Filed pursuant to Rule 424(b)(4)
Registration No. 333-69064
$250,000,000
[LOGO]
4.25% Convertible Subordinated Notes due 2008
-------------
You may convert the notes into shares of common stock of Community Health
Systems, Inc. at any time prior to their maturity or their redemption by
Community Health Systems. The conversion rate is 29.8507 shares per each $1,000
principal amount of notes, subject to adjustment. This is equivalent to a
conversion price of approximately $33.50 per share. On October 9, 2001, the last
reported sale price for the common stock on the New York Stock Exchange was
$26.80 per share. The common stock is listed under the symbol "CYH".
Community Health Systems will pay interest on the notes on April 15 and
October 15 of each year. The first such payment will be made on April 15, 2002.
The notes will be unsecured obligations of Community Health Systems and will
rank junior to all of its existing and future senior indebtedness and will be
effectively subordinated to all existing and future liabilities of its
subsidiaries, including trade payables. As of June 30, 2001, Community Health
Systems and its subsidiaries had approximately $1.5 billion of consolidated
indebtedness and other liabilities. The notes will be issued only in
denominations of $1,000 and integral multiples of $1,000.
Prior to October 15, 2005, if the price of its common stock closes above
150% of the conversion price for at least 20 trading days in the consecutive
30-day trading period specified in this prospectus, Community Health Systems has
the option to redeem some or all of the notes at the prices set forth in this
prospectus. A portion of the amount paid may be made, at the option of Community
Health Systems, in its common stock. On or after October 15, 2005, Community
Health Systems has the option to redeem some or all of the notes at the
redemption prices set forth in the prospectus. You have the option, subject to
some conditions, to require Community Health Systems to repurchase any note held
by you in the event of a change of control of us, as described in the
prospectus, at a price equal to 100% of its principal amount plus accrued
interest to the date of repurchase.
Concurrently with this offering of notes, Community Health Systems is
offering 12,000,000 shares of its common stock. The common stock will be offered
pursuant to a separate prospectus. Neither offering is contingent on the other.
Community Health Systems, Inc. does not intend to apply for listing of the
notes on any securities exchange or for inclusion of the notes in any automated
quotation system.
SEE "RISK FACTORS" BEGINNING ON PAGE 12 TO READ ABOUT FACTORS YOU SHOULD
CONSIDER BEFORE BUYING THE NOTES.
--------------------
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY OTHER REGULATORY BODY
HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
--------------------
Per Note Total
-------- -----
Initial public offering price............................... 100.00% $250,000,000
Underwriting discount....................................... 2.75% $ 6,875,000
Proceeds, before expenses, to Community Health
Systems, Inc.............................................. 97.25% $243,125,000
The initial public offering price set forth above does not include accrued
interest, if any. Interest on the notes will accrue from the date of original
issuance of the notes, expected to be October 15, 2001.
To the extent that the underwriters sell more than $250,000,000 principal
amount of notes, the underwriters have the option to purchase up to an
additional $37,500,000 principal amount of notes at the initial public offering
less the underwriting discount.
--------------------
The underwriters expect to deliver the notes in book-entry form only through
the facilities of The Depository Trust Company against payment in New York, New
York on October 15, 2001.
GOLDMAN, SACHS & CO. MERRILL LYNCH & CO. CREDIT SUISSE FIRST BOSTON
BANC OF AMERICA SECURITIES LLC
JPMORGAN
UBS WARBURG
--------------------
Prospectus dated October 9, 2001.
[INSIDE FRONT COVER]
[DESCRIPTION OF ARTWORK: MAP OF THE UNITED STATES INDICATING LOCATIONS OF OUR
FACILITIES]
PROSPECTUS SUMMARY
YOU SHOULD READ THE FOLLOWING SUMMARY TOGETHER WITH THE MORE DETAILED
INFORMATION REGARDING OUR COMPANY AND THE NOTES BEING SOLD IN THIS OFFERING AND
OUR CONSOLIDATED FINANCIAL STATEMENTS AND THE RELATED NOTES APPEARING ELSEWHERE
IN THIS PROSPECTUS.
COMMUNITY HEALTH SYSTEMS
OVERVIEW OF OUR COMPANY
We are the largest non-urban provider of general hospital healthcare
services in the United States in terms of number of facilities and the second
largest in terms of revenues. As of October 1, 2001, we owned, leased or
operated 55 hospitals, geographically diversified across 20 states, with an
aggregate of 5,010 licensed beds. In over 85% of our markets, we are the sole
provider of general hospital healthcare services. In all but one of our other
markets, we are one of two providers of these services. For the fiscal year
ended December 31, 2000, we generated $1.34 billion in revenues. For the six
months ended June 30, 2001, we generated $799.6 million in revenues.
Affiliates of Forstmann Little & Co. formed us in 1996 to acquire our
predecessor company. Wayne T. Smith, who has over 30 years of experience in the
healthcare industry, joined our company in January 1997. Under this ownership
and leadership, we have:
- strengthened the senior management team in all key business areas;
- standardized and centralized our operations across key business areas;
- implemented a disciplined acquisition program;
- expanded and improved the services and facilities at our hospitals;
- recruited additional physicians to our hospitals; and
- instituted a company-wide regulatory compliance program.
As a result of these initiatives, we achieved revenue growth of 23.8% in 2000,
26.4% in 1999 and 15.1% in 1998.
We target growing, non-urban healthcare markets because of their favorable
demographic and economic trends and competitive conditions. Because non-urban
service areas have smaller populations, there are generally fewer hospitals and
other healthcare service providers in these communities. We believe that smaller
populations result in less direct competition for hospital-based services. Also,
we believe that non-urban communities generally view the local hospital as an
integral part of the community. There is generally a lower level of managed care
presence in these markets.
OUR BUSINESS STRATEGY
The key elements of our business strategy are to:
- INCREASE REVENUE AT OUR FACILITIES. We seek to increase our share of the
healthcare dollars spent by local residents and limit inpatient and
outpatient migration to larger urban facilities. Our initiatives to
increase revenue include:
o recruiting additional primary care physicians and specialists;
1
o expanding the breadth of services offered at our hospitals through
targeted capital expenditures; and
o providing the capital to invest in our facilities, particularly in our
emergency rooms.
- GROW THROUGH SELECTIVE ACQUISITIONS. Each year we intend to acquire, on a
selective basis, two to four hospitals. We generally pursue acquisition
candidates that:
o have a general service area population between 20,000 and 100,000 with a
stable or growing population base;
o are the sole or primary provider of general hospital services in the
community;
o are located more than 25 miles from a competing hospital;
o are not located in an area that is dependent upon a single employer or
industry; and
o have financial performance that we believe will benefit from our
management's operating skills.
We estimate that there are currently approximately 375 hospitals that
meet our acquisition criteria. These hospitals are primarily
not-for-profit or municipally owned.
- REDUCE COSTS. To improve efficiencies and increase margins, we implement
cost containment programs which include:
o standardizing and centralizing our operations;
o optimizing resource allocation by utilizing our company-devised case and
resource management program;
o capitalizing on purchasing efficiencies;
o installing a standardized management information system; and
o managing staffing levels.
- IMPROVE QUALITY. We implement new programs to improve the quality of care
provided. These include training programs, sharing of best practices,
assistance in complying with regulatory requirements, standardized
accreditation documentation, and patient, physician, and staff
satisfaction surveys.
RECENT DEVELOPMENTS
Effective June 1, 2001, we acquired Brandywine Hospital, a 168-bed acute
care facility located in Coatesville, Pennsylvania for an aggregate
consideration of approximately $61 million. Effective September 1, 2001, we
acquired Red Bud Regional Hospital, a 103-bed facility located in Red Bud,
Illinois, for an aggregate consideration of approximately $5 million. On
October 1, 2001, we acquired Jennersville Regional Hospital, formerly known as
Southern Chester County Medical Center, a 59-bed hospital located in West Grove,
Pennsylvania, for an aggregate consideration of approximately $29 million. These
three acquisitions increased the number of hospitals we own, lease or operate to
55. On August 2, 2001, we signed a definitive agreement to acquire 369-bed
Easton Hospital, the only hospital in the city of Easton and Northampton County,
Pennsylvania. This pending transaction is expected to close during the fourth
quarter of 2001. The sellers of each of these four hospitals are tax-exempt
entities. Each of these hospitals is the sole provider of general hospital
services in its community.
Effective July 19, 2001, we amended our credit agreement. The credit
agreement is syndicated with a group of lenders led by The Chase Manhattan Bank,
an affiliate of J.P. Morgan Securities
2
Inc., and co-agents, Bank of America, N.A. and The Bank of Nova Scotia. This
amendment extended the maturity of approximately 80% of the $200 million
revolving credit facility and the $263.2 million in acquisition loan commitments
from December 31, 2002 to January 2, 2004.
As of October 9, 2001, we also have entered into non-binding letters of
intent to acquire an additional two hospitals. We do not enter into definitive
agreements until we complete satisfactory business and financial due diligence
and financial modeling. In some cases, we do not sign definitive agreements or
acquire the hospital after a letter of intent is executed. Some of the hospitals
we acquired this year or have executed definitive agreements or letters of
intent to acquire had significant historical operating losses. It is not
uncommon for us to acquire hospitals with historical losses. As evidenced by our
experience with prior acquisitions, these historical losses are not necessarily
indicative of the future operating results we would experience after these
acquisitions are completed.
INDUSTRY OVERVIEW
Hospital services, the market in which we operate, is the largest single
category of healthcare expenditures at 32.1% of total healthcare spending in
2000, or $415.8 billion. The Centers for Medicare and Medicaid Services,
formerly known as the U.S. Health Care Financing Administration, projects the
hospital services category to grow by 5.7% per year through 2010.
According to the American Hospital Association, there are approximately
5,000 hospitals in the U.S. that are owned by not-for-profit entities,
for-profit investors, or state or local governments. Of these hospitals, 44%, or
approximately 2,200, are located in non-urban communities.
------------------------
We were incorporated in Delaware in 1996. Our principal subsidiary was
incorporated in Delaware in 1985. We completed our initial public offering of
common stock in June 2000 and completed a subsequent offering of common stock in
October 2000. Our principal executive offices are located at 155 Franklin Road,
Suite 400, Brentwood, Tennessee 37027. Our telephone number at that address is
(615) 373-9600. Our World Wide Web site address is www.chs.net. The information
in the website is not intended to be incorporated into this prospectus by
reference and should not be considered a part of this prospectus.
3
THE OFFERING
Securities offered........................... $250,000,000 aggregate principal amount of
4.25% Convertible Subordinated Notes due
October 15, 2008. We have also granted the
underwriters an over-allotment option to
purchase up to an additional $37,500,000
aggregate principal amount of convertible
notes.
Offering price............................... 100% of the principal amount of the notes,
plus accrued interest, if any, from the date
of original issuance of the notes, which we
expect to be October 15, 2001.
Interest payable............................. We will pay interest on the notes
semi-annually on April 15 and October 15 of
each year, commencing April 15, 2002.
Conversion................................... The notes are convertible, at the option of
the holder, into shares of our common stock
at any time before the close of business on
the business day preceding the maturity date,
unless we have previously redeemed or
repurchased the notes, at a conversion rate
of 29.8507 shares of common stock per $1,000
principal amount of notes. The conversion
rate is subject to anti-dilution adjustment
in some events.
Provisional Redemption....................... Prior to October 15, 2005, if the price of
our common stock has exceeded 150% of the
conversion price for at least 20 trading days
in the consecutive 30-day trading period
ending on the trading day prior to the date
of mailing of the notice of redemption, we
have the right at any time to redeem some or
all of the notes at a redemption price of
100% of their principal amount plus accrued
and unpaid interest to the redemption date.
In this case, we must make an additional
"make whole" payment in cash or, at our
option, common stock or a combination of cash
and common stock on the redeemed notes equal
to $170 per $1,000 principal amount of notes,
minus the amount of any interest actually
paid or accrued and unpaid on each $1,000
principal amount of redeemed notes prior to
the date we redeem the notes. We must make
these "make whole" payments on all notes
called for redemption, including notes
converted after the date we mailed the
notice. See "Description of
Notes--Provisional Redemption."
Optional redemption by us.................... On or after October 15, 2005, we have the
right at any time to redeem some or all of
the notes at the redemption prices set forth
in this prospectus, plus accrued and unpaid
interest to the redemption date.
4
Repurchase at the option of holders upon a
change of control.......................... If we experience a specified change of
control, a holder of notes will have the
right, subject to some conditions and
restrictions, to require us to repurchase,
with cash or common stock, some or all of the
notes held by that holder at a price equal to
100% of the principal amount, plus accrued
and unpaid interest to the repurchase date.
Ranking...................................... The notes will be subordinated to our future
senior debt, as that term is defined in
"Description of the Notes--Subordination."
The notes are also effectively subordinated
in right of payment to all indebtedness and
other liabilities of our subsidiaries. As of
June 30, 2001, we had outstanding senior debt
of $1,251.0 million, including the $500
million of our 7 1/2% subordinated debt, and
the aggregate amount of other indebtedness
and liabilities of us and our subsidiaries
was approximately $249.2 million. The
indenture under which the notes will be
issued will not restrict the incurrence of
senior debt by us or any of our subsidiaries
or our incurrence of other indebtedness or
liabilities. See "Description of the Notes--
Subordination."
Use of proceeds.............................. We estimate that our net proceeds from this
offering and the concurrent common stock
offering will be approximately
$548.3 million. We intend to use all of the
net proceeds from this offering to repay a
portion of the $500 million of our 7 1/2%
subordinated debt, plus accrued interest. We
intend to use the net proceeds from the
concurrent common stock offering to repay the
balance of our 7 1/2% subordinated debt, plus
accrued interest, and to repay a portion of
our outstanding debt under the acquisition
loan facility of our credit agreement with
The Chase Manhattan Bank, an affiliate of
J.P. Morgan Securities Inc., and other
lenders. All of our 7 1/2% subordinated debt
is held by the limited partners of an
affiliate of Forstmann Little & Co. As of
September 30, 2001, accrued interest on our
subordinated debt was $6.3 million.
5
Events of default............................ Events of default include:
- failure to pay interest on any of the
notes within 30 days after payment
becomes due;
- failure to pay principal of or premium,
if any, on any of the notes when due;
- failure to perform or comply with the
other covenants in the indenture with
respect to the notes, and that failure
is not cured within 60 days after we
are given notice of the failure;
- failure by us or some of our
subsidiaries to pay when due, or the
acceleration of the due date, of more
than $15.0 million of indebtedness for
money borrowed, and that indebtedness
is not discharged, or the acceleration
is not annulled, within 30 days after
we are given notice of the failure or
acceleration;
- some events of bankruptcy, insolvency
or reorganization of our company;
- failure to provide the required notice
of any change of control or to pay the
repurchase price in connection with a
change of control; and
- failure for 10 days to deliver shares
of common stock, together with cash
instead of fractional shares, in
connection with the conversion of the
notes into shares of our common stock.
Listing of notes............................. The notes will not be listed on any
securities exchange or any automated
quotation system. Some of the underwriters
have advised us that they currently intend to
make a market in the notes. However, they are
not obligated to do so, and any market making
may be discontinued at any time at the sole
discretion of the underwriters without
notice.
6
Global note; book-entry system............... We will issue the notes only in book-entry
form, registered in the name of DTC or its
nominee. Purchasers will not receive
individually certificated notes. Instead, the
notes will be evidenced by a global note, in
fully registered form and without coupons,
and deposited with the trustee, as custodian
for DTC. The interest of any holder in the
global note will be shown on, and transfers
of that interest will be effected only
through, records maintained by DTC and its
direct and indirect participants.
Governing law................................ The indenture and the notes will be governed
by the laws of the State of New York.
Unless we specifically state otherwise, the information in this prospectus
does not take into account:
- up to 8,582,077 shares of common stock, including the underwriters'
over-allotment option, issuable upon the conversion of the notes;
- up to 1,800,000 shares of common stock which the underwriters have the
option to purchase to cover over-allotments in the concurrent common stock
offering; and
- an additional 4,885,778 shares of common stock we have reserved for
issuance under our stock option plans as of October 5, 2001. Of these
reserved shares, 4,286,628 shares are issuable upon exercise of
outstanding stock options at an average exercise price of $13.30.
OUR CONCURRENT COMMON STOCK OFFERING
Concurrently with this offering, we are offering 12,000,000 shares of common
stock, excluding the over-allotment option of 1,800,000 shares of common stock,
in an underwritten public offering at $26.80 per share.
The common stock offering and this offering are not contingent on each
other.
7
SUMMARY CONSOLIDATED FINANCIAL AND OTHER DATA
You should read the summary consolidated financial and other data below in
conjunction with our consolidated financial statements and the accompanying
notes. We derived the historical financial data for the three years ended
December 31, 2000 from our audited consolidated financial statements. We derived
the historical financial data for the six months ended June 30, 2000 and
June 30, 2001, and as of June 30, 2001, from our unaudited interim condensed
consolidated financial statements. The unaudited interim condensed consolidated
financial statements contain all adjustments, consisting only of normal
recurring adjustments, necessary for a fair presentation of the results for
these periods. You should also read Selected Consolidated Financial and Other
Data and the accompanying Management's Discussion and Analysis of Financial
Condition and Results of Operations. All of these materials are contained later
in this prospectus. The pro forma consolidated statements of operations and
balance sheet data are presented in a separate table following the historical
data. For each period, the pro forma consolidated statements of operations data
are presented in three columns: historical data, pro forma data reflecting the
application of the estimated net proceeds from this offering to repay a portion
of our outstanding debt as if this repayment occurred on January 1, 2000, and
pro forma data reflecting the application of the estimated net proceeds from
both this offering and the concurrent common stock offering to repay a portion
of our outstanding debt as if this repayment had occurred on January 1, 2000.
The pro forma consolidated statements of operations data for the year ended
December 31, 2000 also reflect the application of the net proceeds from our two
common stock public offerings in 2000. The pro forma consolidated balance sheet
data give effect to this offering as well as both this offering and the
concurrent common stock offering as if they had occurred on June 30, 2001.
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
------------------------------------ -----------------------
1998 1999 2000 2000 2001
---------- ---------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
CONSOLIDATED STATEMENT OF OPERATIONS DATA
Net operating revenues.................................... $ 854,580 $1,079,953 $1,337,501 $ 625,787 $ 799,554
Operating expenses (a).................................... 688,190 875,768 1,084,765 505,931 648,476
Depreciation and amortization............................. 49,861 56,943 71,931 33,910 43,094
Amortization of goodwill.................................. 26,639 24,708 25,693 12,378 14,074
Impairment of long-lived assets........................... 164,833 -- -- -- --
Compliance settlement and Year 2000 remediation costs
(b)..................................................... 20,209 17,279 -- -- --
---------- ---------- ---------- ---------- ----------
Income (loss) from operations............................. (95,152) 105,255 155,112 73,568 93,910
Interest expense, net..................................... 101,191 116,491 127,370 65,305 53,174
---------- ---------- ---------- ---------- ----------
Income (loss) before cumulative effect of a change in
accounting principle and income taxes................... (196,343) (11,236) 27,742 8,263 40,736
Provision for (benefit from) income taxes................. (13,405) 5,553 18,173 7,164 20,237
---------- ---------- ---------- ---------- ----------
Income (loss) before cumulative effect of a change in
accounting principle.................................... (182,938) (16,789) 9,569 1,099 20,499
Cumulative effect of a change in accounting principle, net
of taxes................................................ (352) -- -- -- --
---------- ---------- ---------- ---------- ----------
Net income (loss)......................................... $ (183,290) $ (16,789) $ 9,569 $ 1,099 $ 20,499
========== ========== ========== ========== ==========
Basic income (loss) per common share:
Income (loss) before cumulative effect of a change in
accounting principle.................................. $ (3.37) $ (0.31) $ 0.14 $ 0.02 $ 0.24
Cumulative effect of a change in accounting principle... (0.01) -- -- -- --
---------- ---------- ---------- ---------- ----------
Net income (loss)....................................... $ (3.38) $ (0.31) $ 0.14 $ 0.02 $ 0.24
========== ========== ========== ========== ==========
Diluted income (loss) per common share:
Income (loss) before cumulative effect of a change in
accounting principle.................................. $ (3.37) $ (0.31) $ 0.14 $ 0.02 $ 0.23
Cumulative effect of a change in accounting principle... (0.01) -- -- -- --
---------- ---------- ---------- ---------- ----------
Net income (loss)....................................... $ (3.38) $ (0.31) $ 0.14 $ 0.02 $ 0.23
========== ========== ========== ========== ==========
Weighted average number of shares outstanding:
Basic................................................... 54,249,895 54,545,030 67,610,399 56,423,677 85,696,119
========== ========== ========== ========== ==========
Diluted................................................. 54,249,895 54,545,030 69,187,191 57,554,519 87,554,317
========== ========== ========== ========== ==========
Ratio of earnings to fixed charges (c):................... -- -- 1.18x 1.10x 1.66x
(FOOTNOTES BEGIN ON PAGE 11)
8
YEAR ENDED DECEMBER 31, 2000 SIX MONTHS ENDED JUNE 30, 2001
--------------------------------------------------- ---------------------------------------------------
PRO FORMA TO PRO FORMA TO
REFLECT THIS REFLECT THIS
OFFERING AND THE OFFERING AND THE
PRO FORMA TO CONCURRENT PRO FORMA TO CONCURRENT
REFLECT THIS COMMON STOCK REFLECT THIS COMMON STOCK
ACTUAL OFFERING (D) OFFERING (E) ACTUAL OFFERING (D) OFFERING (E)
----------- ----------------- ----------------- ----------- ----------------- -----------------
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
CONSOLIDATED STATEMENT
OF OPERATIONS DATA
Net operating
revenues.......... $ 1,337,501 $ 1,337,501 $ 1,337,501 $ 799,554 $ 799,554 $ 799,554
Operating
expenses(a)....... 1,084,765 1,084,765 1,084,765 648,476 648,476 648,476
Depreciation and
amortization...... 71,931 71,931 71,931 43,094 43,094 43,094
Amortization of
goodwill.......... 25,693 25,693 25,693 14,074 14,074 14,074
----------- ----------- ----------- ----------- ----------- -----------
Income from
operations........ 155,112 155,112 155,112 93,910 93,910 93,910
Interest expense,
net............... 127,370 91,155 67,244 53,174 50,071 38,308
----------- ----------- ----------- ----------- ----------- -----------
Income before
extraordinary item
and income taxes.. 27,742 63,957 87,868 40,736 43,839 55,602
Provision for income
taxes............. 18,173 32,297 41,622 20,237 21,447 26,035
----------- ----------- ----------- ----------- ----------- -----------
Income before
extraordinary
item.............. $ 9,569 $ 31,660 $ 46,246 $ 20,499 $ 22,392 $ 29,567
=========== =========== =========== =========== =========== ===========
Income per common
share before
extraordinary
item:
Basic............. $ 0.14 $ 0.47 $ 0.58 $ 0.24 $ 0.26 $ 0.30
=========== =========== =========== =========== =========== ===========
Diluted........... $ 0.14 $ 0.46 $ 0.57 $ 0.23 $ 0.26 $ 0.30
=========== =========== =========== =========== =========== ===========
Weighted average
number of shares
outstanding:
Basic............. 67,610,399 67,610,399 79,610,399 85,696,119 85,696,119 97,696,119
=========== =========== =========== =========== =========== ===========
Diluted........... 69,187,191 69,187,191 81,187,191 87,554,317 87,554,317 99,554,317
=========== =========== =========== =========== =========== ===========
Ratio of earnings to
fixed charges
(c):.............. 1.18x 1.24x 1.24x 1.66x 1.75x 1.75x
CONSOLIDATED BALANCE SHEET DATA
(AS OF END OF PERIOD)
Cash and cash equivalents............................ $ 35,740 $ 35,740 $ 35,740
Total assets......................................... 2,280,086 2,284,779 2,281,359
Long-term debt....................................... 1,229,507 1,243,507 937,432
Other long-term liabilities.......................... 14,015 14,015 14,015
Stockholders' equity................................. 779,841 777,976 1,081,965
(FOOTNOTES BEGIN ON PAGE 11)
9
SELECTED OPERATING DATA
The following table sets forth operating statistics for our hospitals for
each of the periods presented. Statistics for 1998 include a full year of
operations for 37 hospitals and partial periods for four hospitals acquired
during the year. Statistics for 1999 include a full year of operations for 41
hospitals and partial periods for four hospitals acquired, and one hospital
constructed and opened, during the year. Statistics for 2000 include a full year
of operations for 45 hospitals and partial periods for one hospital disposed of,
and seven hospitals acquired during the year. Statistics for the six months
ended June 30, 2000 include operations for 45 hospitals and partial periods for
four hospitals acquired during the six month period. Statistics for the six
months ended June 30, 2001 include operations for 52 hospitals and partial
periods for one hospital acquired.
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
------------------------------------------ ---------------------
1998 1999 2000 2000 2001
---------- ---------- ---------- --------- ---------
(DOLLARS IN THOUSANDS)
Number of hospitals (f)....................... 41 46 52 49 53
Licensed beds (f)(g).......................... 3,644 4,115 4,688 4,401 4,848
Beds in service (f)(h)........................ 2,776 3,123 3,587 3,355 3,722
Admissions (i)................................ 100,114 120,414 143,310 68,314 82,559
Adjusted admissions (j)....................... 177,075 217,006 262,419 126,137 149,741
Patient days (k).............................. 416,845 478,658 548,827 267,060 315,994
Average length of stay (days) (l)............. 4.2 4.0 3.8 3.9 3.8
Occupancy rate (beds in service) (m).......... 43.3% 44.1% 44.6% 45.0% 48.4%
Net inpatient revenue as a % of total net
revenue..................................... 55.7% 52.7% 51.0% 50.6% 51.0%
Net outpatient revenue as a % of total net
revenue..................................... 42.6% 45.5% 47.3% 47.6% 47.8%
Adjusted EBITDA (n)........................... $ 166,390 $ 204,185 $ 252,736 $ 119,856 $ 151,078
Adjusted EBITDA as a % of net revenue......... 19.5% 18.9% 18.9% 19.2% 18.9%
Net cash flows provided by (used in) operating
activities.................................. $ 15,719 $ (11,746) $ 22,985 $ (34,399) $ 95,528
Net cash flows used in investing activities... $(236,553) $(155,541) $(244,444) $ (74,261) $(104,464)
Net cash flows provided by financing
activities.................................. $ 219,890 $ 164,850 $ 230,914 $ 110,368 $ 30,936
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
---------------------------- PERCENTAGE ------------------------ PERCENTAGE
1999 2000 INCREASE 2000 2001 INCREASE
----------- ----------- ----------- --------- --------- -----------
(DOLLARS IN THOUSANDS) (DOLLARS IN THOUSANDS)
SAME HOSPITALS DATA (o)
Admissions (i)............... 117,768 125,207 6.3% 68,066 72,126 6.0%
Adjusted admissions (j)...... 212,246 227,780 7.3% 125,649 131,027 4.3%
Patient days (k)............. 467,884 481,620 2.9% 266,114 276,134 3.8%
Average length of stay
(days) (l)................. 4.0 3.8 3.9 3.8
Occupancy rate (beds in
service) (m)............... 44.8% 45.1% 45.1% 47.4%
Net revenue.................. $1,047,950 $1,155,850 10.3% $ 620,067 $ 688,905 11.1%
Adjusted EBITDA (n).......... $ 196,843 $ 229,637 16.7% $ 116,730 $ 133,537 14.4%
Adjusted EBITDA, as a % of
net revenue................ 18.8% 19.9% 18.8% 19.4%
(FOOTNOTES BEGIN ON PAGE 11)
10
------------------------------
(a) Operating expenses include salaries and benefits, provision for bad debts,
supplies, rent, and other operating expenses, and exclude certain items for
purposes of determining adjusted EBITDA as discussed in footnote (n) below.
(b) Includes Year 2000 remediation costs of $0.2 million in 1998 and
$3.3 million in 1999.
(c) The ratio of earnings to fixed charges is calculated by dividing earnings by
fixed charges. For this purpose, "earnings" means income (loss) from
continuing operations before provision for income taxes and extraordinary
items plus fixed charges (other than capitalized interest). "Fixed charges"
means total interest whether capitalized or expensed (including the portion
of rent expense representative of interest costs) on outstanding debt plus
debt related fees and amortization of deferred financing costs. For the
years ended December 31, 1998 and 1999, earnings were insufficient to cover
fixed charges by approximately $197.0 million and $12.6 million.
The pro forma ratio of earnings to fixed charges gives effect to the net
decrease in the interest expense resulting from this offering and the
application of the estimated net proceeds from this offering to the
repayment of existing debt, as if this offering had occurred at the
beginning of the periods presented; this ratio does not give effect to any
other pro forma events. The ratio has been computed using an assumed
interest rate of 4.75% for the notes.
(d) The pro forma adjustments for this offering for the year ended December 31,
2000 reflect our two common stock public offerings in 2000 and this
offering, the application of the net proceeds from our two common stock
public offerings in 2000 to repay debt of $225.2 million on June 14, 2000,
$20.5 million on July 3, 2000 and $268.8 million on November 3, 2000 and the
estimated net proceeds from this offering to repay debt of $236.0 million
based on the outstanding debt balance as of December 31, 2000 and the
resultant reduction of interest expense of $36.2 million as if these events
had occurred on January 1, 2000.
The pro forma adjustments for this offering for the six months ended
June 30, 2001 reflect this offering, the estimated net proceeds from this
offering to repay debt of $236.0 million based on the outstanding debt
balance as of June 30, 2001 and the resultant reduction of interest expense
of $3.1 million as if these events had occurred on January 1, 2000.
The pro forma adjustments also reflect an increase in provision for income
taxes of $14.1 million for the year ended December 31, 2000 and
$1.2 million for the six months ended June 30, 2001, resulting from the
decrease in interest expense. See "Use of Proceeds" and note (q) to the
"Selected Consolidated Financial and Other Data."
(e) The pro forma adjustments for both this offering and the concurrent common
stock offering for the year ended December 31, 2000 reflect the pro forma
adjustments for our two common stock public offerings in 2000 and this
offering as detailed in footnote (d) above as well as the concurrent common
stock offering and the estimated net proceeds from the concurrent common
stock offering to repay additional debt of $306.1 million based on the
outstanding balance as of December 31, 2000 and the resultant additional
reduction of interest expense of $23.9 million as if these events had
occurred on January 1, 2000.
The pro forma adjustments for both this offering and the concurrent common
stock offering for the six months ended June 30, 2001 reflect the pro forma
adjustments for this offering as detailed in footnote (d) above as well as
the concurrent common stock offering and the estimated net proceeds from the
concurrent common stock offering to repay additional debt of $306.1 million
based on the outstanding balance as of June 30, 2001 and the resultant
additional reduction of interest expense of $11.8 million as if these events
had occurred on January 1, 2000.
The pro forma adjustments also reflect an additional increase in provision
for income taxes of $9.3 million for the year ended December 31, 2000 and
$4.6 million for the six months ended June 30, 2001, resulting from the
decrease in interest expense. See "Use of Proceeds" and note (r) to the
"Selected Consolidated Financial and Other Data."
(f) At end of period.
(g) Licensed beds are the number of beds for which the appropriate state agency
licenses a facility regardless of whether the beds are actually available
for patient use.
(h) Beds in service are the number of beds that are readily available for
patient use.
(i) Admissions represent the number of patients admitted for inpatient
treatment.
(j) Adjusted admissions is a general measure of combined inpatient and
outpatient volume. We computed adjusted admissions by multiplying admissions
by gross patient revenues and then dividing that number by gross inpatient
revenues.
(k) Patient days represent the total number of days of care provided to
inpatients.
(l) Average length of stay (days) represents the average number of days
inpatients stay in our hospitals.
(m) We calculated percentages by dividing the average daily number of inpatients
by the weighted average of beds in service.
(n) We define adjusted EBITDA as EBITDA adjusted to exclude cumulative effect of
a change in accounting principle, impairment of long-lived assets,
compliance settlement and Year 2000 remediation costs, and loss from
hospital sales. EBITDA consists of income (loss) before interest, income
taxes, depreciation and amortization, and amortization of goodwill. EBITDA
and adjusted EBITDA should not be considered as measures of financial
performance under generally accepted accounting principles. Items excluded
from EBITDA and adjusted EBITDA are significant components in understanding
and assessing financial performance. EBITDA and adjusted EBITDA are key
measures used by management to evaluate our operations and provide useful
information to investors. EBITDA and adjusted EBITDA should not be
considered in isolation or as alternatives to net income, cash flows
generated by operations, investing or financing activities, or other
financial statement data presented in the consolidated financial statements
as indicators of financial performance or liquidity. Because EBITDA and
adjusted EBITDA are not measurements determined in accordance with generally
accepted accounting principles and are thus susceptible to varying
calculations, EBITDA and adjusted EBITDA as presented may not be comparable
to other similarly titled measures of other companies.
(o) Includes acquired hospitals to the extent we operated them during comparable
periods in both years.
11
RISK FACTORS
YOU SHOULD CAREFULLY CONSIDER THE RISKS DESCRIBED BELOW BEFORE BUYING THE
NOTES IN THIS OFFERING. THE RISKS DESCRIBED IN THIS SECTION ARE THE ONES WE
CONSIDER TO BE MATERIAL TO YOUR DECISION WHETHER TO INVEST IN THE NOTES AT THIS
TIME. IF ANY OF THE FOLLOWING RISKS OCCUR, OUR BUSINESS, FINANCIAL CONDITION OR
RESULTS OF OPERATIONS COULD BE MATERIALLY HARMED. IN THAT CASE, THE TRADING
PRICE OF THE NOTES COULD DECLINE, AND YOU COULD LOSE ALL OR PART OF YOUR
INVESTMENT.
IF FEDERAL OR STATE HEALTHCARE PROGRAMS OR MANAGED CARE COMPANIES REDUCE THE
PAYMENTS WE RECEIVE AS REIMBURSEMENT FOR SERVICES WE PROVIDE, OUR REVENUES MAY
DECLINE.
A large portion of our revenues come from the Medicare and Medicaid
programs. In recent years, federal and state governments made significant
changes in the Medicare and Medicaid programs. These changes have decreased the
amount of money we receive for our services relating to these programs.
In recent years, Congress and some state legislatures have introduced an
increasing number of other proposals to make major changes in the healthcare
system. Future federal and state legislation may further reduce the payments we
receive for our services.
In addition, insurance and managed care companies and other third parties
from whom we receive payment for our services increasingly are attempting to
control healthcare costs by requiring that hospitals discount their services in
exchange for exclusive or preferred participation in their benefit plans. We
believe that this trend may continue and may reduce the payments we receive for
our services.
IF WE FAIL TO COMPLY WITH EXTENSIVE LAWS AND GOVERNMENT REGULATIONS, WE COULD
SUFFER PENALTIES OR BE REQUIRED TO MAKE SIGNIFICANT CHANGES TO OUR OPERATIONS.
The healthcare industry is required to comply with many laws and regulations
at the federal, state, and local government levels. These laws and regulations
require that hospitals meet various requirements, including those relating to
the adequacy of medical care, equipment, personnel, operating policies and
procedures, maintenance of adequate records, compliance with building codes, and
environmental protection. If we fail to comply with applicable laws and
regulations, we could suffer civil or criminal penalties, including the loss of
our licenses to operate and our ability to participate in the Medicare,
Medicaid, and other federal and state healthcare programs.
In addition, there are heightened coordinated civil and criminal enforcement
efforts by both federal and state government agencies relating to the healthcare
industry, including the hospital segment. The ongoing investigations relate to
various referral, cost reporting, and billing practices, laboratory and home
healthcare services, and physician ownership and joint ventures involving
hospitals.
In the future, different interpretations or enforcement of these laws and
regulations could subject our current practices to allegations of impropriety or
illegality or could require us to make changes in our facilities, equipment,
personnel, services, capital expenditure programs, and operating expenses.
IF WE FAIL TO COMPLY WITH THE MATERIAL TERMS OF OUR CORPORATE COMPLIANCE
AGREEMENT, WE COULD BE EXCLUDED FROM GOVERNMENT HEALTHCARE PROGRAMS.
In December 1997, we approached the Office of Inspector General of the U.S.
Department of Health and Human Services and made a voluntary disclosure
regarding the assignment of billing codes for inpatient services and
reimbursements we received from the U.S. government programs
12
from 1993 to 1997. We entered into a settlement agreement under which we paid
approximately $31.8 million to the appropriate governmental agencies in exchange
for a release of civil claims relating to these reimbursements.
As part of this settlement, we entered into a corporate compliance agreement
with the Inspector General. Complying with our corporate compliance agreement
will require additional efforts and costs. Our failure to comply with the terms
of the compliance agreement could subject us to civil and criminal penalties,
including significant fines. In addition, failure to comply with the material
terms of the compliance agreement could lead to suspension or disbarment from
further participation in the federal and state healthcare programs, including
Medicare and Medicaid. Any suspension or disbarment would restrict our ability
to treat patients and receive reimbursement from these programs. See "Business
of Community Health Systems--Compliance Program."
IF COMPETITION DECREASES OUR ABILITY TO ACQUIRE ADDITIONAL HOSPITALS ON
FAVORABLE TERMS, WE MAY BE UNABLE TO EXECUTE OUR ACQUISITION STRATEGY.
An important part of our business strategy is to acquire two to four
hospitals each year in non-urban markets. However, not-for-profit hospital
systems and other for-profit hospital companies generally attempt to acquire the
same type of hospitals as we do. Some of these other purchasers have greater
financial resources than we do. Our principal competitors for acquisitions
include Health Management Associates, Inc. and Province Healthcare Company. In
addition, some hospitals are sold through an auction process, which may result
in higher purchase prices than we believe are reasonable. Therefore, we may not
be able to acquire additional hospitals on terms favorable to us.
IF WE FAIL TO IMPROVE THE OPERATIONS OF ACQUIRED HOSPITALS, WE MAY BE UNABLE TO
ACHIEVE OUR GROWTH STRATEGY.
Some of the hospitals we have acquired or will acquire had or may have
operating losses prior to the time we acquired them. We may be unable to operate
profitably any hospital or other facility we acquire, effectively integrate the
operations of any acquisitions, or otherwise achieve the intended benefit of our
growth strategy.
IF WE ACQUIRE HOSPITALS WITH UNKNOWN OR CONTINGENT LIABILITIES, WE COULD BECOME
LIABLE FOR MATERIAL OBLIGATIONS.
Hospitals that we acquire may have unknown or contingent liabilities,
including liabilities for failure to comply with healthcare laws and
regulations. Although we seek indemnification from prospective sellers covering
these matters, we may nevertheless have material liabilities for past activities
of acquired hospitals.
STATE EFFORTS TO REGULATE THE SALE OF HOSPITALS OPERATED BY NOT-FOR-PROFIT
ENTITIES COULD PREVENT US FROM ACQUIRING ADDITIONAL HOSPITALS AND EXECUTING OUR
BUSINESS STRATEGY.
Many states, including some where we have hospitals and others where we may
in the future acquire hospitals, have adopted legislation regarding the sale or
other disposition of hospitals operated by not-for-profit entities. In other
states that do not have specific legislation, the attorneys general have
demonstrated an interest in these transactions under their general obligations
to protect charitable assets from waste. These legislative and administrative
efforts focus primarily on the appropriate valuation of the assets divested and
the use of the proceeds of the sale by the non-profit seller. While these review
and, in some instances, approval processes can add additional time to the
closing of a hospital acquisition, we have not had any significant difficulties
or delays in
13
completing acquisitions. However, future actions on the state level could
seriously delay or even prevent our ability to acquire hospitals.
STATE EFFORTS TO REGULATE THE CONSTRUCTION, ACQUISITION OR EXPANSION OF
HOSPITALS COULD PREVENT US FROM ACQUIRING ADDITIONAL HOSPITALS, RENOVATING OUR
FACILITIES OR EXPANDING THE BREADTH OF SERVICES WE OFFER.
Some states require prior approval for the construction or acquisition of
healthcare facilities and for the expansion of healthcare facilities and
services. In giving approval, these states consider the need for additional or
expanded healthcare facilities or services. In some states in which we operate,
we are required to obtain certificates of need, known as CONs, for capital
expenditures exceeding a prescribed amount, changes in bed capacity or services,
and some other matters. Other states may adopt similar legislation. We may not
be able to obtain the required CONs or other prior approvals for additional or
expanded facilities in the future. In addition, at the time we acquire a
hospital, we may agree to replace or expand the facility we are acquiring. If we
are not able to obtain required prior approvals, we would not be able to acquire
additional hospitals and expand healthcare services.
OUR SIGNIFICANT INDEBTEDNESS COULD LIMIT OUR OPERATIONAL AND CAPITAL
FLEXIBILITY.
As of June 30, 2001, on a pro forma basis after giving effect to the
issuance of the notes in this offering and the use of the estimated net proceeds
from this offering and the concurrent common stock offering, we had total
long-term debt of $937.4 million or approximately 46.4% of our total
capitalization.
Our acquisition program requires substantial capital resources. In addition,
the operations of our existing hospitals require ongoing capital expenditures.
We may need to incur additional indebtedness to fund these acquisitions and
expenditures. However, we may be unable to obtain sufficient financing on terms
satisfactory to us.
The degree to which we are leveraged could have other important consequences
to holders of the common stock, including the following:
- we must dedicate a substantial portion of our cash flow from operations to
the payment of principal and interest on our indebtedness; this reduces
the funds available for our operations;
- a portion of our borrowings are at variable rates of interest, which makes
us vulnerable to increases in interest rates; and
- some of our indebtedness contains numerous financial and other restrictive
covenants, including restrictions on paying dividends, incurring
additional indebtedness, and selling assets.
Under our credit agreement and the notes being offered pursuant to this
offering, a change of control of us may result in the debt under these
agreements becoming due and payable. See "--We may not have sufficient funds to
repay the notes at maturity or if we experience a change of control."
IF WE ARE UNABLE TO EFFECTIVELY COMPETE FOR PATIENTS, LOCAL RESIDENTS COULD USE
OTHER HOSPITALS.
The hospital industry is highly competitive. In addition to the competition
we face for acquisitions and physicians, we must also compete with other
hospitals and healthcare providers for patients. The competition among hospitals
and other healthcare providers for patients has intensified in recent years. Our
hospitals are located in non-urban service areas. Most of our
14
hospitals face no direct competition because there are no other hospitals in
their primary service areas. However, these hospitals do face competition from
hospitals outside of their primary service area, including hospitals in urban
areas that provide more complex services. These facilities generally are located
in excess of 25 miles from our facilities. Patients in our primary service areas
may travel to these other hospitals for a variety of reasons. These reasons
include physician referrals or the need for services we do not offer. Patients
who seek services from these other hospitals may subsequently shift their
preferences to those hospitals for the services we do provide.
Some of our hospitals operate in primary service areas where they compete
with one other hospital. One of our hospitals competes with more than one other
hospital in its primary service area. Some of these competing hospitals use
equipment and services more specialized than those available at our hospitals.
In addition, some of the hospitals that compete with us are owned by
tax-supported governmental agencies or not-for-profit entities supported by
endowments and charitable contributions. These hospitals can make capital
expenditures without paying sales, property and income taxes. We also face
competition from other specialized care providers, including outpatient surgery,
orthopedic, oncology, and diagnostic centers.
We expect that these competitive trends will continue. Our inability to
compete effectively with other hospitals and other healthcare providers could
cause local residents to use other hospitals. See "Business of Community Health
Systems--Competition."
IF WE BECOME SUBJECT TO SIGNIFICANT LEGAL ACTIONS, WE COULD BE SUBJECT TO
SUBSTANTIAL UNINSURED LIABILITIES.
In recent years, physicians, hospitals, and other healthcare providers have
become subject to an increasing number of legal actions alleging malpractice,
product liability, or related legal theories. Many of these actions involve
large claims and significant defense costs. To protect us from the cost of these
claims, we generally maintain professional malpractice liability insurance and
general liability insurance coverage in amounts and with deductibles that we
believe to be appropriate for our operations. However, our insurance coverage
may not cover all claims against us or continue to be available at a reasonable
cost for us to maintain adequate levels of insurance.
IF FUTURE CASH FLOWS ARE INSUFFICIENT TO RECOVER THE CARRYING VALUE OF OUR
GOODWILL, A MATERIAL NON-CASH CHARGE TO EARNINGS COULD RESULT.
The Forstmann Little partnerships acquired our predecessor company in 1996
principally for cash. We recorded a significant portion of the purchase price as
goodwill. We have also recorded as goodwill a portion of the purchase price for
our subsequent hospital acquisitions. At June 30, 2001, we had $992 million of
goodwill recorded on our books. We expect to recover the carrying value of this
goodwill through our future cash flows. On an ongoing basis, we evaluate, based
on projected undiscounted cash flows, whether we will be able to recover all or
a portion of the carrying value of goodwill. If future cash flows are
insufficient to recover the carrying value of our goodwill, we must write off a
portion of the unamortized balance of goodwill. In 1998, in connection with our
periodic review process, we determined that projected undiscounted cash flows
from seven of our hospitals were below the carrying value of the long-lived
assets associated with these hospitals. In accordance with generally accepted
accounting principles, we adjusted the carrying value of these assets to their
estimated fair value through an impairment charge of $164.8 million. Of this
charge, goodwill accounted for $134.3 million. This impairment charge arose from
various circumstances that were unique to each of the hospitals and adversely
affected their prospects. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
15
IF OUR STOCK PRICE FLUCTUATES AFTER THIS OFFERING, YOU COULD LOSE A SIGNIFICANT
PART OF YOUR INVESTMENT.
Our common stock is listed on the New York Stock Exchange. We do not know if
an active trading market will continue to exist for our common stock or how the
common stock will trade in the future. The market price of our common stock may
fluctuate significantly in the future, and these fluctuations may be unrelated
to our performance. In addition, the stock market in general has experienced
extreme volatility that often has been unrelated to the operating performance or
prospects of particular companies. The trading price of the notes is, in part, a
function of the market price of our common stock.
IF EXISTING STOCKHOLDERS SELL THEIR COMMON STOCK, YOU COULD LOSE A SIGNIFICANT
PART OF YOUR INVESTMENT.
Upon the completion of our concurrent common stock offering, assuming no
exercise of the underwriters' over-allotment option, we will have outstanding
98,466,364 shares of common stock. The 20,425,717 shares of common stock that we
sold in our initial public offering, the 18,000,000 shares of common stock that
we sold in our offering in October 2000, the 12,000,000 shares of common stock
that we intend to sell in our concurrent common stock offering and the 7,462,675
shares of common stock issuable upon conversion of the notes sold in this
offering will be freely tradable without restriction or further registration
under the federal securities laws unless purchased by our "affiliates" as that
term is defined in Rule 144 under the Securities Act of 1933. Upon completion of
this offering and the concurrent common stock offering, approximately 47,704,296
shares of our common stock will be "restricted securities" as that term is
defined in Rule 144. A significant amount of these securities will be subject to
90-day lock up agreements restricting their resale and are subject to resale
restrictions under our stockholder's agreements. In addition, existing
stockholders including the Forstmann Little partnerships holding approximately
46,134,738 shares of common stock have the right to require us to register their
shares under the Securities Act of 1933. These shares may also be sold under
Rule 144 of the Securities Act of 1933, depending on their holding period and
subject to significant restrictions in the case of shares held by persons deemed
to be our affiliates. As restrictions on resale end or as these stockholders
exercise their registration rights, the market price of our stock could drop
significantly if the holders of restricted shares sell them or are perceived by
the market as intending to sell them.
BECAUSE FORSTMANN LITTLE AND OUR MANAGEMENT OWN A SUBSTANTIAL INTEREST IN US,
THEY WILL HAVE SIGNIFICANT INFLUENCE IN DETERMINING THE OUTCOME OF ALL MATTERS
SUBMITTED TO OUR STOCKHOLDERS FOR APPROVAL.
Following this offering, the Forstmann Little partnerships and our
management will together own approximately 47.8% of our outstanding common
stock. Accordingly, they will collectively have significant influence in:
- electing our entire board of directors;
- controlling our management and policies;
- determining the outcome of any corporate transaction or other matter
submitted to our stockholders for approval, including mergers,
consolidations and the sale of all or substantially all of our assets; and
- amending our certificate of incorporation and by-laws.
The Forstmann Little partnerships and our management may also be able to
prevent or cause a change of control of us. Their interests may conflict with
the interests of the other holders of
16
common stock. The Forstmann Little partnerships have a contractual right to
elect two directors until they no longer own any shares of our common stock.
THE NOTES WILL RANK BELOW OUR CURRENT AND FUTURE SENIOR DEBT, AND WE MAY BE
UNABLE TO REPAY OUR OBLIGATIONS UNDER THE NOTES.
The notes are unsecured and will be subordinated in right of payment to all
of our current and future senior debt. Because the notes will be subordinate to
our senior debt if we experience:
- a bankruptcy, liquidation or reorganization;
- an acceleration of the notes due to an event of default under the
indenture; or
- other specified events;
we will be permitted to make payments on the notes only after we have satisfied
all of our senior debt obligations currently outstanding or which we may incur
in the future. Therefore, we may not have sufficient assets remaining to pay
amounts due on any or all of the notes.
The indenture for the notes does not limit our ability to incur additional
senior debt. We may have difficulty paying what we owe under the notes if we
incur additional senior debt. As of June 30, 2001, on a pro forma basis giving
effect to this offering and the concurrent common stock offering and the use of
the estimated net proceeds from this offering and the concurrent common stock
offering, our total senior debt would have been approximately $937.4 million.
See "Description of Notes--Subordination of Notes."
BECAUSE OF OUR HOLDING COMPANY STRUCTURE, THE NOTES WILL BE EFFECTIVELY
SUBORDINATED TO THE OBLIGATIONS OF OUR SUBSIDIARIES.
Because we are a holding company and our assets consist primarily of our
equity interests in our operating subsidiaries, our obligations on the notes
will be effectively subordinated to all existing and future indebtedness and
other liabilities of our subsidiaries or any subsidiaries we may in the future
acquire or establish. None of our subsidiaries has guaranteed or otherwise
become obligated with respect to the notes. In a bankruptcy, liquidation or
reorganization, claims of creditors of our subsidiaries, including trade
creditors, will generally have priority as to the assets of our subsidiaries
over our claims and claims of the holders of our indebtedness, including the
notes. As of June 30, 2001, we and our subsidiaries had approximately $1.5
billion of consolidated indebtedness and other liabilities effectively ranking
senior to the notes.
WE ARE A HOLDING COMPANY AND WILL DEPEND ON OUR OPERATING SUBSIDIARIES FOR CASH
TO MAKE PAYMENTS ON THE NOTES.
All of our revenues are generated by our subsidiaries. As a result, we are
dependent upon dividends, incidental expense reimbursement and intercompany
transfer of funds from our subsidiaries to meet our payment obligation on the
notes. Our credit agreement generally prohibits the transfer of funds from our
subsidiaries to us.
WE MAY NOT HAVE SUFFICIENT FUNDS TO REPAY THE NOTES AT MATURITY OR IF WE
EXPERIENCE A CHANGE OF CONTROL.
At maturity, the entire outstanding principal amount of the notes will
become due and payable. If we experience a change of control under the indenture
governing the notes, a holder of notes will have the right, subject to some
conditions and restrictions, to require us to repurchase, with cash or common
stock, some or all of the notes at a purchase price equal to 100% of the
principal amount plus accrued interest. At maturity or upon a change of control,
we may not have sufficient
17
funds or may be unable to arrange for additional financing to pay the principal
amount due. Under the terms of the indenture for the notes, we may elect, if we
meet specified conditions, to pay the repurchase price upon a change of control
with shares of common stock. A change of control under the notes may also be a
change of control under our bank credit agreement. A change of control under our
credit agreement may result in our indebtedness under the credit agreement
becoming due and payable at the option of the lenders under the credit
agreement. The definition of change of control in our bank credit agreement may
be broader than the definition of change of control under the notes. See
"Description of Other Indebtedness." If the maturity date or change of control
occurs at a time when our other arrangements prohibit us from repaying the
notes, we could try to obtain the consent of the lenders under those
arrangements, or we could attempt to refinance the borrowings that contain the
restrictions. Under the covenants governing our credit agreement, we are not
permitted to repurchase the notes for cash. Any future borrowing arrangements or
agreements relating to senior debt to which we become a party may contain
restrictions on, or prohibitions against, our repayments of the notes. If we do
not obtain the necessary consents or refinance these borrowings, we will be
unable to repay the notes. In that case, our failure to repay the notes due upon
maturity or upon a change of control would constitute an event of default under
the indenture. Any default, in turn, may cause a default under the terms of our
senior debt. As a result, in those circumstances, the subordination provisions
of the indenture would, absent a waiver, prohibit any repayment of the notes
until we pay the senior debt in full.
A LIQUID TRADING MARKET FOR THE NOTES MAY NOT DEVELOP.
There has not been an established trading market for the notes. We do not
intend to apply for listing of the notes on any securities exchange or for
quotation through the National Association of Securities Dealers Automated
Quotation System. Although some of the underwriters have informed us that they
currently intend to make a market in the notes, they have no obligation to do so
and may discontinue making a market at any time without notice. The liquidity of
any market for the notes will depend on the number of holders of the notes, our
performance, the market for similar securities, the interest of securities
dealers in making a market in the notes and other factors. A liquid trading
market may not develop for the notes.
IF PROVISIONS IN OUR CORPORATE DOCUMENTS AND DELAWARE LAW DELAY OR PREVENT A
CHANGE OF CONTROL OF OUR COMPANY, WE MAY BE UNABLE TO CONSUMMATE A TRANSACTION
THAT OUR STOCKHOLDERS CONSIDER FAVORABLE.
Our certificate of incorporation and by-laws may discourage, delay, or
prevent a merger or acquisition involving us that our stockholders may consider
favorable by:
- authorizing the issuance of preferred stock, the terms of which may be
determined at the sole discretion of the board of directors;
- providing for a classified board of directors, with staggered three-year
terms; and
- establishing advance notice requirements for nominations for election to
the board of directors or for proposing matters that can be acted on by
stockholders at meetings.
Delaware law may also discourage, delay or prevent someone from acquiring or
merging with us. For a description you should read "Description of Capital
Stock."
THIS PROSPECTUS INCLUDES FORWARD-LOOKING STATEMENTS WHICH COULD DIFFER FROM
ACTUAL FUTURE RESULTS.
Some of the matters discussed in this prospectus include forward-looking
statements. Statements that are predictive in nature, that depend upon or refer
to future events or conditions or
18
that include words such as "expects," "anticipates," "intends," "plans,"
"believes," "estimates," "thinks," and similar expressions are forward-looking
statements. These statements involve known and unknown risks, uncertainties, and
other factors that may cause our actual results and performance to be materially
different from any future results or performance expressed or implied by these
forward-looking statements. These factors include the following:
- general economic and business conditions, both nationally and in the
regions in which we operate;
- demographic changes;
- existing governmental regulations and changes in, or the failure to comply
with, governmental regulations or our corporate compliance agreement;
- legislative proposals for healthcare reform;
- our ability, where appropriate, to enter into managed care provider
arrangements and the terms of these arrangements;
- changes in Medicare and Medicaid payment levels;
- uncertainty with the newly issued Health Insurance Portability and
Accountability Act of 1996 regulations;
- liability and other claims asserted against us;
- competition;
- our ability to attract and retain qualified personnel, including
physicians;
- trends toward treatment of patients in lower acuity healthcare settings;
- changes in medical or other technology;
- changes in generally accepted accounting principles;
- the availability and terms of capital to fund additional acquisitions or
replacement facilities; and
- our ability to successfully acquire and integrate additional hospitals.
Although we believe that these statements are based upon reasonable
assumptions, we can give no assurance that our goals will be achieved. Given
these uncertainties, prospective investors are cautioned not to place undue
reliance on these forward-looking statements. These forward-looking statements
are made as of the date of this prospectus. We assume no obligation to update or
revise them or provide reasons why actual results may differ.
19
USE OF PROCEEDS
We estimate our net proceeds from our sale of notes in this offering after
deducting estimated expenses and underwriting discounts and commissions of
$7.7 million, to be approximately $242.3 million. In addition, we expect to
receive net proceeds of $306.1 million from our concurrent common stock
offering, at an estimated public offering price of $26.80 per share and after
deducting estimated expenses and underwriting discounts and commissions. We
intend to use all of the net proceeds from this offering to repay a portion of
the $500 million of our 7 1/2% subordinated debt, plus accrued interest. We
intend to use the net proceeds from the concurrent common stock offering to
repay the balance of our 7 1/2% subordinated debt, plus accrued interest, and to
repay a portion of our outstanding debt under the acquisition loan facility of
our credit agreement with The Chase Manhattan Bank, an affiliate of J.P. Morgan
Securities Inc., and other lenders. The entire $500 million of our subordinated
debt is held by the limited partners of an affiliate of Forstmann Little & Co.
and approximately $27.5 million of our outstanding debt under the acquisition
loan facility of our credit agreement is held by affiliates of the underwriters.
As of September 30, 2001, accrued interest on the subordinated debt was
$6.3 million.
Approximately 80% of our outstanding debt under the acquisition loan
facility matures January 2, 2004. The balance of this debt matures on
December 31, 2002. As of June 30, 2001, the effective interest rate for our
outstanding debt under the acquisition loan facility was 6.17%.
We expect to borrow under the acquisition loan facility as needed to fund
our acquisitions. See "Business of Community Health Systems--Our Business
Strategy--Grow Through Selective Acquisitions."
See "Management--Relationships and Transactions between Community Health
Systems and its Officers, Directors and 5% Beneficial Owners and their Family
Members" and "Description of Other Indebtedness."
DIVIDEND POLICY
We have not paid any cash dividends in the past, and we do not intend to pay
any cash dividends for the foreseeable future. We intend to retain earnings, if
any, for the future operation and expansion of our business. Any determination
to pay dividends in the future will be dependent upon results of operations,
financial condition, contractual restrictions, restrictions imposed by
applicable law, and other factors deemed relevant by our board of directors. Our
existing indebtedness limits our ability to pay dividends and make distributions
to stockholders.
PRICE RANGE OF COMMON STOCK
Our common stock began trading on the New York Stock Exchange on June 9,
2000, under the symbol "CYH." The following table sets forth for the indicated
periods the high and low sale prices of our common stock as reported by the New
York Stock Exchange.
HIGH LOW
-------- --------
Fiscal Year Ended December 31, 2000
Second Quarter (beginning June 9, 2000).................. $16.31 $13.00
Third Quarter............................................ $32.50 $15.63
Fourth Quarter........................................... $37.20 $24.25
Fiscal Year Ended December 31, 2001
First Quarter............................................ $35.45 $22.20
Second Quarter........................................... $30.75 $21.25
Third Quarter............................................ $35.35 $26.85
Fourth Quarter (through October 9, 2001)................. $29.85 $26.00
On October 9, 2001, the last reported sale price of our common stock on the
NYSE was $26.80. As of October 5, 2001, there were approximately 53 holders of
record of our common stock.
20
CAPITALIZATION
The following table sets forth our debt and capitalization as of June 30,
2001, on an actual basis and on a pro forma basis. The pro forma data are
presented in two columns. One column reflects this offering and the use of the
estimated net proceeds from this offering to repay some of our outstanding
subordinated debt. The second pro forma column reflects both this offering and
the concurrent common stock offering and the use of the estimated net proceeds
from this offering and the concurrent common stock offering to repay all of our
outstanding subordinated debt and a portion of our outstanding debt under the
acquisition loan facility of our credit agreement.
In addition, you should read the following table in conjunction with
Selected Consolidated Financial and Other Data, our consolidated financial
statements and the accompanying notes, Management's Discussion and Analysis of
Financial Condition and Results of Operations, and Description of Other
Indebtedness, which are contained later in this prospectus.
AS OF JUNE 30, 2001
--------------------------------------------
PRO FORMA
TO REFLECT THIS
PRO FORMA OFFERING AND THE
TO REFLECT CONCURRENT
THIS COMMON STOCK
ACTUAL OFFERING (A) OFFERING (B)
---------- ------------ ----------------
(DOLLARS IN THOUSANDS)
LONG-TERM DEBT:
Credit facilities:
Revolving credit loans................................. $ -- $ -- $ --
Acquisition loans...................................... 119,000 119,000 76,925
Term loans............................................. 563,675 563,675 563,675
Subordinated debentures.................................. 500,000 264,000 --
Convertible notes........................................ -- 250,000 250,000
Taxable bonds............................................ 24,300 24,300 24,300
Tax-exempt bonds......................................... 8,000 8,000 8,000
Capital lease obligations and other debt................. 36,031 36,031 36,031
---------- ---------- ----------
Total debt............................................. 1,251,006 1,265,006 958,931
Less current maturities.................................. 21,499 21,499 21,499
---------- ---------- ----------
Total long-term debt (c)............................... 1,229,507 1,243,507 937,432
---------- ---------- ----------
STOCKHOLDERS' EQUITY:
Preferred stock, $.01 par value per share, 100,000,000
shares authorized, none issued......................... -- -- --
Common stock, $.01 par value per share, 300,000,000
shares authorized; 87,296,185 shares issued and
86,320,636 outstanding actual and pro forma to reflect
this offering; 99,296,185 shares issued and 98,320,636
outstanding pro forma to reflect this offering and the
concurrent common stock offering....................... 873 873 993
Additional paid-in capital............................... 1,001,204 1,001,204 1,307,159
Accumulated deficit...................................... (215,284) (217,149) (219,235)
Treasury stock, at cost, 975,549 shares.................. (6,678) (6,678) (6,678)
Notes receivable for common stock........................ (211) (211) (211)
Unearned stock compensation.............................. (63) (63) (63)
---------- ---------- ----------
Total stockholders' equity........................... 779,841 777,976 1,081,965
---------- ---------- ----------
Total capitalization................................. $2,009,348 $2,021,483 $2,019,397
========== ========== ==========
--------------------------
(a) Pro forma reflects the write-off of deferred financing costs associated with
the repayment of 7 1/2% subordinated debt of $1.9 million, net of tax
benefit of $1.2 million.
(b) Pro forma reflects the write-off of deferred financing costs associated with
the repayment of 7 1/2% subordinated debt of $3.9 million, net of tax
benefit of $2.6 million.
(c) We also had letters of credit issued, primarily in support of our taxable
and tax-exempt bonds, of approximately $35.9 million.
21
SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA
You should read the selected consolidated historical financial and other data
below in conjunction with our consolidated financial statements and the
accompanying notes. You should also read Management's Discussion and Analysis of
Financial Condition and Results of Operations. All of these materials are
contained later in this prospectus. We derived the consolidated historical
financial data as of December 31, 1998, 1999 and 2000 and for the three years
ended December 31, 2000 from our consolidated financial statements. We derived
the historical data for the six months ended June 30, 2000 and June 30, 2001,
and as of June 30, 2001, from our unaudited interim condensed consolidated
financial statements. The unaudited interim condensed consolidated financial
statements contain all adjustments, consisting only of normal recurring
adjustments, necessary for a fair presentation of the results for these periods.
The pro forma consolidated statements of operations and balance sheet data are
presented in a separate table following the historical data. For each period,
the pro forma consolidated statements of operations data are presented in three
columns: historical data, pro forma data reflecting the application of the
estimated net proceeds from this offering to repay a portion of our outstanding
debt as if this repayment had occurred on January 1, 2000 and pro forma data
reflecting the application of the estimated net proceeds from both this offering
and the concurrent common stock offering to repay a portion of our outstanding
debt as if this repayment had occurred on January 1, 2000. The pro forma
consolidated statements of operations data for the year ended December 31, 2000
also reflect the application of the net proceeds from our two common stock
public offerings in 2000. The consolidated balance sheet data give effect to
this offering as well as both this offering and the concurrent common stock
offering as if these events had occurred on June 30, 2001. We derived the
selected consolidated financial and other data as of December 31, 1996 and 1997
and for the period from July 1, 1996 through December 31, 1996 and the year
ended December 31, 1997 from our unaudited consolidated financial statements,
which are not contained in this prospectus. We derived the selected consolidated
financial and other data at June 30, 1996 and for the period from January 1,
1996 through June 30, 1996 from the unaudited consolidated financial statements
of our predecessor company, which are not contained in this prospectus.
PREDECESSOR
(a)
--------------
PERIOD FROM PERIOD FROM
JANUARY 1 JULY 1
THROUGH THROUGH YEAR ENDED DECEMBER 31,
JUNE 30, DECEMBER 31, -----------------------------------------------------
1996 (b) 1996 (c) 1997 1998 1999 2000
-------------- ------------ ----------- ----------- ----------- -----------
(DOLLARS IN THOUSANDS)
CONSOLIDATED STATEMENT OF
OPERATIONS DATA
Net operating revenues........... $ 294,166 $ 327,922 $ 742,350 $ 854,580 $ 1,079,953 $ 1,337,501
Operating expenses (d)........... 291,712 (e) 270,319 620,112 688,190 875,768 1,084,765
Depreciation and amortization.... 17,558 18,858 43,753 49,861 56,943 71,931
Amortization of goodwill......... 164 11,627 25,404 26,639 24,708 25,693
Impairment of long-lived assets
and relocation costs........... 15,655 -- -- 164,833 -- --
Compliance settlement and Year
2000 remediation costs (f)..... -- -- -- 20,209 17,279 --
Loss from hospital sales......... 3,146 -- -- -- -- --
------------ ----------- ----------- ----------- ----------- -----------
Income (loss) from operations.... (34,069) 27,118 53,081 (95,152) 105,255 155,112
Interest expense, net............ 8,930 38,964 89,753 101,191 116,491 127,370
------------ ----------- ----------- ----------- ----------- -----------
Income (loss) before cumulative
effect of a change in
accounting principle and income
taxes.......................... (42,999) (11,846) (36,672) (196,343) (11,236) 27,742
Provision for (benefit from)
income taxes................... (15,747) 1,256 (4,501) (13,405) 5,553 18,173
------------ ----------- ----------- ----------- ----------- -----------
Income (loss) before cumulative
effect of a change in
accounting principle........... (27,252) (13,102) (32,171) (182,938) (16,789) 9,569
Cumulative effect of a change in
accounting principle........... -- -- -- (352) -- --
------------ ----------- ----------- ----------- ----------- -----------
Net income (loss)................ $ (27,252) $ (13,102) $ (32,171) $ (183,290) $ (16,789) $ 9,569
============ =========== =========== =========== =========== ===========
(FOOTNOTES BEGIN ON PAGE 26)
22
PREDECESSOR
(a)
--------------
PERIOD FROM PERIOD FROM
JANUARY 1 JULY 1
THROUGH THROUGH YEAR ENDED DECEMBER 31,
JUNE 30, DECEMBER 31, -----------------------------------------------------
1996 (b) 1996 (c) 1997 1998 1999 2000
-------------- ------------ ----------- ----------- ----------- -----------
(DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA)
Basic and diluted income (loss)
per common share:
Income (loss) before cumulative
effect of a change in
accounting principle......... $ (0.24) $ (0.60) $ (3.37) $ (0.31) $ 0.14
Cumulative effect of a change
in accounting principle...... -- -- (0.01) -- --
----------- ----------- ----------- ----------- -----------
Net income (loss).............. $ (0.24) $ (0.60) $ (3.38) $ (0.31) $ 0.14
=========== =========== =========== =========== ===========
Diluted income (loss) per common
share:
Income (loss) before cumulative
effect of a change in
accounting principle......... $ (0.24) $ (0.60) $ (3.37) $ (0.31) $ 0.14
Cumulative effect of a change
in accounting principle...... -- -- (0.01) -- --
----------- ----------- ----------- ----------- -----------
Net income (loss).............. $ (0.24) $ (0.60) $ (3.38) $ (0.31) $ 0.14
=========== =========== =========== =========== ===========
Weighted-average number of shares
outstanding:
Basic.......................... 53,786,432 53,989,089 54,249,895 54,545,030 67,610,399
=========== =========== =========== =========== ===========
Diluted........................ 53,786,432 53,989,089 54,249,895 54,545,030 69,187,191
=========== =========== =========== =========== ===========
Ratio of earnings to fixed
charges (g).................. -- -- -- -- 1.18x
CONSOLIDATED BALANCE SHEET DATA (AS
OF END OF PERIOD OR YEAR)
Cash and cash equivalents........ $ 10,410 $ 26,588 $ 7,663 $ 6,719 $ 4,282 $ 13,740
Total assets..................... 506,323 1,630,630 1,643,521 1,747,016 1,895,084 2,213,837
Long-term debt................... 190,797 988,612 1,021,832 1,246,594 1,407,604 1,201,590
Other long-term liabilities...... 55,419 21,086 31,618 26,915 22,495 15,200
Stockholders' equity............. 165,879 465,673 433,625 246,826 229,708 756,174
SELECTED OPERATING DATA
Number of hospitals (h).......... 29 35 37 41 46 52
Licensed beds (h)(i)............. 2,641 3,222 3,288 3,644 4,115 4,688
Beds in service (h)(j)........... 2,005 2,311 2,543 2,776 3,123 3,587
Admissions (k)................... 34,876 40,246 88,103 100,114 120,414 143,310
Adjusted admissions (l).......... 56,136 68,059 153,618 177,075 217,006 262,419
Patient days (m)................. 168,995 183,809 399,012 416,845 478,658 548,827
Average length of stay (days)
(n)............................ 4.8 4.6 4.5 4.2 4.0 3.8
Occupancy rate
(beds in service) (o).......... 46.3% 43.2% 43.1% 43.3% 44.1% 44.6%
Net inpatient revenue as a % of
total net revenue.............. 61.1% 58.3% 57.3% 55.7% 52.7% 51.0%
Net outpatient revenue as a % of
total net revenue.............. 37.5% 40.4% 41.5% 42.6% 45.5% 47.3%
Adjusted EBITDA (p).............. $ 2,454 $ 57,603 $ 122,238 $ 166,390 $ 204,185 $ 252,736
Adjusted EBITDA as a % of net
revenue........................ 0.8% 17.6% 16.5% 19.5% 18.9% 18.9%
Net cash flows provided by (used
in) operating activities....... $ 30,081 $ 2,953 $ 21,544 $ 15,719 $ (11,746) $ 22,985
Net cash flows used in investing
activities..................... $ (25,067) $(1,259,268) $ (76,651) $ (236,553) $ (155,541) $ (244,441)
Net cash flows provided by (used
in) financing activities....... $ (8,886) $ 1,282,903 $ 36,182 $ 219,890 $ 164,850 $ 230,914
(FOOTNOTES BEGIN ON PAGE 26)
23
SIX MONTHS ENDED JUNE 30,
---------------------------
2000 2001
------------ ------------
(DOLLARS IN THOUSANDS,
EXCEPT PER SHARE DATA)
CONSOLIDATED STATEMENT OF OPERATIONS DATA
Net operating revenues.................................... $ 625,787 $ 799,554
Operating expense (d)..................................... 505,931 648,476
Depreciation and amortization............................. 33,910 43,094
Amortization of goodwill.................................. 12,378 14,074
----------- -----------
Income from operations.................................... 73,568 93,910
Interest expense, net..................................... 65,305 53,174
----------- -----------
Income before income taxes................................ 8,263 40,736
Provision for income taxes................................ 7,164 20,237
----------- -----------
Net income................................................ $ 1,099 $ 20,499
=========== ===========
Net income per common share:
Basic................................................... $ 0.02 $ 0.24
Diluted................................................. $ 0.02 $ 0.23
Weighted average number of shares outstanding:
Basic................................................... 56,423,677 85,696,119
=========== ===========
Diluted................................................. 57,554,519 87,554,317
=========== ===========
Ratio of earnings to fixed charges (g).................... 1.10x 1.66x
SELECTED OPERATING DATA
Number of hospitals (h)................................... 49 53
Licensed beds (h)(i)...................................... 4,401 4,848
Beds in service (h)(j).................................... 3,355 3,722
Admissions (k)............................................ 68,314 82,559
Adjusted admissions (l)................................... 126,137 149,741
Patient days (m).......................................... 267,060 315,994
Average length of stay (days) (n)......................... 3.9 3.8
Occupancy rate (beds in service) (o)...................... 45.0% 48.4%
Net inpatient revenue as a % of total net revenue......... 50.6% 51.0%
Net outpatient revenue as a % of total net revenue........ 47.6% 47.8%
Adjusted EBITDA (p)....................................... $ 119,856 $ 151,078
Adjusted EBITDA as a % of net revenue..................... 19.2% 18.9%
Net cash flows (used in) provided by operating
activities................................................ $ (34,399) $ 95,528
Net cash flows used in investing activities............... $ (74,261) $ (104,464)
Net cash flows provided by financing activities........... $ 110,368 $ 30,936
(FOOTNOTES BEGIN ON PAGE 26)
24
YEAR ENDED DECEMBER 31, 2000 SIX MONTHS ENDED JUNE 30, 2001
------------------------------------------ ----------------------------------------
PRO FORMA
PRO FORMA TO REFLECT
TO REFLECT THIS
THIS OFFERING, OFFERING
AND THE AND THE
PRO FORMA CONCURRENT PRO FORMA CONCURRENT
TO REFLECT COMMON TO REFLECT COMMON
THIS STOCK THIS STOCK
ACTUAL OFFERING (Q) OFFERING (R) ACTUAL OFFERING (Q) OFFERING (R)
---------- ------------ -------------- ---------- ------------ ------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
CONSOLIDATED STATEMENT OF
OPERATIONS DATA..............
Net operating revenues....... $1,337,501 $1,337,501 $1,337,501 $ 799,554 $ 799,554 $ 799,554
Operating expense (d)........ 1,084,765 1,084,765 1,084,765 648,476 648,476 648,476
Depreciation and
amortization............... 71,931 71,931 71,931 43,094 43,094 43,094
Amortization of goodwill..... 25,693 25,693 25,693 14,074 14,074 14,074
---------- ---------- ---------- ---------- ---------- ----------
Income from operations....... 155,112 155,112 155,112 93,910 93,910 93,910
Interest expense, net........ 127,370 91,155 67,244 53,174 50,071 38,308
---------- ---------- ---------- ---------- ---------- ----------
Income before extraordinary
item and income taxes...... 27,742 63,957 87,868 40,736 43,839 55,602
Provision for income taxes... 18,173 32,297 41,622 20,237 21,447 26,035
---------- ---------- ---------- ---------- ---------- ----------
Income before extraordinary
item......................... $ 9,569 $ 31,660 $ 46,246 $ 20,499 $ 22,392 $ 29,567
========== ========== ========== ========== ========== ==========
Income per common share before
extraordinary item:
Basic...................... $ 0.14 $ 0.47 $ 0.58 $ 0.24 $ 0.26 $ 0.30
========== ========== ========== ========== ========== ==========
Diluted.................... $ 0.14 $ 0.46 $ 0.57 $ 0.23 $ 0.26 $ 0.30
========== ========== ========== ========== ========== ==========
Weighted average number of
shares outstanding:
Basic...................... 67,610,399 67,610,399 79,610,399 85,696,119 85,696,119 97,696,119
========== ========== ========== ========== ========== ==========
Diluted.................... 69,187,191 69,187,191 81,187,191 87,554,317 87,554,317 99,554,317
========== ========== ========== ========== ========== ==========
Ratio of earnings to fixed
charges (g).................. 1.18x 1.24x 1.24x 1.66x 1.75x 1.75x
CONSOLIDATED BALANCE SHEET
DATA (AS OF END OF PERIOD)
Cash and cash equivalents................................................ $ 35,740 $ 35,740 $ 35,740
Total assets............................................................. 2,280,086 2,284,779 2,281,359
Long-term debt........................................................... 1,229,507 1,243,507 937,432
Other long-term liabilities.............................................. 14,015 14,015 14,015
Stockholders' equity..................................................... 779,841 777,976 1,081,965
(FOOTNOTES BEGIN ON PAGE 26)
25
------------------------------
(a) Effective in July 1996, we acquired all of the outstanding common stock of
our principal subsidiary, CHS/Community Health Systems, Inc. The predecessor
company had a substantially different capital structure compared to ours.
Because of the limited usefulness of the earnings per share information for
the predecessor company, these amounts have been excluded.
(b) Includes two acquisitions.
(c) Includes six acquisitions.
(d) Operating expenses include salaries and benefits, provision for bad debts,
supplies, rent, and other operating expenses, and exclude certain items for
purposes of determining adjusted EBITDA as discussed in footnote (p) below.
(e) Includes $47.5 million of expense resulting from the cancellation of stock
options associated with the acquisition of our principal subsidiary as
discussed in footnote (a).
(f) Includes Year 2000 remediation costs of $0.2 million in 1998 and
$3.3 million in 1999.
(g) The ratio of earnings to fixed charges is calculated by dividing earnings by
fixed charges. For this purpose, "earnings" means income (loss) from
continuing operations before provision for income taxes and extraordinary
items plus fixed charges (other than capitalized interest). "Fixed charges"
means total interest whether capitalized or expensed (including the portion
of rent expense representative of interest costs) on outstanding debt plus
debt related fees and amortization of deferred financing costs. The ratio of
earnings to fixed charges for the period January 1, 1996 to June 30, 1996 is
not presented because of a lack of comparability between the capital
structure of our company and that of its predecessor. For the years ended
December 31, 1996, 1997, 1998 and 1999, earnings were insufficient to cover
fixed charges by approximately $11.8 million, $37.3 million, $197.0 million
and $12.6 million.
The pro forma ratio of earnings to fixed charges gives effect to the net
decrease in the interest expense resulting from this offering and the
application of the estimated net proceeds from this offering to the
repayment of existing debt, as if this offering had occurred at the
beginning of the periods presented; this ratio does not give effect to any
other pro forma events. The ratio has been computed using an assumed
interest rate of 4.75% for the notes.
(h) At end of period.
(i) Licensed beds are the number of beds for which the appropriate state agency
licenses a facility regardless of whether the beds are actually available
for patient use.
(j) Beds in service are the number of beds that are readily available for
patient use.
(k) Admissions represent the number of patients admitted for inpatient
treatment.
(l) Adjusted admissions is a general measure of combined inpatient and
outpatient volume. We computed adjusted admissions by multiplying admissions
by gross patient revenues and then dividing that number by gross inpatient
revenues.
(m) Patient days represent the total number of days of care provided to
inpatients.
(n) Average length of stay (days) represents the average number of days
inpatients stay in our hospitals.
(o) We calculated percentages by dividing the daily average number of inpatients
by the weighted average of beds in service.
(p) We define adjusted EBITDA as EBITDA adjusted to exclude cumulative effect of
a change in accounting principle, impairment of long-lived assets and
relocation costs, compliance settlement and Year 2000 remediation costs, and
loss from hospital sales. EBITDA consists of income (loss) before interest,
income taxes, depreciation and amortization, and amortization of goodwill.
EBITDA and adjusted EBITDA should not be considered as measures of financial
performance under generally accepted accounting principles. Items excluded
from EBITDA and adjusted EBITDA are significant components in understanding
and assessing financial performance. EBITDA and adjusted EBITDA are key
measures used by management to evaluate our operations and provide useful
information to investors. EBITDA and adjusted EBITDA should not be
considered in isolation or as alternatives to net income, cash flows
generated by operations, investing or financing activities, or other
financial statement data presented in the consolidated financial statements
as indicators of financial performance or liquidity. Because EBITDA and
adjusted EBITDA are not measurements determined in accordance with generally
accepted accounting principles and are thus susceptible to varying
calculations, EBITDA and adjusted EBITDA as presented may not be comparable
to other similarly titled measures of other companies.
(q) The pro forma adjustments for this offering for the year ended December 31,
2000 reflect our two common stock public offerings in 2000 and this
offering, the application of the net proceeds from our two common stock
public offerings in 2000 to repay debt of $225.2 million on June 14, 2000,
$20.5 million on July 3, 2000 and $268.8 million on November 3, 2000 and the
estimated net proceeds from this offering to repay debt of $236.0 million
based on the outstanding debt
26
balance as of December 31, 2000 and the resultant reduction of interest
expense of $36.2 million as if these events had occurred on January 1, 2000.
The pro forma adjustments for this offering for the six months ended
June 30, 2001 reflect this offering, the estimated net proceeds from this
offering to repay debt of $236.0 million based on the outstanding debt
balance as of June 30, 2001 and the resultant reduction of interest expense
of $3.1 million as if these events had occurred on January 1, 2000.
The pro forma adjustments also reflect an increase in provision for income
taxes of $14.1 million for the year ended December 31, 2000 and
$1.2 million for the six months ended June 30, 2001, resulting from the
decrease in interest expense. See "Use of Proceeds." These adjustments are
detailed as follows:
1. To adjust interest expense to reflect the following:
- For the year ended December 31, 2000, interest expense of
$17.7 million and for the six months ended June 30, 2001, interest
expense of $8.8 million on the 7 1/2% subordinated debt has been
excluded giving effect to the repayment of $236.0 million with the
estimated net proceeds from this offering.
- For the year ended December 31, 2000, interest expense of $0.4 million
and for the six months ended June 30, 2001, interest expense of
$0.2 million from the amortization of deferred financing costs
associated with the 7 1/2% subordinated debt has been excluded giving
effect to the write-off of $3.1 million of deferred financing costs.
- For the year ended December 31, 2000, interest expense of
$19.8 million on the acquisition revolving loan facility of our credit
agreement has been excluded, giving effect to the repayment of
$308.7 million in outstanding borrowings with the net proceeds from our
two common stock public offerings in 2000 at an assumed weighted
average interest rate of 8.6%.
- For the year ended December 31, 2000, interest expense of $6.8 million
on the revolving credit facility of our credit agreement has been
excluded, giving effect to the repayment of $165.5 million in
outstanding borrowings with the net proceeds from our two common stock
public offerings in 2000 using an assumed weighted average interest
rate of 9.0%.
- For the year ended December 31, 2000, interest expense of $3.2 million
on the term loans of our credit agreement has been excluded, giving
effect to the repayment of $40.3 million in outstanding borrowings with
the net proceeds from our two common stock public offerings in 2000 at
an assumed weighted average interest rate of 9.6%.
- For the year ended December 31, 2000, interest expense of
$11.7 million has been included giving effect to this offering at an
assumed interest rate of 4.25% on the notes. This interest expense
includes $1.1 million of amortization of the $7.7 million of debt
offering costs. For the six months ended June 30, 2001, interest
expense of $5.9 million has been included giving effect to this
offering at an assumed interest rate of 4.25% of the notes. This
interest expense includes $0.6 million of amortization of the
$7.7 million of debt offering costs.
2. The adjustment to the pro forma provision for income taxes, computed
using a 39% statutory income tax rate, was $14.1 million for the year
ended December 31, 2000 and $1.2 million for the six months ended
June 30, 2001 for the tax effect of the above-noted pro forma
adjustments.
3. Pro forma income statement for the year ended December 31, 2000 and six
months ended June 30, 2001 does not reflect the write-off of deferred
financing costs associated with the repayment of the 7 1/2% subordinated
debt of $1.9 million, net of tax benefit of $1.2 million.
4. The conversion of the notes into 7,462,675 shares of common stock under
the if-converted method has not been included in the computation of
diluted pro forma earnings per share because the effect would be
antidilutive.
(r) The pro forma adjustments for both this offering and the concurrent offering
for the year ended December 31, 2000 reflect the pro forma adjustments for
our two common stock public offerings in 2000 and this offering as detailed
in footnote (q) above as well as the concurrent common stock offering and
the estimated net proceeds from the concurrent common stock offering to
repay additional debt of $306.1 million based on the outstanding balance as
of December 31, 2000 and the resultant additional reduction of interest
expense of $23.9 million as if these events had occurred on January 1, 2000.
The pro forma adjustments for both this offering and the concurrent common
stock offering for the six months ended June 30, 2001 reflect the pro forma
adjustments for this offering as detailed in footnote (q) above as well as
the concurrent common stock offering and the estimated net proceeds from the
concurrent common stock offering to repay debt of $306.1 million based on
outstanding balance at June 30, 2001 and the resultant additional reduction
of interest expense of $11.8 million as if these events had occurred on
January 1, 2000.
27
The pro forma adjustments also reflect an additional increase in provision
for income taxes of $9.3 million for the year ended December 31, 2000 and
$4.6 million for the six months ended June 30, 2001, resulting from the
decrease in interest expense. See "Use of Proceeds." These adjustments are
detailed as follows:
1. To adjust interest expense to reflect the following:
- For the year ended December 31, 2000, interest expense of
$37.5 million on $500.0 million of the 7 1/2% subordinated debt has
been excluded. For the six months ended June 30, 2001, interest expense
of $18.6 million on $500.0 million of the 7 1/2% subordinated debt has
been excluded.
- For the year ended December 31, 2000, interest expense of $0.8 million
and for the six months ended June 30, 2001, interest expense of
$0.4 million from the amortization of deferred financing costs
associated with the subordinated debt has been excluded giving effect
to the write-off of $6.5 million of deferred financing costs.
- For the year ended December 31, 2000, interest expense of $23.5 million
on the acquisition revolving loan facility of our credit agreement has
been excluded, giving effect to the repayment of $308.7 million in
outstanding borrowings with the net proceeds from our two common stock
public offerings in 2000 at an assumed weighted average interest rate
of 8.6% and the repayment of $42.1 million in outstanding borrowings
with proceeds from this offering and the concurrent common stock
offering at an assumed weighted average interest rate of 8.8%. For the
six months ended June 30, 2001, interest expense of $1.7 million on the
acquisition loan revolving facility of our credit agreement has been
excluded, giving effect to the repayment of $42.1 million in
outstanding borrowings with proceeds from this offering and the
concurrent common stock offering using an assumed weighted average
interest rate of 8.3%.
- For the year ended December 31, 2000, interest expense of $6.8 million
on the revolving credit facility of our credit agreement has been
excluded, giving effect to the repayment of $165.5 million in
outstanding borrowings with the net proceeds from our two common stock
public offerings in 2000 using an assumed weighted average interest
rate of 9.0%.
- For the year ended December 31, 2000, interest expense of $3.2 million
on the term loans of our credit agreement has been excluded, giving
effect to the repayment of $40.3 million in outstanding borrowings with
the net proceeds from our two common stock public offerings in 2000 at
an assumed weighted average interest rate of 9.6%.
- For the year ended December 31, 2000, interest expense of
$11.7 million has been included giving effect to this offering at an
assumed interest rate of 4.25% on the notes. This interest expense
includes $1.1 million of amortization of the $7.7 million of debt
offering costs. For the six months ended June 30, 2001, interest
expense of $5.9 million has been included giving effect to this
offering at an assumed interest rate of 4.25% on the notes. This
interest expense includes $0.6 million of amortization of the
$7.7 million of debt offering costs.
2. The adjustment to the pro forma provision for income taxes, computed
using a 39% statutory income tax rate, was $23.4 million for the year
ended December 31, 2000 and $5.8 million for the six months ended
June 30, 2001 for the tax effect of the above-noted pro forma
adjustments.
3. Pro forma income statement for the year ended December 31, 2000 and six
months ended June 30, 2001 does not reflect the write-off of deferred
financing costs associated with the repayment of the 7 1/2% subordinated
debt of $3.9 million, net of tax benefit of $2.6 million.
4. The conversion of the notes into 7,462,675 shares of common stock under
the if-converted method has not been included in the computation of
diluted pro forma earnings per share because the effect would be
antidilutive.
28
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
YOU SHOULD READ THE FOLLOWING DISCUSSION IN CONJUNCTION WITH "RISK FACTORS,"
"SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA" AND OUR CONSOLIDATED FINANCIAL
STATEMENTS AND THE RELATED NOTES INCLUDED ELSEWHERE IN THIS PROSPECTUS.
OVERVIEW
We are the largest non-urban provider of general hospital healthcare
services in the United States in terms of number of facilities and the second
largest in terms of revenues and EBITDA. As of October 1, 2001, we owned, leased
or operated 55 hospitals, geographically diversified across 20 states, with an
aggregate of 5,010 licensed beds. In over 85% of our markets, we are the sole
provider of general hospital healthcare services. In all but one of our other
markets, we are one of two providers of general hospital healthcare services.
For the fiscal year ended December 31, 2000, we generated $1.34 billion in net
operating revenues and $252.7 million in adjusted EBITDA. For the six months
ended June 30, 2001, we generated $799.6 million in net operating revenues and
$151.1 million in adjusted EBITDA. We achieved revenue growth of 23.8% in 2000,
26.4% in 1999 and 15.1% in 1998. We also achieved growth in adjusted EBITDA of
23.8% in 2000, 22.7% in 1999 and 36.1% in 1998. Our net income for 2000 was
$9.6 million, compared to a net loss of $16.8 million in 1999 and a net loss of
$183.3 million in 1998.
ACQUISITIONS
Effective June 1, 2001, we acquired Brandywine Hospital, a 168-bed acute
care facility located in Coatesville, Pennsylvania, for an aggregate
consideration of approximately $61 million. Effective September 1, 2001, we
acquired Red Bud Regional Hospital, a 103-bed facility located in Red Bud,
Illinois, for an aggregate consideration of approximately $5 million. On October
1, 2001, we acquired Jennersville Regional Hospital, a 59-bed hospital located
in West Grove, Pennsylvania, for an aggregate consideration of approximately $29
million. Each of these hospitals is the sole provider of general acute hospital
services in its community.
During 2000, we acquired, through five purchases and two capital lease
transactions, most of the assets, including working capital, of seven hospitals.
These acquisitions include the purchase of assets of a hospital which we were
managing under an operating agreement. We had purchased the working capital
accounts of that hospital in 1998. The consideration for the seven hospitals
totaled approximately $247 million. This consideration consisted of
$148 million in cash, which we borrowed under our acquisition loan facilities,
and assumed liabilities of $99 million. We prepaid the lease obligation relating
to each lease transaction. We included the prepayment as part of the cash
consideration. The purchase of our hospital in Kirksville, Missouri includes an
operating lease for the primary building location.
During 1999, we acquired, through three purchases and one capital lease
transaction, most of the assets, including working capital, of four hospitals.
The consideration for the four hospitals totaled approximately $77.8 million.
This consideration consisted of $59.7 million in cash, which we borrowed under
our acquisition loan facility, and assumed liabilities of $18.1 million. We
prepaid the entire lease obligation relating to the lease transaction. We
included the prepayment as part of the cash consideration. We also opened one
additional hospital, after completion of construction, at a cost of
$15.3 million. This owned hospital replaced a hospital that we managed.
During 1998, we acquired, through two purchase and two capital lease
transactions, most of the assets, including working capital, of four hospitals.
The consideration for the four hospitals totaled approximately $218.6 million.
This consideration consisted of $169.8 million in cash, which we borrowed under
our acquisition loan facility, and assumed liabilities of $48.8 million. We
prepaid
29
the entire lease obligation relating to each lease transaction. We included the
prepayment as part of the cash consideration. Also, effective December 1, 1998,
we entered into an operating agreement relating to a 38 licensed bed hospital.
We also purchased the working capital accounts of that hospital. The cash
payment made for this hospital was $2.8 million. Pursuant to this operating
agreement, upon specified conditions being met, we will be obligated to
construct a replacement hospital and to purchase for $0.9 million the remaining
assets of the hospital. Upon completion, all rights of ownership and operation
will transfer to us.
During 1997, we exercised a purchase option under an operating lease and
acquired two hospitals through capital lease transactions. The consideration for
these three hospitals totaled $46.1 million, including working capital. This
consideration consisted of $36.3 million in cash, which we borrowed under our
acquisition loan facility, and assumed liabilities of $9.8 million. We prepaid
the entire lease obligation relating to each lease transaction. We included the
prepayment as part of the cash consideration.
Goodwill from the acquisition of our predecessor company in 1996 was
$662.7 million and from subsequent hospital acquisitions was $328.8 million as
of June 30, 2001. Based on management's assessment of the goodwill's estimated
useful life, we generally amortize our goodwill over 40 years. Goodwill
represented 127.1% of our shareholders' equity as of June 30, 2001; the amount
of goodwill amortized equaled 15.0% of our income from operations for the
six-month period ended June 30, 2001. Significant adverse changes in facts
regarding our industry, markets and operations could cause our management to
determine that impairment indicators exist. This could cause impairments to the
carrying amount of such goodwill, resulting in a non-cash charge which would
reduce operating income.
In the future, we intend to acquire, on a selective basis, two to four
hospitals in our target markets annually. Because of the financial impact of
acquisitions, it is difficult to make meaningful comparisons between our
financial statements for the periods presented. Because adjusted EBITDA margins
at hospitals we acquire are, at the time of acquisition, lower than those of our
existing hospitals, acquisitions can negatively affect our adjusted EBITDA
margins on a consolidated basis.
On May 1, 2000, we terminated the lease of a hospital previously held for
disposition. At June 30, 2001, the carrying amounts of one of our hospitals were
segregated from our remaining assets. The carrying amount of long-term assets of
a facility held for disposition are classified in other assets, net in our
unaudited interim condensed consolidated balance sheet as of June 30, 2001. We
do not expect the impact of any gain or loss on our financial results to be
material.
SOURCES OF REVENUE
Net operating revenues include amounts estimated by management to be
reimbursable by Medicare and Medicaid under prospective payment systems and
provisions of cost-reimbursement and other payment methods. Approximately 49%
for the year ended December 31, 1998, 48% for the year ended December 31, 1999
and 46% for the year ended December 31, 2000, are related to services rendered
to patients covered by the Medicare and Medicaid programs. In addition, we are
reimbursed by non-governmental payors using a variety of payment methodologies.
Amounts we receive for treatment of patients covered by these programs are
generally less than the standard billing rates. We account for the differences
between the estimated program reimbursement rates and the standard billing rates
as contractual adjustments, which we deduct from gross revenues to arrive at net
operating revenues. Final settlements under some of these programs are subject
to adjustment based on administrative review and audit by third parties. We
record adjustments to the estimated billings in the periods that such
adjustments become known. We account for adjustments to previous program
reimbursement estimates as contractual adjustments and report them in future
periods as final settlements are determined. Adjustments related to final
settlements or appeals that
30
increased revenue were insignificant in each of the years ended December 31,
1998, 1999 and 2000. Net amounts due to third-party payors were $9.1 million as
of December 31, 1999 and $2.3 million as of December 31, 2000. We included these
amounts in the line item accrued liabilities--other in the accompanying balance
sheets. Substantially all Medicare and Medicaid cost reports are final settled
through 1997.
We expect the percentage of revenues received from the Medicare program to
increase due to the general aging of the population and the restoration of some
payments under the Balanced Budget Refinement Act of 1999 and the Benefits
Improvement and Protection Act of 2000. The payment rates under the Medicare
program for inpatients are based on a prospective payment system, based upon the
diagnosis of a patient. While these rates are indexed for inflation annually,
the increases have historically been less than actual inflation. Reductions in
the rate of increase in Medicare reimbursement may have an adverse impact on our
net operating revenue growth.
The implementation of Medicare's new prospective payment system for
outpatient hospital care, effective August 1, 2000, had a favorable impact, but
was not material to our overall operating results. The Centers for Medicare and
Medicaid Services estimates that this new prospective payment system will result
in an overall 9.7% increase in projected outpatient payments which began
August 1, 2000, mandated by the Balanced Budget Act of 1997.
In December, 2000, the Benefits Improvement and Protection Act of 2000
became law. It is estimated that the changes to be implemented to many facets of
the Medicare reimbursement system by reason of this law will increase
reimbursement. We do not believe these increases will be material to our overall
operating results.
In addition, Medicaid programs, insurance companies, and employers are
actively negotiating the amounts paid to hospitals as opposed to their standard
rates. The trend toward increased enrollment in managed care may adversely
affect our net operating revenue growth.
RESULTS OF OPERATIONS
Our hospitals offer a variety of services involving a broad range of
inpatient and outpatient medical and surgical services. These include
orthopedics, cardiology, OB/GYN, occupational medicine, rehabilitation
treatment, home health, and skilled nursing. The strongest demand for hospital
services generally occurs during January through April and the weakest demand
for these services occurs during the summer months. Accordingly, eliminating the
effect of new acquisitions, our net operating revenues and earnings are
generally highest during the first quarter and lowest during the third quarter.
31
The following tables summarize, for the periods indicated, selected
operating data.
SIX MONTHS
ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
------------------------------------ ----------------------
1998 1999 2000 2000 2001
-------- -------- -------- -------- --------
(EXPRESSED AS A PERCENTAGE OF NET OPERATING
REVENUES)
Net operating revenues........................... 100.0 100.0 100.0 100.0 100.0
Operating expenses (a)........................... (80.5) (81.1) (81.1) (80.8) (81.1)
----- ----- ----- ----- -----
Adjusted EBITDA (b).............................. 19.5 18.9 18.9 19.2 18.9
Depreciation and amortization.................... (5.8) (5.3) (5.4) (5.4) (5.4)
Amortization of goodwill......................... (3.1) (2.3) (1.9) (2.0) (1.8)
Impairment of long-lived assets.................. (19.3) -- -- -- --
Compliance settlement and Year 2000 remediation
costs (c)...................................... (2.4) (1.6) -- -- --
----- ----- ----- ----- -----
Income (loss) from operations.................... (11.1) 9.7 11.6 11.8 11.7
Interest, net.................................... (11.8) (10.8) (9.5) (10.4) (6.7)
----- ----- ----- ----- -----
Income (loss) before cumulative effect of a
change in accounting principle and income
taxes.......................................... (22.9) (1.1) 2.1 1.3 5.1
Provision for (benefit from) income taxes........ (1.5) 0.5 1.4 1.1 2.5
----- ----- ----- ----- -----
Income (loss) before cumulative effect of a
change in accounting principle................. (21.4) (1.6) 0.7 0.2 2.6
===== ===== ===== ===== =====
SIX MONTHS
YEAR ENDED ENDED
DECEMBER 31, JUNE 30,
---------------------- -----------
1999 2000 2001
-------- -------- -----------
(EXPRESSED IN PERCENTAGES)
PERCENTAGE CHANGE FROM PRIOR PERIOD:
Net operating revenues.................................... 26.4 23.8 27.8
Admissions................................................ 20.3 19.0 20.9
Adjusted admissions (d)................................... 22.6 20.9 18.7
Average length of stay.................................... (4.8) (5.0) (2.6)
Adjusted EBITDA........................................... 22.7 23.8 26.0
SAME HOSPITALS PERCENTAGE CHANGE FROM PRIOR PERIOD (e):
Net operating revenues.................................... 7.6 10.3 11.1
Admissions................................................ 4.9 6.3 6.0
Adjusted admissions....................................... 7.7 7.3 4.3
Adjusted EBITDA........................................... 12.6 16.7 14.4
--------------------------
(a) Operating expenses include salaries and benefits, provision for bad debts,
supplies, rent, and other operating expenses, and exclude the items that are
excluded for purposes of determining adjusted EBITDA as discussed in
footnote (b) below.
(b) We define adjusted EBITDA as EBITDA adjusted to exclude cumulative effect of
a change in accounting principle, impairment of long-lived assets,
compliance settlement and Year 2000 remediation costs, and loss from
hospital sales. EBITDA consists of income (loss) before interest, income
taxes, depreciation and amortization, and amortization of goodwill. EBITDA
and adjusted EBITDA should not be considered as measures of financial
performance under generally accepted accounting principles. Items excluded
from EBITDA and adjusted EBITDA are significant components in understanding
and assessing financial performance. EBITDA and adjusted EBITDA are key
measures used by management to evaluate our operations and provide useful
information to investors. EBITDA and adjusted EBITDA should not be
32
considered in isolation or as alternatives to net income, cash flows
generated by operations, investing or financing activities, or other
financial statement data presented in the consolidated financial statements
as indicators of financial performance or liquidity. Because EBITDA and
adjusted EBITDA are not measurements determined in accordance with generally
accepted accounting principles and are thus susceptible to varying
calculations, EBITDA and adjusted EBITDA as presented may not be comparable
to other similarly titled measures of other companies.
(c) Includes Year 2000 remediation costs representing 0.0% in 1998 and 0.3% in
1999.
(d) Adjusted admissions is a general measure of combined inpatient and
outpatient volume. We computed adjusted admissions by multiplying admissions
by gross patient revenues and then dividing that number by gross inpatient
revenues.
(e) Includes acquired hospitals to the extent we operated them during comparable
periods in both years.
SIX MONTHS ENDED JUNE 30, 2001 COMPARED TO SIX MONTHS ENDED JUNE 30, 2000
Net operating revenues increased 27.8% to $799.6 million for the six months
ended June 30, 2001 from $625.8 million for the six months ended June 30, 2000.
Of the $173.8 million increase in net operating revenues, the seven hospitals
acquired in 2000 and one hospital acquired in 2001 contributed approximately
$104.9 million, and hospitals we owned throughout both periods contributed
$68.9 million, an increase of 11.1%. The increase from hospitals owned
throughout both periods was attributable primarily to volume increases, rate
increases from managed care and other payors and an increase in government
reimbursement; these increases were offset by the 2001 period having one fewer
day as compared to the 2000 period, resulting from 2000 being a leap year.
Inpatient admissions increased by 20.9%. Adjusted admissions increased by
18.7%. Adjusted admissions is a general measure of combined inpatient and
outpatient volume. We computed adjusted admissions by multiplying admissions by
gross patient revenues and then dividing that number by gross inpatient
revenues. Average length of stay decreased by 2.6%. On a same hospital basis,
inpatient admissions increased by 6.0% and adjusted admissions increased by
4.3%. The increase in same hospital inpatient admissions and adjusted admissions
was due primarily to an increase in services offered, physician relationship
development efforts and the addition of physicians through our focused
recruitment program. On a same hospital basis, net outpatient revenues increased
12.5%.
Operating expenses, as a percentage of net operating revenues, increased
from 80.8% for the six months ended June 30, 2000, to 81.1% for the six months
ended June 30, 2001, primarily due to an increase in provision for bad debts,
increases in utility expense and an increase in rent expense, offset by
improvements in salaries and benefits. Salaries and benefits, as a percentage of
net operating revenues, decreased to 38.7% from 39.0% for the comparable
periods, due to the continued realization of savings from improvements made at
the hospitals acquired offset by hospitals acquired more recently having higher
salaries and benefits as a percentage of net operating revenues for which
savings have not yet been realized. Provision for bad debts, as a percentage of
net operating revenues, increased to 9.3% for the six months ended June 30, 2001
from 9.0% for the comparable period in 2000 due primarily to an increase in
self-pay business. Supplies as a percentage of net operating revenues remained
unchanged at 11.6% for the comparable periods in 2000 and 2001. Rent and other
operating expenses, as a percentage of net operating revenues, increased from
21.2% for the six months ended June 30, 2000 to 21.5% for the six months ended
June 30, 2001. Adjusted EBITDA margins decreased from 19.2% for the six months
ended June 30, 2000 to 18.9% for the six months ended June 30, 2001 due
primarily to the acquisition of a previously managed facility and the lower
initial adjusted EBITDA margins associated with hospitals acquired in 2000 and
2001.
33
On a same hospital basis, operating expenses as a percentage of net
operating revenues decreased from 81.2% for the six months ended June 30, 2000
to 80.6% for the six months ended June 30, 2001. We achieved this reduction
through efficiency and productivity gains in payroll and supplies expense
reductions, offset by a smaller increase in bad debt expense and other operating
expenses.
Depreciation and amortization increased by $9.2 million from $33.9 million
for the six months ended June 30, 2000 to $43.1 million for the six months ended
June 30, 2001. The seven hospitals acquired in 2000 and one hospital acquired in
2001 accounted for $2.9 million of the increase; facility renovations and
purchases of equipment, information system upgrades, the inclusion of a hospital
previously held for divestiture and other deferred items accounted for the
remaining $6.3 million.
Amortization of goodwill increased from $12.4 million for the six months
ended June 30, 2000 to $14.1 million for the comparable period in 2001 related
to acquired hospitals.
Interest, net decreased from $65.3 million for the six months ended
June 30, 2000 to $53.2 million for the six months ended June 30, 2001. The
decrease in average long-term debt during the comparable periods in 2000 and
2001 accounted for $9.8 million of the decrease while a net decrease in interest
rates accounted for the remaining difference. The decrease in average debt
balance is the result of debt repayments from proceeds raised from the issuance
of common stock in 2000 being greater than additional sums borrowed to finance
hospital acquisitions.
Income before income taxes increased from $8.3 million for the six months
ended June 30, 2000 to $40.7 million for the six months ended June 30, 2001
primarily as a result of the increases in revenue and decreases in expenses as
discussed above.
Provision for income taxes increased from $7.2 million for the six months
ended June 30, 2000 to $20.2 million for the six months ended June 30, 2001 as a
result of the increase in pre-tax income.
Net income was $20.5 million for the six months ended June 30, 2001 compared
to $1.1 million for the six months ended June 30, 2000.
YEAR ENDED DECEMBER 31, 2000 COMPARED TO YEAR ENDED DECEMBER 31, 1999
Net operating revenues increased by 23.8% to $1,337.5 million in 2000 from
$1,080.0 million in 1999. Of the $257.5 million increase in net operating
revenues, the hospitals we acquired, including one new hospital we constructed,
in 2000 and 1999 contributed $149.6 million and the hospitals we owned
throughout both periods contributed $107.9 million. The $107.9 million, or
10.3%, increase in same hospitals net operating revenues was attributable
primarily to inpatient and outpatient volume increases. In 2000, we experienced
an estimated $25 million of reductions from the Balanced Budget Act of 1997. We
have experienced lower payments from a number of payors, resulting primarily
from:
- reductions mandated by the Balanced Budget Act of 1997, particularly in
the areas of reimbursement for Medicare outpatient, capital, bad debts,
home health, and skilled nursing;
- reductions in various states' Medicaid programs; and
- reductions in length of stay for patients not reimbursed on an admission
basis.
We expect the Balanced Budget Refinement Act of 1999 and the Benefits
Improvement and Protection Act of 2000 to lessen the impact of these reductions
in future periods.
34
Inpatient admissions increased by 19.0%. Adjusted admissions increased by
20.9%. Average length of stay decreased by 5.0%. On a same hospitals basis,
inpatient admissions increased by 6.3% and adjusted admissions increased by
7.3%. The increase in same hospitals inpatient admissions and adjusted
admissions was due primarily to an increase in services offered, physician
relationship development efforts, and the addition of physicians through our
focused recruitment program. On a same hospitals basis, net outpatient operating
revenues increased 13.7%. Outpatient growth reflects the continued trend toward
a preference for outpatient procedures, where appropriate, by patients,
physicians, and payors.
Operating expenses, as a percentage of net operating revenues, remained
unchanged at 81.1% from 1999 to 2000. Adjusted EBITDA margin remained unchanged
at 18.9% from 1999 to 2000. Salaries and benefits, as a percentage of net
operating revenues, decreased from 38.8% in 1999 to 38.7% in 2000. Provision for
bad debts, as a percentage of net operating revenues, increased to 9.1% in 2000
from 8.8% in 1999 due to an increase in self-pay revenues and payor remittance
slowdowns in part caused by an increase in the number of acquisition
conversions. The conversion is the process by which the Company must apply for
new Medicare and Medicaid provider numbers on acquired hospitals. This process
results in billing delays and payor remittance slowdowns and subsequently an
increase in the allowance for uncollectible receivables during the conversion
period. Supplies, as a percentage of net operating revenues, decreased to 11.5%
in 2000 from 11.7% in 1999. Rent and other operating expenses, as a percentage
of net operating revenues, remained unchanged at 21.7% from 1999 to 2000.
On a same hospitals basis, operating expenses as a percentage of net
operating revenues decreased from 81.2% in 1999 to 80.1% in 2000 and adjusted
EBITDA margin increased from 18.8% in 1999 to 19.9% in 2000. These efficiency
and productivity gains resulted from the achievement of target staffing ratios,
physician recruiting efforts, and improved compliance with national purchasing
contracts. Operating expenses improved as a percentage of net operating revenues
in every major category except provision for bad debts which increased slightly
and other operating expenses which were flat compared to 1999.
Depreciation and amortization increased by $15.0 million from $56.9 million
in 1999 to $71.9 million in 2000. The twelve hospitals acquired in 1999 and 2000
accounted for $5.9 million of the increase and facility renovations and
purchases of equipment primarily accounted for the remaining $9.1 million.
Amortization of goodwill increased by $1.0 million from $24.7 million in
1999 to $25.7 million in 2000. This increase primarily related to the twelve
hospitals acquired, including one constructed, in 1999 and 2000.
Interest, net increased by $10.9 million from $116.5 million in 1999 to
$127.4 million in 2000. The twelve hospitals acquired, including one
constructed, in 1999 and 2000 accounted for approximately $8.5 million of
incremental interest, borrowings under our credit agreement to finance capital
expenditures and physician recruiting accounted for $10.0 million of incremental
interest, borrowings to fund our compliance settlement accounted for
$1.9 million of incremental interest and changes in interest rates accounted for
$8.2 million of incremental interest. These increases were offset by savings of
approximately $16.0 million from the repayment of long-term debt with the
proceeds from our initial public and secondary offerings in 2000 and a savings
of $1.7 million from an increase in cash flow from operations.
Income before income taxes for 2000 was $27.7 million compared to a loss of
$11.2 million in 1999. This improvement is primarily the result of revenue
growth from both acquisitions and same store hospitals, management's ability to
control expenses and a reduction in the growth rate of interest expense.
35
The provision for income taxes in 2000 was $18.2 million compared to
$5.6 million in 1999. Due to the non-deductible nature of certain goodwill
amortization, the resulting effective tax rate is in excess of the statutory
rate.
Net income for 2000 was $9.6 million as compared to $16.8 million net loss
in 1999.
YEAR ENDED DECEMBER 31, 1999 COMPARED TO YEAR ENDED DECEMBER 31, 1998
Net operating revenues increased by 26.4% to $1,080.0 million in 1999 from
$854.6 million in 1998. Of the $225.4 million increase in net operating
revenues, the nine hospitals we acquired, including one constructed, in 1998 and
1999, contributed $160.6 million and nine hospitals we owned throughout both
periods contributed $64.8 million. The $64.8 million, or 7.6%, increase in same
hospitals net operating revenues was attributable primarily to inpatient and
outpatient volume increases, partially offset by a decrease in reimbursement. In
1999, we experienced an estimated $23 million of reductions from the Balanced
Budget Act of 1997. We have experienced lower payments from a number of payors,
resulting primarily from:
- reductions mandated by the Balanced Budget Act of 1997, particularly in
the areas of reimbursement for Medicare outpatient, capital, bad debts,
home health, and skilled nursing;
- reductions in various states' Medicaid programs; and
- reductions in length of stay for patients not reimbursed on an admission
basis.
We expect the Balanced Budget Refinement Act of 1999 to lessen the impact of
these reductions in future periods.
Inpatient admissions increased by 20.3%. Adjusted admissions increased by
22.6%. Average length of stay decreased by 4.8%. On a same hospitals basis,
inpatient admissions increased by 4.9% and adjusted admissions increased by
7.7%. The increase in same hospitals inpatient admissions and adjusted
admissions was due primarily to an increase in services offered, physician
relationship development efforts, and the addition of physicians through our
focused recruitment program. On a same hospitals basis, net outpatient operating
revenues increased 14.8%. Outpatient growth reflects the continued trend toward
a preference for outpatient procedures, where appropriate, by patients,
physicians, and payors.
Operating expenses, as a percentage of net operating revenues, increased
from 80.5% in 1998 to 81.1% in 1999 due to higher operating expenses and lower
initial adjusted EBITDA margins associated with acquired hospitals and one
recently constructed hospital. Adjusted EBITDA margin decreased from 19.5% in
1998 to 18.9% in 1999. Salaries and benefits, as a percentage of net operating
revenues, increased to 38.8% in 1999 from 38.4% in 1998, due to acquisitions of
hospitals in 1998 and 1999 having higher salaries and benefits as a percentage
of net operating revenues than our 1998 results. Provision for bad debts, as a
percentage of net operating revenues, increased to 8.8% in 1999 from 8.1% in
1998 due to an increase in self-pay revenues and payor remittance slowdowns in
part caused by Year 2000 conversions. Supplies, as a percentage of net operating
revenues, decreased to 11.7% in 1999 from 11.8% in 1998. Rent and other
operating expenses, as a percentage of net operating revenues, decreased to
21.7% in 1999 from 22.3% in 1998.
On a same hospitals basis, operating expenses as a percentage of net
operating revenues decreased from 81.1% in 1998 to 80.3% in 1999 and adjusted
EBITDA margin increased from 18.9% in 1998 to 19.7% in 1999. These efficiency
and productivity gains resulted from the achievement of target staffing ratios
and improved compliance with national purchasing contracts. Operating expenses
improved as a percentage of net operating revenues in every major category
except provision for bad debts.
36
Depreciation and amortization increased by $7.0 million from $49.9 million
in 1998 to $56.9 million in 1999. The nine hospitals acquired in 1998 and 1999
accounted for $7.1 million of the increase and facility renovations and
purchases of equipment accounted for the remaining $3.3 million. These increases
were offset by a $3.4 million reduction in depreciation and amortization related
to the 1998 impairment write-off of certain assets.
Amortization of goodwill decreased by $1.9 million from $26.6 million in
1998 to $24.7 million in 1999. The 1998 impairment charge resulted in a
$3.6 million reduction in amortization of goodwill, offset by an increase of
$1.7 million primarily related to the nine hospitals acquired in 1998 and 1999.
Interest, net increased by $15.3 million from $101.2 million in 1998 to
$116.5 million in 1999. The nine hospitals acquired in 1998 and 1999 accounted
for $10.2 million of the increase, and borrowings under our credit agreement to
finance capital expenditures accounted for the remaining $5.1 million.
Loss before cumulative effect of a change in accounting principle and income
taxes for 1999 was $11.2 million compared to a loss of $196.3 million in 1998. A
majority of this variance was due to a $164.8 million charge for impairment of
long-lived assets recorded in 1998. In December 1998, in connection with our
periodic review process, we determined that as a result of adverse changes in
physician relationships, undiscounted cash flows from seven of our hospitals
were below the carrying value of long-lived assets associated with those
hospitals. Therefore, in accordance with Statement of Financial Accounting
Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed of," we adjusted the carrying value of the
related long-lived assets, primarily goodwill, to their estimated fair value. We
based the estimated fair values of these hospitals on specific market
appraisals.
The provision for income taxes in 1999 was $5.6 million compared to a
benefit of $13.4 million in 1998. Due to the non-deductible nature of certain
goodwill amortization and the goodwill portion of the 1998 impairment charge,
the resulting effective tax rate is in excess of the statutory rate.
Including the impairment of long-lived assets, compliance settlement costs,
Year 2000 remediation costs, and cumulative effect of a change in accounting
principle charges, net loss for 1999 was $16.8 million as compared to
$183.3 million net loss in 1998. In 1997, we initiated a voluntary review of
inpatient medical records to determine whether documentation supported the
inpatient codes billed to certain governmental payors for the years 1993 through
1997. We executed a settlement agreement with the appropriate state and federal
governmental agencies for a negotiated settlement amount of approximately
$31.8 million, which we paid in May 2000. We recorded as a charge to income,
under the caption "Compliance settlement costs," $20 million in 1998 and
$14 million in 1999.
LIQUIDITY AND CAPITAL RESOURCES
SIX MONTHS ENDED JUNE 30, 2001 COMPARED TO SIX MONTHS ENDED JUNE 30, 2000
Net cash provided by operating activities increased $129.9 million to
$95.5 million for the six months ended June 30, 2001 from a cash use of
$34.4 million for the six months ended June 30, 2000. This increase represents
an increase in net income of $19.4 million, an increase in non-cash expenses of
$11.8 million, an increase of cash from working capital of $67.8 million and the
absence of the one-time compliance settlement payment of $30.9 million made in
2000 when comparing the six month periods ended June 30, 2000 and 2001. The
increase of cash from working capital can be attributed primarily to improvement
in collections of accounts receivable, an increase in our tax provision, which
we anticipate will be substantially offset by our existing net operating loss
carryforwards and therefore not result in cash outflow, and overall better
37
management of other working capital items. The use of cash from investing
activities increased from $74.3 million for the six months ended June 30, 2000
to $104.5 million for the six months ended June 30, 2001. This increase is the
result of the additional cost of the acquisition in 2001 and additional
expenditures on property, equipment and other assets. Net cash provided by
financing activities decreased $79.4 million during the comparable periods as a
result of not borrowing to meet capital expenditure and working capital needs
during the 2001 period and not borrowing for the compliance settlement as was
done in the 2000 period.
2000 COMPARED TO 1999
Net cash provided by operating activities increased by $34.7 million, from a
use of $11.7 million during 1999 to cash provided of $23.0 million during 2000.
This improvement is due primarily to an increase in net income of
$26.4 million, use of deferred tax assets of $17.2 million during 2000 as
compared to creating deferred tax assets of $3.8 million in 1999, and an
increase in accounts payable and accrued liabilities, offset by an increase in
accounts receivable and the $31.8 million compliance settlement payment made
during 2000. The use of cash in investing activities increased $88.9 million
from $155.5 million in 1999 to $244.4 million in 2000. The increase is due
primarily to an increase in cash used to finance hospital acquisitions of
$88.5 million during 2000 and an increase in cash used to finance all other
capital expenditures of $0.4 million. Net cash provided by financing activities
increased $66.0 million from $164.9 million in 1999 to $230.9 million in 2000.
We raised $514.5 million in proceeds, net of expenses from our initial public
and secondary offerings completed in 2000, which were used to repay long term
debt. Our borrowings during 2000 were $241.3 million and, excluding the offering
proceeds, repayments would have been $11.0 million. Excluding the 2000 offering
proceeds and the refinancing of our credit facility in 1999, this represents a
$64.8 million increase compared to borrowings of $186.3 million and repayments
of $20.9 million in 1999. The $64.8 million increase in borrowings is derived
from the increase in the amount spent on acquisitions of facilities partially
offset by an increase in operating cash flows.
1999 COMPARED TO 1998
Net cash provided by operating activities decreased by $27.4 million, from
$15.7 million during 1998 to a use of $11.7 million during 1999 due primarily to
an increase in accounts receivable at both same hospitals and newly-acquired
hospitals. The use of cash in investing activities decreased from
$236.6 million in 1998 to $155.5 million in 1999. The $81.1 million decrease was
due primarily to a decrease in cash used to finance hospital acquisitions of
$112.9 million during 1999. This decrease was offset by a $31.8 million increase
in cash used primarily to finance capital expenditures during 1999, including
approximately $15.0 million of Year 2000 expenditures. The 1998 use of cash to
acquire facilities, included four hospitals, two of which were larger
facilities. Net cash provided by financing activities decreased from
$219.9 million in 1998 to $164.9 million in 1999. Excluding the refinancing of
our credit facility, borrowings in 1999 would have been $186.3 million and
repayments would have been $20.9 million. This represents a $56.2 million
decrease compared to $242.5 million borrowed in 1998 and repayments of long-term
indebtedness of $20.9 million in 1999 compared to repayments of $18.8 million in
1998. The $56.2 million decrease in borrowings related to a lesser amount spent
on acquisition of facilities, partially offset by increased capital expenditures
and an increase in the accounts receivable balance.
CAPITAL EXPENDITURES
Our capital expenditures for 2000 totaled $63.0 million compared to
$64.8 million in 1999 and $51.3 million in 1998. Our capital expenditures for
1999 excludes $15.3 million of costs associated with the construction of one
additional hospital that opened in 1999. The decrease in capital expenditures in
2000 was due primarily to the increase in purchases of medical equipment and
38
information systems upgrades in 1999 related to Year 2000 compliance. The Year
2000 compliance expenditures account for the increase in capital expenditures
during 1999 as compared to 1998.
Pursuant to hospital purchase agreements, we are required to construct four
replacement hospitals through 2005 with an aggregate estimated construction
cost, including equipment, of approximately $120 million. We expect total
capital expenditures of approximately $90 million in 2001, including
approximately $60 million for renovation and equipment purchases and
approximately $30 million for construction of replacement hospitals.
CAPITAL RESOURCES
Net working capital was $169.1 million at June 30, 2001 compared to
$167.7 million at December 31, 2000. The $1.4 million increase was attributable
primarily to an increase in cash and cash equivalents, an increase in accounts
receivable consistent with the increase in net revenues and a decrease in
accrued interest and other current liabilities offset by a decrease in prepaid
expenses and an increase in current income taxes payable that we expect to
settle using net operating loss carry forwards.
In July 2001, we amended our credit agreement. Our amended credit agreement
provides for $644 million in term debt with quarterly amortization and staggered
maturities in 2001, 2002, 2003, 2004 and 2005. This agreement also provides for
revolving facility debt for working capital of $200 million and acquisitions of
$263.2 million at June 30, 2001. This new amendment extends the maturity of
approximately 80% of the revolver commitments to January 2, 2004. Borrowings
under the facility bear interest at either LIBOR or prime rate plus various
applicable margins which are based upon financial covenant ratio tests. As of
June 30, 2001 using amended rates, our weighted average interest rate under our
credit agreement was 7.04%. As of June 30, 2001, we had availability to borrow
an additional $162.1 million under the working capital revolving facility and an
additional $144.2 million under the acquisition loan revolving facility.
We are required to pay a quarterly commitment fee at a rate of .375% to
.500% based on specified financial criteria. This fee applies to unused
commitments under the revolving credit facility and the acquisition loan
facility.
The terms of the credit agreement include various restrictive covenants.
These covenants include restrictions on additional indebtedness, investments,
asset sales, capital expenditures, dividends, sale and leasebacks, contingent
obligations, transactions with affiliates, and fundamental changes. The
covenants also require maintenance of various ratios regarding senior
indebtedness, senior interest, and fixed charges.
We believe that internally generated cash flows and borrowings under our
revolving credit facility and acquisition facility will be sufficient to finance
acquisitions, capital expenditures and working capital requirements through the
next 12 months. If funds required for future acquisitions exceed existing
sources of capital, we will need to increase our credit facilities or obtain
additional capital by other means.
REIMBURSEMENT, LEGISLATIVE AND REGULATORY CHANGES
Legislative and regulatory action has resulted in continuing change in the
Medicare and Medicaid reimbursement programs which will continue to limit
payment increases under these programs. Within the statutory framework of the
Medicare and Medicaid programs, there are substantial areas subject to
administrative rulings, interpretations, and discretion which may further affect
payments made under those programs, and the federal and state governments might,
in the future, reduce the funds available under those programs or require more
stringent utilization and quality reviews of hospital facilities. Additionally,
there may be a continued rise in managed care
39
programs and future restructuring of the financing and delivery of healthcare in
the United States. These events could have an adverse effect on our future
financial results.
INFLATION
The healthcare industry is labor intensive. Wages and other expenses
increase during periods of inflation and when labor shortages occur in the
marketplace. In addition, suppliers pass along rising costs to us in the form of
higher prices. We have implemented cost control measures, including our case and
resource management program, to curb increases in operating costs and expenses.
We have, to date, offset increases in operating costs by increasing
reimbursement for services and expanding services. However, we cannot predict
our ability to cover or offset future cost increases.
RECENT ACCOUNTING PRONOUNCEMENTS NOT YET ADOPTED
On July 20, 2001, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards (SFAS) No. 141, "Business Combinations," and
SFAS No. 142, "Goodwill and Other Intangible Assets." These SFAS Statements make
significant changes to the accounting for business combinations, goodwill and
intangible assets.
SFAS No. 141 eliminates the pooling-of-interests method of accounting for
business combinations. In addition, it further clarifies the criteria for
recognition of intangible assets separately from goodwill. This statement's
provisions apply to business combinations accounted for using the purchase
method for which the date of acquisition is July 1, 2001, or later.
SFAS No. 142 discontinues the practice of amortizing goodwill and indefinite
life intangible assets. Its nonamortization provisions are effective January 1,
2002 for goodwill existing at June 30, 2001, and are effective immediately for
business combinations with acquisition dates after June 30, 2001. Intangible
assets with a determinable useful life will continue to be amortized over that
period. SFAS No. 142 requires us to complete a transitional goodwill impairment
test as of January 1, 2002. Any impairment loss will be recorded as soon as
possible, but in no case later than December 31, 2002. In addition, SFAS
No. 142 requires that indefinite life intangible assets and goodwill be tested
at least annually for impairment of carrying value; impairment of carrying value
would be evaluated more frequently if certain indicators are encountered.
We expect to adopt SFAS No. 142 effective January 1, 2002. Early adoption
and retroactive application of SFAS No. 141 and SFAS No. 142 are not permitted.
Subject to final analysis, we expect application of the nonamortization
provisions of these SFAS Statements to result in a positive effect on net income
of approximately $23 million in calendar year 2002. We will perform the first of
the required impairment tests of goodwill and indefinite lived intangible assets
as of January 1, 2002. We do not expect the effect of SFAS Nos. 141 and 142 to
have a significant effect on our financial position.
SFAS No. 143, "Accounting for Asset Retirement Obligations," was issued in
June 2001 by the Financial Accounting Standards Board and is effective for
financial statements issued for fiscal years beginning after June 15, 2002.
Earlier application is encouraged. SFAS No. 143 establishes accounting standards
for recognition and measurement of a liability for an asset retirement
obligation and the associated retirement cost. This SFAS Statement applies to
all entities and to legal obligations associated with the retirement of
long-lived assets that result from the acquisition, construction, development
and (or) the normal operation of a long-lived asset, except for certain
obligations of lessees. We are evaluating the impact, if any, of adopting SFAS
No. 143.
40
ACCOUNTING PRONOUNCEMENT ADOPTED
SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities," is effective for all fiscal years beginning after June 15, 2000.
SFAS No. 133, as amended, establishes accounting and reporting standards for
derivative instruments, including certain derivative instruments embedded in
other contracts and for hedging activities. Under SFAS No. 133, certain
contracts that were not formerly considered derivatives may now meet the
definition of a derivative. We adopted SFAS No. 133 on January 1, 2001. The
adoption of SFAS No. 133 did not impact our financial position, results of
operations, or cash flows.
FEDERAL INCOME TAX EXAMINATIONS
We have settled the Internal Revenue Service examinations of our filed
federal income tax returns for the tax periods ended December 31, 1993 through
December 31, 1996. In that settlement, we have agreed to several adjustments,
primarily involving temporary or timing differences, and made a payment of
approximately $8.5 million, which is sufficient to cover all resulting federal
income taxes and interest. The Internal Revenue Service examinations did not
have a material financial impact on us.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to interest rate changes, primarily as a result of our credit
agreement which bears interest based on floating rates. We have not taken any
action to cover interest rate market risk, and are not a party to any interest
rate market risk management activities.
A 1% change in interest rates on variable rate debt would have resulted in
interest expense fluctuating approximately $6 million for 1998, $8 million for
1999, $9 million for 2000 and $3.5 million for the six months ended June 30,
2001.
41
BUSINESS OF COMMUNITY HEALTH SYSTEMS
OVERVIEW OF OUR COMPANY
We are the largest non-urban provider of general hospital healthcare
services in the United States in terms of number of facilities and the second
largest in terms of revenues and EBITDA. As of October 1, 2001 we owned, leased
or operated 55 hospitals, geographically diversified across 20 states, with an
aggregate of 5,010 licensed beds. In over 85% of our markets, we are the sole
provider of these services. In all but one of our other markets, we are one of
two providers of these services. For the fiscal year ended December 31, 2000, we
generated $1.34 billion in revenues and $252.7 million in adjusted EBITDA. For
the six months ended June 30, 2001, we generated $799.6 million in revenues and
$151.1 million in adjusted EBITDA.
In July 1996, an affiliate of Forstmann Little & Co. acquired our
predecessor company from its public stockholders. The predecessor company was
formed in 1985. The aggregate purchase price for the acquisition was
$1,100.2 million. Wayne T. Smith, who has over 30 years of experience in the
healthcare industry, joined our company as President in January 1997. We named
him Chief Executive Officer in April 1997 and Chairman of our board of directors
in February 2001. Under this ownership and leadership, we have:
- strengthened the senior management team in all key business areas;
- standardized and centralized our operations across key business areas;
- implemented a disciplined acquisition program;
- expanded and improved the services and facilities at our hospitals;
- recruited additional physicians to our hospitals; and
- instituted a company-wide regulatory compliance program.
As a result of these initiatives, we achieved revenue growth of 23.8% in 2000,
26.4% in 1999 and 15.1% in 1998. We also achieved growth in adjusted EBITDA of
23.8% in 2000, 22.7% in 1999 and 36.1% in 1998. Our adjusted EBITDA margins
improved from 16.5% for 1997 to 18.9% for 2000.
Our hospitals typically have 50 to 200 beds and approximate annual revenues
ranging from $12 million to $80 million. Some of the hospitals we have recently
acquired have exceeded these ranges. They generally are located in non-urban
markets with populations of 20,000 to 100,000 people and economically diverse
employment bases. These facilities, together with their medical staffs, provide
a wide range of inpatient and outpatient general hospital services and a variety
of specialty services.
We target growing, non-urban healthcare markets because of their favorable
demographic and economic trends and competitive conditions. Because non-urban
service areas have smaller populations, there are generally fewer hospitals and
other healthcare service providers in these communities. We believe that smaller
populations result in less direct competition for hospital-based services. Also,
we believe that non-urban communities generally view the local hospital as an
integral part of the community. There is generally a lower level of managed care
presence in these markets.
OUR BUSINESS STRATEGY
The key elements of our business strategy are to:
- increase revenue at our facilities;
- grow through selective acquisitions;
- reduce costs; and
- improve quality.
42
INCREASE REVENUE AT OUR FACILITIES
OVERVIEW. We seek to increase revenue at our facilities by providing a
broader range of services in a more attractive care setting, as well as by
supporting and recruiting physicians. We identify the healthcare needs of the
community by analyzing demographic data and patient referral trends. We also
work with local hospital boards, management teams, and medical staffs to
determine the number and type of additional physicians needed. Our initiatives
to increase revenue include:
- recruiting additional primary care physicians and specialists;
- expanding the breadth of services offered at our hospitals through
targeted capital expenditures to support the addition of more complex
services, including orthopedics, cardiology, OB/GYN, and occupational
medicine; and
- providing the capital to invest in technology and the physical plant at
the facilities, particularly in our emergency rooms.
By taking these actions, we believe that we can increase our share of the
healthcare dollars spent by local residents and limit inpatient and outpatient
migration to larger urban facilities. Total revenue for hospitals operated by us
for a full year increased by 10.3% from 1999 to 2000. Total inpatient admissions
increased by 6.3% over the same period.
PHYSICIAN RECRUITING. The primary method of adding or expanding medical
services is the recruitment of new physicians into the community. A core group
of primary care physicians is necessary as an initial contact point for all
local healthcare. The addition of specialists who offer services including
general surgery, OB/GYN, cardiology, and orthopedics completes the full range of
medical and surgical services required to meet a community's core healthcare
needs. When we acquire a hospital, we identify the healthcare needs of the
community by analyzing demographic data and patient referral trends. We are then
able to determine what we believe to be the optimum mix of primary care
physicians and specialists. We employ recruiters at the corporate level to
support the local hospital managers in their recruitment efforts. During the
past three years, we have increased the number of physicians affiliated with us
by 405, including 84 in 1998, 156 in 1999 and 165 in 2000. The percentage of
recruited physicians commencing practice that were surgeons or specialists grew
from 45% in 1997 to 65% in 2000. We do not employ most of our physicians, but
rather they are in private practice in their communities. We have been
successful in recruiting physicians because of the practice opportunities of
physicians in our markets, as well as the lower managed care penetration as
compared to urban areas. These physicians are able to earn incomes comparable to
incomes earned by physicians in urban centers. As of June 30, 2001,
approximately 2,200 physicians were affiliated with our hospitals.
To attract and retain qualified physicians, we provide recruited physicians
with various services to assist them in opening and operating their practices,
including:
- relocation assistance;
- physician practice management assistance, either through consulting advice
or training;
- access to medical office building space adjacent to our hospitals;
- joint marketing programs for community awareness of new services and
providers of care in the community;
- case management consulting for best practices; and
- access to a physician advisory board which communicates regularly with
physicians regarding a wide range of issues affecting the medical staffs
of our hospitals.
43
EMERGENCY ROOM INITIATIVES. Given that over 50% of our hospital admissions
originate in the emergency room, we systematically take steps to increase
patient flow in our emergency rooms as a means of optimizing utilization rates
for our hospitals. Furthermore, the impression of our overall operations by our
customers is substantially influenced by our emergency room since often that is
their first experience with our hospitals. The steps we take to increase patient
flow in our emergency rooms include renovating and expanding our emergency room
facilities, improving service, and reducing waiting times, as well as
publicizing our emergency room capabilities in the local community. We have
expanded or renovated 15 of our emergency room facilities since 1997 and are now
in the process of upgrading an additional 5 emergency room facilities. Since
1997, we have entered into new contracts with emergency room operating groups to
improve performance in emergency rooms in approximately 35 of our hospitals. We
have implemented marketing campaigns that emphasize the speed, convenience, and
quality of our emergency rooms to enhance each community's awareness of our
emergency room services.
Our upgrades include the implementation of specialized software programs
designed to assist physicians in making diagnoses and determining treatments.
The software also benefits patients and hospital personnel by assisting in
proper documentation of patient records. It enables our nurses to provide more
consistent patient care and provides clear instructions to patients at time of
discharge to help them better understand their treatments.
EXPANSION OF SERVICES. To capture a greater portion of the healthcare
spending in our markets and to more efficiently utilize our hospital facilities,
we have added a broad range of emergency, outpatient, and specialty services to
our hospitals. Depending on the needs of the community, we identify
opportunities to expand into various specialties, including orthopedics,
cardiology, OB/GYN, and occupational medicine. In addition to expanding
services, we have completed major capital projects at selected facilities to
offer these types of services. For example, in 1999 we invested $1 million in a
new cardiac catheterization laboratory at our Crestview, Florida hospital. As a
result, this laboratory increased the number of procedures it performed from 122
in 1998 to 670 in 2000. In another example, the magnetic resonance imaging
technology was upgraded in our Lancaster, South Carolina hospital in late 2000.
In the first 10 months since the upgrade, MRI volumes grew by 879 procedures, or
113%. We believe that through these efforts to expand our services we will
reduce patient migration to competing providers of healthcare services and
increase volume.
MANAGED CARE STRATEGY. Managed care has seen growth across the U.S. as
health plans expand service areas and membership. As we service primarily
non-urban markets, we have limited relationships with managed care
organizations. We have responded with a proactive and carefully considered
strategy developed specifically for each of our facilities. Our experienced
business development department reviews and approves all managed care contracts,
which are managed through a central database. The primary mission of this
department is to select and evaluate appropriate managed care opportunities,
manage existing reimbursement arrangements, negotiate increases, and educate our
physicians. We do not have any risk sharing capitated contracts.
GROW THROUGH SELECTIVE ACQUISITIONS
ACQUISITION CRITERIA. Each year we intend to acquire, on a selective basis,
two to four hospitals that fit our acquisition criteria. We generally pursue
acquisition candidates that:
- have a general service area population between 20,000 and 100,000 with a
stable or growing population base;
- are the sole or primary provider of acute care services in the community;
- are located more than 25 miles from a competing hospital;
- are not located in an area that is dependent upon a single employer or
industry; and
44
- have financial performance that we believe will benefit from our
management's operating skills.
Most hospitals we have acquired are located in service areas having
populations within the lower to middle range of our criteria. However, we have
also acquired hospitals having service area populations in the upper range of
our criteria. For example, in 1998, we acquired a 162-bed facility in Roswell,
New Mexico, which has a service area population of over 70,000 and is located
200 miles from the nearest urban centers in Albuquerque, New Mexico and Lubbock,
Texas. In 2000, we acquired a 164-bed facility in Kirksville, Missouri, which
has a service area population of over 100,000. Facilities similar to the ones
located in Roswell and Kirksville offer even greater opportunities to expand
services given their larger service area populations.
Most of our acquisition targets are municipal and other not-for-profit
hospitals. We believe that our access to capital and ability to recruit
physicians make us an attractive partner for these communities. In addition, we
have found that communities located in states where we already operate a
hospital are more receptive to us when they consider selling their hospital
because they are aware of our operating track record with respect to our
existing facilities within the state.
ACQUISITION OPPORTUNITIES. We believe that there are significant
opportunities for growth through the acquisition of additional facilities. We
estimate that there are currently approximately 375 hospitals that meet our
acquisition criteria. These hospitals are primarily not-for-profit or
municipally owned. Many of these hospitals have experienced declining financial
performance, lack the resources necessary to maintain and improve facilities,
have difficulty attracting qualified physicians, and are challenged by the
changing healthcare industry. We believe that these circumstances will continue
and may encourage owners of these facilities to turn to companies, like ours,
that have greater management expertise and financial resources and can enhance
the local availability of healthcare.
After we acquire a hospital, we:
- improve hospital operations by implementing our standardized and
centralized programs and appropriate expense controls as well as by
managing staff levels;
- recruit additional primary care physicians and specialists;
- expand the breadth of services offered in the community to increase
local market share and reduce inpatient and outpatient migration to
larger urban hospitals; and
- implement appropriate capital expenditure programs to renovate the
facility, add new services, and upgrade equipment.
REPLACEMENT FACILITIES. In some cases, we enter into agreements with the
owners of hospitals to construct a new facility to be owned or leased by us that
will replace the existing facility. The new facilities offer many benefits to us
as well as the local community, including:
- state of the art technology, which attracts physicians trained in the
latest medical procedures;
- physical plant efficiencies designed to enhance the flow of services,
including emergency room and outpatient services;
- improved registration and business office functions; and
- local support for the institution.
As an obligation under hospital purchase agreements, we are required to
construct four replacement hospitals through 2005 with an aggregate estimated
construction cost, including equipment, of approximately $120 million.
45
DISCIPLINED ACQUISITION APPROACH. We have been disciplined in our approach
to acquisitions. We have a dedicated team of internal and external professionals
who complete a thorough review of the hospital's financial and operating
performance, the demographics of the market, and the state of the physical plant
of the facilities. Based on our historical experience, we then build a pro forma
financial model that reflects what we believe can be accomplished under our
ownership. Whether we buy or lease the existing facility or agree to construct a
replacement hospital, we have been disciplined in our approach to pricing. We
typically begin the acquisition process by entering into a non-binding letter of
intent with an acquisition candidate. After we complete business and financial
due diligence and financial modeling, we decide whether or not to enter into a
definitive agreement.
ACQUISITION EFFORTS. We have significantly enhanced our acquisition efforts
in the last five years in an effort to achieve our goals. We have focused on
identifying possible acquisition opportunities through expanding our internal
acquisition group and working with a broad range of financial advisors who are
active in the sale of hospitals, especially in the not-for-profit sector. Since
July 1996, we have acquired 27 hospitals through October 1, 2001, for an
aggregate investment of approximately $866 million, including working capital.
We have completed the following acquisitions since July 1996:
YEAR OF LICENSED
ACQUISITION/LEASE BEDS
HOSPITAL NAME CITY STATE INCEPTION (a)
------------- ------------- -------- ----------------- ---------------------
Chesterfield General (b)...................... Cheraw SC 1996 66
Marlboro Park (b)............................. Bennettsville SC 1996 109
Northeast Medical (b)......................... Bonham TX 1996 75
Cleveland Regional (b)........................ Cleveland TX 1996 115
River West Medical (b)........................ Plaquemine LA 1996 80
Marion Memorial............................... Marion IL 1996 99
Lake Granbury Medical......................... Granbury TX 1997 56
Payson Regional............................... Payson AZ 1997 66
Eastern New Mexico............................ Roswell NM 1998 162
Watsonville Community......................... Watsonville CA 1998 102
Martin General................................ Williamston NC 1998 49
Fallbrook Hospital............................ Fallbrook CA 1998 47
Greensville Memorial.......................... Emporia VA 1999 114
Berwick Hospital.............................. Berwick PA 1999 144
King's Daughters.............................. Greenville MS 1999 137
Big Bend Regional (c)......................... Alpine TX 1999 40
Evanston Regional............................. Evanston WY 1999 42
Southampton Memorial.......................... Franklin VA 2000 105
Northeastern Regional......................... Las Vegas NM 2000 54
Lakeview Community............................ Eufaula AL 2000 74
South Baldwin Regional........................ Foley AL 2000 82
Western Arizona Regional...................... Bullhead City AZ 2000 90
Tooele Valley Regional(d)..................... Tooele UT 2000 38
Northeastern Regional......................... Kirksville MO 2000 164
Brandywine.................................... Coatesville PA 2001 168
Red Bud Regional.............................. Red Bud IL 2001 103
Jennersville Regional......................... West Grove PA 2001 59
--------------------------
(a) Licensed beds are the number of beds for which the appropriate state agency
licenses a facility regardless of whether the beds are actually available
for patient use.
(b) Acquired in a single transaction from a private, for-profit company.
(c) New hospital constructed to replace existing facility that we managed.
(d) We acquired this hospital as of October 1, 2000. Prior to the acquisition,
we operated this hospital under a management agreement and did not include
the operating statistics of this hospital in our consolidated statistics.
During the term of the management agreement, our fee was equal to the excess
of the hospital's net revenue over expenses.
46
REDUCE COSTS
OVERVIEW. To improve efficiencies and increase operating margins, we
implement cost containment programs and adhere to operating philosophies which
include:
- standardizing and centralizing our operations;
- optimizing resource allocation by utilizing our company-devised case and
resource management program, which assists in improving clinical care and
containing expenses;
- capitalizing on purchasing efficiencies through the use of company-wide
standardized purchasing contracts and terminating or renegotiating certain
vendor contracts;
- installing a standardized management information system, resulting in more
efficient billing and collection procedures; and
- managing staffing levels according to patient volumes and the appropriate
level of care.
In addition, each of our hospital management teams is supported by our
centralized operational, reimbursement, regulatory, and compliance expertise as
well as by our senior management team, which has an average of 20 years of
experience in the healthcare industry. Adjusted EBITDA margins on a same
hospitals basis improved from 18.9% in 1998 to 19.7% in 1999 and to 19.9% in
2000. Adjusted EBITDA margins on a same hospitals basis improved from 18.8% for
the first six months in 2000 to 19.4% for the first six months in 2001.
STANDARDIZATION AND CENTRALIZATION. Our standardization and centralization
initiatives encompass nearly every aspect of our business, from developing
standard policies and procedures with respect to patient accounting and
physician practice management, to implementing standard processes to initiate,
evaluate, and complete construction projects. Our standardization and
centralization initiatives have been a key element in improving our adjusted
EBITDA margins.
- BILLING AND COLLECTIONS. We have adopted standard policies and procedures
with respect to billing and collections. We have also automated and
standardized various components of the collection cycle, including
statement and collection letters and the movement of accounts through the
collection cycle. Upon completion of an acquisition, our management
information system team converts the hospital's existing information
system to our standardized system. This enables us to quickly implement
our business controls and cost containment initiatives.
- PHYSICIAN SUPPORT. We support our physicians to enhance their performance.
We have implemented physician practice management seminars and training.
We host these seminars at least quarterly. All newly recruited physicians
are required to attend a three-day introductory seminar. The subjects
covered in these comprehensive seminars include:
o our corporate structure and philosophy;
o provider applications, physician to physician relationships, and
performance standards;
o marketing and volume building techniques;
o medical records, equipment, and supplies;
o review of coding and documentation guidelines;
o compliance, legal, and regulatory issues;
o understanding financial statements;
o national productivity standards; and
o managed care.
47
- MATERIALS MANAGEMENT. We have standardized and centralized our operations
with respect to medical supplies and equipment and pharmaceuticals used in
our hospitals. In 1997, after evaluating our vendor contract pricing, we
entered into an affiliation agreement with Broadlane Inc., formerly known
as BuyPower, a group purchasing organization in which Tenet Healthcare
Corporation has a majority ownership interest. At the present time,
Broadlane is the source for a substantial portion of our medical supplies
and equipment and pharmaceuticals. We have reduced supply from 11.8% of
our revenue in 1998 to 11.7% of our revenue in 1999 and to 11.5% of our
revenue in 2000.
- FACILITIES MANAGEMENT. We have standardized interiors, lighting, and
furniture programs. We have also implemented a standard process to
initiate, evaluate, and complete construction projects. Our corporate
staff monitors all construction projects and pays all construction project
invoices. Our initiatives in this area have reduced our construction costs
while maintaining the same level of quality and improving upon the time it
takes us to complete these projects.
- OTHER INITIATIVES. We have also improved margins by implementing standard
programs with respect to ancillary services support in areas including
emergency rooms, pharmacy, laboratory, imaging, cardiac services, home
health, skilled nursing, centralized outpatient scheduling and health
information management. We have reduced costs associated with these
services by improving contract terms, standardizing information systems,
and encouraging adherence to best practices guidelines.
CASE AND RESOURCE MANAGEMENT. Our case and resource management program is a
company-devised program developed in response to ongoing reimbursement changes
with the goal of improving clinical care and cost containment. The program
focuses on:
- appropriately treating patients along the care continuum;
- reducing inefficiently applied processes, procedures, and resources;
- developing and implementing standards for operational best practices; and
- using on-site clinical facilitators to train and educate care
practitioners on identified best practices.
Our case and resource management program integrates the functions of
utilization review, discharge planning, overall clinical management, and
resource management into a single effort to improve the quality and efficiency
of care. Issues evaluated in this process include patient treatment, patient
length of stay, and utilization of resources. The average length of inpatient
stays decreased from 4.5 days in 1997 to 3.8 in 2000 and in the first six months
of 2001. We believe this decrease was primarily a result of these initiatives.
Under our case and resource management program, patient care begins with a
clinical assessment of the appropriate level of care, discharge planning, and
medical necessity for planned services. Once a patient is admitted to the
hospital, we conduct a review for ongoing medical necessity using
appropriateness criteria. We reassess and adjust discharge plan options as the
needs of the patient change. We closely monitor cases to prevent delayed service
or inappropriate utilization of resources. Once the patient obtains clinical
improvement, we encourage the attending physician to consider alternatives to
hospitalization through discussions with the facility's physician advisor.
Finally, we refer the patient to the appropriate post-hospitalization resources.
IMPROVE QUALITY
We have implemented various programs to ensure improvement in the quality of
care provided. We have developed training programs for all senior hospital
management, chief nursing officers,
48
quality directors, physicians and other clinical staff. We share information
among our hospital management to implement best practices and assist in
complying with regulatory requirements. We have standardized accreditation
documentation and requirements. Corporate support is provided to each facility
to assist with accreditation reviews. Several of our facilities have received
accreditation "with commendation" from the Joint Commission on Accreditation of
Healthcare Organizations. All hospitals conduct patient, physician, and staff
satisfaction surveys to help identify methods of improving the quality of care.
Each of our hospitals is governed by a board of trustees, which includes
members of the hospital's medical staff. The board of trustees establishes
policies concerning the hospital's medical, professional, and ethical practices,
monitors these practices, and is responsible for ensuring that these practices
conform to legally required standards. We maintain quality assurance programs to
support and monitor quality of care standards and to meet Medicare and Medicaid
accreditation and regulatory requirements. Patient care evaluations and other
quality of care assessment activities are reviewed and monitored continuously.
OUR FACILITIES
Our hospitals are general care hospitals offering a wide range of inpatient
and outpatient medical services. These services generally include internal
medicine, general surgery, cardiology, oncology, orthopedics, OB/GYN, diagnostic
and emergency room services, outpatient surgery, laboratory, radiology,
respiratory therapy, physical therapy, and rehabilitation services. In addition,
some of our hospitals provide skilled nursing and home health services based on
individual community needs.
For each of our hospitals, the following table shows its location, the date
of its acquisition or lease inception and the number of licensed beds as of
October 1, 2001:
DATE OF
LICENSED ACQUISITION/LEASE OWNERSHIP
HOSPITAL CITY BEDS(a) INCEPTION TYPE
-------- ------------- -------- ----------------- -------------
ALABAMA
Woodland Community Hospital................ Cullman 100 October, 1994 Owned
Parkway Medical Center Hospital............ Decatur 120 October, 1994 Owned
L.V. Stabler Memorial Hospital............. Greenville 72 October, 1994 Owned
Hartselle Medical Center................... Hartselle 150 October, 1994 Owned
Edge Regional Hospital..................... Troy 97 December, 1994 Owned
Lakeview Community Hospital................ Eufaula 74 April, 2000 Owned
South Baldwin Regional Medical Center...... Foley 82 June, 2000 Leased
ARIZONA
Payson Regional Medical Center............. Payson 66 August, 1997 Leased
Western Arizona Regional................... Bullhead City 90 July, 2000 Owned
ARKANSAS
Harris Hospital............................ Newport 132 October, 1994 Owned
Randolph County Medical Center............. Pocahontas 50 October, 1994 Leased
CALIFORNIA
Barstow Community Hospital................. Barstow 56 January, 1993 Leased
Fallbrook Hospital......................... Fallbrook 47 November, 1998 Operated (b)
Watsonville Community Hospital............. Watsonville 102 September, 1998 Owned
FLORIDA
North Okaloosa Medical Center.............. Crestview 110 March, 1996 Owned
GEORGIA
Berrien County Hospital.................... Nashville 63 October, 1994 Leased
Fannin Regional Hospital................... Blue Ridge 34 January, 1986 Owned
ILLINOIS
Crossroads Community Hospital.............. Mt. Vernon 55 October, 1994 Owned
Marion Memorial Hospital................... Marion 99 October, 1996 Leased
Red Bud Regional Hospital.................. Red Bud 103 September, 2001 Owned
(CONTINUED ON FOLLOWING PAGE)
49
DATE OF
LICENSED ACQUISITION/LEASE OWNERSHIP
HOSPITAL CITY BEDS(a) INCEPTION TYPE
-------- ------------- -------- ----------------- -------------
KENTUCKY
Parkway Regional Hospital.................. Fulton 70 May, 1992 Owned
Three Rivers Medical Center................ Louisa 90 May, 1993 Owned
Kentucky River Medical Center.............. Jackson 55 August, 1995 Leased
LOUISIANA
Byrd Regional Hospital..................... Leesville 70 October, 1994 Owned
Sabine Medical Center...................... Many 52 October, 1994 Owned
River West Medical Center.................. Plaquemine 80 August, 1996 Leased
MISSISSIPPI
The King's Daughters Hospital.............. Greenville 137 September, 1999 Owned
MISSOURI
Moberly Regional Medical Center............ Moberly 114 November, 1993 Owned
Northeastern Regional Medical Center....... Kirksville 164 December, 2000 Leased
NEW MEXICO
Mimbres Memorial Hospital.................. Deming 49 March, 1996 Owned
Eastern New Mexico Medical Center.......... Roswell 162 April, 1998 Owned
Northeastern Regional Hospital............. Las Vegas 54 April, 2000 Leased
NORTH CAROLINA
Martin General Hospital.................... Williamston 49 November, 1998 Leased
PENNSYLVANIA
Berwick Hospital........................... Berwick 144 March, 1999 Owned
Brandywine Hospital........................ Coatesville 168 June, 2001 Owned
Jennersville Regional Hospital............. West Grove 59 October, 2001 Owned
SOUTH CAROLINA
Marlboro Park Hospital..................... Bennettsville 109 August, 1996 Leased
Chesterfield General Hospital.............. Cheraw 66 August, 1996 Leased
Springs Memorial Hospital.................. Lancaster 194 November, 1994 Owned
TENNESSEE
Lakeway Regional Hospital.................. Morristown 135 May, 1993 Owned
Scott County Hospital...................... Oneida 99 November, 1989 Leased
Cleveland Community Hospital............... Cleveland 100 October, 1994 Owned
White County Community Hospital............ Sparta 60 October, 1994 Owned
TEXAS
Big Bend Regional Medical Center........... Alpine 40 October, 1999 Owned
Northeast Medical Center................... Bonham 75 August, 1996 Owned
Cleveland Regional Medical Center.......... Cleveland 115 August, 1996 Leased
Highland Medical Center.................... Lubbock 123 September, 1986 Owned
Scenic Mountain Medical Center............. Big Spring 150 October, 1994 Owned
Hill Regional Hospital..................... Hillsboro 92 October, 1994 Owned
Lake Granbury Medical Center............... Granbury 56 January, 1997 Leased
UTAH
Tooele Valley Regional Medical Center...... Tooele 38 October, 2000 Owned (c)
VIRGINIA
Greensville Memorial Hospital.............. Emporia 114 March, 1999 Leased
Russell County Medical Center.............. Lebanon 78 September, 1986 Owned
Southampton Memorial Hospital.............. Franklin 105 March, 2000 Owned
WYOMING
Evanston Regional Hospital................. Evanston 42 November, 1999 Owned
--------------------------
(a) Licensed beds are the number of beds for which the appropriate state agency
licenses a facility regardless of whether the beds are actually available
for patient use.
(b) We operate this hospital under a lease-leaseback and operating agreement. We
recognize all revenue and expenses associated with this hospital on our
financial statements.
(c) We acquired this hospital as of October 1, 2000. Prior to the acquisition,
we operated this hospital under a management agreement and did not include
the operating statistics of this hospital in our consolidated statistics.
During the term of the management agreement, our fee was equal to the excess
of the hospital's net revenue over expenses.
50
SOURCES OF REVENUE
We receive payment for healthcare services provided by our hospitals from:
- the federal Medicare program;
- state Medicaid programs;
- healthcare insurance carriers, health maintenance organizations, or
"HMOs," preferred provider organizations, or "PPOs," and other managed
care programs; and
- patients directly.
The following table presents the approximate percentages of net revenue
received from private, Medicare, Medicaid and other sources for the periods
indicated. The data for the years presented are not strictly comparable due to
the significant effect that hospital acquisitions and dispositions have had on
these statistics.
SIX MONTHS
ENDED
NET REVENUE BY PAYOR SOURCE 1998 1999 2000 JUNE 30, 2001
--------------------------- -------- -------- -------- -------------
Medicare................................... 39.0% 36.2% 34.2% 34.1%
Medicaid................................... 10.2% 11.9% 11.8% 11.6%
Managed Care (HMO/PPO)..................... 14.0% 14.3% 15.9% 16.4%
Private and Other.......................... 36.8% 37.6% 38.1% 37.9%
------ ------ ------ ------
Total.................................. 100.0% 100.0% 100.0% 100.0%
====== ====== ====== ======
As shown above, we receive a substantial portion of our revenue from the
Medicare and Medicaid programs.
Medicare is a federal program that provides medical insurance benefits to
persons age 65 and over, some disabled persons, and persons with end-stage renal
disease. Medicaid is a federal-state funded program, administered by the states,
which provides medical benefits to individuals who are unable to afford
healthcare. All of our hospitals are certified as providers of Medicare and
Medicaid services. Amounts received under the Medicare and Medicaid programs are
generally significantly less than the hospital's customary charges for the
services provided. In recent years, changes made to the Medicare and Medicaid
programs have further reduced payment to hospitals. We expect this trend to
continue. Since an important portion of our revenues comes from patients under
Medicare and Medicaid programs, our ability to operate our business successfully
in the future will depend in large measure on our ability to adapt to changes in
these programs.
In addition to government programs, we are paid by private payors, which
include insurance companies, HMOs, PPOs, other managed care companies, and
employers, as well as by patients directly. Patients are generally not
responsible for any difference between customary hospital charges and amounts
paid for hospital services by Medicare and Medicaid programs, insurance
companies, HMOs, PPOs, and other managed care companies, but are responsible for
services not covered by these programs or plans, as well as for deductibles and
co-insurance obligations of their coverage. The amount of these deductibles and
co-insurance obligations has increased in recent years. Collection of amounts
due from individuals is typically more difficult than collection of amounts due
from government or business payors. To further reduce their healthcare costs, an
increasing number of insurance companies, HMOs, PPOs, and other managed care
companies are negotiating discounted fee structures or fixed amounts for
hospital services performed, rather than paying healthcare providers the amounts
billed. We negotiate discounts with managed care companies which are typically
smaller than discounts under governmental programs. If an increased number of
insurance companies, HMOs, PPOs, and other managed care companies
51
succeed in negotiating discounted fee structures or fixed amounts, our results
of operations may be negatively affected. For more information on the payment
programs on which our revenues depend, see "--Payment."
Hospital revenues depend upon inpatient occupancy levels, the volume of
outpatient procedures, and the charges or negotiated payment rates for hospital
services provided. Charges and payment rates for routine inpatient services vary
significantly depending on the type of service performed and the geographic
location of the hospital. In recent years, we have experienced a significant
increase in revenue received from outpatient services. We attribute this
increase to:
- advances in technology, which have permitted us to provide more services
on an outpatient basis; and
- pressure from Medicare or Medicaid programs, insurance companies, and
managed care plans to reduce hospital stays and to reduce costs by having
services provided on an outpatient rather than on an inpatient basis.
SUPPLY CONTRACTS
During fiscal 1997, we entered into an affiliation agreement with Broadlane,
a group purchasing organization in which Tenet Healthcare Corporation has a
majority ownership interest. Our affiliation with Broadlane combines the
purchasing power of our hospitals with the purchasing power of more than 600
other healthcare providers affiliated with the program. This increased
purchasing power has resulted in reductions in the prices paid by our hospitals
for medical supplies and equipment and pharmaceuticals. We also use Broadlane's
internet purchasing portal.
INDUSTRY OVERVIEW
The Centers for Medicare and Medicaid Services estimated that in 2000, total
U.S. healthcare expenditures grew by 8.3% to $1.3 trillion. It projects total
U.S. healthcare spending to grow by 8.6% in 2001 and by 7.1% annually from 2002
through 2010. By these estimates, healthcare expenditures will account for
approximately $2.6 trillion, or 15.9% of the total U.S. gross domestic product,
by 2010.
Hospital services, the market in which we operate, is the largest single
category of healthcare at 32.1% of total healthcare spending in 2000, or
$415.8 billion. The Centers for Medicare and Medicaid Services projects the
hospital services category to grow by 5.7% per year through 2010. It expects
growth in hospital healthcare spending to continue due to the aging of the U.S.
population and consumer demand for expanded medical services. As hospitals
remain the primary setting for healthcare delivery, it expects hospital services
to remain the largest category of healthcare spending.
U.S. HOSPITAL INDUSTRY. The U.S. hospital industry is broadly defined to
include acute care, rehabilitation, and psychiatric facilities that are either
public (government owned and operated), not-for-profit private (religious or
secular), or for-profit institutions (investor owned). According to the American
Hospital Association, there are approximately 5,000 inpatient hospitals in the
U.S. which are not-for-profit owned, investor owned, or state or local
government owned. Of these hospitals, 44%, or approximately 2,200, are located
in non-urban communities. These facilities offer a broad range of healthcare
services, including internal medicine, general surgery, cardiology, oncology,
neurosurgery, orthopedics, OB/GYN, and emergency services. In addition,
hospitals also offer other ancillary services including psychiatric, diagnostic,
rehabilitation, home health, and outpatient surgery services.
52
URBAN VS. NON-URBAN HOSPITALS
According to the U.S. Census Bureau, 25% of the U.S. population lives in
communities designated as non-urban. In these non-urban communities, hospitals
are typically the primary source of healthcare and, in many cases, a single
hospital is the only provider of general healthcare services. According to the
American Hospital Association, in 1998, there were approximately 2,200 non-urban
hospitals in the U.S. We believe that a majority of these hospitals are owned by
not-for-profit or governmental entities.
FACTORS AFFECTING PERFORMANCE. Among the many factors that can influence a
hospital's financial and operating performance are:
- facility size and location;
- facility ownership structure (i.e., tax-exempt or investor owned);
- a facility's ability to participate in group purchasing organizations; and
- facility payor mix.
We believe that non-urban hospitals are generally able to obtain higher
operating margins than urban hospitals. Factors contributing to a non-urban
hospital's margin advantage include fewer patients with complex medical
problems, a lower cost structure, limited competition, and favorable Medicare
payment provisions. Patients needing the most complex care are more often served
by the larger and/or more specialized urban hospitals. A non-urban hospital's
lower cost structure results from its geographic location as well as the lower
number of patients treated who need the most highly advanced services.
Additionally, because non-urban hospitals are generally sole providers or one of
a small group of providers in their markets, there is limited competition. This
generally results in more favorable pricing with commercial payors. Medicare has
special payment provisions for "sole community hospitals." Under present law,
hospitals that qualify for this designation receive higher reimbursement rates
and are guaranteed capital reimbursement equal to 90% of capital costs. As of
June 30, 2001, 15 of our hospitals were "sole community hospitals." In addition,
we believe that non-urban communities are generally characterized by a high
level of patient and physician loyalty that fosters cooperative relationships
among the local hospitals, physicians, employees, and patients.
The type of third party responsible for the payment of services performed by
healthcare service providers is also an important factor which affects hospital
margins. These providers have increasingly exerted pressure on healthcare
service providers to reduce the cost of care. The most active providers in this
regard have been HMOs, PPOs, and other managed care organizations. The
characteristics of non-urban markets make them less attractive to these managed
care organizations. This is partly because the limited size of non-urban markets
and their diverse, non-national employer bases minimize the ability of managed
care organizations to achieve economies of scale. In 2000, approximately 16% of
our revenues were paid by managed care organizations.
HOSPITAL INDUSTRY TRENDS
DEMOGRAPHIC TRENDS. According to the U.S. Census Bureau, there are
approximately 35 million Americans aged 65 or older in the U.S. today, who
comprise approximately 13% of the total U.S. population. By the year 2030, the
number of elderly is expected to climb to 69 million, or 20% of the total
population. Due to the increasing life expectancy of Americans, the number of
people aged 85 years and older is also expected to increase from 4.3 million to
8.5 million by the year 2030. This increase in life expectancy will increase
demand for healthcare services and, as importantly, the demand for innovative,
more sophisticated means of delivering those services.
53
Hospitals, as the largest category of care in the healthcare market, will be
among the main beneficiaries of this increase in demand. Based on data compiled
for us, the populations of the service areas where our hospitals are located
grew by 10.4% from 1990 to 2000 and are projected to grow by 4.3% from 2000 to
2005. The number of people aged 65 or older in these service areas grew by 15.1%
from 1990 to 2000 and is projected to grow by 4.2% from 2000 to 2005.
CONSOLIDATION. During the late 1980s and early 1990s, there was significant
industry consolidation involving large, investor owned hospital companies
seeking to achieve economies of scale. While consolidation activity in the
hospital industry is continuing, the consolidation is currently primarily taking
place through mergers and acquisitions involving not-for-profit hospital
systems. Reasons for this activity include:
- limited access to capital;
- financial performance issues, including challenges associated with changes
in reimbursement;
- the desire to enhance the local availability of healthcare in the
community;
- the need and ability to recruit primary care physicians and specialists;
and
- the need to achieve general economies of scale and to gain access to
standardized and centralized functions, including favorable supply
agreements.
SHIFTING UTILIZATION TRENDS. Over the past decade, many procedures that had
previously required hospital visits with overnight stays have been performed on
an outpatient basis. This shift has been driven by cost containment efforts led
by private and government payors. The focus on cost containment has coincided
with advancements in medical technology that have allowed patients to be treated
with less invasive procedures that do not require overnight stays. According to
the American Hospital Association, the number of surgeries performed on an
inpatient basis declined from 1995 to 1999 at an average annual rate of 0.4%,
from 9.7 million in 1995 to 9.5 million in 1999. During the same period, the
number of outpatient surgeries increased at an average annual rate of 4.2%, from
13.5 million in 1995 to 15.8 million in 1998. The mix of inpatient as compared
to outpatient surgeries shifted from a ratio of 27.9% inpatient to 72.1%
outpatient in 1995 to a ratio of 39.8% inpatient to 60.2% outpatient in 1999.
These trends have led to a reduction in the average length of stay and, as a
result, inpatient utilization rates. According to the American Hospital
Association, the average length of stay in general hospitals has declined from
6.5 days in 1995 to 5.9 days in 1999.
GOVERNMENT REGULATION
OVERVIEW. The healthcare industry is required to comply with extensive
government regulation at the federal, state, and local levels. Under these
regulations, hospitals must meet requirements to be certified as hospitals and
qualified to participate in government programs, including the Medicare and
Medicaid programs. These requirements relate to the adequacy of medical care,
equipment, personnel, operating policies and procedures, maintenance of adequate
records, hospital use, rate-setting, compliance with building codes, and
environmental protection laws. There are also extensive regulations governing a
hospital's participation in these government programs. If we fail to comply with
applicable laws and regulations, we can be subject to criminal penalties and
civil sanctions, our hospitals can lose their licenses and we could lose our
ability to participate in these government programs. In addition, government
regulations may change. If that happens, we may have to make changes in our
facilities, equipment, personnel, and services so that our hospitals remain
certified as hospitals and qualified to participate in these programs. We
believe
54
that our hospitals are in substantial compliance with current federal, state,
and local regulations and standards.
Hospitals are subject to periodic inspection by federal, state, and local
authorities to determine their compliance with applicable regulations and
requirements necessary for licensing and certification. All of our hospitals are
licensed under appropriate state laws and are qualified to participate in
Medicare and Medicaid programs. In addition, most of our hospitals are
accredited by the Joint Commission on Accreditation of Healthcare Organizations.
This accreditation indicates that a hospital satisfies the applicable health and
administrative standards to participate in Medicare and Medicaid programs.
FRAUD AND ABUSE LAWS. Participation in the Medicare program is heavily
regulated by federal statute and regulation. If a hospital fails substantially
to comply with the requirements for participating in the Medicare program, the
hospital's participation in the Medicare program may be terminated and/or civil
or criminal penalties may be imposed. For example, a hospital may lose its
ability to participate in the Medicare program if it performs any of the
following acts:
- making claims to Medicare for services not provided or misrepresenting
actual services provided in order to obtain higher payments;
- paying money to induce the referral of patients where services are
reimbursable under a federal health program; or
- failing to provide treatment to any individual who comes to a hospital's
emergency room with an "emergency medical condition" or otherwise failing
to properly treat and transfer emergency patients.
The Health Insurance Portability and Accountability Act of 1996 broadened
the scope of the fraud and abuse laws by adding several criminal statutes that
are not related to receipt of payments from a federal healthcare program. The
Accountability Act created civil penalties for conduct, including upcoding and
billing for medically unnecessary goods or services. It established new
enforcement mechanisms to combat fraud and abuse. These include a bounty system,
where a portion of the payments recovered is returned to the government
agencies, as well as a whistleblower program. This law also expanded the
categories of persons that may be excluded from participation in federal
healthcare programs.
Another law regulating the healthcare industry is a section of the Social
Security Act, known as the "anti-kickback" or "fraud and abuse" statute. This
law prohibits some business practices and relationships under Medicare,
Medicaid, and other federal healthcare programs. These practices include the
payment, receipt, offer, or solicitation of money in connection with the
referral of patients covered by a federal or state healthcare program.
Violations of the anti-kickback statute may be punished by criminal and civil
fines, exclusion from federal healthcare programs, and damages up to three times
the total dollar amount involved.
The Office of Inspector General of the Department of Health and Human
Services is authorized to publish regulations outlining activities and business
relationships that would be deemed not to violate the anti-kickback statute.
These regulations are known as "safe harbor" regulations. However, the failure
of a particular activity to comply with the safe harbor regulations does not
mean that the activity violates the anti-kickback statute.
The Office of Inspector General is responsible for identifying fraud and
abuse activities in government programs. In order to fulfill its duties, the
Office of Inspector General performs audits, investigations, and inspections. In
addition, it provides guidance to healthcare providers by
55
identifying types of activities that could violate the anti-kickback statute.
The Office of the Inspector General has identified the following incentive
arrangements as potential violations:
- payment of any incentive by the hospital each time a physician refers a
patient to the hospital;
- use of free or significantly discounted office space or equipment for
physicians in facilities usually located close to the hospital;
- provision of free or significantly discounted billing, nursing, or other
staff services;
- free training for a physician's office staff including management and
laboratory techniques;
- guarantees which provide that if the physician's income fails to reach a
predetermined level, the hospital will pay any portion of the remainder;
- low-interest or interest-free loans, or loans which may be forgiven if a
physician refers patients to the hospital;
- payment of the costs of a physician's travel and expenses for conferences;
- payment of services which require few, if any, substantive duties by the
physician, or payment for services in excess of the fair market value of
the services rendered; or
- purchasing goods or services from physicians at prices in excess of their
fair market value.
We have a variety of financial relationships with physicians who refer
patients to our hospitals. Physicians own interests in a few of our facilities.
Physicians may also own our stock. We also have contracts with physicians
providing for a variety of financial arrangements, including employment
contracts, leases, management agreements, and professional service agreements.
We provide financial incentives to recruit physicians to relocate to communities
served by our hospitals. These incentives include revenue guarantees and, in
some cases, loans. Although we believe that we have structured our arrangements
with physicians in light of the "safe harbor" rules, we cannot assure you that
regulatory authorities will not determine otherwise. If that happens, we would
be subject to criminal and civil penalties and/or exclusion from participating
in Medicare, Medicaid, or other government healthcare programs.
The Social Security Act also includes a provision commonly known as the
"Stark law." This law prohibits physicians from referring Medicare and Medicaid
patients to healthcare entities in which they or any of their immediate family
members have ownership or other financial interests. These types of referrals
are commonly known as "self referrals." Sanctions for violating the Stark law
include civil money penalties, assessments equal to twice the dollar value of
each service, and exclusion from Medicare and Medicaid programs. There are
ownership and compensation arrangement exceptions to the self-referral
prohibition. One exception allows a physician to make a referral to a hospital
if the physician owns an interest in the entire hospital, as opposed to an
ownership interest in a department of the hospital; however, a bill has been
introduced into Congress that would eliminate this exception. Another exception
allows a physician to refer patients to a healthcare entity in which the
physician has an ownership interest if the entity is located in a rural area, as
defined in the statute. There are also exceptions for many of the customary
financial arrangements between physicians and providers, including employment
contracts, leases, and recruitment agreements. In 2001, the federal government
began issuing final regulations which interpret some of the provisions included
in the Stark law. The government invited comment on a number of the regulations
and has not indicated when it will issue the remaining final regulations. We
have structured our financial arrangements with physicians to comply with the
statutory exceptions included in the Stark law. However, when the government
finalizes the regulations, it may interpret certain provisions of this law in a
manner different from the manner with which we
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have interpreted them. We cannot predict the final form that these regulations
will take and the effect these regulations will have on us, including any
possible restructuring of our existing relationships with physicians.
Many states in which we operate also have adopted, or are considering
adopting, similar laws. Some of these state laws apply even if the payment for
care does not come from the government. These statutes typically provide
criminal and civil penalties as well as loss of licensure. While there is little
precedent for the interpretation or enforcement of these state laws, we have
attempted to structure our financial relationships with physicians and others in
light of these laws. However, if we are found to have violated these state laws,
it could result in the imposition of criminal and civil penalties as well as
possible licensure revocation.
CORPORATE PRACTICE OF MEDICINE FEE-SPLITTING. Some states have laws that
prohibit unlicensed persons or business entities, including corporations, from
employing physicians. Some states also have adopted laws that prohibit direct or
indirect payments or fee-splitting arrangements between physicians and
unlicensed persons or business entities. Possible sanctions for violations of
these restrictions include loss of a physician's license, civil and criminal
penalties and rescission of business arrangements. These laws vary from state to
state, are often vague and have seldom been interpreted by the courts or
regulatory agencies. We structure our arrangements with healthcare providers to
comply with the relevant state law. However, we cannot assure you that
governmental officials charged with responsibility for enforcing these laws will
not assert that we, or transactions in which we are involved, are in violation
of these laws. These laws may also be interpreted by the courts in a manner
inconsistent with our interpretations.
EMERGENCY MEDICAL TREATMENT AND ACTIVE LABOR ACT. The Emergency Medical
Treatment and Active Labor Act imposes requirements as to the care that must be
provided to anyone who comes to facilities providing emergency medical services
seeking care before they may be transferred to another facility or otherwise
denied care. Regulations have recently been adopted that expand the areas within
a facility and in off-campus locations that must provide emergency medical
screening examinations and treatment. Sanctions for failing to fulfill these
requirements include exclusion from participation in Medicare and Medicaid
programs and civil money penalties. In addition, the law creates private civil
remedies which enable an individual who suffers personal harm as a direct result
of a violation of the law to sue the offending hospital for damages and
equitable relief. A medical facility that suffers a financial loss as a direct
result of another participating hospital's violation of the law also has a
similar right. Although we believe that our practices are in compliance with the
law, we can give no assurance that governmental officials responsible for
enforcing the law or others will not assert we are in violation of these laws.
FALSE CLAIMS ACT. Another trend in healthcare litigation is the use of the
False Claims Act. This law has been used not only by the U.S. government, but
also by individuals who bring an action on behalf of the government under the
law's "qui tam" or "whistleblower" provisions. When a private party brings a qui
tam action under the False Claims Act, the defendant will generally not be aware
of the lawsuit until the government makes a determination whether it will
intervene and take a lead in the litigation.
Civil liability under the False Claims Act can be up to three times the
actual damages sustained by the government plus civil penalties for each
separate false claim. There are many potential bases for liability under the
False Claims Act. Although liability under the False Claims Act arises when an
entity knowingly submits a false claim for reimbursement to the federal
government, the False Claims Act defines the term "knowingly" broadly. Thus,
although simple negligence generally will not give rise to liability under the
False Claims Act, submitting a claim with reckless disregard to its truth or
falsity can constitute "knowingly" submitting a claim. See "--Legal Proceedings"
for a description of pending, unsealed False Claims Act litigation.
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HEALTHCARE REFORM. The healthcare industry continues to attract much
legislative interest and public attention. In recent years, an increasing number
of legislative proposals have been introduced or proposed in Congress and in
some state legislatures that would effect major changes in the healthcare
system. Proposals that have been considered include cost controls on hospitals,
insurance market reforms to increase the availability of group health insurance
to small businesses, and mandatory health insurance coverage for employees. The
costs of implementing some of these proposals would be financed, in part, by
reductions in payments to healthcare providers under Medicare, Medicaid, and
other government programs. We cannot predict the course of future healthcare
legislation or other changes in the administration or interpretation of
governmental healthcare programs and the effect that any legislation,
interpretation, or change may have on us.
CONVERSION LEGISLATION. Many states, including some where we have hospitals
and others where we may acquire hospitals, have adopted legislation regarding
the sale or other disposition of hospitals operated by not-for-profit entities.
In other states that do not have specific legislation, the attorneys general
have demonstrated an interest in these transactions under their general
obligations to protect charitable assets from waste. These legislative and
administrative efforts primarily focus on the appropriate valuation of the
assets divested and the use of the proceeds of the sale by the not-for-profit
seller. While these review and, in some instances, approval processes can add
additional time to the closing of a hospital acquisition, we have not had any
significant difficulties or delays in completing the process. There can be no
assurance, however, that future actions on the state level will not seriously
delay or even prevent our ability to acquire hospitals. If these activities are
widespread, they could have a negative impact on our ability to acquire
additional hospitals. See "--Our Business Strategy."
CERTIFICATES OF NEED. The construction of new facilities, the acquisition
of existing facilities and the addition of new services at our facilities may be
subject to state laws that require prior approval by state regulatory agencies.
These certificate of need laws generally require that a state agency determine
the public need and give approval prior to the construction or acquisition of
facilities or the addition of new services. We operate hospitals in 11 states
that have adopted certificate of need laws. If we fail to obtain necessary state
approval, we will not be able to expand our facilities, complete acquisitions or
add new services in these states. Violation of these state laws may result in
the imposition of civil sanctions or the revocation of a hospital's licenses.
PRIVACY AND SECURITY REQUIREMENTS OF THE HEALTH INSURANCE PORTABILITY AND
ACCOUNTABILITY ACT OF 1996. The Administrative Simplification Provisions of the
Health Insurance Portability and Accountability Act of 1996 require the use of
uniform electronic data transmission standards for healthcare claims and payment
transactions submitted or received electronically. These provisions are intended
to encourage electronic commerce in the healthcare industry. On August 17, 2000,
the Centers for Medicare and Medicaid Services published final regulations
establishing electronic data transmission standards that all healthcare
providers must use when submitting or receiving certain healthcare transactions
electronically. Compliance with these regulations is required by October 16,
2002. We cannot predict the impact that final regulations, when fully
implemented, will have on us. We have established a sub-committee of our
compliance committee to address our compliance with these regulations.
The Administrative Simplification Provisions also require the Centers for
Medicare and Medicaid Services to adopt standards to protect the security and
privacy of health-related information. The Centers for Medicare and Medicaid
Services proposed regulations containing security standards on August 12, 1998.
These proposed security regulations have not been finalized, but as proposed,
would require healthcare providers to implement organizational and technical
practices to protect the security of electronically maintained or transmitted
health-related information. In addition, the Centers for Medicare and Medicaid
Services released final regulations containing privacy standards
58
in December 2000. These privacy regulations became effective April 14, 2001 but
compliance with these regulations is not required until April 2003. Therefore,
these privacy regulations could be further amended prior to the compliance date.
However, as currently drafted, the privacy regulations will extensively regulate
the use and disclosure of individually identifiable health-related information.
The security regulations, as proposed, and the privacy regulations could impose
significant costs on our facilities in order to comply with these standards. We
cannot predict the final form that these regulations will take or the impact
that final regulations, when fully implemented, will have on us. If we violate
these regulations, we would be subject to monetary fines and penalties, criminal
sanctions and civil causes of action.
PAYMENT
MEDICARE. Under the Medicare program, we are paid for inpatient and
outpatient services performed by our hospitals.
Payments for inpatient acute services are generally made pursuant to a
prospective payment system, commonly known as "PPS." Under a PPS, our hospitals
are paid a prospectively determined amount for each hospital discharge based on
the patient's diagnosis. Specifically, each discharge is assigned to a
diagnosis-related group, commonly known as a "DRG," based upon the patient's
condition and treatment during the relevant inpatient stay. Each DRG is assigned
a payment rate that is prospectively set using national average costs per case
for treating a patient for a particular diagnosis. DRG payments do not consider
the actual costs incurred by a hospital in providing a particular inpatient
service. However, DRG payments are adjusted by a predetermined geographic
adjustment factor assigned to the geographic area in which the hospital is
located. While a hospital generally does not receive payment in addition to a
DRG payment, hospitals may qualify for an "outlier" payment when the relevant
patient's treatment costs are extraordinarily high and exceed a specified
threshold. In addition, hospitals may qualify for Medicare disproportionate
share payments when their percentage of low income patients exceeds specified
thresholds. Under the Benefits Improvement and Protection Act of 2000, a
majority of our hospitals qualify to receive Medicare disproportionate share
payments.
The DRG rates are adjusted by an update factor each federal fiscal year,
which begins on October 1. The index used to adjust the DRG rates, known as the
"market basket index," gives consideration to the inflation experienced by
hospitals in purchasing goods and services. For several years, however, the
percentage increases in the DRG payments have been lower than the projected
increases in the costs of goods and services purchased by hospitals. DRG rate
increases were 1.1% for federal fiscal year 1995, 1.5% for federal fiscal year
1996, 2.0% for federal fiscal year 1997, 0.0% for federal fiscal year 1998, and
0.5% for federal fiscal year 1999. The DRG rate was increased by market basket
minus 1.8% for federal fiscal year 2000. Under the Benefits Improvement and
Protection Act of 2000, the DRG rate increased by the amount of the full market
basket for federal fiscal year 2001 and by an amount equal to the market basket
minus 0.55% for federal fiscal years 2002 and 2003. Future legislation may
decrease the rate of increase for DRG payments, but we are not able to predict
the amount of any reduction or the effect that any reduction will have on us.
Outpatient services have traditionally been paid at the lower of customary
charges or on a reasonable cost basis. The Balanced Budget Act of 1997
established a PPS for outpatient hospital services that commenced on August 1,
2000. The Balanced Budget Refinement Act of 1999 eliminated the anticipated
average reduction of 5.7% for various Medicare outpatient business under the
Balanced Budget Act of 1997. Under the Balanced Budget Refinement Act of 1999,
non-urban hospitals with 100 beds or less are held harmless under Medicare
outpatient PPS through December 31, 2003. Of our 54 hospitals, 35 qualify for
this relief. Losses under Medicare outpatient PPS of non-urban hospitals with
greater than 100 beds and urban hospitals will be mitigated
59
through a corridor reimbursement approach, where a percentage of losses will be
reimbursed through December 31, 2003. Substantially all of our remaining
hospitals qualify for relief under this provision.
Skilled nursing facilities have historically been paid by Medicare on the
basis of actual costs, subject to limitations. The Balanced Budget Act of 1997
established a PPS for Medicare skilled nursing facilities. The new PPS commenced
in July 1998, and will be fully implemented in June 2002. We have experienced
reductions in payments for our skilled nursing services. However, the Benefits
Improvement and Protection Act of 2000 requires the Centers for Medicare and
Medicaid Services to increase the current reimbursement amount for the skilled
nursing facility PPS by approximately 8.0% for services furnished between
April 1, 2001 and September 30, 2002. Additionally, the Benefits Improvement and
Protection Act of 2000 increases the skilled nursing facility PPS to the full
market basket for federal fiscal year 2001 and market basket minus 0.5% for
federal fiscal years 2002 and 2003.
The Balanced Budget Act of 1997 also required the Department of Health and
Human Services to establish a PPS for home health services. The Balanced Budget
Act of 1997 put in place the interim payment system, commonly known as "IPS,"
until the home health PPS could be implemented. As of October 1, 2000, the home
health PPS replaced IPS. We have experienced reductions in payments for our home
health services and a decline in home health visits due to a reduction in
benefits by reason of the Balanced Budget Act of 1997. However, the Balanced
Budget Refinement Act of 1999 delayed until one year following implementation of
the PPS a 15.0% payment reduction that would have otherwise applied effective
October 1, 2000. The Benefits Improvement and Protection Act of 2000 further
delays the one-time 15.0% payment reduction until October 1, 2002. Additionally,
the Benefits Improvement and Protection Act of 2000 increases the home health
agency PPS annual update to 2.2% for services furnished between April 1, 2001
and September 30, 2001, and for a two year period that began on April 1, 2001,
increases Medicare payments by 10.0% for home health services furnished in rural
areas.
The Balanced Budget Act of 1997 mandated a PPS for inpatient rehabilitation
hospital services. A PPS system for Medicare inpatient rehabilitation services
is scheduled for a two year phase-in beginning January 1, 2002. Prior to the
implementation of this prospective payment system, payments to exempt
rehabilitation hospitals and units are based upon reasonable cost, subject to a
cost per discharge target. These limits are updated annually by a market basket
index.
MEDICAID. Most state Medicaid payments are made under a PPS or under
programs which negotiate payment levels with individual hospitals. Medicaid is
currently funded jointly by state and federal governments. The federal
government and many states are currently considering significantly reducing
Medicaid funding, while at the same time expanding Medicaid benefits. The Bush
administration has announced a proposal to reduce the upper payment limits of
Medicaid reimbursements made to the states. This could adversely affect future
levels of Medicaid payments received by our hospitals.
ANNUAL COST REPORTS. Hospitals participating in the Medicare and some
Medicaid programs, whether paid on a reasonable cost basis or under a PPS, are
required to meet certain financial reporting requirements. Federal and, where
applicable, state regulations require submission of annual cost reports
identifying medical costs and expenses associated with the services provided by
each hospital to Medicare beneficiaries and Medicaid recipients.
Annual cost reports required under the Medicare and some Medicaid programs
are subject to routine governmental audits. These audits may result in
adjustments to the amounts ultimately determined to be due to us under these
reimbursement programs. Finalization of these audits often takes several years.
Providers can appeal any final determination made in connection with an audit.
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COMMERCIAL INSURANCE. Our hospitals provide services to individuals covered
by private healthcare insurance. Private insurance carriers pay our hospitals,
or in some cases reimburse their policyholders, based upon the hospital's
established charges and the coverage provided in the insurance policy.
Commercial insurers are trying to limit the costs of hospital services by
negotiating discounts, including PPS, which would reduce payments by commercial
insurers to our hospitals. Reductions in payments for services provided by our
hospitals to individuals covered by commercial insurers could adversely affect
us.
COMPETITION
The hospital industry is highly competitive. An important part of our
business strategy is to acquire hospitals each year in non-urban markets.
However, not-for-profit hospital systems and other for-profit hospital companies
generally attempt to acquire the same type of hospitals as we do. In addition,
some hospitals are sold through an auction process, which may result in higher
purchase prices than we believe are reasonable.
In addition to the competition we face for acquisitions and physicians, we
must also compete with other hospitals and healthcare providers for patients.
The competition among hospitals and other healthcare providers for patients has
intensified in recent years. Our hospitals are located in non-urban service
areas. Most of our hospitals face no direct competition because there are no
other hospitals in their primary service areas. However, these hospitals do face
competition from hospitals outside of their primary service area, including
hospitals in urban areas that provide more complex services. These facilities
are generally located in excess of 25 miles from our facilities. Patients in our
primary service areas may travel to these other hospitals for a variety of
reasons, including the need for services we do not offer or physician referrals.
Patients who are required to seek services from these other hospitals may
subsequently shift their preferences to those hospitals for services we do
provide.
Some of our hospitals operate in primary service areas where they compete
with one other hospital. One of our hospitals competes with more than one other
hospital in its primary service area. Some of these competing hospitals use
equipment and services more specialized than those available at our hospitals.
In addition, some of the hospitals that compete with us are owned by
tax-supported governmental agencies or not-for-profit entities supported by
endowments and charitable contributions. These hospitals can make capital
expenditures without paying sales, property and income taxes. We also face
competition from other specialized care providers, including outpatient surgery,
orthopedic, oncology, and diagnostic centers.
The number and quality of the physicians on a hospital's staff is an
important factor in a hospital's competitive advantage. Physicians decide
whether a patient is admitted to the hospital and the procedures to be
performed. Admitting physicians may be on the medical staffs of other hospitals
in addition to those of our hospitals. We attempt to attract our physicians'
patients to our hospitals by offering quality services and facilities,
convenient locations, and state-of-the-art equipment.
COMPLIANCE PROGRAM
OUR COMPLIANCE PROGRAM. In early 1997, under our new management and
leadership, we voluntarily adopted a company-wide compliance program. The
program included the appointment of a compliance officer and committee, adoption
of an ethics and business conduct code, employee education and training,
implementation of an internal system for reporting concerns, auditing and
monitoring programs, and a means for enforcing the program's policies.
We take an operations team approach to compliance and utilize corporate
experts for program design efforts and facility leaders for employee-level
implementation. Compliance is another area
61
that demonstrates our utilization of standardization and centralization
techniques and initiatives which yield efficiencies and consistency throughout
our facilities. We recognize that our compliance with applicable laws and
regulations depends on individual employee actions as well as company
operations. Our approach focuses on integrating compliance responsibilities with
operational function. This approach is intended to reinforce our company-wide
commitment to operate strictly in accordance with the laws and regulations that
govern our business.
Since its initial adoption, the compliance program continues to be expanded
and developed to meet the industry's expectations and our needs. Specific
written policies, procedures, training and educational materials and programs,
as well as auditing and monitoring activities, have been prepared and
implemented to address the functional and operational aspects of our business.
Included within these functional areas are materials and activities for business
sub-units, including laboratory, radiology, pharmacy, emergency, surgery,
observation, home health, skilled nursing, and clinics. Specific areas
identified through regulatory interpretation and enforcement activities have
also been addressed in our program. Claims preparation and submission, including
coding, billing, and cost reports, comprise the bulk of these areas. Financial
arrangements with physicians and other referral sources, including anti-kickback
and Stark laws, emergency department treatment and transfer requirements, and
other patient disposition issues are also the focus of policy and training,
standardized documentation requirements, and review and audit.
INPATIENT CODING COMPLIANCE ISSUE. In August 1997, during a routine
internal audit at one of our facilities, we discovered inaccuracies in the DRG
coding for some of our inpatient medical records. At that time, this was the
primary auditing activity for our compliance program. These inaccuracies
involved inpatient coding practices that had been put in place prior to the time
we acquired our operating company in 1996.
Because of the concerns raised by the internal audit, we performed an
internal review of historical inpatient coding practices. At the completion of
this review in December 1997, we voluntarily disclosed the coding problems to
the Office of Inspector General of the U.S. Department of Health and Human
Services. After discussions with the Inspector General, we agreed to have an
independent consultant audit the coding for eight specific DRGs. This audit
ultimately involved a review by the consultant of approximately 1,500 patient
files. The audit procedures we followed generated a statistically valid estimate
of the dollar amounts related to coding errors for these DRGs at 36 of our
hospitals for the period 1993 to 1997.
The results of this audit were reviewed by the Inspector General and the
Department of Justice, who also conducted their own investigation. We cooperated
fully with their investigation.
We have entered into a settlement agreement with these federal government
agencies and the applicable state Medicaid programs. Pursuant to the settlement
agreement, we paid approximately $31.4 million in May 2000 and were released
from all civil claims relating to the coding of the eight specific DRGs for the
hospitals and time periods covered in the audit. We funded this payment from our
acquisition loan facility. During 1998 and 1999, we established a liability in
our financial statements for this amount. We have also agreed with the Inspector
General to continue our existing voluntary compliance program under a corporate
compliance agreement and to adopt various additional compliance measures for a
period of three years. These additional compliance measures include making
various reports to the federal government and having our actions pursuant to the
compliance agreement reviewed annually by a third party.
The compliance measures and reporting and auditing requirements contained in
the compliance agreement include:
- continuing the duties and activities of our corporate compliance officer,
corporate compliance work group, and facility compliance chairs and
committees;
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- maintaining our written ethics and conduct policy, which sets out our
commitment to full compliance with all statutes, regulations, and
guidelines applicable to federal healthcare programs;
- maintaining our written policies and procedures addressing the operation
of our compliance program, including proper coding for inpatient hospital
stays;
- continuing our general training on the ethics and conduct policy and
adding training about our compliance program and the compliance agreement;
- continuing our specific training for the appropriate personnel on billing
and coding issues;
- continuing independent third party periodic audits of our facilities'
inpatient DRG coding;
- having an independent third party perform an annual review of our
compliance with the compliance agreement;
- continuing our confidential disclosure program and "ethics hotline" to
enable employees or others to disclose issues or questions regarding
possible inappropriate policies or behavior;
- enhancing our screening program to ensure that we do not hire or engage
employees or contractors who are ineligible persons for federal healthcare
programs;
- reporting any material deficiency which resulted in an overpayment to us
by a federal healthcare program; and
- submitting annual reports to the Inspector General which describe in
detail the operations of our corporate compliance program for the past
year.
Our substantial adherence to the terms and conditions of the compliance
agreement will constitute an element of our eligibility to participate in the
federal healthcare programs. Consequently, material, uncorrected violations of
the compliance agreement could lead to suspension or disbarment from these
federal programs. In addition, we will be subject to possible civil penalties
for a failure to substantially comply with the terms of the compliance
agreement, including stipulated penalties ranging between $1,000 to $2,500 per
day. We will also be subject to a stipulated penalty of $25,000 per day,
following notice and cure periods, for any deliberate and/or flagrant breach of
the material provisions of the compliance agreement.
EMPLOYEES
At June 30, 2001, we employed 12,176 full time employees and 5,531 part-time
employees. Of these employees, 807 are union members. We believe that our labor
relations are good.
PROFESSIONAL LIABILITY
As part of our business of owning and operating hospitals, we are subject to
legal actions alleging liability on our part. To cover claims arising out of the
operations of hospitals, we generally maintain professional malpractice
liability insurance and general liability insurance on a claims made basis in
amounts and with deductibles that we believe to be sufficient for our
operations. We also maintain umbrella liability coverage covering claims which,
due to their nature or amount, are not covered by our insurance policies. We
cannot assure you that professional liability insurance will cover all claims
against us or continue to be available at reasonable costs for us to maintain
adequate levels of insurance.
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LEGAL PROCEEDINGS
We have entered into a settlement agreement with the Inspector General, the
Department of Justice, and the applicable state Medicaid programs pursuant to
which we paid approximately $31.8 million in exchange for a release of civil
claims associated with possible inaccurate inpatient coding for the period 1993
to 1997. For a description of the terms of the settlement agreement as well as
the events giving rise to the settlement agreement, see "--Compliance Program"
and "Risk Factors--If we fail to comply with the material terms of our corporate
compliance agreement, we could be excluded from government healthcare programs."
In May 1999, we were served with a complaint in U.S. EX REL. BLEDSOE V.
COMMUNITY HEALTH SYSTEMS, INC., now pending in the Middle District of Tennessee,
Case No. 2-00-0083. This qui tam action seeks treble damages and penalties under
the False Claims Act against us. The Department of Justice did not intervene in
this action. The allegations in the amended complaint are extremely general, but
involve Medicare billing at our White County Community Hospital in Sparta,
Tennessee. No discovery has occurred in this action. Based on our review of the
complaint, we do not believe that this lawsuit is meritorious and we intend to
vigorously defend ourselves against this action. We have filed a motion to
dismiss this case, which is still pending. Because of the uncertain nature of
litigation, we cannot predict the outcome of this matter. The relator in this
case has filed a motion seeking from the United States government a portion of
the settlement proceeds from our May 2000 settlement with the U.S. Department of
Justice, the Office of the Inspector General, and applicable state Medicaid
programs. The government is vigorously opposing this motion. Should the relator
prevail on this motion, any monies would come from the United States and not us,
and at least a portion of the relator's lawsuit would likely be dismissed. By
order entered on September 19, 2001, the U.S. District Court granted our motion
for judgment on the pleadings and dismissed the case, with prejudice.
We have also received various inquiries or subpoenas from state regulators,
fiscal intermediaries, and the Department of Justice regarding various Medicare
and Medicaid issues. In addition, we are subject to other claims and lawsuits
arising in the ordinary course of our business. Plaintiffs in these lawsuits
generally request punitive or other damages that by state law may not be able to
be covered by insurance. We are not aware of any pending or threatened
litigation which we believe would have a material adverse impact on us.
ENVIRONMENTAL MATTERS
We are subject to various federal, state, and local laws and regulations
governing the use, discharge, and disposal of hazardous materials, including
medical waste products. Compliance with these laws and regulations is not
expected to have a material adverse effect on us. It is possible, however, that
environmental issues may arise in the future which we cannot now predict.
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MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The following sets forth information regarding our executive officers and
directors as of October 1, 2001. Unless otherwise indicated, each of our
executive officers holds an identical position with CHS/Community Health
Systems, Inc., our wholly owned subsidiary:
NAME AGE POSITION
---- -------- ------------------------------------------
Wayne T. Smith............................ 55 Chairman of the Board, President and Chief
Executive Officer (Class III)
W. Larry Cash............................. 52 Executive Vice President, Chief Financial
Officer and Director (Class I)
David L. Miller........................... 53 Senior Vice President--Group Operations
Gary D. Newsome........................... 43 Senior Vice President--Group Operations
Michael T. Portacci....................... 43 Senior Vice President--Group Operations
John A. Fromhold.......................... 48 Vice President--Group Operations
Martin G. Schweinhart..................... 47 Senior Vice President--Operations
T. Mark Buford............................ 48 Vice President and Corporate Controller
Rachel A. Seifert......................... 42 Senior Vice President, Secretary and
General Counsel
Sheila P. Burke........................... 50 Director (Class III)
Robert J. Dole............................ 78 Director (Class I)
J. Anthony Forstmann...................... 63 Director (Class I)
Theodore J. Forstmann..................... 61 Director (Class III)
Dale F. Frey.............................. 69 Director (Class II)
Sandra J. Horbach......................... 41 Director (Class II)
Harvey Klein, M.D......................... 64 Director (Class I)
Thomas H. Lister.......................... 37 Director (Class III)
Michael A. Miles.......................... 62 Director (Class II)
WAYNE T. SMITH is the Chairman of the Board, President and Chief Executive
Officer. Mr. Smith joined us in January 1997 as President. In April 1997 we also
named him our Chief Executive Officer and a member of the Board of Directors. In
February 2001, he was elected Chairman of our Board of Directors. Prior to
joining us, Mr. Smith spent 23 years at Humana Inc., most recently as President
and Chief Operating Officer, and as a director, from 1993 to mid-1996. He is
also a director of Almost Family and Praxair, Inc.
W. LARRY CASH is the Executive Vice President, Chief Financial Officer and a
Director. Mr. Cash joined us in September 1997 as Executive Vice President and
Chief Financial Officer. He was elected a director in May 2001. Prior to joining
Community Health Systems, he served as Vice President and Group Chief Financial
Officer of Columbia/HCA Healthcare Corporation from September 1996 to
August 1997. Prior to Columbia/HCA, Mr. Cash spent 23 years at Humana Inc., most
recently as Senior Vice President of Finance and Operations from 1993 to 1996.
DAVID L. MILLER is a Senior Vice President--Group Operations. Mr. Miller
joined us in November 1997 as a Group Vice President, managing hospitals in
Alabama, Florida, North Carolina, South Carolina, and Virginia. Prior to joining
us, he served as a Divisional Vice President for Health Management
Associates, Inc. from January 1996 to October 1997. From July 1994 to December
1995, Mr. Miller was the Chief Executive Officer of the Lake Norman Regional
Medical Center in Mooresville, North Carolina, which is owned by Health
Management Associates, Inc.
GARY D. NEWSOME is a Senior Vice President--Group Operations. Mr. Newsome
joined us in February 1998 as Group Vice President, managing hospitals in
Kentucky, Mississippi, Wyoming, Pennsylvania, Tennessee, and Utah. Prior to
joining us, he was a Divisional Vice President of Health Management
Associates, Inc. in Midwest City, Oklahoma from January 1996 to February 1998.
From January 1995 to January 1996, Mr. Newsome served as Assistant Vice
President/Operations and Group Operations Vice President responsible for
facilities of Health Management Associates, Inc. in Oklahoma, Arkansas,
Kentucky, and West Virginia.
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MICHAEL T. PORTACCI is a Senior Vice President--Group Operations.
Mr. Portacci joined us in 1987 as a hospital administrator and became a Group
Director in 1991. In 1994, he became Group Vice President, managing facilities
in Arizona, California, Illinois, Missouri, New Mexico, and Texas.
JOHN A. FROMHOLD is a Vice President--Group Operations. Mr. Fromhold joined
us in June 1998 as a Group Vice President, managing hospitals in Arkansas,
Florida, Georgia, Louisiana, and Texas. Prior to joining us, he served as Chief
Executive Officer of Columbia Medical Center of Arlington, Texas from 1995 to
1998.
MARTIN G. SCHWEINHART is Senior Vice President--Operations. Mr. Schweinhart
joined us in June 1997 and has served as the Vice President Operations. From
1994 to 1997 he served as Chief Financial Officer of the Denver and Kentucky
divisional markets of Columbia/HCA Healthcare Corporation. Prior to that time he
spent 18 years with Humana Inc. and Columbia/HCA Healthcare Corporation in
various management capacities.
T. MARK BUFORD is Vice President and Corporate Controller. Mr. Buford has
served as our Corporate Controller since 1986 and as Vice President since 1988.
RACHEL A. SEIFERT is Senior Vice President, Secretary and General Counsel.
Ms. Seifert joined us in January 1998. From 1992 to 1997, she was Associate
General Counsel of Columbia/HCA Healthcare Corporation and became Vice
President-Legal Operations in 1994. Prior to joining Columbia/HCA in 1992, she
was in private practice in Dallas, Texas.
SHEILA P. BURKE has been a director since 1997. She has been the Under
Secretary for American Museums and National Programs at the Smithsonian
Institution since June 2000. Previously, she was Executive Dean of the John F.
Kennedy School of Government, Harvard University from 1996 until June 2000.
Previously in 1996, Ms. Burke was senior advisor to the Dole for President
Campaign. From 1986 until June 1996, Ms. Burke served as the chief of staff to
former Senator Robert Dole and, in that capacity, was actively involved in
writing some of the healthcare legislation in effect today. She is a director of
WellPoint Health Networks Inc. and The Chubb Corporation.
ROBERT J. DOLE has been a director since 1997. He was a U.S. Senator from
1968 to 1996, during which time he served as Senate majority leader, minority
leader and chairman of the Senate Finance Committee. Mr. Dole was also a U.S.
Representative from 1960 to 1968. He has been a special counsel with Verner,
Liipfert, Bernhard, McPherson and Hand since 1997. He is also a director of TB
Woods Corp.
J. ANTHONY FORSTMANN has been a director since 1996. He has been a Managing
Director of J.A. Forstmann & Co., a merchant banking firm, since October 1987.
Mr. Forstmann was President of The National Registry Inc. from October 1991 to
August 1993 and from September 1994 to March 1995 and Chief Executive Officer
from October 1991 to August 1993 and from September 1994 to December 1995. In
1968, he co-founded Forstmann-Leff Associates, an institutional money management
firm with $6 billion in assets. He is also a special limited partner of one of
the Forstmann Little partnerships.
THEODORE J. FORSTMANN has been a director since 1996. He has been a general
partner of FLC XXIX Partnership, L.P. since he co-founded Forstmann Little & Co.
in 1978. He is also a director of The Yankee Candle Company, Inc. and McLeodUSA
Incorporated.
DALE F. FREY has been a director since 1997. Mr. Frey currently is retired.
From 1984 until 1997, Mr. Frey was the Chairman of the Board and President of
General Electric Investment Corp. From 1980 until 1997, he was also Vice
President of General Electric Company. Mr. Frey is also a director of
Praxair, Inc., The Yankee Candle Company, Inc., Roadway Express Inc., McLeodUSA
Incorporated, and Aftermarket Technology Corp.
SANDRA J. HORBACH has been a director since 1996. She has been a general
partner of FLC XXIX Partnership, L.P. since 1993. She is also a director of The
Yankee Candle Company, Inc. and XO Communications, Inc.
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HARVEY KLEIN, M.D. has been an Attending Physician at the New York Hospital
since 1992. Dr. Klein serves as the William S. Paley Professor of Clinical
Medicine at Cornell University Medical College, a position he has held since
1992. He also has been a Member of the Board of Overseers of Weill Medical
College of Cornell University since 1997. Dr. Klein is a member of the American
Board of Internal Medicine and American Board of Internal Medicine,
Gastroenterology. Upon joining the Board in May 2001, Dr. Klein received 10,000
options under the Community Health Systems 2000 Stock Options and Award Plan.
THOMAS H. LISTER has been a director since April 2000. He has been a general
partner of FLC XXX Partnership, L.P. since 1997. He joined Forstmann Little &
Co. in 1993 as an associate.
MICHAEL A. MILES has been a director since 1997 and served as Chairman of
the Board from March 1998 to February 2001. Mr. Miles currently is retired.
Mr. Miles served as Chairman and Chief Executive Officer of Philip Morris from
1991 to 1994. He is also a director of AMR Corporation, Dell Computer Corp.,
Morgan Stanley & Co., Sears Roebuck and Co., AOL Time Warner Inc.,
Allstate Inc., and the Interpublic Group of Companies, Inc. He is a special
limited partner of one of the Forstmann Little partnerships.
THE BOARD OF DIRECTORS
Our certificate of incorporation provides for a classified board of
directors consisting of three classes. Each class consists, as nearly as
possible, of one-third of the total number of directors constituting the entire
board. The term of the Class I directors will terminate on the date of the 2004
annual meeting of stockholders; the term of the Class II directors will
terminate on the date of the 2002 annual meeting of stockholders; and the term
of the Class III directors will terminate on the date of the 2003 annual meeting
of stockholders. At each annual meeting of stockholders, successors to the class
of directors whose term expires at that annual meeting will be elected for a
three-year term and until their respective successors are elected and qualified.
A director may only be removed with cause by the affirmative vote of the holders
of a majority of the outstanding shares of capital stock entitled to vote in the
election of directors. The Forstmann Little partnerships have a contractual
right to elect two directors until they no longer own any shares of our common
stock.
Directors who are neither our executive officers nor general partners in the
Forstmann Little partnerships have been granted options to purchase common stock
in connection with their election to our board of directors. Directors do not
receive any fees for serving on our board, but are reimbursed for their
out-of-pocket expenses arising from attendance at meetings of the board and
committees. See "--Outside Director Stock Options."
The board has three committees: Executive, Compensation, and Audit and
Compliance. The Executive Committee consists of Theodore J. Forstmann, Sandra J.
Horbach, Michael A. Miles, and Wayne T. Smith. The Compensation Committee
consists of Michael A. Miles and J. Anthony Forstmann. The Audit and Compliance
Committee consists of Dale F. Frey, Michael A. Miles, and Sheila P. Burke.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The current members of the Compensation Committee of our board of directors
are: Michael A. Miles and J. Anthony Forstmann. Until February 2000, the
Compensation Committee consisted of Theodore J. Forstmann and Sandra J. Horbach.
Sandra J. Horbach formerly served as one of our officers but received no
compensation for her services. None of the other members of the current or
former Compensation Committees are current or former executive officers or
employees of us or any of our subsidiaries. Theodore J. Forstmann and Sandra J.
Horbach are general partners in partnerships affiliated with the Forstmann
Little partnerships. See "--Relationships and Transactions between Community
Health Systems and its Officers, Directors and 5% Beneficial Owners and their
Family Members" for a description of the 1996 acquisition of our principal
subsidiary by the Forstmann Little partnerships and members of our management.
EXECUTIVE COMPENSATION
The following table sets forth certain summary information with respect to
compensation for 1999 and 2000 paid by us for services to our Chief Executive
Officer and our four other most highly paid executive officers who were serving
as executive officers at December 31, 2000.
67
SUMMARY COMPENSATION TABLE
ANNUAL COMPENSATION LONG TERM
---------------------------------------------------- COMPENSATION
AWARDS
OTHER ----------------
ANNUAL SECURITIES ALL
COMPENSATION UNDERLYING OTHER
NAME AND POSITION YEAR SALARY ($) BONUS ($) (a) OPTIONS (#) COMPENSATION ($)
----------------- -------- ---------- --------- ---------------- ---------------- ----------------
Wayne T. Smith 2000 500,000 450,000 -- 1,000,000 24,171 (b)
Chairman of the 1999 475,002 427,500 -- -- 11,947 (c)
Board, President
and Chief
Executive Officer
W. Larry Cash 2000 400,000 325,000 -- 700,000 15,815 (d)
Executive Vice 1999 375,000 318,750 -- -- 10,764 (e)
President and
Chief Financial
Officer
Michael T. Portacci 2000 223,000 212,745 -- 300,000 5,940 (f)
Senior Vice 1999 216,000 145,800 -- -- 5,735 (g)
President--Group
Operations
David L. Miller 2000 245,000 179,775 -- 300,000 6,520 (h)
Senior Vice 1999 235,000 137,475 -- -- 6,635 (i)
President--Group
Operations
Gary D. Newsome 2000 233,000 165,000 -- 300,000 5,311 (j)
Senior Vice 1999 216,000 163,080 -- -- 32,352 (k)
President--Group
Operations
--------------------------
(a) The amount of other annual compensation is not required to be reported since
the aggregate amount of perquisites and other personal benefits was less
than $50,000 or 10% of the total annual salary and bonus reported for each
named executive officer.
(b) Amount consists of additional long-term disability premiums and payments
made to the Supplemental Survivors Accumulation Plan of $5,512, employer
matching contributions to the 401(k) plan of $3,401 and employer matching
contributions to the deferred compensation plan of $15,258.
(c) Amount consists of additional long-term disability premiums and payments
made to the Supplemental Survivors Accumulation Plan of $4,822, employer
matching contributions to the 401(k) plan of $2,400 and employer matching
contributions to the deferred compensation plan of $4,725.
(d) Amount consists of additional long-term disability premiums and payments
made to the Supplemental Survivors Accumulation Plan of $4,337, employer
matching contributions to the 401(k) plan of $3,401, and employer matching
contributions to the deferred compensation plan of $8,077.
(e) Amount consists of additional long-term disability premiums and payments
made to the Supplemental Survivors Accumulation Plan of $5,139, employer
matching contributions to the 401(k) plan of $2,400 and employer matching
contributions to the deferred compensation plan of $3,225.
(f) Amount consists of additional long-term disability premiums and payments
made to the Supplemental Survivors Accumulation Plan of $2,539 and employer
matching contributions to the 401(k) plan of $3,401.
(g) Amount consists of additional long-term disability premiums and payments
made to the Supplemental Survivors Accumulation Plan of $3,335 and employer
matching contributions to the 401(k) plan of $2,400.
(h) Amount consists of additional long-term disability premiums and payments
made to the Supplemental Survivors Accumulation Plan of $3,453 and employer
matching contributions to the 401(k) plan of $3,067.
(i) Amount consists of additional long-term disability premiums and payments
made to the Supplemental Survivors Accumulation Plan of $4,235 and employer
matching contributions to the 401(k) plan of $2,400.
(j) Amount consists of additional long-term disability premiums and payments
made to the Supplemental Survivors Accumulation Plan totaling $2,802,
employer matching contributions to the 401(k) plan of $1,700 and employer
matching contributions to the deferred compensation plan of $809.
(k) Amount consists of additional long-term disability premiums and payments
made to the Supplemental Survivors Accumulation Plan totaling $3,502,
relocation expense reimbursement of $26,758 and employer matching
contributions to the 401(k) plan of $2,092.
68
STOCK OPTION TABLES
OPTION GRANTS IN FISCAL 2000
The following table sets forth information with respect to options to
purchase common stock granted during 2000 under our stock option plans to the
executive officers named in the "Summary Compensation Table."
INDIVIDUAL GRANTS
------------------------------------------------
PERCENT OF
TOTAL POTENTIAL REALIZABLE VALUE AT
NUMBER OF OPTIONS ASSUMED ANNUAL RATE OF
SECURITIES GRANTED TO STOCK PRICE APPRECIATION FOR
UNDERLYING EMPLOYEES EXERCISE OPTION TERM
OPTIONS IN FISCAL PRICE EXPIRATION -----------------------------
NAME GRANTED YEAR PER SHARE DATE 5% 10%
---- ---------- ---------- --------- ---------- ------------- -------------
Wayne T. Smith............ 1,000,000 26.0% $13.00 6/8/10 $8,180,000 $20,720,000
W. Larry Cash............. 700,000 18.2 13.00 6/8/10 5,726,000 14,504,000
David L. Miller........... 300,000 7.8 13.00 6/8/10 2,454,000 6,216,000
Gary D. Newsome........... 300,000 7.8 13.00 6/8/10 2,454,000 6,216,000
Michael T. Portacci....... 300,000 7.8 13.00 6/8/10 2,454,000 6,216,000
AGGREGATED OPTION EXERCISES IN FISCAL 2000 AND FISCAL YEAR-END OPTION VALUES
The following table sets forth the stock option values as of December 31,
2000 for these persons:
NUMBER OF SECURITIES VALUE OF UNEXERCISED IN-THE-
SHARES UNDERLYING UNEXERCISED MONEY OPTIONS AT FISCAL
ACQUIRED OPTIONS AT FISCAL YEAR-END YEAR-END (A)
ON VALUE --------------------------- -----------------------------
EXERCISE REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
-------- -------- ----------- ------------- ------------ --------------
Wayne T. Smith.......... -- $ -- -- 1,000,000 $ -- $22,000,000
W. Larry Cash........... -- -- -- 700,000 -- 15,400,000
David L. Miller......... 1,598 33,874 1,765 305,044 49,438 6,741,282
Gary D. Newsome......... 1,598 33,874 1,765 305,044 49,438 6,741,282
Michael T. Portacci..... -- -- 5,044 303,363 141,282 6,694,198
--------------------------
(a) Sets forth values for options that represent the positive spread between the
respective exercise prices of outstanding stock options based on the closing
price of our common stock on the NYSE on December 29, 2000, which was $35.00
per share.
EMPLOYMENT ARRANGEMENTS
There are no written employment contracts with any of our executive
officers. The stockholder's agreements, to which each of our executive officers
is bound, contain forfeiture provisions in the event the person engages in
prohibited conduct, including certain competitive activities. The stockholder's
agreements, as well as the stock option agreements, provide for full and
immediate vesting in the event of a change of control transaction (as defined
under each agreement). Under our policy, our executive officers are entitled to
severance compensation in the event they are terminated without cause; the
compensation ranges from 12 to 24 months of base salary depending on benefit
category, length of employment and reason for termination.
COMMUNITY HEALTH SYSTEMS STOCK OPTION PLAN
The Community Health Systems Employee Stock Option Plan provides for the
granting of options to purchase shares of common stock of our company to any
employee of our company or our subsidiaries. These options are not intended to
qualify as incentive stock options. The plan is
69
currently administered by the Compensation Committee of our Board of Directors.
As of June 30, 2001, options to purchase 381,504 shares of common stock were
outstanding. No additional grants will be made under this plan. See "Principal
Stockholders."
STOCK OPTION AGREEMENTS. Options are granted pursuant to stock option
agreements. To exercise an option, the optionee must pay for the shares in full
and execute the stockholder's agreement described below. One-fifth of the
options generally vest and become exercisable on each of the first, second,
third, fourth and fifth anniversaries of the grant date. Unvested options expire
on the date of the optionee's termination of employment and vested options
expire after the termination of employment as described below.
Each option expires, unless earlier terminated, on the earliest of:
- the tenth anniversary of the date of grant; and
- the exercise in full of the option.
If an optionee's employment is terminated for any reason, the options will
terminate to the extent they were not exercisable at the time of termination of
employment. The optionee has a 60-day period from the date of our notification
to exercise the vested portion of the option. These options are generally
exercisable only by an optionee during the optionee's lifetime and are not
transferable.
The stock option agreements provide that we will notify the optionee prior
to a total sale or a partial sale. A total sale includes:
- the merger or consolidation of us into another corporation, other than a
merger or consolidation in which we are the surviving corporation and
which does not result in a capital reorganization, reclassification or
other change in the then outstanding common stock;
- the liquidation of us;
- the sale to a third party of all or substantially all of our assets; or
- the sale to a third party of common stock, other than through a public
offering;
but only if the Forstmann Little partnerships cease to own any shares of the
voting stock of our Company.
A partial sale means a sale by the Forstmann Little partnerships of all or a
portion of their shares of common stock to a third party, including through a
public offering, other than a total sale. The concurrent common stock offering
constitutes neither a total sale nor a partial sale.
The optionee may exercise his or her options only for purposes of
participating in the partial sale, whether or not the options were otherwise
exercisable, with respect to the excess, if any, of
- the number of shares with respect to which the optionee would be entitled
to participate in the partial sale under the stockholder's agreement which
permits proportional participation with the Forstmann Little partnerships
in a public offering or sale to a third party, as described below, over
- the number of shares previously issued upon exercise of such options and
not previously disposed of in a partial sale.
Upon receipt of a notice of a total sale, the optionee may exercise all or
part of his or her options, whether or not such options were otherwise
exercisable, within five days of receiving such notice, or a shorter time as
determined by the committee.
In connection with a total sale involving the merger, consolidation or
liquidation of us or the sale of common stock by the Forstmann Little
partnerships, we may redeem the unexercised
70
portion of the options, for a price equal to the price received per share of
common stock in the total sale, less the exercise price of the options, in lieu
of permitting the optionee to exercise the options. Any unexercised portion of
an option will terminate upon the completion of a total sale, unless we provide
for its continuation.
In the event a total sale or partial sale is not completed, any option that
the optionee had exercised in connection with the total sale or partial sale
will be deemed not to have been exercised and will be exercisable after the
total sale or partial sale only to the extent it would have been exercisable if
notice of the total sale or partial sale had not been given to the optionee. The
optionee has no independent right to require us to register the shares of common
stock underlying the options under the Securities Act of 1933.
The stock option agreements permit us to terminate all of an optionee's
options if the optionee engages in prohibited or competitive activities,
including:
- disclosing confidential information about us;
- soliciting any of our employees within eighteen months of being
terminated;
- publishing any statement critical of us;
- engaging in any competitive activities; or
- being convicted of a crime against us.
The number and class of shares underlying, and the terms of, outstanding
options may be adjusted in certain events, such as a merger, consolidation,
stock split or stock dividend.
STOCKHOLDER'S AGREEMENT. Upon exercise of an option under the plan, an
optionee is required to enter into a stockholder's agreement with us in the form
then in effect. The stockholder's agreement governs the optionee's rights and
obligations as a stockholder. The stockholder's agreement provides that,
generally, the shares issued upon exercise of the options may not be sold,
assigned or otherwise transferred. The description below summarizes the terms of
the form of the stockholder's agreement currently in effect.
If one or more partial sales result in the Forstmann Little partnerships
owning, in the aggregate, less than 25% of our then outstanding voting stock,
the stockholder is entitled to sell, transfer or hold his or her shares of
common stock free of the restrictions and rights contained in the stockholder's
agreement.
The stockholder's agreement provides that the stockholder may participate
proportionately in any sale by the Forstmann Little partnerships of all or a
portion of their shares of common stock to any person who is not a partner or
affiliate of the Forstmann Little partnerships. In addition, the stockholder
shall be entitled to (and may be required to) participate proportionately in a
public offering of shares of common stock by the Forstmann Little partnerships,
by selling the same percentage of the stockholder's shares that the Forstmann
Little partnerships are selling of their shares. The sale of shares of common
stock in such a transaction must be for the same price and otherwise on the same
terms and conditions as the sale by the Forstmann Little partnerships. If the
Forstmann Little partnerships sell or exchange all or a portion of their common
stock in a bona fide arm's-length transaction, the Forstmann Little partnerships
may require the stockholder to sell a proportionate amount of his or her shares
for the same price and on the same terms and conditions as the sale of common
stock by the Forstmann Little partnerships and, if stockholder approval of the
transaction is required, to vote his or her shares in favor of the sale or
exchange.
The stockholder's agreement permits us to repurchase all the shares of
common stock then held by a stockholder if the stockholder engages in any
prohibited activity or competitive activity or is convicted of a crime against
us.
71
OUTSIDE DIRECTOR STOCK OPTIONS
Five directors, Messrs. Dole, J. Anthony Forstmann, Frey and Miles, and
Ms. Burke, have options which were granted pursuant to individual stock option
agreements. Each of the director optionees other than Mr. Miles has options to
purchase 29,940 shares of common stock at $8.96 per share. Mr. Miles has options
to purchase 41,916 shares of common stock at $8.96 per share. These options are
not intended to qualify as incentive stock options and were not issued pursuant
to the plan. See "Principal Stockholders."
One-third of the options generally become exercisable on each of the first,
second and third anniversaries of the date of the grant. Each option expires on
the earliest of:
- the tenth anniversary of the date of grant;
- the date the director optionee ceases to serve as one of our directors;
and
- the exercise in full of the option.
The director optionees may not sell or otherwise transfer their options.
The director option agreements provide that we will notify the director
optionees prior to a total sale or a partial sale. Upon receipt of a notice of a
partial sale, a director optionee may exercise his or her options only for
purposes of participating in the partial sale, whether or not the options were
otherwise exercisable, with respect to the excess, if any, of:
- the number of shares with respect to which the director optionee would be
entitled to participate in the partial sale under the director
stockholder's agreements described below, over
- the number of shares previously issued upon exercise of the options and
not previously disposed of in a partial sale.
Upon receipt of a notice of a total sale, a director optionee may exercise
all or part of his options, whether or not the options were otherwise
exercisable.
In connection with a total sale, we may redeem the unexercised portion of
the director optionee's options. Any unexercised portion of a director
optionee's options will terminate upon the completion of a total sale, unless we
provide for continuation of the options.
In the event a total sale or partial sale is not completed, any option which
a director optionee had exercised in connection with the sale will be
exercisable after the sale only to the extent it would have been exercisable if
notice of the sale had not been given to the director optionee. The concurrent
common stock offering constitutes neither a total sale nor a partial sale.
The director option agreements provide that, if the Forstmann Little
partnerships sell shares of common stock in a bona fide arm's-length
transaction, at our election, a director optionee may be required to:
- proportionately exercise the director optionee's options and to sell all
of the shares of common stock purchased under the exercise in the same
transaction and on the same terms as the shares sold by the Forstmann
Little partnerships, or if unwilling to do so; or
- forfeit the portion of the option required to be exercised.
The director optionees have no independent right to require us to register
the shares of common stock underlying the options under the Securities Act of
1933.
The number and class of shares underlying and the terms of outstanding
options may be adjusted in certain events, such as a merger, consolidation,
stock split or stock dividend.
72
DIRECTOR STOCKHOLDER'S AGREEMENTS. Upon exercise of a director option, a
director optionee is required to enter into a director stockholder's agreement
with us in the form then in effect. The form of director stockholder's agreement
currently in effect is substantially the same as the form of employee
stockholder's agreement currently in effect.
STOCKHOLDER'S AGREEMENTS
Prior to our initial public offering in June, 2000, members of our
management and other employees purchased shares of our common stock pursuant to
the terms of stockholder agreements. Currently, 23 members of our management and
other employees or former employees own an aggregate of 1,569,558 shares of our
common stock, excluding shares issuable upon exercise of options, that were
purchased pursuant to the terms of these stockholder agreements. See "Principal
Stockholders." The stockholder agreements contain transfer provisions
substantially similar to those in the form of stockholder's agreements that the
employee and director optionees must execute upon exercise of options granted
under the Community Health Systems Stock Option Plan and the Outside Directors
Stock Options Plans.
Upon termination of employment, we have the right, at our option, to
purchase all of the unvested shares of common stock held by the stockholder. The
stock vests at a rate of 20% per year, beginning after one year. The
stockholders have no independent right to require us to register their shares
under the Securities Act of 1933.
THE COMMUNITY HEALTH SYSTEMS 2000 STOCK OPTION AND AWARD PLAN
Our Board of Directors adopted the 2000 Stock Option and Award Plan in
April, 2000, and the stockholders approved it in April, 2000. The stock plan
provides for the grant of incentive stock options intended to qualify under
Section 422 of the Internal Revenue Code and stock options which do not so
qualify, stock appreciation rights, restricted stock, performance units and
performance shares, phantom stock awards, and share awards. Persons are eligible
to receive grants under the stock plan include our directors, officers,
employees, and consultants. The stock plan is designed to comply with the
requirements for "performance-based compensation" under Section 162(m) of the
Internal Revenue Code, and the conditions for exemption from the short-swing
profit recovery rules under Rule 16b-3 under the Securities Exchange Act of
1934.
The stock plan is administered by a committee that consists of at least two
nonemployee outside board members. The Compensation Committee of the board
currently serves as the committee. Generally, the committee has the right to
grant options and other awards to eligible individuals and to determine the
terms and conditions of options and awards, including the vesting schedule and
exercise price of options and awards. The stock plan authorizes the issuance of
4,562,791 shares of common stock. As of June 30, 2001, options to purchase
3,790,716 shares were outstanding.
The stock plan provides that the term of any option may not exceed ten
years, except in the case of the death of an optionee in which event the option
may be exercised for up to one year following the date of death even if it
extends beyond ten years from the date of grant. If a participant's employment,
or service as a director, is terminated following a change of control, any
options or stock appreciation rights become immediately and fully vested at that
time and will remain outstanding until the earlier of the six-month anniversary
of termination and the expiration of the option term.
THE COMMUNITY HEALTH SYSTEMS 2000 EMPLOYEE STOCK PURCHASE PLAN
We adopted the 2000 Employee Stock Purchase Plan in April, 2000. The plan
allows our employees to purchase additional shares of our common stock on the
New York Stock Exchange at
73
the then current market price. Employees who elect to participate in the program
will pay for these purchases with funds that we will withhold from their
paychecks.
RELATIONSHIPS AND TRANSACTIONS BETWEEN COMMUNITY HEALTH SYSTEMS AND ITS
OFFICERS, DIRECTORS AND 5% BENEFICIAL OWNERS AND THEIR FAMILY MEMBERS
In July 1996, we were formed by two Forstmann Little partnerships and
members of our management to acquire CHS/Community Health Systems, Inc., which
was then a publicly owned company named Community Health Systems, Inc. We
financed the acquisition by issuing our common stock to the Forstmann Little
partnerships and members of management, by incurring indebtedness under credit
facilities, and by issuing an aggregate of $500 million of subordinated
debentures to one of the Forstmann Little partnerships, Forstmann Little & Co.
Subordinated Debt and Equity Management Buyout Partnership-VI, L.P., or MBO-VI.
MBO-VI immediately distributed the subordinated debentures to its limited
partners. The subordinated debentures are our general senior subordinated
obligations, are not subject to mandatory redemption and mature in three equal
annual installments beginning June 30, 2007, with the final payment due on
June 30, 2009. The debentures bear interest at a fixed rate of 7.50% which is
payable semi-annually in January and July. The balance of debentures outstanding
at December 31, 1999 was $500 million. Total interest expense for the debentures
was $37.5 million for each of the years ended December 31, 1998, 1999 and 2000.
We anticipate that some or all of the debentures will be redeemed with the
proceeds of this offering and the concurrent common stock offering.
We have engaged Greenwood Marketing and Management Services to provide
oversight for our Senior Circle Association, which is a community affinity
organization with local chapters sponsored by each of our hospitals. Greenwood
Marketing and Management is a company owned and operated by Anita Greenwood
Cash, the spouse of W. Larry Cash. In 2000, we paid Greenwood Marketing and
Management Services $239,401 for marketing services, postage, magazines,
handbooks, sales brochures, training manuals, and membership services.
We employ Brad Cash, son of Larry Cash. In 2000, Brad Cash received
compensation of $65,945 while serving as a financial analyst and assistant chief
financial officer of one of our hospitals.
We have used the services of Emprint Document Solutions, a company owned and
operated by the sister and brother-in-law of Theodore J. Forstmann and J.
Anthony Forstmann. In 2000, we paid Emprint Document Solutions approximately
$2 million for printing services.
The following executive officers of our company were indebted to us in
amounts greater than $60,000 since January 1, 2000 under full recourse
promissory notes. These notes were delivered in partial payment for the purchase
of our common stock. The promissory notes are secured by the shares to which
they relate. The highest amounts outstanding under these notes since January 1,
2000 and the amounts outstanding at September 30, 2001 were as follows:
SINCE JANUARY 1, AT SEPTEMBER 30,
2000 2001 INTEREST RATE
---------------- ---------------- -------------
W. Larry Cash................................... $697,771 $60,192 6.84%
David L. Miller................................. 344,620 42,187 6.84%
Gary D. Newsome................................. 221,707 22,984 6.84%
Michael T. Portacci............................. 82,065 -- 6.84%
John A. Fromhold................................ 224,250 27,284 6.84%
Rachel A. Seifert............................... 72,157 58,520 6.84%
In connection with the relocation of our corporate office from Houston to
Nashville in May 1996, we lent $100,000 to Mr. T. Mark Buford, our Vice
President and Corporate Controller. This loan was paid in full on December 13,
2000.
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PRINCIPAL STOCKHOLDERS
The following table sets forth certain information regarding the beneficial
ownership of our common stock immediately prior to the consummation of the
concurrent common stock offering and as adjusted to reflect the sale of the
shares of common stock pursuant to the concurrent common stock offering. The
table includes:
- each person who is known by us to be the beneficial owner of more than 5%
of the outstanding common stock;
- each of our directors;
- each executive officer named in the "Summary Compensation Table"; and
- all directors and executive officers as a group.
Except as otherwise indicated, the persons or entities listed below have
sole voting and investment power with respect to all shares of common stock
beneficially owned by them, except to the extent such power may be shared with a
spouse.
SHARES BENEFICIALLY PERCENT BENEFICIALLY OWNED (a)
OWNED BEFORE -------------------------------
THE CONCURRENT AFTER THE
COMMON STOCK BEFORE THE CONCURRENT
OFFERING (a) CONCURRENT COMMON
------------------- COMMON STOCK STOCK
NAME NUMBER OFFERING OFFERING
---- ------------------- --------------- -------------
5% STOCKHOLDERS:
Forstmann Little & Co. Equity Partnership-V, L.P.
(b)................................................. 26,911,990 31.2% 27.4%
Forstmann Little & Co. Subordinated Debt and Equity
Management Buyout Partnership-VI, L.P. (b).......... 19,222,748 22.2% 19.5%
DIRECTORS:
Sheila P. Burke....................................... 29,940 (c) * *
W. Larry Cash......................................... 385,327 (i) * *
Robert J. Dole........................................ 25,681 (d) * *
J. Anthony Forstmann (b).............................. 106,981 (e) * *
Theodore J. Forstmann (b)............................. 46,134,738 53.4% 46.9%
Dale F. Frey (b)...................................... 25,681 (f) * *
Sandra J. Horbach (b)................................. 46,134,738 53.4% 46.9%
Harvey Klein, M.D..................................... -- * *
Thomas H. Lister (b).................................. 26,911,990 31.2% 27.3%
Michael A. Miles (b).................................. 99,908 (g) * *
Wayne T. Smith........................................ 831,554 (h) 1.0% *
OTHER NAMED EXECUTIVE OFFICERS:
David L. Miller....................................... 179,443 (j) * *
Gary D. Newsome....................................... 107,033 (k) * *
Michael T. Portacci................................... 158,916 (l) * *
All directors and executive officers as a group
(18 persons)........................................ 48,160,132 (m) 55.6% 48.8%
--------------------------
* Less than 1%.
(a) For purposes of this table, information as to the shares of common stock
assumes in the column "After Common Stock Offering" that the underwriters'
over-allotment option is not exercised. In addition, a person or group of
persons is deemed to have "beneficial ownership" of any shares of common
stock when such person or persons has the right to acquire them within
60 days after the date of this prospectus. For purposes of computing the
percentage of outstanding shares of common stock held by each person or
group of persons named above, any shares which such person or persons have
the right to acquire within 60 days after the date of this prospectus is
deemed to be outstanding but is not deemed to be outstanding for the purpose
of computing the percentage ownership of any other person.
(b) The general partner of Forstmann Little & Co. Equity Partnership-V, L.P., a
Delaware limited partnership, or Equity-V, is FLC XXX Partnership, L.P. a
New York limited partnership of which Theodore J. Forstmann,
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Sandra J. Horbach, Thomas H. Lister, Winston W. Hutchins, Erskine B. Bowles
(through Tywana LLC, a North Carolina limited liability company having its
principal business office at 2012 North Tryon Street, Suite 2450, Charlotte,
N.C. 28202) and Jamie C. Nicholls are general partners. The general partner
of Forstmann Little & Co. Subordinated Debt and Equity Management Buyout
Partnership VI, L.P., a Delaware limited partnership, or MBO-VI, is FLC XXIX
Partnership, L.P., a New York limited partnership of which Theodore J.
Forstmann, Sandra J. Horbach, Thomas H. Lister, Winston W. Hutchins, Erskine
B. Bowles (through Tywana LLC) and Jamie C. Nicholls are general partners.
Accordingly, each of the individuals named above, other than Mr. Lister,
with respect to MBO-VI, and Mr. Bowles and Ms. Nicholls, with respect to
Equity-V and MBO-VI, for the reasons described below, may be deemed the
beneficial owners of shares owned by MBO-VI and Equity-V and, for purposes
of this table, beneficial ownership is included. Mr. Lister, with respect to
MBO-VI, and Mr. Bowles, Ms. Nicholls and Mr. Lewis, with respect to Equity-V
and MBO-VI, do not have any voting or investment power with respect to, or
any economic interest in, the shares of common stock of the company held by
MBO-VI or Equity-V; and, accordingly, Mr. Lister, Mr. Bowles and
Ms. Nicholls are not deemed to be the beneficial owners of these shares.
Theodore J. Forstmann and J. Anthony Forstmann are brothers. Messrs. Frey
and Miles are members of the Forstmann Little Advisory Board and, as such,
have economic interests in the Forstmann Little partnerships. FLC XXX
Partnership is a limited partner of Equity-V. Each of Messrs. J. Anthony
Forstmann and Michael A. Miles is a special limited partner in one of the
Forstmann Little partnerships. None of the other limited partners in each of
MBO-VI and Equity-V is otherwise affiliated with Community Health Systems.
The address of Equity-V and MBO-VI is c/o Forstmann Little & Co., 767 Fifth
Avenue, New York, New York 10153.
(c) Includes 29,940 shares subject to options which are currently exercisable or
exercisable within 60 days of the date of this prospectus.
(d) Includes 25,681 shares subject to options which are currently exercisable or
exercisable within 60 days of the date of this prospectus.
(e) Includes 29,940 shares subject to options which are currently exercisable or
exercisable within 60 days of the date of this prospectus. The remaining
shares are held through a limited partnership interest in the Forstmann
Little partnerships.
(f) Includes 25,681 shares subject to options which are currently exercisable
or exercisable within 60 days of the date of this prospectus.
(g) Includes 41,916 shares subject to options which are currently exercisable or
exercisable within 60 days of the date of this prospectus. The remaining
shares are held through a limited partnership interest in the Forstmann
Little partnerships.
(h) Includes 333,333 shares subject to options which are currently exercisable
or exercisable within 60 days of the date of this prospectus.
(i) Includes 233,333 shares subject to options which are currently exercisable
or exercisable within 60 days of the date of this prospectus.
(j) Includes 103,346 shares subject to options which are currently exercisable
or exercisable within 60 days of the date of this prospectus.
(k) Includes 63,346 shares subject to options which are currently exercisable or
exercisable within 60 days of the date of this prospectus.
(l) Includes 86,725 shares subject to options which are currently exercisable
or exercisable within 60 days of the date of this prospectus.
(m) Includes 1,055,460 shares subject to options which are currently exercisable
or exercisable within 60 days of the date of this prospectus.
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DESCRIPTION OF NOTES
We will issue the notes under a document called the "indenture." The
indenture is a contract between us and First Union National Bank, as trustee.
The indenture and the notes are governed by the laws of the State of New York.
Because this section is a summary, it does not describe every aspect of the
notes and the indenture that may be important to you. In this section, we use
capitalized words to signify defined terms that have been given special meaning
in the indenture. We describe the meaning of only the more important terms. You
should read the indenture itself for a full description of the terms of the
notes, a form of which has been filed as an exhibit to the registration
statement of which this prospectus forms a part. Whenever we refer to particular
defined terms, those defined terms are incorporated by reference here. In this
section, references to "Community Health Systems, Inc.," "we," "our" or "us"
refer solely to Community Health Systems, Inc., a Delaware corporation, and its
successors under the indenture and not to any of its subsidiaries.
GENERAL
The notes will be general, unsecured obligations of Community Health
Systems, Inc. The notes will be subordinated, which means that they will rank
behind certain of our indebtedness as described below. The notes will be limited
to $250,000,000 aggregate principal amount ($287,500,000 if the underwriters
exercise their over-allotment option in full). We will be required to repay the
principal amount of the notes in full on October 15, 2008. The notes will bear
interest at the rate per annum shown on the front cover of this prospectus from
October 15, 2001. Interest will be computed on the basis of a 360 day year of
twelve 30 day months. We will pay interest on the notes on April 15 and
October 15 of each year, commencing on April 15, 2002.
You may convert the notes into shares of our common stock initially at the
conversion rate stated on the front cover of this prospectus at any time before
the close of business on the business day preceding October 15, 2008 unless the
notes have been previously redeemed or repurchased by us. The conversion rate
may be adjusted as described below.
Prior to October 15, 2005, if the price of our common stock closes above
150% of the conversion price for at least 20 trading days in the consecutive
30-day trading period ending on the trading day prior to the mailing of the
notice of redemption, we may redeem the notes at our option at any time, in
whole or in part, at $1,000 per note plus accrued and unpaid interest to the
redemption date. In connection with this redemption, we may be required to make
a "make whole" payment, as described below under "--Provisional Redemption." On
or after October 15, 2005, we may redeem the notes at our option at any time, in
whole or in part, at the redemption prices set forth below under "--Optional
Redemption," plus accrued and unpaid interest to the redemption date. If there
is a Change of Control of Community Health Systems, Inc., you may have the right
to require us to repurchase your notes as described below under "--Repurchase at
Option of Holders Upon a Change of Control."
The notes will not be guaranteed by any of our subsidiaries. As a result,
the notes will be effectively subordinated to all existing and future
indebtedness and other liabilities of our subsidiaries. Our subsidiaries have a
substantial amount of existing debt and other liabilities and will incur
substantial additional debt and other liabilities in the future. See "Risk
Factors--Risks Relating to our Business and Operations."
We are not restricted from paying dividends, incurring debt, or issuing or
repurchasing our securities under the indenture. In addition, there are no
financial covenants in the indenture. You are not protected under the indenture
in the event of a highly leveraged transaction or a change of control of
Community Health Systems, Inc., except to the extent described under
"--Repurchase at Option of Holders Upon a Change of Control."
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FORM, DENOMINATION, TRANSFER, EXCHANGE AND BOOK-ENTRY PROCEDURES
The notes will be issued:
- only in fully registered form;
- without interest coupons; and
- in denominations of $1,000 and greater multiples.
The notes will be evidenced by one or more global notes which will be
deposited with the trustee as custodian for the Depository Trust Company, or
DTC, and registered in the name of Cede & Co. as nominee of DTC. Except as set
forth below, record ownership of the global note may be transferred, in whole or
in part, only to another nominee of DTC or to a successor of DTC or its nominee.
The global note will not be registered in the name of any person, or
exchanged for notes that are registered in the name of any person, other than
DTC or its nominee unless either of the following occurs:
- DTC notifies us that it is unwilling, unable or no longer qualified to
continue acting as the depositary for the global note and no successor to
DTC is appointed by us within 90 days; or
- an Event of Default with respect to the notes represented by the global
note has occurred and is continuing;
In those circumstances, DTC will determine in whose names any securities
issued in exchange for the global note will be registered.
DTC or its nominee will be considered the sole owner and holder of the
global note for all purposes, and as a result:
- you cannot get notes registered in your name if they are represented by
the global note;
- you cannot receive certificated (physical) notes in exchange for your
beneficial interest in the global notes;
- you will not be considered to be the owner or holder of the global note or
any note it represents for any purpose; and
- all payments on the global note will be made to DTC or its nominee.
The laws of some jurisdictions require that certain kinds of purchasers (for
example, certain insurance companies) can only own securities in definitive
(certificated) form. These laws may limit your ability to transfer your
beneficial interests in the global note to these types of purchasers.
Only institutions (such as a securities broker or dealer) that have accounts
with DTC or its nominee (called "participants") and persons that may hold
beneficial interests through participants can own a beneficial interest in the
global note. The only place where the ownership of beneficial interests in the
global note will appear and the only way the transfer of those interests can be
made will be on the records kept by DTC (for their participants' interests) and
the records kept by those participants (for interests of persons held by
participants on their behalf).
Secondary trading in bonds and notes of corporate issuers is generally
settled in clearinghouse (that is, next-day) funds. In contrast, beneficial
interests in a global note usually trade in DTC's same-day funds settlement
system, and settle in immediately available funds. We make no representations as
to the effect that settlement in immediately available funds will have on
trading activity in those beneficial interests.
We will make cash payments of interest on and principal of and the
redemption or repurchase price of the global note to Cede, the nominee for DTC,
as the registered owner of the global note.
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We will make these payments by wire transfer of immediately available funds on
each payment date.
We have been informed that DTC's practice is to credit participants'
accounts on the payment date with payments in amounts proportionate to their
respective beneficial interests in the notes represented by the global note as
shown on DTC's records, unless DTC has reason to believe that it will not
receive payment on that payment date. Payments by participants to owners of
beneficial interests in notes represented by the global note held through
participants will be the responsibility of those participants.
We will send any redemption notices to Cede. We understand that if less than
all the notes are being redeemed, DTC's practice is to determine by lot the
amount of the holdings of each participant to be redeemed.
We also understand that neither DTC nor Cede will consent or vote with
respect to the notes. We have been advised that under its usual procedures, DTC
will mail an "omnibus proxy" to us as soon as possible after the record date.
The omnibus proxy assigns Cede's consenting or voting rights to those
participants to whose accounts the notes are credited on the record date
identified in a listing attached to the omnibus proxy.
Because DTC can only act on behalf of participants, who in turn act on
behalf of indirect participants, the ability of a person having a beneficial
interest in the principal amount represented by the global note to pledge the
interest to persons or entities that do not participate in the DTC book-entry
system, or otherwise take actions in respect of that interest, may be affected
by the lack of a physical certificate evidencing its interest.
DTC has advised us that it will take any action permitted to be taken by a
holder of notes (including the presentation of notes for exchange) only at the
direction of one or more participants to whose account with DTC interests in the
global note are credited and only in respect of such portion of the principal
amount of the notes represented by the global note as to which such participant
or participants has or have given such direction.
DTC has also advised us as follows: DTC is a limited purpose trust company
organized under the laws of the State of New York, a member of the Federal
Reserve System, a "clearing corporation" within the meaning of the Uniform
Commercial Code, as amended, and a "clearing agency" registered pursuant to the
provisions of Section 17A of the Exchange Act. DTC was created to hold
securities for its participants and facilitate the clearance and settlement of
securities transactions between participants through electronic book-entry
changes in accounts of its participants. Participants include securities brokers
and dealers, banks, trust companies and clearing corporations and may include
certain other organizations. Certain of such participants (or their
representatives), together with other entities, own DTC. Indirect access to the
DTC system is available to other entities such as banks, brokers, dealers and
trust companies that clear through or maintain a custodial relationship with a
participant, either directly or indirectly.
The policies and procedures of DTC, which may change periodically, will
apply to payments, transfers, exchanges and other matters relating to beneficial
interests in the global note. We and the trustee have no responsibility or
liability for any aspect of DTC's or any participants' records relating to
beneficial interests in the global note, including for payments made on the
global note, and we and the trustee are not responsible for maintaining,
supervising or reviewing any of those records.
CONVERSION RIGHTS
You may, at your option, convert any portion of the principal amount of any
note that is an integral multiple of $1,000 into shares of our common stock at
any time on or prior to the close of business on the business day prior to the
maturity date, unless the notes have been previously redeemed or repurchased, at
a conversion rate of 29.8507 shares of common stock per $1,000
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principal amount of notes. The conversion rate is equivalent to a conversion
price of approximately $33.50, subject to adjustment as set forth below. Your
right to convert a note called for redemption or delivered for repurchase
following a Change of Control will terminate at the close of business on the
business day prior to the redemption date or repurchase date for that note,
unless we default in making the payment due upon redemption or repurchase.
You may convert all or part of any note by delivering the note at the
corporate trust office of the trustee in the Borough of Manhattan, The City of
New York, accompanied by a duly signed and completed notice of conversion, a
copy of which may be obtained from the trustee. The conversion date will be the
date on which the note and the duly signed and completed notice of conversion
are so delivered.
As promptly as practicable on or after the conversion date, we will issue
and deliver to the trustee a certificate or certificates for the number of full
shares of our common stock issuable upon conversion, together with payment in
lieu of any fraction of a share. The certificate will then be sent to the
holder. The shares of our common stock issuable upon conversion of the notes
will be fully paid and nonassessable and will rank equally with the other shares
of our common stock.
If you surrender a note for conversion on a date that is not an interest
payment date, you will not be entitled to receive any interest for the period
from the next preceding interest payment date to the conversion date, except as
described below in this paragraph. Any note surrendered for conversion during
the period from the close of business on any Regular Record Date (as defined
below under "Payment and Conversion") to the opening of business on the next
succeeding interest payment date (except notes or portions of notes called for
redemption on a redemption date that will occur, or to be repurchased on a
repurchase date for which the right to convert would terminate, during such
period) must be accompanied by payment of an amount equal to the interest
payable on such interest payment date on the principal amount of notes being
surrendered for conversion. In the case of any note which has been converted
after any Regular Record Date but before the next succeeding interest payment
date, interest payable on such interest payment date shall be payable on such
interest payment date notwithstanding such conversion, and such interest shall
be paid to the holder of such note on such Regular Record Date.
No other payment or adjustment for interest, or for any dividends in respect
of our common stock, will be made upon conversion. Holders of our common stock
issued upon conversion will not be entitled to receive any dividends payable to
holders of our common stock as of any record time or date before the close of
business on the conversion date. We will not issue fractional shares upon
conversion. Instead, at our option, we will pay cash based on the market price
of our common stock at the close of business on the conversion date or round up
the number of shares of common stock issuable upon conversion of the notes to
the nearest whole share.
You will not be required to pay any taxes or duties relating to the issue or
delivery of shares of our common stock on conversion but you will be required to
pay any tax or duty relating to any transfer involved in the issue or delivery
of shares of our common stock in a name other than yours. Certificates
representing shares of our common stock will not be issued or delivered unless
all taxes and duties, if any, payable by you have been paid.
The conversion rate will be subject to adjustment for, among other things:
- dividends (and other distributions) payable in our common stock on shares
of our capital stock;
- the issuance to all or substantially all holders of our common stock of
rights, options or warrants entitling them to subscribe for or purchase
our common stock, or securities convertible into our common stock, at less
than the then current market price of such common stock (determined as
provided in the indenture) as of the record date for shareholders entitled
to receive such rights, options or warrants;
80
- subdivisions, combinations and reclassifications of our common stock;
- distributions to all or substantially all holders of our common stock of
evidences of indebtedness of Community Health Systems, Inc., shares of
capital stock, or other property (including cash or assets or securities,
but excluding those dividends, rights, options, warrants and distributions
referred to above, dividends and distributions paid exclusively in cash
and distributions upon mergers or consolidations discussed below);
- distributions consisting exclusively of cash (excluding any cash portion
of distributions referred to in the immediately preceding clause, or cash
distributed upon a merger or consolidation as discussed below) to all
holders of our common stock in an aggregate amount that, combined together
with (1) other such all-cash distributions made within the preceding
365-day period in respect of which no adjustment has been made and
(2) any cash and the fair market value of other consideration payable in
connection with any tender offer by us or any of our subsidiaries for our
common stock concluded within the preceding 365-day period in respect of
which no adjustment has been made, exceeds 10% of our market
capitalization (being the product of the current market price per share of
the common stock on the record date for that distribution and the number
of shares of common stock then outstanding); and
- the successful completion of a tender offer made by us or any of our
subsidiaries for our common stock which involves an aggregate
consideration that, combined together with (1) any cash and other
consideration payable in a tender offer by us or any of our subsidiaries
for our common stock expiring within the 365-day period preceding the
expiration of such tender offer in respect of which no adjustment has been
made and (2) the aggregate amount of any such all-cash distributions
referred to in the immediately preceding clause above to all holders of
our common stock within the 365-day period preceding the expiration of
such tender offer in respect of which no adjustments have been made,
exceeds 10% of our market capitalization on the expiration of such tender
offer.
We will not be required to make any adjustment to the conversion rate until
the cumulative adjustments amount to 1.0% or more of the conversion rate. We
will compute all adjustments to the conversion rate and will give notice by mail
to holders of the notes of any adjustments.
In case of any consolidation or merger of Community Health Systems, Inc.
with or into another entity or any merger of another entity into Community
Health Systems, Inc. (other than a merger which does not result in any
reclassification, conversion, exchange or cancellation of our common stock), or
in case of any sale or transfer of all or substantially all of our assets, each
note then outstanding will become convertible only into the kind and amount of
securities, cash and other property receivable upon such consolidation, merger,
sale or transfer by a holder of the number of shares of common stock into which
the notes were convertible immediately prior to the consolidation, merger, sale
or transfer.
We may increase the conversion rate for any period of at least 20 days, upon
at least 15 days notice, if our Board of Directors determines that the increase
would be in our best interest. The Board of Directors' determination in this
regard will be conclusive. We will give holders of notes at least 15 days notice
of such an increase in the conversion rate. Any increase, however, will not be
taken into account for purposes of determining whether the closing price of our
common stock exceeds the conversion price by 105% in connection with an event
which otherwise would be a Change of Control as defined below.
We may also increase the conversion rate for the remaining term of the notes
or any shorter period in order to avoid or diminish any income tax to any
holders of shares of common stock resulting from any dividend or distribution of
stock or issuance of rights or warrants to purchase or subscribe for stock or
from any event treated as such for income tax purposes. If at any time we make a
distribution of property to our shareholders that would be taxable to such
shareholders as a
81
dividend for United States federal income tax purposes, such as distributions of
evidences of indebtedness or assets of Community Health Systems, Inc., but
generally not stock dividends on common stock or rights to subscribe for common
stock, and, pursuant to the adjustment provisions of the indenture, the number
of shares into which notes are convertible is increased, that increase may be
deemed for United States federal income tax purposes to be the payment of a
taxable dividend to holders of notes; in specified other circumstances, the
absence of such an adjustment may result in a taxable dividend to the holders of
the common stock. For a discussion of the tax consequences to you as a result of
the adjustment of the conversion rate, see "Certain United States Federal Tax
Consequences--United States Holders."
Except as stated above, we will not adjust the conversion price for the
issuance of our common stock or any securities convertible into or exchangeable
for our common stock or the right to purchase our common stock or such
convertible or exchangeable securities.
SUBORDINATION
The notes are subordinated and, as a result, the payment of the principal,
any premium and interest on the notes, including amounts payable on any
redemption or repurchase, will be subordinated to the prior payment in full, in
cash or other payment satisfactory to holders of Senior Debt, of all of our
Senior Debt. The notes are also effectively subordinated to any debt or other
liabilities of our subsidiaries. On June 30, 2001, we had outstanding Senior
Debt of $640.6 million (on a pro forma basis giving effect to the sale of the
notes in this offering and the concurrent common stock offering and the
application of the net proceeds therefrom as described under "Use of Proceeds"),
consisting of senior debt under our credit facility. See "Capitalization." Our
aggregate amount of liabilities (calculated on a pro forma basis taking into
account the application of such proceeds from the sale of the notes and common
stock as described under "Use of Proceeds") was $1.2 billion, excluding
intercompany liabilities.
"Senior Debt" is defined in the indenture to mean: the principal of, and
premium, if any, and interest on, including all interest accruing subsequent to
the commencement of any bankruptcy or similar proceeding, whether or not a claim
for post-petition interest is allowable as a claim in any such proceeding and
rent payable on or termination payment with respect to or in connection with,
and all fees, costs, expenses and other amounts accrued or due on or in
connection with, Indebtedness of the Company, whether absolute or contingent,
secured or unsecured, due or to become due, outstanding on the date of the
indenture or thereafter created, incurred, assumed, guaranteed or in effect
guaranteed by us (including all deferrals, renewals, extensions or refundings
of, or amendments, modifications or supplements to, the foregoing). The term
"Senior Debt" shall also include all Designated Senior Debt and shall not
include our Indebtedness to any of our subsidiaries of which we own, directly or
indirectly, a majority of the voting stock.
"Indebtedness" means, with respect to any person:
- all indebtedness evidenced by a credit or loan agreement, note, bond,
debenture or other written obligation;
- all obligations for money borrowed;
- all obligations evidenced by a note or similar instrument given in
connection with the acquisition of any businesses, properties or assets of
any kind;
- all obligations (1) as lessee under leases required to be capitalized on
the balance sheet of the lessee under generally accepted accounting
principles or (2) as lessee under other leases for facilities, capital
equipment or related assets, whether or not capitalized, entered into or
leased for financing purposes;
- all obligations under interest rate and currency swaps, caps, floors,
collars, hedge agreements, forward contracts or similar agreements or
arrangements;
82
- all obligations with respect to letters of credit, bank guarantees,
bankers' acceptances and similar facilties, including reimbursement
obligations with respect to the foregoing;
- all obligations issued or assumed as the deferred purchase price of any
business, property, assets (including intangibles) or services, excluding
trade accounts payable and accrued expenses arising in the ordinary course
of business as determined in good faith by us;
- all obligations of the type referred to in the above clauses of another
person and all dividends of another person, the payment of which, in
either case, we have assumed or guaranteed, or for which we are
responsible or liable, directly or indirectly, jointly or severally, as
obligor, guarantor or otherwise, or which are secured by a lien on our
property; and
- renewals, extensions, modifications, replacements, restatements and
refundings of, or any indebtedness or obligation issued in exchange for,
any such indebtedness or obligation described in the above clauses of this
definition.
Senior Debt will not include any other indebtedness or obligations if its
terms or the terms of the instrument under which or pursuant to which it is
issued expressly provide that such indebtedness shall not be senior in right of
payment to the notes or expressly provides that such indebtedness is equal with
or junior to the notes.
We may not make any payment on account of principal, premium or interest on
the notes, or redemption or repurchase of the notes, if either of the following
occurs:
- we default in our obligations to pay principal, premium, interest or other
amounts on our Senior Debt, including a default under any redemption or
repurchase obligation, and the default continues beyond any grace period
that we may have to make those payments; or
- any other default occurs and is continuing on any Designated Senior Debt
and (1) the default permits the holders of the Designated Senior Debt (as
defined below) to accelerate its maturity and (2) the trustee has received
a notice of the default, called a "Payment Blockage Notice," from
Community Health Systems, Inc., the holder of such debt or such other
person permitted to give such notice under the indenture.
If payments of the notes have been blocked by a payment default on Senior
Debt, payments on the notes may resume when the payment default has been cured
or waived or ceases to exist. If payments on the notes have been blocked by a
nonpayment default, payments on the notes may resume on the earlier of (1) the
date the nonpayment default is cured or waived or ceases to exist or (2) in the
case of Designated Senior Debt, 179 days after the Payment Blockage Notice is
received if the Designated Senior Debt has not been accelerated.
No nonpayment default that existed on the day a Payment Blockage Notice was
delivered to the trustee can be used as the basis for any subsequent Payment
Blockage Notice. In addition, once a holder of Designated Senior Debt has
blocked payment on the notes by giving a Payment Blockage Notice, no new period
of payment blockage can be commenced pursuant to a subsequent Payment Blockage
Notice until both of the following are satisfied:
- 365 days have elapsed since the effectiveness of the immediately prior
Payment Blockage Notice; and
- all scheduled payments of principal, any premium and interest with respect
to the notes that have come due have been paid in full.
"Designated Senior Debt" means our obligations under any particular Senior
Debt in which the instrument creating or evidencing the same or the assumption
or guarantee thereof, or related agreements or documents to which we are a
party, expressly provides that such indebtedness shall be "Designated Senior
Debt" for purposes of the indenture. The instrument, agreement or other document
evidencing any Designated Senior Debt may place limitations and conditions on
the right of such Senior Debt to exercise the rights of Designated Senior Debt.
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In addition, upon any acceleration of the principal due on the notes as a
result of an Event of Default or payment or distribution of our assets to
creditors upon any dissolution, winding up, liquidation or reorganization,
whether voluntary or involuntary, marshaling of assets, assignment for the
benefit of creditors, or in bankruptcy, insolvency, receivership or other
similar proceedings, all principal, premium, if any, interest and other amounts
due on all Senior Debt must be paid in full before you are entitled to receive
any payment. By reason of such subordination, in the event of insolvency, our
creditors who are holders of Senior Debt are likely to recover more, ratably,
than you are, and you are likely to experience a reduction or elimination of
payments on the notes.
In addition, the notes will be "structurally subordinated" to all
indebtedness and other liabilities, including trade payables and lease
obligations, of our subsidiaries. This occurs because any right of Community
Health Systems, Inc. to receive any assets of our subsidiaries upon their
liquidation or reorganization, and the right of the holders of the notes to
participate in those assets, will be effectively subordinated to the claims of
that subsidiary's creditors, including trade creditors, except to the extent
that Community Health Systems, Inc. itself is recognized as a creditor of such
subsidiary, in which case the claims of Community Health Systems, Inc., would
still be subordinate to any security interest in the assets of the subsidiary
and any indebtedness of the subsidiary senior to that held by Community Health
Systems, Inc.
The indenture does not limit our ability to incur Senior Debt or our ability
or the ability of our subsidiaries to incur any other indebtedness.
PROVISIONAL REDEMPTION
Prior to October 15, 2005, if the closing price of our common stock has
exceeded 150% of the conversion price for at least 20 trading days in the
consecutive 30-day trading period ending on the trading day prior to the date we
mail the notice of redemption, we may redeem the notes, in whole or from time to
time in part, at a redemption price equal to 100% of the principal amount of the
notes to be redeemed, plus accrued and unpaid interest to the redemption date.
If we redeem the notes under these circumstances, we will make an additional
"make whole" payment on the redeemed notes equal to $170 per $1,000 principal
amount of notes, minus the amount of any interest actually paid or accrued and
unpaid on each $1,000 principal amount of redeemed notes prior to the date we
redeem the notes. We must make these "make whole" payments on all notes called
for redemption, including notes converted after the date we mailed the notice.
We may make these "make whole" payments, at our option, either in cash or,
subject to the satisfaction of the conditions in the indenture, in our common
stock or a combination of cash and common stock. We will specify the type of
consideration for the "make whole" payment in the redemption notice.
Payments made in our common stock will be valued at 95% of the average of
the closing sales prices of our common stock for the five consecutive trading
days ending on the third trading day prior to the redemption date.
OPTIONAL REDEMPTION
On or after October 15, 2005 we may redeem the notes, in whole or from time
to time in part, in cash at the prices set forth below. If we elect to redeem
all or part of the notes, we will give at least 30 but no more than 60 days
notice to you.
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The redemption price, expressed as a percentage of principal amount, is as
follows for the 12-month periods beginning on:
REDEMPTION
YEAR PRICE
---- ----------
October 15, 2005............................................ 101.821%
October 15, 2006............................................ 101.214%
October 15, 2007............................................ 100.607%
and thereafter is equal to 100% of the principal amount, in each case together
with accrued and unpaid interest to the date of redemption.
If fewer than all of the notes are to be redeemed, the trustee will select
the notes to be redeemed on a pro rata basis by lot, or in accordance with any
other method the Trustee considers fair and appropriate. If any note is to be
redeemed in part only, a new note in principal amount equal to the unredeemed
principal portion will be issued. If a portion of your notes is selected for
partial redemption and you convert a portion of your convertible notes, the
converted portion will be deemed to be of the portion selected for redemption.
No sinking fund is provided for the notes, which means that the indenture
does not require us to redeem or retire the notes periodically.
We may, to the extent permitted by applicable law, at any time purchase
notes in the open market, by tender at any price or by private agreement. Any
note that we purchase may, to the extent permitted by applicable law and subject
to restrictions contained in the underwriting agreement, be re-issued or resold
or may, at our option, be surrendered to the trustee for cancellation. Any notes
surrendered for cancellation may not be re-issued or resold and will be canceled
promptly.
PAYMENT AND CONVERSION
Payment of any interest on the notes will be made to the person in whose
name the note, or any predecessor note, is registered at the close of business
on the April 1 or the October 1 (whether or not a business day) immediately
preceding the relevant interest payment date (a "Regular Record Date"). Payments
on any global note registered in the name of DTC or its nominee will be payable
by the trustee to DTC or its nominee in its capacity as the registered holder
under the indenture. Under the terms of the indenture, we and the trustee will
treat the persons in whose names the notes, including any global note, are
registered as the owners for the purpose of receiving payments and for all other
purposes. Consequently, neither we, the trustee nor any of our agents or the
trustee's agents has or will have any responsibility or liability for (1) any
aspect of DTC's records or any participant's or indirect participant's records
relating to or payments made on account of beneficial ownership interests in the
global note, or for maintaining, supervising or reviewing any of DTC's records
or any participant's or indirect participant's records relating to the
beneficial ownership interests in the global note, or (2) any other matter
relating to the actions and practices of DTC or any of its participants or
indirect participants.
We will not be required to make any payment on the notes due on any day
which is not a business day until the next succeeding business day. The payment
made on the next succeeding business day will be treated as though it were paid
on the original due date and no interest will accrue on the payment for the
additional period of time.
Notes may be surrendered for conversion at the corporate trust office of the
trustee in the Borough of Manhattan, The City of New York. Notes surrendered for
conversion must be accompanied by appropriate notices and any payments in
respect of interest or taxes, as applicable, as described above under
"--Conversion Rights."
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We have initially appointed the trustee as paying agent and conversion
agent. We may terminate the appointment of any paying agent or conversion agent
and appoint additional or other paying agents and conversion agents. However,
until the convertible notes have been delivered to the trustee for cancellation,
or moneys sufficient to pay the principal of, premium, if any, and interest on
the notes have been made available for payment and either paid or returned to us
as provided in the indenture, the trustee will maintain an office or agency in
the Borough of Manhattan, The City of New York for surrender of convertible
notes for conversion.
REPURCHASE AT OPTION OF HOLDERS UPON A CHANGE OF CONTROL
If a Change of Control (as defined below) occurs, you will have the right,
at your option, to require us to repurchase all of your notes not previously
called for redemption, or any portion of the principal amount thereof, that is
equal to $1,000 or an integral multiple of $1,000, pursuant to a "Change of
Control Offer." In the Change of Control Offer, we will offer a "Change of
Control Payment" in cash (or, as described below, shares of our common stock)
equal to 100% of the aggregate principal amount of the notes to be repurchased,
together with interest accrued to, but excluding, the repurchase date.
At our option, instead of paying the repurchase price in cash, we may pay
the repurchase price in shares of our common stock valued at 95% of the average
of the closing prices of our common stock for the five trading days immediately
preceding and including the fifth trading day prior to the repurchase date. We
may only pay the repurchase price in shares of our common stock if we satisfy
the conditions provided in the indenture.
A "Change of Control" means the occurrence of any of the following after the
notes are originally issued:
1. any Person, including any syndicate or group deemed to be a "person"
under Section 13(d)(3) of the Exchange Act, becomes the Beneficial Owner,
directly or indirectly, through a purchase, merger or other acquisition
transaction or series of transactions, of shares of our capital stock
entitling that Person to exercise 50% or more of the total voting power
of all shares of our capital stock entitled to vote generally in
elections of directors; however, any acquisition by us, any Subsidiary of
us, the Principals and their Related Parties or any employee benefit plan
of us and any merger or consolidation that is not a Change of Control
under clause (2) below will not trigger this provision;
2. we consolidate with or merge with or into any other Person or another
Person merges into us, except if the transaction satisfies any of the
following: (i) the Principals and their Related Parties have, directly or
indirectly, 50% or more of the total voting power of all shares of
capital stock of the continuing or surviving corporation entitled to vote
generally in elections of directors of the continuing or surviving
corporation immediately after the transaction; (ii) the transaction is a
merger which does not result in any reclassification, conversion,
exchange or cancellation of outstanding shares of our capital stock; or
(iii) the transaction is a merger effected only to change our
jurisdiction of incorporation and it results in a reclassification,
conversion or exchange of outstanding shares of our common stock only
into other shares of Common Stock or shares of common stock of another
corporation;
3. we convey, transfer, sell, lease or otherwise dispose, in one or a
series of transactions, of all or substantially all of our assets to
another Person, other than a Principal or a Related Party, directly or
indirectly, 50% or more of the total voting power of all shares of
capital stock of such Person entitled to vote generally in elections of
directors immediately after the consummation of such transaction; or
4. the first day on which a majority of the members of our board of
directors are not Continuing Directors.
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However, a Change of Control will not be deemed to have occurred if either
(A) the closing price per share of our common stock for any five trading days
within the period of ten consecutive trading days ending immediately after the
later of the Change of Control or the date of the public announcement of the
Change of Control, in the case of a Change of Control under clause (1) above, or
the period of ten consecutive trading days ending immediately before the Change
of Control, in the case of Change of Control under clause (2) or (3) above,
equals or exceeds 105% of the conversion price of the notes in effect on each of
those trading days or (B) all of the consideration (excluding cash payments for
fractional shares and cash payments made pursuant to dissenters' appraisal
rights) in a merger or consolidation otherwise constituting a Change of Control
under clause (1) or (2) above issuable to the holders of our common stock,
consists of shares of common stock traded on a national securities exchange or
quoted on the Nasdaq National Market (or will be so traded or quoted immediately
following such merger or consolidation) and as a result of such merger or
consolidation the notes become convertible into such common stock. For purposes
of these provisions the conversion price is equal to $1,000 divided by the
conversion rate then in effect.
The definition of Change of Control includes a phrase relating to the sale,
lease, transfer, conveyance or other disposition of "all or substantially all"
of the assets of Community Health Systems, Inc. and our subsidiaries, taken as a
whole. Although there is a limited body of case law interpreting the phrase
"substantially all," there is no precise established definition of the phrase
under applicable law. Accordingly, the ability of a holder of notes to require
us to repurchase such notes as a result of a sale, lease, transfer, conveyance
or other disposition of less than all of the assets of Community Health
Systems, Inc. and our subsidiaries, taken as a whole, to another Person or group
may be uncertain.
Within 30 days following any Change of Control, we will mail a notice to
each holder and the trustee describing the transaction or transactions that
constitute the Change of Control, offering to repurchase the notes on a certain
date (which shall not exceed 30 business days from the date of such notice) (the
"Change of Control Payment Date") specified in such notice, pursuant to the
procedures required by the indenture and described in such notice and specifying
whether the repurchase price will be payable in cash or shares of common stock.
Rule 13e-4 under the Exchange Act requires the dissemination of prescribed
information to security holders in the event of an issuer tender offer and may
apply in the event that the repurchase option becomes available to you. We will
comply with this rule to the extent it applies at that time and any other
securities laws and regulations thereunder to the extent such laws and
regulations are applicable in connection with the repurchase of the notes as a
result of a Change of Control.
For purposes of the Change of Control definition:
"BENEFICIAL OWNER" has the meaning assigned to that term in Rule 13d-3 and
Rule 13d-5 under the Exchange Act. The terms "Beneficially Owns" and
"Beneficially Owned" shall have corresponding meanings.
"BOARD OF DIRECTORS" means (1) with respect to a corporation, the board of
directors of the corporation or any duly authorized committee of such board of
directors and (2) with respect to any other Person, the board or committee of
such Person serving a similar function.
"CAPITAL STOCK" of any Person means any and all shares, interests,
participations or other equivalents, however designated, of corporate stock or
other equity participations, including partnership interests, whether general or
limited, of the Person.
"CONTINUING DIRECTORS" means, as of any date of determination, any member of
the Board of Directors of the Company who (1) was a member of such Board of
Directors on the date of the indenture; or (2) was nominated for election or
elected to such Board of Directors with the approval of a majority of the
Continuing Directors who were members of such Board at the time of such
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nomination or election; or (3) is a designee of a Principal or a Related Party
of a Principal or was nominated by a Principal or a Related Party.
"PERSON" means any individual, corporation, partnership, joint venture,
association, limited liability company, joint-stock company, trust,
unincorporated organization, government subdivision thereof or any other entity.
"PRINCIPAL" means Forstmann Little & Co. Equity Partnership-V, L.P. or any
of its affiliates, Forstmann Little & Co. Subordinated Debt and Equity
Management Buyout Partnership-VI, L.P. or any of its affiliates, or each
executive officer of Community Health Systems, Inc. as of the date of the
indenture.
"RELATED PARTY" means (1) any controlling stockholder, 80% (or more) owned
subsidiary, or immediate family member (in the case of an individual) of any
Principal; or (2) any trust, corporation, partnership or other entity, the
beneficiaries, stockholders, partners, owners or Persons beneficially holding an
80% or more interest of which consist of any one or more Principals and/or such
other Persons referred to in the immediately preceding clause (1).
"VOTING STOCK" of any Person as of any date means the Capital Stock of such
Person that is at the time entitled to vote in the election of the Board of
Directors or all interests in such Person with the ability to control the
management or action of such Person.
On the Change of Control Payment Date, we will, to the extent lawful:
1. accept for payment all the notes or portions thereof properly tendered
pursuant to the Change of Control Offer;
2. if the Change of Control Payment is to be paid in cash, deposit with the
paying agent an amount equal to the Change of Control Payment in respect
of all the notes or portions thereof so tendered, or if the Change of
Control Payment is to be paid in shares of our common stock, instruct the
transfer agent to issue shares representing such Change of Control
Payment; and
3. deliver or cause to be delivered to the trustee the notes so accepted
together with an officers' certificate stating the aggregate principal
amount of notes or portions thereof being purchased by us.
The paying agent or, in the event we are paying the Change of Control
Payment in shares of our common stock, the trustee will promptly mail to each
holder of notes so tendered the Change of Control Payment for such notes, and
the trustee will promptly authenticate and mail (or cause to be transferred by
book entry) to each holder a new note equal in principal amount or principal
amount at maturity, as applicable, to any unpurchased portion of the notes
surrendered, if any; PROVIDED that each such new note will be in a principal
amount or principal amount at maturity, as applicable, of $1,000 or an integral
multiple thereof.
Except as described above, the indenture does not contain provisions that
permit the holders of the notes to require that we repurchase or redeem the
notes in the event of a takeover, recapitalization or similar transaction.
We will not be required to make a Change of Control Offer upon a Change of
Control if a third party makes the Change of Control Offer in the manner, at the
times and otherwise in compliance with the requirements set forth in the
indenture applicable to a Change of Control Offer made by us and purchases all
of the notes validly tendered and not withdrawn under such Change of Control
Offer.
The foregoing provisions would not necessarily provide you with protection
if we are involved in a highly leveraged or other transaction that may adversely
affect you.
Our ability to repurchase notes upon the occurrence of a Change of Control
is subject to important limitations. Some of the events constituting a Change of
Control could result in an event
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of default under our Senior Debt. Moreover, a Change of Control could cause an
event of default under, or be prohibited or limited by, the terms of our Senior
Debt. As a result, unless we were to obtain a waiver, a repurchase of the notes
in cash could be prohibited under the subordination provisions of the indenture
until the Senior Debt is paid in full. Although we have the right to repurchase
the notes with our common stock, subject to certain conditions, we cannot assure
you that we would have the financial resources, or would be able to arrange
financing, to pay the repurchase price in cash for all the notes that might be
delivered by holders of notes seeking to exercise the repurchase right. If we
were to fail to repurchase the notes when required following a Change of
Control, an Event of Default under the Indenture would occur, whether or not
such repurchase is permitted by the subordination provisions of the indenture.
Any such default may, in turn, cause a default under our Senior Debt. See
"--Subordination" and "Risk Factors" for a discussion of these restrictions and
limitations.
MERGER, CONSOLIDATION OR SALE OF ASSETS
We may not, directly or indirectly, (1) (A) consolidate or merge with or
into another person (whether or not we are the surviving corporation) or
(B) sell, assign, transfer, lease, convey or otherwise dispose of all or
substantially all of our properties or assets, in one or more related
transactions, to another person, or (2) permit any person to (A) consolidate or
merge with or into us (whether or not we are the surviving corporation) or
(B) sell, assign, transfer, lease, convey or otherwise dispose of all or
substantially all of such person's properties and assets, in one or more related
transactions, to us; unless:
(i) either:
(a) we are the surviving corporation; or
(b) the person formed by or surviving any such consolidation or merger
(if other than us) or to which such sale, assignment, transfer, leases,
conveyance or other disposition shall have been made is a person organized
or existing under the laws of the United States, any state thereof or the
District of Columbia (provided that if the person formed by or surviving any
such consolidation or merger with us is not a corporation, a corporate
co-issuer shall also be an obligor with respect to the notes);
(ii) the person formed by or surviving any such consolidation or merger (if
other than us) or the person to which such sale, assignment, transfer,
conveyance or other disposition shall have been made assumes all our obligations
under the notes and the indenture pursuant to an agreement reasonably
satisfactory to the trustee; and
(iii) immediately after such transaction, no Default or Event of Default
exists, and no event that, after notice or lapse of time or both, would become
an Event of Default, will have occurred and be continuing.
In addition, we may not, directly or indirectly, lease all or substantially
all of our properties or assets, in one or more related transactions, to any
other person.
These provisions will not apply to a sale, assignment, transfer, conveyance
or other disposition of assets between or among Community Health Systems, Inc.
and any of its subsidiaries.
EVENTS OF DEFAULT AND REMEDIES
Each of the following is an Event of Default with respect to the notes:
- default for 30 days in the payment when due of interest on the notes,
whether or not the payment is prohibited by the subordination
provisions of the indenture;
- default in payment when due of the principal of or premium, if any
(including the "make-whole" payment, if any), on the notes, whether or
not the payment is prohibited by the subordination provisions of the
indenture;
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- failure to comply with the notice and repurchase provisions described
under the caption "--Repurchase at Option of Holders Upon a Change of
Control," whether or not the provision of such notice or compliance
with the repurchase provisions is prohibited by the subordination
provisions of the indenture;
- failure for 10 days to deliver shares of common stock, together with
cash instead of fractional shares, in accordance with the conversion
provisions described under the caption "--Conversion Rights;"
- failure for 60 days after written notice thereof has been given to us
by the trustee or to us and the trustee by holders of at least 25% of
the aggregate principal amount of the notes outstanding to comply with
any of the other covenants or agreements in the indenture;
- default under any mortgage, indenture or instrument under which there
may be issued or by which there may be secured or evidenced any
indebtedness for money borrowed by us or any of our significant
subsidiaries (or the payment of which is guaranteed by us or any of our
significant subsidiaries) whether such indebtedness or guarantee now
exists, or is created after the issue date of the notes, if that
default:
(a) is caused by a failure to pay at final stated maturity the
principal amount on such indebtedness by the end of the applicable
grace period provided in such indebtedness on the date of such
default (a "Payment Default"); or
(b) results in the acceleration of such indebtedness prior to its
express maturity,
and, in each case, the principal amount of any such indebtedness,
together with the principal amount of any other such indebtedness
under which there has been a Payment Default or the maturity of which
has been so accelerated, aggregates $15 million or more if (1) the
indebtedness is not discharged, or (2) the acceleration is not
annulled, within 30 days after written notice to the Company by the
Trustee or the holders of at least 25% in aggregate principal amount
of the outstanding notes; and
- specified events of bankruptcy, insolvency or reorganization involving
us or any of our significant subsidiaries.
In the case of an Event of Default arising from events of bankruptcy,
insolvency or reorganization with respect to us or our significant subsidiaries,
all outstanding notes will become due and payable immediately without further
action or notice on the part of the holders of the notes or the trustee. If any
other Event of Default occurs and is continuing, the trustee or the holders of
at least 25% in principal amount of the then outstanding notes may, subject to
the subordination provisions of the indenture, declare all notes to be due and
payable immediately.
Holders of the notes may not enforce the indenture or the notes except as
provided in the indenture. Subject to certain limitations, holders of a majority
in principal amount of the then outstanding notes may direct the trustee in its
exercise of any trust or power. The trustee may withhold from holders of the
notes notice of any continuing Default or Event of Default (except a Default or
Event of Default relating to the payment of principal or interest) if it
determines that withholding notice is in their interest.
The holders of a majority in aggregate principal amount of the then
outstanding notes also may waive by written consent any past default under the
indenture, except:
- failure to pay principal, premium, if any, or interest which has not
been cured;
- failure to convert any note into common stock; or
- failure to comply with any of the provisions of the indenture that
would require the consent of the holder of each outstanding note
affected.
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No holder will have any right to institute any proceeding under the
indenture, or for the appointment of a receiver or a trustee, or for any other
remedy under the indenture unless:
- the holder has previously given to the trustee written notice of a
continuing event of default with respect to the notes;
- the holders of at least 25% in aggregate principal amount of the
outstanding notes have made a written request and have offered
reasonable indemnity to the trustee to institute such proceeding as
trustee; and
- the trustee has failed to institute such proceeding, and has not
received from the holders of a majority in aggregate principal amount
of the outstanding notes a direction inconsistent with the request
specified above within 60 days after such notice, request and offer.
However, these limitations do not apply to a suit instituted by a holder for
the enforcement of payment of the principal of or any premium or interest on any
note or the right to convert the note on or after the applicable due date.
We will be required to deliver to the trustee annually a statement regarding
compliance with the indenture. Upon becoming aware of any Default or Event of
Default, we will be required to deliver to the trustee a statement specifying
such Default or Event of Default.
"Significant subsidiaries" has the meaning assigned to that term in
Rule 1-02(w) of Regulation S-X under the Exchange Act.
MEETINGS, MODIFICATION AND WAIVER
The indenture contains provisions for convening meetings of the holders of
the notes to consider matters affecting their interests.
Certain limited modifications of the indenture may be made without the
necessity of obtaining the consent of the holders of the notes. Other
modifications and amendments of the indenture may be made, and certain past
defaults by us may be waived, either (1) with the written consent of the holders
of not less than a majority in aggregate principal amount of the notes then
outstanding or (2) by the adoption of a resolution, at a meeting of holders of
the notes at which a quorum is present, by the holders of at least 66 2/3% in
aggregate principal amount of the notes represented at such meeting or, if less,
holders of not less than a majority in aggregate principal amount of the notes
then outstanding. The quorum at any meeting called to adopt a resolution will be
persons holding or representing a majority in aggregate principal amount of the
notes then outstanding and, at any reconvened meeting adjourned for lack of a
quorum, 25% of such aggregate principal amount.
However, a modification or amendment requires the consent of the holder of
each outstanding note affected if it would:
- change the stated maturity of the principal or interest of a note;
- reduce the principal amount of, or any premium (including the
"make-whole" payment, if any) or rate of interest on, any note;
- reduce the amount payable upon a redemption or mandatory repurchase;
- modify the provisions with respect to the repurchase rights of holders
of notes in a manner adverse to the holders;
- change the place or currency of payment on a note;
- impair the right to institute suit for the enforcement of any payment
on any note;
- modify our obligation to maintain an office or agency in New York City;
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- modify the subordination provisions in a manner that is adverse to the
holders of the notes;
- adversely affect the right to convert the notes;
- reduce the above-stated percentage of the principal amount of the
holders whose consent is needed to modify or amend the indenture;
- reduce the percentage of the principal amount of the holders whose
consent is needed to waive compliance with certain provisions of the
indenture or to waive certain defaults; or
- reduce the percentage required for the adoption of a resolution or the
quorum required at any meeting of holders of notes at which a
resolution is adopted.
The holders of a majority in aggregate principal amount of the then
outstanding notes may waive compliance by us with certain restrictive provisions
of the indenture by written consent. Holders of at least 66 2/3% in aggregate
principal amount of notes represented at a meeting or, if less, holders of not
less than a majority in aggregate principal amount of the notes then outstanding
may also waive compliance by us with certain restrictive provisions of the
indenture by the adoption of a resolution at the meeting if a quorum of holders
are present and certain other conditions are met.
Any notes held by us or by any person directly or indirectly controlling or
controlled by or under direct or indirect common control with us will be
disregarded (from both the numerator and the denominator) for purposes of
determining whether the holders of a majority in aggregate principal amount of
the outstanding notes have consented to a modification, amendment or waiver of
the terms of the indenture.
SATISFACTION AND DISCHARGE
The indenture shall cease to be of further effect (except as to any
surviving rights of registration of transfer or exchange or conversion of notes
herein expressly provided for), subject to certain conditions, when:
(1) either
(A) all notes theretofore authenticated and delivered (other than
(i) notes which have been destroyed, lost or stolen and which have
been replaced or paid in accordance with the indenture and
(ii) notes for whose payment money has been deposited in trust or
segregated and held in trust by the Company and has since been repaid
to the Company or discharged from such trust,) have been delivered to
the trustee for cancellation; or
(B) all such notes not theretofore delivered to the trustee for
cancellation (i) have become due and payable, (ii) will become due
and payable at their maturity date within one year, or (iii) are to
be called for redemption within one year under arrangements
satisfactory to the trustee,
and the Company, in the case of each of clauses (B)(i) through (iii) above, has
deposited with the trustee as trust funds an amount sufficient to pay and
discharge the entire indebtedness on such notes not theretofore delivered to the
trustee for cancellation, for principal (and premium, if any) and interest to
the date of such deposit (in the case of notes which have become due and
payable) or to the maturity or redemption thereof, as the case may be; and
(2) the Company has paid or caused to be paid all other sums payable by the
Company under the indenture.
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NOTICES
Notice to holders of the notes will be given by mail to the addresses as
they appear in the security register.
REPLACEMENT OF NOTES
We will replace any note that becomes mutilated, destroyed, stolen or lost
at the expense of the holder upon delivery to the trustee of the mutilated notes
or evidence of the loss, theft or destruction satisfactory to us and the
trustee. In the case of a lost, stolen or destroyed note, indemnity satisfactory
to the trustee and us may be required at the expense of the holder of the note
before a replacement note will be issued.
PAYMENT OF STAMP AND OTHER TAXES
We will pay all stamp and other duties, if any, which may be imposed by the
United States or any political subdivision thereof or taxing authority thereof
or therein with respect to the original issuance of the notes. We will not be
required to make any payment with respect to any other tax, assessment or
governmental charge imposed by any government or any political subdivision
thereof or taxing authority thereof or therein.
GOVERNING LAW
The indenture and the notes will be governed by and construed in accordance
with the laws of the State of New York.
CONCERNING THE TRUSTEE
If the trustee becomes a creditor of Community Health Systems, Inc., the
indenture limits its right to obtain payment of claims in certain cases, or to
realize on certain property received in respect of any such claim as security or
otherwise. The trustee will be permitted to engage in other transactions;
however, if it acquires any conflicting interest it must eliminate such conflict
within 90 days, apply to the SEC for permission to continue or resign.
The holders of a majority in principal amount of the then outstanding notes
will have the right to direct the time, method and place of conducting any
proceeding for exercising any remedy available to the trustee, subject to
certain exceptions. The indenture provides that in case an Event of Default
shall occur and be continuing, the trustee will be required, in the exercise of
its power, to use the degree of care of a prudent man in the conduct of his own
affairs. Subject to such provisions, the trustee will be under no obligation to
exercise any of its rights or powers under the indenture at the request of any
holder of notes, unless such holder shall have offered to the trustee security
and indemnity satisfactory to it against any loss, liability or expense.
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DESCRIPTION OF OTHER INDEBTEDNESS
THE CREDIT AGREEMENT
We and our wholly owned subsidiary, CHS/Community Health Systems, Inc., are
parties to a credit facility with a syndicate of banks and other financial
institutions led by The Chase Manhattan Bank, an affiliate of J.P. Morgan
Securities Inc., as a lender and administrative agent, under which our
subsidiary has, and may in the future, borrow. We have guaranteed the
performance of our subsidiary under this credit facility. The credit facility
consists of the following:
BALANCE OUTSTANDING
(AS OF JUNE 30, 2001)
---------------------
Revolving credit facility........................... $ --
Acquisition loan facility........................... $119,000,000
Tranche A term loan................................. $ 12,100,000
Tranche B term loan................................. $120,000,000
Tranche C term loan................................. $120,000,000
Tranche D term loan................................. $311,575,349
The loans bear interest, at our option, at either of the following rates:
(a) the highest of:
- the rate from time to time publicly announced by The Chase Manhattan
Bank, an affiliate of J.P. Morgan Securities Inc., in New York as its
prime rate;
- the secondary market rate for three-month certificates of deposit from
time to time plus 1%; and
- the federal funds rate from time to time, plus 1/2 of 1%;
in each case plus an applicable margin which is:
- based on a pricing grid depending on our leverage ratio at that time
and the maturity date of the loan, for the revolving credit loans,
acquisition loans and the tranche A term loan;
- 2.00% for the tranche B term loan;
- 2.50% for the tranche C term loan;
- 2.75% for the tranche D term loan; or
(b) a Eurodollar rate plus an applicable margin which is:
- based on a pricing grid depending on our leverage ratio at that time
and the maturity date of the loan, for revolving credit loans,
acquisition loans and the tranche A term loan;
- 3.00% for the tranche B term loan;
- 3.50% for the tranche C term loan; or
- 3.75% for the tranche D term loan.
The term loans are repayable in quarterly installments pursuant to a
predetermined payment schedule through December 31, 2005.
We also pay a commitment fee for the daily average unused commitment under
the revolving credit commitment and available acquisition loan commitment. The
commitment fee is based on a pricing grid depending on our leverage ratio and
the termination date of the revolving credit commitment or the acquisition loan
commitment. The commitment fee is payable quarterly in arrears and on the
revolving credit termination date with respect to the available revolving credit
commitments and on the acquisition loan termination date with respect to
available acquisition loan commitments. In addition, we will pay fees for each
letter of credit issued under the credit facility.
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Approximately 20% of the outstanding debt under our revolving credit
facility terminates on December 31, 2002 while the remaining part of the
outstanding debt under our revolving credit facility terminates on January 2,
2004. The total borrowings we may have outstanding at any time under our
revolving credit facility is $200.0 million prior to December 31, 2002 and,
thereafter, $156.0 million.
The acquisition loan facility is a reducing revolving credit facility that
will be permanently reduced on predetermined anniversaries in accordance with a
schedule. Once reduced, outstanding acquisition loans must be repaid to the
extent they exceed the reduced level. Approximately 20% of the outstanding debt
under our acquisition loan facility terminates on December 31, 2002 while the
remaining part of the outstanding debt under our acquisition loan facility
terminates on January 2, 2004. The total borrowings we may have outstanding at
any time under our acquisition loan facility is $251.9 million prior to
July 22, 2002, reducing to $234.4 million thereafter, through December 31, 2002
and, thereafter, $206.4 million.
The loans must be prepaid with the net proceeds in excess of $20 million in
the aggregate of specified asset sales and issuances of additional indebtedness
not constituting permitted indebtedness in the credit facility. These net
proceeds from these specified asset sales and non-permitted indebtedness must be
applied first to prepay ratably the outstanding balances of the term loans and
the acquisition loans and then to repay outstanding balances of the revolving
credit loans. The commitments under the acquisition loans and revolving credit
loans would be permanently reduced by the amount of the repayment of these
facilities. We are seeking a waiver to allow the notes to constitute permitted
indebtedness.
The credit facility contains covenants and provisions that restrict, among
other things, our ability to change the business we are conducting, declare
dividends, grant liens, incur additional indebtedness, exceed a specified
leverage ratio, fall below a minimum interest coverage ratio and make capital
expenditures. Our wholly owned subsidiary, CHS/Community Health Systems, Inc.,
is prohibited from paying dividends or making other distributions to us except
to the extent necessary to pay taxes, fees, and expenses to maintain our
corporate existence and to conduct our activities as permitted by our guarantee
of the obligations under the credit facility.
The credit agreement contains customary events of default. In addition, our
indebtedness under this credit agreement becomes due and payable at the option
of the lenders if we experience a fundamental corporate change, a change of
control occurs under the indenture governing the notes, the Forstmann Little
partnerships cease to own at least 25% of our outstanding common stock, any
person or group owns a greater percentage of our outstanding common stock than
the Forstmann Little partnerships, or any person or group, other than the
Forstmann Little partnerships, at any time has the right to designate a majority
of our board of directors.
We will use the net proceeds from the concurrent common stock offering not
used to repay our subordinated debt to repay a portion of our outstanding debt
under the acquisition loan facility. See "Use of Proceeds."
SUBORDINATED DEBT
We issued an aggregate of $500 million of subordinated debentures to MBO-VI
in connection with the July 1996 acquisition of our subsidiary. MBO-VI
immediately distributed the subordinated debentures to its limited partners. The
subordinated debentures are divided into three equal series, due on June 30,
2007, June 30, 2008 and June 30, 2009. The subordinated debentures provide for
interest at a rate of 7 1/2%, payable semi-annually. The subordinated debentures
may be prepaid by us at any time without premium, penalty or charge and are
subordinate to our credit agreement and other senior obligations. We have a
right of first refusal on the transfer of the debentures.
We will use all of the net proceeds from this offering and a portion of the
net proceeds from the concurrent common stock offering to repay all of our
subordinated debt. See "Use of Proceeds."
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DESCRIPTION OF CAPITAL STOCK
OVERVIEW
Our authorized capital stock consists of 300,000,000 shares of common stock,
$.01 par value per share, and 100,000,000 shares of preferred stock, $.01 par
value per share.
Before the closing of the concurrent common stock offering, based on share
information as of October 5, 2001, there were 86,466,364 shares of common stock
outstanding and no shares of preferred stock outstanding. After the closing of
the concurrent common stock offering, there will be 98,466,364 shares of common
stock outstanding. After giving effect to this offering, there will be an
additional 7,462,675 shares of common stock issuable upon conversion of the
notes.
After the closing of this offering and the concurrent common stock offering,
the Forstmann Little partnerships and our management will beneficially own
approximately 48.8% of the outstanding common stock, 45.4% on a diluted basis.
Accordingly, they will collectively have significant influence in:
- electing our entire board of directors;
- determining the outcome of any corporate transaction or other matter
submitted to the stockholders for approval, including mergers,
consolidations and the sale of all or substantially all of our assets;
- preventing or causing a change of control; and
- approving substantially all amendments to our certificate of incorporation
and by-laws.
The Forstmann Little partnerships have a contractual right to elect two
directors until such time as they no longer own any of our shares of common
stock.
The following summary contains material information relating to provisions
of our common stock, preferred stock, certificate of incorporation and by-laws
is not intended to be complete and is qualified by reference to the provisions
of applicable law and to our certificate of incorporation and by-laws included
as exhibits to the registration statement of which this prospectus is a part.
COMMON STOCK
Holders of common stock are entitled to one vote for each share held on all
matters submitted to a vote of stockholders and do not have cumulative voting
rights. Accordingly, holders of a majority of the outstanding shares of common
stock entitled to vote in any election of directors may elect all of the
directors standing for election. Holders of common stock are entitled to receive
ratably such dividends, if any, as may be declared by the board of directors out
of legally available funds. Upon our liquidation, dissolution or winding-up,
holders of common stock are entitled to receive ratably our net assets available
for distribution after the payment of all of our liabilities and the payment of
any required amounts to the holders of any outstanding preferred stock. Holders
of common stock have no preemptive, subscription, redemption or conversion
rights. The outstanding shares of common stock are, and the shares sold in the
concurrent common stock offering will be, when issued and paid for, validly
issued, fully paid and nonassessable. The rights, preferences and privileges of
holders of common stock are subject to, and may be adversely affected by, the
rights of holders of shares of any series of preferred stock that may designate
and issue in the future.
PREFERRED STOCK
Our board of directors is authorized, subject to any limitations prescribed
by law, without further stockholder approval, to establish from time to time one
or more classes or series of preferred stock covering up to an aggregate of
100,000,000 shares of preferred stock, and to issue
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such shares of preferred stock. Each class or series of preferred stock will
cover such number of shares and will have such preferences, voting powers,
qualifications and special or relative rights or privileges as is determined by
the board of directors, which may include, among others, dividend rights,
liquidation preferences, voting rights, conversion rights, preemptive rights,
and redemption rights.
The purpose of authorizing the board of directors to establish preferred
stock is to eliminate delays associated with a stockholders vote on the creation
of a particular class or series of preferred stock. The rights of the holders of
common stock will be subject to the rights of holders of any preferred stock
issued in the future. The issuance of preferred stock, while providing desirable
flexibility in connection with possible acquisitions and other corporate
purposes, could have the effect of discouraging, delaying or preventing an
acquisition of our company at a price which many stockholders find attractive.
These provisions could also make it more difficult for our stockholders to
effect certain corporate actions, including the election of directors. We have
no present plans to issue any shares of preferred stock.
LIMITATION ON LIABILITY AND INDEMNIFICATION MATTERS
Our certificate of incorporation limits the liability of our directors to us
and our stockholders to the fullest extent permitted by Delaware law.
Specifically, our directors will not be personally liable for money damages for
breach of fiduciary duty as a director, except for liability:
- for any breach of the director's duty of loyalty to us or our
stockholders;
- for acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law;
- under Section 174 of the Delaware General Corporation Law, which concerns
unlawful payments of dividends, stock purchases, or redemptions; and
- for any transaction from which the director derived an improper personal
benefit.
Our certificate of incorporation and by-laws also contain provisions
indemnifying our directors and officers to the fullest extent permitted by
Delaware law. The indemnification permitted under Delaware law is not exclusive
of any other rights to which such persons may be entitled.
In addition, we maintain directors' and officers' liability insurance to
provide our directors and officers with insurance coverage for losses arising
from claims based on breaches of duty, negligence, error and other wrongful
acts.
We have entered into indemnification agreements with our directors and
executive officers. These agreements contain provisions that may require us,
among other things, to indemnify these directors and executive officers against
certain liabilities that may arise because of their status or service as
directors or executive officers, advance their expenses incurred as a result of
any proceeding against them as to which they could be indemnified and obtain
directors' and officers' liability insurance.
At present there is no pending litigation or proceeding involving any
director or officer, as to which indemnification is required or permitted. We
are not aware of any threatened litigation or proceeding which may result in a
claim for such indemnification.
ANTI-TAKEOVER EFFECTS OF OUR CERTIFICATE OF INCORPORATION AND BY-LAWS AND
PROVISIONS OF DELAWARE LAW
A number of provisions in our certificate of incorporation, by-laws and
Delaware law may make it more difficult to acquire control of us. These
provisions could deprive the stockholders of
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opportunities to realize a premium on the shares of common stock owned by them.
In addition, these provisions may adversely affect the prevailing market price
of our common stock. These provisions are intended to:
- enhance the likelihood of continuity and stability in the composition of
the board and in the policies formulated by the board;
- discourage certain types of transactions which may involve an actual or
threatened change of control of our company;
- discourage certain tactics that may be used in proxy fights; and
- encourage persons seeking to acquire control of our company to consult
first with the board of directors to negotiate the terms of any proposed
business combination or offer.
STAGGERED BOARD. Our certificate of incorporation and by-laws provide that
the number of our directors shall be fixed from time to time by a resolution of
a majority of our board of directors. Our certificate of incorporation and
by-laws also provide that the board of directors is divided into three classes.
The members of each class of directors serve for staggered three-year terms. In
accordance with the Delaware General Corporation Law, directors serving on
classified boards of directors may only be removed from office for cause. The
classification of the board has the effect of requiring at least two annual
stockholder meetings, instead of one, to replace a majority of the members of
the board. Subject to the rights of the holders of any outstanding series of
preferred stock, vacancies on the board of directors may be filled only by a
majority of the remaining directors, by the sole remaining director, or by the
stockholders if the vacancy was caused by removal of the director by the
stockholders. This provision could prevent a stockholder from obtaining majority
representation on the board by enlarging the board of directors and filling the
new directorships with its own nominees.
ADVANCE NOTICE PROCEDURES FOR STOCKHOLDER PROPOSALS AND DIRECTOR
NOMINATIONS. Our by-laws provide that stockholders seeking to bring business
before an annual meeting of stockholders, or to nominate candidates for election
as directors at an annual meeting of stockholders, must provide timely notice
thereof in writing. To be timely, a stockholder's notice generally must be
delivered to or mailed and received at our principal executive offices not less
than 45 or more than 75 days prior to the first anniversary of the date on which
we first mailed our proxy materials for the preceding year's annual meeting of
stockholders. However, if the date of the annual meeting is advanced more than
30 days prior to or delayed by more than 30 days after the anniversary of the
preceding year's annual meeting, to be timely, notice by the stockholder must be
delivered not later than the close of business on the later of the 90th day
prior to the annual meeting or the 10th day following the day on which public
announcement of the date of the meeting is first made. The by-laws also specify
certain requirements as to the form and content of a stockholder's notice. These
provisions may preclude stockholders from bringing matters before an annual
meeting of stockholders or from making nominations for directors at an annual
meeting of stockholders.
STOCKHOLDER ACTION BY WRITTEN CONSENT. Our by-laws provide that
stockholders may take action by written consent.
PREFERRED STOCK. The ability of our board to establish the rights and issue
substantial amounts of preferred stock without the need for stockholder
approval, while providing desirable flexibility in connection with possible
acquisitions, financings, and other corporate transactions, may among other
things, discourage, delay, defer, or prevent a change of control of the company.
AUTHORIZED BUT UNISSUED SHARES OF COMMON STOCK. The authorized but unissued
shares of common stock are available for future issuance without stockholder
approval. These additional
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shares may be utilized for a variety of corporate purposes, including future
public offerings to raise additional capital, corporate acquisitions, and
employee benefit plans. The existence of authorized but unissued shares of
common stock could render more difficult or discourage an attempt to obtain
control of us by means of a proxy contest, tender offer, merger or otherwise.
WE HAVE OPTED OUT OF SECTION 203 OF THE DELAWARE GENERAL CORPORATION
LAW. Our certificate of incorporation provides that we have opted out of the
provisions of Section 203 of the Delaware General Corporation Law. In general,
Section 203 prohibits a publicly held Delaware corporation from engaging in a
"business combination" with an "interested stockholder" for a period of three
years after the date of the transaction in which the person became an interested
stockholder, unless the business combination is approved in a prescribed manner.
Because we have opted out in the manner permitted under Delaware law, the
restrictions of this provision will not apply to us.
SHARES ELIGIBLE FOR FUTURE SALE
RULE 144 SECURITIES
Upon the consummation of the concurrent common stock offering, we will have
98,466,364 shares of common stock outstanding. Of these shares, 50,762,068
shares, including the 12,000,000 shares of common stock sold in the concurrent
common stock offering, will be freely tradeable without registration under the
Securities Act of 1933 and without restriction by persons other than our
"affiliates." The 47,704,296 shares of common stock held by the Forstmann Little
partnerships and our directors and executive officers as well as by our other
shareholders who acquired their shares prior to our initial public offering are
"restricted" securities under the meaning of Rule 144 under the Securities Act
of 1933. Their shares may not be sold in the absence of registration under the
Securities Act of 1933, unless an exemption from registration is available,
including exemptions pursuant to Rule 144 or Rule 144A under the Securities Act
of 1933.
In general, under Rule 144 as currently in effect, a person who has
beneficially owned shares of our common stock for at least one year would be
entitled to sell within any three-month period a number of shares that does not
exceed the greater of either of the following:
- 1% of the number of shares of common stock then outstanding, which will
equal approximately 980,000 shares immediately after the concurrent common
stock offering, or
- the average weekly trading volume of the common stock on the New York
Stock Exchange during the four calendar weeks preceding the filing of a
notice on Form 144 with respect to such sale.
Sales under Rule 144 are also subject to certain manner of sale provisions
and notice requirements and to the availability of current public information
about us.
Under Rule 144(k), a person who is not deemed to have been one of our
"affiliates" at any time during the 90 days preceding a sale, and who has
beneficially owned the shares proposed to be sold for at least two years,
including the holding period of any prior owner other than an "affiliate," is
entitled to sell its shares without complying with the manner of sale, public
information, volume limitation or notice provisions of Rule 144. Therefore,
unless otherwise restricted, "144(k) shares" may be sold immediately upon the
completion of the concurrent common stock offering. The sale of these shares, or
the perception that sales will be made, could adversely affect the price of our
common stock after the concurrent common stock offering because a greater supply
of shares would be, or would be perceived to be, available for sale in the
public market.
We, our executive officers and directors and the Forstmann Little
partnerships have agreed, with exceptions, not to dispose of or hedge any of our
common stock or securities convertible into
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or exchangeable for shares of our common stock for 90 days after the date of
this prospectus without first obtaining the written consent of Goldman, Sachs &
Co. See "Underwriting."
REGISTRATION RIGHTS
We have entered into a registration rights agreement with the Forstmann
Little partnerships, pursuant to which we have granted to the Forstmann Little
partnerships six demand rights to cause us to file a registration statement
under the Securities Act of 1933 covering resales of all shares of common stock
held by the Forstmann Little partnerships, and to cause the registration
statement to become effective. The registration rights agreement also grants
"piggyback" registration rights permitting the Forstmann Little partnerships to
include its registrable securities in a registration of securities by us. Under
the agreement, we will pay the expenses of such registrations.
In addition, pursuant to the stockholder's and subscription agreements, we
have granted "piggyback" registration rights to all of our employees and
directors who have purchased shares of common stock and/or that have been
awarded options to purchase shares of common stock. These registration rights
are exercisable only upon registration by us of shares of common stock held by
the Forstmann Little partnerships. The holders of common stock entitled to these
registration rights are entitled to notice of any proposal to register shares
held by the Forstmann Little partnerships and to include their shares in such
registration. We will pay the expenses of these piggyback registrations.
CERTAIN UNITED STATES FEDERAL TAX CONSEQUENCES
NOTES OFFERING
The following summary describes the material United States federal income
tax consequences and, in the case of a holder that is a non-U.S. holder (as
defined below), the United States federal estate tax consequences, of
purchasing, owning and disposing of the notes and of the common stock into which
the notes may be converted. This summary applies to you only if you are the
initial holder of the notes and you acquire the notes for a price equal to the
issue price of the notes. The issue price of the notes is the first price at
which a substantial amount of the notes is sold other than to bond houses,
brokers, or similar persons or organizations acting in the capacity of
underwriters, placement agents or wholesalers.
This summary deals only with notes, and with common stock into which the
notes may be converted, held as capital assets (generally, investment property)
and does not discuss all of the aspects of United States federal income and
estate taxation that may be relevant to you in light of your particular
investment or other circumstances. In particular this discussion does not
consider:
- U.S. state and local or non-U.S. tax consequences;
- the tax consequences for the stockholders, partners or beneficiaries of a
holder;
- special tax rules that may apply to particular holders, such as financial
institutions, insurance companies, tax-exempt organizations, U.S.
expatriates, broker-dealers, and traders in securities;
- special tax rules that may apply to a holder that holds our notes or
common stock into which the notes may be converted, as part of a
"straddle," "hedge," "conversion transaction," "synthetic security" or
other integrated investment; or
- persons that are not the initial holders of the notes or that acquire the
notes for a price other than their issue price.
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This summary is based on United States federal income and estate tax law,
including the provisions of the Internal Revenue Code of 1986, as amended, which
we refer to as the Internal Revenue Code, Treasury regulations, administrative
rulings and judicial authority, all as in effect as of the date of this
prospectus. Subsequent developments in United States federal income and estate
tax law, including changes in law or differing interpretations, which may be
applied retroactively, could have a material effect on the United States federal
income and estate tax consequences of purchasing, owning and disposing of the
notes, and common stock into which the notes may be converted, as set forth in
this summary. Before you purchase notes, you should consult your own tax advisor
regarding the particular United States federal, state and local and foreign
income and other tax consequences of acquiring, owning and disposing of the
notes that may be applicable to you.
UNITED STATES HOLDERS
The following summary applies to you only if you are a United States holder
(as defined below).
DEFINITION OF A UNITED STATES HOLDER
A "United States holder" is a beneficial owner of a note or notes, or of
common stock into which the notes may be converted, who or which is for United
States federal income tax purposes:
- an individual citizen or resident of the United States;
- a corporation or partnership (or other entity classified as a corporation
or partnership for these purposes) created or organized in or under the
laws of the United States or of any political subdivision of the United
States, including any State;
- an estate, the income of which is subject to United States federal income
taxation regardless of the source of that income; or
- a trust, if, in general, a United States court is able to exercise primary
supervision over the trust's administration and one or more United States
persons (within the meaning of the Internal Revenue Code) has the
authority to control all of the trust's substantial decisions.
PAYMENTS OF INTEREST
Interest on your notes will be taxed as ordinary interest income. In
addition:
- if you use the cash method of accounting for United States federal income
tax purposes, you will have to include the interest on your notes in your
gross income at the time you receive the interest; and
- if you use the accrual method of accounting for United States federal
income tax purposes, you will have to include the interest on your notes
in your gross income at the time the interest accrues.
The notes will not be issued with original issue discount, and, accordingly,
issues relating to original issue discount are not summarized in this document.
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SALE OR OTHER DISPOSITION OF NOTES
Your tax basis in your notes generally will be their cost. You generally
will recognize taxable gain or loss when you sell or otherwise dispose of your
notes equal to the difference, if any, between:
- the amount realized on the sale or other disposition (less any amount
attributable to accrued interest, which will be taxable in the manner
described under "United States Holders--Payments of Interest"); and
- your tax basis in the notes.
Your gain or loss generally will be capital gain or loss. This capital gain
or loss will be long-term capital gain or loss if at the time of the sale or
other disposition you have held the notes for more than one year. Subject to
limited exceptions, your capital losses cannot be used to offset your ordinary
income. If you are a non-corporate United States holder, your long-term capital
gain generally will be subject to a maximum tax rate of 20%.
If your notes are redeemed pursuant to a Provisional Redemption your amount
realized will include the fair market value of any common stock you receive as a
Make-Whole Payment. Any such common stock received will generally have a tax
basis equal to its fair market value at the time of the redemption and may be
considered received pursuant to a recapitalization of the Company, in which case
its holding period would generally include the holding period of the note
converted.
CONVERSION OF THE NOTES
You generally will not recognize any income, gain or loss upon conversion of
a note into common stock, except with respect to cash received in lieu of a
fractional share of common stock. Your tax basis in the common stock received on
conversion of a note will be the same as your adjusted tax basis in the note at
the time of conversion (reduced by any basis allocable to a fractional share),
and the holding period for the common stock received on conversion will
generally include the holding period of the note converted.
Cash received in lieu of a fractional share of common stock upon conversion
should be treated as a payment in exchange for the fractional share of common
stock. Accordingly, the receipt of cash in lieu of a fractional share of common
stock generally should result in capital gain or loss (measured by the
difference between the cash received for the fractional share and your adjusted
tax basis in the fractional share).
If you convert your notes in connection with a Provisional Redemption and
receive a cash Make-Whole Payment you will generally recognize gain equal to the
amount of the cash Make-Whole Payment.
DISTRIBUTIONS ON COMMON STOCK
The amount of any distributions by us in respect of the common stock will be
equal to the amount of cash and the fair market value, on the date of
distribution, of any property distributed. Generally, distributions will be
treated as a dividend, subject to a tax as ordinary income, to the extent of our
current or accumulated earnings and profits, then as a tax-free return of
capital to the extent of your tax basis in the common stock and thereafter as a
gain from the sale or exchange of the stock.
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SALE OR OTHER DISPOSITION OF COMMON STOCK
Your tax basis in your common stock received on conversion of a note will be
the same as your adjusted tax basis in the note at the time of conversion,
reduced by any basis allocable to a fractional share paid in cash. You generally
will recognize taxable gain or loss when you sell or otherwise dispose of your
common stock equal to the difference, if any, between:
- the amount realized on the sale or other disposition; and
- your tax basis in the common stock.
Your gain or loss generally will be capital gain or loss. This capital gain
or loss will be long-term capital gain or loss if at the time of the sale or
other disposition your holding period for the common stock exceeds one year.
Subject to limited exceptions, your capital losses cannot be used to offset your
ordinary income. If you are a non-corporate United States holder, your long-term
capital gain generally will be subject to a maximum tax rate of 20%.
ADJUSTMENT OF CONVERSION PRICE
If at any time we make a distribution of property to stockholders that would
be taxable to those stockholders as a dividend (e.g., distributions of evidences
of indebtedness or assets of our company, but generally not stock dividends or
rights to subscribe for common stock) for United States federal income tax
purposes and, in accordance with the antidilution provisions of the notes, the
conversion price of the notes is decreased, the amount of that decrease may be
deemed to be the payment of a taxable dividend to you. As a result, you could
recognize taxable income as a result of an event pursuant to which you receive
no cash or property.
BACKUP WITHHOLDING
In general, "backup withholding," at the applicable rate, for payments made
may apply:
- to any payments made to you of principal of and interest on your note,
- to any payment of the proceeds of a sale or other disposition of your note
before maturity,
- to any payments of dividends on common stock; and
- to any payments of the proceeds of a sale or other disposition of common
stock,
if you are a non-corporate United States holder and fail to provide a correct
taxpayer identification number or otherwise comply with applicable requirements
of the backup withholding rules.
The backup withholding tax is not an additional tax and may be credited
against your United States federal income tax liability, provided that correct
information is provided to the Internal Revenue Service.
NON-U.S. HOLDERS
The following summary applies to you if you are a non-U.S. holder. You are a
non-U.S. holder if you are a beneficial owner of a note or notes, or of common
stock into which the notes may be converted, and are not a United States holder
(as defined above). An individual may, subject to exceptions, be deemed to be a
resident alien, as opposed to a non-resident alien, by among other ways being
present in the United States:
- on at least 31 days in the calendar year, and
- for an aggregate of at least 183 days during a three-year period ending in
the current calendar year, counting for such purposes all of the days
present in the current year,
103
one-third of the days present in the immediately preceding year, and
one-sixth of the days present in the second preceding year.
Resident aliens are subject to United States federal income tax as if they
were United States citizens.
PAYMENTS OF INTEREST
Interest paid by us or our paying agent (in its capacity as such) to you on
your notes will qualify for the "portfolio interest" exception of the Internal
Revenue Code, and therefore, subject to the discussion of backup withholding
below, will not be subject to United States federal income tax or withholding
tax, provided that:
- you do not, directly or indirectly, actually or constructively, own ten
percent or more of the total combined voting power of all classes of our
stock entitled to vote within the meaning of section 871(h)(3) of the
Internal Revenue Code and the Treasury regulations thereunder;
- you are not (i) a controlled foreign corporation for United States federal
income tax purposes that is related, directly or indirectly, to us through
sufficient stock ownership (as provided in the Internal Revenue Code), or
(ii) a bank receiving interest described in section 881(c)(3)(A) of the
Internal Revenue Code;
- such interest is not effectively connected with your conduct of a United
States trade or business; and
- you provide a signed written statement, under penalties of perjury, which
can reliably be related to you, certifying that you are not a United
States person within the meaning of the Internal Revenue Code and
providing your name and address to:
(A) us or our paying agent; or
(B) a securities clearing organization, bank or other financial
institution that holds customers' securities in the ordinary course
of its trade or business and holds your notes on your behalf and that
certifies to us or our paying agent under penalties of perjury that
it, or the bank or financial institution between it and you, has
received from you your signed, written statement and provides us or
our paying agent with a copy of this statement.
Treasury regulations provide alternative methods for satisfying the
certification requirement described in this section. In addition, under these
Treasury regulations:
- if you are a foreign partnership, the certification requirement will
generally apply to your partners, and you will be required to provide
certain information;
- if you are a foreign trust, the certification requirement will generally
be applied to you or your beneficial owners depending on whether you are a
"foreign complex trust," "foreign simple trust," or "foreign grantor
trust" as defined in the Treasury regulations; and
- look-through rules will apply for tiered partnerships, foreign simple
trusts and foreign grantor trusts.
If you are a foreign partnership or a foreign trust, you should consult your own
tax advisor regarding your status under these Treasury regulations and the
certification requirements applicable to you.
If you are engaged in a trade or business in the United States and interest
on your notes is effectively connected with the conduct of your trade or
business, and, if an income tax treaty applies, you maintain a United States
"permanent establishment" to which the interest is generally
104
attributable, you may be subject to United States income tax on a net basis at
the regular graduated rates and in the manner applicable to U.S. persons on the
interest (although interest is exempt from the withholding tax discussed in the
preceding paragraphs provided that you provide a properly executed applicable
Internal Revenue Service form on or before any payment date to claim the
exemption). In addition, United States trade or business income of a non-U.S.
holder that is a non-U.S. corporation may be subject to a branch profits tax at
a rate of 30%, or such lower rate provided by an applicable income tax treaty.
SALE OR OTHER DISPOSITION OF NOTES
You generally will not be subject to United States federal income tax or
withholding tax on any gain realized on the sale or other disposition of your
notes (including the receipt of cash in lieu of a fractional share upon
conversion of a note into common stock but not including any amount representing
interest) unless:
- you are an individual who is present in the United States for 183 days or
more during the taxable year of the sale or other disposition of your
notes, and specific other conditions are met; or
- the gain is effectively connected with your conduct of a United States
trade or business, and, if an income tax treaty applies, is generally
attributable to a United States "permanent establishment" maintained by
you.
CONVERSION OF NOTES
In general, no United States federal income tax or withholding tax should be
imposed upon conversion of a note into common stock by you, except with respect
to cash you receive in lieu of a fractional share of common stock upon
conversion where:
- you are an individual who is present in the United States for 183 days or
more during the taxable year of the conversion of your note, and specific
other conditions are met; or
- the cash received in lieu of a fractional share of common stock upon
conversion of a note is effectively connected with your conduct of a
United States trade or business, and, if an income tax treaty applies, is
generally attributable to a United States "permanent establishment"
maintained by you.
DIVIDENDS ON COMMON STOCK
In the event that we pay dividends on our common stock, we will have to
withhold a United States federal withholding tax at a rate of 30%, or a lower
rate under an applicable income tax treaty, from the gross amount of the
dividends paid to you. You should consult your tax advisor regarding your
entitlement to benefits under a relevant income tax treaty.
Dividends that are effectively connected with your conduct of a trade or
business in the United States and, if an income tax treaty applies, attributable
to a permanent establishment in the United States, are taxed on a net income
basis at the regular graduated rates and in the manner applicable to U.S.
persons. In that case, we will not have to withhold United States federal
withholding tax if you comply with applicable certification and disclosure
requirements. In addition, United States trade or business income of a non-U.S.
holder that is a non-U.S. corporation may be subject to a branch profits tax at
a rate of 30%, or such lower rate provided by an applicable income tax treaty.
If you claim the benefit of an applicable income tax treaty rate, you
generally will be required to satisfy applicable certification and other
requirements. However,
105
- if you are a foreign partnership, the certification requirement will
generally apply to your partners, and you will be required to provide
certain information;
- if you are a foreign trust, the certification requirement will generally
be applied to you or your beneficial owners depending on whether you are a
"foreign complex trust," "foreign simple trust," or "foreign grantor
trust" as defined in the Treasury regulations; and
- look-through rules will apply for tiered partnerships, foreign simple
trusts and foreign grantor trusts.
If you are a foreign partnership or a foreign trust, you should consult your own
tax advisor regarding your status under these Treasury regulations and the
certification requirements applicable to you.
SALE OR OTHER DISPOSITION OF COMMON STOCK
You generally will not be taxed on gain recognized upon the sale or other
disposition of common stock unless:
- the gain is effectively connected with your conduct of a trade or business
in the United States and, if an income tax treaty applies, is attributable
to a permanent establishment in the United States;
- you are an individual who is present in the United States for 183 days or
more during the taxable year of the sale or other disposition and specific
other conditions are met; or
- we are or have been a "U.S. real property holding corporation" for United
States federal income tax purposes at any time during the shorter of the
five-year period ending on the date of sale or other disposition or the
period that you held the common stock.
Generally, a corporation is a "U.S. real property holding corporation" if
the fair market value of its "U.S. real property interests" equals or exceeds
50% of the sum of the fair market value of its worldwide real property interests
plus its other assets used or held for use in a trade or business. The tax
relating to stock in a U.S. real property holding corporation generally will not
apply to a non-U.S. holder whose holdings, direct and indirect, at all times
during the applicable period, constituted 5% or less of our common stock,
provided that our common stock was regularly traded on an established securities
market. We believe that we are not currently, and we do not anticipate becoming
in the future, a U.S. real property holding corporation.
UNITED STATES FEDERAL ESTATE TAX
If you are an individual who is a non-U.S. holder (as specially defined for
United States federal estate tax purposes) at the time of your death, notes
owned or treated as owned by you will generally not be subject to the United
States federal estate tax, unless, at the time of your death:
- you directly or indirectly, actually or constructively, own ten percent or
more of the total combined voting power of all classes of our stock
entitled to vote within the meaning of section 871(h)(3) of the Internal
Revenue Code and the Treasury regulations thereunder; or
- your interest on the notes is effectively connected with your conduct of a
United States trade or business.
If you are an individual who is a non-U.S. holder (as specially defined for
United States federal estate tax purposes) at the time of your death, common
stock owned or treated as owned by you will generally be included in your gross
estate for United States federal estate tax purposes, unless an applicable
estate tax or other treaty provides otherwise and, therefore, you may be subject
to United States federal estate tax.
106
BACKUP WITHHOLDING AND INFORMATION REPORTING
Under current Treasury regulations, backup withholding may apply to payments
made by us or our paying agent (in its capacity as such) to you in respect of
the notes or common stock into which the notes may be converted, unless you
provide a Form W-8BEN or otherwise meet documentary evidence requirements for
establishing that you are a non-U.S. holder or otherwise establish an exemption.
We or our paying agent may, however, report payments of interest on the notes or
dividends on the common stock into which the notes may be converted.
The gross proceeds from the disposition of your notes or of common stock
into which the notes may be converted may be subject to information reporting
and backup withholding tax at the applicable rate. If you sell your notes or
common stock into which the notes may be converted outside the United States
through a non-U.S. office of a non-U.S. broker and the sales proceeds are paid
to you outside the United States, then the U.S. backup withholding and
information reporting requirements generally will not apply to that payment.
However, U.S. information reporting, but not backup withholding, will apply to a
payment of sales proceeds, even if that payment is made outside the United
States, if you sell your notes or common stock into which the notes may be
converted through a non-U.S. office of a broker that:
- is a United States person (as defined in the Internal Revenue Code);
- derives 50% or more of its gross income in specific periods from the
conduct of a trade or business in the United States;
- is a "controlled foreign corporation" for United States federal income tax
purposes; or
- is a foreign partnership, if at any time during its tax year:
o one or more of its partners are U.S. persons who in the aggregate hold
more than 50% of the income or capital interests in the partnership; or
o the foreign partnership is engaged in a U.S. trade or business,
unless the broker has documentary evidence in its files that you are a non-U.S.
person and certain other conditions are met or you otherwise establish an
exemption. If you receive payments of the proceeds of a sale of your notes or
common stock into which the notes may be converted to or through a U.S. office
of a broker, the payment is subject to both U.S. backup withholding and
information reporting unless you provide a Form W-8BEN certifying that you are a
non-U.S. person or you otherwise establish an exemption.
You should consult your own tax advisor regarding application of backup
withholding in your particular circumstance and the availability of and
procedure for obtaining an exemption from backup withholding under current
Treasury regulations. Any amounts withheld under the backup withholding rules
from a payment to you will be allowed as a refund or credit against your United
States federal income tax liability, provided the required information is
furnished to the Internal Revenue Service.
107
UNDERWRITING
Community Health Systems and the underwriters for this offering named below
have entered into an underwriting agreement with respect to the notes being
offered. Subject to certain conditions, each underwriter has severally agreed to
purchase the principal amount of notes indicated in the following table.
Principal Amount
Underwriters of Notes
------------ ----------------
Goldman, Sachs & Co......................................... $125,000,000
Merrill Lynch, Pierce, Fenner & Smith
Incorporated...................................... 43,750,000
Credit Suisse First Boston Corporation...................... 43,750,000
Banc of America Securities LLC.............................. 12,500,000
J.P. Morgan Securities Inc.................................. 12,500,000
UBS Warburg LLC............................................. 12,500,000
------------
Total................................................... $250,000,000
============
If the underwriters sell more than the total principal amount of notes set
forth in the table above, the underwriters have an option to buy up to an
additional $37,500,000 principal amount of notes from Community Health Systems
to cover such sales. They may exercise that option for 30 days. If any notes are
purchased pursuant to this option, the underwriters will severally purchase
notes in approximately the same proportion as set forth in the table above.
The following table shows the per note and total underwriting discounts and
commissions to be paid to the underwriters by Community Health Systems. Such
amounts are shown assuming both no exercise and full exercise of the
underwriters' option to purchase additional notes.
Paid by Community Health Systems
No Exercise Full Exercise
----------- -------------
Per Note................................................. $ 27.50 $ 27.50
Total.................................................... $6,875,000 $7,906,250
Notes sold by the underwriters to the public will initially be offered at
the initial public offering price set forth on the cover of this prospectus. Any
notes sold by the underwriters to securities dealers may be sold at a discount
from the initial public offering price of up to 1.65% of the principal amount of
the notes. Any such securities dealers may resell any notes purchased from the
underwriters to certain other brokers or dealers at a discount from the initial
public offering price. If all the notes are not sold at the initial public
offering price, the representatives may change the offering price and the other
selling terms.
Community Health Systems, its executive officers and directors, and the
Forstmann Little partnerships have agreed with the underwriters, with
exceptions, not to dispose of or hedge any of their common stock or securities
convertible into, or exchangeable for, shares of common stock for 90 days after
the date of this prospectus, except with the prior written consent of Goldman,
Sachs & Co. This agreement does not apply to any existing employee benefit
plans.
The notes are a new issue of securities with no established trading market.
Community Health Systems has been advised by certain underwriters that those
underwriters intend to make a market in the notes but are not obligated to do so
and may discontinue market making at any time without notice. No assurance can
be given as to the liquidity of the trading market for the notes.
108
In connection with this offering, the underwriters may purchase and sell
notes in the open market. These transactions may include short sales,
stabilizing transactions and purchases to cover positions created by short
sales. Short sales involve the sale by the underwriters of a greater number of
notes than they are required to purchase in the offering. "Covered" short sales
are sales made in an amount not greater than the underwriters' option to
purchase additional notes from the issuer in the offering. The underwriters may
close out any covered short position by either exercising their option to
purchase additional notes or purchasing notes in the open market. In determining
the source of notes to close out the covered short position, the underwriters
will consider, among other things, the price of notes available for purchase in
the open market as compared to the price at which they may purchase notes
through the overallotment option. "Naked" short sales are any sales in excess of
such option. The underwriters must close out any naked short position by
purchasing notes in the open market. A naked short position is more likely to be
created if the underwriters are concerned that there may be downward pressure on
the price of the notes in the open market after pricing that could adversely
affect investors who purchase in this offering. Stabilizing transactions consist
of certain bids or purchases made for the purpose of preventing or retarding a
decline in the market price of the notes while this offering is in progress.
The underwriters also may impose a penalty bid. This occurs when a
particular underwriter repays to the underwriters a portion of the underwriting
discount received by it because the representatives have repurchased notes sold
by or for the account of such underwriter in stabilizing or short covering
transactions.
Purchases to cover a short position and stabilizing transactions may have
the effect of preventing or retarding a decline in the market price of Community
Health Systems' notes and common stock, and together with the imposition of the
penalty bid, may stabilize, maintain or otherwise affect the market price of the
notes. As a result, the price of the notes may be higher than the price that
otherwise might exist in the open market. If these activities are commenced,
they may be discontinued at any time. These transactions may be effected in the
over-the-counter market or otherwise.
Some of the underwriters and their affiliates have engaged in, and may in
the future engage in, investment banking and other commercial dealings in the
ordinary course of business with Community Health Systems. They have received
customary fees and commissions for these transactions. In particular, an
affiliate of J.P. Morgan Securities Inc. acts as an administrative agent for
Community Health Systems' credit facility and affiliates of J.P. Morgan
Securities Inc., Banc of America Securities LLC, Goldman, Sachs & Co. and
Merrill Lynch, Pierce, Fenner & Smith Incorporated are lenders under Community
Health Systems' credit facility.
A prospectus in electronic format may be made available on the website
maintained by Goldman, Sachs & Co. and may also be made available on websites
maintained by other underwriters. The underwriters may agree to allocate an
aggregate principal amount of the notes to underwriters for sale to their online
brokerage account holders. Internet distributions will be allocated by Goldman,
Sachs & Co. to underwriters that may make Internet distributions on the same
basis as other allocations.
Community Health Systems estimates that its share of the total expenses of
this offering and the concurrent common stock offering, excluding underwriting
discounts and commissions, will be approximately $2.0 million.
Community Health Systems has agreed to indemnify the several underwriters
against certain liabilities, including liabilities under the Securities Act of
1933.
109
LEGAL MATTERS
The validity of the notes offered in this offering will be passed upon for
us by Fried, Frank, Harris, Shriver & Jacobson (a partnership including
professional corporations), New York, New York. Certain legal matters related to
this offering will be passed upon for the underwriters by Debevoise & Plimpton,
New York, New York. Fried, Frank, Harris, Shriver & Jacobson has in the past
provided, and may continue to provide, legal services to Forstmann Little and
its affiliates.
EXPERTS
The consolidated financial statements as of December 31, 1999 and 2000 and
for each of the three years in the period ended December 31, 2000 included in
this prospectus and the related financial statement schedule included elsewhere
in the registration statement have been audited by Deloitte & Touche LLP,
independent auditors, as stated in their reports appearing herein and elsewhere
in the registration statement, and have been so included in reliance upon the
reports of such firm given upon their authority as experts in accounting and
auditing.
WHERE YOU CAN FIND MORE INFORMATION
We have filed with the Commission a registration statement on Form S-1,
which includes amendments, exhibits, schedules and supplements, under the
Securities Act of 1933 and the rules and regulations under the Securities Act of
1933, for the registration of the notes offered by this prospectus. Although
this prospectus, which forms a part of the registration statement, contains all
material information relating to this offering included in the registration
statement, parts of the registration statement have been omitted from this
prospectus as permitted by the rules and regulations of the Commission. For
further information with respect to us and the notes offered by this prospectus,
please refer to the registration statement. Statements contained in this
prospectus as to the contents of any contracts or other document referred to in
this prospectus are not necessarily complete and, where such contract or other
document is an exhibit to the registration statement, each such statement is
qualified in all respects by the provisions of such exhibit, to which reference
is now made. The registration statement can be inspected and copied at
prescribed rates at the public reference facilities maintained by the Commission
at Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549, and at the
Commission's regional office at Northwestern Atrium Center, 500 West Madison
Street, Suite 1400, Chicago, Illinois 60661. The public may obtain information
regarding the Washington, D.C. Public Reference Room by calling the Commission
at 1-800-SEC-0330. In addition, the registration statement is publicly available
through the Commission's site on the Internet's World Wide Web, located at:
http://www.sec.gov. Our public filings are available for inspection at the
offices of the New York Stock Exchange, Inc., 20 Broad Street, New York, New
York 10005.
We are subject to the informational requirements of the Securities Exchange
Act of 1934. To comply with these requirements, we will file periodic reports,
proxy statements and other information with the Commission. These reports and
other information are available as provided above.
------------------------
You should rely only on the information contained in this prospectus. We
have not, and the underwriters have not, authorized anyone to provide you with
information different from that contained in this prospectus. If anyone provides
you with different information you should not rely on it. We are offering to
sell, and seeking offers to buy, the notes only in jurisdictions where offers
and sales are permitted. The information contained in this prospectus is
accurate only as of the date of this prospectus regardless of the time of
delivery of this prospectus or of any sale of the notes. Our business, financial
condition, results of operations, and prospects may have changed since that
date.
110
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Independent Auditors' Report................................ F-2
Consolidated Balance Sheets as of December 31, 1999 and
2000...................................................... F-3
Consolidated Statements of Operations for the years ended
December 31, 1998, 1999 and 2000.......................... F-4
Consolidated Statements of Stockholders' Equity for the
years ended December 31, 1998, 1999 and 2000.............. F-5
Consolidated Statements of Cash Flows for the years ended
December 31, 1998, 1999 and 2000.......................... F-6
Notes to Consolidated Financial Statements.................. F-7
Unaudited Interim Condensed Consolidated Balance Sheet as of
June 30, 2001............................................. F-24
Unaudited Interim Condensed Consolidated Statements of
Operations for the six months ended June 30, 2000 and
2001...................................................... F-25
Unaudited Interim Condensed Consolidated Statements of Cash
Flows for the six months ended June 30, 2000 and 2001..... F-26
Notes to Unaudited Interim Condensed Consolidated Financial
Statements................................................ F-27
F-1
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
Community Health Systems, Inc.
Brentwood, Tennessee
We have audited the accompanying consolidated balance sheets of Community
Health Systems, Inc. and subsidiaries as of December 31, 2000 and 1999, and the
related consolidated statements of operations, stockholders' equity, and cash
flows for each of the three years in the period ended December 31, 2000. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the consolidated financial position of Community Health
Systems, Inc. and subsidiaries as of December 31, 2000 and 1999, and the results
of their operations and their cash flows for each of the three years in the
period ended December 31, 2000, in conformity with accounting principles
generally accepted in the United States of America.
/s/ Deloitte & Touche LLP
Nashville, Tennessee
February 20, 2001
F-2
COMMUNITY HEALTH SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
DECEMBER 31,
-----------------------
1999 2000
---------- ----------
ASSETS
Current assets:
Cash and cash equivalents................................. $ 4,282 $ 13,740
Patient accounts receivable, net of allowance for doubtful
accounts of $34,499 and $52,935 in 1999 and 2000,
respectively............................................ 226,350 309,826
Supplies.................................................. 32,134 39,679
Prepaid expenses and taxes................................ 9,846 19,989
Deferred income taxes..................................... 5,862 2,233
Other current assets...................................... 22,022 23,110
---------- ----------
Total current assets.................................... 300,496 408,577
---------- ----------
Property and equipment:
Land and improvements..................................... 41,327 46,268
Buildings and improvements................................ 470,856 536,428
Equipment and fixtures.................................... 219,659 267,505
---------- ----------
731,842 850,201
Less accumulated depreciation and amortization............ (108,499) (142,120)
---------- ----------
Property and equipment, net............................. 623,343 708,081
---------- ----------
Goodwill, net of accumulated amortization of $97,766 and
$123,459 in 1999 and 2000, respectively................... 877,890 985,568
---------- ----------
Other assets, net of accumulated amortization of $34,265 and
$37,142 in 1999 and 2000, respectively.................... 93,355 111,611
---------- ----------
Total assets............................................ $1,895,084 $2,213,837
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt...................... $ 27,029 $ 17,433
Accounts payable.......................................... 57,392 83,191
Compliance settlement payable............................. 30,900 --
Accrued liabilities:
Employee compensation................................... 49,346 56,840
Interest................................................ 19,451 27,389
Other................................................... 51,159 56,020
---------- ----------
Total current liabilities............................. 235,277 240,873
---------- ----------
Long-term debt.............................................. 1,407,604 1,201,590
---------- ----------
Other long-term liabilities................................. 22,495 15,200
---------- ----------
Commitments and contingencies:
Stockholders' equity:
Preferred stock, $.01 par value per share, 100,000,000
shares authorized; none issued.......................... -- --
Common stock, $.01 par value per share, 300,000,000 shares
authorized; 87,105,562 shares issued and 86,137,582
shares outstanding at December 31, 1999 and 55,620,807
shares issued and 56,588,787 shares outstanding at
December 31, 2000....................................... 566 871
Additional paid-in capital................................ 483,237 998,092
Accumulated deficit....................................... (245,352) (235,783)
Treasury stock, at cost, 967,980 shares at December 31,
2000 and 1999........................................... (6,587) (6,587)
Notes receivable for common stock......................... (1,997) (334)
Unearned stock compensation............................... (159) (85)
---------- ----------
Total stockholders' equity.............................. 229,708 756,174
---------- ----------
Total liabilities and stockholders' equity............ $1,895,084 $2,213,837
========== ==========
See notes to consolidated financial statements.
F-3
COMMUNITY HEALTH SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
YEAR ENDED DECEMBER 31,
---------------------------------------
1998 1999 2000
----------- ----------- -----------
Net operating revenues.............................. $ 854,580 $ 1,079,953 $ 1,337,501
Operating costs and expenses:
Salaries and benefits............................. 328,264 419,320 517,392
Provision for bad debts........................... 69,005 95,149 122,303
Supplies.......................................... 100,633 126,693 154,211
Rent.............................................. 22,344 25,522 31,385
Other operating expenses.......................... 167,944 209,084 259,474
Depreciation and amortization..................... 49,861 56,943 71,931
Amortization of goodwill.......................... 26,639 24,708 25,693
Impairment of long-lived assets................... 164,833 -- --
Compliance settlement and Year 2000 remediation
costs........................................... 20,209 17,279 --
----------- ----------- -----------
Total operating costs and expenses.................. 949,732 974,698 1,182,389
----------- ----------- -----------
Income (loss) from operations....................... (95,152) 105,255 155,112
Interest expense, net of interest income of $261,
$288 and $600 in 1998, 1999 and 2000,
respectively...................................... 101,191 116,491 127,370
----------- ----------- -----------
Income (loss) before cumulative effect of a change
in accounting principle and income taxes.......... (196,343) (11,236) 27,742
Provision for (benefit from) income taxes........... (13,405) 5,553 18,173
----------- ----------- -----------
Income (loss) before cumulative effect of a change
in accounting principle........................... (182,938) (16,789) 9,569
Cumulative effect of a change in accounting
principle, net of taxes of $189................... (352) -- --
----------- ----------- -----------
Net income (loss)................................... $ (183,290) $ (16,789) $ 9,569
=========== =========== ===========
Basic and diluted earnings (loss) per common share:
Income (loss) before cumulative effect of a change
in accounting principle........................... $ (3.37) $ (0.31) $ 0.14
Cumulative effect of a change in accounting
principle......................................... (0.01) -- --
----------- ----------- -----------
Net income (loss)................................... $ (3.38) $ (0.31) $ 0.14
=========== =========== ===========
Weighted average number of shares outstanding:
Basic............................................. 54,249,895 54,545,030 67,610,399
=========== =========== ===========
Diluted........................................... 54,249,895 54,545,030 69,187,191
=========== =========== ===========
See notes to consolidated financial statements.
F-4
COMMUNITY HEALTH SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE DATA)
NOTES
COMMON STOCK ADDITIONAL TREASURY STOCK RECEIVABLE
--------------------- PAID-IN ACCUMULATED ------------------- FOR COMMON
SHARES AMOUNT CAPITAL DEFICIT SHARES AMOUNT STOCK
---------- -------- ---------- ------------- -------- -------- --------------
BALANCE, January 1, 1998.. 56,376,695 $564 $480,435 $ (45,273) (135,868) $(1,041) $(1,050)
Issuance of common stock.. 212,092 2 1,653 -- 150,067 1,120 (900)
Common stock purchased for
treasury, at cost....... -- -- -- -- (970,269) (5,634) 204
Payments on notes
receivable.............. -- -- -- -- -- -- 36
Net loss.................. -- -- -- (183,290) -- -- --
---------- ---- -------- --------- -------- ------- -------
BALANCE, December 31,
1998.................... 56,588,787 566 482,088 (228,563) (956,070) (5,555) (1,710)
Issuance of common stock.. -- -- 907 -- 314,425 1,748 (440)
Common stock purchased for
treasury, at cost....... -- -- -- -- (326,335) (2,780) --
Payments on notes
receivable.............. -- -- -- -- -- -- 153
Unearned stock
compensation............ -- -- 242 -- -- -- --
Earned stock
compensation............ -- -- -- -- -- -- --
Net loss.................. -- -- -- (16,789) -- -- --
---------- ---- -------- --------- -------- ------- -------
BALANCE, December 31,
1999.................... 56,588,787 566 483,237 (245,352) (967,980) (6,587) (1,997)
Issuance of common stock
in connection with
initial public offering,
net of issuance costs... 20,425,717 204 245,498 -- -- -- --
Issuance of common stock
in connection with
secondary public
offering, net of
issuance costs.......... 10,000,000 100 268,722 -- -- -- --
Issuance of common stock
in connection with the
exercise of options..... 91,058 1 635 -- -- -- --
Payments on notes
receivable.............. -- -- -- -- -- -- 1,663
Earned stock
compensation............ -- -- -- -- -- -- --
Net income................ -- -- -- 9,569 -- -- --
---------- ---- -------- --------- -------- ------- -------
BALANCE, December 31,
2000.................... 87,105,562 $871 $998,092 $(235,783) (967,980) $(6,587) $ (334)
========== ==== ======== ========= ======== ======= =======
UNEARNED
STOCK
COMPENSATION TOTAL
-------------- ---------
BALANCE, January 1, 1998.. $ -- $433,635
Issuance of common stock.. -- 1,875
Common stock purchased for
treasury, at cost....... -- (5,430)
Payments on notes
receivable.............. -- 36
Net loss.................. -- (183,290)
----- --------
BALANCE, December 31,
1998.................... -- 246,826
Issuance of common stock.. -- 2,215
Common stock purchased for
treasury, at cost....... -- (2,780)
Payments on notes
receivable.............. -- 153
Unearned stock
compensation............ (242) --
Earned stock
compensation............ 83 83
Net loss.................. -- (16,789)
----- --------
BALANCE, December 31,
1999.................... (159) 229,708
Issuance of common stock
in connection with
initial public offering,
net of issuance costs... -- 245,702
Issuance of common stock
in connection with
secondary public
offering, net of
issuance costs.......... -- 268,822
Issuance of common stock
in connection with the
exercise of options..... -- 636
Payments on notes
receivable.............. -- 1,663
Earned stock
compensation............ 74 74
Net income................ -- 9,569
----- --------
BALANCE, December 31,
2000.................... $ (85) $756,174
===== ========
See notes to consolidated financial statements.
F-5
COMMUNITY HEALTH SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31,
-------------------------------
1998 1999 2000
--------- -------- --------
(DOLLARS IN THOUSANDS)
Cash flows from operating activities:
Net income (loss)......................................... $(183,290) $(16,789) $ 9,569
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization........................... 76,500 81,651 97,624
Deferred income taxes................................... (14,797) (3,799) 17,210
Impairment charge....................................... 164,833 -- --
Compliance settlement costs............................. 20,000 14,000 --
Stock compensation expense.............................. -- 83 74
Other non-cash (income) expenses, net................... (528) (570) (5,030)
Changes in operating assets and liabilities, net of
effects of acquisitions and divestitures:
Patient accounts receivable........................... (33,908) (42,973) (52,989)
Supplies, prepaid expenses and other current assets... (7,724) (17,598) (15,604)
Accounts payable, accrued liabilities and income
taxes............................................... 4,461 (28,071) 17,931
Compliance settlement payable......................... -- -- (30,900)
Other................................................. (9,828) 2,320 (14,900)
--------- -------- --------
Net cash provided by (used in) operating activities......... 15,719 (11,746) 22,985
--------- -------- --------
Cash flows from investing activities:
Acquisitions of facilities, pursuant to purchase
agreements.............................................. (172,597) (59,699) (148,216)
Purchases of property and equipment....................... (52,880) (80,255) (63,005)
Proceeds from sale of equipment........................... 1,531 121 107
Increase in other assets.................................. (12,607) (15,708) (33,327)
--------- -------- --------
Net cash used in investing activities....................... (236,553) (155,541) (244,441)
--------- -------- --------
Cash flows from financing activities:
Proceeds from issuance of common stock.................... 1,875 2,215 514,524
Proceeds from exercise of stock options................... -- -- 636
Common stock purchased for treasury....................... (5,634) (2,780) --
Borrowings under Credit Agreement......................... 242,491 436,300 241,310
Repayments of long-term indebtedness...................... (18,842) (270,885) (525,556)
--------- -------- --------
Net cash provided by financing activities................... 219,890 164,850 230,914
--------- -------- --------
Net change in cash and cash equivalents..................... (944) (2,437) 9,458
Cash and cash equivalents at beginning of period............ 7,663 6,719 4,282
--------- -------- --------
Cash and cash equivalents at end of period.................. $ 6,719 $ 4,282 $ 13,740
========= ======== ========
See notes to consolidated financial statements.
F-6
COMMUNITY HEALTH SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BUSINESS. Community Health Systems Inc. (the "Company") owns, leases and
operates acute care hospitals that are the principal providers of primary
healthcare services in non-urban communities. As of December 31, 2000, the
Company owned, leased or operated 52 hospitals, licensed for 4,688 beds in 20
states.
USE OF ESTIMATES. The preparation of financial statements in conformity
with accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results could differ
from those estimates.
PRINCIPLES OF CONSOLIDATION. The consolidated financial statements include
the accounts of the Company and its subsidiaries. All significant intercompany
accounts and transactions have been eliminated. Certain of the subsidiaries have
minority stockholders. The amount of minority interest in equity and minority
interest in income or loss is not material and is included in other long-term
liabilities and other operating expenses.
CASH EQUIVALENTS. The Company considers highly liquid investments with
original maturities of three months or less to be cash equivalents.
SUPPLIES. Supplies, principally medical supplies, are stated at the lower
of cost (first-in, first-out basis) or market.
PROPERTY AND EQUIPMENT. Property and equipment are recorded at cost.
Depreciation is recognized using the straight-line method over the estimated
useful lives of the land improvements (2 to 15 years; weighted average useful
life is 11 years), buildings and improvements (5 to 40 years; weighted average
useful life is 33 years) and equipment and fixtures (5 to 20 years; weighted
average useful life is 7 years). Costs capitalized as construction in progress
were $27.2 million and $30.3 million at December 31, 1999 and 2000,
respectively, and are included in buildings and improvements. Expenditures for
renovations and other significant improvements are capitalized; however,
maintenance and repairs which do not improve or extend the useful lives of the
respective assets are charged to operations as incurred. Interest capitalized in
accordance with Statement of Financial Accounting Standards ("SFAS") No. 34,
"Capitalization of Interest Cost," was $.07 million, $1.4 million and
$2.5 million for the years ended December 31, 1998, 1999, and 2000,
respectively.
The Company also leases certain facilities and equipment under capital
leases (see Notes 2 and 7). Such assets are amortized on a straight-line basis
over the lesser of the terms of the respective leases, or the remaining useful
lives of the assets.
GOODWILL. Goodwill represents the excess of cost over the fair value of net
assets acquired and is amortized on a straight-line basis ranging from 18 to
40 years. Annually, as required by Accounting Principles Board ("APB") Opinion
No. 17, the Company reviews its total enterprise goodwill for possible
impairment, by comparing total projected undiscounted cash flows to the total
carrying amount of goodwill.
OTHER ASSETS. Other assets consist primarily of the noncurrent portion of
deferred income taxes and costs associated with the issuance of debt which are
amortized over the life of the
F-7
COMMUNITY HEALTH SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
related debt using the effective interest method. Amortization of deferred
financing costs is included in interest expense.
THIRD-PARTY REIMBURSEMENT. Net operating revenues include amounts estimated
by management to be reimbursable by Medicare and Medicaid under prospective
payment systems, provisions of cost-reimbursement and other payment methods.
Approximately 49% of net operating revenues for the year ended December 31,
1998, 48% for the year ended December 31, 1999, and 46% for the year ended
December 31, 2000, are related to services rendered to patients covered by the
Medicare and Medicaid programs. In addition, the Company is reimbursed by
non-governmental payors using a variety of payment methodologies. Amounts
received by the Company for treatment of patients covered by such programs are
generally less than the standard billing rates. The differences between the
estimated program reimbursement rates and the standard billing rates are
accounted for as contractual adjustments, which are deducted from gross revenues
to arrive at net operating revenues. Final settlements under certain of these
programs are subject to adjustment based on administrative review and audit by
third parties. Adjustments to the estimated billings are recorded in the periods
that such adjustments become known. Adjustments to previous program
reimbursement estimates are accounted for as contractual adjustments and
reported in future periods as final settlements are determined. Adjustments
related to final settlements or appeals increased revenue by an insignificant
amount in each of the years ended December 31, 1998, 1999 and 2000. Net amounts
due to third-party payors as of December 31, 1999 were $9.1 million and as of
December 31, 2000 were $2.3 million and are included in accrued
liabilities-other in the accompanying balance sheets. Substantially all Medicare
and Medicaid cost reports are final settled through 1997.
CONCENTRATIONS OF CREDIT RISK. The Company grants unsecured credit to its
patients, most of whom reside in the service area of the Company's facilities
and are insured under third-party payor agreements. Because of the geographic
diversity of the Company's facilities and non-governmental third-party payors,
Medicare and Medicaid represent the Company's only significant concentrations of
credit risk.
NET OPERATING REVENUES. Net operating revenues are recorded net of
provisions for contractual adjustments of approximately $829 million,
$1,157 million and $1,649 million in 1998, 1999 and 2000, respectively. Net
operating revenues are recognized when services are provided. In the ordinary
course of business the Company renders services to patients who are financially
unable to pay for hospital care. The value of these services to patients who are
unable to pay is not material to the Company's consolidated results of
operations.
PROFESSIONAL LIABILITY INSURANCE CLAIMS. The Company accrues, on a
quarterly basis, for estimated losses resulting from professional liability
claims to the extent they are not covered by insurance. The accrual, which
includes an estimate for incurred but not reported claims, is based on
historical loss patterns and annual actual projections. To the extent that
subsequent claims information varies from management's estimates, the liability
is adjusted currently.
ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS. In accordance with SFAS
No. 121, "Accounting for Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed Of," whenever events or changes in circumstances indicate
that the carrying values of certain long-lived assets and related intangible
assets may be impaired, the Company projects the undiscounted cash flows
expected to be generated by these assets. If the projections indicate that the
reported amounts are not expected to be recovered, such amounts are reduced to
their estimated fair value
F-8
COMMUNITY HEALTH SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
based on a quoted market price, if available, or an estimate based on valuation
techniques available in the circumstances.
INCOME TAXES. The Company accounts for income taxes under the asset and
liability method, in which deferred income tax assets and liabilities are
recognized for the tax consequences of "temporary differences" by applying
enacted statutory tax rates applicable to future years to differences between
the financial statement carrying amounts and the tax bases of existing assets
and liabilities. The effect on deferred taxes of a change in tax rates is
recognized in the statement of operations during the period in which the tax
rate change becomes law.
COMPREHENSIVE INCOME. SFAS No. 130, "Reporting Comprehensive Income,"
defines comprehensive income as the change in equity of a business enterprise
during a period from transactions and other events and circumstances from
non-owner sources. Comprehensive income (loss) for 2000, 1999 and 1998 is equal
to the net income (loss) reported.
STOCK-BASED COMPENSATION. The Company accounts for stock-based compensation
using the intrinsic value method prescribed in APB Opinion No. 25, "Accounting
for Stock Issued to Employees" and related interpretations. Compensation cost,
if any, is measured as the excess of the fair value of the Company's stock at
the date of grant over the amount an employee must pay to acquire the stock.
SFAS No. 123, "Accounting for Stock-Based Compensation," established accounting
and disclosure requirements using a fair value based method of accounting for
stock-based employee compensation plans; however, it allows an entity to
continue to measure compensation for those plans using the intrinsic value
method of accounting prescribed by APB Opinion No. 25. The Company has elected
to continue to measure compensation under the method of accounting as described
above, and has adopted the disclosure requirements of SFAS No. 123.
SEGMENT REPORTING. SFAS No. 131, "Disclosures About Segments of an
Enterprise and Related Information," requires that a public company report
annual and interim financial and descriptive information about its reportable
operating segments. Operating segments, as defined, are components of an
enterprise about which separate financial information is available that is
evaluated regularly by the chief operating decision maker in deciding how to
allocate resources and in assessing performance. SFAS No. 131 allows aggregation
of similar operating segments into a single operating segment if the businesses
have similar economic characteristics and are considered similar under the
criteria established by SFAS No. 131. The Company owns, leases and operates 52
acute care hospitals in 52 different non-urban communities. All of these
hospitals have similar services, have similar types of patients, operate in a
consistent manner and have similar economic and regulatory characteristics.
Therefore, the Company has one reportable segment.
RECENT ACCOUNTING PRONOUNCEMENT NOT YET ADOPTED. SFAS No. 133, "Accounting
for Derivative Instruments and Hedging Activities," is effective for all fiscal
years beginning after June 15, 2000. SFAS No. 133, as amended, establishes
accounting and reporting standards for derivative instruments, including certain
derivative instruments embedded in other contracts and for hedging activities.
Under SFAS No. 133, certain contracts that were not formerly considered
derivatives may now meet the definition of a derivative. The Company will adopt
SFAS No. 133 effective January 1, 2001. Management does not expect the adoption
of SFAS No. 133 to have a significant impact on the financial position, results
of operations, or cash flows of the Company.
F-9
COMMUNITY HEALTH SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. LONG-TERM LEASES AND PURCHASES OF HOSPITALS
During 1998, the Company acquired, through two purchase transactions,
effective in April and September, respectively, and two capital lease
transactions, effective in November, most of the assets, including working
capital, of four hospitals. The consideration for the four hospitals totaled
$218.6 million. The consideration consisted of $169.8 million in cash, which was
borrowed under the acquisition loan facilities, and assumed liabilities of
$48.8 million. The entire lease obligation relating to each lease transaction
was prepaid. The prepayment was included as part of the cash consideration.
Licensed beds at these four hospitals totaled 360.
Also, effective December 1, 1998, the Company entered into an operating
agreement relating to, and purchased certain working capital accounts, primarily
accounts receivable, supplies and accounts payable, of a 38 licensed bed
hospital, for a cash payment of $2.8 million. Pursuant to this agreement, the
hospital was acquired on October 1, 2000, with the remaining assets being
purchased for $0.9 million and is included in the acquisitions described above.
During 1999, the Company acquired, through three purchase transactions,
effective in March, September, and November, respectively, and one capital lease
transaction, effective in March, most of the assets, including working capital,
of four hospitals. The consideration for the four hospitals totaled
$77.8 million. The consideration consisted of $59.7 million in cash, which was
borrowed under the acquisition loan facilities, and assumed liabilities of
$18.1 million. The entire lease obligation relating to the lease transaction was
prepaid. The prepayment was included as part of the cash consideration. The
Company also constructed and opened an additional hospital at a cost of
$15.3 million, which replaced a hospital we managed. Licensed beds at the four
hospitals acquired totaled 477.
During 2000, the Company acquired five hospitals through purchase
transactions, effective in March, April, July, October and December and acquired
two hospitals through capital lease transactions, effective in April and June,
respectively. The consideration for the seven hospitals totaled $246.9 million.
The consideration consisted of $147.6 million in cash, which was borrowed under
the acquisition loan facilities and assumed liabilities of $99.3 million. The
entire lease obligation relating to each lease transaction was prepaid. The
repayment was included as part of the cash consideration. Licensed beds at these
seven hospitals totaled 607 beds.
The foregoing acquisitions were accounted for using the purchase method of
accounting. The allocation of the purchase price for acquisition transactions
closed in 2000 has been determined by the Company based upon available
information and is subject to obtaining final asset valuations prepared by
independent appraisers, and settling amounts related to purchased working
capital. Independent asset valuations are generally completed within 120 days of
the date of acquisition; working capital settlements are generally made within
180 days of the date of acquisition. Adjustments to the purchase price
allocation are not expected to be material.
The table below summarizes the allocations of the purchase price (including
assumed liabilities) for these acquisitions (in thousands):
1998 1999 2000
--------- -------- ---------
Current assets............................... $ 40,680 $15,514 $ 39,844
Property and equipment....................... 116,443 53,746 84,512
Goodwill..................................... 61,441 24,840 122,585
The operating results of the foregoing hospitals have been included in the
consolidated statements of operations from their respective dates of
acquisition. The following pro forma
F-10
COMMUNITY HEALTH SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. LONG-TERM LEASES AND PURCHASES OF HOSPITALS (CONTINUED)
combined summary of operations of the Company gives effect to using historical
information of the operations of the hospitals purchased in 2000 and 1999 as if
the acquisitions had occurred as of January 1, 1999 (in thousands except per
share data):
YEAR ENDED DECEMBER 31,
-----------------------
1999 2000
---------- ----------
Pro forma net operating revenues................... $1,347,785 $1,456,867
Pro forma net income (loss)........................ (24,904) 6,008
Pro forma net income (loss) per share:
Basic............................................ $ (0.46) $ 0.09
Diluted.......................................... $ (0.46) $ 0.09
3. IMPAIRMENT OF LONG-LIVED ASSETS
In December 1998, in connection with the Company's periodic review process,
it was determined that primarily as a result of adverse changes in physician
relationships, undiscounted cash flows from seven of the Company's hospitals
were below the carrying value of long-lived assets associated with those
hospitals. Therefore, in accordance with SFAS No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of",
the Company adjusted the carrying value of the related long-lived assets to
their estimated fair value. The estimated fair values of these hospitals were
based on independently prepared specific market appraisals. The impairment
charge of $164.8 million was comprised of reductions to goodwill of
$134.3 million, tangible property of $27.1 million and identifiable intangibles
of $3.4 million.
Of the seven impaired hospitals, two are located in Georgia; two are located
in Texas; one is located in Florida; one is located in Louisiana; and one is
located in Kentucky. The events and circumstances leading to the impairment
charge were unique to each of the hospitals.
One of our Kentucky hospitals lost its only anesthesiologist due to
unexpected death and a leading surgeon due to illness. We had not been able to
successfully recruit a replacement surgeon. One of our Georgia hospitals lost a
key surgeon due to unexpected death and a leading specialist due to relocation
to another market. We had not been able to successfully recruit replacement
physicians. One of our Louisiana hospitals relies heavily on foreign physicians
and, following the departure of four foreign physicians from its market over a
short period of time, had difficulties replacing these physicians because of
regulatory changes in recruiting foreign physicians. The skilled nursing and
home health reimbursement for one of our Texas hospitals was disproportionately
and adversely affected by the Balanced Budget Act of 1997. In addition, the
market in which this hospital operates relies on foreign physicians that have
been difficult to recruit because of regulatory changes. Our other Georgia
hospitals terminated an employed specialty surgeon who was responsible for over
5% of the hospital's revenue. We had not been able to replace the surgeon. In
addition, this hospital's skilled nursing reimbursement was disproportionately
and adversely affected by the Balanced Budget Act of 1997. Our other Texas
hospital lost market share and was excluded from several key managed care
contracts caused by the combination in 1998 of two larger competing hospitals.
This is our only hospital which competes with more than one hospital in its
primary service area. A Florida hospital we then owned terminated discussions in
1998 with an unrelated hospital, located in a contiguous county, to build a
combined replacement facility. The short and long-term success of this hospital
was in our view dependent upon the combination being effected.
F-11
COMMUNITY HEALTH SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. IMPAIRMENT OF LONG-LIVED ASSETS (CONTINUED)
Generally, we have not experienced difficulty in recruiting physicians and
specialists for our hospitals. However, for the four hospitals referred to above
we have experienced difficulty in recruiting physicians and specialists where
the number of physicians on staff is low. These four hospitals averaged 13
physicians per hospital as of December 31, 1998. The average number of
physicians on the medical staff of our other hospitals was 39 physicians at that
time. We continually monitor the relationships of our hospitals with their
physicians and any physician recruiting requirements. We have frequent
discussions with board members, chief executive officers and chief financial
officers of our hospitals. We are not aware of any significant adverse
relationships with physicians or any recurring physician recruitment needs that,
if not resolved in a timely manner, would have a material adverse effect on our
results of operations and financial position, either currently or in future
periods.
4. INCOME TAXES
The provision for (benefit from) income taxes consists of the following (in
thousands):
YEAR ENDED DECEMBER 31,
------------------------------
1998 1999 2000
-------- -------- --------
Current
Federal........................................... $ -- $ -- $ 195
State............................................. 1,204 2,815 1,328
-------- ------ -------
.................................................... 1,204 2,815 1,523
-------- ------ -------
Deferred
Federal........................................... (11,036) 3,163 16,519
State............................................. (3,573) (425) 131
-------- ------ -------
.................................................... (14,609) 2,738 16,650
-------- ------ -------
Total provision for (benefit from) income taxes..... $(13,405) $5,553 $18,173
======== ====== =======
The following table reconciles the differences between the statutory federal
income tax rate and the effective tax rate (dollars in thousands):
YEAR ENDED DECEMBER 31,
------------------------------------------------------------------------------
1998 1999 2000
---------------------- ---------------------- ----------------------
AMOUNT % AMOUNT % AMOUNT %
-------- -------- -------- -------- -------- --------
Provision for (benefit from) income
taxes at statutory federal rate... $(68,843) 35.0% $(3,933) 35.0% $ 9,710 35.0%
State income taxes, net of federal
income tax benefit................ (1,379) 0.7 2,389 (21.3) 1,459 5.3
Non-deductible goodwill
amortization...................... 7,859 (4.0) 6,751 (60.1) 6,675 24.0
Impairment charge--goodwill......... 41,652 (21.2) -- -- -- --
Other............................... 7,306 (3.7) 346 (3.0) 329 1.2
-------- ----- ------- ----- ------- ----
Provision for (benefit from) income
taxes and effective tax rate...... $(13,405) 6.8% $ 5,553 (49.4)% $18,173 65.5%
======== ===== ======= ===== ======= ====
F-12
COMMUNITY HEALTH SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. INCOME TAXES (CONTINUED)
Deferred income taxes are based on the estimated future tax effects of
differences between the financial statement and tax bases of assets and
liabilities under the provisions of the enacted tax laws. Deferred income taxes
as of December 31, consist of (in thousands):
1999 2000
---------------------- ----------------------
ASSETS LIABILITIES ASSETS LIABILITIES
-------- ----------- -------- -----------
Net operating loss and credit
carryforwards...................... $76,798 $ -- $77,316 $ --
Property and equipment............... -- 40,020 -- 54,420
Self-insurance liabilities........... 6,212 -- 6,421 --
Intangibles.......................... -- 9,385 -- 14,204
Other liabilities.................... -- 1,828 -- 736
Long-term debt and interest.......... -- 4,373 -- 4,409
Accounts receivable.................. 5,362 -- 12,956 --
Accrued expenses..................... 15,975 -- 4,140 --
Other................................ 2,538 1,578 3,259 308
------- ------- ------- -------
106,885 57,184 104,092 74,077
Valuation allowance.................. (18,474) -- (15,999) --
------- ------- ------- -------
Total deferred income taxes.......... $88,411 $57,184 $88,093 $74,077
======= ======= ======= =======
Management believes that the net deferred tax assets will ultimately be
realized, except as noted below. Management's conclusion is based on its
estimate of future taxable income and the expected timing of temporary
difference reversals. The Company has federal net operating loss carryforwards
of $153.4 million which expire from 2001 to 2020 and state net operating loss
carryforwards of $284.8 million which expire from 2001 to 2020.
The valuation allowance, which was recognized at the date of the acquisition
by affiliates of Forstmann Little & Co. ("FL & Co.") of the operating company of
the Company in June 1996 (the "Acquisition") of $13.2 million, relates primarily
to state net operating losses and other tax attributes. Any future decrease in
this valuation allowance will be recorded as a reduction in goodwill recorded in
connection with the Acquisition.
The valuation allowance increased by $0.2 million and decreased by
$2.5 million during the years ended December 31, 1999 and 2000, respectively.
The decrease relates to a redetermination of the amount, and realizability of
net operating losses in certain state income tax jurisdictions for which a
valuation allowance was previously provided. The increase is primarily related
to net operating losses in certain state income tax jurisdictions not expected
to be realized.
The Company paid income taxes, net of refunds received, of $1.4 million, and
$1.5 million during 1999 and 2000, respectively.
FEDERAL INCOME TAX EXAMINATIONS. The Internal Revenue Service ("IRS") is
examining the Company's federal income tax returns for the tax periods ended
December 31, 1993 through December 31, 1996. The IRS has indicated that it is
considering certain adjustments primarily involving "temporary" or timing
differences. To date, a Revenue Agent's Report has not been issued in connection
with the examination of these tax periods. In management's opinion, the ultimate
outcome of the IRS examination will not have a material effect on the Company's
results of operations or financial condition.
F-13
COMMUNITY HEALTH SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. LONG-TERM DEBT
Long-term debt consists of the following (in thousands):
AS OF DECEMBER 31,
-----------------------
1999 2000
---------- ----------
Credit Facilities:
Revolving Credit Loans.................................... $ 109,750 $ --
Acquisition Loans......................................... 138,551 70,000
Term Loans................................................ 624,345 568,679
Subordinated debentures..................................... 500,000 500,000
Taxable bonds............................................... 29,700 26,100
Tax-exempt bonds............................................ 8,000 8,000
Capital lease obligations (see Note 7)...................... 20,828 21,100
Term loan from acquisition in 2000.......................... -- 21,700
Other....................................................... 3,459 3,444
---------- ----------
Total debt............................................ 1,434,633 1,219,023
Less current maturities..................................... (27,029) (17,433)
---------- ----------
Total long-term debt.................................. $1,407,604 $1,201,590
========== ==========
CREDIT FACILITIES. In connection with the Acquisition, a $900 million
credit agreement was entered into with a consortium of creditors (the "Credit
Agreement"). The financing under the Credit Agreement consists of (i) a 6 1/2
year term loan facility (the "Tranche A Loan") in an aggregate principal amount
equal to $50 million, (ii) a 7 1/2 year term loan facility (the "Tranche B
Loan") in an aggregate principal amount equal to $132.5 million, (iii) an 8 1/2
year term loan facility (the "Tranche C Loan") in an aggregate principal amount
equal to $132.5 million, (iv) a 9 1/2 year term loan facility (the "Tranche D
Loan") in an original aggregate principal amount equal to $100 million and
amended to an aggregate principal amount of $350 million in March 1999
(collectively, the "Term Loans"), (v) a revolving credit facility (the
"Revolving Credit Loans") in an aggregate principal amount equal to
$200 million, of which up to $90 million may be used, to the extent available,
for standby and commercial letters of credit and up to $25 million is available
to the Company pursuant to a swingline facility and (vi) a reducing acquisition
loan facility (the "Acquisition Loans") in an aggregate principal amount of
$285 million, reduced to $263.2 million in July 2000.
The Term Loans are scheduled to be paid in consecutive quarterly
installments with aggregate principal payments for future years as follows (in
thousands):
2001........................................................ $ 10,094
2002........................................................ 47,216
2003........................................................ 125,360
2004........................................................ 162,970
2005........................................................ 223,039
2006........................................................ --
--------
Total....................................................... $568,679
========
Revolving Credit Loans may be made, and letters of credit may be issued, at
any time during the period between July 22, 1996, the loan origination date (the
"Origination Date"), and
F-14
COMMUNITY HEALTH SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. LONG-TERM DEBT (CONTINUED)
December 31, 2002 (the "Termination Date"). No letter of credit is permitted to
have an expiration date after the Termination Date. The Acquisition Loans may be
made at any time during the period preceding the Termination Date.
The Acquisition Loans facility will automatically be reduced and the
Acquisition Loans will be repaid to the following levels on each of the
following anniversaries of the Origination Date: July 22, 2001, $215.3 million;
July 22, 2002, $139.0 million; with payment of any remaining balance on the
Termination Date.
The Company may elect that all or a portion of the borrowings under the
Credit Agreement bear interest at a rate per annum equal to (a) an annual
benchmark rate, which will be equal to the greatest of (i) "Prime Rate,"
(ii) the "Base" CD Rate plus 1% or (iii) the Federal Funds effective rate plus
50 basis points (the "ABR") or (b) the Eurodollar Rate, in each case increased
by the applicable margin (the "Applicable Margin") which will vary between 1.50%
and 3.75% per annum. The applicable margin on the Revolving Credit Loans,
Acquisition Loans and Tranche A Loan is subject to a reduction based on
achievement of certain levels of total senior indebtedness to annualized
consolidated EBITDA, as defined in the Credit Agreement. To date, the Company
has not achieved a reduction of the Applicable Margin.
Interest based on the ABR is payable on the last day of each calendar
quarter and interest based on the Eurodollar Rate is payable on set maturity
dates. The borrowings under the Credit Agreement bore interest at rates ranging
from 9.13% to 10.38% as of December 31, 2000.
The Company is also required to pay a quarterly commitment fee at a rate
which ranges from .375% to .500% based on the Eurodollar Applicable Margin for
Revolving Credit Loans. This rate is applied to unused commitments under the
Revolving Credit Loans and the Acquisition Loans.
The Company is also required to pay letters of credit fees at rates which
vary from 1.625% to 2.625%.
All or a portion of the outstanding borrowings under the Credit Agreement
may be prepaid at any time and the unutilized portion of the facility for the
Revolving Credit Loans or the Acquisition Loans may be terminated, in whole or
in part, at the Company's option. Repaid Term Loans and permanent reductions to
the Acquisition Loans and Revolving Credit Loans may not be reborrowed.
Credit Facilities generally are required to be prepaid with the net proceeds
(in excess of $20 million) of certain permitted asset sales and the issuances of
debt obligations (other than certain permitted indebtedness) of the Company or
any of its subsidiaries.
Generally, prepayments of Term Loans will be applied to principal payments
due during the next twelve months with any excess being applied pro rata to
scheduled principal payments thereafter.
The terms of the Credit Agreement include certain restrictive covenants.
These covenants include restrictions on indebtedness, investments, asset sales,
capital expenditures, dividends, sale and leasebacks, contingent obligations,
transactions with affiliates, and fundamental change. The covenants also require
maintenance of certain ratios regarding senior indebtedness, senior interest,
and fixed charges. The Company was in compliance with all debt covenants at
December 31, 2000.
F-15
COMMUNITY HEALTH SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. LONG-TERM DEBT (CONTINUED)
As of December 31, 1999 and 2000, the Company had letters of credit issued,
primarily in support of its Taxable Bonds and Tax-Exempt Bonds, of approximately
$43 million and $40 million, respectively. Availability at December 31, 1999 and
2000 under the Revolving Credit Loans facility was approximately $47 million and
$160 million, respectively and under the Acquisition Loans facility was
approximately $144 million and $193 million, respectively.
SUBORDINATED DEBENTURES. In connection with the Acquisition, the Company
issued its subordinated debentures to an affiliate of FL & Co. for $500 million
in cash. The debentures are a general senior subordinated obligation of the
Company, are not subject to mandatory redemption and mature in three equal
annual installments beginning June 30, 2007, with the final payment due on
June 30, 2009. The debentures bear interest at a fixed rate of 7.50% which is
payable semi-annually in January and July. Total interest expense for the
debentures was $37.5 million for each of the years ended December 31, 1998, 1999
and 2000.
TAXABLE BONDS AND TAX-EXEMPT BONDS. Taxable Bonds bear interest at a
floating rate which averaged 5.29% and 6.40% during 1999 and 2000, respectively.
These bonds are subject to mandatory annual redemptions with the final payment
of $17.4 million due on October 1, 2003. Tax-Exempt Bonds bear interest at
floating rates which averaged 3.36% and 4.21% during 1999 and 2000,
respectively. These bonds are not subject to mandatory annual redemptions under
the bond provisions and are due in 2010. Taxable Bonds and Tax-Exempt Bonds are
both guaranteed by letters of credit.
TERM LOAN FROM ACQUISITION IN 2000. The Company acquired a hospital in
December 2000, in which we assumed debt upon acquisition, through an amended and
restated credit agreement dated December 1, 2000. The loan bears interest at a
rate of 9.18% as of December 31, 2000 and has the same terms as the Tranche A
Term Loan in the "Credit Agreement", previously described. Required principal
payments are as follows: $1,350,000 in 2001, $1,875,000 in 2002 and $18,475,000
in 2003.
OTHER DEBT. As of December 31, 2000, other debt consisted primarily of an
industrial revenue bond and other obligations maturing in various installments
through 2014.
As of December 31, 2000, the scheduled maturities of long-term debt
outstanding, including capital leases, for each of the next five years and
thereafter are as follows (in thousands):
2001........................................................ $ 17,433
2002........................................................ 126,166
2003........................................................ 165,549
2004........................................................ 164,090
2005........................................................ 224,118
Thereafter.................................................. 521,667
----------
$1,219,023
==========
The Company paid interest of $101 million, $118 million and $115 million on
borrowings during the years ended December 31, 1998, 1999 and 2000,
respectively.
F-16
COMMUNITY HEALTH SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. FAIR VALUES OF FINANCIAL INSTRUMENTS
The fair value of financial instruments has been estimated by the Company
using available market information as of December 31, 1999 and 2000, and
valuation methodologies considered appropriate. The estimates presented are not
necessarily indicative of amounts the Company could realize in a current market
exchange (in thousands):
AS OF DECEMBER 31,
-----------------------------------------------------
1999 2000
------------------------- -------------------------
CARRYING ESTIMATED FAIR CARRYING ESTIMATED FAIR
VALUE VALUE AMOUNT VALUE
-------- -------------- -------- --------------
Assets:
Cash and cash equivalents................... $ 4,282 $ 4,282 $13,740 $13,740
Liabilities:
Credit facilities........................... 872,646 862,174 638,679 633,506
Taxable Bonds............................... 29,700 29,700 26,100 26,100
Tax-exempt Bonds............................ 8,000 8,000 8,000 8,000
Other term loans............................ -- -- 21,700 21,483
Cash and cash equivalents: The carrying amount approximates fair value due
to the short term maturity of these instruments (less than three months).
Credit facilities and other term loans: Estimated fair value is based on
communications with the Company's bankers regarding relevant pricing for trading
activity among the Company's lending institutions.
Taxable and Tax-exempt Bonds: The carrying amount approximates fair value as
a result of the weekly interest rate reset feature of these publicly traded
instruments.
The Company believes that it is not practicable to estimate the fair value
of the subordinated debentures because of (i) the fact that the subordinated
debentures were issued in connection with the issuance of the original equity of
the Company at the date of Acquisition as an investment unit, (ii) the related
party nature of the subordinated debentures, (iii) the lack of comparable
securities, and (iv) the lack of a credit rating of the Company by an
established rating agency.
7. LEASES
The Company leases hospitals, medical office buildings, and certain
equipment under capital and operating lease agreements. All lease agreements
generally require the Company to pay maintenance, repairs, property taxes and
insurance costs. Commitments relating to noncancellable operating and capital
leases for each of the next five years and thereafter are as follows (in
thousands):
YEAR ENDED DECEMBER 31, OPERATING CAPITAL
----------------------- --------- --------
2001........................................................ $ 24,141 $ 5,715
2002........................................................ 21,073 4,738
2003........................................................ 19,379 3,706
2004........................................................ 17,160 2,773
2005........................................................ 11,943 2,311
Thereafter.................................................. 72,376 23,999
-------- -------
Total minimum future payments............................... $166,072 43,242
Less debt discounts......................................... (22,142)
-------
21,100
Less current portion........................................ (2,290)
-------
Long-term capital lease obligations......................... $18,810
=======
F-17
COMMUNITY HEALTH SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. LEASES (CONTINUED)
Assets capitalized under capital leases as reflected in the accompanying
consolidated balance sheets were $5.8 million of land and improvements,
$55.7 million of buildings and improvements, and $19.2 million of equipment and
fixtures as of December 31, 1999 and $9.9 million of land and improvements,
$73.3 million of buildings and improvements and $35.5 million of equipment and
fixtures as of December 31, 2000. The accumulated depreciation related to assets
under capital leases was $15.1 million and $26.4 million as of December 31, 1999
and 2000, respectively. Depreciation of assets under capital leases is included
in depreciation and amortization and amortization of debt discounts on capital
lease obligations is included in interest expense in the consolidated statements
of operations.
8. EMPLOYEE BENEFIT PLANS
The Company has a defined contribution plan that is qualified under
Section 401(k) of the Internal Revenue Code, which covers all eligible employees
at its hospitals, clinics, and the corporate offices. Participants may
contribute a portion of their compensation not exceeding a limit set annually by
the Internal Revenue Service. This plan includes a provision for the Company to
match a portion of employee contributions. The Company also provides a defined
contribution welfare benefit plan for post-termination benefits to executive and
middle management employees. Total expense under the 401(k) plan was
$2.2 million, $2.9 million and $2.8 million for the years ended December 31,
1998, 1999 and 2000, respectively. Total expense under the welfare benefit plan
was $0.9 million, $0.8 million and $0.7 million for the years ended
December 31, 1998, 1999 and 2000, respectively.
9. STOCKHOLDERS' EQUITY
On June 14, 2000, the Company closed its initial public offering of
18,750,000 shares of common stock and on July 3, 2000, the underwriters
exercised their overallotment option and purchased 1,675,717 shares of common
stock. These shares were offered at $13.00 per share. On November 3, 2000, the
Company completed a secondary offering of 18,000,000 shares of its common stock
at an offering price of $28.1875. Of these shares, 8,000,000 shares were sold by
affiliates of FL & Co. and other shareholders. The net proceeds to the Company
from these offerings were $514.5 million in the aggregate and were used to repay
long-term debt.
Authorized capital shares of the Company include 400,000,000 shares of
capital stock consisting of 300,000,000 shares of common stock and 100,000,000
shares of Preferred Stock. Each of the aforementioned classes of capital stock
has a par value of $.01 per share. Shares of Preferred Stock, none of which are
outstanding as of December 31, 2000, may be issued in one or more series having
such rights, preferences and other provisions as determined by the Board of
Directors without approval by the holders of common stock.
Common shares held by employees that were acquired directly from the Company
are the subject of a stockholder's agreement under which each share, until
vested, is subject to repurchase, upon termination of employment. Shares vest,
on a cumulative basis, each year at a rate of 20% of the total shares issued
beginning after the first anniversary date of the purchase. Further, under the
stockholder's agreement shares of common stock held by stockholders other than
FL&Co. will only be transferable together with shares transferred by FL&Co.
until FL&Co.'s ownership falls below 25%.
F-18
COMMUNITY HEALTH SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. STOCKHOLDERS' EQUITY (CONTINUED)
During 1997, the Company granted options to purchase 191,614 shares of
common stock to non-employee directors at an exercise price of $8.96 per share.
One-third of such options are exercisable each year on a cumulative basis
beginning on the first anniversary of the date of grant and expiring ten years
from the date of grant. As of December 31, 2000, 178,839 non-employee director
options to purchase common stock were exercisable with a weighted average
remaining contractual life of 6.5 years.
In November 1996, the Board of Directors approved an Employee Stock Option
Plan (the "1996 Plan") to provide incentives to key employees of the Company.
Options to purchase up to 756,636 shares of common stock are authorized under
the 1996 Plan. All options granted pursuant to the 1996 Plan are generally
exercisable each year on a cumulative basis at a rate of 20% of the total number
of common shares covered by the option beginning one year from the date of grant
and expiring ten years from the date of grant. There will be no additional
grants of options under the 1996 Plan.
In April 2000, the Board of Directors approved the 2000 Stock Option and
Award Plan (the "2000 Plan"). The 2000 Plan provides for the grant of incentive
stock options intended to qualify under Section 422 of the Internal Revenue Code
as well as stock options which do not so qualify, stock appreciation rights,
restricted stock, performance units and performance shares, phantom stock awards
and share awards. Persons eligible to receive grants under the 2000 Plan include
the Company's directors, officers, employees and consultants. Options to
purchase 4,562,791 shares of common stock are authorized under the 2000 Plan.
All options granted pursuant to the 2000 Plan are generally exercisable each
year on a cumulative basis at a rate of 33 1/3% of the total number of common
shares covered by the option beginning on the first anniversary of the date of
grant and expiring ten years from the date of grant. As of December 31, 2000,
there were 3,917,500 options granted and 645,291 shares of unissued common stock
reserved for future grants under the 2000 Plan.
The options granted are "nonqualified" for tax purposes. For financial
reporting purposes, the exercise price of certain option grants under the 1996
plan were considered to be below the fair value of the stock at the time of
grant. The fair value of those grants was determined based on an appraisal
conducted by an independent appraisal firm as of the relevant date. Options
granted under the 2000 Plan were granted to employees at the fair value of the
related stock. The aggregate differences between fair value and the exercise
price is being charged to compensation expense over the relevant vesting
periods. Such expense aggregated $83,000 and $74,000 in 1999 and 2000,
respectively.
F-19
COMMUNITY HEALTH SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. STOCKHOLDERS' EQUITY (CONTINUED)
A summary of the number of shares of common stock issuable upon the exercise
of options under the Company's 1996 Plan and 2000 Plan for fiscal 2000, 1999 and
1998 and changes during those years is presented below:
WEIGHTED
SHARES PRICE RANGE AVERAGE PRICE
--------- ------------ -------------
Balance at December 31, 1997......................... 431,282 $ 6.99 $ 6.99
Granted............................................ 299,292 6.99 6.99
Exercised.......................................... -- -- --
Forfeited or canceled.............................. (119,801) 6.99 6.99
--------- ------------ ------
Balance at December 31, 1998......................... 610,773 $ 6.99 $ 6.99
Granted............................................ 90,376 6.99 6.99
Exercised.......................................... -- -- --
Forfeited or canceled.............................. (150,907) 6.99 6.99
--------- ------------ ------
Balance at December 31, 1999......................... 550,242 $ 6.99 $ 6.99
Granted............................................ 3,943,000 13.00-31.70 13.69
Exercised.......................................... (78,284) 6.99 6.99
Forfeited or canceled.............................. (83,927) 6.99-20.06 9.40
--------- ------------ ------
Balance at December 31, 2000......................... 4,331,031 $ 6.99-31.70 $13.05
The following table summarizes information concerning currently outstanding
and exercisable options:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------------------------------------------- ------------------------------
WEIGHTED AVERAGE
RANGE OF EXERCISE NUMBER REMAINING WEIGHTED AVERAGE NUMBER WEIGHTED AVERAGE
PRICES OUTSTANDING CONTRACTUAL LIFE EXERCISE PRICE EXERCISABLE EXERCISE PRICE
--------------------- ----------- ---------------- ---------------- ----------- ----------------
$ 6.99 413,531 6.8 years $ 6.99 153,668 $6.99
$13.00-31.70 3,917,500 9.5 years $13.69 -- --
Under SFAS No. 123, the fair value of each option grant is estimated on the
date of grant using the Black-Scholes option-pricing model. The weighted-average
fair value of each option granted during 1998, 1999 and 2000 were $2.05, $5.10
and $6.11, respectively. In 2000 and 1998, the exercise price of options granted
was the same as the fair value of the related stock. In 1999, the exercise price
of options granted was less than the fair value of the related stock. The
following weighted-average assumptions were used for grants in fiscal 1998, 1999
and 2000: risk-free interest rate of 5.14%, 5.49% and 6.46%; expected volatility
of the Company's common stock based on peer companies in the healthcare industry
of 34%, 45% and 58%, respectively; no dividend yields; and weighted-average
expected life of the options of 3 years for all years.
Had the fair value of the options granted been recognized as compensation
expense on a straight-line basis over the vesting period of the grant, the
Company's net income (loss) and
F-20
COMMUNITY HEALTH SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. STOCKHOLDERS' EQUITY (CONTINUED)
income (loss) per share would have been reduced to the pro forma amounts
indicated below (in thousands except per share data):
1998 1999 2000
--------- -------- --------
Pro forma net income (loss)................................. $(183,513) $(17,010) $ 6,907
Pro forma net income (loss) per share:
Basic..................................................... $ (3.38) $ (0.31) $ 0.10
Diluted................................................... $ (3.38) $ (0.31) $ 0.10
10. EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted net
income (loss) per share (in thousands, except share data):
YEAR ENDED DECEMBER 31,
---------------------------------------
1998 1999 2000
----------- ----------- -----------
NUMERATOR:
Income (loss) before cumulative effect of a change
in accounting principle......................... $ (182,938) $ (16,789) $ 9,569
Cumulative effect of a change in accounting
principle....................................... (352) -- --
----------- ----------- -----------
Net income (loss) available to common -- basic and
diluted......................................... $ (183,290) $ (16,789) $ 9,569
=========== =========== ===========
DENOMINATOR:
Weighted-average number of shares outstanding --
basic............................................... 54,249,895 54,545,030 67,610,399
Effect of dilutive securities:
Non-employee director options..................... -- -- 54,885
Unvested common shares............................ -- -- 802,471
Employee options.................................. -- -- 719,436
----------- ----------- -----------
Weighted-average number of shares outstanding --
diluted............................................. 54,249,895 54,545,030 69,187,191
=========== =========== ===========
Dilutive securities outstanding not included in the
computation of earnings (loss) per share because
their effect is antidilutive:
Non-employee director options..................... 191,614 191,614 --
Unvested common shares............................ 1,239,902 1,031,734 --
Employee options.................................. 610,773 550,242 --
11. ACCOUNTING CHANGE
In 1998, the Company adopted The American Institute of Certified Public
Accountants Statement of Position 98-5, "Reporting on the Costs of Start-Up
Activities," which affects the accounting for start-up costs. The change
involved expensing these costs as incurred, rather than capitalizing and
subsequently amortizing such costs. The cumulative effect of the change on the
F-21
COMMUNITY HEALTH SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
11. ACCOUNTING CHANGE (CONTINUED)
accumulated deficit as of the beginning of 1998 is reflected as a charge of
$0.5 million ($0.4 million net of taxes) to 1998 earnings.
12. COMMITMENTS AND CONTINGENCIES
CONSTRUCTION COMMITMENTS. As of December 31, 2000, the Company has
obligations under certain hospital purchase agreements to construct four
hospitals through 2005 with an aggregate estimated construction cost, including
equipment, of approximately $120 million.
PROFESSIONAL LIABILITY RISKS. Substantially all of the Company's
professional and general liability risks are subject to a $0.5 million per
occurrence deductible (with an annual deductible cap of $5 million). The
Company's insurance is underwritten on a "claims-made basis." The Company
accrues an estimated liability for its uninsured exposure and self-insured
retention based on historical loss patterns and actuarial projections. The
Company's estimated liability for the self-insured portion of professional and
general liability claims was $16.4 million and $16.6 million as of December 31,
1999 and 2000, respectively. These estimated liabilities represent the present
value of estimated future professional liability claims payments based on
expected loss patterns using a discount rate of 5.72% and 5.77% in 1999 and
2000, respectively. The discount rate is based on an estimate of the risk-free
interest rate for the duration of the expected claim payments. The estimated
undiscounted claims liability was $18.9 million and $19.5 million as of
December 31, 1999 and 2000, respectively. The effect of discounting professional
and general liability claims was a $0.1 million decrease to expense in 1998 and
1999 and a $0.3 million increase to expense in 2000.
COMPLIANCE SETTLEMENT AND YEAR 2000 REMEDIATION COSTS. In 1997, the Company
initiated a voluntary review of its inpatient medical records in order to
determine the extent it may have had coding inaccuracies under certain
government programs. At December 31, 1998, an estimate of the costs of these
coding inaccuracies settlement was accrued based on information available and
additional costs were accrued at December 31, 1999. In March 2000, the Company
reached a settlement with appropriate governmental agencies pursuant to which
the Company paid approximately $31.8 million to settle potential liabilities
related to coding inaccuracies occurring from October 1993 through
September 1997. Year 2000 remediation costs totaled $0.2 million and
$3.3 million for 1998 and 1999, respectively.
LEGAL MATTERS. The Company is a party to legal proceedings incidental to
its business. In the opinion of management, any ultimate liability with respect
to these actions will not have a material adverse effect on the Company's
consolidated financial position, cash flows or results of operations.
13. RELATED PARTY TRANSACTIONS
Notes receivable for common shares held by employees, as disclosed on the
consolidated balance sheets, represent the outstanding balance of notes accepted
by the Company as partial payment for the purchase of the common shares from
senior management employees. These notes bear interest at 6.84%, are full
recourse promissory notes and are secured by the shares to which they relate.
Each of the full recourse promissory notes mature on the fifth anniversary date
of the note, with accelerated maturities in case of employee termination,
Company stock repurchases, or
F-22
COMMUNITY HEALTH SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
13. RELATED PARTY TRANSACTIONS (CONTINUED)
stockholder's sale of common stock. Employees have fully paid for purchases of
common stock by cash or by a combination of cash and full recourse promissory
notes.
The Company purchased marketing services and materials at a cost of $268,000
and $239,400 in 1999 and 2000, respectively, from a company owned by the spouse
of one of the Company's officers.
In 1996, in connection with the Company's relocation from Houston to
Nashville, the Company provided a $100,000 non-interest bearing loan to one of
its executives. This loan was repaid on December 13, 2000.
14. QUARTERLY FINANCIAL DATA (UNAUDITED)
QUARTER
-------------------------------------------------
1ST 2ND 3RD 4TH TOTAL
---------- ---------- ---------- ---------- ----------
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
1999
Net operating revenues........ $ 263,004 $ 261,821 $ 266,896 $ 288,232 $1,079,953
Income (loss) before taxes.... 6,498 254 (4,036) (13,952) (11,236)
Net income (loss)............. 1,918 (1,843) (4,427) (12,437) (16,789)
Net income (loss) per share:
Basic....................... 0.04 (0.03) (0.08) (0.23) (0.31)
Diluted..................... 0.03 (0.03) (0.08) (0.23) (0.31)
Weighted average number of
shares:
Basic....................... 54,439,895 54,517,660 54,495,334 54,459,838 54,545,030
Diluted..................... 55,632,718 54,517,660 54,495,334 54,459,838 54,545,030
2000
Net operating revenues........ $ 308,651 $ 317,136 $ 342,447 $ 369,267 $1,337,501
Income before taxes........... 4,850 3,413 5,163 14,316 27,742
Net income.................... 921 178 1,258 7,212 9,569
Net income per share:
Basic....................... 0.02 -- 0.02 0.09 0.14
Diluted..................... 0.02 -- 0.02 0.09 0.14
Weighted average number of
shares:
Basic....................... 54,634,285 58,175,050 75,120,860 81,717,585 67,610,399
Diluted..................... 55,838,214 59,310,601 77,193,350 84,067,319 69,187,191
F-23
COMMUNITY HEALTH SYSTEMS, INC. AND SUBSIDIARIES
UNAUDITED INTERIM CONDENSED CONSOLIDATED BALANCE SHEET
AS OF JUNE 30, 2001
(IN THOUSANDS, EXCEPT SHARE DATA)
ASSETS
CURRENT ASSETS
Cash and cash equivalents................................. $ 35,740
Patients accounts receivable, net......................... 316,499
Supplies.................................................. 41,860
Prepaid expenses and income taxes......................... 14,169
Current deferred income taxes............................. 2,233
Other current assets...................................... 15,330
----------
Total current assets.................................. 425,831
----------
PROPERTY AND EQUIPMENT...................................... 936,336
Less: accumulated depreciation and amortization........... (169,627)
----------
Property and equipment, net........................... 766,709
----------
GOODWILL, NET............................................... 991,557
----------
OTHER ASSETS, NET........................................... 95,989
----------
TOTAL ASSETS................................................ $2,280,086
==========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Current maturities of long-term debt...................... $ 21,499
Accounts payable.......................................... 86,460
Current income taxes payable.............................. 16,998
Accrued interest.......................................... 20,278
Accrued liabilities....................................... 111,488
----------
Total current liabilities............................. 256,723
----------
LONG-TERM DEBT.............................................. 1,229,507
----------
OTHER LONG-TERM LIABILITIES................................. 14,015
----------
STOCKHOLDERS' EQUITY
Preferred stock, $.01 par value per share, 100,000,000
shares authorized, none issued.......................... --
Common stock, $.01 par value per share, 300,000,000 shares
authorized; 87,296,185 shares issued and 86,320,636
shares outstanding at June 30, 2001..................... 873
Additional paid-in capital................................ 1,001,204
Accumulated deficit....................................... (215,284)
Treasury stock, at cost, 975,549 shares at June 30, 2001
and 967,980 shares at December 31, 2000................. (6,678)
Notes receivable for common stock......................... (211)
Unearned stock compensation............................... (63)
----------
Total stockholders' equity............................ 779,841
----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY.................. $2,280,086
==========
See notes to unaudited interim condensed consolidated financial statements.
F-24
COMMUNITY HEALTH SYSTEMS, INC. AND SUBSIDIARIES
UNAUDITED INTERIM CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
SIX MONTHS ENDED JUNE 30,
-----------------------------
2000 2001
----------- -----------
NET OPERATING REVENUES...................................... $ 625,787 $ 799,554
----------- -----------
OPERATING COSTS AND EXPENSES:
Salaries and benefits..................................... 244,222 309,781
Provision for bad debts................................... 56,594 73,959
Supplies.................................................. 72,410 92,888
Other operating expenses.................................. 118,168 152,161
Rent...................................................... 14,537 19,687
Depreciation and amortization............................. 33,910 43,094
Amortization of goodwill.................................. 12,378 14,074
----------- -----------
Total operating costs and expenses...................... 552,219 705,644
----------- -----------
INCOME FROM OPERATIONS...................................... 73,568 93,910
INTEREST EXPENSE, NET....................................... 65,305 53,174
----------- -----------
INCOME BEFORE INCOME TAXES.................................. 8,263 40,736
PROVISION FOR INCOME TAXES.................................. 7,164 20,237
----------- -----------
NET INCOME.................................................. $ 1,099 $ 20,499
=========== ===========
NET INCOME PER COMMON SHARE:
Basic..................................................... $ 0.02 $ 0.24
=========== ===========
Diluted................................................... $ 0.02 $ 0.23
=========== ===========
WEIGHTED-AVERAGE NUMBER OF SHARES OUTSTANDING:
Basic..................................................... 56,423,677 85,696,119
=========== ===========
Diluted................................................... 57,554,519 87,554,317
=========== ===========
See notes to unaudited interim condensed consolidated financial statements.
F-25
COMMUNITY HEALTH SYSTEMS, INC. AND SUBSIDIARIES
UNAUDITED INTERIM CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
SIX MONTHS ENDED
JUNE 30,
---------------------
2000 2001
--------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income................................................ $ 1,099 $ 20,499
Adjustments to reconcile net income to net cash provided
by (used in) operating activities:
Depreciation and amortization........................... 46,288 57,168
Stock compensation expense.............................. 43 22
Other non-cash expenses (income), net................... (498) 474
Changes in operating assets and liabilities, net of
effects of acquisitions and divestitures:
Patient accounts receivable......................... (9,321) 6,277
Supplies, prepaid expenses and other current
assets............................................ (3,989) 6,275
Accounts payable, accrued liabilities and income
taxes............................................. (30,486) 2,677
Compliance settlement payment....................... (30,900) --
Other............................................... (6,635) 2,136
--------- ---------
Net cash provided by (used in) operating activities....... (34,399) 95,528
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Acquisitions of facilities, pursuant to purchase
agreements.............................................. (40,639) (50,063)
Purchases of property and equipment....................... (24,006) (39,056)
Proceeds from sale of equipment........................... 62 53
Increase in other assets.................................. (9,678) (15,398)
--------- ---------
Net cash used in investing activities................... (74,261) (104,464)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of common stock, net of expenses... 225,225 --
Proceeds from exercise of stock options................... -- 2,289
Common stock purchased for treasury....................... -- (91)
Borrowings under credit agreement......................... 137,731 69,000
Repayments of long-term indebtedness...................... (252,588) (40,262)
--------- ---------
Net cash provided by financing activities............... 110,368 30,936
--------- ---------
NET CHANGE IN CASH AND CASH EQUIVALENTS..................... 1,708 22,000
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD............ 4,282 13,740
--------- ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD.................. $ 5,990 $ 35,740
========= =========
See notes to unaudited interim condensed consolidated financial statements.
F-26
COMMUNITY HEALTH SYSTEMS, INC.
NOTES TO UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The unaudited condensed consolidated financial statements of Community
Health Systems, Inc. and its subsidiaries (the "Company") as of and for the six
month periods ended June 30, 2001 and June 30, 2000, have been prepared in
accordance with accounting principles generally accepted in the United States of
America ("GAAP"). In the opinion of management, such information contains all
adjustments, consisting only of normal recurring adjustments, necessary for a
fair presentation of the results for such periods. All intercompany transactions
and balances have been eliminated. The results of operations for the six months
ended June 30, 2001 are not necessarily indicative of the results to be expected
for the full fiscal year ending December 31, 2001.
Certain information and disclosures normally included in the notes to
consolidated financial statements have been condensed or omitted as permitted by
the rules and regulations of the Securities and Exchange Commission, although
the Company believes the disclosure is adequate to make the information
presented not misleading. The accompanying unaudited financial statements should
be read in conjunction with the consolidated financial statements and notes
thereto for the year ended December 31, 2000 contained in the Company's Annual
Report on Form 10-K.
2. USE OF ESTIMATES
The preparation of financial statements in conformity with GAAP requires
management of the Company to make estimates and assumptions that affect the
amounts reported in the consolidated financial statements. Actual results could
differ from the estimates.
3. ACQUISITIONS
Effective June 1, 2001, the Company acquired, through a purchase
transaction, the assets and working capital of a hospital for consideration of
approximately $60.7 million, including liabilities assumed. Licensed beds at the
facility totaled 168. The Company borrowed $49.0 million against its acquisition
loan revolving facility to fund this transaction.
4. RECENT ACCOUNTING PRONOUNCEMENTS NOT YET ADOPTED
On July 20, 2001, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards ("SFAS") No. 141, "Business Combinations," and
SFAS No. 142, "Goodwill and Other Intangible Assets" (the "Statements"). These
Statements make significant changes to the accounting for business combinations,
goodwill and intangible assets.
SFAS No. 141 eliminates the pooling-of-interests method of accounting for
business combinations. In addition, it further clarifies the criteria for
recognition of intangible assets separately from goodwill. This statement's
provisions apply to business combinations accounted for using the purchase
method for which the date of acquisition is July 1, 2001, or later.
SFAS No. 142 discontinues the practice of amortizing goodwill and indefinite
life intangible assets. Its nonamortization provisions are effective January 1,
2002 for goodwill existing at June 30, 2001, and are effective immediately for
business combinations with acquisition dates after June 30, 2001. Intangible
assets with a determinable useful life will continue to be amortized over that
period. SFAS No. 142 requires the Company to complete a transitional goodwill
impairment test as of January 1, 2002. Any impairment loss will be recorded as
soon as possible, but in no case later
F-27
COMMUNITY HEALTH SYSTEMS, INC.
NOTES TO UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
4. RECENT ACCOUNTING PRONOUNCEMENTS NOT YET ADOPTED (CONTINUED)
than December 31, 2002. In addition, SFAS No. 142 requires that indefinite life
intangible assets and goodwill be tested at least annually for impairment of
carrying value; impairment of carrying value would be evaluated more frequently
if certain indicators are encountered.
We expect to adopt SFAS No. 142 effective January 1, 2002. Early adoption
and retroactive application of SFAS No. 141 and SFAS No. 142 are not permitted.
The Company expects that the adoption of these statements will not have a
significant effect on its financial position, but will have a favorable effect
on its results of operations.
SFAS No. 143, "Accounting for Asset Retirement Obligations," was issued in
June 2001 by the Financial Accounting Standards Board and is effective for
financial statements issued for fiscal years beginning after June 15, 2002.
Earlier application is encouraged. SFAS No. 143 establishes accounting standards
for recognition and measurement of a liability for an asset retirement
obligation and the associated retirement cost. This Statement applies to all
entities and to legal obligations associated with the retirement of long-lived
assets that result from the acquisition, construction, development and (or) the
normal operation of a long-lived asset, except for certain obligations of
lessees. The Company is currently evaluating the impact, if any, of adopting
SFAS No. 143.
5. ACCOUNTING PRONOUNCEMENT ADOPTED
SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities," is effective for all fiscal years beginning after June 15, 2000.
SFAS No. 133, as amended, establishes accounting and reporting standards for
derivative instruments, including certain derivative instruments embedded in
other contracts and for hedging activities. Under SFAS No. 133, certain
contracts that were not formerly considered derivatives may now meet the
definition of a derivative. The Company adopted SFAS No. 133 on January 1, 2001.
The adoption of SFAS No. 133 did not impact the financial position, results of
operations, or cash flows of the Company.
6. EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted earnings
per share (in thousands, except share and per share data):
SIX MONTHS ENDED
JUNE 30,
-------------------------
2000 2001
----------- -----------
NUMERATOR:
Net income............................................... $ 1,099 $ 20,499
=========== ===========
DENOMINATOR:
Weighted-average number of shares outstanding--basic..... 56,423,677 85,696,119
Effect of dilutive options............................... 1,130,842 1,858,198
----------- -----------
Weighted-average number of shares outstanding--diluted... 57,554,519 87,554,317
=========== ===========
Basic earnings per share................................. $ 0.02 $ 0.24
=========== ===========
Diluted earnings per share............................... $ 0.02 $ 0.23
=========== ===========
F-28
COMMUNITY HEALTH SYSTEMS, INC.
NOTES TO UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
7. SUBSEQUENT EVENTS
Effective July 19, 2001, the Company amended its 1999 Amended and Restated
Credit Agreement. The Credit Agreement is syndicated with a group of lenders led
by The Chase Manhattan Bank, an affiliate of J.P. Morgan Securities Inc., and
co-agents, Bank of America, N.A. and The Bank of Nova Scotia. This amendment,
among other things, extends the maturity of approximately 80% of the
$200 million revolving credit facility and the $263.2 million in acquisition
loan commitments from December 31, 2002 to January 2, 2004.
Effective September 1, 2001, the Company acquired Red Bud Regional Hospital,
a 103-bed facility located in Red Bud, Illinois, for an aggregate consideration
of approximately $5 million. On October 1, 2001, the Company acquired Southern
Chester County Medical Center, renamed Jennersville Regional Hospital, a 59-bed
hospital located in West Grove, Pennsylvania, for an aggregate consideration of
approximately $29 million. Southern Chester County Medical Center is the sole
provider of general acute hospital services in its community. On August 2, 2001,
the Company signed a definitive agreement to acquire 369-bed Easton Hospital,
the only hospital in the city of Easton and Northampton County, Pennsylvania.
This transaction is subject to state regulatory approvals and licensing and is
expected to be completed and closed during the fourth quarter of 2001.
The Company is pursuing concurrent public offerings of 12,000,000 shares of
its common stock and $250 million of convertible notes. The Company plans to
utilize proceeds from the offerings to repay $500 million of its outstanding
subordinated debentures, plus accrued interest, as well as a portion of the
outstanding debt under the acquisition loan facility of the Company's credit
agreement. In connection with such repayment, the Company anticipates that it
will recognize an extraordinary loss on early extinguishment of debt of
approximately $3.9 million (after tax). The Company expects to complete such
offerings during the fourth quarter of 2001.
F-29
[INSIDE BACK COVER PAGE]
[Description of artwork:
Photographs of four of our facilities:
Eastern New Mexico Medical Center,
Moberly Regional Medical Center,
Springs Memorial Hospital, and
North Okaloosa Medical Center]
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No dealer, salesperson or other person is authorized to give any information
or to represent anything not contained in this prospectus. You must not be rely
on any unauthorized information or representations. This prospectus is an offer
to sell the notes offered hereby, but only under circumstances and in
jurisdictions where it is lawful to do so. The information contained in this
prospectus is current only as of its date.
------------------------
TABLE OF CONTENTS
Page
--------
Prospectus Summary................... 1
Risk Factors......................... 12
Use of Proceeds...................... 20
Dividend Policy...................... 20
Price Range of Common Stock.......... 20
Capitalization....................... 21
Selected Consolidated Financial and
Other Data......................... 22
Management's Discussion and Analysis
of Financial Condition and Results
of Operations...................... 29
Business of Community Health
Systems............................ 42
Management........................... 65
Principal Stockholders............... 75
Description of Notes................. 77
Description of Other Indebtedness.... 94
Description of Capital Stock......... 96
Shares Eligible for Future Sale...... 99
Certain United States Federal Tax
Consequences....................... 100
Underwriting......................... 108
Legal Matters........................ 110
Experts.............................. 110
Where You Can Find More Information.. 110
Index to Consolidated Financial
Statements......................... F-1
$250,000,000
COMMUNITY HEALTH
SYSTEMS, INC.
4.25% Convertible Subordinated
Notes due 2008
------------------
[LOGO]
------------------
GOLDMAN, SACHS & CO.
MERRILL LYNCH & CO.
CREDIT SUISSE FIRST BOSTON
BANC OF AMERICA SECURITIES LLC
JPMORGAN
UBS WARBURG
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