additional shares of our common stock on the
NYSE at the then current market
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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. To the extent any of the persons named below sell any common shares
in this offering, the notes require that the net proceeds received by such
selling stockholders, after taxes, will be used to reduce the outstanding
balances under these notes. 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 AND SELLING 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 stockholders selling shares in the offering;
- 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
SHARES OWNED (a)
SHARES BENEFICIALLY SHARES OFFERED BENEFICIALLY -------------------
OWNED PRIOR TO IN THIS OWNED AFTER BEFORE AFTER
NAME OFFERING (a) OFFERING (B) THIS OFFERING (a) OFFERING OFFERING
---- ------------------- -------------- ----------------- -------- --------
<S> <C> <C> <C> <C> <C>
5% STOCKHOLDERS:
Forstmann Little & Co. Equity
Partnership-V, L.P.(c)................. 31,375,488 4,456,564 26,918,924 41.3% 31.3%
Forstmann Little & Co. Subordinated Debt
and Equity Management Buyout
Partnership-VI, L.P.(c)................ 22,410,943 3,183,241 19,227,702 29.5% 22.4%
DIRECTORS:
Sheila P. Burke.......................... 29,940(d) -- 29,940 * *
Robert J. Dole........................... 29,940(e) 4,254 25,686(e) * *
J. Anthony Forstmann(c).................. 119,759(f) 12,758 107,001(f) * *
Nicholas C. Forstmann(c)................. 53,786,431 7,639,805 46,146,626 70.8% 53.7%
Theodore J. Forstmann(c)................. 53,786,431 7,639,805 46,146,626 70.8% 53.7%
Dale F. Frey(c).......................... 29,940(g) 4,254 25,686(g) * *
Sandra J. Horbach(c)..................... 53,786,431 7,639,805 46,146,626 70.8% 53.7%
Thomas H. Lister(c)...................... 31,375,488 4,456,564 26,918,924 41.3% 31.3%
Michael A. Miles(c)...................... 109,526(h) 9,603 99,923(h) * *
Samuel A. Nunn(c)........................ 29,940(i) 4,254 25,686(i) * *
Wayne T. Smith........................... 582,506 82,183 500,323 *
OTHER NAMED EXECUTIVE OFFICERS:
W. Larry Cash............................ 177,202 25,178 152,024 * *
David L. Miller.......................... 91,964(j) 14,187 77,777(j) * *
Gary D. Newsome.......................... 54,179(k) 8,818 45,361(k) * *
Michael T. Portacci...................... 89,208(l) 11,958 77,250(l) * *
All Directors and Executive Officers as a
Group (19 persons)..................... 55,121,126(m) 7,815,876 47,305,250(m) 72.3% 55.0%
ADDITIONAL SELLING STOCKHOLDERS:
107 additional selling stockholders, each
of whom is selling less than 32,584
shares in the offering and will
beneficially own less than 1% of the
outstanding common stock after the
offering............................... 918,563 184,124 734,439 1.2% *
</TABLE>
--------------------------
* Less than 1%.
(a) For purposes of this table, information as to the shares of common stock
assumes in 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
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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.
(b) This represents the estimated amount of shares that we expect the selling
stockholders may sell in the offering. The possible selling stockholders,
other than the Forstmann Little partnerships, have not yet determined
whether or not they want to participate in the offering. If some of the
possible selling stockholders elect not to participate in the offering, the
Forstmann Little partnerships will sell additional shares so that the total
number of shares of common stock to be sold in the offering by all of the
selling stockholders will be 8,000,000. If the underwriters exercise their
over-allotment option in full, the Forstmann Little partnerships and other
selling stockholders will sell an additional 2,700,000 shares of common
stock.
(c) 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.
(d) Includes 29,940 shares subject to options which are currently exercisable or
exercisable within 60 days of the date of this prospectus.
(e) Includes 29,940 shares subject to options which are currently exercisable or
exercisable within 60 days of the date of this prospectus. Of these shares
subject to options, 4,254 are being offered in this offering.
(f) Includes 29,940 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. Of these shares subject to options, none are being
offered in this offering.
(g) Includes 29,940 shares subject to options which are currently exercisable or
exercisable within 60 days of the date of this prospectus. Of these shares
subject to options, 4,254 are being offered in this offering.
(h) Includes 41,916 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. Of these shares subject to options, none are being
offered in this offering.
(i) Includes 29,940 shares subject to options which are currently exercisable or
exercisable within 60 days of the date of this prospectus. Of these shares
subject to options, 4,254 are being offered in this offering.
(j) Includes 3,363 shares subject to options which are currently exercisable or
exercisable within 60 days of the date of this prospectus. Of these shares
subject to options, 1,598 are being offered in this offering.
(k) Includes 3,363 shares subject to options which are currently exercisable or
exercisable within 60 days of the date of this prospectus. Of these shares
subject to options, 1,598 are being offered in this offering.
(l) Includes 5,044 shares subject to options which are currently exercisable or
exercisable within 60 days of the date of this prospectus. Of these shares
subject to options, none are being offered in this offering.
(m) Includes 206,772 shares subject to options which are currently exercisable
or exercisable within 60 days of the date of this prospectus. Of these
shares subject to options, 20,272 are being offered in this offering.
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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 SEPTEMBER 30, 2000)
--------------------------
<S> <C>
Revolving credit facility............................. $ 32,440,000
Acquisition loan facility............................. $160,851,000
Tranche A term loan................................... $ 22,500,000
Tranche B term loan................................... $126,000,000
Tranche C term loan................................... $126,000,000
Tranche D term loan................................... $334,479,100
</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 $263.2 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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<PAGE>
DESCRIPTION OF CAPITAL STOCK
OVERVIEW
Our authorized capital stock consists 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.
Before the closing of the offering, based on share information as of
September 30, 2000, there will be 76,046,524 shares of common stock outstanding
and no shares of preferred stock outstanding. After the closing of the offering,
there will be 86,046,524 shares of common stock outstanding.
After the closing of the offering, the Forstmann Little partnerships and our
management will beneficially own approximately 54.9% of the outstanding common
stock, 54.6% on a 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 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
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<PAGE>
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 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 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;
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- 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 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 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 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.
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
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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 86,046,524 shares of
common stock outstanding. Of these shares, 38,322,451 shares, including the
18,000,000 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 47,724,073 shares of common stock held by the
Forstmann Little partnerships, our directors and executive officers and other
shareholders who acquired their shares prior to our initial public offering are
"restricted" securities under the meaning of Rule 144 under the Securities Act.
Their shares 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, 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 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
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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.
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.
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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;
- in the case of common stock held by a foreign trust, the certification
requirement will generally be applied to the trust or the beneficial
owners of the trust depending on whether the trust is a "foreign complex
trust," "foreign simple trust," or "foreign grantor trust" as defined in
the U.S. Treasury regulations; and
- look-through rules will apply for tiered partnerships, foreign simple
trusts and foreign grantor trusts.
A non-U.S. holder which is a foreign partnership or a foreign trust is urged
to consult its own tax advisor regarding its status under these U.S. Treasury
regulations and the certification requirements applicable to it.
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 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.
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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.
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
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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 and the selling stockholders 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, Credit Suisse
First Boston Corporation, Banc of America Securities LLC, Chase
Securities Inc., 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, the
selling stockholders and the U.S. underwriters, and concurrently with the sale
of 3,600,000 shares to the international managers, we and the selling
stockholders have agreed to sell to the U.S. underwriters, and the U.S.
underwriters severally have agreed to purchase from us and the selling
stockholders, 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......................................
Credit Suisse First Boston Corporation......................
Banc of America Securities LLC..............................
Chase Securities Inc........................................
Goldman, Sachs & Co.........................................
Morgan Stanley & Co. Incorporated...........................
----------
Total............................................. 14,400,000
==========
</TABLE>
We and the selling stockholders 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, Credit Suisse
First Boston (Europe) Limited, Bank of America International Limited, Chase
Manhattan International 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 14,400,000 shares to the U.S. underwriters pursuant to the U.S.
purchase agreement, we and the selling stockholders have agreed to sell to the
international managers, and the international managers severally have agreed to
purchase 3,600,000 shares from us and the selling stockholders. 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 and the selling stockholders 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 and the selling stockholders that
the U.S. underwriters propose initially to offer the shares to the public at the
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 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 to us and the selling stockholders. 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.................................. $ $ $
Proceeds, before expenses, to the selling
stockholders.................................... $ $ $
</TABLE>
The expenses of the offering, not including the underwriting discount, are
estimated at $ and are payable by Community Health Systems.
OVER-ALLOTMENT OPTION
The selling stockholders have granted options to the U.S. underwriters to
purchase up to 2,160,000 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.
The selling stockholders have also granted options to the international
managers, exercisable for 30 days from the date of this prospectus, to purchase
up to 540,000 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 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.
NO SALES OF SIMILAR SECURITIES
We, our executive officers and directors, the Forstmann Little partnerships
and some of the selling stockholders have agreed, with exceptions, not to sell
or transfer any common stock for 90 days after
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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.
In addition, on June 8, 2000 the underwriters of our initial public offering
entered into similar lock-up agreements with us, our executive officers and
directors and our then existing stockholders in connection with our initial
public offering. These lock-up agreements expire on December 5, 2000. Merrill
Lynch has granted a waiver to the selling stockholders that are a party to these
lockups to the extent necessary to allow these selling stockholders to
participate in this offering.
NEW YORK STOCK EXCHANGE LISTING
The shares are listed on the NYSE under the symbol "CYH."
NASD REGULATIONS
It is anticipated that more than ten percent of the proceeds of the offering
may be applied to pay down debt obligations owed to affiliates of Merrill Lynch,
Chase Securities Inc., Banc of America Securities LLC and Morgan Stanley & Co.
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).
PRICE STABILIZATION, SHORT POSITIONS, AND PENALTY BIDS
Until the distribution of the shares is completed, Commission rules may
limit the underwriters and selling stockholders from bidding for or 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 that
peg, fix or maintain that price.
The underwriters may purchase and sell our common stock in the open market.
These transactions may include short sales, stabilizing transactions and
purchases to cover positions created by short sales. Short sales involve the
sale by the underwriters of a greater number of shares than they are required to
purchase in the offering. "Covered" short sales are sales made in an amount not
greater than the underwriters' option to purchase additional shares from the
issuer in the offering. The underwriters
81
<PAGE>
may close out any covered short position by either exercising their option to
purchase additional shares or purchasing shares in the open market. In
determining the source of shares to close out the covered short position, the
underwriters will consider, among other things, the price of shares available
for purchase in the open market as compared to the price at which they may
purchase shares through the over-allotment option. "Naked" short sales are any
sales in excess of such option. The underwriters must close our any naked short
position by purchasing shares in the open market. A naked short position is more
likely to be created if the underwriters are concerned that there may be
downward pressure on the price of the common shares in the open market after
pricing that could adversely affect investors who purchase in the offering.
Stabilizing transactions consist of various bids for or purchases of common
shares made by the underwriters in the open market prior to the completion of
the offering.
The underwriters may also impose a penalty bid. This occurs when a
particular underwriter repays to the underwriters a portion of the underwriting
discount received by it because the representatives have repurchased shares sold
by or for the account of such underwriter in stabilizing or short covering
transactions.
Similar to other purchase transactions, the underwriters' purchases to cover
the syndicate short sales may have the effect of raising or maintaining the
market price of our common stock or preventing or retarding a decline in the
market price of the common shares. As a result, the price of our common stock
may be higher than the price that might otherwise exist in the open market.
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 U.S. representatives makes any representation that the
representatives 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, Goldman,
Sachs & Co., Merrill Lynch, Pierce, Fenner & Smith Incorporated, Morgan Stanley
& Co., and certain other underwriters 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.
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.
82
<PAGE>
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. Our public
filings are available for inspection at the offices of the New York Stock
Exchange, Inc., 20 Broad Street, New York, New York 10005.
We are subject to the 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. These reports and other
information are available as provided above.
------------------------
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.
83
<PAGE>
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
June 30, 2000............................................. F-25
Unaudited Interim Condensed Consolidated Statements of
Operations for the six months ended June 30, 1999 and
2000...................................................... F-26
Unaudited Interim Condensed Consolidated Statements of Cash
Flows for the six months ended June 30, 1999 and 2000..... F-27
Notes to Unaudited Interim Condensed Consolidated Financial
Statements................................................ F-28
</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.
/s/ Deloitte & Touche LLP
Nashville, Tennessee
February 25, 2000 (October 5, 2000 as to Note 14)
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; 56,588,787 shares issued and 55,632,717 and
55,620,807 shares outstanding at December 31, 1998 and
1999, respectively...................................... 566 566
Additional paid-in capital................................ 482,088 483,237
Accumulated deficit....................................... (228,563) (245,352)
Treasury stock, at cost, 956,070 and 967,980 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) $ (3.37) $ (0.31)
Cumulative effect of a change in accounting
principle......................................... -- (0.01) --
----------- ----------- -----------
Net loss............................................ $ (0.60) $ (3.38) $ (0.31)
=========== =========== ===========
WEIGHTED-AVERAGE NUMBER OF SHARES OUTSTANDING, BASIC
AND DILUTED......................................... 53,989,089 54,249,895 54,545,030
=========== =========== ===========
Pro forma information (unaudited):
Pro forma net income per common share:
Basic and diluted................................. $ (0.04)
===========
Pro forma weighted-average number of shares
outstanding:
Basic and diluted................................. 84,970,747
===========
</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.... 56,207,106 $562 $479,127 $ (13,102) -- $ -- $ (904)
Issuance of common stock.. 169,589 2 1,308 -- -- -- (634)
Common stock purchased for
treasury, at cost....... -- -- -- -- (135,868) (1,041) 450
Payments on notes
receivable.............. -- -- -- -- -- -- 38
Net loss.................. -- -- -- (32,171) -- -- --
---------- ---- -------- --------- ---------- ------- -------
BALANCE, December 31,
1997...................... 56,376,695 564 480,435 (45,273) (135,868) (1,041) (1,050)
Issuance of common stock.. 212,092 2 1,653 -- 150,067 1,120 (900)
Common stock purchased for
treasury, at cost....... -- -- -- -- (970,269) (5,634) 204
Payments on notes
receivable.............. -- -- -- -- -- -- 36
Net loss.................. -- -- -- (183,290) -- -- --
---------- ---- -------- --------- ---------- ------- -------
BALANCE, December 31,
1998...................... 56,588,787 566 482,088 (228,563) (956,070) (5,555) (1,710)
Issuance of common stock.. -- -- 907 -- 314,425 1,748 (440)
Common stock purchased for
treasury, at cost....... -- -- -- -- (326,335) (2,780) --
Payments on notes
receivable.............. -- -- -- -- -- -- 153
Unearned stock
compensation............ -- -- 242 -- -- -- --
Earned stock
compensation............ -- -- -- -- -- -- --
Net loss.................. -- -- -- (16,789) -- -- --
---------- ---- -------- --------- ---------- ------- -------
BALANCE, December 31,
1999...................... 56,588,787 $566 $483,237 $(245,352) (967,980) $(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 was effective
for fiscal years ended 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 effect, if any, of
adopting SFAS No. 133.
PRO FORMA ADJUSTMENTS (UNAUDITED). The pro forma financial information
gives effect to the use of net proceeds from the initial public offering,
including the exercise of the underwriters' over-allotment option, and the
estimated net proceeds from the contemplated offering described in Note 14 to
repay debt of $281.3 million, the resultant reduction of interest expense of
$21.3 million and an increase in the provision for income taxes of $8.3 million
resulting from the decrease in interest expense, as if these events had occurred
on January 1, 1999. For purposes of computing pro forma interest expense, the
assumed debt repayments exclude $225.8 million to repay indebtedness incurred
subsequent to December 31, 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.
F-10
<PAGE>
COMMUNITY HEALTH SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. LONG-TERM LEASES AND PURCHASES OF HOSPITALS (CONTINUED)
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 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............................ $ (3.50) $ (0.39)
</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.
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 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 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 191,614 shares of
common stock to non-employee directors at an exercise price of $8.96 per share.
One-third of such options are 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, 127,783 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 756,636 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 206,394 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.................... -- 431,282 610,773
Granted..................................................... 560,751 299,292 90,376
Exercised................................................... -- -- --
Forfeited or canceled....................................... (129,469) (119,801) (150,907)
-------- -------- --------
Outstanding at the end of the year.......................... 431,282 610,773 550,242
======== ======== ========
</TABLE>
Of the options outstanding as of December 31, 1997, 1998 and 1999, none,
62,296 and 146,703, 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 $6.99 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 $2.17, $2.05,
and $5.10, 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) $ (3.38) $ (0.31)
Pro forma--basic and diluted.............................. $ (0.60) $ (3.38) $ (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.................. 53,989,089 54,249,895 54,545,030
Effect of dilutive securities:
none................................ -- -- --
----------- ----------- -----------
Weighted-average number of shares
outstanding--diluted................ 53,989,089 54,249,895 54,545,030
=========== =========== ===========
Dilutive securities outstanding not
included in the computation of
earnings (loss) per share because
their effect is antidilutive:
Non-employee director options....... 191,614 191,614 191,614
Unvested common shares.............. 1,897,242 1,239,902 1,031,734
Employee options.................... 431,282 610,773 550,242
</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. In 1997, the Company
initiated a voluntary review of its inpatient medical records in order to
determine the extent it may have had coding inaccuracies under certain
government programs. At December 31, 1998, an estimate of the costs of these
coding inaccuracies settlement was accrued based on information available and
additional costs were accrued at December 31, 1999. In March 2000, the Company
reached a settlement with appropriate governmental agencies pursuant to which
the Company agreed to pay approximately $31.8 million to settle potential
liabilities related to coding inaccuracies occurring from October 1993 through
September 1997. Year 2000 remediation costs totaled $0.2 million and $3.3
million for 1998 and 1999, respectively.
LEGAL MATTERS. The Company is a party to legal proceedings incidental to
its business. In the opinion of management, any ultimate liability with respect
to these actions will not have a material adverse effect on the Company's
consolidated financial position, cash flows or results of operations.
13. RELATED PARTY TRANSACTIONS
Notes receivable for common shares held by employees, as disclosed on the
consolidated balance sheets, represent the outstanding balance of notes accepted
by the Company as partial payment for the purchase of the common shares from
senior management employees. These notes bear interest at 6.84%, are full
recourse promissory notes and are secured by the shares to which they relate.
Each of the full recourse promissory notes mature on the fifth anniversary date
of the note, with accelerated
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
On June 14, 2000, the Company closed its initial public offering of
18,750,000 shares of Common Stock at a public offering price of $13.00 per
share. The net proceeds to the Company from the offering were $225.2 million,
excluding the net proceeds from the sale of shares of common stock pursuant to
the over-allotment option granted to the underwriters. Prior to the closing, the
following recapitalization took place:
- each outstanding share of Class B common stock was exchanged for .390 of a
share of Class A common stock:
- each outstanding option to purchase a share of Class C common stock was
exchanged for an option to purchase .702 of a share of Class A common
stock;
- the Class A common stock was redesignated as Common Stock and adjusted for
a stock split on a 119.7588-for-1 basis;
- the certificate of incorporation was amended and restated to reflect a
single class of common stock, par value $.01 per share, and increase the
number of authorized shares of common stock to 300,000,000 and the number
of shares of preferred stock to 100,000,000; and
- vesting, repurchase and transfer provisions related to Class B and
Class C common shares were not affected.
All share and per share amounts have been restated to give effect to these
transactions.
Under the terms of the Credit Agreement, the Company was obligated in
connection with the initial public offering to use the proceeds (net of expenses
and underwriting commissions) to repay the revolving credit and acquisition loan
revolving facilities. These proceeds were used to pay $145.0 million on the
revolving credit facility and $80.2 million of the acquisition loan revolving
facility. In connection with any subsequent registered public offering, the
Company may, subject to the terms of the Credit Agreement, apply the proceeds to
the repayment of subordinated debentures if certain financial covenants are met.
On June 8, 2000, the Company authorized grants of 3,778,000 stock options to
various employees under the 2000 Stock Option and Award Plan at an exercise
price of $13.00, the initial public offering price. 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.
In connection with the Company's initial public offering, an over-allotment
option was granted to the underwriters. On July 3, 2000, the underwriters
exercised their over-allotment option and purchased
F-23
<PAGE>
COMMUNITY HEALTH SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
14. SUBSEQUENT EVENTS (CONTINUED)
1,675,717 shares at the initial public offering price of $13.00 per share. The
Company used the net proceeds of the $20.5 million to repay the revolving credit
facility.
The Company is pursuing a public offering of 18,000,000 shares of its common
stock. Of these shares, 8,000,000 shares will be offered by FL&Co. and other
shareholders. The Company expects to complete such offering during the fourth
quarter of 2000.
F-24
<PAGE>
COMMUNITY HEALTH SYSTEMS, INC. AND SUBSIDIARIES
UNAUDITED INTERIM CONDENSED CONSOLIDATED BALANCE SHEET
AS OF JUNE 30, 2000
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<S> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents................................. $ 5,990
Patient accounts receivable, net.......................... 248,451
Supplies and other current assets......................... 60,636
Prepaid expenses.......................................... 15,304
Prepaid and current deferred income taxes................. 5,779
----------
Total current assets.................................. 336,160
----------
PROPERTY AND EQUIPMENT...................................... 766,869
Less accumulated depreciation and amortization............ (114,677)
----------
Property and equipment, net........................... 652,192
----------
GOODWILL, NET............................................... 874,218
----------
OTHER ASSETS, NET........................................... 113,229
----------
TOTAL ASSETS................................................ $1,975,799
==========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Current maturities of long-term debt...................... $ 26,987
Accounts payable.......................................... 46,496
Current income taxes payable.............................. 6,261
Compliance settlement payable.............................
Accrued liabilities....................................... 122,970
----------
Total current liabilities............................. 202,714
----------
LONG-TERM DEBT.............................................. 1,296,394
----------
OTHER LONG-TERM LIABILITIES................................. 20,475
----------
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; 75,338,787 shares issued; 74,370,807 shares
outstanding at June 30, 2000............................ 753
Additional paid-in capital................................ 708,273
Accumulated deficit....................................... (244,253)
Treasury stock, at cost, 967,980 shares................... (6,587)
Notes receivable for common stock......................... (1,854)
Unearned stock compensation............................... (116)
----------
Total stockholders' equity............................ 456,216
----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY.................. $1,975,799
==========
</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 OPERATIONS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
-----------------------------
1999 2000
----------- -----------
<S> <C> <C>
NET OPERATING REVENUES...................................... $ 524,825 $ 625,787
----------- -----------
OPERATING COSTS AND EXPENSES:
Salaries and benefits..................................... 204,235 244,222
Provision for bad debts................................... 44,687 56,594
Supplies.................................................. 61,890 72,410
Other operating expenses.................................. 99,219 118,168
Rent...................................................... 12,545 14,537
Depreciation and amortization............................. 26,962 33,910
Amortization of goodwill.................................. 11,954 12,378
Year 2000 remediation costs............................... 900 --
----------- -----------
Total operating cost and expenses....................... 462,392 552,219
----------- -----------
INCOME FROM OPERATIONS...................................... 62,433 73,568
INTEREST EXPENSE, NET....................................... 55,681 65,305
----------- -----------
INCOME BEFORE INCOME TAXES.................................. 6,752 8,263
PROVISION FOR INCOME TAXES.................................. 6,677 7,164
----------- -----------
NET INCOME.................................................. $ 75 $ 1,099
=========== ===========
NET INCOME PER COMMON SHARE:
Basic..................................................... $ 0.00 $ 0.02
=========== ===========
Diluted................................................... $ 0.00 $ 0.02
=========== ===========
WEIGHTED-AVERAGE NUMBER OF SHARES OUTSTANDING:
Basic..................................................... 54,497,950 56,423,677
=========== ===========
Diluted................................................... 55,632,717 57,554,519
=========== ===========
PRO FORMA INFORMATION:
Pro forma net income per common share:
Basic................................................... $ 0.13
===========
Diluted................................................. $ 0.13
===========
Pro forma weighted-average number of shares outstanding:
Basic................................................... 85,098,020
===========
Diluted................................................. 86,228,862
===========
</TABLE>
See notes to unaudited interim condensed consolidated financial statements.
F-26
<PAGE>
COMMUNITY HEALTH SYSTEMS, INC. AND SUBSIDIARIES
UNAUDITED INTERIM CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
--------------------
1999 2000
-------- ---------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income................................................ $ 75 $ 1,099
Adjustments to reconcile net income to net cash used in
operating activities:
Depreciation and amortization........................... 38,916 46,288
Stock compensation expense.............................. 28 43
Other non-cash (income) expenses, net................... 3,443 (498)
Changes in operating assets and liabilities, net of
effects of acquisitions and divestitures:
Patient accounts receivable......................... (23,675) (9,321)
Supplies, prepaid expenses and other current
assets............................................ (886) (3,989)
Accounts payable, accrued liabilities and income
taxes............................................. (24,880) (30,486)
Compliance settlement payable....................... -- (30,900)
Other............................................... (3,686) (6,635)
-------- ---------
Net cash used in operating activities..................... (10,665) (34,399)
-------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Acquisitions of facilities, pursuant to purchase
agreements.............................................. (44,347) (40,639)
Purchases of property and equipment....................... (37,913) (24,006)
Proceeds from sale of equipment........................... 61 62
Increase in other assets.................................. (5,846) (9,678)
-------- ---------
Net cash used in investing activities................... (88,045) (74,261)
-------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of common stock, net of expenses... 24 225,225
Borrowings under credit agreement......................... 351,200 137,731
Repayments of long-term indebtedness...................... (257,377) (252,588)
-------- ---------
Net cash provided by financing activities............... 93,847 110,368
-------- ---------
NET CHANGE IN CASH AND CASH EQUIVALENTS..................... (4,863) 1,708
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD............ 6,719 4,282
-------- ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD.................. $ 1,856 $ 5,990
======== =========
</TABLE>
See notes to unaudited interim condensed consolidated financial statements.
F-27
<PAGE>
COMMUNITY HEALTH SYSTEMS, INC.
NOTES TO UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The unaudited condensed consolidated financial statements of Community
Health Systems, Inc. and its subsidiaries (the "Company") as of and for the six
month periods ended June 30, 2000 and June 30, 1999, 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 six months ended June 30, 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 consolidated financial statements and notes
thereto for the year ended December 31, 1999.
The pro forma information gives effect for the use of net proceeds from the
initial public offering, including the exercise of the underwriters'
over-allotment option, and the estimated net proceeds from the contemplated
offering described in Note 7 to repay debt of $179.8 million, the resultant
reduction of interest expense of $16.9 million and an increase in the provision
for income taxes of $6.6 million resulting from the decrease in interest expense
as if these events had occurred on January 1, 1999. For purposes of computing
pro forma interest expense, the assumed debt repayments exclude $102.1 million
to repay indebtedness incurred subsequent to June 30, 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. ACQUISITIONS
Effective April 1, 2000, the Company acquired, through separate purchase
transactions, the assets and working capital of two hospitals for aggregate
consideration of $23.8 million, including liabilities assumed. Licensed beds at
these two facilities totaled 124. The Company borrowed $12.9 million against its
acquisition loan revolving facility to fund these transactions.
Effective June 1, 2000, the Company acquired, pursuant to a capital lease,
most of the assets and working capital of an 82 licensed bed hospital for total
consideration of $24.4 million, including liabilities assumed and prepaying the
entire lease, by borrowing $18.5 million against its acquisition loan revolving
facility.
4. INITIAL PUBLIC OFFERING
On June 14, 2000 the Company closed its initial public offering of
18,750,000 shares of Common Stock at a public offering price of $13.00 per
share. The net proceeds to the Company from the offering were $225.2 million,
excluding the net proceeds from the sale of shares of common stock pursuant to
the over-allotment option granted to the underwriters. Prior to the closing, the
following recapitalization took place:
F-28
<PAGE>
COMMUNITY HEALTH SYSTEMS, INC.
NOTES TO UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
4. INITIAL PUBLIC OFFERING (CONTINUED)
- each outstanding share of Class B common stock was exchanged for .390 of a
share of Class A common stock;
- each outstanding option to purchase a share of Class C common stock was
exchanged for an option to purchase .702 of a share of Class A common
stock;
- the Class A common stock was redesignated as Common Stock and adjusted for
a stock split on a 119.7588-for-1 basis;
- the certificate of incorporation was amended and restated to reflect a
single class of common stock, par value $.01 per share, and increase the
number of authorized shares of common stock to 300,000,000 and the number
of shares of preferred stock to 100,000,000; and
- vesting, repurchase and transfer provisions related to Class B and
Class C common shares were not affected.
All shares and per share amounts have been restated to give effect to these
transactions.
Under the terms of the Credit Agreement, the Company was obligated in
connection with the initial public offering to use the proceeds (net of expenses
and underwriting commissions) to repay the revolving credit and acquisition loan
revolving facilities. These proceeds were used to pay $145.0 million on the
revolving credit facility and $80.2 million of the acquisition loan revolving
facility. In connection with any subsequent registered public offering, the
Company may, subject to the terms of the Credit Agreement, apply the proceeds to
the repayment of subordinate debentures if certain financial covenants are met.
On June 8, 2000, the Company authorized grants of 3,778,000 stock options to
various employees under the 2000 Stock Option and Award Plan at an exercise
price of $13.00, the initial public offering price. 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.
5. 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>
SIX MONTHS ENDED
JUNE 30,
-------------------------
1999 2000
----------- -----------
<S> <C> <C>
NUMERATOR:
Net income......................................... $ 75 $ 1,099
=========== ===========
DENOMINATOR:
Weighted-average number of shares
outstanding--basic............................... 54,497,950 56,423,677
Effect of dilutive options......................... 1,134,767 1,130,842
----------- -----------
Weighted-average number of shares
outstanding--diluted............................. 55,632,717 57,554,519
=========== ===========
Basic earnings per share........................... $ 0.00 $ 0.02
=========== ===========
Diluted earnings per share......................... $ 0.00 $ 0.02
=========== ===========
</TABLE>
F-29
<PAGE>
COMMUNITY HEALTH SYSTEMS, INC.
NOTES TO UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
6. 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 statement specifies how to report and
display derivative instruments and hedging activities and was effective for
fiscal years beginning after June 15, 2000. The Company is currently evaluating
the impact, if any, of adopting SFAS No. 133.
On December 3, 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101 (SAB 101) "Revenue Recognition in Financial
Statements," that provides the staff's views in applying generally accepted
accounting principles to selected revenue recognition issues. SAB 101 is
required to be implemented no later than the fourth quarter of fiscal years
beginning after December 15, 1999. The Company is currently evaluating the
impact, if any, of implementing SAB 101.
7. SUBSEQUENT EVENTS
Effective July 1, 2000, the Company acquired, through a purchase
transaction, the assets and working capital of a 90 bed hospital for total
consideration of approximately $82 million including liabilities assumed. The
Company borrowed $34.0 million against its acquisition loan revolving facility
and signed a promissory note to seller for $42.6 million to fund the
transaction.
In connection with the Company's initial public offering, an over-allotment
option was granted to the underwriters. On July 3, 2000, the underwriters
exercised their overallotment option and purchased 1,675,717 shares at the
initial public offering price of $13.00 per share. The Company used the net
proceeds of $20.5 million to repay the revolving credit facility.
The Company is pursuing a public offering of 18,000,000 shares of its common
stock. Of these shares, 8,000,000 shares will be offered by affiliates of
Forstmann Little & Co. and other shareholders. The Company expects to complete
such offering during the fourth quarter of 2000.
F-30
<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>
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
18,000,000 SHARES
[LOGO]
COMMON STOCK
------------------
P R O S P E C T U S
------------------
MERRILL LYNCH & CO.
CREDIT SUISSE FIRST BOSTON
BANC OF AMERICA SECURITIES LLC
CHASE H&Q
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 OCTOBER 11, 2000
PROSPECTUS
18,000,000 SHARES
[LOGO]
COMMON STOCK
--------------
Community Health Systems, Inc. is selling 10,000,000 shares and the selling
stockholders are selling 8,000,000 shares. The international managers are
offering 3,600,000 shares outside the U.S. and Canada and the U.S. underwriters
are offering 14,400,000 shares in the U.S. and Canada.
The shares trade on the New York Stock Exchange under the symbol "CYH." On
October 10, 2000, the last sale price of the shares as reported on the New York
Stock Exchange was $27 3/8 per share.
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...... $ $
Proceeds, before expenses, to the selling stockholders...... $ $
</TABLE>
The international managers may also purchase up to an additional 540,000
shares from the selling stockholders, 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 2,160,000 shares from the selling stockholders.
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 CREDIT SUISSE FIRST BOSTON
BANK OF AMERICA INTERNATIONAL LIMITED
CHASE H&Q
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
Price Range of Common Stock................................. 14
Capitalization.............................................. 15
Dilution.................................................... 16
Selected Consolidated Financial and Other Data.............. 17
Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 22
Business of Community Health Systems........................ 34
Management.................................................. 57
Principal and Selling Stockholders.......................... 67
Description of Indebtedness................................. 69
Description of Capital Stock................................ 71
Shares Eligible for Future Sale............................. 74
United States Federal Tax Considerations for Non-United
States Holders............................................ 75
Underwriting................................................ 79
Legal Matters............................................... 83
Experts..................................................... 83
Where You Can Find More Information......................... 83
Index to Consolidated Financial Statements.................. F-1
</TABLE>
i
<PAGE>
UNDERWRITING
We and the selling stockholders 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, Credit Suisse First Boston
(Europe) Limited, Bank of America International Limited, Chase Manhattan
International 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, the selling stockholders and the international
managers, and concurrently with the sale of 14,400,000 shares to the U.S.
underwriters, we and the selling stockholders have agreed to sell to the
international managers, and the international managers severally have agreed to
purchase from us and the selling stockholders, the number of shares listed
opposite their names below.
<TABLE>
<CAPTION>
NUMBER
INTERNATIONAL MANAGER OF SHARES
--------------------- ---------
<S> <C>
Merrill Lynch International.................................
Credit Suisse First Boston (Europe) Limited.................
Bank of America International Limited.......................
Chase Manhattan International Limited.......................
Goldman Sachs International.................................
Morgan Stanley & Co. International Limited..................
---------
Total............................................. 3,600,000
=========
</TABLE>
We and the selling stockholders 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, Credit
Suisse First Boston Corporation, Banc of America Securities LLC, Chase
Securities Inc., 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 3,600,000 shares to the
pursuant to the international purchase agreement, we and the selling
stockholders have agreed to sell to the U.S. underwriters, and U.S. underwriters
severally have agreed to purchase 14,400,000 shares from us and the selling
stockholders. The 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.
79
<PAGE>
COMMISSIONS AND DISCOUNTS
The lead managers have advised us and the selling stockholders that the
international managers propose initially to offer the shares to the public at
the 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 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 expenses to us and the selling stockholders. 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........................................ $ $ $
Proceeds, before expenses, to the selling
stockholders................................... $ $ $
</TABLE>
The expenses of the offering, not including the underwriting discount, are
estimated at $ and are payable by Community Health Systems and the
selling stockholders.
OVER-ALLOTMENT OPTION
The selling stockholders have granted options to the international managers
to purchase up to 540,000 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.
The selling stockholders have also granted options to the U.S. underwriters,
exercisable for 30 days from the date of this prospectus, to purchase up to
2,160,000 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 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.
NO SALES OF SIMILAR SECURITIES
We, our executive officers and directors, the Forstmann Little partnerships
and some of the selling stockholders have agreed, with exceptions, not to sell
or transfer any common stock for 90 days after
80
<PAGE>
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.
In addition, on June 8, 2000 the underwriters of our initial public offering
entered into similar lock-up agreements with us, our executive officers and
directors and our then existing stockholders in connection with our initial
public offering. These lock-up agreements expire on December 5, 2000. Merrill
Lynch has granted a waiver to the selling stockholders that are a party to these
lockups to the extent necessary to allow these selling stockholders to
participate in this offering.
NEW YORK STOCK EXCHANGE LISTING
The shares are listed on the NYSE under the symbol "CYH."
PRICE STABILIZATION, SHORT POSITIONS AND PENALTY BIDS
Until the distribution of the shares is completed, Commission rules may
limit the underwriters and selling stockholders from bidding for or 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 that
peg, fix or maintain that price.
The underwriters may purchase and sell our common stock in the open market.
These transactions may include short sales, stabilizing transactions and
purchases to cover positions created by short sales. Short sales involve the
sale by the underwriters of a greater number of shares than they are required to
purchase in the offering. "Covered" short sales are sales made in an amount not
greater than the underwriters' option to purchase additional shares from the
issuer in the offering. The underwriters may close out any covered short
position by either exercising their option to purchase additional shares or
purchasing shares in the open market. In determining the source of shares to
close out the covered short position, the underwriters will consider, among
other things, the price of shares available for purchase in the open market as
compared to the price at which they may purchase shares through the
over-allotment option. "Naked" short sales are any sales in excess of such
option. The underwriters must close our any naked short position by purchasing
shares in the open market. A naked short position is more likely to be created
if the underwriters are concerned that there may be downward pressure on the
price of the common shares in the open market after pricing that could adversely
affect investors who purchase in the offering. Stabilizing transactions consist
of various bids for or purchases
81
<PAGE>
of common shares made by the underwriters in the open market prior to the
completion of the offering.
The underwriters may also impose a penalty bid. This occurs when a
particular underwriter repays to the underwriters a portion of the underwriting
discount received by it because the representatives have repurchased shares sold
by or for the account of such underwriter in stabilizing or short covering
transactions.
Similar to other purchase transactions, the underwriters' purchases to cover
the syndicate short sales may have the effect of raising or maintaining the
market price of our common stock or preventing or retarding a decline in the
market price of the common shares. As a result, the price of our common stock
may be higher than the price that might otherwise exist in the open market.
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 U.S. representatives makes any representation that the
representatives 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.
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
prospectus.
82
<PAGE>
NASD REGULATIONS
It is anticipated that more than ten percent of the proceeds of the offering
may be applied to pay down debt obligations owed to affiliates of Merrill Lynch,
Chase Securities Inc., Bank of America International Limited and Morgan
Stanley & Co. 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).
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, Goldman
Sachs International, Merrill Lynch, Pierce, Fenner & Smith Incorporated, and
Morgan Stanley & Co. Incorporated, and certain other underwriters 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.
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
83
<PAGE>
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. Our public filings are available for inspection at the
offices of the New York Stock Exchange, Inc., 20 Broad Street, New York, New
York 10005.
We are subject to the 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. These reports and other
information are available as presented above.
------------------------
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.
84
<PAGE>
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
18,000,000 SHARES
[LOGO]
COMMON STOCK
------------------
P R O S P E C T U S
------------------
MERRILL LYNCH INTERNATIONAL
CREDIT SUISSE FIRST BOSTON
BANK OF AMERICA INTERNATIONAL LIMITED
CHASE H&Q
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......... $ 162,237
National Association of Securities Dealers, Inc. filing
fee....................................................... 30,500
New York Stock Exchange listing fee......................... 73,000
Printing and engraving fees and expenses.................... 350,000
Legal fees and expenses..................................... 250,000
Accounting fees and expenses................................ 150,000
Blue Sky fees and expenses.................................. 6,000
Transfer Agent and Registrar fees and expenses.............. 20,000
Miscellaneous expenses...................................... 358,263
----------
Total..................................................... $1,400,000
==========
</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 our initial public offering in June 2000,
we recapitalized as follows:
- each outstanding share of Class B common stock will be exchanged for .390
of a share of Class A common stock;
- each outstanding option to purchase a share of Class C common stock was
exchanged for an option to purchase .702 of a share of Class A common
stock;
- the Class A common stock was redesignated as common stock and adjusted for
a stock split on a 119.7588-for-1 basis; and
- the certificate of incorporation was 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 was increased.
Registration under the Securities Act was not required in respect of
issuances pursuant to this recapitalization because they will be made
exclusively to existing holders of our securities and did 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 (incorporated by reference to Exhibit 2.1 to the
Company's Registration Statement on Form S-1
(No. 333-7190))
</TABLE>
II-2
<PAGE>
<TABLE>
<CAPTION>
NO. DESCRIPTION
--- -----------
<C> <S>
3.1 Form of Restated Certificate of Incorporation of the
Registrant. (incorporated by reference to Exhibit 3.1 to the
Company's Registration Statement on Form S-1
(No. 333-7190))
3.2 Form of Restated By-laws of the Registrant. (incorporated by
reference to Exhibit 3.2 to the Company's Registration
Statement on Form S-1 (No. 333-7190))
4.1 Form of Common Stock Certificate. (incorporated by reference
to Exhibit 4.1 to the Company's Registration Statement on
Form S-1 (No. 333-7190))
5.1 Opinion of Fried, Frank, Harris, Shriver & Jacobson.**
10.1 Form of outside director Stock Option Agreement.
(incorporated by reference to Exhibit 10.1 to the Company's
Registration Statement on Form S-1 (No. 333-7190))
10.2 Form of Stockholder's Agreement between the Registrant and
outside directors. (incorporated by reference to
Exhibit 10.2 to the Company's Registration Statement on
Form S-1 (No. 333-7190))
10.3 Form of Employee Stockholder's Agreement. (incorporated by
reference to Exhibit 10.3 to the Company's Registration
Statement on Form S-1 (No. 333-7190))
10.4 The Registrant's Employee Stock Option Plan and form of
Stock Option Agreement. (incorporated by reference to
Exhibit 10.4 to the Company's Registration Statement on
Form S-1 (No. 333-7190))
10.5 The Registrant's 2000 Stock Option and Award Plan.
(incorporated by reference to Exhibit 10.5 to the Company's
Registration Statement on Form S-1 (No. 333-7190))
10.6 Form of Stockholder's Agreement between the Registrant and
employees. (incorporated by reference to Exhibit 10.6 to the
Company's Registration Statement on Form S-1
(No. 333-7190))
10.7 Registration Rights Agreement, dated July 9, 1996, among the
Registrant, FLCH Acquisition Corp., Forstmann Little & Co.
Equity Partnership--V, L.P. and Forstmann Little & Co.
Subordinated Debt and Equity Management Buyout
Partnership--VI, L.P. (incorporated by reference to
Exhibit 10.7 to the Company's Registration Statement on
Form S-1 (No. 333-7190))
10.8 Form of Indemnification Agreement between the Registrant and
its directors and executive officers. (incorporated by
reference to Exhibit 10.8 to the Company's Registration
Statement on Form S-1 (No. 333-7190))
10.9 Amended and Restated Credit Agreement, dated as of March 26,
1999, among Community Health Systems, Inc. (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. (incorporated by reference to Exhibit 10.9 to the
Company's Registration Statement on Form S-1
(No. 333-7190))
10.10 First Amendment, dated February 24, 2000, to the Amended and
Restated Credit Agreement, dated as of March 26, 1999, among
Community Health Systems, Inc. (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.
(incorporated by reference to Exhibit 10.10 to the Company's
Registration Statement on Form S-1 (No. 333-7190))
</TABLE>
II-3
<PAGE>
<TABLE>
<CAPTION>
NO. DESCRIPTION
--- -----------
<C> <S>
10.11 Form of Management Rights Letter between the Registrant and
the partnerships affiliated with Forstmann Little & Co.
(incorporated by reference to Exhibit 10.11 to the Company's
Registration Statement on Form S-1 (No. 333-7190))
10.12 Form of Series A 7 1/2% Subordinated Debenture.
(incorporated by reference to Exhibit 10.12 to the
Company's Registration Statement on Form S-1
(No. 333-7190))
10.13 Form of Series B 7 1/2% Subordinated Debenture.
(incorporated by reference to Exhibit 10.13 to the
Company's Registration Statement on Form S-1
(No. 333-7190))
10.14 Form of Series C 7 1/2% Subordinated Debenture.
(incorporated by reference to Exhibit 10.14 to the
Company's Registration Statement on Form S-1
(No. 333-7190))
10.15 Corporate Compliance Agreement between the Office of
Inspector General of the Department of Health and Human
Services and the Registrant. (incorporated by reference to
Exhibit 10.15 to the Company's Registration Statement on
Form S-1 (No. 333-7190))
10.16 Tenet BuyPower Purchasing Assistance Agreement, dated
June 13, 1997, between Community Health Systems, Inc. and
Tenet HealthSystem Inc., Addendum, dated September 19, 1997
and First Amendment, dated March 15, 2000. (incorporated by
reference to Exhibit 10.16 to the Company's Registration
Statement on Form S-1 (No. 333-7190))
10.17 The Registrant's 2000 Employee Stock Purchase Plan.
(incorporated by reference to Exhibit 10.17 to the Company's
Registration Statement on Form S-1 (No. 333-7190))
10.18 Settlement Agreement between the United States of America,
the states of Illinois, New Mexico, South Carolina,
Tennessee, Texas, West Virginia and the Registrant.
(incorporated by reference to Exhibit 10.18 to the Company's
Registration Statement on Form S-1 (No. 333-7190))
21 List of subsidiaries.*
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.*
24.1 Power of Attorney.***
</TABLE>
------------------------
* Filed herewith.
** To be filed by amendment.
*** Previously filed.
(b) Financial Statement Schedule
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.
II-4
<PAGE>
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-5
<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 11th day of October, 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. 1 to the registration statement has been signed below by the following
persons in the capacities indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
----------------------------------------------------- ----------------------------- ----------------
<C> <S> <C>
President and Chief Executive
/s/ WAYNE T. SMITH Officer and Director
------------------------------------------- (principal executive October 11, 2000
Wayne T. Smith officer)
Executive Vice President and
* Chief Financial Officer
------------------------------------------- (principal financial October 11, 2000
W. Larry Cash officer)
Vice President and Corporate
* Controller
------------------------------------------- (principal accounting October 11, 2000
T. Mark Buford officer)
*
------------------------------------------- Director October 11, 2000
Sheila P. Burke
*
------------------------------------------- Director October 11, 2000
Robert J. Dole
*
------------------------------------------- Director October 11, 2000
J. Anthony Forstmann
*
------------------------------------------- Director October 11, 2000
Nicholas C. Forstmann
</TABLE>
II-6
<PAGE>
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
----------------------------------------------------- ----------------------------- ----------------
<C> <S> <C>
*
------------------------------------------- Director October 11, 2000
Theodore J. Forstmann
*
------------------------------------------- Director October 11, 2000
Dale F. Frey
*
------------------------------------------- Director October 11, 2000
Sandra J. Horbach
*
------------------------------------------- Director October 11, 2000
Thomas H. Lister
*
------------------------------------------- Director October 11, 2000
Michael A. Miles
*
------------------------------------------- Director October 11, 2000
Samuel A. Nunn
</TABLE>
<TABLE>
<S> <C> <C> <C>
*By: /s/ WAYNE T. SMITH
--------------------------------------
Wayne T. Smith
AS ATTORNEY-IN-FACT
</TABLE>
II-7
<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 (October 5, 2000 as to Note 14) (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, such consolidated financial statement schedule, when considered in
relation to the basic consolidated financial statements taken as a whole,
presents fairly in all material respects the information set forth therein.
/s/ Deloitte & Touche LLP
Nashville, Tennessee
February 25, 2000 (October 5, 2000 as to Note 14)
<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 (incorporated by reference to Exhibit 2.1 to the
Company's Registration Statement on Form S-1
(No. 333-7190))
3.1 Form of Restated Certificate of Incorporation of the
Registrant. (incorporated by reference to Exhibit 3.1 to the
Company's Registration Statement on Form S-1
(No. 333-7190))
3.2 Form of Restated By-laws of the Registrant. (incorporated by
reference to Exhibit 3.2 to the Company's Registration
Statement on Form S-1 (No. 333-7190))
4.1 Form of Common Stock Certificate. (incorporated by reference
to Exhibit 4.1 to the Company's Registration Statement on
Form S-1 (No. 333-7190))
5.1 Opinion of Fried, Frank, Harris, Shriver & Jacobson.**
10.1 Form of outside director Stock Option Agreement.
(incorporated by reference to Exhibit 10.1 to the Company's
Registration Statement on Form S-1 (No. 333-7190))
10.2 Form of Stockholder's Agreement between the Registrant and
outside directors. (incorporated by reference to
Exhibit 10.2 to the Company's Registration Statement on
Form S-1 (No. 333-7190))
10.3 Form of Employee Stockholder's Agreement. (incorporated by
reference to Exhibit 10.3 to the Company's Registration
Statement on Form S-1 (No. 333-7190))
10.4 The Registrant's Employee Stock Option Plan and form of
Stock Option Agreement. (incorporated by reference to
Exhibit 10.4 to the Company's Registration Statement on
Form S-1 (No. 333-7190))
10.5 The Registrant's 2000 Stock Option and Award Plan.
(incorporated by reference to Exhibit 10.5 to the Company's
Registration Statement on Form S-1 (No. 333-7190))
10.6 Form of Stockholder's Agreement between the Registrant and
employees. (incorporated by reference to Exhibit 10.6 to the
Company's Registration Statement on Form S-1
(No. 333-7190))
10.7 Registration Rights Agreement, dated July 9, 1996, among the
Registrant, FLCH Acquisition Corp., Forstmann Little & Co.
Equity Partnership--V, L.P. and Forstmann Little & Co.
Subordinated Debt and Equity Management Buyout
Partnership--VI, L.P. (incorporated by reference to
Exhibit 10.7 to the Company's Registration Statement on
Form S-1 (No. 333-7190))
10.8 Form of Indemnification Agreement between the Registrant and
its directors and executive officers. (incorporated by
reference to Exhibit 10.8 to the Company's Registration
Statement on Form S-1 (No. 333-7190))
10.9 Amended and Restated Credit Agreement, dated as of March 26,
1999, among Community Health Systems, Inc. (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. (incorporated by reference to Exhibit 10.9 to the
Company's Registration Statement on Form S-1
(No. 333-7190))
10.10 First Amendment, dated February 24, 2000, to the Amended and
Restated Credit Agreement, dated as of March 26, 1999, among
Community Health Systems, Inc. (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.
(incorporated by reference to Exhibit 10.10 to the Company's
Registration Statement on Form S-1 (No. 333-7190))
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
NO. DESCRIPTION PAGE
--------------------- ----------- --------
<C> <S> <C>
10.11 Form of Management Rights Letter between the Registrant and
the partnerships affiliated with Forstmann Little & Co.
(incorporated by reference to Exhibit 10.11 to the Company's
Registration Statement on Form S-1 (No. 333-7190))
10.12 Form of Series A 7 1/2% Subordinated Debenture.
(incorporated by reference to Exhibit 10.12 to the Company's
Registration Statement on Form S-1 (No. 333-7190))
10.13 Form of Series B 7 1/2% Subordinated Debenture.
(incorporated by reference to Exhibit 10.13 to the Company's
Registration Statement on Form S-1 (No. 333-7190))
10.14 Form of Series C 7 1/2% Subordinated Debenture.
(incorporated by reference to Exhibit 10.14 to the Company's
Registration Statement on Form S-1 (No. 333-7190))
10.15 Corporate Compliance Agreement between the Office of
Inspector General of the Department of Health and Human
Services and the Registrant. (incorporated by reference to
Exhibit 10.15 to the Company's Registration Statement on
Form S-1 (No. 333-7190))
10.16 Tenet BuyPower Purchasing Assistance Agreement, dated
June 13, 1997, between Community Health Systems, Inc. and
Tenet HealthSystem Inc., Addendum, dated September 19, 1997
and First Amendment, dated March 15, 2000. (incorporated by
reference to Exhibit 10.16 to the Company's Registration
Statement on Form S-1 (No. 333-7190))
10.17 The Registrant's 2000 Employee Stock Purchase Plan.
(incorporated by reference to Exhibit 10.17 to the Company's
Registration Statement on Form S-1 (No. 333-7190))
10.18 Settlement Agreement between the United States of America,
the states of Illinois, New Mexico, South Carolina,
Tennessee, Texas, West Virginia and the Registrant.
(incorporated by reference to Exhibit 10.18 to the Company's
Registration Statement on Form S-1 (No. 333-7190))
21 List of subsidiaries.*
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.*
24.1 Power of Attorney.***
</TABLE>
------------------------
* Filed herewith.
** To be filed by amendment.
*** Previously filed.
