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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended September 30,2000
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ________________ to_________________
Commission File No. 000-18799
HEALTH MANAGEMENT ASSOCIATES, INC.
(Exact name of Registrant as specified in its charter)
Delaware 61-0963645
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
5811 Pelican Bay Boulevard
Suite 500
Naples, Florida 34108-2710
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (941) 598-3131
Securities registered pursuant to Section 12(b) of the Act:
================================================================================
Title of Each Class Name of Each Exchange
on Which Registered
================================================================================
Class A Common Stock, $.01 par value New York Stock Exchange
================================================================================
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
As of December 15, 2000 there were 243,573,264 shares of Common Stock,
par value $.01 per share outstanding. The aggregate market value of the voting
stock held by non-affiliates of the Registrant is $4,748,225,184. Market value
is determined by reference to the listed price of the Registrant's Class A
Common Stock as of the close of business on December 15, 2000.
Portions of the Registrant's definitive Proxy Statement to be issued in
connection with the Annual Meeting of Stockholders of the Registrant to be held
on February 20, 2001 have been incorporated by reference into Part III, Items
10, 11, 12 and 13 of this Report.
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TABLE OF CONTENTS
FORM 10-K ANNUAL REPORT
HEALTH MANAGEMENT ASSOCIATES, INC.
Fiscal year ended September 30, 2000
<TABLE>
<CAPTION>
PART I Page
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<S> <C> <C>
Item 1. Business.................................................... 1
Item 2. Properties.................................................. 14
Item 3. Legal Proceedings........................................... 18
Item 4. Submission of Matters to a Vote of Security Holders........ 18
PART II
Item 5. Market for Registrant's Common Equity and
Related Stockholder Matters................................. 20
Item 6. Selected Financial Data..................................... 21
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations......................... 21
Item 7A. Quantitative and Qualitative Disclosures about Market Risk.. 28
Item 8. Financial Statements and Supplementary Data................. 28
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure......................... 48
PART III
Item 10. Directors and Executive Officers of the Registrant.......... 48
Item 11. Executive Compensation...................................... 48
Item 12. Security Ownership of Certain Beneficial Owners and
Management.................................................. 48
Item 13. Certain Relationships and Related Transactions.............. 48
PART IV
Item 14. Exhibits, Financial Statements, Schedules and Reports
on Form 8-K................................................. 48
</TABLE>
_________________
Note: Portions of the Registrant's definitive Proxy Statement to be issued in
connection with the Annual Meeting of Stockholders of the Registrant to
be held on February 20, 2001 have been incorporated by reference into
Part III, Items 10, 11, 12, and 13 of this Report.
i
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PART I
Item 1. Business
General
Health Management Associates, Inc. (the "Company" or the "Registrant") was
incorporated in Delaware in 1979 and succeeded to the operations of its
subsidiary, Hospital Management Associates, Inc., which was formed in 1977. The
Company provides a broad range of general acute care health services in non-
urban communities. As of October 1, 2000, the Company operated 34 general acute
care hospitals with a total of 4,904 licensed beds and three psychiatric
hospitals with a total of 186 licensed beds. For the year ended September 30,
2000 ("Fiscal 2000"), the acute care hospital operations accounted for
approximately 96% of the Company's net patient service revenue and the
psychiatric hospital operations accounted for approximately 1%. See Item 2
"Properties".
Business Strategy
The Company pursues a business strategy of efficiently and profitably
operating its existing base of facilities and selectively acquiring additional
100 to 300 bed acute care hospitals located in non-urban communities in market
areas of 40,000 to 400,000 people in the southeastern and southwestern United
States. The Company seeks to acquire, at reasonable prices, acute care hospitals
which are the sole or predominant health care providers in their market service
areas. In evaluating potential acquisitions, the Company requires a hospital's
market service area to exhibit a demographic need for the facility and to have
an established physician base which can be augmented by the Company's ability to
attract additional physicians to the community. Many of the hospitals the
Company has acquired were unprofitable at the time of acquisition. Upon
acquiring a facility, the Company employs a well-qualified executive director
and controller, implements its proprietary management information system,
recruits physicians, introduces strict cost control measures with respect to
hospital staffing and volume purchasing under Company-wide or group purchasing
agreements, and spends the necessary capital to renovate the facility and
upgrade equipment. The Company strives to provide at least 90% of the acute care
needs of each community its hospitals serve, thereby reducing the out-migration
of potential patients to hospitals in larger urban areas.
The Company manages each acquired hospital to maximize operating margins
and return on capital within the first 24 to 36 months of operations, a time
period which the Company believes is sufficient to fully implement the plan of
improvement. Generally, the Company has been successful in achieving a
significant improvement in the operating performance of its facilities within
this time period. Once a facility has matured, the Company generally achieves
additional growth through favorable demographic trends, the continued growth of
physicians' practices in the community, expansion of health care services
offered and selective rate increases.
See Item 2 "Properties" for a description of the Company's current
facilities.
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Operations and Marketing
Upon acquisition of a hospital, the Company immediately implements its
policies to achieve its financial and operating goals. The Company (i) appraises
current management personnel and makes necessary changes, (ii) seeks to reduce
expenses by managing staffing more effectively and purchasing supplies through
volume agreements, (iii) improves billings and collections and (iv) installs its
proprietary management information system. The Company's flexible staffing
program allows the Company to manage its labor costs effectively by properly
staffing a hospital based on current occupancy, utilizing a combination of full-
time and part-time employees. The Company's management information system
provides the executive director and the controller with the necessary financial
and operational information to operate the hospital effectively and to implement
the Company's flexible staffing program. Based on the information gathered, the
Company can also assist physicians in appropriate case management.
The Company also attempts to increase admissions and outpatient business
through marketing programs. The marketing programs of each of the Company's
hospitals are directed by the hospital's executive director to best suit the
particular geographic, demographic and economic characteristics of the
hospital's market area. A key element of the Company's marketing strategy is to
establish and maintain a cooperative relationship with its physicians. The
Company pursues an active physician recruitment program to attract and retain
qualified specialists and other physicians to broaden the services available.
The Company's hospitals often provide newly recruited physicians with various
services to assist them in opening and commencing the operation of their
practices, including staffing assistance, financial support, equipment and
office rental. Such costs are generally expensed as incurred. The Company's
hospitals also pursue various strategies aimed at increasing utilization of
their services, particularly emergency and outpatient services. For example,
hospitals offer an emergency service program called "Nurse First," which quickly
assigns a registered nurse specially trained for emergency room duties to assess
the condition of each patient upon arrival. Other programs include "Pro Med," an
emergency room computer-based diagnostic aid that helps physicians assess a
patient's medical condition quickly and formulate a diagnosis and course of
treatment, "Med Key," a plastic identification card that contains a variety of
patient information which streamlines the registration process, and "One Call
Scheduling," a dedicated phone system which physicians and their staff can
utilize to schedule various diagnostic tests and other services easily at one
time.
The operations of the Company's psychiatric hospitals focus mainly on
child/adolescent residential treatment programs. This has been in response to a
movement in recent years by third party payors to severely limit payments for
traditional inpatient treatment programs. Since the Company's psychiatric
hospitals receive most of their admissions for the child/adolescent programs
from state and locally-sponsored child and adolescent care agencies and the
court system, the majority of the hospitals' marketing efforts are devoted to
these areas. There is little direct marketing to the public. See "Competition--
Psychiatric Hospitals" in this Item 1.
The Company considers its management structure to be decentralized. Its
hospitals are run by experienced executive directors and controllers having both
authority and responsibility for day-to-day operations. Incentive compensation
programs have been implemented to reward such managers for accomplishing
established goals. The Company employs a relatively small corporate staff to
provide services such as systems design and development, marketing assistance,
training, human resource management, reimbursement, technical accounting
support, purchasing and construction management. Financial control is maintained
through fiscal and accounting policies which are established at the corporate
level for use at the hospitals. Financial information is centralized at the
corporate level through the Company's proprietary management information system.
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Selected Operating Statistics
The following table sets forth selected operating statistics for the
Company's hospitals for the periods and dates indicated.
<TABLE>
<CAPTION>
Year ended September 30,
------------------------------
2000 1999 1998
-------- -------- --------
<S> <C> <C> <C>
Total hospitals owned or leased (as of the
end of period, except for 2000, which is
as of October 1)........................................ 37 36 32
Licensed beds (as of the end of period,
except for 2000, which is as of October 1).............. 5,090 4,665 3,821
Admissions................................................ 161,895 143,078 123,713
Patient days.............................................. 791,617 718,035 615,248
Acute care average length of stay (days).................. 4.5 4.5 4.6
Psychiatric average length of stay (days)................. 117.1 47.5 21.9
Occupancy rate (1)........................................ 46% 47% 47%
Outpatient utilization (2)................................ 35% 36% 35%
Earnings before depreciation, interest
and income taxes margin................................. 24% 23% 25%
</TABLE>
________________________
(1) Hospital occupancy rates are affected by many factors, including the
population size and general economic conditions within the service area,
the degree of variation in medical and surgical products, outpatient use of
hospital services, quality and treatment availability at competing
hospitals, and seasonality. Generally, the Company's hospitals experience a
seasonal decline in occupancy in the first and fourth fiscal quarters.
(2) Outpatient revenue as a percent of Total Patient Service Revenue (as
defined in "Sources of Revenue" in this Item 1).
Competition
Acute Care Hospitals. The health care industry is highly competitive and in
recent years has been characterized by increased competition for patients and
staff physicians, a shift from inpatient to outpatient settings and increased
consolidation. The principal factors contributing to these trends are advances
in medical technology, cost-containment efforts by managed care payors,
employers and traditional health insurers, changes in regulations and
reimbursement policies, increases in the number and type of competing health
care providers and changes in physician practice patterns. A hospital will
compete within the geographic area in which it operates by distinguishing itself
based on the quality and scope of medical services provided. With respect to the
delivery of general acute care services, most of the Company's hospitals face
less competition in their immediate patient service areas than would be expected
in larger communities. While the Company's hospitals are generally the
predominant provider in their respective communities, most of its hospitals face
competition; however, that competition is generally limited to a single
competitor in each respective market. The Company seeks to provide at least 90%
of the health care needs in each community its hospital serves. For the
specialized treatment of diseases, such as neurological and major
cardiopulmonary disorders and health problems of relatively low incidence in the
population served, requiring specialized technology, residents in the Company's
service areas will generally be referred for treatment at major medical centers.
The competitive position of a hospital is increasingly affected by its
ability to negotiate service contracts with purchasers of group health care
services. Such purchasers include employers, preferred provider organizations
3
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("PPOs") and health maintenance organizations ("HMOs"). PPOs and HMOs attempt to
direct and control the use of hospital services through management of care and
either (i) receive discounts from a hospital's established charges or (ii) pay
based on a fixed per diem or on a capitated basis, where hospitals receive fixed
periodic payments based on the number of members of the organization regardless
of the actual services provided. To date, HMOs have not been a competitive
factor in the Company's nonurban hospitals. In addition, employers and
traditional health insurers are increasingly interested in containing costs
through negotiations with hospitals for managed care programs and discounts from
established charges. In return, hospitals secure commitments for a larger number
of potential patients. Accordingly, the Company has been proactive in
establishing or joining such programs to maintain, and even increase, hospital
services. Management believes the Company is able to compete effectively in its
markets, and does not believe such programs will have a significant adverse
impact on the Company's net revenue. See "Operations and Marketing" in this Item
1.
Psychiatric Hospitals. In recent years third party payors have severely
limited payments for traditional inpatient programs, which has negatively
affected the Company's volume of business and its revenue per admission. In
response to these changes, most of the Company's psychiatric hospitals have
moved to residential treatment programs for the youth services market, which
includes a variety of services for the troubled child and adolescent groups.
These changes have served to reverse the negative trends in recent years. The
Company's psychiatric hospitals face substantial competition in their market
areas because the Company's psychiatric hospitals compete in larger urban areas
than do its acute care hospitals and these hospitals draw patients from a
limited number of sources. The Company's psychiatric hospitals realize over 90%
of their admissions through a) networking with various state and local-sponsored
child and adolescent programs and b) the Department of Juvenile Justice via
court system commitments. However, as noted earlier in this Item 1., psychiatric
operations only account for approximately 1% of the Company's net revenue.
Acquisitions. The Company faces competition for the acquisition of non-
urban community acute care hospitals from proprietary and not-for-profit multi-
hospital groups. Some of these competitors may have greater financial and other
resources than the Company. Historically, the Company has been able to acquire
hospitals at reasonable prices. However, increased competition for the
acquisition of nonurban community acute care hospitals could have an adverse
impact on the Company's ability to acquire such hospitals on favorable terms.
Consolidation. There has been significant consolidation in the hospital
industry over the past decade due, in large part, to continuing pressures on
payments from government and private payors and increasing shifts away from the
provision of traditional inpatient services. Those economic trends have caused
many hospitals to close and many to consolidate either through acquisitions or
affiliations. The Company believes that these cost containment pressures will
continue and will lead to further consolidation in the hospital industry.
Sources of Revenue
The Company receives payment for services rendered to patients from (i)
the federal government under the Medicare program, (ii) each of the states in
which its hospitals are located under the Medicaid program, and (iii) private
insurers and patients. The following table sets forth the approximate percentage
of Total Patient Service Revenue (defined as revenue from all sources before
deducting contractual allowances and discounts from established billing rates)
derived from the various sources of payment for the periods indicated.
4
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<TABLE>
<CAPTION>
Year Ended September 30,
------------------------
2000 1999 1998
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<S> <C> <C> <C>
Medicare ...................................... 48% 49% 49%
Medicaid ...................................... 12 11 13
Private and other sources...................... 40 40 38
--- --- ---
Total..................................... 100% 100% 100%
=== === ===
</TABLE>
Hospital revenues depend upon inpatient occupancy levels, the extent to
which ancillary services and therapy programs are ordered by physicians and
provided to patients, and the volume of outpatient procedures. Reimbursement
rates for inpatient routine services vary significantly depending on the type of
service (e.g., acute care, intensive care or psychiatric) and the geographic
location of the hospital. The Company has experienced an increase in the
percentage of patient revenues attributable to outpatient services in recent
years. This increase is primarily the result of advances in medical technology
(which allow more services to be provided on an outpatient basis) and increased
pressures from Medicare, Medicaid and insurers to reduce hospital stays and
provide services, where possible, on a less expensive outpatient basis. The
Company's experience with respect to increased outpatient volume mirrors the
trend in the hospital industry.
Medicare. Most hospitals (including all of the Company's hospitals)
derive a substantial portion of their revenue from the Medicare program, which
is a federal government program designed to reimburse participating health care
providers for covered services rendered and items furnished to qualified
beneficiaries. The Medicare program is heavily regulated and subject to frequent
changes which in recent years have reduced, and in future years are expected to
restrict increases in, Medicare payments to hospitals. In light of its
hospitals' high percentage of Medicare patients, the Company's ability in the
future to operate its business successfully will depend in large measure on its
ability to adapt to changes in the Medicare program.
The Medicare program is designed primarily to provide health care
services to persons aged 65 and over and those who are chronically disabled or
who have End Stage Renal Disease ("ESRD"). The Medicare program is governed by
the Social Security Act of 1965 and is administered by the federal government,
primarily the Department of Health and Human Services ("DHHS") and the Health
Care Financing Administration ("HCFA").
Legislative action and federal regulatory changes over the years have
resulted in significant changes in the Medicare program. Formerly, Medicare
provided reimbursement for the reasonable direct and indirect costs of hospital
services furnished to beneficiaries, plus an allowed return on equity for
proprietary hospitals. Pursuant to the Social Security Amendments of 1983 ("the
Amendments") and subsequent budget reconciliation act modifications, Congress
adopted a prospective payment system ("PPS") to reimburse the routine and
ancillary operating costs of most Medicare inpatient hospital services. In
November 2000 as described on the following page, a prospective payment system
was proposed for rehabilitation hospitals and rehabilitation units that are a
distinct part unit of a hospital. Psychiatric, long-term care and pediatric
hospitals, as well as psychiatric units that are distinct parts of a hospital,
currently are exempt from PPS and continue to be reimbursed on a reasonable cost
basis. Effective August 1, 2000, as also further described on the following
page, a prospective payment system was implemented for hospital outpatient
services. The Company's three psychiatric hospitals, which are currently exempt
from PPS reimbursement, are subject to an operating cost per discharge
limitation for Medicare reimbursement purposes.
5
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Under PPS, the Secretary of DHHS has established fixed payment amounts per
discharge for categories of hospital treatment, commonly known as diagnosis-
related groups ("DRGs"). DRG rates have been established for each individual
hospital participating in the Medicare program, in part based upon the
facility's geographic location. As a general rule under PPS, if a facility's
costs of providing care for the beneficiary are less than the predetermined DRG
rate, the facility retains the difference. Conversely, if the facility's costs
of providing the necessary service are more than the predetermined rate, the
facility must absorb the loss. Because DRG rates are based upon a statistically
normal distribution of severity, patients falling outside the normal
distribution are afforded additional payments and defined as "outliers." In
certain instances, additional payments may be received for outliers.
The DRG rates are updated annually to account for projected inflation. For
several years the annual updates or percentage increases to the DRG rates have
been lower than the actual inflation in the cost of goods and services purchased
by general hospitals. The inflation index used by HCFA to adjust the DRG rates
gives consideration to the cost of goods and services purchased by hospitals as
well as non-hospitals (the "market basket"). The increase in the market basket
for the federal fiscal year ("FY") beginning on October 1, 2000 ("FY 2001") is
3.4%. Pursuant to the Balanced Budget Act of 1997, the net annual updates have
been set as follows: market basket minus 1.1% for FY 2001 and 2002; and for FY
2003 and each subsequent FY, the market basket percentage. The Company cannot
predict how future adjustments by Congress and the HCFA will affect the
profitability of its health care facilities.
Hospitals currently excluded from the PPS, such as psychiatric and
rehabilitation hospitals, receive reimbursement based on their reasonable costs,
with limits placed upon the annual rate of increase in operating costs per
discharge. Pursuant to the Balanced Budget Act of 1997, the annual update for FY
1998 was set at 0%. For FY 1999 through FY 2002, the annual update factor is
dependent upon where the hospital's costs fall in relation to the limits set by
the Tax Equity and Fiscal Responsibility Act of 1982 ("TEFRA"). The annual
update factor will range from 0% to the market basket percentage increase,
depending upon whether the hospital's costs are at, below or above the TEFRA
target limits. On November, 3, 2000, HCFA announced plans to implement a PPS
system for certain rehabilitation hospitals and rehabilitation units of a
hospital currently exempt from the PPS system. The proposed rehabilitation PPS
system would be implemented over a two-year period beginning in April 2001.
During the implementation period, each rehabilitation hospital or unit would
receive a blended payment rate that reflects the hospital's facility-specific
historical costs and the new prospective payment rate. As required by the
Balanced Budget Act of 1997, the rates established under the new PPS system
would be 2% less than the estimated payments that would have been made under the
current cost-based system. Since the PPS system is merely proposed and yet to be
adopted, the Company cannot at this time accurately assess the impact of the
rehabilitation hospital PPS system. The Company currently has three hospitals
that are exempt from the PPS.
Prior to October 1, 1990, Medicare payments for outpatient hospital-based
services were generally the lower of hospital costs or customary charges. Due to
federal budget restraints, the Omnibus Budget Reconciliation Act of 1993 ("OBRA-
1993") reduced Medicare payments for the majority of outpatient services to the
lower of 94.2% of hospital costs, customary charges or a blend of 94.2% of
hospital costs and a fee schedule (such fee schedule generally being lower than
hospital costs) through FY 1998. The Balanced Budget Act of 1997, and the
Balanced Budget Refinement Act of 1999, extended this reduction to the first
date that an outpatient PPS was implemented. On August 1, 2000, as required by
the Balanced Budget Act of 1997 and the Balanced Budget Refinement Act of 1999,
a Medicare PPS went into place for hospital outpatient services. Under the
outpatient PPS, all outpatient services are grouped into Ambulatory Payment
Classifications ("APCs"). Services in each APC are clinically similar and are
6
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similar in terms of the resources they require. A payment rate has been
established by HCFA for each APC, with adjustments provided for geographic wage
differentials. Hospitals may be paid more than one APC per patient and per
encounter, depending upon the services required by and provided to the Medicare
eligible beneficiary. Significantly, the outpatient PPS revises the way in which
beneficiary co-insurance amounts are determined. Initially, co-insurance amounts
will be based on 20% of the national median charge for the APC. The Balanced
Budget Refinement Act of 1999 limits beneficiary liability so that no co-
insurance amount can be greater than the Medicare hospital inpatient deductible
for a given year. The outpatient PPS provides for a transitional adjustment to
limit potential payment reductions experienced as a result of the transition to
prospective encounter payments. For the years 2000 through 2003, providers will
receive an adjustment if their payment-to-cost ratio for outpatient services
furnished during the year is less than a set percentage of their payment-to-cost
ratio for those services in their cost reporting period ending in 1996 (the base
year). Rural hospitals with 100 or fewer beds and cancer hospitals will be held
harmless under this provision. In addition, small rural hospitals, for services
furnished before January 1, 2004, will be maintained at the same payment-to-cost
ratio as their base year cost report, if their PPS payment-to-cost ratio is
less. Preliminary estimates and initial payment amounts have indicated that the
outpatient PPS will not have a material impact on reimbursement to the Company.
The Company anticipates the Medicare outpatient prospective payment system will
continue to be refined and future adjustments may limit or reduce payments from
the program. Outpatient laboratory services are paid based on a fee schedule
which is substantially lower than customary charges. Certain ambulatory surgery
procedures are paid for at a rate based on a blend of hospital costs and the
rate paid by Medicare for similar procedures performed in free standing
ambulatory surgery centers. Certain radiology and other diagnostic services are
paid on a blend of actual cost and prevailing area charge.
Payments under the Medicare program for capital related costs, for cost
reporting periods prior to October 1, 1991, were made on a reasonable cost
basis. Reasonable capital costs generally include depreciation, rent and lease
expense, capital interest, property taxes, insurance related to the physical
plant, fixed equipment and movable equipment. As a result of changes made to the
Social Security Act by the Omnibus Reconciliation Act of 1987 ("OBRA-1987")
hospitals paid under PPS for operating costs must be reimbursed for capital
costs on a prospective basis, effective with the cost reporting period beginning
October 1, 1991 (i.e., FY 1992). HCFA implemented the PPS for capital costs for
FY 1992 based upon FY 1989 Medicare inpatient capital costs per discharge
updated to FY 1992 by the estimated increase in Medicare capital costs per
discharge. A ten- year transition period, beginning with FY 1992, was
established for the phasing- in of the capital PPS. Under the transition period
rules, hospitals with a hospital-specific capital rate below the standard
Federal rate are paid on a fully prospective methodology. Hospitals with a
hospital-specific rate above the standard Federal rate are paid based on a
hold-harmless method or 100% of the standard Federal rate, whichever results in
the higher payment. Beginning with cost reporting periods on or after October 1,
2001, at the end of the transition period, all hospitals are to be paid at the
standard Federal rate. Pursuant to the Balanced Budget Act of 1997, capital
payment rates were rebased in FY 1998 using the actual rates in effect in FY
1995 and the budget neutrality adjustment factor used to determine the federal
capital payment rate on September 30, 1995. In addition, capital rates are
reduced by an additional 2.1% by the Balanced Budget Act of 1997. For FY 2001,
HCFA announced a 1.3% increase to the Federal rate. The Company anticipates
further adjustments in the future but is unable to predict the amount or impact
of future adjustments.
The Medicare program reimburses each hospital on a reasonable cost basis
for the Medicare program's pro rata share of the hospital's allowable capital
costs related to outpatient services. Outpatient capital reimbursement was
reduced by 15% (i.e., 85% of outpatient capital costs) during FY 1990 and OBRA
1990 extended the 15% reduction through FY 1991. OBRA-1990 and OBRA-1993 further
directed that outpatient capital reimbursement be reduced by only 10% beginning
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FY 1992 through FY 1998. The Balanced Budget Act of 1997 continued the 10%
reduction during FY 2000 up to January 1, 2000. The Company anticipates that
payments to hospitals will be reduced as a result of future legislation but is
unable to predict what the amount of the final reduction will be.
On October, 1, 2000, as required by the Balanced Budget Act of 1997 and the
Balanced Budget Refinement Act of 1999, Medicare began paying all home health
agencies under a PPS system. Medicare will pay home health care agencies for
each covered 60-day episode of care for each Medicare beneficiary who continues
to remain eligible for home health services. The home health care PPS system
provides payment at a higher rate for the beneficiaries with greater medical
needs, based upon a payment system that relies upon data collected by caregivers
on a patient clinical assessment. PPS rates for FY 2001 range from $1,100 to
$5,900, depending upon the intensity of care required by each beneficiary, with
actual rates adjusted by HCFA to reflect the geographic area wage differentials.
Home health care agencies will receive less than the full PPS amounts in those
instances where they provide only a minimal number of visits to beneficiaries.
In addition, the new PPS provides for "outlier" payments in instances where the
costs of care are significantly higher than the specified rate. In most other
instances, they will be paid the full PPS amount. The Company cannot fully
assess the impact of the new PPS system at this time. The Company anticipates
that payments for home health services may be limited or reduced as a result of
this legislation.
The Balanced Budget Act of 1997 mandated numerous other adjustments and
reductions to the Medicare system that collectively may impact the Company's
operations. With respect to the valuation of capital assets as a result of a
change in hospital ownership, the Balanced Budget Act of 1997 eliminates the
allowance for return on equity capital, and bases reimbursement on the book
value of the assets, recognizing no gain, loss or recapture of depreciation. In
addition, the Balanced Budget Act of 1997 mandated the following changes: a)
reimbursement for Medicare enrollee deductible and coinsurance bad debts is
reduced 40% for FY 2000 and 45% for FY 2001 and each subsequent year; b) the
bonus payments made to hospitals whose costs are below the target amounts is
reduced to 2% of the target amount; and, c) skilled nursing home reimbursement
must transition to a prospective payment system, based upon 1995 allowable
costs, with a three year transition period beginning on or after July 1, 1998.
The Balanced Budget Refinement Act ("BBRA") was signed into law on November
29, 1999, and provided hospitals some relief from the impact of the Balanced
Budget Act of 1997. The provisions enacted by the BBRA did not materially impact
the Company. It did, however, indicate the recognition by Congress that further
reductions in payments to hospitals were not necessary. Congress continues to
evaluate a number of proposals that would give hospitals additional relief from
the impact of the Balanced Budget Act of 1997.
Medicaid. The Medicaid program, created by the Social Security Act of 1965,
is designed to provide medical assistance to individuals unable to afford care.
Medicaid is a joint federal and state program in which states voluntarily
participate. Payment rates and services covered under the Medicaid program are
set by each participating state. As a result, Medicaid payment rates and covered
services may vary from state to state. Approximately 50% of Medicaid funding
comes from the federal government, with the balance shared by the state and
local governments. The Medicaid program is administered by individual state
governments, subject to compliance with broadly defined federal requirements.
8
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The Balanced Budget Act of 1997 repealed the Boren Amendment to the
Medicaid Act which had been interpreted by the Courts as establishing a federal
minimum standard for Medicaid rates payable to hospitals and nursing homes.
Congress repealed the Boren Amendment in order to give states greater
flexibility in establishing Medicaid payment methods and rates. The Boren
Amendment required states to undertake a finding analysis and then to assure the
federal government that their Medicaid rates were reasonable and adequate to
meet the costs that must be incurred by economically and efficiently operated
hospitals in providing care to Medicaid recipients. In place of this minimum
standard, Congress has mandated that states employ a rate setting process that
requires prior publication and an opportunity for provider comment on the rates.
This replacement requirement became effective for rates of payment on and after
January 1, 1998.
State Medicaid payment methodologies vary from state to state. The most
common methodologies are state Medicaid prospective payment systems or state
programs that negotiate payment rates with individual hospitals. Generally,
Medicaid payments are less than Medicare payments and are substantially less
than a hospital's cost of services. In 1991 Congress passed legislation limiting
the states' use of provider-specific taxes and donated funds to bolster the
states' share and obtain increased federal Medicaid matching funds. Certain
states in which the Company operates have adopted broad-based provider taxes to
fund their Medicaid programs in response to the 1991 legislation. Congress has
also established a national limit on disproportionate share hospital adjustments
(which are additional amounts required to be paid to hospitals defined as
providing a disproportionate amount of Medicaid and low-income inpatient
services). This legislation and the resulting state broad-based provider taxes
have adversely affected the Company's net Medicaid payments, but to date the net
impact has not been materially adverse.
The federal government and many states are currently considering additional
ways to limit the increase in the level of Medicaid funding, which also could
adversely affect future levels of Medicaid payments received by the Company's
hospitals. Because the Company cannot predict precisely what action the federal
government or the states will take as a result of existing and future
legislation, the Company is unable to assess the effect of such legislation on
its business. Like Medicare funding, Medicaid funding may also be affected by
health care reform legislation, and it is impossible to predict the effect such
legislation might have on the Company.
CHAMPUS. Some of the Company's hospitals provide services to retired and
certain other military personnel and their families pursuant to the Civilian
Health and Medical Program of Uniformed Services ("CHAMPUS") program. CHAMPUS
pays for inpatient acute hospital care on the basis of a prospectively
determined rate applied on a per discharge basis using DRGs similar to the
Medicare system. At this time, inpatient psychiatric hospital services are
reimbursed on an individual hospital per diem rate calculated based upon the
average charges for these services by all psychiatric hospitals. The Company can
make no assurance that the CHAMPUS program will continue per diem reimbursement
for psychiatric hospital services in the future.
The Medicare, Medicaid and CHAMPUS programs are subject to statutory and
regulatory changes, administrative rulings, interpretations and determinations,
requirements for utilization review and new governmental funding restrictions,
all of which may materially increase or decrease program payments as well as
affect the cost of providing services and the timing of payments to facilities.
The final determination of amounts earned under the programs often requires many
years, because of audits by the program representatives, providers' rights of
appeal and the application of numerous technical reimbursement provisions.
Management believes that adequate provision has been made for such adjustments.
Until final adjustment, however, significant issues remain unresolved and
9
<PAGE>
previously determined allowances could become either inadequate or more than
ultimately required.
Commercial Insurance. The Company's hospitals provide services to
individuals covered by private health care insurance. Private insurance carriers
either reimburse their policy holders or make direct payments to the Company's
hospitals based upon the particular hospitals' established charges and the
particular coverage program that provides its subscribers with hospital benefits
through independent organizations that vary from state to state. The Company's
hospitals are paid directly by local Blue Cross organizations on the basis
agreed to by each hospital and Blue Cross by a written contract.
Recently, several commercial insurers have undertaken efforts to limit the
costs of hospital services by adopting prospective payment or DRG-based systems.
To the extent such efforts are successful, and to the extent that the insurers'
systems fail to reimburse hospitals for the costs of providing services to their
beneficiaries, such efforts may have a negative impact on the results of
operations of the Company's hospitals.
Health Care Reform, Regulation and Other Factors
General. Health care, as one of the largest industries in the United
States, continues to attract much legislative interest and public attention.
Medicare, Medicaid, mandatory and other public and private hospital cost-
containment programs, proposals to limit health care spending, proposals to
limit prices and industry competitive factors are highly significant to the
health care industry. In addition, the health care industry is governed by a
framework of Federal and state laws, rules and regulations that are extremely
complex and for which the industry has the benefit of little or no regulatory or
judicial interpretation. Although the Company believes it is in compliance in
all material respects with such laws, rules and regulations, if a determination
is made that the Company was in material violation of such laws, rules or
regulations, its operations and financial results could be materially adversely
affected.
Licensure, Certification and Accreditation. Health care facility
construction and operation is subject to federal, state and local regulation
relating to the adequacy of medical care, equipment, personnel, operating
policies and procedures, fire prevention, rate-setting and compliance with
building codes and environmental protection laws. Facilities are subject to
periodic inspection by governmental and other authorities to assure continued
compliance with the various standards necessary for licensing and accreditation.
All of the Company's health care facilities are properly licensed under
appropriate state laws and are certified under the Medicare program or are
accredited by the Joint Commission on Accreditation of HealthCare Organizations
("Joint Commission"), the effect of which is to permit the facilities to
participate in the Medicare/Medicaid programs. Should any Joint Commission
facility lose its accreditation, and then not become certified under the
Medicare program, the facility would be unable to receive reimbursement from the
Medicare/Medicaid programs. Management believes that the Company's facilities
are in substantial compliance with current applicable federal, state, local and
independent review body regulations and standards. The requirements for
licensure, certification and accreditation are subject to change and, in order
to remain qualified, it may be necessary for the Company to effect changes in
its facilities, equipment, personnel and services. Although the Company intends
to continue its qualification, there can be no assurance that its hospitals will
be able to comply in the future.
Utilization Review. In order to ensure efficient utilization of facilities
and services, federal regulations require that admissions to, and the
utilization of, facilities by Medicare and Medicaid patients be reviewed by a
federally
10
<PAGE>
funded Peer Review Organization ("PRO"). Pursuant to Federal law, the PRO must
review the need for hospitalization and the utilization of services, denying
admission of a patient or denying payment for services provided, where
appropriate. Each of the Company's facilities has contracted with a PRO and has
had in effect a quality assurance program that provides for retrospective
patient care evaluation and utilization review.
Certificates of Need. The construction of new facilities, the
acquisition of existing facilities, and the addition of new beds or services may
be reviewable by state regulatory agencies under a program frequently referred
to as certificate of need. Except for Arkansas and Pennsylvania, all of the
other states in which the Company's health care facilities are located have
certificate of need or equivalent laws which generally require appropriate state
agency determination of public need and approval prior to beds or services being
added, or a related capital amount being spent. Failure to obtain necessary
state approval can result in the inability to complete the acquisition, the
imposition of civil or, in some cases, criminal sanctions, the inability to
receive Medicare or Medicaid reimbursement and/or the revocation of the
facility's license.
State Hospital Rate-Setting Activity. The Company currently operates
one facility in a state that has some form of mandated hospital rate-setting.
The West Virginia Health Care Authority ("HCA") requires that hospitals seeking
an increase in rates must submit requests for increases to hospital charges
annually. Requests for rate increases are reviewed by the HCA and are either
approved at the amount requested, approved for a lower amount than requested or
are rejected. As a result, in West Virginia, the Company's ability to increase
its rates to compensate for increased costs per admission is limited and the
Company's operating margin on its West Virginia facility may be adversely
affected. There can be no assurance that other states in which the Company
operates hospitals will not enact rate-setting provisions as well.
Antikickback and Self-Referral Regulations. During 1998, the federal
government announced that reducing health care fraud was its second priority
(behind reducing crime in America). As a result, the health care industry is
being subjected to unprecedented scrutiny and a panoply of statutes, regulations
and government initiatives intended to prevent those practices deemed fraudulent
or abusive by the government. The health care industry is subject to extensive
Federal, state and local regulation relating to licensure, conduct of
operations, ownership of facilities, addition of facilities and services and
prices for services. In particular, Medicare and Medicaid antikickback,
antifraud and abuse amendments codified under Section 1128B(b) of the Social
Security Act (the "Antikickback Amendments") prohibit certain business practices
and relationships that might affect the provision and cost of health care
services reimbursable under Medicare and Medicaid, including the payment or
receipt of remuneration for the referral of patients whose care will be paid for
by Medicare or other government programs. Sanctions for violating the
Antikickback Amendments include criminal penalties and civil sanctions,
including fines and possible exclusion from the Medicare and Medicaid programs.
Pursuant to the Medicare and Medicaid Patient and Program Protection Act of
1987, the DHHS has issued regulations that describe some of the conduct and
business relationships permissible under the Antikickback Amendments ("Safe
Harbors"). The fact that a given business arrangement does not fall within a
Safe Harbor does not render the arrangement per se illegal. Business
arrangements of health care service providers that fail to clearly satisfy the
applicable Safe Harbor criteria, however, risk increased scrutiny by enforcement
authorities. Because the Company may be less willing than some of its
competitors to enter into business arrangements that do not clearly satisfy the
Safe Harbors, it could be at a competitive disadvantage in entering into certain
transactions and arrangements with physicians and other health care providers.
In addition, Section 1877 of the Social Security Act, which restricts
11
<PAGE>
referrals by physicians of Medicare and other government-program patients to
providers of a broad range of designated health services with which they have
ownership or certain other financial arrangements, was amended effective January
1, 1995, to significantly broaden the scope of prohibited physician referrals
(the "Self-Referral Prohibitions"). Many states have adopted or are considering
similar legislative proposals, some of which extend beyond the Medicaid program
to prohibit the payment or receipt of renumeration for the referral of patients
and physician self-referrals regardless of the source of the payment for the
care. The Company's participation in and development of joint ventures and other
financial relationships with physicians could be adversely affected by these
amendments and similar state enactments. The Company systematically reviews all
of its operations to ensure that it complies with the Social Security Act and
similar state statutes. In addition, the Company has in operation a Corporate
compliance program at all of the Company's hospitals, and that is an ongoing,
working program to monitor and insure continuing compliance with these statutory
prohibitions and requirements.
Both Federal and state government agencies have announced heightened
and coordinated civil and criminal enforcement efforts in accordance with the
requirements of recent federal statutory enactments including the Health
Insurance Portability Act of 1996. The Company is unable to predict the future
course of Federal, state and local regulation or legislation, including Medicare
and Medicaid statutes and regulations. Further changes in the regulatory
framework could have a material adverse effect on the Company's financial
condition.
Conversion Legislation. Many states have enacted or are considering
enacting laws affecting the conversion or sale of not-for-profit hospitals.
These laws generally require prior approval from state attorney generals,
advance notification and community involvement. In addition, state attorney
generals in states without specific conversion legislation may exercise
authority over these transactions based upon existing law. States are showing an
increased interest in overseeing the sales or conversions of not-for-profit
hospitals. The adoption of conversion legislation and the increased review of
not-for-profit hospital conversions may make it more difficult for the Company
to acquire not-for-profit hospitals, or could increase acquisition costs in the
future. See "Business Strategy" in this Item 1.
Environmental Regulations. The Company's health care operations
generate medical waste that must be disposed of in compliance with Federal,
state and local environmental laws, rules and regulations. The Company's
operations, as well as the Company's purchases and sales of facilities, are also
subject to compliance with various other environmental laws, rules and
regulations. Such compliance does not, and the Company anticipates that such
compliance will not, materially affect the Company's capital expenditures,
financial position or results of operations.
Compliance Program. During 1996 the Company began developing, and in
1997 formally implemented, a Corporate compliance program to supplement and
enhance our existing ethics program. The Company believes its compliance and
ethics program meets or exceeds all applicable federal guidelines and industry
standards. The program is designed to raise awareness of various regulatory
issues among employees and to stress the importance of complying with all
governmental laws and regulations. As part of the program, the Company provides
ethics and compliance training to every employee. Management encourages all
employees to report, without fear of retaliation, any suspected legal or ethical
violation to their supervisors, the compliance officer on staff at the hospital
or the Company's Corporate compliance officer. In addition, the Company
maintains a 24-hour toll-free telephone hotline, which is manned by an
independent company, so that employees can report suspected violations
anonymously.
12
<PAGE>
HIPAA. The Health Insurance Portability and Accountability Act of 1996
("HIPAA") was enacted on August 21, 1996. The security and privacy regulations
of HIPAA have not been finalized by DHHS. HIPAA is an effort to encourage
overall administrative simplification and enhance the effectiveness and
efficiency of the health care industry. It mandates the adoption of standards
for the exchange of electronic health information. The two key factors of HIPAA
were accountability and portability. Accountability refers to the attempt of the
legislation to ensure privacy and security of patient information and
portability refers to the legislation's intent to ensure that individuals can
take their medical and insurance records with them when they change employers.
HIPAA mandates new security measures, sets standards for electronic
signatures, standardizes a method for identifying providers, employers, health
plans and patients, requires that the health care industry utilize the most
efficient method to codify data and may significantly change the manner in which
hospitals communicate with payors. These are significant and potentially costly
changes to the health care industry.
The Company has approximately two years to be fully compliant with the
security and privacy regulations once these regulations become final. Sanctions
for failing to comply with HIPAA include criminal penalties and civil sanctions.
At this time, the Company anticipates that it will be able to fully
comply with the HIPAA requirements and regulations as they have been adopted to
date. The Company has initiated a plan which will allow it to comply with the
currently adopted regulations. Estimating the cost of such compliance is
difficult and no such estimations have been made at this time. Based on its
current knowledge, however, the Company believes that the cost of its compliance
will not have a material adverse effect on its business, financial condition or
results of operations.
Employees and Medical Staff
As of September 30, 2000, the Company had approximately 19,000 full-
time and part-time employees, approximately 450 of whom were covered by three
collective bargaining agreements. The Company's corporate office staff consisted
of approximately 70 people at that date. The Company believes that its relations
with employees are satisfactory. In general, the staff physicians at the
Company's acute care and psychiatric hospitals are not employees of the Company.
The physicians may also be staff members of other hospitals. The Company
provides physicians with certain services and assistance. The Company does
employ approximately 103 physicians, most of whom are primary care physicians
located at clinics the Company owns and operates. In addition, the Company's
hospitals provide emergency room coverage, radiology, pathology and
anesthesiology services by entering into service contracts with physician groups
which are generally cancelable on 90 days notice.
Liability Insurance
The Company maintains at each hospital it operates professional
liability insurance and general liability insurance in amounts of $1 million per
claim and $4,000,000 per aggregation of claims, of which the Company retains the
first $100,000 of each professional liability claim and up to $4 million in the
aggregate for all such claims each year. The Company maintains a $1 million
layer of self-insured retention of professional liability for all hospitals
above the first level of coverage and then purchases $35 million umbrella
coverage for all hospitals. The Company also maintains other typical insurance
coverage. The Company maintains an unfunded reserve for its self-insured risks
described above based upon actuarially determined estimates. Actual hospital
professional liability costs for a particular period are not known for several
years after the
13
<PAGE>
period has expired. The delay in determining the actual cost associated with a
particular period is a result of the time between the occurrence of an incident
and when it is reported as well as the time involved and costs incurred in
resolution of such claims. The Company believes that its insurance is adequate
in amount and coverage. There can be no assurance that in the future such
insurance will be available at a reasonable price or that the Company will not
have to increase its levels of self-insurance.
Item 2. Properties
The Company's acute care hospitals offer a broad range of medical and
surgical services, including inpatient care, intensive and cardiac care,
diagnostic services and emergency services that are physician-staffed 24 hours a
day, seven days a week. The Company also provides outpatient services such as
one-day surgery, laboratory, x-ray, respiratory therapy, cardiology and physical
therapy. At certain of the Company's hospitals specialty services such as
oncology, radiation therapy, CT scanning, MRI imaging, lithotripsy and full-
service obstetrics are provided.
The Company's psychiatric care operations consist of three psychiatric
hospitals: one 66-bed hospital with 32 psychiatric adult beds, 16 psychiatric
child/adolescent beds, and 18 adult substance abuse beds, and two 60-bed
intensive residential treatment hospitals.
The following table presents certain information with respect to the
Company's facilities as of September 30, 2000. For more information regarding
the utilization of the Company's facilities, see "Item 1. Business -- Selected
Operating Statistics".
14
<PAGE>
<TABLE>
<CAPTION>
Owned Acquisition or
Licensed Leased or Commencement
Hospital Location Type Beds Managed Date
-------------------------------------- ---------------- ------------- -------- --------- --------------
<S> <C> <C> <C> <C> <C>
Paul B. Hall Regional Medical Center Paintsville, Acute Care 72 Owned January 1979
Kentucky
Williamson Memorial Hospital Williamson, Acute Care 76 Owned June 1979
West Virginia
Highlands Regional Medical Center Sebring, Acute Care 126 Leased August 1985
Florida
Lake Norman Regional Medical Center Mooresville, Acute Care 105 Owned January 1986
North Carolina
Palmview Hospital Lakeland, Psychiatric 66 Owned March 1986
Florida
Fishermen's Hospital Marathon, Acute Care 58 Leased August 1986
Florida
Franklin Regional Medical Center Louisburg, Acute Care 70 Owned August 1986
North Carolina Psychiatric 15
Biloxi Regional Medical Center Biloxi, Acute Care 153 Leased September 1986
Mississippi
Medical Center of Southeastern Oklahoma Durant, Acute Care 103 Owned May 1987
Oklahoma
Crawford Memorial Hospital Van Buren, Acute Care 103 Leased May 1987
Arkansas
Hamlet Hospital (1) Hamlet, Acute Care 54 Owned August 1987
North Carolina Psychiatric 10
Upstate Carolina Regional Medical Center Gaffney, Acute Care 125 Owned March 1988
South Carolina
University Behavioral Center Orlando, Psychiatric 60 Owned January 1989
Florida
SandyPines Tequesta, Psychiatric 60 Owned January 1990
Florida
Riverview Regional Medical Center Gadsden, Acute Care 281 Owned July 1991
Alabama
</TABLE>
15
<PAGE>
<TABLE>
<CAPTION>
Owned Acquisition or
Licensed Leased or Commencement
Hospital Location Type Beds Managed Date
-------------------------------------- ---------------- ------------- -------- --------- --------------
<S> <C> <C> <C> <C> <C>
Heart of Florida Hospital Haines City, Acute Care 75 Owned August 1993
Florida
Natchez Community Hospital Natchez, Acute Care 101 Owned September 1993
Mississippi
Sebastian Hospital Sebastian, Acute Care 129 Owned September 1993
Florida
Medical Center Hospital Punta Gorda, Acute Care 156 Owned December 1994
Florida Psychiatric 52
Byerly Hospital Hartsville, Acute Care 116 Owned September 1995
South Carolina
Bulloch Memorial Hospital (2) Statesboro, Acute Care 150 Owned October 1995
Georgia
Northwest Mississippi Regional Clarksdale, Acute Care 175 Leased January 1996
Medical Center Mississippi Skilled Nursing 20
Midwest City Regional Hospital Midwest City, Acute Care 197 Leased June 1996
Oklahoma Psychiatric 30
Skilled Nursing 20
Stringfellow Memorial Hospital Anniston, Acute Care 125 Managed January 1997
Alabama
Rankin Medical Center Brandon, Acute Care 120 Leased January 1997
Mississippi Gero-Psych 14
Southwest Regional Medical Center Little Rock, Acute Care 108 Owned November 1997
Arkansas Gero-Psych 17
Riley Memorial Hospital Meridian, Acute Care 168 Owned January 1998
Mississippi Skilled Nursing 12
River Oaks Hospital Jackson, Acute Care 110 Owned January 1998
Mississippi
River Oaks East Jackson, Acute Care 94 Owned January 1998
Mississippi Skilled Nursing 17
Brooksville Regional Hospital Brooksville, Acute Care 91 Leased June 1998
Florida
Springhill Regional Hospital Spring Hill, Acute Care 75 Leased June 1998
Florida
</TABLE>
16
<PAGE>
<TABLE>
<CAPTION>
Owned Acquisition or
Licensed Leased or Commencement
Hospital Location Type Beds Managed Date
-------------------------------------- ---------------- ------------- -------- --------- --------------
<S> <C> <C> <C> <C> <C>
Central Mississippi Medical Center (3) Jackson, Acute Care 444 Leased April 1999
Mississippi Psychiatric 29
Lower Keys Medical Center (4) Key West, Acute Care 112 Leased May 1999
Florida Skilled Nursing 15
Psychiatric 40
Community Hospital of Lancaster (5) Lancaster, Acute Care 204 Owned July 1999
Pennsylvania
Lancaster Regional Medical Center (6) Lancaster, Acute Care 268 Owned July 2000
Pennsylvania
Pasco Regional Medical Center (7) Dade City, Acute Care 120 Owned September 2000
Florida
-----
TOTAL LICENSED BEDS OWNED, LEASED OR MANAGED
at September 30, 2000 4,941
Davis Regional Medical Center (8) Statesville, Acute Care 149 Owned October 2000
North Carolina
-----
TOTAL LICENSED BEDS OWNED, LEASED OR MANAGED
at October 1, 2000 5,090
=====
</TABLE>
(1) The Company opened a replacement hospital for Hamlet
Hospital in March 2000. The total cost of the project was
approximately $17 million, including equipment.
(2) The Company opened a replacement hospital for Bulloch
Memorial Hospital, The East Georgia Regional Medical Center, in
July 2000. Whereas the previous facility was operated by the
Company under a lease agreement, the Company now owns the new
replacement hospital. The total cost of the project was
approximately $51 million, including equipment.
(3) Effective April 1, 1999 the Company acquired a two-hospital
system from Methodist Health care pursuant to an Asset Purchase
and Lease Agreement. The transaction included the lease of
certain real property and the purchase of substantially all
equipment and working capital of the hospitals. The total
consideration approximated $134 million in cash.
(4) Effective April 1, 1999 the Company acquired the Lower
Florida Keys Health System pursuant to asset purchase and lease
agreements. The consideration totaled approximately $49.9
million, which included $27 million in cash paid at closing,
$18.6 recorded as the net present value of lease payments
required over the 30 year term of the lease, and the assumption
of $4.3 million in debt. The agreements included the assumption
of working capital balances at closing, and also entitle the
Company to receive $1.5 million per year in cash from the seller
for the first ten years of the lease to support indigent care
programs.
17
<PAGE>
(5) Effective July 1, 1999 the Company acquired Community Hospital of
Lancaster from Community of Lancaster Hospital Foundation pursuant to
a Definitive Agreement. The Agreement included the purchase of
substantially all property, plant and equipment and working capital of
the hospital. The total consideration involved approximately $15
million in cash. The Company is committed to the construction of a
replacement hospital, subject to obtaining all required governmental
and regulatory approvals.
(6) Effective July 1, 2000, the Company acquired Lancaster Regional
Medical Center pursuant to an Asset Purchase Agreement. The Agreement
included the purchase of substantially all property, plant and
equipment and working capital of the hospital. The total consideration
approximated $64 million, including $58 million in cash and the
assumption of $6 million in liabilities.
(7) Effective September 1, 2000, the Company acquired the Pasco
Regional Medical Center pursuant to an Asset Purchase Agreement. The
Agreement included the purchase of substantially all property, plant
and equipment and working capital of the hospital. The total
consideration approximated $17 million in cash.
(8) Effective October 1, 2000, the Company acquired Davis Regional
Medical Center pursuant to an Asset Purchase Agreement. The Agreement
included the purchase of substantially all property, plant and
equipment and working capital of the hospital. The total consideration
approximated $55 million in cash.
The Company currently leases the facilities of Highlands Regional
Medical Center, Fishermen's Hospital, Biloxi Regional Medical Center,
Crawford Memorial Hospital, Northwest Mississippi Regional Medical Center,
Midwest City Regional Hospital, Rankin Medical Center, Brooksville Regional
Hospital, Spring Hill Regional Hospital, Central Mississippi Medical Center
and Lower Keys Medical Center pursuant to long-term leases expiring in
2025, 2011, 2024, 2027, 2025, 2026, 2026, 2028, 2028, 2040 and 2029,
respectively, which provide the Company with the exclusive right to use and
control the hospital operations.
The Company's corporate headquarters are located in an office building
in Naples, Florida, in which space is leased. The Company believes that all
of its facilities are suitable and adequate for its needs. Certain of the
Company's hospitals are subject to mortgages securing various borrowings.
See Note 3 of the Notes to the Consolidated Financial Statements (Item 8.
hereof).
Item 3. Legal Proceedings
The Company is subject to claims and legal actions by patients and
others in the ordinary course of business. The Company believes that all
such claims and actions are either adequately covered by insurance or are
unlikely, individually or in the aggregate, to have a material adverse
effect on the Company's financial condition.
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of security holders during the
fourth quarter of the fiscal year ended September 30, 2000.
18
<PAGE>
Executive Officers of the Registrant
The following is certain information regarding the executive officers
of the Company.
William J. Schoen, age 65, has served as Chairman of the Board, and
Chief Executive Officer of the Company since April 1986. He joined the Company's
Board of Directors in February 1983, in December 1983 became its President and
Chief Operating Officer, and Co-Chief Executive Officer in December 1985. He
relinquished the position of President in April 1997. From 1982 to 1987 Mr.
Schoen was Chairman of Commerce National Bank, Naples, Florida, and from 1973 to
1981 he was President, Chief Operating Officer and Chief Executive Officer of
The F&M Schaefer Corporation, a consumer products company. From 1971 to 1973,
Mr. Schoen was President of the Pierce Glass subsidiary of Indian Head, Inc., a
diversified company. Mr. Schoen also serves on the Board of Directors of Horace
Mann Insurance Companies.
Earl P. Holland, age 55, is Vice Chairman and Chief Operations Officer.
He joined the Company in 1981 as Senior Vice President - Operations. He became
Senior Vice President - Marketing and Development in 1984, Executive Vice
President - Operations and Development in 1989, and Vice Chairman in 1997. For
more than five years prior to 1981, he was employed by Humana, Inc., where he
served as Assistant Regional Vice President and as the Executive Director of two
hospitals.
Joseph V. Vumbacco, age 55, is President and Chief Administrative
Officer. He joined the Company as an Executive Vice President in January 1996
after 14 years with Turner Construction Company, most recently as an Executive
Vice President. He was promoted to President in 1997 and then became Chief
Administrative Officer in 1998. Prior to joining Turner, he served as the Senior
Vice President and General Counsel for The F&M Schaefer Corporation.
Stephen M. Ray, age 52, is Executive Vice President - Finance of the
Company. A certified public accountant, he joined the Company in 1981 as
Controller, became a Vice President in 1983, and a Senior Vice President in
1991. He also served as Treasurer from 1987 to 1988 and most recently Senior
Vice President - Administrative Services until his appointment to Senior Vice
President - Finance in September 1994 and Executive Vice President in January
1999. From 1979 until 1981, Mr. Ray was employed by Hospital Affiliates
International, Inc., a hospital management company, where he was responsible for
reporting compliance and corporate technical accounting.
Timothy R. Parry, age 45, is Vice President and General Counsel of the
Company. He joined the Company in February 1996 as a Divisional Vice-President
and Assistant General Counsel after 12 years in the law firm of Harter, Secrest
& Emery, the last seven years as partner. Prior to joining Harter, Secrest &
Emery he was an Assistant Ohio Attorney General for two years and before that a
law clerk for the United States District Court for the Southern District of
Ohio.
19
<PAGE>
PART II
Item 5. Market for the Registrant's Common Equity and Related Stockholder
Matters
The Company completed an initial public offering of its Class A Common
Stock on February 5, 1991. The Company's Class A Common Stock is listed on the
New York Stock Exchange under the Symbol HMA. At December 15, 2000 there were
approximately 1,552 record holders of the Company's Class A Common Stock. The
following table sets forth, for the periods indicated, the high and low sale
prices per share of the Company's Class A Common Stock as listed on the New York
Stock Exchange.
High Low
-------- --------
Fiscal Year Ended September 30, 1999
First Quarter............................... $23 1/2 $16
Second Quarter.............................. 21 5/8 10 3/16
Third Quarter............................... 17 5/16 10 7/16
Fourth Quarter.............................. 12 1/4 7 1/4
Fiscal Year Ended September 30, 2000
First Quarter............................... 13 1/2 7
Second Quarter.............................. 18 1/4 9 5/8
Third Quarter............................... 16 9/16 11 1/4
Fourth Quarter.............................. 21 1/8 12 3/4
The Company has not paid any cash dividends since its inception, and
does not anticipate the payment of cash dividends in the foreseeable future.
In connection with a stock repurchase program approved by the Board of
Directors in February 1998 the Company sold, pursuant to Section 4(2) of the
Securities Act of 1933, 2,459,000 put options to an independent third party for
proceeds totaling $2,090,000. Each put option entitled the holder to sell one
share of the Company's common stock to the Company at a price of $17.50 per
share, exercisable only at maturity and expiring at various dates from November
1998 to December 1998. The put options expired without being exercised.
During Fiscal 1999 the Company repurchased 7.5 million shares of its
stock at a cost of $69.1 million, which completed the February 1998 stock
repurchase plan referred to above. In September 1999 the Board of Directors
approved a stock repurchase program of up to 25 million shares of common stock.
On October 14, 1999 the Company executed a share repurchase agreement with an
independent third party, whereby the third party agreed to "sell short" 5
million shares of the Company's common stock to the Company. As of October 19,
1999 the 5 million shares were delivered to the Company and became treasury
stock. From October 15, 1999 to December 15, 1999, a period of 60 days, the
third party covered the "short sale" by buying shares on the open market. On
December 15, 1999 the Company reimbursed the third party the cost of the common
stock purchased plus a commission plus interest (at LIBOR) on the outstanding
balance of funds used to purchase the common stock. The total cost for the
purchase of the 5 million shares of treasury stock was approximately $42.4
million. At September 30, 2000, there were 12.5 million shares of common stock
reserved for future issuance upon the conversion of the Company's subordinated
convertible notes (see financial statement note No. 3.b.).
20
<PAGE>
Item 6. Selected Financial Data
The following table summarizes certain selected financial data of the
Registrant and should be read in conjunction with the related Consolidated
Financial Statements and accompanying Notes to Consolidated Financial Statements
(Item 8. hereof).
HEALTH MANAGEMENT ASSOCIATES, INC.
FIVE YEAR SUMMARY OF SELECTED FINANCIAL DATA
(Dollars in thousands, except per share data)
<TABLE>
<CAPTION>
Year ended September 30,
----------------------------------------------------------------------------
2000 1999 1998 1997 1996
---------- ---------- ---------- -------- --------
<S> <C> <C> <C> <C> <C>
Net patient service revenue $1,577,767 $1,355,707 $1,138,802 $895,482 $714,317
Costs and expenses 1,301,772 1,109,054 913,523 717,173 575,906
Income before income taxes 275,995 246,653 225,279 178,309 138,411
Net income 167,667 149,845 136,844 108,322 84,086
Net income per share-diluted $ .68 $ .59 $ .54 $ .43 $ .34
Weighted average number of
shares outstanding-diluted 247,277 255,067 255,575 249,130 244,045
At Year End
-----------
Working capital $ 317,181 $ 250,549 $ 196,578 $153,250 $106,907
Total assets 1,772,065 1,527,381 1,106,022 734,041 591,707
Short-term debt 6,523 9,351 8,544 8,263 8,438
Long-term debt 520,151 401,522 134,217 49,650 68,702
Stockholders' equity 1,030,066 890,523 756,825 560,220 417,739
Book value per common share $ 4.03 $ 3.51 $ 3.01 $ 2.30 $ 1.76
</TABLE>
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Results of Operations
Fiscal Year Ended September 30, 2000 Compared to Fiscal Year Ended
September 30, 1999
Net patient service revenue for Fiscal 2000 was $1,577.8 million, as
compared to $1,355.7 million for the fiscal year ended September 30, 1999
("Fiscal 1999"). This represented an increase in net patient service revenue of
$222.1 million, or 16.4%. Hospitals in operation for the entire period of Fiscal
2000 and Fiscal 1999 ("same hospitals") provided $77.6 million of the increase
in net patient service revenue, which resulted primarily from inpatient and
outpatient volume increases. The source of the remaining net increase of $144.5
million included the following: (1) $147.6 million of net patient service
revenue from Fiscal 1999 and Fiscal 2000 acquisitions including the April 1999
acquisition of a 473-bed hospital system, the May 1999 acquisition of a 167-bed
hospital system, the July 1999 acquisition of a 204-bed hospital, the July 2000
acquisition of a 268-bed hospital and the September 2000 acquisition of a 120-
bed hospital, (2) $2.6 million decrease in net patient service revenue from
psychiatric hospitals, due primarily to the closure of one facility as of March
31, 2000 and (3) a decrease of $.5 million in Corporate and miscellaneous
revenue.
21
<PAGE>
The Company's hospitals generated 791,617 patient days of service in Fiscal
2000, which produced an overall occupancy rate of 46.2%. During Fiscal 1999 the
Company's hospitals generated 718,035 patient days of service for an overall
occupancy rate of 47.1%. Admissions in same hospitals for Fiscal 2000 increased
4.7%, from 134,285 to 140,545.
The Company's salaries and benefits, supplies and other expenses and
provision for doubtful accounts for Fiscal 2000 were $1,163.8 million, or 73.8%
of net patient service revenue, as compared to $1,006.2 million, or 74.2% of net
patient service revenue for Fiscal 1999. Of the total $157.6 million increase
approximately $49.4 million related to same hospitals, which was largely
attributable to increased inpatient and outpatient volumes. Another $103.7
million of increased operating expenses related to the acquisitions mentioned
previously. The remaining increase of $4.5 million represented an increase in
Corporate and miscellaneous other operating expenses offset by a reduction in
expenses resulting from the closure of one psychiatric facility as previously
noted. The Company's Fiscal 2000 rent expense increased by $5.0 million, which
resulted both from acquisitions and the expansion of hospital services.
The Company's depreciation and amortization costs increased by $13.2
million. Approximately $6.2 million of the increase resulted from the
acquisitions mentioned above with the remaining increase attributable to two
replacement hospitals opened in Fiscal 1999 and Fiscal 2000, as well as ongoing
building improvements and equipment purchases. Interest expense increased $17.0
million due to borrowings related to Fiscal 1999 and Fiscal 2000 acquisitions, a
higher interest rate on the Revolving Credit Agreement and the recognition of a
lower amount in capitalized interest cost in Fiscal 2000.
The Company's income before income taxes was $276.0 million for Fiscal 2000
as compared to $246.7 million for Fiscal 1999, an increase of $29.3 million or
11.9%. As noted above, the increased profitability resulted from an increase in
same hospital inpatient and outpatient business and from the acquisitions
previously mentioned. The Company's provision for income taxes was $108.3
million for Fiscal 2000 as compared to $96.8 million for Fiscal 1999. These
provisions reflect an effective income tax rate of 39.25% for Fiscal 2000 and
Fiscal 1999. As a result of the foregoing, the Company's net income was $167.7
million for Fiscal 2000 as compared to $149.8 million for Fiscal 1999.
Fiscal Year Ended September 30, 1999 Compared to Fiscal Year Ended
September 30, 1998
Net patient service revenue for Fiscal 1999 was $1,355.7 million, as
compared to $1,138.8 million for the fiscal year ended September 30, 1998
("Fiscal 1998"). This represented an increase in net patient service revenue of
$216.9 million, or 19.0%. Same hospitals provided $48.0 million of the increase
in net patient service revenue. The remaining increase of $168.9 million
included $169.3 million of net patient service revenue from the April 1999
acquisition of a 473-bed hospital system, the May 1999 acquisition of a 167-bed
hospital system and the July 1999 acquisition of a 204-bed hospital, offset by a
decrease of $.4 million in Corporate and miscellaneous revenue.
22
<PAGE>
As noted above, same hospital net operating revenue increased $48.0
million, or a 4.9% increase over Fiscal 1998. The increase in net operating
revenue of same hospitals was primarily attributable to inpatient and outpatient
volume increases, partially offset by a decrease in reimbursement. The Company
has experienced lower payments from a number of payors, resulting primarily from
a) reductions mandated by the Balanced Budget Act of 1997, particularly in the
areas of home health and Medicare bad debts, b) reduced Medicare outlier
payments caused by an increase in the cost outlier threshold, c) reductions in
various states' Medicaid programs, d) an increase in managed care discounts, and
e) a reduction in the Medicare case-mix index.
The Company's hospitals generated 718,035 patient days of service in Fiscal
1999, which produced an overall occupancy rate of 47.1%. During Fiscal 1998 the
Company's hospitals generated 615,248 patient days of service for an overall
occupancy rate of 47.1%. Admissions in same hospitals for Fiscal 1999 increased
3.3%, from 105,235 to 108,673.
The Company's salaries and benefits, supplies and other expenses and
provision for doubtful accounts for Fiscal 1999 were $1,006.2 million, or 74.2%
of net patient service revenue, as compared to $831.4 million, or 73.0% of net
patient service revenue for Fiscal 1998. Of the total $174.8 million increase,
approximately $47.5 million related to same hospitals, which was largely
attributable to increased inpatient and outpatient volumes. Another $128.2
million of increased operating expenses related to the acquisitions mentioned
previously. The remaining decrease of $.9 million represented a decrease in
Corporate and miscellaneous other operating expenses. The Company's Fiscal 1999
rent expense increased by $6.2 million, which resulted both from acquisitions
and the expansion of hospital services.
The Company's depreciation and amortization costs increased by $10.8
million. Approximately $8.5 million of the increase resulted from the
acquisitions mentioned above with the remaining increase attributable to ongoing
building improvements and equipment purchases. Interest expense increased $3.6
million, which was due largely to acquisition related debt and lower investment
income in Fiscal 1999 (which is settled against interest expense), partially
offset by higher capitalized interest costs during Fiscal 1999.
The Company's income before income taxes was $246.7 million for Fiscal 1999
as compared to $225.3 million for Fiscal 1998, an increase of $21.4 million or
9.5%. As noted above, the increased profitability resulted from an increase in
inpatient and outpatient business and from the acquisitions previously
mentioned. The Company's provision for income taxes was $96.8 million for Fiscal
1999 as compared to $88.4 million for Fiscal 1998. These provisions reflect an
effective income tax rate of 39.25% for Fiscal 1999 and Fiscal 1998. As a result
of the foregoing, the Company's net income was $149.8 million for Fiscal 1999 as
compared to $136.8 million for Fiscal 1998.
Liquidity and Capital Resources
Fiscal 2000 Cash Flows Compared to Fiscal 1999 Cash Flows
Working capital increased to $317.2 million at September 30, 2000 from
$250.5 million at September 30, 1999, resulting primarily from increased
business volumes and good management of the Company's working capital. The
Company's cash flows from operating activities increased by $8.6 million from
$168.3 million in Fiscal 1999 to $176.9 million in Fiscal 2000. Offsetting the
Company's improved profitability were increases in accounts receivable and
increased income tax
23
<PAGE>
payments. The increase in accounts receivable was due to higher volumes at same
hospitals and acquisition hospitals, as well as temporary delays in billing of
Medicare and Medicaid accounts receivable while waiting for assignment of
applicable third-party provider numbers at those newly-acquired hospitals. The
use of the Company's cash in investing activities decreased from $412.3 million
in Fiscal 1999 to $293.3 million in Fiscal 2000, resulting from smaller outlays
of cash for acquisitions, replacement hospitals, and treasury stock purchases in
Fiscal 2000 compared to Fiscal 1999. The Company's cash flows from financing
activities decreased $124.3 million from $244.2 million provided in Fiscal 1999
to $119.9 million provided in Fiscal 2000, resulting from reduced borrowings for
acquisitions in Fiscal 2000, and the net effect of proceeds of $282.7 from a
convertible debt offering used to pay down existing debt under the Company's
revolving credit agreement.
Fiscal 1999 Cash Flows Compared to Fiscal 1998 Cash Flows
Working capital increased to $250.5 million at September 30, 1999 from
$196.6 million at September 30, 1998, resulting primarily from increased
business volumes and good management of the Company's working capital. The
Company's cash flows from operating activities increased by $50.3 million from
$118.0 million in Fiscal 1998 to $168.3 million in Fiscal 1999. Offsetting the
Company's improved profitability was a large increase in accounts receivable,
both at same hospitals and newly-acquired hospitals. This increase was due to
higher volumes at same hospitals and acquisition hospitals, as well as temporary
delays in billing of Medicare and Medicaid accounts receivable while waiting for
assignment of applicable third-party provider numbers at those newly acquired
hospitals. The use of the Company's cash in investing activities increased from
$233.4 million in Fiscal 1998 to $412.3 million in Fiscal 1999, reflecting some
larger, more expensive acquisitions during Fiscal 1999. The Company's cash flows
from financing activities increased $183.5 million from $60.7 million provided
in Fiscal 1998 to $244.2 million provided in Fiscal 1999, due primarily to
borrowings related to acquisitions.
Capital Resources
In November 1999, the Company closed on a $600 million Credit Agreement
(the "Credit Agreement"), thereby refinancing and replacing its existing $300
million credit agreement which expired on November 30, 1999. The Credit
Agreement is an unsecured revolving credit loan, comprised of a $150 million
364-day credit loan and a $450 million 5-year credit loan. The Company may
choose a Base Rate Loan (prime interest rate) or a Eurodollar Rate Loan (LIBOR
interest rate). The interest rate for a Eurodollar Rate Loan is currently LIBOR
plus 1.00 percent, and will increase or decrease in relation to a change in the
Company's credit rating. Under either alternative, quarterly interest payments
are required. The interest rate on the outstanding balance at September 30, 2000
was 7.6%. The Credit Agreement is a revolving and term loan agreement which
permits the Company to borrow under an unsecured revolving credit loan at any
time through November 30, 2004, at which time the agreement terminates and all
outstanding revolving credit loans become due and payable. As described below,
the Company utilized the proceeds from the issuance of subordinated notes and
cancelled the $150 million 364-day credit loan portion of the Credit Agreement
in September 2000.
The Company also has a $15 million unsecured revolving credit commitment
(increased from $10 million effective March 2000) with a bank. The $15 million
credit is a working capital commitment which is tied to the Company's cash
management system, and renews annually on November 1. Currently, interest on any
24
<PAGE>
outstanding balance is payable monthly at a fluctuating rate not to exceed the
bank's prime rate less 1/4%.
In addition, the Company is obligated to pay certain commitment fees based
upon amounts borrowed and available for borrowing during the terms of the credit
agreements described above.
The credit agreements contain covenants which, without prior consent of the
banks, limit certain activities, including those relating to mergers,
consolidations and the Company's ability to secure additional indebtedness, make
guarantees, grant security interests and declare dividends. The Company must
also maintain minimum levels of consolidated tangible net worth, debt service
coverage and interest coverage.
On August 16, 2000, the Company sold $488.8 million face value of zero-
coupon subordinated convertible notes for gross proceeds of $287.7 million. The
notes mature on August 16, 2020 unless converted or redeemed earlier. The notes
are convertible into the Company's common stock at a conversion rate of 29.5623
shares of common stock for each $1,000 principal amount of the notes (equivalent
to the conversion price of $19.9125 per share). Interest on the notes is payable
semiannually in arrears on August 16 and February 16 of each year, beginning
February 16, 2001 at a rate of .25% per year on the principal amount at
maturity. The rate of cash interest and accrual of original issue discount
represent a yield to maturity of 3% per year calculated from August 16, 2000.
Holders may require the Company to purchase all or a portion of their notes
on August 16, 2003, August 16, 2008 and August 16, 2013 for a purchase price per
note of $635.88, $724.58 and $827.53, respectively, plus accrued and unpaid
interest to each purchase date. The Company may choose to pay the purchase price
in cash or common stock or a combination of cash and common stock. In addition,
upon a change in control of the Company occurring on or before August 16, 2003,
each holder may require the Company to repurchase all or a portion of such
holder's notes. The Company may redeem all or a portion of the notes at any time
on or after August 16, 2003. At September 30, 2000, there were 12.5 million
shares of common stock reserved for future issuance upon the conversion of the
Company's subordinated convertible notes.
Legislative and regulatory action has resulted in continuing change in
the Medicare and Medicaid reimbursement programs which will continue to limit
payment increases under these programs. However, the Company believes that these
continued changes will not have a material adverse effect on the Company's
future revenue or liquidity. Within the statutory framework of the Medicare and
Medicaid programs, there are substantial areas subject to administrative
rulings, interpretations and discretion which may further affect payments made
under those programs, and the federal and state governments might, in the
future, reduce the funds available under those programs or require more
stringent utilization and quality reviews of hospital facilities, either of
which could have a material adverse effect on the Company's future revenue and
liquidity. Additionally, any future restructuring of the financing and delivery
of health care in the United States and the continued rise in managed care
programs could have an effect on the Company's future revenue and liquidity. See
Item 1. "Sources of Revenue" and "Regulation and Other Factors."
Capital Expenditures
Effective July 1, 2000, the Company acquired the Lancaster Regional Medical
Center pursuant to an Asset Purchase Agreement. The Agreement included the
25
<PAGE>
purchase of substantially all property, plant and equipment and working capital
of the hospital. The total consideration approximated $64 million, including $58
million in cash and the assumption of $6 million in liabilities.
Effective September 1, 2000, the Company acquired Pasco Regional Medical
Center pursuant to an Asset Purchase Agreement. The Agreement included the
purchase of substantially all property, plant and equipment and working capital
of the hospital. The total consideration approximated $17 million in cash.
Effective October 1, 2000, the Company acquired Davis Regional Medical
Center pursuant to an Asset Purchase Agreement. The Agreement included the
purchase of substantially all property, plant and equipment and working capital
of the hospital. The total consideration approximated $55 million in cash.
During 1999 the Company repurchased 7.5 million shares of its stock at a
total cost of $69.1 million, which completed a stock repurchase plan approved by
the Board of Directors in February 1998. In September 1999 the Board of
Directors approved a stock repurchase program of up to 25 million shares of
common stock. On October 14, 1999 the Company executed a share repurchase
agreement with an independent third party, whereby the third party agreed to
"sell short" 5 million shares of the Company's common stock to the Company. As
of October 19, 1999 the 5 million shares were delivered to the Company and
became treasury stock. From October 15, 1999 to December 15, 1999, a period of
60 days, the third party covered the "short sale" by buying shares on the open
market. On December 15, 1999 the Company reimbursed the third party the cost of
the common stock purchased plus a commission plus interest (at LIBOR) on the
outstanding balance of funds used to purchase the common stock. The total cost
for the purchase of the 5 million shares of treasury stock was approximately
$42.4 million.
The Company had a number of hospital renovation/expansion projects underway
at September 30, 2000. None of these projects are individually significant nor
do they represent a significant commitment in total at September 30, 2000.
The Company anticipates spending approximately $75-85 million for capital
equipment and renovations during the fiscal year ending September 30, 2001
("Fiscal 2001"). At the present time, cash on hand, internally generated funds
in Fiscal 2001, and funds available under the Credit Facilities are expected to
be sufficient to satisfy the Company's requirements for capital expenditures,
future acquisitions and working capital in Fiscal 2001.
Impact of Seasonality and Inflation
The Company's business is seasonal, with higher patient volumes and net
patient service revenue in the second and third quarters of the Company's fiscal
year. This seasonality occurs because more people become ill during the winter
months, which results in significant increases in the number of patients treated
in the Company's hospitals during those months.
The health care industry is labor intensive. Wages and other expenses
increase especially during periods of inflation and when shortages in the
marketplace occur. In addition, suppliers pass along rising costs to the Company
in the form of higher prices. The Company has, to date, offset increases in
operating costs to the Company by increasing charges for services and expanding
services. The Company has also implemented cost control measures to curb
increases in operating costs and expenses. The Company cannot predict its
ability to cover or offset future cost increases.
26
<PAGE>
Income Tax Examinations
The Internal Revenue Service (the "IRS") has examined the Company's federal
income tax returns for fiscal years 1995 through 1998. No material adjustments
were proposed as a result of these examinations and the proposed adjustments
were primarily timing differences.
Forward-Looking Statements
Certain statements contained in this Form 10-K, including, without
limitation, statements containing the words "believes," "anticipates,"
"intends," "expects" and words of similar import, constitute "forward-looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995. Forward-looking statements are based upon the Company's current plans,
expectations and projections about future events. However, such statements
involve known and unknown risks, uncertainties and other factors that may cause
the actual results, performance or achievements of the Company to be materially
different from any future results, performance or achievements expressed or
implied by such forward-looking statements. Such factors include, among others,
the following: general economic and business conditions, both nationally and in
the regions in which the Company operates; demographic changes; existing
governmental regulations and changes in, or the failure to comply with,
governmental regulations; legislative proposals for health care reform; the
ability to enter into managed care provider arrangements on acceptable terms;
changes in Medicare and Medicaid payment levels; liability and other claims
asserted against the Company; competition; the loss of any significant ability
to attract and retain qualified personnel, including physicians; the
availability and terms of capital to fund additional acquisitions or replacement
facilities. Given these uncertainties, prospective investors are cautioned not
to place undue reliance on such forward-looking statements. The Company
disclaims any obligation to update any such factors or to publicly announce the
results of any revision to any of the forward-looking statements contained
herein to reflect future events or developments.
27
<PAGE>
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Interest Rates
The Company is exposed to interest rates, primarily as a result of its
$450 million revolving credit agreement with a floating interest rate (see
financial statement note No. 3). The following table summarizes principal cash
flows and related weighted average interest rates by expected maturity dates. At
September 30, 2000 the fair value of the Company's debt was $592.1 million,
while the carrying value was approximately $526.7 million.
<TABLE>
<CAPTION>
2001 2002 2003 2004 2005 Thereafter Total
---- ----- ----- ---- ---- ---------- -----
<S> <C> <C> <C> <C> <C> <C> <C>
Long term debt
(in millions):
Fixed rate long-term
debt $6.5 $ 9.6 $ 4.5 $4.7 $4.4 $357.0 $386.7
Average interest rates 7.6% 7.5% 7.9% 7.9% 7.8% 3.9% 4.2%
Variable rate
long-term debt $140.0 $140.0
Average interest rate LIBOR+ LIBOR+
Spread Spread
</TABLE>
Item 8. Financial Statements and Supplementary Data
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Health Management Associates, Inc.
Consolidated Financial Statements:
Report of Independent Certified Public Accountants.................... 29
Consolidated Statements of Income -- for the years ended
September 30, 2000, 1999 and 1998 .................................. 30
Consolidated Balance Sheets --September 30, 2000 and 1999 ............ 31
Consolidated Statements of Stockholders' Equity -- for the
years ended September 30, 2000, 1999 and 1998 ...................... 33
Consolidated Statements of Cash Flows -- for the years
ended September 30, 2000, 1999 and 1998............................. 34
Notes to Consolidated Financial Statements ........................... 36
</TABLE>
28
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors and Stockholders
Health Management Associates, Inc.
We have audited the accompanying consolidated balance sheets of Health
Management Associates, Inc. as of September 30, 2000 and 1999, and the related
consolidated statements of income, stockholders' equity, and cash flows for each
of the three years in the period ended September 30, 2000. Our audits also
included the financial statement schedule listed in the Index at Item 14 (a).
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements and
schedule based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Health
Management Associates, Inc. at September 30, 2000 and 1999 and the consolidated
results of its operations and its cash flows for each of the three years in the
period ended September 30, 2000, in conformity with accounting principles
generally accepted in the United States. Also, in our opinion, the related
financial statement schedule, when considered in relation to the basic financial
statements taken as a whole, presents fairly in all material respects the
information set forth therein.
Ernst & Young LLP
Tampa, Florida
October 20, 2000
29
<PAGE>
HEALTH MANAGEMENT ASSOCIATES, INC.
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Year ended September 30,
----------------------------------------------
2000 1999 1998
---------- ---------- ----------
(in thousands, except per share data)
<S> <C> <C> <C>
Net patient service revenue ............ $1,577,767 $1,355,707 $1,138,802
Costs and expenses:
Salaries and benefits ................ 569,112 486,003 402,133
Supplies and other ................... 458,817 390,229 331,006
Provision for doubtful accounts ...... 135,862 130,013 98,258
Depreciation and amortization ........ 74,499 61,278 50,437
Rent expense ......................... 38,118 33,146 26,930
Interest, net ........................ 25,364 8,385 4,759
---------- --------- ----------
Total costs and expenses ......... 1,301,772 1,109,054 913,523
---------- ---------- ----------
Income before income taxes ............. 275,995 246,653 225,279
Provision for income taxes ............. 108,328 96,808 88,435
---------- ---------- ----------
Net income ............................. $ 167,667 $ 149,845 $ 136,844
========== ========== ==========
Net income per share:
Basic ................................ $ .69 $ .60 $ .55
========== ========== ==========
Diluted .............................. $ .68 $ .59 $ .54
========== ========== ==========
Weighted average number of shares outstanding:
Basic ................................ 241,946 250,467 249,049
========== ========== ==========
Diluted .............................. 247,277 255,067 255,575
========== ========== ==========
</TABLE>
30
<PAGE>
HEALTH MANAGEMENT ASSOCIATES, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands)
<TABLE>
<CAPTION>
September 30,
-----------------------------
2000 1999
----------- ----------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.......................................... $ 16,471 $ 12,926
Accounts receivable, less allowance for doubtful
accounts of $118,602 and $114,792 in 2000 and 1999,
respectively..................................................... 343,583 321,771
Accounts receivable -- other....................................... 29,070 26,917
Supplies, at cost.................................................. 39,207 32,038
Prepaid expenses and other assets.................................. 18,659 9,324
Funds held by trustee.............................................. 2,562 1,764
Deferred income taxes.............................................. 37,411 30,813
---------- ----------
Total current assets............................................ 486,963 435,553
Property, plant and equipment:
Land and improvements.............................................. 47,365 40,212
Buildings and improvements......................................... 793,363 610,292
Leaseholds......................................................... 97,174 91,528
Equipment.......................................................... 379,473 331,961
Construction in progress........................................... 35,444 68,463
---------- ----------
1,352,819 1,142,456
Less: accumulated depreciation and amortization.................... (287,489) (229,967)
---------- ----------
Net property, plant and equipment................................ 1,065,330 912,489
Funds held by trustee................................................ 2,005 4,131
Excess of cost over acquired net assets, net......................... 195,004 158,499
Deferred charges and other assets.................................... 22,763 16,709
---------- ----------
$1,772,065 $1,527,381
========== ==========
</TABLE>
See accompanying notes.
31
<PAGE>
HEALTH MANAGEMENT ASSOCIATES, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands)
<TABLE>
<CAPTION>
September 30,
---------------------------
2000 1999
---------- ---------
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable ................................... $ 78,227 $ 73,595
Accrued payroll and related taxes .................. 27,029 29,402
Accrued expenses and other liabilities ............. 32,909 30,604
Due to third party payors .......................... 22,972 21,774
Income taxes - currently payable and deferred ...... 2,122 20,278
Current maturities of long-term debt ............... 6,523 9,351
---------- ----------
Total current liabilities ........................ 169,782 185,004
Deferred income taxes ................................ 34,496 32,877
Other long-term liabilities .......................... 17,570 17,455
Long-term debt ....................................... 520,151 401,522
Stockholders' equity:
Preferred stock, $.01 par value, 5,000 shares
authorized ....................................... - -
Common stock, Class A, $.01 par value, 300,000
shares authorized, 255,357 and 253,405
shares issued and outstanding at
September 30, 2000 and 1999, respectively ........ 2,554 2,534
Additional paid-in-capital ......................... 308,834 294,579
Retained earnings .................................. 830,169 662,502
---------- ----------
1,141,557 959,615
Less: treasury stock, 12,500 and 7,500 shares at
September 30, 2000 and 1999, respectively .. (111,491) (69,092)
---------- ----------
Total stockholders' equity ................... 1,030,066 890,523
---------- ----------
$1,772,065 $1,527,381
========== ==========
</TABLE>
See accompanying notes.
32
<PAGE>
HEALTH MANAGEMENT ASSOCIATES, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Years ended September 30, 2000, 1999, and 1998
<TABLE>
<CAPTION>
Common Stock
---------------------- Additional
Par Paid-in Retained Treasury
Shares Value Capital Earnings Stock
------ ------- --------- ---------- --------
(in thousands)
<S> <C> <C> <C> <C> <C>
Balance at September 30, 1997 .. 244,058 $2,441 $181,966 $375,813
Exercise of stock options ... 2,636 26 12,080 -
Income tax benefit from exercise
of stock options............. - - 8,601 -
Issuance of common stock for
acquisition................... 4,864 49 79,951 -
Proceeds from sale of
equity put options............ - - 2,090 -
Reclassification of put
option obligation............. - (25) (43,011) -
Net income ................... - - - 136,844
------- ------ -------- --------
Balance at September 30, 1998 .. 251,558 2,491 241,677 512,657
Exercise of stock options .... 1,847 18 6,436 -
Income tax benefit from exercise
of stock options............. - - 3,455 -
Expiration of put option
obligation................... - 25 43,011 -
Purchase of treasury stock,
at cost...................... - - - - $ (69,092)
Net income ................... - - - 149,845 -
------- ------ -------- -------- ---------
Balance at September 30, 1999... 253,405 2,534 294,579 662,502 (69,092)
Exercise of stock options..... 1,952 20 11,611 - -
Income tax benefit from exercise
of stock options.............. - - 2,644 - -
Purchase of treasury stock,
at cost....................... - - - - (42,399)
Net income.................... - - - 167,667 -
------- ------ -------- -------- ---------
Balance at September 30, 2000... 255,357 $2,554 $308,834 $830,169 $(111,491)
======= ====== ======== ======== =========
</TABLE>
See accompanying notes.
33
<PAGE>
HEALTH MANAGEMENT ASSOCIATES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year ended September 30,
--------------------------------------------
2000 1999 1998
---------- --------- ---------
(in thousands)
<S> <C> <C> <C>
Cash flows from operating activities:
Net income................................................... $ 167,667 $ 149,845 $ 136,844
Adjustments to reconcile net income
to net cash provided by operating
activities:
Depreciation and amortization............................ 74,499 61,278 50,437
Loss on sale of fixed assets............................. 85 171 14
Change in deferred income taxes.......................... (4,979) (5,000) (2,914)
Changes in assets and liabilities,
net of effects of acquisitions
and dispositions:
Accounts receivable.................................. (24,377) (65,055) (63,382)
Supplies............................................. (4,802) (3,834) (3,029)
Prepaid expenses and
other assets....................................... (9,146) (441) (567)
Deferred charges and
other assets....................................... (10,426) (3,954) (3,706)
Accounts payable..................................... 4,632 22,878 5,182
Accrued payroll, interest and
other liabilities.................................. 1,785 3,371 (4,658)
Income taxes -- currently
payable............................................ (18,156) 10,092 1,965
Other long-term liabilities.......................... 115 (1,002) 1,765
--------- --------- ---------
Net cash provided by
operating activities......................................... 176,897 168,349 117,951
--------- --------- ---------
Cash flows from investing activities:
Acquisition of facilities, net of
cash acquired.............................................. (130,402) (183,967) (169,484)
Additions to property, plant
and equipment.............................................. (120,704) (159,392) (67,931)
Proceeds from sale of property,
plant and equipment........................................ 207 111 4,047
Purchase of treasury stock, at cost.......................... (42,399) (69,092) -
--------- --------- ---------
Net cash used in investing
activities................................................... (293,298) (412,340) (233,368)
--------- --------- ---------
</TABLE>
See accompanying notes.
34
<PAGE>
HEALTH MANAGEMENT ASSOCIATES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
<TABLE>
<CAPTION>
Year ended September 30,
-------------------------------------------
2000 1999 1998
--------- -------- --------
(in thousands)
<S> <C> <C> <C>
Cash flows from financing activities:
Proceeds from long-term borrowings............................ $ 447,117 $ 249,645 $ 80,995
Principal payments on debt.................................... (342,774) (17,229) (39,850)
Proceeds from issuance of common
stock....................................................... 14,275 11,999 20,707
Proceeds from sale of equity
put options................................................. - - 2,090
Decrease (increase) in funds
held by trustee............................................. 1,328 (183) (3,221)
--------- ---------- ---------
Net cash provided by
financing activities.......................................... 119,946 244,232 60,721
--------- --------- --------
Net increase (decrease) in cash and
cash equivalents.............................................. 3,545 241 (54,696)
Cash and cash equivalents at
beginning of year............................................ 12,926 12,685 67,381
--------- --------- --------
Cash and cash equivalents at
end of year.................................................. $ 16,471 $ 12,926 $ 12,685
========= ========= ========
Supplemental schedule of noncash
investing and financing activities:
Fair value of assets acquired
(including cash).......................................... $ 136,649 $ 218,863 $288,903
Consideration: Cash paid.................................... 130,402 183,967 169,484
Stock issued................................. - - 80,000
--------- --------- --------
Liabilities assumed......................................... $ 6,247 $ 34,896 $ 39,419
========= ========= ========
</TABLE>
See accompanying notes.
35
<PAGE>
HEALTH MANAGEMENT ASSOCIATES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2000
1. Business and summary of significant accounting policies
Health Management Associates, Inc. ("the Company"), through its
subsidiary companies, substantially all of which are wholly-owned, provides
health care services to patients in owned and leased facilities and provides
management services under contracts to other health care organizations in the
southeast and southwest United States. The Company consistently applies the
following significant accounting policies:
a. Principles of consolidation
The consolidated financial statements include the accounts of the
Company and its subsidiaries. The Company has a 30-year management agreement
with a hospital which commenced in January 1997. Since the agreement provides
that the Company exercises complete control over the operations of the hospital,
and bears the risks and rewards of ownership, the financial results of the
hospital have been included in the accompanying consolidated statements of
income since the commencement date of the agreement. All significant
intercompany accounts and transactions have been eliminated.
b. Cash equivalents
The Company considers all highly liquid investments purchased with a
maturity of less than three months to be cash equivalents. The Company's cash
equivalents consist principally of investment grade instruments.
c. Property, plant and equipment
Property, plant and equipment are carried at cost and include major
expenditures which increase their values or extend their useful lives.
Depreciation and amortization are computed using the straight line method based
on estimated useful lives. Estimated useful lives for buildings and improvements
range from twenty to forty years and for equipment range from three to ten
years. Leaseholds are amortized on a straight-line basis over the terms of the
respective leases. Depreciation expense was $63.7 million, $51.7 million and
$43.9 million for the years ended September 30, 2000, 1999 and 1998,
respectively.
d. Excess of cost over acquired net assets, net and deferred charges
and other assets
Excess of cost over acquired net assets is being amortized on a
straight-line basis over lives ranging from three to twenty-five years.
Accumulated amortization relating thereto is $23.1 million and $15.2 million at
September 30, 2000 and 1999, respectively. Deferred charges and other assets
consist principally of deferred financing costs and certain non-productive
assets held for sale. The financing costs are being amortized over the life of
the related debt. The accumulated amortization of deferred financing costs was
$2.9 million and $2.4 million at September 30, 2000 and 1999, respectively.
Certain long-lived assets and the related excess of cost over acquired
net assets may become impaired, requiring a writedown of the assets to their
estimated fair values. The Company periodically reviews future cash flows
related to these assets, and if necessary, reduces such assets to their
estimated fair values.
e. Use of estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management of the Company to make
estimates and assumptions that affect the amounts reported in the consolidated
financial statements and accompanying notes. Actual results could differ from
those estimates.
36
<PAGE>
HEALTH MANAGEMENT ASSOCIATES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
1. Business and summary of significant accounting policies (continued)
f. Net patient service revenue and accounts receivable
Approximately 60%, 60% and 62% of gross patient service charges for the
years ended September 30, 2000, 1999 and 1998, respectively, relates to services
rendered to patients covered by the Medicare and Medicaid programs. Payments for
services rendered to patients covered by these programs are generally less than
billed charges. Provisions for contractual adjustments are made to reduce the
charges to these patients to estimated receipts based upon the programs'
principles of payment/reimbursement (either prospectively determined or
retrospectively determined costs). Final settlements under these programs are
subject to administrative review and audit, and provision is currently made for
adjustments which may result. Revenues and receivables from government programs
are significant to the Company's operations, but the Company does not believe
that there are significant credit risks associated with these government
programs.
Estimates for contractual allowances under managed care health plans
are based primarily on the payment terms of contractual arrangements such as
predetermined rates per diagnosis, per diem rates or discounted fee for service
rates.
Net patient service revenue is presented net of provisions for
contractual adjustments and other allowances of $2.195 billion, $1.748 billion
and $1.391 billion in 2000, 1999 and 1998, respectively, in the accompanying
consolidated statements of income. In the ordinary course of business, the
Company renders services in its facilities to patients who are financially
unable to pay for the hospital care. The value of these services to patients who
are unable to pay is not material to the Company's consolidated results of
operations.
g. Income taxes
Deferred income taxes at September 30, 2000 and 1999 relate principally
to differences in the recognition of certain income and expense items for income
tax and financial reporting purposes.
h. Net income per share
Net income per share is based on the weighted average number of common
and common equivalent shares (stock options) outstanding during the periods
presented.
i. Recently issued accounting pronouncements
In 1998 the Financial Accounting Standards Board (FASB) issued
Statement No. 133, "Accounting for Derivative Instruments and Hedging
Activities," which the Company will adopt October 1, 2000. Because of the
Company's minimal use of derivatives, the Company does not believe the new
standard will have a material effect on the earnings or financial position of
the Company.
j. Reclassifications
Certain amounts have been reclassified in prior years to conform with
the current year presentation.
2. Acquisitions and dispositions
During 2000 the Company acquired certain assets of three hospitals (one
at September 30, 2000) through purchase agreements for $130.4 million in cash
and the assumption of $6.2 million in liabilities. During 1999 the Company
acquired certain assets of four hospitals through one purchase and two long-term
lease agreements for consideration totaling $218.9 million, which included
$184.0 million in cash and the assumption of $34.9 million of liabilities.
During 1998
37
<PAGE>
HEALTH MANAGEMENT ASSOCIATES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
2. Acquisitions and dispositions (continued)
the Company acquired certain assets of six hospitals through various acquisition
and long-term lease agreements for consideration totaling $288.9 million, which
included $169.5 million in cash, $80.0 million in Company stock, and the
assumption of $39.4 million in long-term debt. The foregoing acquisitions were
accounted for using the purchase method of accounting. The allocation of the
purchase price has been determined by the Company based upon available
information and is subject to further refinement.
The operating results of the foregoing hospitals(except for the
September 30, 2000 acquisition) have been included in the accompanying
consolidated statements of income from the respective dates of acquisition. The
following unaudited pro forma combined summary of operations of the Company for
each of the years in the three year period ended September 30, 2000 give effect
to the operation of the hospitals purchased in 2000, 1999 and 1998 as if the
acquisitions had occurred as of October 1, 1998, 1997 and 1996, respectively:
2000 1999 1998
------- -------- --------
(in millions, except per share data)
Net patient service revenue...... $1,700.0 $1,602.5 $1,404.4
Net income....................... $ 164.3 $ 140.4 $ 132.6
Net income per share - Basic..... $ .68 $ .56 $ .53
Net income per share - Diluted... $ .67 $ .55 $ .52
3. Long-term debt
The Company's long-term debt consists of the following:
September 30,
------------------
2000 1999
------- --------
(in thousands)
Revolving Credit Agreements (a)............... $140,000 $293,000
Zero-Coupon Subordinated Convertible Notes
due 2020 at 3%, net of discount of $200.2
million at September 30, 2000(b)............. 288,421 -
Industrial Revenue Bond Issue (c)............. 5,940 6,270
Mortgage notes, secured by real and
personal property (d)......................... 53,592 75,360
Various mortgage and installment notes and
debentures, some secured by equipment,
at interest rates ranging from 6% to
prime plus 1%, payable through 2009.......... 11,325 6,162
Capitalized lease obligations (see Note 4).... 27,396 30,081
-------- --------
526,674 410,873
Less current maturities ...................... 6,523 9,351
-------- --------
$520,151 $401,522
======== ========
a. Revolving Credit Agreements
In November 1999, the Company closed on a $600 million Credit Agreement
(the "Credit Agreement"), thereby refinancing and replacing its existing $300
million credit agreement which expired on November 30, 1999. The Credit
Agreement is an unsecured revolving credit loan, comprised of a $150 million
364-day credit loan and a $450 million 5-year credit loan. The Company may
choose a Base Rate Loan (prime interest rate) or a Eurodollar Rate Loan (LIBOR
interest rate). The interest rate for a Eurodollar Rate Loan is currently at
LIBOR plus 1.00 percent, and will increase or decrease in relation to a change
in the Company's credit rating. Under either alternative, quarterly interest
payments are required. The
38
<PAGE>
HEALTH MANAGEMENT ASSOCIATES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
3. Long-term debt (Continued)
interest rate on the outstanding balance at September 30, 2000 was 7.6%. The
Credit Agreement is a revolving and term loan agreement which permits the
Company to borrow under an unsecured revolving credit loan at any time through
November 30, 2004, at which time the agreement terminates and all outstanding
revolving credit loans become due and payable. As described below, the Company
utilized the proceeds from the issuance of subordinated notes and cancelled the
$150 million 364-day credit loan portion of the Credit Agreement in September
2000.
The Company also has a $15 million unsecured revolving credit
commitment (increased from $10 million effective March 2000) with a bank. The
$15 million credit is a working capital commitment which is tied to the
Company's cash management system, and renews annually on November 1. Currently,
interest on any outstanding balance is payable monthly at a fluctuating rate not
to exceed the bank's prime rate less 1/4%.
In addition, the Company is obligated to pay certain commitment fees
based upon amounts borrowed and available for borrowing during the terms of the
credit agreements described above.
The credit agreements contain covenants which, without prior consent of
the banks, limit certain activities, including those relating to mergers,
consolidations and the Company's ability to secure additional indebtedness, make
guarantees, grant security interests and declare dividends. The Company must
also maintain minimum levels of consolidated tangible net worth, debt service
coverage and interest coverage.
b. Subordinated Convertible Notes
On August 16, 2000, the Company sold $488.8 million face value of zero-
coupon subordinated convertible notes for gross proceeds of $287.7 million. The
notes mature on August 16, 2020 unless converted or redeemed earlier. The notes
are convertible into the Company's common stock at a conversion rate of 29.5623
shares of common stock for each $1,000 principal amount of the notes (equivalent
to a conversion price of $19.9125 per share). Interest on the notes is payable
semiannually in arrears on August 16 and February 16 of each year, beginning
February 16, 2001 at a rate of .25% per year on the principal amount at
maturity. The rate of cash interest and accrual of original issue discount
represent a yield to maturity of 3% per year calculated from August 16, 2000.
Holders may require the Company to purchase all or a portion of their
notes on August 16, 2003, August 16, 2008 and August 16, 2013 for a purchase
price per note of $635.88, $724.58 and $827.53, respectively, plus accrued and
unpaid interest to each purchase date. The Company may choose to pay the
purchase price in cash or common stock or a combination of cash and common
stock. In addition, upon a change in control of the Company occurring on or
before August 16, 2003, each holder may require the Company to repurchase all or
a portion of such holder's notes. The Company may redeem all or a portion of the
notes at any time on or after August 16, 2003.
c. Industrial Revenue Bond Issue
The Company has one Industrial Revenue Bond issue outstanding at
September 30, 2000 and 1999, which is secured by all real and personal property
of the facility with aggregate net book value of $11.0 million and $10.8
million, respectively, and a pledge of the stock of the subsidiary owning the
facility; payment of principal and interest is unconditionally guaranteed by the
Company. The bonds are serial bonds with maturities and rates ranging from
September 1, 2005 to September 1, 2011 and 8.5% to 8.75%, respectively. The
Company makes monthly sinking-fund payments in amounts sufficient to cover
principal and interest payment requirements.
39
<PAGE>
HEALTH MANAGEMENT ASSOCIATES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
3. Long-term debt (Continued)
d. Mortgage Notes
The Company has six mortgage notes which are secured by all the real
and personal property related to five facilities with a net book value of $78.0
million and $88.9 million at September 30, 2000 and 1999, respectively. The
notes are payable in various installments with maturity dates ranging from 2001
through 2007 and carry interest rates ranging from prime to 11.5%.
As of September 30, 2000, the quoted market price for the subordinated
convertible notes was approximately $353.8 million. The fair value of the other
debt included above, based on available market information, approximates its
carrying value.
Maturities of long-term debt and capital leases for the next five years
and thereafter, are as follows (in thousands):
2001 $ 6,523
2002 9,557
2003 4,551
2004 4,663
2005 144,405
Thereafter 356,975
The Company paid interest of $31.1 million, $14.4 million and $8.6
million for the years ended September 30, 2000, 1999 and 1998, respectively.
Capitalized interest totaled $3.1 million, $4.3 million and $1.3 million for the
years ended September 30, 2000, 1999 and 1998 respectively.
4. Leases
The Company leases real estate properties, equipment and vehicles under
cancelable and non-cancelable leases. Future minimum operating and capital lease
payments, including amounts relating to leased hospitals, are as follows at
September 30, 2000 (in thousands):
Operating Capital
------------------------- ------------
Real
Real Property and
September 30, Property Equipment Equipment Total
------------- ----------- ----------- ------------ -----------
2001 ................. $ 4,484 $14,096 $ 3,608 $ 22,188
2002 ................. 3,850 11,074 3,408 18,332
2003 ................. 3,277 7,692 3,280 14,249
2004 ................. 2,341 4,750 3,153 10,244
2005 ................. 2,057 2,541 2,813 7,411
Thereafter ........... 19,488 741 41,876 62,105
------- ------- ------- --------
Total minimum payments $35,497 $40,894 58,138 $134,529
======= ======= ========
Less amounts
representing interest 30,742
-------
Present value of
minimum lease
payments ........... $27,396
=======
40
<PAGE>
HEALTH MANAGEMENT ASSOCIATES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
4. Leases (continued)
The following summarizes amounts related to assets leased by the Company
under capital leases (in thousands):
September 30,
------------------------
2000 1999
----------- -----------
Cost.............................. $70,139 $69,855
Accumulated amortization.......... 13,503 9,943
------- -------
Net book value.................... $56,636 $59,912
======= =======
The Company entered into capitalized leases for equipment of $.2 million,
$.8 million and $.1 million for the years ended September 30, 2000, 1999 and
1998, respectively.
5. Income taxes
The significant components of the provision for income taxes are as follows
(in thousands):
<TABLE>
<CAPTION>
Year ended September 30,
-------------------------------------------------
2000 1999 1998
--------- --------- --------
<S> <C> <C> <C>
Federal:
Current ............................. $ 96,713 $85,248 $80,086
Deferred ............................ (3,439) (2,777) (4,076)
-------- -------- -------
Total Federal ................... 93,274 82,471 76,010
State:
Current and deferred ................ 15,054 14,337 12,425
-------- ------- -------
Total ............................ $108,328 $96,808 $88,435
======== ======= =======
</TABLE>
An analysis of the Company's effective income tax rates is as follows:
<TABLE>
<CAPTION>
Year ended September 30,
----------------------------------------------------------------------
2000 1999 1998
------------------ ------------------------ ---------------------
<S> <C> <C> <C> <C> <C> <C>
Statutory income
tax rate ............... $ 96,598 35.0% $86,329 35.0% $78,848 35.0%
State income taxes, net
of Federal benefit ..... 10,797 3.9 9,319 3.8 8,076 3.6
Other items (each less
than 5% of computed
tax) .................. 933 .4 1,160 .5 1,511 .7
-------- ---- ------- ---- ------- ----
Total ............... $108,328 39.3% $96,808 39.3% $88,435 39.3%
======== ==== ======= ==== ======= ====
</TABLE>
41
<PAGE>
HEALTH MANAGEMENT ASSOCIATES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
5. Income taxes (continued)
The tax effects of temporary differences that give rise to significant portions
of the Federal and state deferred income tax assets and liabilities are
comprised of the following:
September 30,
------------------------
2000 1999
-------- ---------
(in thousands)
Deferred income tax assets:
Self insurance liability risks $ 2,498 $ 4,467
Allowance for doubtful accounts 26,201 21,096
Cash basis method of accounting 8,712 5,250
------- -------
37,411 30,813
Valuation allowance for
deferred income tax assets - -
------- -------
Net deferred income tax assets 37,411 30,813
Deferred income tax liabilities:
Depreciable assets 32,334 30,992
Other 2,162 1,885
------- -------
Net deferred income tax asset
(liability) $ 2,915 $(2,064)
======= =======
Income taxes paid (net of refunds) amounted to $123.6 million,$79.3
million, and $77.8 million for the years ended September 30, 2000, 1999 and
1998, respectively.
6. Retirement plan
The Company has a defined contribution retirement plan which covers
substantially all eligible employees at its hospitals and the corporate office.
This plan includes a provision for the Company to match a portion of employee
contributions. Total retirement program expense was $4.0 million, $3.8 million
and $3.2 million for the years ended September 30, 2000, 1999 and 1998,
respectively.
7. Earnings per share
The following table sets forth the computation of basic and diluted
earnings per share (in thousands, except per share data):
42
<PAGE>
HEALTH MANAGEMENT ASSOCIATES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
7. Earnings Per Share (continued)
<TABLE>
<CAPTION>
Year ended September 30,
--------------------------------------
2000 1999 1998
-------- -------- ---------
<S> <C> <C> <C>
Numerator:
Numerator for basic earnings
per share - net income $167,667 $149,845 $136,844
Effect of convertible debt 655 - -
-------- -------- --------
Numerator for diluted
earnings per share $168,322 $149,845 $136,844
======== ======== ========
Denominator:
Denominator for basic earnings
per share-weighted average shares 241,946 250,467 249,049
Effect of dilutive securities:
Employee stock options 3,550 4,600 6,526
Convertible debt 1,781 - -
-------- -------- --------
Denominator for diluted
earnings per share 247,277 255,067 255,575
======== ======== ========
Basic earnings per share $ .69 $ .60 $ .55
======== ======== ========
Diluted earnings per share $ .68 $ .59 $ .54
======== ======== ========
</TABLE>
8. Stockholders' equity
The Company has elected to follow Accounting Principles Board Opinion
No. 25, "Accounting for Stock Issued to Employees" ("APB 25"). Under APB 25,
since the exercise price of the Company's employee stock options equals the
market price of the underlying stock on the date of grant, no compensation
expense is recognized. Pro forma disclosure of alternative fair value accounting
is then required under FASB Statement No. 123, "Accounting for Stock-Based
Compensation" (Statement 123), utilizing an option valuation model.
The Company has a 1991 Stock Option Plan, a 1993 Stock Option Plan and a
1996 Executive Incentive Compensation Plan for the granting of options to key
employees of the Company. All options granted have 10 year terms and vest and
become fully exercisable at the end of either 3 or 4 years of continued
employment.
43
<PAGE>
HEALTH MANAGEMENT ASSOCIATES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
8. Stockholders' equity (continued)
Pertinent information covering the plans is summarized below:
<TABLE>
<CAPTION>
Price Weighted
Shares Range Average Price
---------- ------------- -------------
(in thousands)
<S> <C> <C> <C>
Balance at September 30, 1997 19,762 1.24 - 10.33 3.58
Granted 1,690 21.63 21.63
Exercised (2,237) 1.24 - 12.72 4.89
Terminated (838) 5.16 - 21.63 9.84
------
Balance at September 30, 1998 18,377 1.24 - 21.63 8.36
Granted 3,688 8.25 - 13.00 12.72
Exercised (1,623) 2.07 - 12.72 3.43
Terminated (204) 10.33 - 21.63 18.61
------
Balance at September 30, 1999 20,238 1.24 - 21.63 10.30
Granted 3,807 12.13 - 14.69 12.14
Exercised (1,809) 1.24 - 13.00 5.97
Terminated ( 403) 10.33 - 21.63 16.14
------
Balance at September 30, 2000 21,833 1.24 - 21.63
======
Exercisable at
September 30, 2000 14,685
======
</TABLE>
The following table summarizes information concerning currently outstanding
and exercisable options:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
-------------------------------------------------------- -----------------------
Weighted
Average Weighted Weighted
Range of Remaining Average Average
Exercise Number Contractual Exercise Number Exercise
Prices Outstanding Life Price Exercisable Price
------------- ----------- ----------- -------- ----------- ---------
<S> <C> <C> <C> <C> <C>
$ 1.24-$10.50 6,817,000 3.5 $ 5.25 6,601,000 $ 5.15
$12.13-$21.63 15,016,000 8.5 $13.43 8,084,000 $13.48
</TABLE>
Pro forma information regarding net income and earnings per share is
required by Statement 123, which also requires that the information be
determined as if the Company has accounted for its employee stock options
granted subsequent to December 31, 1995 under the fair value method of that
Statement. The fair value for these options was estimated at the date of grant
using the Black-Scholes option pricing model with the following weighted-average
assumptions for 2000, 1999 and 1998: risk- free interest rate of 6.56%, 5.81% -
6.18% and 5.78%; no dividend yields; volatility factor of the expected market
price of the Company's common stock of .486, .446 and .342; and weighted average
expected lives of the options of 7 years.
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions including the expected stock price
volatility. Because the Company's employee stock options have characteristics
significantly different from those of traded options, and because changes in the
subjective input assumptions can materially affect the fair value estimate, in
management's opinion, the existing
44
<PAGE>
HEALTH MANAGEMENT ASSOCIATES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
8. Stockholders' equity (continued)
models do not necessarily provide a reliable single measure of the fair value of
its employee stock options.
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. The Company's
pro forma information follows (in thousands, except per share data):
2000 1999 1998
--------- --------- ---------
Pro forma net income $ 156,702 $ 138,588 $ 132,112
Pro forma earnings per share:
Basic $ .65 $ .55 $ .53
Diluted $ .64 $ .54 $ .52
At September 30, 2000 there were approximately 16.1 million shares of
common stock reserved for future issuance under the plans. In addition, the
Company has granted options for shares of Class A Common Stock to six non-
employee directors. At September 30, 2000 there were approximately 205,000
options outstanding at $2.07 to $21.63 per share, expiring in 2002 through 2010.
The Company also has a Stock Incentive Plan for corporate officers and
management staff. This plan provides for the awarding of additional compensation
to key personnel in the form of Company stock. The stock will be issued to the
grantee four years after the date of grant, provided the individual is still an
employee of the Company. At September 30, 2000 there were approximately 455,000
shares reserved under the plan, for which the Company has recorded $1.5 million,
$1.5 million and $1.2 million of compensation expense for the years ended
September 30, 2000, 1999 and 1998, respectively.
In February 1998 the Board of Directors approved a stock repurchase
program. In connection with the program, put options were sold to an independent
third party in September 1998. Proceeds of $2,090,000 from the issuance of the
put options were accounted for as additional paid-in-capital. Each put option
entitled the holder to sell one share of the Company's common stock to the
Company at a price of $17.50 per share. At September 30, 1998, 2,459,000 put
options were outstanding, which were exercisable only at maturity and expired at
various dates from November 1998 to December 1998. The potential repurchase
obligation of $43,036,000 was reclassified from stockholders' equity to a
liability as of September 30, 1998. Subsequent to year end, the liability was
eliminated in connection with the expiration of the put options.
During 1999 the Company repurchased 7.5 million shares of its stock at a
cost of $69.1 million, which completed the February 1998 stock repurchase plan
referred to above. In September 1999 the Board of Directors approved a stock
repurchase program of up to 25 million shares of common stock. On October 14,
1999 the Company executed a share repurchase agreement with an independent third
party, whereby the third party agreed to "sell short" 5 million shares of the
Company's common stock to the Company. As of October 19, 1999 the 5 million
shares were delivered to the Company and became treasury stock. From October 15,
1999 to December 15, 1999, a period of 60 days, the third party covered the
"short sale" by buying shares on the open market. On December 15, 1999 the
Company reimbursed the third party $42,399,000, which represented the cost of
the common stock purchased plus a commission plus interest (at LIBOR) on the
outstanding balance of funds used to purchase the common stock. At September 30,
2000, there were 12.5 million shares of common stock reserved for future
issuance upon the conversion of the Company's subordinated convertible notes.
45
<PAGE>
HEALTH MANAGEMENT ASSOCIATES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
9. Professional and liability risks
The Company has a layered claims-made self-insurance program with a major
insurance carrier for its professional liability risks. An umbrella policy
provides $35 million of coverage in excess of an underlying limit of $4 million
depending upon layer structures and the dollar amounts of claims settled.
Accruals for self-insured professional liability risks are determined using
asserted and unasserted claims identified by the Company's incident reporting
system and actuarially determined estimates based on Company and industry
historical loss payment patterns. Although the ultimate settlement of these
accruals may vary from these estimates, management believes that the amounts
provided in the Company's consolidated financial statements are adequate.
10. Commitments
The Company has a number of hospital renovation/expansion projects underway
at September 30, 2000. None of these projects are individually significant nor
do they represent a significant commitment in total at September 30, 2000.
46
<PAGE>
HEALTH MANAGEMENT ASSOCIATES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
11. Quarterly data (unaudited)
<TABLE>
<CAPTION>
Years ended September 30, 2000 and 1999
(in thousands, except per share data)
Quarter
1st 2nd 3rd 4th Total
-------- -------- --------- -------- ----------
<S> <C> <C> <C> <C> <C>
2000
----------
Net patient
service revenue........... $370,094 $408,655 $391,099 $407,919 $1,577,767
Income before income
taxes..................... 56,451 83,103 72,138 64,303 275,995
Net income.................. 34,292 50,487 43,823 39,065 167,667
Net income per share:
Basic.............. $ .14 $ .21 $ .18 $ .16 $ .69
Diluted............ $ .14 $ .21 $ .18 $ .16 $ .68
Weighted average
number of shares:
Basic.............. 241,916 241,064 242,078 242,816 241,946
Diluted............ 245,015 244,979 245,917 254,788 247,277
1999
----------
Net patient
service revenue........... $305,496 $339,748 $352,473 $357,990 $1,355,707
Income before income
taxes..................... 50,953 78,534 63,796 53,370 246,653
Net income.................. 30,955 47,707 38,757 32,426 149,845
Net income per share:
Basic.............. $ .12 $ .19 $ .15 $ .13 $ .60
Diluted............ $ .12 $ .19 $ .15 $ .13 $ .59
Weighted average
number of shares:
Basic.............. 251,653 251,905 251,972 247,805 250,467
Diluted............ 258,114 256,497 256,513 250,617 255,067
</TABLE>
47
<PAGE>
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None
PART III
Item 10. Directors and Executive Officers of the Registrant
The information required by this Item is (i) incorporated herein by
reference to the Company's proxy statement to be issued in connection with the
Annual Meeting of Stockholders of the Company to be held on February 20, 2001
under "Election of Directors", which proxy statement will be filed within 120
days after the end of the Company's fiscal year and (ii) set forth under
"Executive Officers of the Registrant" in Part I of this Report.
Item 11. Executive Compensation
The information required by this Item is incorporated herein by reference
to the Company's proxy statement to be issued in connection with the Annual
Meeting of the Stockholders of the Company to be held on February 20, 2001 under
"Executive Compensation", which proxy statement will be filed within 120 days
after the end of the Company's fiscal year.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The information required by this Item is incorporated herein by reference
to the Company's proxy statement to be issued in connection with the Annual
Meeting of Stockholders of the Company to be held on February 20, 2001 under
"Security Ownership of Certain Beneficial Owners and Management", which proxy
statement will be filed within 120 days after the end of the Company's fiscal
year.
Item 13. Certain Relationships and Related Transactions
The information required by this Item is incorporated herein by reference
to the Company's proxy statement to be issued in connection with the Annual
Meeting of Stockholders of the Company to be held on February 20, 2001 under
"Certain Transactions", which proxy statement will be filed within 120 days
after the end of the Company's fiscal year.
PART IV
Item 14. Exhibits, Financial Statement Schedule, and Reports on Form 8-K
Item 14(a)(1), 14(a)(2) and 14(d):
The following financial statement schedule is filed as part of this Report
at page 50 hereof:
Schedule II - Valuation and Qualifying Accounts
48
<PAGE>
Item 14. Exhibits, Financial Statement Schedule, and Reports on Form 8-K
(continued)
All other schedules are omitted since the required information is not
present or is not present in amounts sufficient to require submission of the
schedule, or because the information required is included in the consolidated
financial statements and notes thereto.
Item 14(a)(3) and 14(c): See Index to Exhibits.
Item 14(b):
During the last quarter of the fiscal year ended September 30, 2000, the
Registrant did not file a Current Report on Form 8-K.
49
<PAGE>
HEALTH MANAGEMENT ASSOCIATES, INC.
SCHEDULE II - VALUATION AND QUALIFYING
ACCOUNTS (in thousands of dollars)
<TABLE>
<CAPTION>
Balance at Acquisitions Charged Balance at
Beginning of and Charges to to other End of
Period Dispositions Operations(a) Accounts Deductions(b) Period
------------ ------------ ------------- -------- ------------- ------
<S> <C> <C> <C> <C> <C> <C>
Year ended September 30, 1998
Allowance for doubtful
accounts.................. $ 54,055 $16,388 $119,797 $ - $102,440 $ 87,800
======== ======= ======== ========= ======== ========
Year ended September 30, 1999
Allowance for doubtful
accounts.................. $ 87,800 $20,818 $153,021 $ - $146,847 $114,792
======== ======= ======== ========= ======== ========
Year ended September 30, 2000
Allowance for doubtful
accounts.................. $114,792 $ - $169,712 $ - $165,902 $118,602
======== ======= ======== ========= ======== ========
</TABLE>
_____________________
(a) Charges to operations include amounts related to provisions for
doubtful accounts, before recoveries.
(b) Includes amounts written-off as uncollectible.
50
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
HEALTH MANAGEMENT ASSOCIATES, INC.
<TABLE>
<S> <C> <C>
By /s/ William J. Schoen Chairman of the Board
--------------------------------- and December 5, 2000
William J. Schoen Chief Executive Officer
</TABLE>
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant in the capacities and on the dates indicated:
<TABLE>
<S> <C> <C>
/s/ William J. Schoen Chairman of the Board
----------------------------------- and December 5, 2000
William J. Schoen Chief Executive Officer
(Principal Executive
Officer)
/s/ Stephen M. Ray Executive Vice President
----------------------------------- - Finance December 5, 2000
Stephen M. Ray (Principal Financial
Officer and Principal
Accounting Officer)
/s/ Kent P. Dauten
-----------------------------------
Kent P. Dauten Director December 5, 2000
/s/ Robert A. Knox
-----------------------------------
Robert A. Knox Director December 5, 2000
/s/ Charles R. Lees
-----------------------------------
Charles R. Lees Director December 5, 2000
/s/ Kenneth D. Lewis
-----------------------------------
Kenneth D. Lewis Director December 5, 2000
/s/ William E. Mayberry
-----------------------------------
William E. Mayberry, M.D. Director December 5, 2000
/s/ Randolph W. Westerfield
-----------------------------------
Randolph W. Westerfield, Ph.D. Director December 5, 2000
</TABLE>
51
<PAGE>
INDEX TO EXHIBITS
(2) Plan of acquisition, reorganization, arrangement, liquidation or
succession
Not applicable.
(3) (i) Articles of Incorporation
3.1/(i)/ Fifth Restated Certificate of Incorporation. (Exhibit 3.1)
3.2/(s)/ Certificate of Amendment to Fifth Restated Certificate of
Incorporation. (Exhibit 3.2)
(ii) By-laws
3.3/(s)/ By-laws, as amended. (Exhibit 3.3)
(4) Instruments defining rights of security holders, including indentures
The Exhibits referenced under (3) of this Index to Exhibits are incorporated
herein by reference.
4.1/(f)/ Specimen Stock Certificate. (Exhibit 4.11)
4.5/(s)/ Credit Agreement by and among Health Management Associates,
Inc., as Borrower, Bank of America, N.A., as Administrative
Agent and as Lender, First Union National Bank, as
Syndication Agent and as Lender, and the Chase Manhattan
Bank, as Syndication Agent and as Lender, and The Lenders
Party Hereto From Time To Time, dated November 30, 1999.
(Exhibit 4.5)
4.6/(t)/ Credit Agreement dated March 23, 2000 between First Union
National Bank and Health Management Associates, Inc.
pertaining to a $15 million working capital and cash
management line of credit. (Exhibit 4.1)
(9) Voting Trust Agreement
Not applicable.
(10) Material Contracts
The Exhibits referenced under (4) of this Index to Exhibits are incorporated
herein by reference.
10.1/(i)/ First Amended and Restated Lease Agreement, dated as of January 1,
1995 between The Board of Commissioners of the Highlands County
Hospital District and Sebring Hospital Management Associates, Inc.
(Exhibit 10.1)
10.2/(c)/ Lease dated as of July 1, 1986 between Fishermen's Hospital, Inc. and
Marathon H.M.A., Inc. (Exhibit 28.1)
10.3/(e)/ First Amendment of the July 1, 1986 Lease Agreement by and between
Fishermen's Hospital, Inc. and Marathon H.M.A., Inc. dated December
18, 1991. (Exhibit 28.1)
10.4/(a)/ Lease Agreement dated January 12, 1990 between Biloxi Regional
Medical Center, Inc. and Biloxi H.M.A., Inc. (Exhibit 10.54)
10.5/(g)/ Lease Agreement between Heart of Florida Hospital Association,
Inc., Haines City HMA, Inc. and the Company, dated April 30,
1993. (Exhibit 10.49)
52
<PAGE>
10.6/(f)/ Amended and Restated Employment Agreement dated December 15, 1992
between Health Management Associates, Inc. and William J. Schoen.
(Exhibit 10.46)
10.7/(d)/ Health Management Associates, Inc. Stock Incentive Plan for
Corporate Officers and Management Staff. (Exhibit 10.56)
10.8/(i)/ Amendment No. 1 to the Health Management Associates, Inc. Stock
Incentive Plan for Corporate Officers and Management Staff.
(Exhibit 10.2)
10.9/(g)/ Health Management Associates, Inc. Supplemental Executive
Retirement Plan, dated July 12, 1990. (Exhibit 10.22)
10.10/(h)/ First Amendment to the Health Management Associates, Inc.
Supplemental Executive Retirement Plan, dated January 1, 1994.
(Exhibit 10.51)
10.11/(a)/ Registration Agreement dated September 2, 1988 between HMA
Holding Corp., First Chicago Investment Corporation, Madison
Dearborn Partners IV, Prudential Venture Partners, Prudential
Venture Partners II, William J. Schoen, Kelly E. Curry, Stephen
M. Ray, Robb L. Smith, George A. Taylor and Earl P. Holland.
(Exhibit 10.23)
10.12/(b)/ Health Management Associates, Inc. 1991 Non-Statutory Stock
Option Plan. (Exhibit 10.67)
10.13/(f)/ Amendment No. 1 and Amendment No. 2 to the Health Management
Associates, Inc. 1991 Non-Statutory Stock Option Plan. (Exhibit
10.44)
10.14/(f)/ Health Management Associates, Inc. 1993 Non-Statutory Stock
Option Plan. (Exhibit 10.45)
10.15/(i)/ Health Management Associates, Inc. Stock Option Plan for Outside
Directors. (Exhibit 10.5)
10.16/(f)/ Stock Option Agreement, dated May 14, 1992, between the Company
and Charles R. Lees. (Exhibit 10.42)
10.17/(g)/ Stock Option Agreement, dated May 18, 1993, between the Company
and Charles R. Lees. (Exhibit 10.48)
10.18/(h)/ Stock Option Agreement dated May 20, 1994, between the Company
and Charles R. Lees. (Exhibit 10.52)
10.19/(h)/ Stock Option Agreement dated May 17, 1994, between the Company
and Kenneth D. Lewis. (Exhibit 10.53)
10.20/(j)/ Amendment No. 5 to the Health Management Associates, Inc. 1991
Non-Statutory Stock Option Plan. (Exhibit 10.57)
10.21/(j)/ Amendment No. 3 to the Health Management Associates, Inc. 1993
Non-Statutory Stock Option Plan. (Exhibit 10.58)
10.22/(j)/ Amendment No. 1 to the Health Management Associates, Inc. Stock
Option Plan for Outside Directors. (Exhibit 10.59)
10.23/(l)/ Lease Agreement dated as of December 28, 1995 among Coahoma
County, Mississippi, Clarksdale HMA, Inc. and the Company.
(Exhibit 10.1)
10.24/(n)/ Lease Agreement dated May 21, 1996 among Midwest City Memorial
Hospital Authority, an Oklahoma Public Trust, and Midwest City
HMA, Inc. and Health Management Associates, Inc. (Exhibit 2.1)
53
<PAGE>
10.25/(l)/ Amendment No. 6 to the Health Management Associates, Inc. 1991
Non-Statutory Stock Option Plan. (Exhibit 10.2)
10.26/(l)/ Amendment No. 7 to the Health Management Associates, Inc. 1991
Non-Statutory Stock Option Plan. (Exhibit 10.3)
10.27/(l)/ Amendment No. 4 to the Health Management Associates, Inc. 1993
Non-Statutory Stock Option Plan. (Exhibit 10.4)
10.28/(l)/ Amendment No. 5 to the Health Management Associates, Inc. 1993
Non-Statutory Stock Option Plan. (Exhibit 10.5)
10.29/(k)/ Health Management Associates, Inc. 1996 Executive Incentive
Compensation Plan. (Exhibit 99.15)
10.30/(m)/ Amendment No. 1 to the Health Management Associates, Inc. 1996
Executive Incentive Compensation Plan. (Exhibit 10.1)
10.31/(o)/ Second Amendment to the Health Management Associates, Inc.
Supplemental Executive Retirement Plan, dated September 17, 1996.
(Exhibit 10.64)
10.32/(p)/ Hospital Management Agreement by and between Anniston HMA, Inc.
and the Trust created under the last will and testament of Susie
P. Stringfellow, entered into on January 24, 1997. (Exhibit 10.1)
10.33/(q)/ Lease Agreement made as of June 1, 1998 between Hernando County,
Florida and Hernando HMA, Inc. (Exhibit 10.2)
10.34/(r)/ Agreement by and among Methodist Healthcare-Jackson Hospitals,
Methodist Healthcare Central Mississippi Medical Associates,
Jackson HMA, Inc., Health Management Associates, Inc. and
Methodist Healthcare, as Guarantor, dated February 16, 1999
(Exhibit 10.1).
10.35/(u)/ Amendment No. 5 to the Health Management Associates, Inc. 1996
Executive Incentive Compensation Plan. (Exhibit 10.1)
10.36/(u)/ Amendment No. 6 to the Health Management Associates, Inc. 1996
Executive Incentive Compensation Plan. (Exhibit 10.2)
10.37 Amendment No. 10 to the Health Management Associates, Inc. 1991
Non-Statutory Stock Option Plan is filed as part of this Report
as Exhibit 10.37 at page 58 hereof.
10.38 Amendment No. 8 to the Health Management Associates, Inc. 1993
Non-Statutory Stock Option Plan is filed as part of this Report
as Exhibit 10.38 at page 59 hereof.
10.39 Amendment to Stock Option Agreements between Health Management
Associates, Inc. and William J. Schoen dated as of December 5,
2000 is filed as part of this Report as Exhibit 10.39 at page 60
hereof.
10.40 Third Amendment to the Health Management Associates, Inc.
Supplemental Retirement Plan is filed as part of this Report as
Exhibit 10.40 at page 62 hereof.
(11) Statement re computation of per share earnings
Not applicable.
54
<PAGE>
(12) Statements re computation of ratios
Not applicable.
(13) Annual report to security holders, Form 10-Q or quarterly report to
security holders
Not applicable.
(16) Letter re change in certifying accountant
Not applicable.
(18) Letter re change in accounting principles
Not applicable.
(21) Subsidiaries of the registrant
21.1 Subsidiaries of the registrant are listed on Exhibit 21.1 included
herein at page 65 of this Report.
(22) Published report regarding matters submitted to vote of security holders
None.
(23) Consent of experts and counsel
23.1 Consent of Ernst & Young LLP is filed as part of this Report as
Exhibit 23.1 at page 66 hereof.
(24) Power of Attorney
Not applicable.
(27) Financial Data Schedule
27.1 Financial Data Schedule is filed as part of this Report as
Exhibit 27.1 at page 67 hereof.
(99) Additional Exhibits
None.
________________________________
(a) Exhibit previously filed as part of and is incorporated herein by
reference to the Company's Registration Statement on Form S-1
(Registration No. 33-36406). The exhibit number contained in parenthesis
refers to the exhibit number in such Registration Statement.
(b) Exhibit previously filed as part of and is incorporated herein by
reference to the Company's Registration Statement on Form S-1
(Registration No. 33-43193). The exhibit number contained in parenthesis
refers to the exhibit number in such Registration Statement.
(c) Exhibit previously filed as part of and is incorporated herein by
reference to the Company's Current Report on Form 8-K dated July 1,
1986. The exhibit number contained in parenthesis refers to the exhibit
number in such Form 8-K.
(d) Exhibit previously filed as part of and is incorporated herein by
reference to the Company's Quarterly Report on Form 10-Q for the quarter
ended June 30, 1991. The exhibit number contained in parenthesis refers
to the exhibit number in such Form 10-Q.
55
<PAGE>
(e) Exhibit previously filed as part of and is incorporated herein by
reference to the Company's Quarterly Report on Form 10-Q for the
quarter ended December 31, 1991. The exhibit number contained in
parenthesis refers to the exhibit number in such Form 10-Q.
(f) Exhibit previously filed as part of and is incorporated herein by
reference to the Company's Annual Report on Form 10-K for the fiscal
year ended September 30, 1992. The exhibit number contained in
parenthesis refers to the exhibit number in such Form 10-K.
(g) Exhibit previously filed as part of and is incorporated herein by
reference to the Company's Annual Report on Form 10-K for the fiscal
year ended September 30, 1993. The exhibit number contained in
parenthesis refers to the exhibit number in such Form 10-K.
(h) Exhibit previously filed as part of and is incorporated herein by
reference to the Company's Annual Report on Form 10-K for the fiscal
year ended September 30, 1994. The exhibit number contained in
parenthesis refers to the exhibit number in such Form 10-K.
(i) Exhibit previously filed as part of and is incorporated herein by
reference to the Company's Quarterly Report on Form 10-Q for the
quarter ended March 31, 1995. The exhibit number contained in
parenthesis refers to the exhibit number in such Form 10-Q.
(j) Exhibit previously filed as part of and is incorporated herein by
reference to the Company's Annual Report on Form 10-K for the fiscal
year ended September 30, 1995. The exhibit number contained in
parenthesis refers to the exhibit number in such Form 10-K.
(k) Exhibit previously filed as part of and is incorporated herein by
reference to the Company's Registration Statement on Form S-8
(Registration No. 33-80433). The exhibit number contained in
parenthesis refers to the exhibit number in such Registration
Statement.
(l) Exhibit previously filed as part of and is incorporated herein by
reference to the Company's Quarterly Report on Form 10-Q for the
quarter ended December 31, 1995. The exhibit number contained in
parenthesis refers to the exhibit number in such Form 10-Q.
(m) Exhibit previously filed as part of and is incorporated herein by
reference to the Company's Quarterly Report on Form 10-Q for the
quarter ended March 31, 1996. The exhibit number contained in
parenthesis refers to the exhibit number in such Form 10-Q.
(n) Exhibit previously filed as part of and is incorporated herein by
reference to the Company's Current Report on Form 8-K dated June 10,
1996. The exhibit number contained in parenthesis refers to the exhibit
number in such Form 8-K.
(o) Exhibit previously filed as part of and is incorporated herein by
reference to the Company's Annual Report on Form 10-K for the fiscal
year ended September 30, 1996. The exhibit number contained in
parenthesis refers to the exhibit number in such Form 10-K.
(p) Exhibit previously filed as part of and is incorporated herein by
reference to the Company's Quarterly Report on Form 10-Q for the
quarter ended December 31, 1996. The exhibit number contained in
parenthesis refers to the exhibit number in such Form 10-Q.
(q) Exhibit previously filed as part of and is incorporated herein by
reference to the Company's Quarterly Report on Form 10-Q for the
quarter ended June 30, 1998. The exhibit number contained in
parenthesis refers to the exhibit number in such Form 10-Q.
56
<PAGE>
(r) Exhibit previously filed as part of and is incorporated herein by
reference to the Company's Quarterly Report on Form 10-Q for the
quarter ended June 30, 1999. The exhibit number contained in
parenthesis refers to the exhibit number in such Form 10-Q.
(s) Exhibit previously filed as part of and is incorporated herein by
reference to the Company's Annual Report on Form 10-K for the fiscal
year ended September 30, 1999. The exhibit number contained in
parenthesis refers to the exhibit number in such Form 10-K.
(t) Exhibit previously filed as part of and is incorporated herein by
reference to the Company's Quarterly Report on Form 10-Q for the
quarter year ended March 31, 2000. The exhibit number contained in
parenthesis refers to the exhibit number in such Form 10-Q.
(u) Exhibit previously filed as part of and is incorporated herein by
reference to the Company's Quarterly Report on Form 10-Q for the
quarter year ended June 30, 2000. The exhibit number contained in
parenthesis refers to the exhibit number in such Form 10-Q.
57
