SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2001
Commission file number 001-15925
COMMUNITY HEALTH SYSTEMS, INC.
(Exact name of registrant as specified in its charter)
Delaware 13-3893191
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
155 Franklin Road, Suite 400
Brentwood, Tennessee
(Address of principal executive offices)
37027
(Zip Code)
615-373-9600
(Registrant's telephone number)
--------------------
Indicate by check mark whether the Registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months,
and (2) has been subject to such filing requirements for the past
90 days.
Yes X No
----------- -----------
As of November 12, 2001, there were outstanding 99,439,463 shares
of the Registrant's Common Stock, $.01 par value.
COMMUNITY HEALTH SYSTEMS, INC.
Form 10-Q
For the Quarter and Nine Months Ended September 30, 2001
Page
PART I. Financial Information
ITEM 1. Financial Statements:
Consolidated Balance Sheets - September 30, 2001 and December 31, 2000 2
Consolidated Statements of Operations - Three and Nine Months Ended September 30, 2001
and September 30, 2000 3
Consolidated Statements of Cash Flows - Nine Months Ended September 30, 2001
and September 30, 2000 4
Notes to Condensed Consolidated Financial Statements 5
ITEM 2. Management's Discussion and Analysis of Financial Condition And Results of
Operations 7
ITEM 3. Quantitative and Qualitative Disclosures about Market Risk 14
PART II. Other Information
ITEM 1. Legal Proceedings 15
ITEM 2. Changes in Securities and Use of Proceeds 15
ITEM 3. Defaults Upon Senior Securities 15
ITEM 4. Submission of Matters to a Vote of Security Holders 15
ITEM 5. Other information 15
ITEM 6. Exhibits and Reports on Form 8-K 15
SIGNATURES 16
PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
COMMUNITY HEALTH SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
September 30, December 31,
2001 2000
----------- -----------
(UNAUDITED)
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 17,699 $ 13,740
Patients accounts receivable, net 334,538 309,826
Supplies 42,669 39,679
Prepaid expenses and income taxes 13,181 19,989
Current deferred income taxes 2,233 2,233
Other current assets 17,510 23,110
----------- -----------
Total current assets 427,830 408,577
----------- -----------
PROPERTY AND EQUIPMENT 964,637 850,201
Less accumulated depreciation and amortization (186,693) (142,120)
----------- -----------
Property and equipment, net 777,944 708,081
----------- -----------
GOODWILL, NET 986,686 985,568
----------- -----------
OTHER ASSETS, NET 106,143 111,611
----------- -----------
TOTAL ASSETS $ 2,298,603 $ 2,213,837
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Current maturities of long-term debt $ 42,182 $ 17,433
Accounts payable 91,810 83,191
Current income taxes payable 26,023 --
Accrued interest 14,797 27,389
Accrued liabilities 105,703 112,860
----------- -----------
Total current liabilities 280,515 240,873
----------- -----------
LONG-TERM DEBT 1,211,586 1,201,590
----------- -----------
OTHER LONG-TERM LIABILITIES 12,882 15,200
----------- -----------
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;
87,438,097 shares issued and 86,462,548 shares outstanding
at September 30, 2001; and 87,105,562 shares issued and
86,137,582 shares outstanding at December 31, 2000 874 871
Additional paid-in capital 1,004,930 998,092
Accumulated deficit (205,243) (235,783)
Treasury stock, at cost, 975,549 shares at September 30, 2001 and 967,980
shares at December 31, 2000 (6,678) (6,587)
Notes receivable for common stock (211) (334)
Unearned stock compensation (52) (85)
----------- -----------
Total stockholders' equity 793,620 756,174
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 2,298,603 $ 2,213,837
=========== ===========
See accompanying notes.
2
COMMUNITY HEALTH SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(Unaudited)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
--------------------------- ---------------------------
2001 2000 2001 2000
----------- ----------- ----------- -----------
NET OPERATING REVENUES $ 416,569 $ 342,447 $ 1,216,123 $ 968,234
----------- ----------- ----------- -----------
OPERATING COSTS AND EXPENSES:
Salaries and benefits 163,320 132,431 473,101 376,653
Provision for bad debts 38,384 31,192 112,343 87,786
Supplies 48,142 40,006 141,030 112,416
Other operating expenses 81,741 67,917 233,902 186,085
Rent 10,956 8,132 30,643 22,669
Depreciation and amortization 23,318 18,655 66,412 52,565
Amortization of goodwill 7,313 6,542 21,387 18,920
----------- ----------- ----------- -----------
Total operating costs and expenses 373,174 304,875 1,078,818 857,094
----------- ----------- ----------- -----------
INCOME FROM OPERATIONS 43,395 37,572 137,305 111,140
INTEREST EXPENSE, NET 23,541 32,409 76,715 97,714
----------- ----------- ----------- -----------
INCOME BEFORE INCOME TAXES 19,854 5,163 60,590 13,426
PROVISION FOR INCOME TAXES 9,813 3,905 30,050 11,069
----------- ----------- ----------- -----------
NET INCOME $ 10,041 $ 1,258 $ 30,540 $ 2,357
=========== =========== =========== ===========
NET INCOME PER COMMON SHARE:
Basic $ 0.12 $ 0.02 $ 0.36 $ 0.04
=========== =========== =========== ===========
Diluted $ 0.11 $ 0.02 $ 0.35 $ 0.04
=========== =========== =========== ===========
WEIGHTED-AVERAGE NUMBER OF SHARES OUTSTANDING:
Basic 85,944,773 75,120,860 85,809,995 62,740,932
=========== =========== =========== ===========
Diluted 87,833,430 77,193,350 87,648,100 64,146,143
=========== =========== =========== ===========
See accompanying notes.
3
COMMUNITY HEALTH SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(Unaudited)
NINE MONTHS ENDED
SEPTEMBER 30,
------------------------
2001 2000
--------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 30,540 $ 2,357
Adjustments to reconcile net income to net cash provided by
(used in) operating activities:
Depreciation and amortization 87,799 71,485
Stock compensation expense 33 43
Other non-cash expenses (income), net 3,021 (447)
Changes in operating assets and liabilities, net of effects of
acquistions and divestitures:
Patient accounts receivable (9,945) (42,324)
Supplies, prepaid expenses and other current assets 10,026 (6,064)
Accounts payable, accrued liabilities and income taxes 2,991 (10,406)
Compliance settlement payable -- (30,900)
Other (10,399) (15,733)
--------- ---------
Net cash provided by (used in) operating activities 114,066 (31,989)
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Acquistions of facilities, pursuant to purchase agreements (55,066) (75,654)
Purchases of property and equipment (64,763) (36,748)
Proceeds from sale of equipment 168 85
Increase in other assets (25,257) (16,761)
--------- ---------
Net cash used in investing activities (144,918) (129,078)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of common stock, net of expenses 3 245,699
Proceeds from exercise of stock options 5,713 --
Common stock purchased for treasury (91) --
Borrowings under credit agreement 70,012 196,731
Repayments of long-term indebtedness (40,826) (277,703)
--------- ---------
Net cash provided by financing activities 34,811 164,727
--------- ---------
NET CHANGE IN CASH AND CASH EQUIVALENTS 3,959 3,660
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 13,740 4,282
--------- ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 17,699 $ 7,942
========= =========
See accompanying notes.
4
COMMUNITY HEALTH SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO 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 three and
nine month periods ended September 30, 2001 and September 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 nine months ended September 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 consolidated 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
During the nine months ended September 30, 2001, the Company acquired, through
two purchase transactions, effective in June and September, respectively, most
of the assets, including working capital, of two hospitals. The consideration
for the two hospitals totaled $65.7 million. The consideration consisted of
$53.6 million in cash, which a substantial portion was borrowed under the
acquisition loan facilities, and assumed liabilities of $12.1 million.
Licensed beds at these two facilities totaled 271.
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 than December 31, 2002. In addition, SFAS
No. 142 requires that intangible assets and goodwill be tested at least annually
for impairment of carrying value; impairment of value would be evaluated more
frequently if certain indicators are encountered.
The provisions of SFAS No. 142 effective for acquisitions after June 30, 2001
have been adopted and we expect to adopt the remaining provisions of 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
5
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 costs. 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. We
are evaluating the impact, if any, of adopting SFAS No. 143.
On August 1, 2001, the Financial Accounting Standards Board issued SFAS No. 144
"Accounting for the Impairment or Disposal of Long-Lived Assets." This Statement
addresses financial accounting and reporting for the impairment or disposal of
long-lived assets and supercedes SFAS No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets To Be Disposed Of," and the
accounting and reporting provisions of APB Opinion No. 30, "Reporting the
Results of Operations - Reporting the Effects of Disposal of a Segment of a
Business, and Extraordinary, Unusual and Infrequently Occurring Events and
Transactions," for the disposal of a segment of a business. This Statement also
amends ARB No. 51 "Consolidated Financial Statements", to eliminate the
exception to consolidation for a subsidiary for which control is likely to be
temporary. The provisions of this Statement are effective for financial
statements issued for fiscal years beginning after December 15, 2001. The
provisions are generally to be applied prospectively. The Company is evaluating
the impact, if any, of adopting SFAS No. 144.
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):
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
--------------------------- ---------------------------
2001 2000 2001 2000
----------- ----------- ----------- -----------
NUMERATOR:
Net income $ 10,041 $ 1,258 $ 30,540 $ 2,357
=========== =========== =========== ===========
DENOMINATOR:
Weighted-average number of shares
outstanding--basic 85,944,773 75,120,860 85,809,995 62,740,932
Effect of dilutive options 1,888,657 2,072,490 1,838,105 1,405,211
----------- ----------- ----------- -----------
Weighted-average number of shares
outstanding--diluted 87,833,430 77,193,350 87,648,100 64,146,143
=========== =========== =========== ===========
Basic earnings per share $ 0.12 $ 0.02 $ 0.36 $ 0.04
=========== =========== =========== ===========
Diluted earnings per share $ 0.11 $ 0.02 $ 0.35 $ 0.04
=========== =========== =========== ===========
7. SUBSEQUENT EVENTS
The Company acquired, through three separate purchase transactions effective
in October and November, most of the assets, including working capital, of
three hospitals. The consideration for the three hospitals totaled
6
approximately $136 million. The consideration consisted of $77.2 million in
cash, which a substantial portion was borrowed under the acquisition loan
facilities, and assumed liabilities of approximately $58.8 million including
a mortgage note payable of $7.7 million and other notes payable of $15.3
million. Licensed beds at the three hospitals totaled 495.
On October 9, 2001, we completed a public offering of 12,000,000 shares of its
common stock and the sale of $287.5 million of 4 1/4 % convertible subordinated
notes, due October 2008, including the exercise of the notes overallotment. Net
proceeds from these offerings of approximately $585 million were used to pay off
$500 million of 7 1/2 % subordinated debt plus accrued interest and the
remainder used to repay other long term debt under our credit agreement.
On November 2, 2001, we signed a definitive agreement to acquire a 152 bed
hospital. This pending transaction is subject to regulatory approvals and
licensing, including application for a certificate of need with the Department
of Health and Senior Services and approval by the Attorney General. The
execution of a definitive agreement is a precondition to the filing of the
certificate of need application. Due diligence will continue during the
regulatory approval process, which is expected to be completed in three to six
months.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
This discussion should be read in conjunction with the unaudited Condensed
Consolidated Financial Statements included herein.
SOURCES OF OPERATING 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,
46% for the year ended December 31, 2000 and 45% for the nine month period ended
September 30, 2001, are related to services rendered to patients covered by the
Medicare and Medicaid programs. In addition, we are reimbursed by
non-governmental payors using a variety of payment methodologies. Amounts we
receive for treatment of patients covered by these programs are generally less
than the standard billing rates. We account for the differences between the
estimated program reimbursement rates and the standard billing rates as
contractual adjustments, which we deduct from gross revenues to arrive at net
operating revenues. Final settlements under some of these programs are subject
to adjustment based on administrative review and audit by third parties. We
record adjustments to the estimated billings in the periods that such
adjustments become known. We account for adjustments to previous program
reimbursement estimates as contractual adjustments and report them in future
periods as final settlements are determined. Adjustments related to final
settlements or appeals that increased revenue were insignificant in each of the
three-month and nine-month periods ended September 30, 2001 and 2000.
We expect the percentage of our net 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 Benefit and
Improvement 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 annually for inflation,
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, but not material
impact to our overall operating results.
In December 2000, the Benefit 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 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. The trend toward increased enrollment
in managed care may affect our net operating revenue growth.
7
RESULTS OF OPERATIONS
Our hospitals offer a variety of services involving a broad range of inpatient
and outpatient medical and surgical services. These include orthopedics,
cardiology, OB/GYN, occupational medicine, rehabilitation treatment, home
health, and skilled nursing. The strongest demand for hospital services
generally occurs during January through April and the weakest demand for these
services occurs during the summer months. Accordingly, eliminating the effect of
new acquisitions, our net operating revenues and earnings are generally highest
during the first quarter and lowest during the third quarter.
The following tables summarize, for the periods indicated, selected operating
data.
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
2001 2000 2001 2000
------- ------- ------- -------
(EXPRESSED AS A PERCENTAGE OF NET OPERATING REVENUES)
Net operating revenues 100.0 100.0 100.0 100.0
Operating expenses (a) 82.2 81.7 81.5 81.1
------- ------- ------- -------
EBITDA (b) 17.8 18.3 18.5 18.9
Depreciation and amortization 5.6 5.4 5.5 5.4
Amortization of goodwill 1.8 1.9 1.7 2.0
------- ------- ------- -------
Income from operations 10.4 11.0 11.3 11.5
Interest, net 5.6 9.5 6.3 10.1
------- ------- ------- -------
Income before income taxes 4.8 1.5 5.0 1.4
Provision for income taxes 2.4 1.1 2.5 1.2
------- ------- ------- -------
Net income 2.4 0.4 2.5 0.2
======= ======= ======= =======
THREE MONTHS NINE MONTHS
ENDED ENDED
SEPTEMBER 30, 2001 SEPTEMBER 30, 2001
------------------ ------------------
(EXPRESSED IN PERCENTAGES)
PERCENTAGE CHANGE FROM SAME PERIOD PRIOR YEAR:
Net operating revenues 21.6 25.6
Admissions 11.5 17.6
Adjusted admissions (c) 13.8 17.0
Average length of stay -- --
EBITDA 17.9 23.3
SAME HOSPITALS PERCENTAGE CHANGE FROM PRIOR PERIOD (d):
Net operating revenues 10.8 11.0
Admissions 1.9 4.6
Adjusted admissions (c) 4.4 4.3
EBITDA 13.3 14.0
- ----------
(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 EBITDA as discussed in footnote (b) below.
(b) EBITDA consists of income before interest, income taxes, depreciation and
amortization, and amortization of goodwill. EBITDA should not be considered a
measure of financial performance under GAAP. Items excluded from EBITDA are
significant components in understanding and assessing financial performance.
EBITDA is a key measure used by management to evaluate our operations and
provide useful information to investors. EBITDA should not be considered in
isolation or as an alternative 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 is not a measurement determined in
accordance with GAAP and is thus susceptible to varying calculations, EBITDA as
presented may not be comparable to other similarly titled measures of other
companies.
(c) 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.
(d) Includes acquired hospitals to the extent we operated them during comparable
periods in both years. The nine months ended September 30, 2000 includes one
more business day in the period due to leap year.
8
THREE MONTHS ENDED SEPTEMBER 30, 2001 COMPARED TO THREE MONTHS ENDED
SEPTEMBER 30, 2000
Net operating revenues increased by 21.6% to $416.6 million for the three months
ended September 30, 2001 from $342.4 million for the three months ended
September 30, 2000. Of the $74.2 million increase in net operating revenues, the
four hospitals we acquired after September 30, 2000 contributed approximately
$37.3 million, and hospitals we owned throughout both periods contributed $36.9
million, an increase of 10.8%. 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.
Inpatient admissions increased by 11.5%. Adjusted admissions increased by 13.8%.
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 remained unchanged. On a same-hospital basis, inpatient
admissions increased by 1.9% and adjusted admissions increased by 4.4%. 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 10.7%. The increase
in net outpatient revenues was attributable primarily to an increase in
outpatient volume as well as rate increases from managed care and other payors.
Operating expenses, as a percentage of net operating revenues, increased from
81.7% for the three months ended September 30, 2000 to 82.2% for the three
months ended September 30, 2001, primarily due to efficiency and productivity
gains in payroll and supplies expenses offset by lower initial EBITDA margins
associated with recently acquired hospitals and one recently constructed
hospital. Operating expenses include salaries and benefits, provision for bad
debts, supplies, rent and other operating expenses. Salaries and benefits, as a
percentage of net operating revenues, increased to 39.2% from 38.7% for the
comparable periods, due to the realization of savings from improvements made at
the hospitals acquired in 2000, offset by the acquisitions made in 2001 having
higher salaries and benefits as a percentage of net operating revenues. EBITDA
margin decreased from 18.3% for the three months ended September 30, 2000 to
17.8% for the three months ended September 30, 2001. Provision for bad debts, as
a percentage of net operating revenues, increased to 9.2% for the three months
ended September 30, 2001 from 9.1% for the comparable period in 2000. Supplies
as a percentage of net operating revenues, decreased to 11.6% for the three
months ended September 30, 2001 from 11.7% for the comparable period in 2000.
Rent and other operating expenses, as a percentage of net operating revenues,
remained at 22.2% for the comparable periods.
On a same-hospital basis, operating expenses as a percentage of net operating
revenues decreased from 82.0% for the three months ended September 30, 2000 to
81.6% for the three months ended September 30, 2001. We achieved this through
efficiency and productivity gains in payroll and supplies expense reductions,
offset by an increase in other expenses.
Depreciation and amortization increased by $4.6 million from $18.7 million for
the three months ended September 30, 2000 to $23.3 million for the three months
ended September 30, 2001. The four hospitals acquired after September 30, 2000
accounted for $1.1 million of the increase; hospital 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 $3.5 million.
Amortization of goodwill increased from $6.5 million for the three months ended
September 30, 2000 to $7.3 million for the comparable period in 2001 related to
acquired hospitals.
Interest, net decreased by $8.9 million from $32.4 million for the three
months ended September 30, 2000 to $23.5 million for the three months ended
September 30, 2001. The decrease in average outstanding long-term debt during
the comparable periods in 2000 and 2001 accounted for approximately $3.0
million of the decrease while a net decrease in interest rates accounted for
the remaining difference. The decrease in average outstanding 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 and capital expenditures.
9
Income before income taxes increased from $5.2 million for the three months
ended September 30, 2000 to $19.8 million for the three months ended September
30, 2001 primarily as a result of the increases in revenue and decreases in
expenses as discussed above.
Provision for income taxes increased from $3.9 million for the three months
ended September 30, 2000 to $9.8 million for the three months ended September
30, 2001 as a result of the increase in pre-tax income.
Net income was $10.0 million for the three months ended September 30, 2001
compared to $1.3 million for the three months ended September 30, 2000.
NINE MONTHS ENDED SEPTEMBER 30, 2001 COMPARED TO NINE MONTHS ENDED
SEPTEMBER 30, 2000
Net operating revenues increased 25.6% to $1.2 billion for the nine months ended
September 30, 2001 from $968.2 million for the nine months ended September 30,
2000. Of the $247.9 million increase in net operating revenues, the seven
hospitals we acquired in 2000 and two hospitals acquired in 2001 contributed
approximately $142.1 million, and hospitals we owned throughout both periods
contributed $105.8 million, an increase of 11.0%. 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 17.6%. Adjusted admissions increased by 17.0%.
Average length of stay remained unchanged. On a same hospital basis, inpatient
admissions increased by 4.6% 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 by 11.9% primarily
as a result of an increase in outpatient volume as well as rate increases from
managed care and other payors.
Operating expenses, as a percentage of net operating revenues, increased from
81.1% for the nine months ended September 30, 2000, to 81.5% for the nine
months ended September 30, 2001, primarily due to an increase in provision
for bad debts, increases in utility expense, an increase in rent expense and
recent acquisitions having higher salaries and benefits as a percentage of
net revenue, offset by improvements in salaries and benefits and supplies
expense at hospitals we have owned throughout both periods. Salaries and
benefits, as a percentage of net operating revenues, remained at 38.9% for
the comparable periods, due to the continued realization of savings from
improvements made at 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 9.2% from 9.1%
for the comparable periods 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 21.5% for
the nine months ended September 30, 2000 to 21.8% for the nine months ended
September 30, 2001, due primarily to initial higher costs from recently
acquired hospitals and an increase in utilities expense. These fluctuations
have led to EBITDA margins decreasing from 18.9% for the nine months ended
September 30, 2000 to 18.5% for the nine months ended September 30, 2001.
On a same hospital basis, operating expenses as a percentage of net operating
revenues decreased from 81.5% for the nine months ended September 30, 2000 to
81.0% for the nine months ended September 30, 2001. We achieved this reduction
through efficiency and productivity gains in payroll and supplies expense
reductions, offset by increases in other expenses.
Depreciation and amortization increased by $13.8 million from $52.6 million for
the nine months ended September 30, 2000 to $66.4 million for the nine months
ended September 30, 2001. The seven hospitals acquired in 2000 and two hospitals
acquired in 2001 accounted for $3.6 million of the increase; hospital
renovations and purchases of equipment, information systems upgrades, the
inclusion of a hospital previously held for divestiture and other deferred items
accounted for the remaining $10.2 million.
Amortization of goodwill increased by $2.5 million from $18.9 million for the
nine months ended September 30, 2000 to $21.4 million for the comparable period
in 2001 related to acquired hospitals.
10
Interest, net decreased by $21.0 million from $97.7 million for the nine
months ended September 30, 2000 to $76.7 million for the nine months ended
September 30, 2001. The decrease in average outstanding long-term debt during
the comparable periods in 2000 and 2001 accounted for approximately $13.5
million of the decrease while a net decrease in interest rates accounted for
the remaining difference. The decrease in average outstanding 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 and capital expenditures.
Income before income taxes increased from $13.4 million for the nine months
ended September 30, 2000 to $60.6 million for the nine months ended September
30, 2001 primarily as a result of the increases in revenue and decreases in
expenses as discussed above.
Provision for income taxes increased from $11.1 million for the nine months
ended September 30, 2000 to $30.0 million for the nine months ended September
30, 2001 as a result of the increase in pre-tax income.
Net income increased from $2.4 million for the nine months ended September 30,
2000 to income of $30.5 million for the nine months ended September 30, 2001.
LIQUIDITY AND CAPITAL RESOURCES
Net cash from operating activities increased $146.1 million from a use of $32.0
million for the nine months ended September 30, 2000 to cash provided of $114.1
million for the nine months ended September 30, 2001. This increase represents
an increase in net income of $28.2 million, an increase in non-cash expenses of
$19.8 million, an increase of cash from working capital of $67.2 million and the
absence of the one-time compliance settlement payment of $30.9 million made in
2000, when comparing the nine month period ended September 30, 2000 and the nine
month period ended September 30, 2001. The increase of cash from working capital
can be attributed primarily to improvement in collections of accounts
receivable, a decrease in the amount of interest paid, and overall better
management of other working capital items. The use of cash from investing
activities increased from $129.1 million for the nine months ended September 20,
2000 to $144.9 million for the nine months ended September 20, 2001. This
increase is the result of additional purchases of property and equipment,
ongoing construction of a replacement facility and information system upgrades,
primarily at recently acquired facilities, offset by a decrease in cash paid for
acquisitions for the comparable periods. Net cash provided by financing
activities decreased $129.9 million during the comparable periods as a result of
not borrowing to meet capital expenditure and working capital needs during the
2001 period, a reduction in cash paid for acquisitions in the comparable periods
and not borrowing for the compliance settlement as was done in the 2000 period.
CAPITAL EXPENDITURES
We expect to incur total capital expenditures of approximately $93 million in
2001, including $60 million for renovation and equipment purchases and $30
million for construction of replacement hospitals. Pursuant to hospital purchase
agreements in effect as of September 30, 2001, we are obligated to construct
four replacement hospitals through 2005 with an aggregate estimated construction
cost including equipment, of approximately $120 million. During the nine months
ended September 20, 2001, we incurred expenditures of approximately $14 million
related to these replacement hospitals.
CAPITAL RESOURCES
Net working capital was $147.3 million at September 30, 2001 compared to $167.7
million at December 31, 2000. The $20.4 million decrease in net working capital
from December 31, 2000 to September 30, 2001 was attributable primarily to an
increase in our current income taxes payable and an increase in current
maturities on long-term debt in accordance with our scheduled payments, offset
by an increase in accounts receivable, primarily due to acquisitions, and a
decrease in accrued interest. We anticipate settling substantially all of our
current tax liability using net operating loss carry forwards, therefore, in
accordance with accounting standards the current income taxes payable will be
offset against deferred tax assets from net operating loss carry forwards in the
fourth quarter of 2001.
11
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
$251.9 million at September 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 a financial covenant ratio test. As of
September 30, 2001 using amended rates, our weighted average interest rate under
our credit agreement was 6.64%. As of September 30, 2001, we had availability to
borrow an additional $164.1 million under the working capital revolving facility
and an additional $132.9 million under the acquisition loan revolving facility.
We are required to pay a quarterly commitment fee at a rate of 0.375% to 0.500%
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 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.
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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.
The provisions of SFAS No. 142 effective for acquisitions after June 30, 2001
have been adopted and we expect to adopt the remaining provisions of 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 costs. 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. We
are evaluating the impact, if any, of adopting SFAS No. 143.
On August 1, 2001, the Financial Accounting Standards Board issued SFAS No. 144
"Accounting for the Impairment or Disposal of Long-Lived Assets." This Statement
addresses financial accounting and reporting for the impairment or disposal of
long-lived assets and supercedes SFAS No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets To Be Disposed Of," and the
accounting and reporting provisions of APB Opinion No. 30, "Reporting the
Results of Operations - Reporting the Effects of Disposal of a Segment of a
Business, and Extraordinary, Unusual and Infrequently Occurring Events and
Transactions," for the disposal of a segment of a business. This Statement also
amends ARB No. 51 "Consolidated Financial Statements", to eliminate the
exception to consolidation for a subsidiary for which control is likely to be
temporary. The provisions of this Statement are effective for financial
statements issued for fiscal years beginning after December 15, 2001. The
provisions are generally to be applied prospectively. We are evaluating the
impact, if any, of adopting SFAS No. 144.
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.
13
FORWARD-LOOKING STATEMENTS
Some of the matters discussed in this filing include forward-looking statements.
Statements that are predictive in nature, that depend upon or refer to future
events or conditions or that include words such as "expects," "anticipates,"
"intends," "plans," "believes," "estimates," "thinks," and similar expressions
are forward-looking statements. These statements involve known and unknown
risks, uncertainties, and other factors that may cause our actual results and
performance to be materially different from any future results or performance
expressed or implied by these forward-looking statements. These factors include
the following:
o general economic and business conditions, both nationally and in the
regions in which we operate;
o demographic changes;
o existing governmental regulations and changes in, or the failure to comply
with, governmental regulations or our corporate compliance agreement;
o legislative proposals for healthcare reform;
o our ability, where appropriate, to enter into managed care provider
arrangements and the terms of these arrangements;
o changes in Medicare and Medicaid payment levels;
o uncertainty with the newly issued Health Insurance Portability and
Accountability Act of 1996 regulations;
o liability and other claims asserted against us;
o competition;
o our ability to attract and retain qualified personnel, including
physicians;
o trends toward treatment of patients in lower acuity healthcare settings;
o changes in medical or other technology;
o changes in generally accepted accounting principles;
o the availability and terms of capital to fund additional acquisitions or
replacement facilities; and
o 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 filing. We assume no obligation to update or revise them
or provide reasons why actual results may differ.
ITEM 3: 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 $1.7 million for the three months
ended September 30, 2001 and $5.2 million for the nine months ended September
30, 2001.
14
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
None
(b) Reports on Form 8-K
Form 8-K, dated July 25, 2001, in connection with our press
release related to second quarter 2001 operating results.
15
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this Report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: November 13, 2001 COMMUNITY HEALTH SYSTEMS, INC.
(Registrant)
By: /s/ Wayne T. Smith
-------------------------------------
Wayne T. Smith
President and Chief Executive Officer
(principal executive officer)
By: /s/ W. Larry Cash
-------------------------------------
W. Larry Cash
Executive Vice President and Chief Financial
Officer
(principal financial officer)
By: /s/ T. Mark Buford
-------------------------------------
T. Mark Buford
Vice President and Corporate Controller
(principal accounting officer)
16
