Item 1. Business
General
Health Management Associates, Inc. (the "Company" or the "Registrant") was incorporated in Delaware in 1979 and succeeded to the operations of its subsidiary, Hospital Management Associates, Inc., which was formed in 1977. The Company provides a broad range of general acute care health services in non-urban communities. As of September 30, 2001, the Company operated 36 general acute care hospitals with a total of 5,184 licensed beds and two psychiatric hospitals with a total of 134 licensed beds. For the year ended September 30, 2001 ("Fiscal 2001"), the acute care hospital operations accounted for approximately 97% of the Company's net patient service revenue and the psychiatric hospital operations accounted for approximately 1%. See Item 2
Item 2. Properties
The Company's acute care hospitals offer a broad range of medical and surgical services, including inpatient care, intensive and cardiac care, diagnostic services and emergency services that are physician-staffed 24 hours a day, seven days a week. The Company also provides outpatient services such as one-day surgery, laboratory, x-ray, respiratory therapy, cardiology and physical therapy. At certain of the Company's hospitals specialty services such as oncology, radiation therapy, CT scanning, MRI imaging, lithotripsy and full-service obstetrics are provided.
The Company's psychiatric care operations consist of two psychiatric hospitals: one 64-bed and one 70-bed intensive residential treatment hospital.
The following table presents certain information with respect to the Company's facilities as of September 30, 2001. For more information regarding the utilization of the Company's facilities, see "Item 1. Business -- Selected Operating Statistics".
(1) The Company opened a replacement hospital for Hamlet Hospital in March 2000. The total cost of the project was approximately $17 million, including equipment.
(2) The Company opened a replacement hospital for Bulloch Memorial Hospital, The East Georgia Regional Medical Center, in July 2000. Whereas the previous facility was operated by the Company under a lease agreement, the Company now owns the new replacement hospital. The total cost of the project was approximately $51 million, including equipment.
(3) Effective July 1, 2000, the Company acquired Lancaster Regional Medical Center pursuant to an Asset Purchase Agreement. The Agreement included the purchase of substantially all property, plant and equipment and working capital of the hospital. The total consideration approximated $64 million, including $58 million in cash and the assumption of $6.2 million in liabilities.
(4) Effective September 1, 2000, the Company acquired the Pasco Regional Medical Center pursuant to an Asset Purchase Agreement. The Agreement included the purchase of substantially all property, plant and equipment and working capital of the hospital. The total consideration approximated $17 million in cash.
(5) Effective October 1, 2000, the Company acquired Davis Regional Medical Center pursuant to an Asset Purchase Agreement. The Agreement included the purchase of substantially all property, plant and equipment and working capital of the hospital. The total consideration approximated $55 million in cash.
(6) Effective June 18, 2001 the Company acquired Carlisle Hospital from Carlisle Hospital and Health Services, Inc. pursuant to a Definitive Agreement. The Agreement included the lease of certain real property, the purchase of certain real property and substantially all plant and equipment and working capital of the hospital. The total consideration involved approximately $41 million in cash. The Company is obligated to the construction of a replacement hospital, subject to obtaining all required governmental and regulatory approvals.
(7) Effective September 1, 2001, the Company acquired Lee County Community Hospital pursuant to an Asset Purchase Agreement. The Agreement included the purchase of substantially all property, plant and equipment and working capital of the hospital. The total consideration approximated $18 million in cash and the assumption of $3.6 million in liabilities.
The Company currently leases the facilities of Highlands Regional Medical Center, Fishermen's Hospital, Biloxi Regional Medical Center, Crawford Memorial Hospital, Northwest Mississippi Regional Medical Center, Midwest City Regional Hospital, Rankin Medical Center, Brooksville Regional Hospital/Spring Hill Regional Hospital, Central Mississippi Medical Center, Lower Keys Medical Center and Carlisle Regional Medical Center pursuant to long-term leases expiring in 2025, 2011, 2040, 2027, 2025, 2026, 2026, 2027, 2028, 2040, 2029 and 2006, respectively, which provide the Company with the exclusive right to use and control the hospital operations.
The Company's corporate headquarters are located in an office building in Naples, Florida, in which space is leased. The Company believes that all of its facilities are suitable and adequate for its needs. Certain of the Company's hospitals are subject to mortgages securing various borrowings. See Note 3 of the Notes to the Consolidated Financial Statements (Item 8. hereof).
Item 3.
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.
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of security holders during the fourth quarter of the fiscal year ended September 30, 2001.
Executive Officers of the Registrant
The following is certain information regarding the executive officers of the Company.
William J. Schoen, age 66, has served as Chairman of the Board since April 1986. He was first elected a director in February 1983, became President and Chief Operating Officer in December 1983, Co-Chief Executive Officer in December 1985 and Chief Executive Officer in April 1986. He served as President until April 1997 and Chief Executive Officer until January 2001. From 1982 to 1987 Mr. Schoen was Chairman of Commerce National Bank, Naples, Florida, and from 1973 to 1981 he was President, Chief Operating Officer and Chief Executive Officer of The F&M Schaefer Corporation, a consumer products company. From 1971 to 1973, Mr. Schoenwas President of the Pierce Glass subsidiary of Indian Head, Inc., a diversified company. Mr. Schoen also serves on the Board of Directors of Horace Mann Insurance Companies.
Joseph V. Vumbacco, age 56, became Chief Executive Officer of the Company in January 2001. Prior to that and since April 1997, he has been the Company's President, as well as serving as Chief Administrative Officer and Chief Operating Officer. He joined the Company as an Executive Vice President in January 1996 after 14 years with The Turner Corporation (construction and real estate), most recently as an Executive Vice President. Prior to joining Turner, he served as the Senior Vice President and General Counsel for The F&M Schaefer Corporation, and previously was an attorney with the Manhattan law firm of Mudge, Rose, Guthrie & Alexander. Mr. Vumbacco was elected a director by the Board of Directors in May 2001.
Timothy R. Parry, age 46, is Vice President and General Counsel of the Company. He joined the Company in February 1996 as a Divisional Vice-President and Assistant General Counsel after 12 years in the law firm of Harter, Secrest & Emery, the last seven years as partner. Prior to joining Harter, Secrest & Emery he was an Assistant Ohio Attorney General for two years and before that a law clerk for the United States District Court for the Southern District of Ohio.
Robert E. Farnham, age 46, is Senior Vice President and Chief Financial Officer of the Company. He joined the Company in 1985 and served as the Company's Controller for the past twelve years before his promotion to Chief Financial Officer in March 2001. Prior to joining the Company, Mr. Farnham, who is a C.P.A., was with Cooper's & Lybrand, LLP.
PART II
Item 5.
Item 5. Market for the Registrant's Common Equity and Related Stockholder Matters
The Company completed an initial public offering of its Class A Common Stock on February 5, 1991. The Company's Class A Common Stock is listed on the New York Stock Exchange under the Symbol HMA. At December 14, 2001 there were approximately 1,600 record holders of the Company's Class A Common Stock. The following table sets forth, for the periods indicated, the high and low sale prices per share of the Company's Class A Common Stock as listed on the New York Stock Exchange.
High Low --------- -------- Fiscal Year Ended September 30, 2000 First Quarter................................. $13.50 $ 7.00 Second Quarter................................ 18.25 9.63 Third Quarter................................. 16.56 11.25 Fourth Quarter................................ 21.13 12.75
Fiscal Year Ended September 30, 2001 First Quarter................................. 22.75 17.69 Second Quarter................................ 20.56 13.42 Third Quarter................................. 21.14 15.00 Fourth Quarter................................ $22.22 $17.95
The Company has not paid any cash dividends since its inception, but could pay cash dividends in the future.
In connection with a stock repurchase program approved by the Board of Directors in February 1998 the Company sold, pursuant to Section 4(2) of the Securities Act of 1933, 2,459,000 put options to an independent third party for proceeds totaling $2,090,000. Each put option entitled the holder to sell one share of the Company's common stock to the Company at a price of $17.50 per share, exercisable only at maturity and expiring at various dates from November 1998 to December 1998. The put options expired without being exercised.
During Fiscal 1999 the Company repurchased 7.5 million shares of its stock at a cost of $69.1 million, which completed the February 1998 stock repurchase plan referred to above. In September 1999 the Board of Directors approved a stock repurchase program of up to 25 million shares of common stock. On October 14, 1999 the Company executed a share repurchase agreement with an independent third party, whereby the third party agreed to "sell short" 5 million shares of the Company's common stock to the Company. As of October 19, 1999 the 5 million shares were delivered to the Company and became treasury stock. From October 15, 1999 to December 15, 1999, a period of 60 days, the third party covered the "short sale" by buying shares on the open market. On December 15, 1999 the Company reimbursed the third party the cost of the common stock purchased plus a commission plus interest (at LIBOR) on the outstanding balance of funds used to purchase the common stock. The total cost for the purchase of the 5 million shares of treasury stock was approximately $42.4 million.
In September 2001, the Board of Directors approved a stock repurchase program of up to 5 million shares of the Company's common stock. Purchases will be made from time to time in the open market and will continue until all of such shares are repurchased or until the Company decides to terminate the repurchase program. Through November 30, 2001, the Company has purchased 3.2 million shares at an average purchase price of $19.76 per share.
At September 30, 2001 and 2000, there were 14.5 million shares of common stock reserved for future issuance upon the conversion of the Company's subordinated convertible notes (see financial statement note No. 3.b.).
Item 6.
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)
Item 7.
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
Results of Operations
Fiscal Year Ended September 30, 2001 Compared to Fiscal Year Ended September 30, 2000
Net patient service revenue for Fiscal 2001 was $1,879.8 million, as compared to $1,577.8 million for the fiscal year ended September 30, 2000 ("Fiscal 2000"). This represented an increase in net patient service revenue of $302.0 million, or 19.1%. Hospitals in operation for the entire period of Fiscal 2001 and Fiscal 2000 ("same hospitals") provided $134.0 million of the increase in net patient service revenue, which resulted primarily from inpatient and outpatient volume increases and rate increases. The source of the remaining net increase of $168.0 million included the following: (1) $169.5 million of net patient service revenue from Fiscal 2000 and Fiscal 2001 acquisitions including the July 2000 acquisition of a 268-bed hospital, the September 2000 acquisition of a 120 bed hospital, the October 2000 acquisition of a 149-bed hospital , the June 2001 acquisition of a 200-bed hospital and the September 2001 acquisition of an 80-bed hospital, and (2) $1.5 million decrease in net patient service revenue from psychiatric hospitals, due primarily to the closure of one facility in December 2000.
The Company's hospitals generated 880,624 patient days of service in Fiscal 2001, which produced an overall occupancy rate of 47.2%. During Fiscal 2000 the Company's hospitals generated 791,617 patient days of service for an overall occupancy rate of 46.2%. Admissions in same hospitals for Fiscal 2001 increased 4.8%, from 158,830 to 166,521.
The Company's salaries and benefits, supplies and other expenses and provision for doubtful accounts for Fiscal 2001 were $1,390.4 million, or 74.0% of net patient service revenue, as compared to $1,163.8 million, or 73.8% of net patient service revenue for Fiscal 2000. Of the total $226.6 million increase approximately $92.5 million related to same hospitals, which was largely attributable to increased inpatient and outpatient volumes. Another $132.3 million of increased operating expenses related to the acquisitions mentioned previously. The remaining increase of $1.8 million represented an increase in Corporate and miscellaneous other operating expenses offset by a reduction in expenses resulting from the closure of one psychiatric facility as previously noted. The Company's Fiscal 2001 rent expense increased by $2.7 million, which resulted both from acquisitions and the expansion of hospital services.
The Company's depreciation and amortization costs increased by $16.1 million. Approximately $8.0 million of the increase resulted from the acquisitions mentioned above with the remaining increase attributable to two replacement hospitals opened in Fiscal 2000, as well as ongoing building improvements and equipment purchases. Interest expense decreased $5.4 million due to paydowns and lower interest rates on the Company's Revolving Credit Agreement. The $17.0 million non-cash charge for retirement benefits and write down of assets held for sale during Fiscal 2001 related to (1) the present value of the future costs of retirement benefits granted to the Company's chairman pursuant to an employment agreement which became effective January 2, 2001, and (2) the write down of two hospital assets held for sale subsequent to their respective replacement.
The Company's income before income taxes was $321.0 million for Fiscal 2001. Excluding the non-recurring charge for retirement benefits and write down of assets held for sale of $17.0 million, income before taxes was $338.0 million for Fiscal 2001 as compared to $276.0 million for Fiscal 2000, an increase of $62.0 million or 22.5%. As noted above, the increased profitability resulted from an increase in same hospital inpatient and outpatient business and from the acquisitions previously mentioned. The Company's provision for income taxes was $126.0 million for Fiscal 2001 as compared to $108.3 million for Fiscal 2000. These provisions reflect an effective income tax rate of 39.25% for Fiscal 2001 and Fiscal 2000. As a result of the foregoing, the Company's net income was $195.0 million for Fiscal 2001 including the aforementioned charge, and $205.3 million excluding the charge, as compared to $167.7 million for Fiscal 2000.
Fiscal Year Ended September 30, 2000 Compared to Fiscal Year Ended September 30, 1999
Net patient service revenue for Fiscal 2000 was $1,577.8 million, as compared to $1,355.7 million for the fiscal year ended September 30, 1999 ("Fiscal 1999"). This represented an increase in net patient service revenue of $222.1 million, or 16.4%. Same hospitals provided $77.6 million of the increase in net patient service revenue, which resulted primarily from inpatient and outpatient volume increases. The source of the remaining net increase of $144.5 million included the following: (1) $147.6 million of net patient service revenue from Fiscal 1999 and Fiscal 2000 acquisitions including the April 1999 acquisition of a 473-bed hospital system, the May 1999 acquisition of a 167-bed hospital system, the July 1999 acquisition of a 204-bed hospital, the July 2000 acquisition of a 268-bed hospital and the September 2000 acquisition of a 120-bed hospital, (2) $2.6 million decrease in net patient service revenue from psychiatric hospitals, due primarily to the closure of one facility as of March 31, 2000 and (3) a decrease of $.5 million in Corporate and miscellaneous revenue.
The Company's hospitals generated 791,617 patient days of service in Fiscal 2000, which produced an overall occupancy rate of 46.2%. During Fiscal 1999 the Company's hospitals generated 718,035 patient days of service for an overall occupancy rate of 47.1%. Admissions in same hospitals for Fiscal 2000 increased 4.7%, from 134,285 to 140,545.
The Company's salaries and benefits, supplies and other expenses and provision for doubtful accounts for Fiscal 2000 were $1,163.8 million, or 73.8% of net patient service revenue, as compared to $1,006.2 million, or 74.2% of net patient service revenue for Fiscal 1999. Of the total $157.6 million increase approximately $49.4 million related to same hospitals, which was largely attributable to increased inpatient and outpatient volumes. Another $103.7 million of increased operating expenses related to the acquisitions mentioned previously. The remaining increase of $4.5 million represented an increase in Corporate and miscellaneous other operating expenses offset by a reduction in expenses resulting from the closure of one psychiatric facility as previously noted. The Company's Fiscal 2000 rent
expense increased by $5.0 million, which resulted both from acquisitions and the expansion of hospital services.
The Company's depreciation and amortization costs increased by $13.2 million. Approximately $6.2 million of the increase resulted from the acquisitions mentioned above with the remaining increase attributable to two replacement hospitals opened in Fiscal 1999 and Fiscal 2000, as well as ongoing building improvements and equipment purchases. Interest expense increased $17.0 million due to borrowings related to Fiscal 1999 and Fiscal 2000 acquisitions, a higher interest rate on the Revolving Credit Agreement, and the recognition of a lower amount in capitalized interest cost in Fiscal 2000.
The Company's income before income taxes was $276.0 million for Fiscal 2000 as compared to $246.7 million for Fiscal 1999, an increase of $29.3 million or 11.9%. As noted above, the increased profitability resulted from an increase in same hospital inpatient and outpatient business and from the acquisitions previously mentioned. The Company's provision for income taxes was $108.3 million for Fiscal 2000 as compared to $96.8 million for Fiscal 1999. These provisions reflect an effective income tax rate of 39.25% for Fiscal 2000 and Fiscal 1999. As a result of the foregoing, the Company's net income was $167.7 million for Fiscal 2000 as compared to $149.8 million for Fiscal 1999.
Liquidity and Capital Resources
Fiscal 2001 Cash Flows Compared to Fiscal 2000 Cash Flows
Working capital increased to $377.1 million at September 30, 2001 from $317.2 million at September 30, 2000, resulting primarily from increased business volumes and good management of the Company's working capital. The Company's cash flows from operating activities increased by $113.1 million from $176.9 million in Fiscal 2000 to $290.0 million in Fiscal 2001. Improved profitability contributed to the majority of this net increase. The use of the Company's cash in investing activities decreased from $250.9 million in Fiscal 2000 to $171.0 million in Fiscal 2001, resulting from smaller outlays of cash for acquisitions and replacement hospitals in Fiscal 2001 compared to Fiscal 2000. The Company's cash flows from financing activities decreased $142.7 million from $77.5 million provided in Fiscal 2000 to $65.2 million used in Fiscal 2001. The decrease is primarily the result of net borrowings of debt of $104.3 in Fiscal 2000 versus net payments of debt of $93.5 in Fiscal 2001.
Fiscal 2000 Cash Flows Compared to Fiscal 1999 Cash Flows
Working capital increased to $317.2 million at September 30, 2000 from $250.5 million at September 30, 1999, resulting primarily from increased business volumes and good management of the Company's working capital. The Company's cash flows from operating activities increased by $8.6 million from $168.3 million in Fiscal 1999 to $176.9 million in Fiscal 2000. Improved profitability contributed to the majority of this net increase.
The use of the Company's cash in investing activities decreased from $343.2 million in Fiscal 1999 to $250.1 million in Fiscal 2000, resulting from smaller outlays of cash for acquisitions and replacement hospitals in Fiscal 2000 compared to Fiscal 1999. The Company's cash flows from financing activities decreased $97.6 million from $175.1 million provided in Fiscal 1999 to $77.5 million provided in Fiscal 2000, resulting from the net effect of proceeds of $282.7 from a convertible debt offering used to pay down existing debt under the Company's revolving credit agreement, reduced borrowings for acquisitions in Fiscal 2000, and reduced treasury stock purchases in Fiscal 2000.
Capital Resources
The Company currently has a 5-year $450 million Credit Agreement (the "Credit Agreement") due November 30, 2004. The Credit Agreement is a term loan agreement which permits the Company to borrow under an unsecured revolving credit loan at any time through November 30, 2004, at which time the agreement terminates and all outstanding amounts become due and payable. The Company may choose a Base Rate Loan (prime interest rate) or a Eurodollar Rate Loan (LIBOR interest rate). The interest rate for a Eurodollar Rate Loan is currently LIBOR plus 1.00 percent, and will increase or decrease in relation to a change in the Company's credit rating. Monthly or quarterly interest payments are required depending on the type of loan chosen by the Company. The interest rate on the outstanding balance at September 30, 2001 was 3.7%.
The Company also has a $15 million unsecured revolving credit commitment (increased from $10 million effective March 2000) with a bank. The $15 million credit is a working capital commitment which is tied to the Company's cash management system, and renews annually on November 1. Currently, interest on any outstanding balance is payable monthly at a fluctuating rate not to exceed the bank's prime rate less 1/4%. The interest rate at September 30, 2001 was 6.0%. There were no outstanding balances at September 30, 2001.
In addition, the Company is obligated to pay certain commitment fees based upon amounts available for borrowing during the terms of the credit agreements described above.
The credit agreements contain covenants which, without prior consent of the banks, limit certain activities, including those relating to mergers, consolidations and the Company's ability to secure additional indebtedness, make guarantees, grant security interests and declare dividends. The Company must also maintain minimum levels of consolidated tangible net worth, debt service coverage and interest coverage. At September 30, 2001, the Company was in compliance with these covenants.
On August 16, 2000, the Company sold $488.8 million face value of zero-coupon subordinated convertible notes for gross proceeds of $287.7 million. The notes mature on August 16, 2020 unless converted or redeemed earlier. The notes are convertible into the Company's common stock at a conversion rate of 29.5623 shares of common stock for each $1,000 principal amount of the notes (equivalent to the conversion price of $19.9125 per share). Interest on the notes is payable semiannually in arrears on August 16 and
February 16 of each year at a rate of .25% per year on the principal amount at maturity. The rate of cash interest and accrual of original issue discount represent a yield to maturity of 3% per year calculated from August 16, 2000.
Holders may require the Company to purchase all or a portion of their notes on August 16, 2003, August 16, 2008 and August 16, 2013 for a purchase price per note of $635.88, $724.58 and $827.53, respectively, plus accrued and unpaid interest to each purchase date. The Company may choose to pay the purchase price in cash or common stock or a combination of cash and common stock. In addition, upon a change in control of the Company occurring on or before August 16, 2003, each holder may require the Company to repurchase all or a portion of such holder's notes. The Company may redeem all or a portion of the notes at any time on or after August 16, 2003. There are 14.5 million shares of common stock reserved for future issuance upon the conversion of the Company's subordinated convertible notes.
Legislative and regulatory action has resulted in continuing change in the Medicare and Medicaid reimbursement programs which will continue to limit payment increases under these programs. However, the Company believes that these continued changes will not have a material adverse effect on the Company's future revenue or liquidity. Within the statutory framework of the Medicare and Medicaid programs, there are substantial areas subject to administrative rulings, interpretations and discretion which may further affect payments made under those programs, and the federal and state governments might, in the future, reduce the funds available under those programs or require more stringent utilization and quality reviews of hospital facilities, either of which could have a material adverse effect on the Company's future revenue and liquidity. Additionally, any future restructuring of the financing and delivery of health care in the United States and the continued rise in managed care programs could have an effect on the Company's future revenue and liquidity. See Item 1. "Sources of Revenue" and "Regulation and Other Factors".
Capital Expenditures
Effective June 19, 2001 the Company acquired Carlisle Hospital from Carlisle Hospital and Health Services, Inc. pursuant to a Definitive Agreement. The Agreement included the lease of certain real property, the purchase of certain real property and substantially all plant and equipment and working capital of the hospital. The total consideration involved approximately $41 million in cash. The Company is obligated to the construction of a replacement hospital, subject to obtaining all required governmental and regulatory approvals.
Effective September 1, 2001, the Company acquired Lee County Community Hospital pursuant to an Asset Purchase Agreement. The Agreement included the purchase of substantially all property, plant and equipment and working capital of the hospital. The total consideration approximated $18 million in cash and the assumption of $3.6 million in liabilities.
Effective November 30, 2001, the Company acquired the East Pointe Hospital pursuant to an Asset Purchase Agreement. The Agreement included the purchase of substantially all property, plant and equipment of the hospital. The total consideration approximated $16.5 million in cash.
The Company financed the above acquisitions through a combination of cash on hand and borrowings under its credit agreement.
In September 2001, the Board of Directors approved a stock repurchase program of up to 5 million shares of the Company's common stock. Purchases will be made from time to time in the open market and will continue until all of such shares are repurchased or until the Company decides to terminate the repurchase program. Through November 30, 2001, the Company had purchased 3.2 million shares at an average purchase price of $19.76 per share. The Company used cash on hand for these purchases.
In November 2001, the Company entered into a Definitive Agreement to purchase four acute-care hospitals from Clarent Hospital Corporation for approximately $170 million. In December 2001, the Company entered into a Definitive Agreement for the sale of one of these hospitals to Universal Health Services, Inc. (See footnote 11 to the Financial Statements). Both of these transactions are expected to be effective during the Company's second fiscal quarter of 2002. At the present time, the Company plans to use amounts available under its credit agreement to finance the net cost of the transaction.
The Company currently has a number of hospital renovation/expansion projects underway. None of these projects are individually significant nor do they represent a significant commitment in total to the Company.
The Company anticipates spending approximately $95-$100 million for capital equipment and renovations during the fiscal year ending September 30, 2002 ("Fiscal 2002"). At the present time, cash on hand, internally generated funds in Fiscal 2002, and funds available under the Credit Facilities are expected to be sufficient to satisfy the Company's requirements for capital expenditures, future acquisitions and working capital in Fiscal 2002.
Impact of Seasonality and Inflation
The Company's business is seasonal, with higher patient volumes and net patient service revenue in the second and third quarters of the Company's fiscal year. This seasonality occurs because more people become ill during the winter months, which results in significant increases in the number of patients treated in the Company's hospitals during those months.
The health care industry is labor intensive. Wages and other expenses increase especially during periods of inflation and when shortages in the marketplace occur. In addition, suppliers pass along rising costs to the Company in the form of higher prices. The Company has, to date, offset increases in operating costs to the Company by increasing charges for services and expanding services. The Company has also implemented cost control measures to curb increases in operating costs and expenses. The Company cannot predict its ability to cover or offset future cost increases.
Forward-Looking Statements
Certain statements contained in this Form 10-K, including, without limitation, statements containing the words "believes," "anticipates," "intends," "expects" and words of similar import, constitute "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements are based upon the Company's current plans, expectations and projections about future events. However, such statements involve known and unknown risks, uncertainties and other factors that may cause the actual results, performance or achievements of the Company to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. Such factors include, among others, the following: general economic and business conditions, both nationally and in the regions in which the Company operates; demographic changes; existing governmental regulations and changes in, or the failure to comply with, governmental regulations; legislative proposals for health care reform; the ability to enter into managed care provider arrangements on acceptable terms; changes in Medicare and Medicaid payment levels; liability and other claims asserted against the Company; competition; the loss of any significant ability to attract and retain qualified personnel, including physicians; the availability and terms of capital to fund additional acquisitions or replacement facilities. Given these uncertainties, prospective investors are cautioned not to place undue reliance on such forward-looking statements. The Company disclaims any obligation to update any such factors or to publicly announce the results of any revision to any of the forward-looking statements contained herein to reflect future events or developments.
Item 7A.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Interest Rates
The Company is exposed to interest rates, primarily as a result of its $450 million revolving credit agreement with a floating interest rate (see financial statement note No. 3). The Company is currently not using derivative instruments to alter the interest rate characteristics of the Company's variable rate long term debt. The following table summarizes principal cash flows and related weighted average interest rates by expected maturity dates. At September 30, 2001 the fair value of the Company's fixed rate debt was $435.2 million, while the carrying value was approximately $390.7 million. At September 30, 2001 the fair value of the Company's variable rate debt was $45.0 million, while the carrying value was approximately $45.0 million.
* The Company may choose a Base Rate Loan (prime interest rate) or a Eurodollar Rate Loan (LIBOR interest rate). The interest rate for a Eurodollar Rate Loan is currently LIBOR plus 1.00 percent, and will increase or decrease in relation to the Company's credit rating. The interest rate on the outstanding balance at September 30, 2001 was 3.7%.
Item 8.
Item 8. Financial Statements and Supplementary Data
Page ----
Health Management Associates, Inc. Consolidated Financial Statements: Report of Independent Certified Public Accountants ............... 32 Consolidated Statements of Income -- for the years ended September 30, 2001, 2000 and 1999 .............................. 33 Consolidated Balance Sheets --September 30, 2001 and 2000 ........ 34 Consolidated Statements of Stockholders' Equity -- for the years ended September 30, 2001, 2000 and 1999 .................. 36 Consolidated Statements of Cash Flows -- for the years ended September 30, 2001, 2000 and 1999 ........................ 37 Notes to Consolidated Financial Statements .......................39
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors and Stockholders Health Management Associates, Inc.
We have audited the accompanying consolidated balance sheets of Health Management Associates, Inc. and subsidiaries as of September 30, 2001 and 2000, and the related consolidated statements of income, stockholders' equity, and cash flows for each of the three years in the period ended September 30, 2001. Our audits also included the financial statement schedule listed in the Index at Item 14(a). These financial statements and schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits.
We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Health Management Associates, Inc. and subsidiaries at September 30, 2001 and 2000 and the consolidated results of their operations and their cash flows for each of the three years in the period ended September 30, 2001, in conformity with accounting principles generally accepted in the United States. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein.
Ernst & Young LLP
Tampa, Florida October 24, 2001
HEALTH MANAGEMENT ASSOCIATES, INC.
CONSOLIDATED STATEMENTS OF INCOME
See accompanying notes.
HEALTH MANAGEMENT ASSOCIATES, INC. CONSOLIDATED BALANCE SHEETS (in thousands)
See accompanying notes.
HEALTH MANAGEMENT ASSOCIATES, INC. CONSOLIDATED BALANCE SHEETS (in thousands)
HEALTH MANAGEMENT ASSOCIATES, INC. CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY Years ended September 30, 2001, 2000, and 1999 (in thousands)
See accompanying notes.
HEALTH MANAGEMENT ASSOCIATES, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands)
See accompanying notes.
HEALTH MANAGEMENT ASSOCIATES, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued) (in thousands)
See accompanying notes.
HEALTH MANAGEMENT ASSOCIATES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS September 30, 2001
1. Business and summary of significant accounting policies
Health Management Associates, Inc. ("the Company"), through its subsidiary companies, substantially all of which are wholly-owned, provides health care services to patients in owned and leased facilities primarily in the southeast and southwest United States. The Company consistently applies the following significant accounting policies:
a. Principles of consolidation The consolidated financial statements include the accounts of the Company and its subsidiaries in which the Company exercises control. All significant intercompany accounts and transactions have been eliminated.
b. Cash equivalents The Company considers all highly liquid investments purchased with a maturity of less than three months to be cash equivalents. The Company's cash equivalents consist principally of investment grade instruments.
c. Property, plant and equipment Property, plant and equipment are carried at cost and include major expenditures which increase their values or extend their useful lives. Depreciation and amortization are computed using the straight line method based on estimated useful lives. Estimated useful lives for buildings and improvements range from twenty to forty years and for equipment range from three to ten years. Leaseholds are amortized on a straight-line basis over the terms of the respective leases. Depreciation expense was $77.3 million, $63.7 million and $51.7 million for the years ended September 30, 2001, 2000 and 1999, respectively.
d. Excess of cost over acquired net assets, net and deferred charges and other assets Excess of cost over acquired net assets has been amortized on a straight-line basis over lives ranging from three to twenty-five years. Accumulated amortization relating thereto is $32.3 million and $23.1 million at September 30, 2001 and 2000, respectively. Deferred charges and other assets consist principally of deferred financing costs and certain non-productive assets held for sale. The financing costs are being amortized over the life of the related debt. The accumulated amortization of deferred financing costs was $3.7 million and $2.9 million at September 30, 2001 and 2000, respectively.
Certain long-lived assets and the related excess of cost over acquired net assets may become impaired, requiring a writedown of the assets to their estimated fair values. The Company periodically reviews future cash flows related to these assets, and if necessary, reduces such assets to their estimated fair values.
e. Use of estimates The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management of the Company to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Actual results could differ from those estimates.
HEALTH MANAGEMENT ASSOCIATES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
1. Business and summary of significant accounting policies (continued)
f. Net patient service revenue and accounts receivable Approximately 59%, 60% and 60% of gross patient service charges for the years ended September 30, 2001, 2000 and 1999, respectively, relates to services rendered to patients covered by the Medicare and Medicaid programs. Payments for services rendered to patients covered by these programs are generally less than billed charges. Provisions for contractual adjustments are made to reduce the charges to these patients to estimated receipts based upon the programs' principles of payment/reimbursement (either prospectively determined or retrospectively determined costs). Final settlements under these programs are subject to administrative review and audit, and provision is currently made for adjustments which may result. Revenues and receivables from government programs are significant to the Company's operations, but the Company does not believe that there are significant credit risks associated with these government programs.
Estimates for contractual allowances under managed care health plans are based primarily on the payment terms of contractual arrangements such as predetermined rates per diagnosis, per diem rates or discounted fee for service rates.
Net patient service revenue is presented net of provisions for contractual adjustments and other allowances of $2.981 billion, $2.195 billion and $1.748 billion in 2001, 2000 and 1999, respectively, in the accompanying consolidated statements of income. In the ordinary course of business, the Company renders services in its facilities to patients who are financially unable to pay for the hospital care. The value of these services to patients who are unable to pay is not material to the Company's consolidated results of operations.
g. Income taxes The Company accounts for income taxes under the Financial Accounting Standards Board (FASB) SFAS No. 109, Accounting for Income Taxes. Deferred income tax assets and liabilities are determined based upon difference between financial reporting and tax bases of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse (see Note 5).
h. Earnings per share Earnings per share is based on the weighted average number of common and common equivalent shares (stock options and convertible debt) outstanding during the periods presented (see Note 7).
i. Segment reporting The Company's business of providing health care services to patients in owned and leased facilities comprises a single reportable operating segment under FASB SFAS No. 131, Disclosures About Segments of an Enterprise and Related Information.
j. Reclassifications Certain amounts have been reclassified in prior years to conform with the current year presentation.
k. Recent Accounting Pronouncements In July 2001, the FASB issued SFAS No. 141, Business Combinations, and SFAS No. 142, Goodwill and Other Intangible Assets. SFAS No. 141 requires that the purchase method of accounting be used for all business combinations initiated after June 30, 2001 as well as all purchase method business combinations completed after June 30, 2001. SFAS No. 141 also specifies criteria intangible assets acquired in a purchase method business combination
HEALTH MANAGEMENT ASSOCIATES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
1. Business and summary of significant accounting policies (continued)
must meet to be recognized and reported apart from goodwill, noting that any purchase price allocable to an assembled workforce may not be accounted for separately. SFAS No. 142 will require that goodwill and intangible assets with indefinite useful lives no longer be amortized, but instead tested for impairment at least annually in accordance with the provisions of SFAS No. 142.
The Company adopted the provisions of SFAS No. 141 effective July 1, 2001 and intends to early adopt SFAS No. 142 effective October 1, 2001. Subsequent to October 1, 2001, any goodwill and intangible asset determined to have an indefinite useful life will no longer be amortized, but will be subject to annual impairment tests in accordance with SFAS No. 142. During fiscal year 2001, the Company recorded $9.2 million of goodwill amortization expense. The Company will be performing the first of the required impairment tests under SFAS No. 142 during fiscal 2002 and has not yet determined the effect of adoption on the Company's business, results of operations, or financial condition.
As a result of the Company's adoption of SFAS No. 141, no amortization of the goodwill associated with the hospital acquired by the Company in September 2001 has been included in the financial statements.
In 1998 the FASB issued SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, which the Company adopted October 1, 2000. Because of the Company's minimal use of derivatives, adoption of this standard did not have an impact on the earnings or financial position of the Company.
2. Acquisitions and dispositions
During 2001 the Company acquired certain assets of two hospitals through purchase agreements for $59.4 million in cash and the assumption of $3.6 million in liabilities. During 2000 the Company acquired certain assets of three hospitals (one at September 30, 2000) through purchase agreements for $130.4 million in cash and the assumption of $6.2 million in liabilities. During 1999 the Company acquired certain assets of four hospitals through one purchase and two long-term lease agreements for $184.0 million in cash and the assumption of $34.9 million in liabilities. The foregoing acquisitions were accounted for using the purchase method of accounting. The allocation of the purchase price has been determined by the Company based upon available information and is subject to further refinement.
The operating results of the foregoing hospitals have been included in the accompanying consolidated statements of income from the respective dates of acquisition. The following unaudited pro forma combined summary of operations of the Company for each of the years in the three year period ended September 30, 2001 give effect to the operation of the hospitals purchased in 2001, 2000 and 1999 as if the acquisitions had occurred as of October 1, 1999, 1998 and 1997, respectively:
2001 2000 1999 --------- -------- -------- (in millions, except per share data)
Net patient service revenue ......... $1,945.4 $1,785.1 $1,602.5 Net income .......................... $ 193.5 $ 160.7 $ 140.4 Net income per share - Basic ........ $ .79 $ .66 $ .56 Net income per share - Diluted ...... $ .75 $ .65 $ .55
HEALTH MANAGEMENT ASSOCIATES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
3. Long-term debt
The Company's long-term debt consists of the following:
a. Revolving Credit Agreements The Company currently has a 5-year $450 million Credit Agreement (the "Credit Agreement") due November 30, 2004. The Credit Agreement is a term loan agreement which permits the Company to borrow under an unsecured revolving credit loan at any time through November 30, 2004, at which time the agreement terminates and all outstanding amounts become due and payable. The Company may choose a Base Rate Loan (prime interest rate) or a Eurodollar Rate Loan (LIBOR interest rate). The interest rate for a Eurodollar Rate Loan is currently LIBOR plus 1.00 percent, and will increase or decrease in relation to a change in the Company's credit rating. Monthly or quarterly interest payments are required depending on the type of loan chosen by the Company. The interest rate on the outstanding balance at September 30, 2001 and September 30, 2000 was 3.7% and 7.6%, respectively.
The Company also has a $15 million unsecured revolving credit commitment with a bank. The $15 million credit is a working capital commitment which is tied to the Company's cash management system, and renews annually on November 1. Currently, interest on any outstanding balance is payable monthly at a fluctuating rate not to exceed the bank's prime rate less .25%. The interest rate at September 30, 2001 and 2000 was 6.0% and 9.5%, respectively. As of September 30, 2001 and 2000, there were no amounts outstanding under this credit commitment.
In addition, the Company is obligated to pay certain commitment fees based upon amounts available for borrowing during the terms of the credit agreements described above.
The credit agreements contain covenants which, without prior consent of the banks, limit certain activities, including those relating to mergers, consolidations and the Company's ability to secure additional indebtedness, make guarantees, grant security interests and declare dividends. The Company must also maintain minimum levels of consolidated tangible net worth, debt service coverage and interest coverage. At September 30, 2001, the Company was in compliance with these covenants.
HEALTH MANAGEMENT ASSOCIATES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
3. Long-term debt (continued)
b. Subordinated Convertible Notes On August 16, 2000, the Company sold $488.8 million face value of zero-coupon subordinated convertible notes for gross proceeds of $287.7 million. The notes mature on August 16, 2020 unless converted or redeemed earlier. The notes are convertible into the Company's common stock at a conversion rate of 29.5623 shares of common stock for each $1,000 principal amount of the notes (equivalent to a conversion price of $19.9125 per share). Interest on the notes is payable semiannually in arrears on August 16 and February 16 of each year at a rate of .25% per year on the principal amount at maturity. The rate of cash interest and accrual of original issue discount represent a yield to maturity of 3% per year calculated from August 16, 2000.
Holders may require the Company to purchase all or a portion of their notes on August 16, 2003, August 16, 2008 and August 16, 2013 for a purchase price per note of $635.88, $724.58 and $827.53, respectively, plus accrued and unpaid interest to each purchase date. The Company may choose to pay the purchase price in cash or common stock or a combination of cash and common stock. In addition, upon a change in control of the Company occurring on or before August 16, 2003, each holder may require the Company to repurchase all or a portion of such holder's notes. The Company may redeem all or a portion of the notes at any time on or after August 16, 2003.
c. Industrial Revenue Bond Issue The Company has one Industrial Revenue Bond issue outstanding at September 30, 2001 and 2000, which is secured by all real and personal property of a facility with aggregate net book value of $11.4 million and $11.0 million, respectively, and a pledge of the stock of the subsidiary owning the facility; payment of principal and interest is unconditionally guaranteed by the Company. The bonds are serial bonds with maturities and rates ranging from September 1, 2005 to September 1, 2011 and 8.5% to 8.75%, respectively. The Company makes monthly sinking-fund payments in amounts sufficient to cover principal and interest payment requirements.
d. Mortgage Notes The Company has six mortgage notes which are secured by all the real and personal property related to five facilities with a net book value of $96.3 million and $78.0 million at September 30, 2001 and 2000, respectively. The notes are payable in various installments with maturity dates ranging from 2002 through 2007 and carry interest rates ranging from prime (6.0% and 9.5% at September 30, 2001 and 2000, respectively) to 11.5%.
As of September 30, 2001 and 2000, the quoted market price for the subordinated convertible notes was approximately $340.3 million and $353.8 million, respectively. The fair value of the other debt included above, based on available market information, approximates its carrying value.
HEALTH MANAGEMENT ASSOCIATES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
3. Long-term debt (Continued)
Maturities of long-term debt and capital leases for the next five fiscal years and thereafter, are as follows (in thousands):
2002 $ 6,752 2003 8,221 2004 5,619 2005 50,169 2006 4,338 Thereafter $360,643
The Company paid interest of $22.3 million, $31.1 million and $14.4 million for the years ended September 30, 2001, 2000 and 1999, respectively. There was no capitalized interest for the year ended September 30, 2001. Capitalized interest totaled $3.1 million and $4.3 million for the years ended September 30, 2000 and 1999 respectively.
4. Leases
The Company leases real estate properties, equipment and vehicles under cancelable and non-cancelable leases. Future minimum operating and capital lease payments, including amounts relating to leased hospitals, are as follows at September 30, 2001 (in thousands):
Operating Capital ------------------------- ------------ Real Real Property and September 30, Property Equipment Equipment Total - ------------- ----------- ----------- ------------ -----------
2002 .................. $ 4,538 $ 19,989 $ 4,132 $ 28,659 2003 .................. 3,373 16,192 4,398 23,963 2004 .................. 2,981 13,009 4,170 20,160 2005 .................. 2,739 9,550 3,557 15,846 2006 .................. 2,685 7,611 2,834 13,130 Thereafter ............ 18,512 1,048 38,319 57,879 -------- -------- -------- --------
Total minimum payments $ 34,828 $ 67,399 57,410 $159,637 ======== ======== ========
Less amounts representing interest 28,537 --------
Present value of minimum lease payments ............ $ 28,873 ========
HEALTH MANAGEMENT ASSOCIATES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
4. Leases (continued)
The following summarizes amounts related to assets leased by the Company under capital leases (in thousands):
September 30, ------------------ 2001 2000 -------- --------
Cost .................................... $71,870 $70,139 Less accumulated amortization ........... (17,191) (13,503) ------- ------- Net book value .......................... $54,679 $56,636 ======= =======
The Company entered into capitalized leases for equipment of $4.0 million, $.2 million and $.8 million for the years ended September 30, 2001, 2000 and 1999, respectively.
5. Income taxes
The significant components of the provision for income taxes are as follows (in thousands):
Year ended September 30, ---------------------------------- 2001 2000 1999 --------- --------- -------- Federal: Current ............................ $114,109 $ 96,713 $ 85,248 Deferred ........................... (6,731) (3,439) (2,777) -------- -------- -------- Total Federal .................. 107,378 93,274 82,471 State: Current and deferred ............... 18,595 15,054 14,337 -------- -------- -------- Total ........................... $125,973 $108,328 $ 96,808 ======== ======== ========
An analysis of the Company's effective income tax rates is as follows:
Year ended September 30, -------------------------------------------------- 2001 2000 1999 ---------------- ----------------- ---------------
Statutory income tax rate ............ $112,333 35.0% $ 96,598 35.0% $86,329 35.0%
State income taxes, net of Federal benefit .. 12,628 3.9 10,797 3.9 9,319 3.8
Other items (each less than 5% of computed tax) ................ 1,012 .4 933 .4 1,160 .5 -------- ----- -------- ----- ------- -----
Total ............. $125,973 39.3% $108,328 39.3% $96,808 39.3% ======== ===== ======== ===== ======= =====
HEALTH MANAGEMENT ASSOCIATES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
5. Income taxes (continued)
The tax effects of temporary differences that give rise to significant portions of the Federal and state deferred income tax assets and liabilities are comprised of the following:
September 30, ------------------- 2001 2000 ------- ------- (in thousands) Deferred income tax assets: Allowance for doubtful accounts $ 24,082 $ 26,201 Accrued liabilities 10,524 8,712 Self insurance liability risks 6,519 2,498 Other 2,676 -- -------- -------- $ 43,801 37,411 Less: Valuation allowance -- -- -------- --------
Net deferred income tax assets 43,801 37,411
Deferred income tax liabilities: Depreciable assets (32,124) (32,334) Other (2,162) (2,162) -------- --------
Net deferred income tax asset $ 9,515 $ 2,915 ======== ========
Income taxes paid (net of refunds) amounted to $126.1 million,$123.6 million, and $79.3 million for the years ended September 30, 2001, 2000 and 1999, respectively.
6. Retirement plans
The Company has a defined contribution retirement plan which covers substantially all eligible employees at its hospitals and the corporate office. This plan includes a provision for the Company to match a portion of employee contributions. Total retirement program expense under this plan was $4.5 million, $4.0 million and $3.8 million for the years ended September 30, 2001, 2000 and 1999 respectively.
In addition, the Company maintains a supplemental retirement plan for certain Company executives which provides for predetermined annual payments to these executives after the attainment of age 62, if still employed by the Company at that time. These payments generally continue for the remainder of the executive's life (see Note 10).
HEALTH MANAGEMENT ASSOCIATES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
7. Earnings per share
The following table sets forth the computation of basic and diluted earnings per share (in thousands, except per share data):
Outstanding options to purchase 5.4 million, 7.2 million, and 7.0 million shares of the Company's common stock were not included in the computation of earnings per share for the years ended September 30, 2001, 2000, and 1999, respectively, because the options' exercise prices were greater than the average market price of the Company's common stock.
8. Stockholders' equity
The Company has elected to follow Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees ("APB 25"). Under APB 25, since the exercise price of the Company's employee stock options equals the market price of the underlying stock on the date of grant, no compensation expense is recognized. Pro forma disclosure of alternative fair value accounting is then required under FASB Statement No. 123, Accounting for Stock-Based Compensation (Statement 123), utilizing an option valuation model.
The Company has a 1991 Stock Option Plan, a 1993 Stock Option Plan and a 1996 Executive Incentive Compensation Plan for the granting of options to key employees of the Company. All options granted have 10 year terms and vest and become fully exercisable at the end of either 3 or 4 years of continued employment.
HEALTH MANAGEMENT ASSOCIATES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
8. Stockholders' equity (continued)
Pertinent information covering the plans is summarized below:
The following table summarizes information concerning currently outstanding and exercisable options:
Pro forma information regarding net income and earnings per share is required by Statement 123, which also requires that the information be determined as if the Company has accounted for its employee stock options granted subsequent to December 31, 1995 under the fair value method of that Statement. The fair value for these options was estimated at the date of grant using the Black-Scholes option pricing model with the following weighted-average assumptions for 2001, 2000 and 1999: risk-free interest rate of 5.51%, 6.56%, and 5.81% - 6.18%; no dividend yields; volatility factor of the expected market price of the Company's common stock of .489, .486 and .446; and weighted average expected lives of the options of 7 years.
The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options which have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions including the expected stock price volatility. Because the Company's employee stock options have characteristics significantly different from those of traded
HEALTH MANAGEMENT ASSOCIATES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
8. Stockholders' equity (continued)
options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management's opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its employee stock options.
For purposes of pro forma disclosures, the estimated fair value of the options is amortized to expense over the options' vesting period. The Company's pro forma information follows (in thousands, except per share data):
2001 2000 1999 -------- -------- -------- Pro forma net income $184,537 $156,702 $138,588 Pro forma earnings per share: Basic $ .75 $ .65 $ .55 Diluted $ .72 $ .64 $ .54
At September 30, 2001 there were approximately 14.7 million shares of common stock reserved for future issuance under the plans. In addition, the Company has granted options for shares of Class A Common Stock to seven non-employee directors. At September 30, 2001 there were approximately 233,000 options outstanding at $2.07 to $21.63 per share, expiring in 2003 through 2011.
The Company also has a Stock Incentive Plan for corporate officers and management staff. This plan provides for the awarding of additional compensation to key personnel in the form of Company stock. The stock will be issued to the grantee four years after the date of grant, provided the individual is still an employee of the Company. At September 30, 2001 there were approximately 388,000 shares reserved under the plan, for which the Company has recorded $2.0 million, $1.5 million and $1.5 million of compensation expense for the years ended September 30, 2001, 2000 and 1999, respectively.
In February 1998 the Board of Directors approved a stock repurchase program. In connection with the program, put options were sold to an independent third party in September 1998. Proceeds of $2,090,000 from the issuance of the put options were accounted for as additional paid-in-capital. Each put option entitled the holder to sell one share of the Company's common stock to the Company at a price of $17.50 per share. At September 30, 1998, 2,459,000 put options were outstanding, which were exercisable only at maturity and expired at various dates from November 1998 to December 1998. The potential repurchase obligation of $43,036,000 was reclassified from stockholders' equity to a liability as of September 30, 1998. Subsequent to year end, the liability was eliminated in connection with the expiration of the put options.
During 1999 the Company repurchased 7.5 million shares of its stock at a cost of $69.1 million, which completed the February 1998 stock repurchase plan referred to above. In September 1999 the Board of Directors approved a stock repurchase program of up to 25 million shares of common stock. On October 14, 1999 the Company executed a share repurchase agreement with an independent third party, whereby the third party agreed to "sell short" 5 million shares of the Company's common stock to the Company. As of October 19, 1999 the 5 million shares were delivered to the Company and became treasury stock. From October 15, 1999 to December 15, 1999, a period of 60 days, the third party covered the "short sale" by buying shares on the open market. On December 15, 1999 the Company reimbursed the third party $42,399,000, which represented the cost of the common stock purchased plus a commission plus interest (at LIBOR) on the outstanding balance of funds used to purchase the common stock.
HEALTH MANAGEMENT ASSOCIATES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
8. Stockholders' equity (continued)
In September 2001, the Board of Directors approved a stock repurchase program of up to 5 million shares of the Company's common stock. Purchases will be made from time to time in the open market and will continue until all of such shares are repurchased or until the Company decides to terminate the repurchase program. As of September 30, 2001, the Company had repurchased 139,000 shares. Subsequent to September 30, 2001 and through November 1, 2001, the Company had purchased an additional 1.9 million shares at an average purchase price of $19.65 per share.
At September 30, 2001 and 2000, there were 14.5 million shares of common stock reserved for future issuance upon the conversion of the Company's subordinated convertible notes.
9. Professional and liability risks
The Company insures for its professional liability risks under a "claims-made" basis policy, whereby each claim is covered up to $1 million per occurrence, subject to a $100,000 deductible (with an annual deductible cap of $6.1 million). Liabilities in excess of these amounts are covered through a combination of limits provided by commercial insurance companies and a self-insurance program.
Accruals for self-insured professional liability risks are determined using asserted and unasserted claims identified by the Company's incident reporting system and actuarially determined estimates based on Company and industry historical loss payment patterns and have been discounted to their present value using a discount rate of 6.0%. Although the ultimate settlement of these accruals may vary from these estimates, management believes that the amounts provided in the Company's consolidated financial statements are adequate.
10. Non-cash charge
The non-cash charge for retirement benefits and write down of assets held for sale represents (1) the present value of the future costs of retirement benefits granted to the Company's chairman pursuant to an employment agreement which became effective January 2, 2001, and (2) the write down of two hospital assets held for sale subsequent to their respective replacement.
11. Commitments
The Company has a number of hospital renovation/expansion projects underway at September 30, 2001. None of these projects are individually significant nor do they represent a significant commitment in total at September 30, 2001. In addition, the Company plans to replace three of its existing hospitals over the next five years, subject to approval by the appropriate regulatory agencies. Included in this is the Company's obligation to construct a new facility at its recently acquired Carlisle, Pennsylvania location.
HEALTH MANAGEMENT ASSOCIATES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
11. Commitments (continued)
Subsequent to September 30, 2001, the Company entered into definitive agreements to purchase, for approximately $187 million, the following five hospitals:
. East Pointe Hospital, Lehigh Acres, Florida, 88 licensed beds
. Santa Rosa Medical Center, Milton, Florida, 129 licensed beds
. Fentress County General Hospital, Jamestown, Tennessee, 85 licensed beds
. The Medical Center of Mesquite, Mesquite, Texas, 176 licensed beds
. Lancaster Community Hospital, Lancaster, California, 117 licensed beds
In December 2001, the Company announced that it had signed a definitive agreement to sell the Lancaster Community Hospital in Lancaster, California. The transaction is expected to close simultaneously with the closing of the Company's above referenced purchase of the hospital.
12. Quarterly data (unaudited)
Years ended September 30, 2001 and 2000 (in thousands, except per share data)
Item 9.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None
PART III
Item 10.
Item 10. Directors and Executive Officers of the Registrant
The information required by this Item is (i) incorporated herein by reference to the Company's proxy statement to be issued in connection with the Annual Meeting of Stockholders of the Company to be held on February 19, 2002 under "Election of Directors", which proxy statement will be filed within 120 days after the end of the Company's fiscal year and (ii) set forth under "Executive Officers of the Registrant" in Part I of this Report.
Item 11.
Item 11. Executive Compensation
The information required by this Item is incorporated herein by reference to the Company's proxy statement to be issued in connection with the Annual Meeting of the Stockholders of the Company to be held on February 19, 2002 under "Executive Compensation", which proxy statement will be filed within 120 days after the end of the Company's fiscal year.
Item 12.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The information required by this Item is incorporated herein by reference to the Company's proxy statement to be issued in connection with the Annual Meeting of Stockholders of the Company to be held on February 19, 2002 under "Security Ownership of Certain Beneficial Owners and Management", which proxy statement will be filed within 120 days after the end of the Company's fiscal year.
Item 13.
Item 13. Certain Relationships and Related Transactions
The information required by this Item is incorporated herein by reference to the Company's proxy statement to be issued in connection with the Annual Meeting of Stockholders of the Company to be held on February 19, 2002 under "Certain Transactions", which proxy statement will be filed within 120 days after the end of the Company's fiscal year.
PART IV
Item 14.
Item 14. Exhibits, Financial Statement Schedule, and Reports on Form 8-K
Item 14(a)(1), 14(a)(2) and 14(d):
The following financial statement schedule is filed as part of this Report at page 54 hereof:
Schedule II - Valuation and Qualifying Accounts
All other schedules are omitted since the required information is not present or is not present in amounts sufficient to require submission of the schedule, or because the information required is included in the consolidated financial statements and notes thereto.
Item 14(a)(3) and 14(c): See Index to Exhibits.
Item 14(b):
During the last quarter of the fiscal year ended September 30, 2001, the Registrant did not file a Current Report on Form 8-K.
HEALTH MANAGEMENT ASSOCIATES, INC. SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS (in thousands of dollars)
(a) Charges to operations include amounts related to provisions for doubtful accounts, before recoveries.
(b) Includes amounts written-off as uncollectible.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
HEALTH MANAGEMENT ASSOCIATES, INC.
By /s/ Joseph V. Vumbacco President and Chief ------------------------------- Executive Officer December 4, 2001 Joseph V. Vumbacco
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant in the capacities and on the dates indicated:
/s/ William J. Schoen Chairman of the Board - --------------------------------- of Directors December 4, 2001 William J. Schoen
/s/ Joseph V. Vumbacco President, Chief December 4, 2001 - --------------------------------- Executive Officer, Joseph V. Vumbacco Director and (Princi- pal Executive Officer)
/s/ Robert E. Farnham Senior Vice President - --------------------------------- and Chief Financial December 4, 2001 Robert E. Farnham Officer (Principal Financial Officer and Principal Accounting Officer)
/s/ Kent P. Dauten - --------------------------------- Kent P. Dauten Director December 4, 2001
- --------------------------------- Robert A. Knox Director December 4, 2001
/s/ Charles R. Lees - --------------------------------- Charles R. Lees Director December 4, 2001
/s/ Kenneth D. Lewis - --------------------------------- Kenneth D. Lewis Director December 4, 2001
/s/ William E. Mayberry - --------------------------------- William E. Mayberry, M.D. Director December 4, 2001
/s/ Randolph W. Westerfield - --------------------------------- Randolph W. Westerfield, Ph.D. Director December 4, 2001
/s/ Donald E. Kiernan - --------------------------------- Donald E. Kiernan Director December 4, 2001
INDEX TO EXHIBITS
(2) Plan of acquisition, reorganization, arrangement, liquidation or succession
Not applicable.
(3) (i) Articles of Incorporation
3.1/(i)/ Fifth Restated Certificate of Incorporation. (Exhibit 3.1)
3.2/(r)/ Certificate of Amendment to Fifth Restated Certificate of Incorporation. (Exhibit 3.2)
(ii) By-laws
3.3/(w)/ By-laws, as amended. (Exhibit 3.3)
(4) Instruments defining rights of security holders, including indentures
The Exhibits referenced under (3) of this Index to Exhibits are incorporated herein by reference.
4.1/(f)/ Specimen Stock Certificate. (Exhibit 4.11)
4.5/(r)/ Credit Agreement by and among Health Management Associates, Inc., as Borrower, Bank of America, N.A., as Administrative Agent and as Lender, First Union National Bank, as Syndication Agent and as Lender, and the Chase Manhattan Bank, as Syndication Agent and as Lender, and The Lenders Party Hereto From Time To Time, dated November 30, 1999. (Exhibit 4.5)
4.6/(s)/ Credit Agreement dated March 23, 2000 between First Union National Bank and Health Management Associates, Inc. pertaining to a $15 million working capital and cash management line of credit. (Exhibit 4.1)
(9) Voting Trust Agreement
Not applicable.
(10) Material Contracts
The Exhibits referenced under (4) of this Index to Exhibits are incorporated herein by reference.
10.1/(i)/ First Amended and Restated Lease Agreement, dated as of January 1, 1995 between The Board of Commissioners of the Highlands County Hospital District and Sebring Hospital Management Associates, Inc. (Exhibit 10.1)
10.2/(c)/ Lease dated as of July 1, 1986 between Fishermen's Hospital, Inc. and Marathon H.M.A., Inc. (Exhibit 28.1)
10.3/(e)/ First Amendment of the July 1, 1986 Lease Agreement by and between Fishermen's Hospital, Inc. and Marathon H.M.A., Inc. dated December 18, 1991. (Exhibit 28.1)
10.4/(a)/ Lease Agreement dated January 12, 1990 between Biloxi Regional Medical Center, Inc. and Biloxi H.M.A., Inc. (Exhibit 10.54)
10.5/(g)/ Lease Agreement between Heart of Florida Hospital Association, Inc., Haines City HMA, Inc. and the Company, dated April 30, 1993. (Exhibit 10.49)
10.6/(d)/ Health Management Associates, Inc. Stock Incentive Plan for Corporate Officers and Management Staff. (Exhibit 10.56)
10.7/(i)/ Amendment No. 1 to the Health Management Associates, Inc. Stock Incentive Plan for Corporate Officers and Management Staff. (Exhibit 10.2)
10.8/(g)/ Health Management Associates, Inc. Supplemental Executive Retirement Plan, dated July 12, 1990. (Exhibit 10.22)
10.9/(h)/ First Amendment to the Health Management Associates, Inc. Supplemental Executive Retirement Plan, dated January 1, 1994. (Exhibit 10.51)
10.10/(a)/ Registration Agreement dated September 2, 1988 between HMA Holding Corp., First Chicago Investment Corporation, Madison Dearborn Partners IV, Prudential Venture Partners, Prudential Venture Partners II, William J. Schoen, Kelly E. Curry, Stephen M. Ray, Robb L. Smith, George A. Taylor and Earl P. Holland. (Exhibit 10.23)
10.11/(b)/ Health Management Associates, Inc. 1991 Non-Statutory Stock Option Plan. (Exhibit 10.67)
10.12/(f)/ Amendment No. 1 and Amendment No. 2 to the Health Management Associates, Inc. 1991 Non-Statutory Stock Option Plan. (Exhibit 10.44)
10.13/(f)/ Health Management Associates, Inc. 1993 Non-Statutory Stock Option Plan. (Exhibit 10.45)
10.14/(i)/ Health Management Associates, Inc. Stock Option Plan for Outside Directors. (Exhibit 10.5)
10.15/(g)/ Stock Option Agreement, dated May 18, 1993, between the Company and Charles R. Lees. (Exhibit 10.48)
10.16/(h)/ Stock Option Agreement dated May 20, 1994, between the Company and Charles R. Lees. (Exhibit 10.52)
10.17/(h)/ Stock Option Agreement dated May 17, 1994, between the Company and Kenneth D. Lewis. (Exhibit 10.53)
10.18/(j)/ Amendment No. 5 to the Health Management Associates, Inc. 1991 Non-Statutory Stock Option Plan. (Exhibit 10.57)
10.19/(j)/ Amendment No. 3 to the Health Management Associates, Inc. 1993 Non-Statutory Stock Option Plan. (Exhibit 10.58)
10.20/(j)/ Amendment No. 1 to the Health Management Associates, Inc. Stock Option Plan for Outside Directors. (Exhibit 10.59)
10.21/(l)/ Lease Agreement dated as of December 28, 1995 among Coahoma County, Mississippi, Clarksdale HMA, Inc. and the Company. (Exhibit 10.1)
10.22/(n)/ Lease Agreement dated May 21, 1996 among Midwest City Memorial Hospital Authority, an Oklahoma Public Trust, and Midwest City HMA, Inc. and Health Management Associates, Inc. (Exhibit 2.1)
10.23/(l)/ Amendment No. 6 to the Health Management Associates, Inc. 1991 Non-Statutory Stock Option Plan. (Exhibit 10.2)
10.24/(l)/ Amendment No. 7 to the Health Management Associates, Inc. 1991 Non-Statutory Stock Option Plan. (Exhibit 10.3)
10.25/(l)/ Amendment No. 4 to the Health Management Associates, Inc. 1993 Non-Statutory Stock Option Plan. (Exhibit 10.4)
10.26/(l)/ Amendment No. 5 to the Health Management Associates, Inc. 1993 Non-Statutory Stock Option Plan. (Exhibit 10.5)
10.27/(k)/ Health Management Associates, Inc. 1996 Executive Incentive Compensation Plan. (Exhibit 99.15)
10.28/(m)/ Amendment No. 1 to the Health Management Associates, Inc. 1996 Executive Incentive Compensation Plan. (Exhibit 10.1)
10.29/(o)/ Second Amendment to the Health Management Associates, Inc. Supplemental Executive Retirement Plan, dated September 17, 1996. (Exhibit 10.64)
10.30/(p)/ Hospital Management Agreement by and between Anniston HMA, Inc. and the Trust created under the last will and testament of Susie P. Stringfellow, entered into on January 24, 1997. (Exhibit 10.1)
10.31/(q)/ Lease Agreement made as of June 1, 1998 between Hernando County, Florida and Hernando HMA, Inc. (Exhibit 10.2)
10.32/(t)/ Amendment No. 5 to the Health Management Associates, Inc. 1996 Executive Incentive Compensation Plan. (Exhibit 10.1)
10.33/(t)/ Amendment No. 6 to the Health Management Associates, Inc. 1996 Executive Incentive Compensation Plan. (Exhibit 10.2)
10.34/(u)/ Amendment No. 10 to the Health Management Associates, Inc. 1991 Non-Statutory Stock Option Plan.(Exhibit 10.37)
10.35/(u)/ Amendment No. 8 to the Health Management Associates, Inc. 1993 Non-Statutory Stock Option Plan.(Exhibit 10.38)
10.36/(u)/ Amendment to Stock Option Agreements between Health Management Associates, Inc. and William J. Schoen dated as of December 5, 2000.(Exhibit 10.39)
10.37/(u)/ Third Amendment to the Health Management Associates, Inc. Supplemental Retirement Plan. (Exhibit 10.40)
10.38/(v)/ Employment Agreement for William J. Schoen made as of January 2, 2001. (Exhibit 99.2)
(11) Statement re computation of per share earnings
Not applicable.
(12) Statements re computation of ratios
Not applicable.
(13) Annual report to security holders, Form 10-Q or quarterly report to security holders
Not applicable.
(16) Letter re change in certifying accountant
Not applicable.
(18) Letter re change in accounting principles
Not applicable.
(21) Subsidiaries of the registrant
21.1 Subsidiaries of the registrant are listed on Exhibit 21.1 included herein at page 63 of this Report.
(22) Published report regarding matters submitted to vote of security holders
None.
(23) Consents of experts and counsel
23.1 Consent of Ernst & Young LLP is filed as part of this Report as Exhibit 23.1 at page 64 hereof.
(24) Power of Attorney
Not applicable.
(99) Additional Exhibits
None.
(a) Exhibit previously filed as part of and is incorporated herein by reference to the Company's Registration Statement on Form S-1 (Registration No. 33-36406). The exhibit number contained in parenthesis refers to the exhibit number in such Registration Statement.
(b) Exhibit previously filed as part of and is incorporated herein by reference to the Company's Registration Statement on Form S-1 (Registration No. 33-43193). The exhibit number contained in parenthesis refers to the exhibit number in such Registration Statement.
(c) Exhibit previously filed as part of and is incorporated herein by reference to the Company's Current Report on Form 8-K dated July 1, 1986. The exhibit number contained in parenthesis refers to the exhibit number in such Form 8-K.
(d) Exhibit previously filed as part of and is incorporated herein by reference to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1991. The exhibit number contained in parenthesis refers to the exhibit number in such Form 10-Q.
(e) Exhibit previously filed as part of and is incorporated herein by reference to the Company's Quarterly Report on Form 10-Q for the quarter ended December 31, 1991. The exhibit number contained in parenthesis refers to the exhibit number in such Form 10-Q.
(f) Exhibit previously filed as part of and is incorporated herein by reference to the Company's Annual Report on Form 10-K for the fiscal year ended September 30, 1992. The exhibit number contained in parenthesis refers to the exhibit number in such Form 10-K.
(g) Exhibit previously filed as part of and is incorporated herein by reference to the Company's Annual Report on Form 10-K for the fiscal year ended September 30, 1993. The exhibit number contained in parenthesis refers to the exhibit number in such Form 10-K.
(h) Exhibit previously filed as part of and is incorporated herein by reference to the Company's Annual Report on Form 10-K for the fiscal year ended September 30, 1994. The exhibit number contained in parenthesis refers to the exhibit number in such Form 10-K.
(i) Exhibit previously filed as part of and is incorporated herein by reference to the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 1995. The exhibit number contained in
parenthesis refers to the exhibit number in such Form 10-Q.
(j) Exhibit previously filed as part of and is incorporated herein by reference to the Company's Annual Report on Form 10-K for the fiscal year ended September 30, 1995. The exhibit number contained in parenthesis refers to the exhibit number in such Form 10-K.
(k) Exhibit previously filed as part of and is incorporated herein by reference to the Company's Registration Statement on Form S-8 Registration No. 33-80433). The exhibit number contained in parenthesis refers to the exhibit number in such Registration Statement.
(l) Exhibit previously filed as part of and is incorporated herein by reference to the Company's Quarterly Report on Form 10-Q for the quarter ended December 31, 1995. The exhibit number contained in parenthesis refers to the exhibit number in such Form 10-Q.
(m) Exhibit previously filed as part of and is incorporated herein by reference to the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 1996. The exhibit number contained in parenthesis refers to the exhibit number in such Form 10-Q.
(n) Exhibit previously filed as part of and is incorporated herein by reference to the Company's Current Report on Form 8-K dated June 10, 1996. The exhibit number contained in parenthesis refers to the exhibit number in such Form 8-K.
(o) Exhibit previously filed as part of and is incorporated herein by reference to the Company's Annual Report on Form 10-K for the fiscal year ended September 30, 1996. The exhibit number contained in parenthesis refers to the exhibit number in such Form 10-K.
(p) Exhibit previously filed as part of and is incorporated herein by reference to the Company's Quarterly Report on Form 10-Q for the quarter ended December 31, 1996. The exhibit number contained in parenthesis refers to the exhibit number in such Form 10-Q.
(q) Exhibit previously filed as part of and is incorporated herein by reference to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1998. The exhibit number contained in parenthesis refers to the exhibit number in such Form 10-Q.
(r) Exhibit previously filed as part of and is incorporated herein by reference to the Company's Annual Report on Form 10-K for the fiscal year ended September 30, 1999. The exhibit number contained in parenthesis refers to the exhibit number in such Form 10-K.
(s) Exhibit previously filed as part of and is incorporated herein by reference to the Company's Quarterly Report on Form 10-Q for the quarter year ended March 31, 2000. The exhibit number contained in parenthesis refers to the exhibit number in such Form 10-Q.
(t) Exhibit previously filed as part of and is incorporated herein by reference to the Company's Quarterly Report on Form 10-Q for the quarter year ended June 30, 2000. The exhibit number contained in parenthesis refers to the exhibit number in such Form 10-Q.
(u) Exhibit previously filed as part of and is incorporated herein by reference to the Company's Annual Report on Form 10-K for the fiscal year ended September 30, 2000. The exhibit number contained in parenthesis refers to the exhibit number in such Form 10-K.
(v) Exhibit previously filed as part of and is incorporated herein by reference to the Company's Registration Statement on Form S-8 (Registration No. 333-53602) filed on January 12, 2001. The exhibit number contained in parenthesis refers to the exhibit number in such Registration Statement.
(w) Exhibit previously filed as part of and is incorporated herein by reference to the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 2001. The exhibit number contained in parenthesis refers to the exhibit number in such Form 10-Q.