UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended September 30, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ________________ to_________________
Commission File No. 000-18799
HEALTH MANAGEMENT ASSOCIATES, INC.
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(Exact name of Registrant as specified in its charter)
Delaware 61-0963645
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
5811 Pelican Bay Boulevard
Suite 500
Naples, Florida 34108-2710
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(Address of principal (Zip Code)
executive offices)
Registrant's telephone number, including area code (941) 598-3131
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Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
------------------- ----------------------
Class A Common Stock, New York Stock Exchange
$.01 par value
Securities registered pursuant to Section 12(g) of the Act:
None
--------------------------------
(Title of Class)
This Report consists of 61 pages.
The Index to Exhibits is located at page 47 of this Report.
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No _____
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Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
The aggregate market value of the voting stock held by non-affiliates of
the Registrant is $3,548,436,397. Market value is determined by reference to
the listed price of the Registrant's Class A Common Stock as of the close of
business on December 4, 1997.
The number of shares outstanding of each of the Registrant's classes of
common stock, as of December 4, 1997, is as follows:
Number of Shares
Outstanding as of
Class December 4, 1997
----- ------------------
Class A Common Stock, par value $.01 per share 163,463,984
Documents incorporated by reference and the Part of the Form 10-K into
which they are incorporated are listed hereunder.
PART OF FORM 10-K DOCUMENT INCORPORATED BY REFERENCE
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Part III, Items 10, 11, 12 and 13 Registrant's proxy statement to be issued in
connection with the Annual Meeting of
Stockholders of the Registrant to be held on
February 17, 1998
PART I
ITEM 1. BUSINESS
GENERAL
Health Management Associates, Inc. (the "Company" or the "Registrant") was
incorporated in Delaware in 1979 and succeeded to the operations of its
subsidiary, Hospital Management Associates, Inc., which was formed in 1977. The
Company provides a broad range of general acute care health services in nonurban
communities. As of September 30, 1997, the Company operated 22 general acute
care hospitals with a total of 2780 licensed beds and four psychiatric hospitals
with a total of 306 licensed beds. For the year ended September 30, 1997
("Fiscal 1997"), the acute care hospital operations accounted for approximately
96% of the Company's net patient service revenue and the psychiatric hospital
operations accounted for approximately 2%. See Item 2 "Properties".
BUSINESS STRATEGY
The Company pursues a business strategy of efficiently and profitably
operating its existing base of facilities and selectively acquiring additional
100 to 300 bed acute care hospitals located in nonurban communities in market
areas of 40,000 to 300,000 people in the southeastern and southwestern United
States. The Company seeks to acquire at reasonable prices acute care hospitals
which are the sole or predominant health care providers in their market service
areas. In evaluating potential acquisitions, the Company requires a hospital's
market service area to exhibit a demographic need for the facility and to have
an established physician base which can be augmented by the Company's ability to
attract additional physicians to the community. Many of the hospitals the
Company has acquired were unprofitable at the time of acquisition. Upon
acquiring a facility, the Company employs a well-qualified executive director
and controller, implements its proprietary management information system,
recruits physicians, introduces strict cost control measures with respect to
hospital staffing and volume purchasing under Company-wide agreements, and
spends the necessary capital to renovate the facility and upgrade equipment.
The Company strives to provide at least 90% of the acute care needs of each
community its hospitals serve, thereby reducing the out-migration of potential
patients to hospitals in larger urban areas.
The Company manages each acquired hospital to maximize operating margins
and return on capital within the first 36 to 48 months of operations, a time
period which the Company believes is sufficient to fully implement the plan of
improvement. Generally, the Company has been successful in achieving a
significant improvement in the operating performance of its facilities within
this time period. Once a facility has matured, the Company generally achieves
additional growth through favorable demographic trends, the continued growth of
physicians' practice in the community, expansion of health care services offered
and selective rate increases.
The Company also selectively reviews potential acquisitions of psychiatric
hospitals on an opportunistic basis. The demographic criteria for a psychiatric
hospital is a minimum service area of about 250,000 people. The psychiatric
hospital business is characterized by substantial competition within a market
area and requires a substantial investment in marketing.
See Item 2 "Properties" for a description of the Company's current
facilities.
3
OPERATIONS AND MARKETING
Upon acquisition of a hospital, the Company immediately implements its
policies to achieve its financial and operating goals. The Company (i)
appraises current management personnel and makes necessary changes, (ii) seeks
to reduce expenses by managing staffing more effectively and purchasing supplies
through volume agreements, (iii) improves billings and collections and (iv)
installs its proprietary management information system. The Company's flexible
staffing program allows the Company to manage its labor costs effectively by
properly staffing a hospital based on current occupancy, utilizing a combination
of full-time and part-time employees. The Company's management information
system provides the executive director and the controller with the necessary
financial and operational information to operate the hospital effectively and to
implement the Company's flexible staffing program. Based on the information
gathered, the Company can also assist physicians in appropriate case management.
The Company also attempts to increase admissions and outpatient business
through marketing programs. The marketing programs of each of the Company's
hospitals are directed by the hospital's executive director to best suit the
particular geographic, demographic and economic characteristics of the
hospital's market area. A key element of the Company's marketing strategy is to
establish and maintain a cooperative relationship with its physicians. The
Company pursues an active physician recruitment program to attract and retain
qualified specialists and other physicians to broaden the services available.
The Company's hospitals often provide newly recruited physicians with various
services to assist them in opening and commencing the operation of their
practices, including staffing assistance, financial support, and equipment and
office rental subsidies. Such costs are generally expensed as incurred. The
Company's hospitals also pursue various strategies aimed at increasing
utilization of their services, particularly emergency and outpatient services.
For example, some hospitals offer an emergency service program which calls for a
60-second response to an emergency room patient. Some hospitals also provide a
one-day surgery service available on weekends.
The Company relies more heavily on marketing for psychiatric hospitals than
for acute care hospitals. The Company believes that marketing through direct
mail, community programs, radio spots and broadcast media is an effective method
of increasing business at its psychiatric hospitals because these hospitals
obtain patients from a broader range of referral sources, including self-
referral and family referral. See "Competition -- Psychiatric Hospitals" in
this Item 1. These marketing programs highlight various psychiatric disorders,
encouraging the affected person or family to seek help from one of the Company's
psychiatric hospitals.
The Company considers its management structure to be decentralized. Its
hospitals are run by experienced executive directors and controllers having both
authority and responsibility for day-to-day operations. Incentive compensation
programs have been implemented to reward such managers for accomplishing
established goals. The Company employs a relatively small corporate staff to
provide services such as systems design and development, marketing assistance,
training, human resource management, reimbursement, technical accounting
support, purchasing and construction management. Financial control is
maintained through fiscal and accounting policies which are established at the
corporate level for use at the hospitals. Financial information is centralized
at the corporate level through the Company's proprietary management information
system.
4
SELECTED OPERATING STATISTICS
The following table sets forth selected operating statistics for the
Company's hospitals for the periods and dates indicated.
Year ended September 30,
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1995 1996 1997
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Total hospitals owned or leased
(as of the end of period)................ 21 24 26
Licensed beds (as of end of period)........ 2,282 2,841 3,108
Admissions................................. 63,729 82,701 100,677
Patient days............................... 340,485 419,418 494,977
Acute care average length of stay (days)... 4.9 4.7 4.6
Psychiatric average length of stay (days).. 12.0 12.2 14.1
Occupancy rate (1)......................... 44% 43% 45%
Outpatient utilization (2)................. 32% 34% 35%
Earnings before depreciation, interest
and income taxes margin.................. 24% 24% 24%
________________________
(1) Hospital occupancy rates are affected by many factors, including the
population size and general economic conditions within the service area,
the degree of variation in medical and surgical products, outpatient use of
hospital services, quality and treatment availability at competing
hospitals, and seasonality. Generally, the Company's hospitals experience
a seasonal decline in occupancy in the first and fourth fiscal quarters.
(2) Outpatient revenue as a percent of Total Patient Service Revenue (as
defined in "Sources of Revenue" in this Item 1).
COMPETITION
Acute Care Hospitals. The healthcare industry is highly competitive and in
recent years has been characterized by increased competition for patients and
staff physicians, a shift from inpatient to outpatient settings and increased
consolidation. The principal factors contributing to these trends are advances
in medical technology, cost-containment efforts by managed care payors,
employers and traditional health insurers, changes in regulations and
reimbursement policies, increases in the number and type of competing health
care providers and changes in physician practice patterns. A hospital will
compete within the geographic area in which it operates by distinguishing itself
based on the quality and scope of medical services provided. With respect to
the delivery of general acute care services, most of the Company's hospitals
face less competition in their immediate patient service areas than would be
expected in larger communities. While the Company's hospitals are generally the
predominant provider in their respective communities, most of its hospitals face
competition; however, that competition is generally limited to a single
competitor in each respective market. The Company seeks to provide at least 90%
of the health care needs in each community its hospital serves. For the
specialized treatment of diseases, such as neurological and major
cardiopulmonary disorders and health problems of relatively low incidence in the
population served, requiring specialized technology, residents in the Company's
service areas will generally be referred for treatment at major medical centers.
5
The competitive position of a hospital is increasingly affected by its
ability to negotiate service contracts with purchasers of group health care
services. Such purchasers include employers, PPOs and HMOs. PPOs and HMOs
attempt to direct and control the use of hospital services through management of
care and either (I) receive discounts from a hospital's established charges or
(ii) pay based on a fixed per diem or on a capitated basis, where hospitals
receive fixed periodic payments based on the number of members of the
organization regardless of the actual services provided. To date, HMOs have not
been a competitive factor in the Company's nonurban hospitals. In addition,
employers and traditional health insurers are increasingly interested in
containing costs through negotiations with hospitals for managed care programs
and discounts from established charges. In return, hospitals secure commitments
for a larger number of potential patients. Accordingly, the Company has been
proactive in establishing or joining such programs to maintain, and even
increase, hospital services. Management believes the Company is able to compete
effectively in its markets, and does not believe such programs will have a
significant adverse impact on the Company's net revenue. See "Operations and
Marketing" in this Item 1.
Psychiatric Hospitals. Generally, the Company's psychiatric hospitals face
substantial competition in their market areas because the Company's psychiatric
hospitals compete in larger urban areas than do its acute care hospitals and
these hospitals also seek to draw patients from secondary service areas (service
referrals). Psychiatric hospitals generally benefit from a broader range of
referral sources than do acute care hospitals. Such referral sources include
physicians, social agencies, both private and governmental, community mental
health centers, local court systems, licensed non-medical professionals such as
psychologists, clergy and mental health counselors, self referrals and family
referrals. The Company's psychiatric hospitals engage in significant media
marketing as part of their comprehensive outreach programs. In recent years
third party payors have significantly reduced payments to psychiatric hospitals
through rate reductions, shorter inpatient lengths-of-stay, movement from
inpatient to outpatient treatments, and various alternative treatment programs.
The Company's psychiatric hospitals have been negatively affected by these
changes. However, as noted earlier in Item 1., psychiatric operations only
account for approximately 2% of the Company's net revenue.
Acquisitions. The Company faces competition for the acquisition of non-
urban community acute care hospitals from proprietary and not-for-profit multi-
hospital groups. Some of these competitors may have greater financial and other
resources than the Company. Historically, the Company has been able to acquire
hospitals at reasonable prices. However, increased competition for the
acquisition of nonurban community acute care hospitals could have an adverse
impact on the Company's ability to acquire such hospitals on favorable terms.
Consolidation. There has been significant consolidation in the hospital
industry over the past decade due, in large part, to continuing pressures on
payments from government and private payors and increasing shifts away from the
provision of traditional in-patient services. Those economic trends have caused
many hospitals to close and many to consolidate either through acquisitions or
affiliations. The Company believes that these cost containment pressures will
continue and will lead to further consolidation in the hospital industry.
6
SOURCES OF REVENUE
The Company receives payment for services rendered to patients from (i) the
federal government under the Medicare program, (ii) each of the states in which
its hospitals are located under the Medicaid program, and (iii) private insurers
and patients. The following table sets forth the approximate percentage of
Total Patient Service Revenue (defined as revenue from all sources before
deducting contractual allowances and discounts from established billing rates)
derived from the various sources of payment for the periods indicated.
Year Ended September 30,
---------------------------
1995 1996 1997
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Medicare................... 55% 52% 52%
Medicaid................... 12 13 14
Private and other sources.. 33 35 34
---- ---- ----
Total................. 100% 100% 100%
==== ==== ====
Hospital revenues depend upon inpatient occupancy levels, the extent to
which ancillary services and therapy programs are ordered by physicians and
provided to patients and the volume of outpatient procedures. Reimbursement
rates for inpatient routine services vary significantly depending on the type of
service (e.g., acute care, intensive care or psychiatric) and the geographic
location of the hospital. The Company has experienced an increase in the
percentage of patient revenues attributable to outpatient services in recent
years. This increase is primarily the result of advances in medical technology
(which allow more services to be provided on an outpatient basis) and increased
pressures from Medicare, Medicaid and insurers to reduce hospital stays and
provide services, where possible, on a less expensive outpatient basis. The
Company's experience with respect to increased outpatient volume mirrors the
trend in the hospital industry.
Medicare. Most hospitals (including all of the Company's hospitals) derive
a substantial portion of their revenue from the Medicare program, which is a
federal government program designed to reimburse participating health care
providers for covered services rendered and items furnished to qualified
beneficiaries. The Medicare program is heavily regulated and subject to
frequent changes which in recent years have reduced, and in future years are
expected to continue to reduce, Medicare payments to hospitals. In light of its
hospitals' high percentage of Medicare patients, the Company's ability in the
future to operate its business successfully will depend in large measure on its
ability to adapt to changes in the Medicare program.
The Medicare program is designed primarily to provide health care services
to persons aged 65 and over and those who are chronically disabled or who have
End Stage Renal Disease ("ESRD"). The Medicare program is governed by the
Social Security Act of 1965 and is administered by the federal government,
primarily the Department of Health and Human Services ("DHHS") and the Health
Care Financing Administration ("HCFA").
Legislative action and federal regulatory changes during the past several
years have resulted in significant changes in the Medicare program. Formerly,
Medicare provided reimbursement for the reasonable direct and indirect costs of
hospital services furnished to beneficiaries, plus an allowed return on equity
for proprietary hospitals. Pursuant to the Social Security Amendments of 1983
("the Amendments") and subsequent budget reconciliation act modifications,
Congress adopted a prospective payment system ("PPS") to reimburse the routine
7
and ancillary operating costs of most Medicare inpatient hospital services.
Psychiatric, long-term care, rehabilitation and pediatric hospitals, as well as
psychiatric or rehabilitation units that are distinct parts of a hospital, are
exempt from PPS and continue to be reimbursed on a reasonable cost basis. In
addition, many outpatient services continue to be reimbursed, subject to certain
regulatory limitations, on a reasonable cost basis. The Company's four
psychiatric hospitals, which are currently exempt from PPS reimbursement, are
subject to an operating cost per discharge limitation for Medicare reimbursement
purposes.
Under PPS, the Secretary of DHHS has established fixed payment amounts per
discharge for categories of hospital treatment, commonly known as diagnosis-
related groups ("DRGs"). DRG rates have been established for each individual
hospital participating in the Medicare program, in part based upon the
facility's geographic location. As a general rule under PPS, if a facility's
costs of providing care for the beneficiary are less than the predetermined DRG
rate, the facility retains the difference. Conversely, if the facility's costs
of providing the necessary service are more than the predetermined rate, the
facility must absorb the loss. Because DRG rates are based upon a statistically
normal distribution of severity, patients falling outside the normal
distribution are afforded additional payments and defined as "outliers." In
certain instances, additional payments may be received for outliers.
The DRG rates are updated annually to account for projected inflation. For
several years the annual updates or percentage increases to the DRG rates have
been lower than the actual inflation in the cost of goods and services purchased
by general hospitals. The inflation index used by HCFA to adjust the DRG rates
gives consideration to the cost of goods and services purchased by hospitals as
well as non-hospitals (the "market basket"). The increase in the market basket
for the year beginning on October 1, 1997 is 2.7%. Pursuant to the Balanced
Budget Act of 1997, the net annual updates have been set as follows: federal
fiscal year ("FY") 1998, 0%; FY 1999, market basket minus 1.9%; FY 2000, market
basket minus 1.8%; FY 2001 and FY 2002, market basket minus 1.1%; and, for FY
2003 and each subsequent FY, the market basket percentage increase. The Company
cannot predict how future adjustments by Congress and the HCFA will affect the
profitability of its health care facilities.
Hospitals excluded from the PPS, such as psychiatric and rehabilitation
hospitals, receive reimbursement based on their reasonable costs, with limits
placed upon the annual rate of increase in operating costs per discharge.
Pursuant to the Balanced Budget Act of 1997, the annual updates for FY 1998 is
set at 0%. For FY 1999 through FY 2002, the annual update factor is dependent
upon where the hospital's costs fall in relation to the limits set by the Tax
Equity and Fiscal Responsibility Act of 1982 ("TEFRA"). The annual update
factor will range from 0% to the market basket percentage increase, depending
upon whether the hospital's costs are at, below or above the TEFRA target
limits. The Company currently has four hospitals that are exempt from the PPS.
Prior to October 1, 1990, Medicare payments for outpatient hospital-based
services were generally the lower of hospital costs or customary charges. Due
to federal budget restraints, the Omnibus Budget Reconciliation Act of 1993
("OBRA-1993") reduced Medicare payments for the majority of outpatient services
to the lower of 94.2% of hospital costs, customary charges or a blend of 94.2%
of hospital costs and a fee schedule (such fee schedule generally being lower
than hospital costs) through FY 1998. The Balanced Budget Act of 1997 extends
this reduction through FY 1999 and during FY 2000 before January 1, 2000. The
Balanced Budget Act of 1997 also requires the development of a prospective
payment system for outpatient services beginning on January 1, 1999. Outpatient
8
laboratory services are paid based on a fee schedule which is substantially
lower than customary charges. Certain ambulatory surgery procedures are paid
for at a rate based on a blend of hospital costs and the rate paid by Medicare
for similar procedures performed in free-standing ambulatory surgery centers.
Certain radiology and other diagnostic services are paid on a blend of actual
cost and prevailing area charge.
Payments under the Medicare program for capital related costs, for cost
reporting periods prior to October 1, 1991, were made on a reasonable cost
basis. Reasonable capital costs generally include depreciation, rent and lease
expense, capital interest, property taxes, insurance related to the physical
plant, fixed equipment and movable equipment. As a result of changes made to
the Social Security Act by the Omnibus Reconciliation Act of 1987 ("OBRA-1987")
hospitals paid under PPS for operating costs must be reimbursed for capital
costs on a prospective basis, effective with the cost reporting period beginning
October 1, 1991 (i.e., FY 1992). HCFA implemented the PPS for capital costs for
FY 1992 based upon FY 1989 Medicare inpatient capital costs per discharge
updated to FY 1992 by the estimated increase in Medicare capital costs per
discharge. A ten year transition period, beginning with FY 1992, was
established for the phasing-in of the capital PPS. Under the transition period
rules, hospitals with a hospital-specific capital rate below the standard
Federal rate are paid on a fully prospective methodology. Hospitals with a
hospital-specific rate above the standard Federal rate are paid based on a hold-
harmless method or 100% of the standard Federal rate, whichever results in the
higher payment. Beginning with cost reporting periods on or after October 1,
2001, at the end of the transition period, all hospitals are to be paid at the
standard Federal rate. Pursuant to the Balanced Budget Act of 1997, capital
payment rates must be rebased in FY 1998 using the actual rates in effect in FY
1995 and the budget neutrality adjustment factor used to determine the federal
capital payment rate on September 30, 1995. In addition, capital rates are
reduced by an additional 2.1% by the Balanced Budget Act of 1997.
The Medicare program reimburses each hospital on a reasonable cost basis
for the Medicare program's pro rata share of the hospital's allowable capital
costs related to outpatient services. Outpatient capital reimbursement was
reduced by 15% (i.e., 85% of outpatient capital costs) during FY 1990 and OBRA
1990 extended the 15% reduction through FY 1991. OBRA-1990 further directed
that outpatient capital reimbursement be reduced by only 10% beginning FY 1992
through FY 1995. OBRA-1993 extended the 10% reduction through FY 1998, and the
Balanced Budget Act of 1997 continues the 10% reduction for FY 1999 and during
FY 2000 before January 1, 2000.
OBRA-1993 provides for certain budget targets through FY 1997 which, if not
met, may result in adjustments in payment rates. Both Congress and the current
Administration have proposed healthcare budgets that reduce federal payments to
hospitals and other providers. The Company anticipates that payments to
hospitals will be reduced as a result of future legislation but is unable to
predict what the amount of the final reduction will be.
The Balanced Budget Act of 1997 mandates that home health care
reimbursement must transition to a prospective payment system on October 1,
1999, as well as a 15% reduction in the cost limits and per beneficiary limits
effective September 30, 1999. During a transition period of not longer than 4
years, home health care reimbursement rates will be a blend of agency-specific
costs and the regional-specific costs, until a fully prospective payment rate is
achieved. The Company currently has 13 hospitals that provide home health care
services. The impact of the transition to PPS for home health care services
9
cannot be assessed at this time, since the HCFA has yet to define the regions to
be used in determining regional costs.
The Balanced Budget Act of 1997 mandated numerous other adjustments and
reductions to the Medicare system that collectively may impact the Company's
operations. With respect to the valuation of capital assets as a result of a
change in hospital ownership, the Balanced Budget Act of 1997 eliminates the
allowance for return on equity capital, and bases reimbursement on the book
value of the assets, recognizing no gain, loss or recapture of depreciation. In
addition, the Balanced Budget Act of 1997 mandated the following changes: a)
reimbursement for Medicare enrollee deductible and coinsurance bad debts is
reduced 25% for FY 1998, 40% for FY 1999 and 45% for FY 2000 and each subsequent
year; b) the bonus payments made to hospitals whose costs are below the target
amounts is reduced from 5% of the target amount to 2%; and, c) skilled nursing
home reimbursement must transition to a prospective payment system, based upon
1995 allowable costs, with a three year transition period beginning on or after
July 1, 1998.
Medicaid. The Medicaid program, created by the Social Security Act of
1965, is designed to provide medical assistance to individuals unable to afford
care. Medicaid is a joint federal and state program in which states voluntarily
participate. Payment rates and services covered under the Medicaid program are
set by each participating state. As a result, Medicaid payment rates and
covered services may vary from state to state. Approximately 50% of Medicaid
funding comes from the federal government, with the balance shared by the state
and local governments. The Medicaid program is administered by individual state
governments, subject to compliance with broadly defined federal requirements.
The Balanced Budget Act of 1997 repealed the Boren Amendment to the
Medicaid Act which had been interpreted by the Courts as establishing a federal
minimum standard for Medicaid rates payable to hospitals and nursing homes.
Congress repealed the Boren Amendment in order to give states greater
flexibility in establishing Medicaid payment methods and rates. The Boren
Amendment required states to undertake a finding analysis and then to assure the
federal government that their Medicaid rates were reasonable and adequate to
meet the costs that must be incurred by economically and efficiently operated
hospitals in providing care to Medicaid recipients. In place of this minimum
standard, Congress has mandated that states employ a rate setting process that
requires prior publication and an opportunity for provider comment on the rates.
This replacement requirement is effective for rates of payment on and after
January 1, 1998.
State Medicaid payment methodologies vary from state to state. The most
common methodologies are state Medicaid prospective payment systems or state
programs that negotiate payment rates with individual hospitals. Generally,
Medicaid payments are less than Medicare payments and are substantially less
than a hospital's cost of services. In 1991 Congress passed legislation
limiting the states' use of provider-specific taxes and donated funds to bolster
the state's share and obtain increased federal Medicaid matching funds. Certain
states in which the Company operates have adopted broad-based provider taxes to
fund their Medicaid programs in response to the 1991 legislation. Congress has
also established a national limit on disproportionate share hospital adjustments
(which are additional amounts required to be paid to hospitals defined as
providing a disproportionate amount of Medicaid and low-income inpatient
services). This legislation and the resulting state broad-based provider taxes
have adversely affected the Company's net Medicaid payments, but to date the net
impact has not been materially adverse.
10
The federal government and many states are currently considering additional
ways to limit the increase in the level of Medicaid funding, which also could
adversely affect future levels of Medicaid payments received by the Company's
hospitals. Because the Company cannot predict precisely what action the federal
government or the states will take as a result of existing and future
legislation, the Company is unable to assess the effect of such legislation on
its business. Like Medicare funding, Medicaid funding may also be affected by
health care reform legislation, and it is impossible to predict the effect such
legislation might have on the Company.
CHAMPUS. Some of the Company's hospitals provide services to retired and
certain other military personnel and their families pursuant to the Civilian
Health and Medical Program of Uniformed Services ("CHAMPUS") program. CHAMPUS
pays for inpatient acute hospital care on the basis of a prospectively
determined rate applied on a per discharge basis using DRGs similar to the
Medicare system. At this time, inpatient psychiatric hospital services are
reimbursed on an individual hospital per diem rate calculated based upon the
average charges for these services by all psychiatric hospitals. The Company
can make no assurance that the CHAMPUS program will continue per diem
reimbursement for psychiatric hospital services in the future.
The Medicare, Medicaid and CHAMPUS programs are subject to statutory and
regulatory changes, administrative rulings, interpretations and determinations,
requirements for utilization review and new governmental funding restrictions,
all of which may materially increase or decrease program payments as well as
affect the cost of providing services and the timing of payments to facilities.
The final determination of amounts earned under the programs often requires many
years, because of audits by the program representatives, providers' rights of
appeal and the application of numerous technical reimbursement provisions.
Management believes that adequate provision has been made for such adjustments.
Until final adjustment, however, significant issues remain unresolved and
previously determined allowances could become either inadequate or more than
ultimately required.
Commercial Insurance. The Company's hospitals provide services to
individuals covered by private health care insurance. Private insurance
carriers either reimburse their policy holders or make direct payments to the
Company's hospital based upon the particular hospital's established charges and
the particular coverage program that provides its subscribers with hospital
benefits through independent organizations that vary from state to state. The
Company's hospitals are paid directly by local Blue Cross organizations on the
basis agreed to by each hospital and Blue Cross by a written contract.
Recently, several commercial insurers have undertaken efforts to limit the
costs of hospital services by adopting prospective payment or DRG-based systems.
To the extend such efforts are successful, and to the extent that the insurers'
systems fail to reimburse hospitals for the costs of providing services to their
beneficiaries, such efforts may have a negative impact on the results of
operations of the Company's hospitals.
HEALTHCARE REFORM, REGULATION AND LICENSING
General. Healthcare, as one of the largest industries in the United
States, continues to attract much legislative interest and public attention.
Medicare, Medicaid, mandatory and other public and private hospital cost-
containment programs, proposals to limit healthcare spending, proposals to limit
prices and industry competitive factors are highly significant to the healthcare
11
industry. In addition, the healthcare industry is governed by a framework of
Federal and state laws, rules and regulations that are extremely complex and for
which the industry has the benefit of little or no regulatory or judicial
interpretation. Although the Company believes it is in compliance in all
material respects with such laws, rules and regulations, if a determination is
made that the Company was in material violation of such laws, rules or
regulations, its operations and financial results could be materially adversely
affected.
Licensure, Certification and Accreditation. Health care facility
construction and operation is subject to federal, state and local regulation
relating to the adequacy of medical care, equipment, personnel, operating
policies and procedures, fire prevention, rate-setting and compliance with
building codes and environmental protection laws. Facilities are subject to
periodic inspection by governmental and other authorities to assure continued
compliance with the various standards necessary for licensing and accreditation.
All of the Company's health care facilities are properly licensed under
appropriate state laws and are certified under the Medicare program or are
accredited by the Joint Commission on Accreditation of Health Care Organizations
("Joint Commission"), the effect of which is to permit the facilities to
participate in the Medicare/Medicaid programs. Should any Joint Commission
facility lose its accreditation, and then not become certified under the
Medicare program, the facility would be unable to receive reimbursement from the
Medicare/Medicaid programs. Management believes that the Company's facilities
are in substantial compliance with current applicable federal, state, local and
independent review body regulations and standards. The requirements for
licensure, certification and accreditation are subject to change and, in order
to remain qualified, it may be necessary for the Company to effect changes in
its facilities, equipment, personnel and services. Although the Company intends
to continue its qualification, there can be no assurance that its hospitals will
be able to comply in the future.
Utilization Review. In order to ensure efficient utilization of facilities
and services, federal regulations require that admissions to and the utilization
of facilities by Medicare and Medicaid patients be reviewed by a federally
funded Peer Review Organization ("PRO"). Pursuant to Federal law, the PRO must
review the need for hospitalization and the utilization of services, denying
admission of a patient or denying payment for services provided, where
appropriate. Each of the Company's facilities has contracted with a PRO and has
had in effect a quality assurance program that provides for retrospective
patient care evaluation and utilization review.
Certificates of Need. The construction of new facilities, the acquisition
of existing facilities, and the addition of new beds or services may be
reviewable by state regulatory agencies under a program frequently referred to
as certificate of need. Except for Arkansas, all the states in which the
Company's health care facilities are located have certificate of need or
equivalent laws which generally require appropriate state agency determination
of public need and approval prior to beds or services being added, or a related
capital amount being spent. Failure to obtain necessary state approval can
result in the inability to complete the acquisition, the imposition of civil or,
in some cases, criminal sanctions, the inability to receive Medicare or Medicaid
reimbursement and/or the revocation of the facility's license.
State Hospital Rate-Setting Activity. The Company currently operates nine
facilities in states that have some form of mandated hospital rate-setting.
Under Florida law, the maximum annual percentage any hospital may increase its
12
revenue per adjusted admission is limited based on an Agency for Health Care
Administration ("AHCA") approved regulatory formula which encompasses
inflationary update factors. A hospital may request AHCA approval for a higher
revenue per adjusted admission by submitting a detailed budget for its review.
The AHCA may either approve the requested revenue per adjusted admission, limit
it to the amount previously determined by the AHCA, or reduce the hospital's
revenue per adjusted admission. The West Virginia Health Care Rate Authority
("HCRA") establishes a maximum approved charge for each hospital service.
Hospitals are limited to this maximum charge for each service until HCRA
approves an increase. Rate increases are reviewed, approved and implemented on
an annual basis. As a result, in Florida and West Virginia, the Company's
ability to increase its rates to compensate for increased costs per admission is
limited and the Company's operating margin on its Florida and West Virginia
facilities may be adversely affected. There can be no assurance that other
states in which the Company operates hospitals will not enact rate-setting
provisions as well.
Antikickback and Self-Referral Regulations. The healthcare industry is
subject to extensive Federal, state and local regulation relating to licensure,
conduct of operations, ownership of facilities, addition of facilities and
services and prices for services. In particular, Medicare and Medicaid
antikickback, antifraud and abuse amendments codified under Section 1128B(b) of
the Social Security Act (the "Antikickback Amendments") prohibit certain
business practices and relationships that might affect the provision and cost of
healthcare services reimbursable under Medicare and Medicaid, including the
payment or receipt of remuneration for the referral of patients whose care will
be paid for by Medicare or other government programs. Sanctions for violating
the Antikickback Amendments include criminal penalties and civil sanctions,
including fines and possible exclusion from the Medicare and Medicaid programs.
Pursuant to the Medicare and Medicaid Patient and Program Protection Act of
1987, DHHS has issued regulations that describe some of the conduct and business
relationships permissible under the Antikickback Amendments ("Safe Harbors").
The fact that a given business arrangement does not fall within a Safe Harbor
does not render the arrangement per se illegal. Business arrangements of
healthcare service providers that fail to clearly satisfy the applicable Safe
Harbor criteria, however, risk increased scrutiny by enforcement authorities.
Because the Company may be less willing than some of its competitors to enter
into business arrangements that do not clearly satisfy the Safe Harbors, it
could be at a competitive disadvantage in entering into certain transactions and
arrangements with physicians and other healthcare providers.
In addition, Section 1877 of the Social Security Act, which restricts
referrals by physicians of Medicare and other government-program patients to
providers of a broad range of designated health services with which they have
ownership or certain other financial arrangements, was amended effective January
1, 1995, to significantly broaden the scope of prohibited physician referrals
under the Medicare and Medicaid programs to providers with which they have
ownership or certain other financial arrangements (the "Self-Referral
Prohibitions"). Many states have adopted or are considering similar legislative
proposals, some of which extend beyond the Medicaid program to prohibit the
payment or receipt of renumeration for the referral of patients and physician
self-referrals regardless of the source of the payment for the care. The
Company's participation in and development of joint ventures and other financial
relationships with physicians could be adversely affected by these amendments
and similar state enactments. The Company systematically reviews all of its
operations to ensure that it complies with the Social Security Act and similar
state statutes. In addition, the Company instituted a Corporate compliance
program that has been implemented by all of the Company's hospitals, and that is
13
an ongoing, working program to monitor and insure continuing compliance with
these statutory prohibitions and requirements.
Both Federal and state government agencies have announced heightened and
coordinated civil and criminal enforcement efforts. The Company is unable to
predict the future course of Federal, state and local regulation or legislation,
including Medicare and Medicaid statutes and regulations. Further changes in
the regulatory framework could have a material adverse effect on the Company's
financial condition.
Environmental Regulations. The Company's healthcare operations generate
medical waste that must be disposed of in compliance with Federal, state and
local environmental laws, rules and regulations. The Company's operations, as
well as the Company's purchases and sales of facilities, are also subject to
compliance with various other environmental laws, rules and regulations. Such
compliance does not, and the Company anticipates that such compliance will not,
materially affect the Company's capital expenditures, earnings or competitive
position.
EMPLOYEES AND MEDICAL STAFF
As of September 30, 1997, the Company had approximately 10,000 full-time
and part-time employees, approximately 140 of whom were covered by a collective
bargaining agreement. The Company's corporate office staff consisted of 55
people at that date. The Company believes that its relations with employees are
satisfactory. In general, the staff physicians at the Company's acute care and
psychiatric hospitals are not employees of the Company. The physicians may also
be staff members of other hospitals. The Company provides physicians with
certain services and assistance. The Company does employ approximately 70
primary care physicians who are located at clinics the Company owns and
operates. In addition, the Company's hospitals provide emergency room coverage,
radiology, pathology and anesthesiology services by entering into service
contracts with physician groups which are generally cancelable on 90 days
notice.
LIABILITY INSURANCE
The Company maintains at each hospital it operates professional liability
insurance and general liability insurance in amounts of $1,000,000 per claim and
$2,000,000 per aggregation of claims, of which the Company retains the first
$100,000 of each professional liability claim and up to $2,000,000 in the
aggregate for all such claims each year. The Company maintains a $1,000,000
layer of self-insured retention of professional liability for all hospitals
above the first level of coverage and then purchases $25,000,000 umbrella
coverage for all hospitals. The Company also maintains other typical insurance
coverage. The Company maintains an unfunded reserve for its self-insured risks
described above based upon actuarially determined estimates. Actual hospital
professional liability costs for a particular period are not known for several
years after the period has expired. The delay in determining the actual cost
associated with a particular period is a result of the time between the
occurrence of an incident and when it is reported as well as the time involved
and costs incurred in resolution of such claims. The Company believes that its
insurance is adequate in amount and coverage. There can be no assurance that in
the future such insurance will be available at a reasonable price or that the
Company will not have to increase its levels of self-insurance.
14
ITEM 2. PROPERTIES
The Company's acute care hospitals offer a broad range of medical and
surgical services, including inpatient care, intensive and cardiac care,
diagnostic services and emergency services that are physician-staffed 24 hours a
day, seven days a week. The Company also provides outpatient services such as
one-day surgery, laboratory, x-ray, respiratory therapy, cardiology and physical
therapy. At certain of the Company's hospitals specialty services such as
oncology, radiation therapy, CT scanning, MRI imaging, lithotripsy and full-
service obstetrics are provided.
The Company's psychiatric care operations consist of four psychiatric
hospitals: one 66-bed hospital, one 80-bed hospital, one 100-bed hospital with
60 child/adolescent beds and 40 adult beds, and one 60-bed child/adolescent
hospital.
The following table presents certain information with respect to the
Company's facilities as of September 30, 1997. For more information regarding
the utilization of the Company's facilities, see "Item 1. Business -- Selected
Operating Statistics".
15
OWNED ACQUISITION OR
LICENSED LEASED OR COMMENCEMENT
HOSPITAL LOCATION TYPE BEDS MANAGED DATE
- ----------------------------------------- -------------- ------------ ------ ---------- ----------------
Paul B. Hall Regional Medical Center Paintsville, Acute Care 72 Owned January 1979
Kentucky (replaced
September 1983)
Williamson Memorial Hospital Williamson, Acute Care 76 Owned June 1979
West Virginia (replaced
June 1987)
Highlands Regional Medical Center Sebring, Acute Care 126 Leased August 1985
Florida
Lake Norman Regional Medical Center(1) Mooresville, Acute Care 109 Owned January 1986
North Carolina Psychiatric 12
Palmview Hospital Lakeland, Psychiatric 66 Owned March 1986
Florida
Fishermen's Hospital Marathon, Acute Care 58 Leased August 1986
Florida
Franklin Regional Medical Center Louisburg, Acute Care 70 Owned August 1986
North Carolina Psychiatric 15
Biloxi Regional Medical Center Biloxi, Acute Care 153 Leased September 1986
Mississippi
Medical Center of Southeastern Oklahoma Durant, Acute Care 103 Owned May 1987
Oklahoma
Crawford Memorial Hospital Van Buren, Acute Care 103 Leased May 1987
Arkansas
Hamlet Hospital Hamlet, Acute Care 54 Owned August 1987
North Carolina Psychiatric 10
Upstate Carolina Regional Medical Center Gaffney, Acute Care 125 Owned March 1988
South Carolina
University Behavioral Center Orlando, Psychiatric 100 Owned January 1989
Florida
SandyPines Tequesta, Psychiatric 60 Owned January 1990
Florida
Riverview Regional Medical Center Gadsden, Acute Care 281 Owned July 1991
Alabama
16
OWNED ACQUISITION OR
LICENSED LEASED OR COMMENCEMENT
HOSPITAL LOCATION TYPE BEDS MANAGED DATE
- ------------------------------------ -------------- ------------ --------------- ------- --------------
Parkview Hospital of Topeka Topeka, Psychiatric 80 Owned July 1993
Kansas
Heart of Florida Hospital (2) Haines City, Acute Care 51 Owned August 1993
Florida
Natchez Community Hospital Natchez, Acute Care 101 Owned September 1993
Mississippi
Sebastian Hospital Sebastian, Acute Care 133 Owned September 1993
Florida
Medical Center Hospital Punta Gorda, Acute Care 156 Owned December 1994
Florida Psychiatric 52
Byerly Hospital (3) Hartsville, Acute Care 116 Leased September 1995
South Carolina
Bulloch Memorial Hospital (3) Statesboro, Acute Care 158 Leased October 1995
Georgia
Northwest Mississippi Regional Clarksdale, Acute Care 175 Leased January 1996
Medical Center Mississippi Skilled Nursing 20
Midwest City Regional Hospital Midwest City, Acute Care 164 Leased June 1996
Oklahoma Psychiatric 30
Skilled Nursing 20
Stringfellow Memorial Hospital (4) Anniston, Acute Care 125 Leased January 1997
Alabama
Rankin Medical Center (5) Brandon, Acute Care 120 Leased January 1997
Mississippi Gero-Psych 14
-----
TOTAL LICENSED BEDS OWNED OR LEASED 3,108
=====
- -------------------------
(1) The Company is currently building a replacement hospital for the Lake
Norman Regional Medical Center. The total cost of the project is
approximately $33,500,000, and is scheduled to open during our fiscal year
ending September 30, 1999.
(2) The Company completed and opened a replacement facility for the Heart of
Florida Hospital in June 1997. Whereas previous facility was operated by
the Company under a lease agreement, the Company now owns the new
replacement hospital.
(3) The Company currently operates Byerly Hospital and Bulloch Memorial
Hospital under a three-year lease. The Company is required to commence
construction of a replacement facility for each location during the initial
lease term, which the Company will own upon completion.
17
(4) In January 1997, the Company entered into a long-term management
agreement with the Susie P. Stringfellow Trust for the operation of the
Stringfellow Memorial Hospital. The Company paid approximately $18,900,000
in cash at closing, which included the purchase of the hospital's working
capital. The Company is obligated to an annual payment of $300,000 to the
Trust.
(5) Effective January 1, 1997 the Company entered into a long-term lease
agreement with the Rankin County Board of Supervisors. The total
consideration approximated $41,611,000, including $37,474,000 in cash paid
at closing, the assumption of certain debt, and the purchase of the
hospital's working capital.
The Company currently leases the facilities of Highlands Regional Medical
Center, Fishermen's Hospital, Biloxi Regional Medical Center, Crawford Memorial
Hospital, Northwest Mississippi Regional Medical Center, Midwest City Regional
Hospital and Rankin Medical Center pursuant to long-term leases expiring in
2025, 2011, 2024, 2027, 2025, 2026 and 2026, respectively, which provide the
Company with the exclusive right to use and control the hospital operations. As
noted above, the Company entered into three year leases at Byerly Hospital and
Bulloch Memorial Hospital, and has committed (subject to regulatory approval) to
building a replacement hospital for each of these facilities.
The Company's corporate headquarters are located in an office building in
Naples, Florida, in which space is leased. The Company believes that all of its
facilities are suitable and adequate for its needs. Certain of the Company's
hospitals are subject to mortgages securing various borrowings. See Note 3 of
the Notes to the Consolidated Financial Statements (Item 8. hereof).
ITEM 3. LEGAL PROCEEDINGS
The Company is subject to claims and legal actions by patients and others
in the ordinary course of business. The Company believes that all such claims
and actions are either adequately covered by insurance or unlikely, individually
or in the aggregate, to have a material adverse effect on the Company's
financial condition.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth
quarter of the fiscal year ended September 30, 1997.
EXECUTIVE OFFICERS OF THE REGISTRANT
The following is certain information regarding the executive officers of
the Company.
William J. Schoen, age 62, has served as Chairman of the Board, and Chief
Executive Officer of the Company since April 1986. He joined the Company's
Board of Directors in February 1983, in December 1983 became its President and
Chief Operating Officer, and Co-Chief Executive Officer in December 1985. From
1982 to 1987 Mr. Schoen was Chairman of Commerce National Bank, Naples, Florida,
and from 1973 to 1981 he was President, Chief Operating Officer and Chief
Executive Officer of The F&M Schaefer Corporation, a consumer products company.
From 1971 to 1973, Mr. Schoen was President of the Pierce Glass subsidiary of
Indian Head, Inc., a diversified company. In addition to serving on the
Company's Board, Mr. Schoen also serves on the Boards of Directors of First
Union National Bank of Florida and Horace Mann Insurance Companies.
18
Earl P. Holland, age 52, is Vice Chairman. He joined the Company in 1981
as Senior Vice President - Operations. He became Senior Vice President -
Marketing and Development in 1984, Executive Vice President - Operations and
Development in 1989, and Vice Chairman in 1997. For more than five years prior
to 1981, he was employed by Humana, Inc., where he served as Assistant Regional
Vice President and as the Executive Director of two hospitals.
Joseph V. Vumbacco, age 52, is President and Chief Operating Officer. He
joined the Company as an Executive Vice President in January 1996 after 14 years
with Turner Construction Company, most recently as an Executive Vice President.
He was promoted to President and Chief Operating Officer in 1997. Prior to
joining Turner, he served as the Senior Vice President and General Counsel for
The F&M Schaefer Corporation.
Stephen M. Ray, age 49, is Senior Vice President - Finance of the Company.
A certified public accountant, he joined the Company in 1981 as Controller,
became a Vice President in 1983, and a Senior Vice President in 1991. He also
served as Treasurer from 1987 to 1988 and most recently Senior Vice President -
Administrative Services until his appointment to Senior Vice President - Finance
in September 1994. From 1979 until 1981, Mr. Ray was employed by Hospital
Affiliates International, Inc., a hospital management company, where he was
responsible for reporting compliance and corporate technical accounting.
Joe D. Pinion, age 51, has served as Senior Vice President - Hospital
Operations since January 1996. He joined the Company in 1985 as Executive
Director of Highlands Regional Medical Center in Sebring, FL. He became Vice
President - Hospital Operations in 1991. Prior to joining HMA in 1985, he was
employed by Humana, Inc., for eighteen years in several hospital administration
positions.
Timothy R. Parry, age 43, is Vice President and General Counsel of the
Company. He joined the Company in February 1996 as a Divisional Vice-President
and Assistant General Counsel after 12 years in the law firm of Harter, Secrest
& Emery, the last seven years as partner. Prior to joining Harter, Secrest &
Emery he was an Assistant Ohio Attorney General for two years and before that a
law clerk for the United States District Court for the Southern District of
Ohio.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The Company completed an initial public offering of its Class A Common
Stock on February 5, 1991. The Company's Class A Common Stock is listed on the
New York Stock Exchange under the Symbol HMA. At December 4, 1997 there were
approximately 1,407 record holders of the Company's Class A Common Stock. The
following table sets forth, for the periods indicated, the high and low sale
prices per share of the Company's Class A Common Stock as listed on the New York
Stock Exchange. All prices below reflect the effect of 3-for-2 stock splits in
the form of stock dividends effective in June 1996 and October 1997.
19
High Low
------- -------
Fiscal Year Ended September 30, 1996
First Quarter....................... $12 $ 8 7/8
Second Quarter...................... 15 3/4 11 1/8
Third Quarter....................... 16 1/4 13 1/8
Fourth Quarter...................... 16 1/2 11 1/4
Fiscal Year Ended September 30, 1997
First Quarter....................... $16 1/2 $13 1/8
Second Quarter...................... 19 7/8 14 1/4
Third Quarter....................... 21 1/8 15 7/8
Fourth Quarter...................... 23 3/8 19 3/8
The Company has not paid any cash dividends since its inception, and does
not anticipate the payment of cash dividends in the foreseeable future.
No equity securities were sold by the Company during Fiscal 1997 which were
not registered under the Securities Act.
ITEM 6. SELECTED FINANCIAL DATA
The following table summarizes certain selected financial data of the
Registrant and should be read in conjunction with the related Consolidated
Financial Statements and accompanying Notes to Consolidated Financial Statements
(Item 8 hereof).
HEALTH MANAGEMENT ASSOCIATES, INC.
FIVE YEAR SUMMARY OF SELECTED FINANCIAL DATA
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
Year ended September 30,
------------------------------------------------
1993 1994 1995 1996 1997
-------- -------- -------- -------- --------
Net patient service revenue $346,767 $438,366 $531,094 $714,317 $895,482
Costs and expenses 290,328 356,636 426,845 575,906 717,173
Income from operations 56,439 81,730 104,249 138,411 178,309
Net income 32,245 46,536 63,331 84,086 108,322
Net income per share $ .21 $ .29 $ .39 $ .51 $ .65
Weighted average number of
common and common equivalent
shares outstanding 150,161 159,906 162,126 165,674 167,798
At Year End
- -----------
Working capital $ 75,295 $138,001 $122,747 $106,907 $153,250
Total assets 325,787 398,813 466,998 591,707 727,561
Short-term debt 6,111 7,104 6,571 8,438 8,263
Long-term debt 77,874 75,769 67,721 68,702 49,650
Stockholders' equity 192,653 252,928 317,950 417,739 560,220
Book value per common share $ 1.28 $ 1.58 $ 1.96 $ 2.52 $ 3.34
20
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
Fiscal Year Ended September 30, 1997 Compared to Fiscal Year Ended
September 30, 1996
Net patient service revenue for Fiscal 1997 was $895,482,000, as compared
to $714,317,000 for the fiscal year ended September 30, 1996 ("Fiscal 1996").
This represented an increase in net patient service revenue of $181,165,000, or
25.4%. Hospitals in operation for the entire period of Fiscal 1996 and Fiscal
1995 ("same store hospitals") provided $45,575,000 of the increase in net
patient service revenue, which resulted primarily from inpatient and outpatient
volume increases. The remaining increase of $135,590,000 included $136,351,000
of net patient service revenue from the January 1996 acquisition of a 195-bed
hospital, the June 1996 acquisition of a 206-bed hospital and the January 1997
acquisitions of a 112-bed hospital and a 125-bed hospital, offset by a decrease
of $761,000 in Corporate and miscellaneous revenue.
The Company's hospitals generated 494,977 patient days of service in Fiscal
1997, which produced an overall occupancy rate of 44.8%. During Fiscal 1996 the
Company's hospitals generated 419,418 patient days of service for an overall
occupancy rate of 43.2%. Admissions in same store hospitals for Fiscal 1997
increased 3.6%, from 75,267 to 78,009.
The Company's salaries and benefits, supplies and other expenses and
provision for doubtful accounts for Fiscal 1997 were $657,456,000, or 73.4% of
net patient service revenue, as compared to $529,131,000, or 74.1% of net
patient service revenue for Fiscal 1996. Of the total $128,325,000 increase,
approximately $25,198,000 related to same store hospitals, which was largely
attributable to increased inpatient and outpatient business. Another
$100,634,000 of increased operating expenses related to the acquisitions
mentioned previously. The remaining increase of $2,493,000 represented an
increase in Corporate and miscellaneous other operating expenses. The Company's
Fiscal 1997 rent expenses increased by $3,357,000, which resulted both from
acquisitions and the expansion of hospital services.
The Company's earnings before depreciation and amortization, interest and
income taxes were $218,582,000 for Fiscal 1997, as compared to $169,099,000 for
Fiscal 1996, an increase of $49,483,000 or 29.3%. Same store hospitals
accounted for approximately $18,753,000, or 37.9% of the increase.
The Company's depreciation and amortization costs increased by $9,388,000.
Approximately $6,026,000 of the increase resulted from the acquisitions
mentioned above with the remaining increase attributable to ongoing building
improvements and equipment purchases. Net interest expense increased $197,000,
due primarily to decreased investment income earned in Fiscal 1997.
The Company's income before income taxes was $178,309,000 for Fiscal 1997
as compared to $138,411,000 for Fiscal 1996, an increase of $39,898,000 or
28.8%. As noted above, the increased profitability resulted from an increase in
inpatient and outpatient business, improved operating performance of same store
hospitals and the contribution from the acquisitions previously mentioned. The
Company's provision for income taxes was $69,987,000 for Fiscal 1997, as
compared
21
to $54,325,000 for Fiscal 1996. These provisions reflect an effective income
tax rate of 39.3% for Fiscal 1997 and Fiscal 1996. As a result of the
foregoing, the Company's net income was $108,322,000 for Fiscal 1997 as compared
to $84,086,000 for Fiscal 1996.
Fiscal Year Ended September 30, 1996 Compared to Fiscal Year Ended
September 30, 1995
Net patient service revenue for Fiscal 1996 was $714,317,000, as compared
to $531,094,000 for the fiscal year ended September 30, 1995 ("Fiscal 1995").
This represented an increase in net patient service revenue of $183,223,000, or
34.5%. Hospitals in operation for the entire period of Fiscal 1996 and Fiscal
1995 ("same store hospitals") provided $33,356,000 of the increase in net
patient service revenue, which resulted primarily from inpatient and outpatient
volume and acuity increases. The remaining increase of $149,867,000 included
$150,239,000 of net patient service revenue from the October 1995 acquisition of
a 158-bed hospital, the January 1996 acquisition of a 195-bed hospital and the
June 1996 acquisition of a 206-bed hospital, offset by a decrease of $372,000 in
Corporate and miscellaneous revenue.
The Company's hospitals generated 419,488 patient days of service in Fiscal
1996, which produced an overall occupancy rate of 43.2%. During Fiscal 1995 the
Company's hospitals generated 340,485 patient days of service for an overall
occupancy rate of 43.6%. Admissions in same store hospitals for Fiscal 1996
increased 1.8%, from 59,071 to 60,123.
The Company's salaries and benefits, supplies and other expenses and
provision for doubtful accounts for Fiscal 1996 were $529,131,000, or 74.1% of
net patient service revenue, as compared to $390,004,000, or 73.4% of net
patient service revenue for Fiscal 1995. Of the total $139,127,000 increase,
approximately $24,956,000 related to same store hospitals, which was largely
attributable to increased inpatient and outpatient business. Another
$113,448,000 of increased operating expenses related to the acquisitions
mentioned previously. The remaining increase of $723,000 represented an
increase in Corporate and miscellaneous other operating expenses. The Company's
Fiscal 1996 rent expenses increased by $3,429,000, which resulted both from
acquisitions and the expansion of hospital services.
The Company's earnings before depreciation and amortization, interest and
income taxes were $169,099,000 for Fiscal 1996, as compared to $128,432,000 for
Fiscal 1995, an increase of $40,667,000 or 31.7%. Same store hospitals
accounted for approximately $9,249,000, or 22.7% of the increase.
The Company's depreciation and amortization costs increased by $6,611,000.
Approximately $4,817,000 of the increase resulted from the acquisitions
mentioned above with the remaining increase attributable to ongoing building
improvements and equipment purchases. Net interest expense decreased $106,000,
due to increased investment income earned in Fiscal 1996.
The Company's income before income taxes was $138,411,000 for Fiscal 1996
as compared to $104,249,000 for Fiscal 1995, an increase of $34,162,000 or
32.8%. As noted above, the increased profitability resulted from an increase in
inpatient and outpatient business, improved operating performance of same store
hospitals and the contribution from the acquisitions previously mentioned. The
Company's provision for income taxes was $54,325,000 for Fiscal 1996, as
compared to $40,918,000 for Fiscal 1995. These provisions reflect an effective
income tax
22
rate of 39.3% for Fiscal 1996 and Fiscal 1995. As a result of the foregoing, the
Company's net income was $84,086,000 for Fiscal 1996 as compared to $63,331,000
for Fiscal 1995.
LIQUIDITY AND CAPITAL RESOURCES
Working capital increased to $153,250,000 at September 30, 1997 from
$106,907,000 at September 30, 1996, resulting primarily from the increase of
cash from operations during Fiscal 1997. The Company's cash flows from
operating activities increased by $37,767,000 from $94,569,000 in Fiscal 1996 to
$132,336,000 in Fiscal 1997. This resulted primarily from improved
profitability and management of the Company's working capital. The use of the
Company's cash in investing activities decreased from $140,851,000 in Fiscal
1996 to $110,428,000 in Fiscal 1997, reflecting a smaller amount of funds used
for acquisitions during Fiscal 1997. The Company's cash flows from financing
activities increased $12,173,000 from $2,128,000 provided in Fiscal 1996 to
$14,301,000 provided in Fiscal 1997 due primarily from proceeds received on the
exercise of employee stock options and issuance of common stock related thereto.
Working capital decreased to $106,907,000 at September 30, 1996 from
$122,747,000 at September 30, 1995, resulting primarily from the use of cash to
fund two acquisitions during Fiscal 1996. The Company's cash flows from
operating activities increased by $20,347,000 from $74,222,000 in Fiscal 1995 to
$94,569,000 in Fiscal 1996. This resulted primarily from improved profitability
and management of the Company's working capital. The use of the Company's cash
in investing activities increased from $96,841,000 in Fiscal 1995 to
$140,851,000 in Fiscal 1996, due primarily to two larger acquisitions in Fiscal
1996. The Company's cash flows from financing activities increased $13,567,000
from $11,439,000 used in Fiscal 1995 to $2,128,000 provided in Fiscal 1996 due
primarily from receiving proceeds of the issuance of common stock and reduced
principal payments on debt.
The Company currently has a $300,000,000 Amended and Restated Credit
Agreement with a syndicate of banks. Interest accrues at the option of the
Company at either the prime rate of interest, a fixed certificate of deposit
rate of the agent bank or a LIBOR rate. Under all methods, interest payments
are required quarterly. The interest rate is subject to adjustments based upon
certain debt-related financial statement ratios provided under the Amended and
Restated Credit Agreement. As of September 30, 1997, there were no outstanding
balances. The $300,000,000 Amended and Restated Credit Agreement permits the
Company to borrow under a revolving credit loan at any time through November 30,
1999, at which time any outstanding balance becomes due and payable.
The Company also has a revolving credit facility with a bank which provides
a $10,000,000 unsecured line of credit commitment through January 31, 1998. All
outstanding loans under this revolving credit facility are due on January 31,
1998. Interest on the outstanding loans is payable at the bank's Index Rate
(prime) less 1/2%. As of September 30, 1997, there were no amounts outstanding
under this line.
The Company is obligated to pay certain commitment fees based upon amounts
borrowed and available for borrowing during the terms of both such credit
facilities ("Credit Facilities").
The credit agreements for the Credit Facilities contain certain covenants
which, without prior consent of the banks, limit certain activities of the
Company and its subsidiaries, including those relating to merger, consolidation
23
and the Company's ability to secure indebtedness, make guarantees and grant
security interests. The Company must also maintain minimum levels of
consolidated tangible net worth, debt service coverage, liabilities to net
worth, current assets to current liabilities and working capital.
Legislative and regulatory action has resulted in continuing change in the
Medicare and Medicaid reimbursement programs which will continue to limit
payment increases under these programs. However, the Company believes that
these continued changes will not have a material adverse effect on the Company's
future revenue or liquidity. Within the statutory framework of the Medicare and
Medicaid programs, there are substantial areas subject to administrative
rulings, interpretations and discretion which may further affect payments made
under those programs, and the federal and state governments might, in the
future, reduce the funds available under those programs or require more
stringent utilization and quality reviews of hospital facilities, either of
which could have a material adverse effect on the Company's future revenue and
liquidity. Additionally, any future restructuring of the financing and delivery
of health care in the United States and the continued rise in managed care
programs could have an effect on the Company's future revenue and liquidity. See
Item 1. "Sources of Revenue" and "Regulation and Other Factors."
Effective January 1, 1997 the Company acquired by long-term lease the 112-
bed Rankin Medical Center in Brandon, Mississippi. The total consideration was
approximately $41.6 million, including $37.5 million in cash. Operating results
of the hospital have been included in the Company's Statements of Income from
the date of acquisition.
Effective January 1, 1997 the Company entered into a long-term management
agreement with the Susie P. Stringfellow Trust for the operation of the 125-bed
Stringfellow Memorial Hospital in Anniston, Alabama. Total cash paid at closing
approximated $18.9 million, which included the purchase of the hospital's
working capital. Operating results of the hospital have been included in the
Company's Statements of Income from the date of acquisition.
The Company had a number of hospital renovation/expansion projects underway
at September 30, 1997. In addition, the Company plans to replace four of its
existing hospitals over the next four years, subject to approval by the
appropriate regulatory agencies. At September 30, 1997 there were hospital
renovation and expansion commitments of approximately $50.6 million outstanding,
of which $3.6 million was paid at September 30, 1997.
The Company anticipates spending approximately $50,000,000 for ongoing
capital equipment and renovations in Fiscal 1998. At the present time, cash on
hand, internally generated funds in the year ending September 30, 1997 ("Fiscal
1997"), and funds available under the Credit Facilities are expected to be
sufficient to satisfy the Company's requirements for capital expenditures,
future acquisitions and working capital in Fiscal 1998.
IMPACT OF INFLATION
The health care industry is labor intensive. Wages and other expenses
increase especially during periods of inflation and when shortages in the
marketplace occur. In addition, suppliers pass along rising costs to the
Company in the form of higher prices. The Company has, to date, offset
increases in operating costs to the Company by increasing charges for services
and expanding services. The Company has also implemented cost control measures
to curb increases in operating costs and expenses. The Company cannot predict
its ability to cover future cost increases.
24
INDEX TO FINANCIAL STATEMENTS
PAGE
------
Health Management Associates, Inc.
Consolidated Financial Statements:
Report of Independent Certified Public Accountants ......... 26
Consolidated Statements of Income -- for the years ended
September 30, 1997, 1996 and 1995 ........................ 27
Consolidated Balance Sheets --September 30, 1997 and 1996 .. 28
Consolidated Statements of Stockholders' Equity -- for the
years ended September 30, 1997, 1996 and 1995 ............ 30
Consolidated Statements of Cash Flows -- for the years
ended September 30, 1997, 1996 and 1995................... 31
Notes to Consolidated Financial Statements ................. 33
25
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors and Stockholders
Health Management Associates, Inc.
We have audited the accompanying consolidated balance sheets of Health
Management Associates, Inc. and subsidiaries as of September 30, 1997 and 1996
and the related consolidated statements of income, stockholders' equity, and
cash flows for each of the three years in the period ended September 30, 1997.
Our audits also included the financial statement schedule listed in the Index at
Item 14(a). These financial statements and schedule are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements and schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Health
Management Associates, Inc. and subsidiaries at September 30, 1997 and 1996 and
the consolidated results of their operations and their cash flows for each of
the three years in the period ended September 30, 1997, in conformity with
generally accepted accounting principles. Also, in our opinion, the related
financial statement schedule, when considered in relation to the basic financial
statements taken as a whole, presents fairly in all material respects the
information set forth therein.
Ernst & Young LLP
Atlanta, Georgia
October 24, 1997
26
HEALTH MANAGEMENT ASSOCIATES, INC.
CONSOLIDATED STATEMENTS OF INCOME
Year ended September 30,
-------------------------------------
1997 1996 1995
----------- ----------- -----------
Net patient service revenue ......................... $895,482,000 $714,317,000 $531,094,000
Costs and expenses:
Salaries and benefits.............................. 310,992,000 247,917,000 179,483,000
Supplies and other................................. 269,570,000 216,451,000 162,183,000
Provision for doubtful accounts.................... 76,894,000 64,763,000 48,338,000
Depreciation and amortization...................... 36,561,000 27,173,000 20,562,000
Rent expense....................................... 19,444,000 16,087,000 12,658,000
Interest, net...................................... 3,712,000 3,515,000 3,621,000
----------- ----------- -----------
Total costs and expenses ...................... 717,173,000 575,906,000 426,845,000
----------- ----------- -----------
Income before income taxes........................... 178,309,000 138,411,000 104,249,000
Provision for income taxes........................... 69,987,000 54,325,000 40,918,000
----------- ----------- -----------
Net income .......................................... $108,322,000 $84,086,000 $63,331,000
=========== ========== ===========
Net income per share ................................ $ .65 $ .51 $ .39
=========== =========== ===========
Weighted average number of common and
common equivalent shares outstanding ............... 167,798,000 165,674,000 162,126,000
=========== =========== ===========
27
HEALTH MANAGEMENT ASSOCIATES, INC.
CONSOLIDATED BALANCE SHEETS
ASSETS
September 30,
-------------------------
1997 1996
------------ ------------
Current assets:
Cash and cash equivalents.......................... $67,381,000 $ 31,172,000
Accounts receivable, less allowance for doubtful
accounts of $44,055,000 and $54,125,000 in 1997
and 1996, respectively........................... 119,349,000 103,112,000
Accounts receivable -- other....................... 13,547,000 11,435,000
Supplies, at cost.................................. 15,597,000 12,372,000
Prepaid expenses and other assets.................. 5,992,000 5,097,000
Funds held by trustee.............................. 1,225,000 2,276,000
Deferred income taxes.............................. 13,039,000 12,339,000
----------- ----------
Total current assets............................ 236,130,000 177,803,000
Property, plant and equipment:
Land and improvements.............................. 17,993,000 15,933,000
Buildings and improvements......................... 309,717,000 245,885,000
Leaseholds......................................... 83,731,000 65,520,000
Equipment.......................................... 188,893,000 159,623,000
Construction in progress........................... 13,418,000 17,989,000
----------- ----------
613,752,000 504,950,000
Less accumulated depreciation and amortization..... 141,033,000 107,206,000
----------- -----------
Net property, plant and equipment................ 472,719,000 397,744,000
Funds held by trustee ............................... 944,000 136,000
Deferred charges and other assets ................... 17,768,000 16,024,000
------------ ------------
$727,561,000 $591,707,000
============ ============
See accompanying notes.
28
HEALTH MANAGEMENT ASSOCIATES, INC.
CONSOLIDATED BALANCE SHEETS
September 30,
--------------------
1997 1996
------- -------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.................................... $33,943,000 $28,754,000
Accrued interest.................................... 1,512,000 1,940,000
Accrued payroll and related taxes................... 16,866,000 12,131,000
Accrued expenses and other liabilities.............. 19,075,000 15,653,000
Income taxes - currently payable and deferred....... 3,221,000 3,980,000
Current maturities of long-term debt................ 8,263,000 8,438,000
----------- -----------
Total current liabilities.......................... 82,880,000 70,896,000
Deferred income taxes................................ 18,699,000 19,099,000
Other long-term liabilities.......................... 16,112,000 15,271,000
Long-term debt....................................... 49,650,000 68,702,000
Stockholders' equity:
Preferred stock, $.01 par value, 5,000,000 shares
authorized......................................... - -
Common stock, Class A, $.01 par value, 300,000,000
shares authorized, 162,705,000 and 158,549,000
shares issued and outstanding at
September 30, 1997 and 1996, respectively.......... 1,627,000 1,585,000
Additional paid-in-capital.......................... 182,780,000 148,663,000
Retained earnings................................... 375,813,000 267,491,000
------------ ------------
Total stockholders' equity........................ 560,220,000 417,739,000
------------ ------------
$727,561,000 $591,707,000
============ ============
See accompanying notes.
29
HEALTH MANAGEMENT ASSOCIATES, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED SEPTEMBER 30, 1997, 1996, AND 1995
Additional
Common Paid-in Retained
Stock Capital Earnings
---------- ------------- ------------
Balance at September 30, 1994.. $1,550,000 $131,304,000 $120,074,000
Exercise of stock options.... 6,000 1,685,000 -
Net income................... - - 63,331,000
---------- ------------ ------------
Balance at September 30, 1995.. 1,556,000 132,989,000 183,405,000
Exercise of stock options.... 29,000 9,439,000 -
Tax benefit from exercise
of stock options........... - 6,235,000 -
Net income................... - - 84,086,000
---------- ------------ ------------
Balance at September 30, 1996 1,585,000 148,663,000 267,491,000
Exercise of stock options.... 42,000 16,118,000 -
Tax benefit from exercise
of stock options........... - 17,999,000 -
Net income................... - - 108,322,000
---------- ------------ ------------
Balance at September 30, 1997 .. $1,627,000 $182,780,000 $375,813,000
========== ============= ============
See accompanying notes.
30
HEALTH MANAGEMENT ASSOCIATES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year ended September 30,
--------------------------------------------
1997 1996 1995
------------- -------------- -------------
Cash flows from operating activities:
Net income ............................. $108,322,000 $ 84,086,000 $ 63,331,000
Adjustments to reconcile net income
to net cash provided by operating
activities:
Depreciation and amortization....... 36,561,000 27,173,000 20,562,000
(Gain) loss on sale of fixed
assets............................ (92,000) 211,000 116,000
(Decrease) increase in deferred
and other income taxes............ (400,000) 700,000 (900,000)
Changes in assets and liabilities,
net of effects of acquisitions
and dispositions:
Accounts receivable............. (12,648,000) (19,898,000) (11,912,000)
Supplies........................ (2,372,000) (1,492,000) 107,000
Prepaid expenses and
other assets.................. (478,000) 421,000 (876,000)
Deferred charges and
other assets.................. (3,302,000) (7,034,000) (3,328,000)
Accounts payable................ 2,425,000 3,370,000 5,619,000
Accrued payroll, interest and
other liabilities............. 4,938,000 737,000 3,448,000
Income taxes -- currently
payable and deferred.......... (1,459,000) 3,321,000 (2,988,000)
Other long-term liabilities .... 841,000 2,974,000 1,043,000
------------ ------------- ------------
Net cash provided by
operating activities.................... 132,336,000 94,569,000 74,222,000
------------ ------------- ------------
Cash flows from investing activities:
Acquisition of facilities, net of
cash acquired......................... (51,467,000) (99,639,000) (73,960,000)
Other additions to property, plant
and equipment......................... (59,349,000) (41,239,000) (22,938,000)
Proceeds from sale of assets............ 388,000 27,000 57,000
------------ ------------- ------------
Net cash used in investing
activities.............................. (110,428,000) (140,851,000) (96,841,000)
------------ ------------- ------------
See accompanying notes.
31
HEALTH MANAGEMENT ASSOCIATES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
Year ended September 30,
-------------------------------------------
1997 1996 1995
------------- ------------- -------------
Cash flows from financing activities:
Proceeds from long-term borrowings.... $ 520,000 $ 708,000 $ 1,097,000
Principal payments on debt ........... (20,621,000) (7,187,000) (14,044,000)
Proceeds from issuance of common
stock, net.......................... 34,159,000 9,468,000 1,691,000
Decrease (increase) in funds
held by trustee..................... 243,000 (861,000) (183,000)
----------- ------------ ------------
Net cash provided by (used in)
financing activities.................. 14,301,000 2,128,000 (11,439,000)
----------- ------------ ------------
Net increase (decrease) in cash......... 36,209,000 (44,154,000) (34,058,000)
Cash and cash equivalents at
beginning of period.................. 31,172,000 75,326,000 109,384,000
----------- ------------ ------------
Cash and cash equivalents at
end of period........................ $67,381,000 $ 31,172,000 $ 75,326,000
=========== ============ ============
Supplemental schedule of noncash
investing and financing activities:
Fair value of assets acquired
(including cash).................. $57,896,000 $116,588,000 $ 76,710,000
Consideration paid.................. 51,467,000 99,639,000 73,960,000
----------- ------------ ------------
Liabilities assumed................. $ 6,429,000 $ 16,949,000 $ 2,750,000
=========== ============ ============
See notes 4 and 5 for additional cash flows information.
See accompanying notes.
32
HEALTH MANAGEMENT ASSOCIATES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Health Management Associates, Inc. ("the Company"), through its subsidiary
companies, substantially all of which are wholly-owned, provides health care
services to patients in owned and leased facilities and provides management
services under contracts to other health care organizations in the southeast and
southwest United States. The Company consistently applies the following
significant accounting policies:
a. Principles of consolidation
The consolidated financial statements include the accounts of the Company
and its subsidiaries. All significant intercompany accounts and transactions
have been eliminated.
b. Cash equivalents
The Company considers all highly liquid investments purchased with a
maturity of less than three months to be cash equivalents. The Company's cash
equivalents consist principally of investment grade instruments which are tax
exempt or qualify for dividend exclusion.
c. Property, plant and equipment
Property, plant and equipment are carried at cost and include major
expenditures which increase their values or extend their useful lives.
Depreciation and amortization are computed using the straight line method based
on estimated useful lives. Estimated useful lives for buildings and
improvements are twenty to forty years and for equipment are three to ten years.
Leaseholds are amortized on a straight-line basis over the terms of the
respective leases.
d. Deferred charges and other assets
Deferred charges and other assets consist principally of goodwill, deferred
financing costs and certain non-productive assets held for sale. Goodwill is
being amortized on a straight-line basis ranging from three to twenty-five
years. The financing costs are being amortized over the life of the related debt
(see Note 3).
e. Use of estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management of the Company to make
estimates and assumptions that affect the amounts reported in the consolidated
financial statements and accompanying notes. Actual results could differ from
those estimates.
f. Net patient service revenue
Approximately 66%, 65% and 67% of gross patient service revenue for the
years ended September 30, 1997, 1996 and 1995, respectively, relates to services
rendered to patients covered by Medicare and Medicaid programs. Payments for
services rendered to patients covered by these programs are generally less than
billed charges. Provisions for contractual adjustments are made to reduce the
charges to these patients to estimated receipts based upon the programs'
principles of payment/reimbursement (either prospectively determined or
retrospectively determined costs). Final settlements under these programs are
33
HEALTH MANAGEMENT ASSOCIATES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
subject to administrative review and audit, and provision is currently made for
adjustments which may result. Estimated settlements under these programs are
netted in accounts receivable in the accompanying consolidated balance sheets.
Net patient service revenue is presented net of provisions for contractual
adjustments and other allowances of $1,039,489,000, $802,931,000 and
$602,201,000 in 1997, 1996 and 1995, respectively, in the accompanying
consolidated statements of income. In the ordinary course of business the
Company renders services in its facilities to patients who are financially
unable to pay for the hospital
care. The value of these services to patients who are unable to pay is not
material to the Company's consolidated results of operations.
g. Income taxes
Deferred income taxes at September 30, 1997 and 1996 relate principally to
differences in the recognition of certain income and expense items for income
tax and financial reporting purposes (see Note 5).
h. Net income per share
Net income per share is based on the weighted average number of common and
common equivalent shares (stock options) outstanding during the periods
presented.
i. Earnings per share
In February 1997 the Financial Accounting Standards Board issued Financial
Accounting Standard No. 128, "Earnings per Share" ("Statement 128") which is
required to be adopted for accounting periods ending after December 15,1997.
For the first quarter ended December 31, 1997, the Company will be required to
change the method currently used to compute earnings per share and restate prior
periods. Under the new requirements for calculating earnings per share, the
Company will be required to present "Basic EPS" and "Fully Diluted EPS." Basic
EPS excludes dilutive securities such as stock options, while Fully Diluted EPS
includes such securities in its calculation. Management believes the impact of
the adoption of Statement 128 will not be material.
2. ACQUISITIONS AND DISPOSITIONS
During 1997 the Company acquired certain assets of two hospitals through
one long-term lease agreement and one long-term management agreement totaling
$57,896,000, including $51,467,000 in cash. During 1996 the Company acquired
certain assets of two hospitals through long-term lease agreements for
consideration totaling $116,588,000, including $99,639,000 in cash. During 1995
the Company acquired certain assets of three hospitals through one purchase and
two asset purchase and short-term lease agreements for consideration totaling
$76,710,000, including $73,960,000 in cash.
The operating results of the foregoing hospitals have been included in the
accompanying consolidated statements of income from the respective dates of
acquisition. The following unaudited pro forma combined summary of operations
of the Company for each of the three years ended September 30, 1997 give effect
34
HEALTH MANAGEMENT ASSOCIATES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. ACQUISITIONS AND DISPOSITIONS (CONTINUED)
to the operation of the hospitals purchased in 1997, 1996 and 1995 as if the
acquisitions had occurred as of October 1, 1995, 1994 and 1993, respectively:
1997 1996 1995
-------------- ----------- -----------
(In thousands, except per share data)
Net patient service revenue.................................. $909,856 $ 828,352 $ 710,436
Net income................................................... $108,625 $ 85,982 $ 66,746
Net income per share......................................... $.65 $.52 $ .41
3. LONG-TERM DEBT
The Company's long-term debt consists of the following:
September 30,
-------------------------
1997 1996
------------- -----------
Revolving Credit Agreements (a)................................ $ - $ -
Industrial Revenue Bond Issues (b)............................. 6,860,000 7,360,000
Mortgage notes, secured by real and
personal property............................................ 36,102,000 51,225,000
Various mortgage and installment notes and
debentures, some secured by equipment,
at interest rates ranging from 6% to
prime plus 1%, payable through 2005.......................... 8,063,000 10,387,000
Capitalized lease obligations (see Note 4)..................... 6,888,000 8,168,000
----------- -----------
57,913,000 77,140,000
Less current maturities........................................ 8,263,000 8,438,000
----------- -----------
$49,650,000 $68,702,000
=========== ===========
a. Revolving Credit Agreements
In December 1994 the Company executed a $300 million Amended and Restated
Credit Agreement ("Credit Agreement"). The Company may choose the prime rate of
interest, a fixed certificate of deposit interest rate of the Agent bank or a
LIBOR interest rate. Under any of the interest alternatives, quarterly interest
payments are required.
The Credit Agreement is a revolving and term loan agreement which permits
the Company to borrow under an unsecured revolving credit loan at any time
through November 30, 1999, at which time the agreement terminates and all
outstanding revolving credit loans become due and payable. The Company also has
a $10 million unsecured revolving credit commitment with a bank. The $10 million
credit is a working capital commitment which is tied to the Company's cash
management system, and renews annually on November 1. Currently, interest on any
outstanding balance is payable monthly at a fluctuating rate not to exceed the
bank's prime rate less 1/4%.
35
HEALTH MANAGEMENT ASSOCIATES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. LONG-TERM DEBT (CONTINUED)
In addition, the Company is obligated to pay certain commitment fees based
upon amounts borrowed and available for borrowing during the terms of the credit
agreements described above.
The credit agreements contain covenants which, without prior consent of the
Banks, limit certain activities, including those relating to mergers,
consolidations and the Company's ability to secure indebtedness, make
guarantees, grant security interests and declare dividends. The Company must
also maintain minimum levels of consolidated tangible net worth, debt service
coverage, liabilities to net worth, current assets to current liabilities and
working capital.
b. Industrial Revenue Bond Issues
The Company has one Industrial Revenue Bond issue outstanding at September
30, 1997 and 1996, which is secured by all real and personal property of the
facility with an aggregate net book value of $12,325,000 and $12,743,000,
respectively, and a pledge of the stock of the subsidiary owning the facility;
payment of principal and interest is unconditionally guaranteed by the Company.
The bonds are serial bonds with maturities and rates ranging from September 1,
2005 to September 1, 2011 and 8.5% to 8.75%, respectively. The Company makes
monthly sinking-fund payments in amounts sufficient to cover principal and
interest payment requirements.
c. Mortgage Notes
At September 30, 1997 the Company has three mortgage notes which are
secured by all the real and personal property of the respective facilities with
a net book value of $32,678,000.
The notes are payable in various installments with maturity dates ranging
from 1999 through 2005 and carry interest rates ranging from prime to 11.5%.
The Company has entered into an interest rate swap agreement to reduce the
impact of changes in interest rates on its $30,000,000 floating rate mortgage
loan. This agreement effectively fixes the interest rate on the loan at 8.63%.
Maturities of long-term debt for the next five years are as follows:
1998 $ 8,263,000
1999 6,501,000
2000 15,371,000
2001 3,000,000
2002 2,904,000
Thereafter 21,874,000
36
HEALTH MANAGEMENT ASSOCIATES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. LEASES
The Company leases real estate properties, equipment and vehicles under
cancelable and non-cancelable leases. Future minimum operating and capital
lease payments, including amounts relating to leased hospitals, are as follows
at September 30, 1997:
Operating Capital
---------------------- -----------
Real
September 30, Property Equipment Equipment Total
- ------------- --------- ----------- ----------- -----------
1998 ........................................................ $ 4,059,000 $ 6,824,000 $ 2,371,000 $13,254,000
1999......................................................... 2,551,000 5,923,000 1,759,000 10,233,000
2000......................................................... 2,226,000 4,661,000 1,134,000 8,021,000
2001......................................................... 2,070,000 3,212,000 454,000 5,736,000
2002......................................................... 1,865,000 1,359,000 320,000 3,544,000
Thereafter .................................................. 20,422,000 327,000 7,040,000 27,789,000
---------- ----------- ----------- -----------
Total minimum payments $33,193,000 $22,306,000 13,078,000 $68,577,000
========== =========== ===========
Less amounts
representing interest 6,190,000
-----------
Present value of
minimum lease
payments................................................... $ 6,888,000
===========
The following summarizes amounts related to equipment leased by the
Company under capital leases:
September 30,
-----------------------
1997 1996
----------- -----------
Equipment........................................ $ 7,999,000 $ 7,487,000
Accumulated amortization......................... 3,677,000 1,950,000
----------- -----------
Net book value................................... $ 4,322,000 $ 5,537,000
=========== ===========
The Company entered into capitalized leases of $777,000, $4,427,000 and
$802,000 for the years ended September 30, 1997, 1996 and 1995, respectively.
37
HEALTH MANAGEMENT ASSOCIATES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. INCOME TAXES
The significant components of the provision for income taxes are as
follows:
Year ended September 30,
------------------------------------------
1997 1996 1995
------------- ------------ ------------
Federal:
Current............................................................... $ 63,957,000 $51,506,000 $36,844,000
Deferred:
Current.............................................................. 90,000 (4,797,000) (751,000)
Non-current.......................................................... (229,000) 940,000 (841,000)
------------- ----------- -----------
Total Federal...................................................... 63,818,000 47,649,000 35,252,000
State
Current and deferred.................................................. 6,169,000 6,676,000 5,666,000
------------- ----------- -----------
Total............................................................... $ 69,987,000 $54,325,000 $40,918,000
============= =========== ===========
An analysis of the Company's effective income tax rates is as follows:
Year ended September 30,
-----------------------------------------------------
1997 1996 1995
--------------- ------------- ---------------
(dollars in thousands)
Statutory income
tax rate ............................................................. $62,408 35.0% $48,444 3.5% $ 36,487 35.0%
State income taxes, net
of Federal benefit.................................................... 4,010 2.2 4,339 3.1 3,683 3.5
Other items (each less
than 5% of computed tax)............................................. 3,569 2.1 1,542 1.2 748 .8
------- ---- ------- ---- -------- ----
Total................................................................ $69,987 39.3% $54,325 39.3% $ 40,918 39.3%
======= ==== ======= ==== ======== =====
38
HEALTH MANAGEMENT ASSOCIATES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. INCOME TAXES (CONTINUED)
The tax effects of temporary differences that give rise to significant
portions of the Federal and state deferred income tax assets and liabilities are
comprised of the following:
September 30,
------------------------
1997 1996
----------- -----------
Deferred income tax liabilities:
Depreciable assets $25,238,000 $25,319,000
Amortization of prior year's
cash basis deductions - 458,000
----------- -----------
25,238,000 25,777,000
Deferred income tax assets:
Self insurance liability risks 4,209,000 3,596,000
Allowance for doubtful accounts 10,361,000 10,860,000
Cash basis method of accounting 5,008,000 4,561,000
----------- -----------
19,578,000 19,017,000
Valuation allowance for
deferred income tax assets - -
----------- -----------
Net deferred income tax assets 19,578,000 19,017,000
----------- -----------
Net deferred income tax liabilities $ 5,660,000 $ 6,760,000
=========== ===========
Income taxes paid (net of refunds) amounted to $53,842,000, $47,853,000 and
$44,807,000 for the years ended September 30, 1997, 1996 and 1995, respectively.
6. RETIREMENT PLAN
The Company has a defined contribution retirement plan which covers all
eligible employees at its hospitals and the corporate office. This plan
includes a provision for the Company to match a portion of employee
contributions. Total retirement program expense was $2,434,0000, $2,136,000 and
$1,676,000 for the years ended September 30, 1997, 1996 and 1995, respectively.
7. STOCKHOLDERS' EQUITY
The Company has elected to follow Accounting Principles Board Opinion No.
25, "Accounting for Stock Issued to Employees" (APB 25). Under APB 25, since
the exercise price of the Company's employee stock options equals the market
price of the underlying stock on the date of grant, no compensation expense is
recognized. Pro forma disclosure of alternative fair value accounting is then
required under FASB Statement No. 123, "Accounting for Stock-Based Compensation"
(Statement 123), utilizing an option valuation model.
The Company has a 1991 Stock Option Plan, a 1993 Stock Option Plan and a
1996 Executive Incentive Compensation Plan for the granting of options to key
employees of the Company. All options granted have 10 year terms and vest and
become fully exerciable at the end of 3 years of continued employment.
39
HEALTH MANAGEMENT ASSOCIATES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. STOCKHOLDERS' EQUITY (CONTINUED)
Pertinent information covering the plans is summarized below:
Price Weighted
Shares Range Average Price
------------ -------------- --------------
Balance at September 30, 1994 11,237,000 $ 1.87 -$ 6.74 $ 3.63
Granted 2,991,000 7.74 7.75
Exercised (552,000) 1.87 - 6.74 2.81
Terminated (623,000) 3.11 - 6.74 3.49
----------
Balance at September 30, 1995 13,053,000 1.87 - 7.74 4.62
Granted 1,880,000 12.50 - 15.50 14.76
Exercised (2,631,000) 1.87 - 7.74 3.27
Terminated (87,000) 3.11 - 15.50 7.26
----------
Balance at September 30, 1996 12,215,000 1.87 - 15.50 6.45
Granted 4,842,000 19.08 19.08
Exercised (3,855,000) 1.87 - 15.50 4.39
Terminated (27,000) 6.74 - 19.08 14.97
----------
Balance at September 30, 1997 13,175,000 1.87 - 19.08 5.37
==========
Exercisable at
September 30, 1997 6,114,000
==========
The following table summarizes information concerning currently outstanding
and exercisable options:
Options Outstanding Options Exercisable
-------------------------------------------------------- -----------------------
Weighted
Average Weighted Weighted
Range of Remaining Average Average
Exercise Number Contractual Exercise Number Exercise
Prices Outstanding Life Price Exercisable Price
----------------- ----------- ----------- --------- ----------- --------
$ 1.87-$ 7.74 6,537,000 6.2 $ 5.37 5,696,000 $ 5.15
$12.50-$19.08 6,638,000 9.4 $ 17.90 418,000 $15.46
Pro forma information regarding net income and earnings per share is
required by Statement 123, which also requires that the information be
determined as if the Company has accounted for its employee stock options
granted subsequent to December 31, 1995 under the fair value method of that
Statement. The fair value for these options was estimated at the date of grant
using a Black-Scholes option pricing model with the following weighted-average
assumptions for 1997 and 1996: risk-free interest rate of 6%; no dividend
yields; volatility factor of the expected market price of the Company's common
stock of .349; and weighted average expected lives of the options of 5 and 7
years.
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions including the expected stock price
volatility. Because the
40
HEALTH MANAGEMENT ASSOCIATES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. STOCKHOLDERS' EQUITY (CONTINUED)
Company's employee stock options have characteristics significantly different
from those of traded options, and because changes in the subjective input
assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its employee stock options.
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. The Company's
pro forma information follows:
1997 1996
------------ -----------
Pro forma net income $103,260,000 $83,062,000
Pro forma earnings per share $ .62 $ .50
At September 30, 1997 there were approximately 4,449,000 shares of unissued
common stock reserved for issuance under the plans. In addition, the Company
has granted options for shares of Class A Common Stock to four non-employee
directors. At September 30, 1997 there were approximately 137,000 options
outstanding at $1.87 to $18.50 per share, expiring in 2001 through 2007.
The Company also has a Stock Incentive Plan for corporate officers and
management staff. This plan provides for the awarding of additional
compensation to key personnel in the form of Company stock. The stock will be
issued to the grantee four years after the date of grant, provided the
individual is still an employee of the Company. At September 30, 1997 there
were approximately 537,000 shares reserved under the plan, for which the Company
has recorded approximately $1,200,000 of compensation expense for the each of
the three years in the period ended September 30, 1997.
8. PROFESSIONAL AND LIABILITY RISKS
The Company has a layered self-insurance program with a major insurance
carrier for its professional liability risks. An umbrella policy provides $25
million of coverage in excess of an underlying limit of $2 million depending
upon layer structures and the dollar amounts of claims settled.
Accruals for self-insured professional liability risks are determined using
asserted and unasserted claims identified by the Company's incident reporting
system and actuarially determined estimates based on Company and industry
historical loss payment patterns. Although the ultimate settlement of these
accruals may vary from these estimates, management believes that the amounts
provided in the Company's consolidated financial statements are adequate.
9. COMMITMENTS
The Company has a number of hospital renovation/expansion projects underway
at September 30, 1997. In addition, the Company plans to replace four of its
existing hospitals over the next four years, subject to approval by the
appropriate regulatory agencies. At September 30, 1997 there were hospital
renovation and expansion commitments of approximately $50.6 million outstanding,
of which approximately $3.6 million was paid at September 30, 1997.
41
HEALTH MANAGEMENT ASSOCIATES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10. SUBSEQUENT EVENTS
On September 25, 1997 the Company's Board of Directors approved a three-
for-two stock split on the Company's Common Stock in the form of a 50% stock
dividend to shareholders of record on October 6, 1997. All share and per share
data in the accompanying consolidated financial statements and footnotes have
been restated for all periods presented to reflect the effect of the stock
split.
The Company has entered into three agreements to acquire a total of four
hospitals, subject to certain regulatory approvals. The Company expects to
complete the transactions before the end of February, 1998. The total
consideration involved is approximately $210 million, which includes $93 million
in cash, $80 million in Company stock and the assumption of $37 million in debt.
11. QUARTERLY DATA (UNAUDITED)
For the two years ended September 30, 1997
(in thousands, except per share data)
Quarter
1st 2nd 3rd 4th Total
--------- -------- -------- -------- --------
1997
- ----------
Net patient
service revenue...... $199,162 $237,792 $232,691 $225,837 $895,482
Income before income
taxes................ 32,722 52,577 51,030 41,980 178,309
Net income............. 19,877 31,942 31,001 25,502 108,322
Net income per share... $ .12 $ .19 $ .18 $ .15 $ .65
Weighted average
number of shares..... 166,418 167,528 168,171 169,199 167,798
1996
- ----------
Net patient
service revenue...... $151,943 $184,825 $184,356 $193,193 $714,317
Income before income
taxes................ 24,773 41,102 39,795 32,741 138,411
Net income............. 15,049 24,970 24,176 19,891 84,086
Net income per share... $ .09 $ .15 $ .15 $ .12 $ .51
Weighted average
number of shares..... 164,081 165,645 166,304 166,143 165,674
42
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this Item is (I) incorporated herein by
reference to the Company's proxy statement to be issued in connection with the
Annual Meeting of Stockholders of the Company to be held on February 17, 1998
under "Election of Directors", which proxy statement will be filed within 120
days after the end of the Company's fiscal year and (ii) set forth under
"Executive Officers of the Registrant" in Part I of this Report.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item is incorporated herein by reference to
the Company's proxy statement to be issued in connection with the Annual Meeting
of the Stockholders of the Company to be held on February 17, 1998 under
"Executive Compensation", which proxy statement will be filed within 120 days
after the end of the Company's fiscal year.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this Item is incorporated herein by reference to
the Company's proxy statement to be issued in connection with the Annual Meeting
of Stockholders of the Company to be held on February 17, 1998 under "Security
Ownership of Certain Beneficial Owners and Management", which proxy statement
will be filed within 120 days after the end of the Company's fiscal year.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item is incorporated herein by reference to
the Company's proxy statement to be issued in connection with the Annual Meeting
of Stockholders of the Company to be held on February 17, 1998 under "Certain
Transactions", which proxy statement will be filed within 120 days after the end
of the Company's fiscal year.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULE, AND REPORTS ON FORM 8-K
Item 14(a)(1), 14(a)(2) and 14(d):
Schedule II - Valuation and Qualifying Accounts
The following financial statement schedule is filed as part of this Report
at page 45 hereof.
All other schedules are omitted since the required information is not
present or is not present in amounts sufficient to require submission of the
schedule, or because the information required is included in the consolidated
financial statements and notes thereto.
43
Item 14(a)(3) and 14(c): See Index to Exhibits.
Item 14(b):
During the last quarter of the fiscal year ended September 30, 1997, the
Registrant did not file a Current Report on Form 8-K.
44
HEALTH MANAGEMENT ASSOCIATES, INC.
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
(IN THOUSANDS OF DOLLARS)
Balance at Acquisitions Charged Balance at
Beginning of and Charges to to other End of
Period Dispositions Operations(a) Accounts Deductions(b) Period
------------ ------------ ------------- -------- ------------- --------
Year ended September 30, 1995
Allowance for doubtful
accounts.................. $21,343 $ 4,318 $48,338 $ - $ 45,665 $28,334
======= ======= ======= ========= ======== =======
Year ended September 30, 1996
Allowance for doubtful
accounts.................. $28,334 $19,107 $64,763 $ - $ 58,079 $54,125
======= ======= ======= ========= ======== =======
Year ended September 30, 1997
Allowance for doubtful
accounts.................. $54,125 $ 2,831 $90,301 $ - $103,202 $44,055
======= ======= ======= ========= ======== =======
________________________
(a) Charges to operations include amounts related to provisions for
doubtful accounts.
(b) Includes amounts written-off as uncollectible.
45
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
HEALTH MANAGEMENT ASSOCIATES, INC.
By /s/ William J. Schoen Chairman of the Board,
--------------------------- President and
William J. Schoen Chief Executive Officer December 9, 1997
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant in the capacities and on the dates indicated:
/s/ William J. Schoen Chairman of the Board,
- ---------------------------- President and
William J. Schoen Chief Executive Officer December 9, 1997
(Principal Executive
Officer)
/s/ Stephen M. Ray Senior Vice President -
- ---------------------------- Finance
Stephen M. Ray (Principal Financial December 9, 1997
Officer and Principal
Accounting Officer)
/s/ Kent P. Dauten Director
- ----------------------------
Kent P. Dauten December 9, 1997
Director
- ----------------------------
Robert A. Knox December 9, 1997
/s/ Charles R. Lees Director
- ----------------------------
Charles R. Lees December 9, 1997
/s/ Kenneth D. Lewis Director
- ----------------------------
Kenneth D. Lewis December 9, 1997
Director
- ----------------------------
William E. Mayberry, M.D. December 9, 1997
46
INDEX TO EXHIBITS
(2) PLAN OF ACQUISITION, REORGANIZATION, ARRANGEMENT, LIQUIDATION OR SUCCESSION
Not applicable.
(3) (i) ARTICLES OF INCORPORATION
3.1/(m)/ Fifth Restated Certificate of Incorporation. (Exhibit 3.1)
(ii) BY-LAWS
3.2/(q)/ By-laws, as amended. (Exhibit 3.2)
(4) INSTRUMENTS DEFINING RIGHTS OF SECURITY HOLDERS, INCLUDING INDENTURES
The Exhibits referenced under (3) of this Index to Exhibits are incorporated
herein by reference.
4.1/(j)/ Specimen Stock Certificate. (Exhibit 4.11)
4.2/(l)/ Fourth Amended and Restated Credit and Reimbursement Agreement
among the Company and NationsBank of Florida National Association and
the Banks named therein, dated December 1, 1994. (Exhibit 4.12)
4.3/(t)/ Credit Agreement dated May 6, 1996 between First Union National
Bank of Florida and the Company pertaining to a $10 million working
capital and cash management line of credit. (Exhibit 4.3 )
4.4/(v)/ Amendment Agreement No. 1 to Fourth Amended and Restated
Revolving Credit and Reimbursement Agreement made as of September 30,
1996. (Exhibit 4.1)
4.5 Certificate of Amendment to Fifth Restated Certificate of
Incorporation is included herein as Exhibit 4.5 at page 56 of this
Report.
(9) VOTING TRUST AGREEMENT
Not applicable.
(10) MATERIAL CONTRACTS
The Exhibits referenced under (4) of this Index to Exhibits are incorporated
herein by reference.
10.1/(a)/ Deed of Trust dated June 2, 1979 of Health Management Associates of
West Virginia, Inc. (Exhibit 10.40)
47
10.2/(f)/ Guaranty Agreement, dated October 1, 1986 between the Company and
Liberty National Bank and Trust Company of Louisville, as Trustee.
(Exhibit 19.1)
10.3/(b)/ Mortgage dated November 20, 1987 by Orlando H.M.A., Inc. to First
Union National Bank of Florida, including Mortgage Modification
Agreement dated December 14, 1987. (Exhibit 10.43)
10.4/(i)/ Mortgage Modification by and between Orlando H.M.A., Inc. and First
Union National Bank of Florida, dated as of May 14, 1992. (Exhibit
28.1)
10.5/(b)/ Guaranty dated November 20, 1987 from the Company to First Union
National Bank of Florida. (Exhibit 10.41)
10.6/(n)/ Modification Agreement (to Guaranty Agreement dated November 20, 1987
for a Mortgage Construction Loan to Orlando H.M.A., Inc.) between the
Company and First Union National Bank of Florida, dated as of April
10, 1995. (Exhibit 4.1)
10.7/(b)/ General Assignment and Security Agreement, dated November 20, 1987 by
Orlando H.M.A., Inc. to First Union National Bank of Florida. (Exhibit
10.44)
10.8/(b)/ Mortgage dated August 19, 1988 by Martin H.M.A., Inc. to First Union
National Bank of Florida. (Exhibit 10.51)
10.9/(i)/ Mortgage Modification by and between Martin H.M.A., Inc. and First
Union National Bank of Florida, dated as of May 14, 1992. (Exhibit
28.2)
10.10/(b)/ Guaranty dated August 19, 1988 by the Company to First Union
National Bank of Florida. (Exhibit 10.52)
10.11/(n)/ Modification Agreement (to Guaranty Agreement dated August 19,
1988 for a Mortgage Construction Loan to Martin H.M.A., Inc.)
between the Company and First Union National Bank of Florida,
dated as of April 10, 1995. (Exhibit 4.2)
10.12/(i)/ Term Loan Agreement among Riverview Regional Medical Center, Inc.
and NCNB National Bank of Florida, The Bank of Nova Scotia and
the Banks named therein, dated July 6, 1992, Parent Guaranty
Agreement made as of July 6, 1992, and Interest Rate Swap
transaction, effective July 15, 1992. (Exhibit 4.1)
10.13/(m)/ Amended and Restated Parent Guaranty Agreement of the Company
dated as of December 1, 1994 relating to a Term Loan Agreement
dated July 6, 1992 among Riverview Regional Medical Center, Inc.,
NationsBank of Florida, National Association, and the Banks named
therein. (Exhibit 4.1)
10.14/(k)/ Mortgage and Security Agreement between Gaffney H.M.A., Inc. and
First Union National Bank of North Carolina, dated as of
September 2, 1993. (Exhibit 10.54)
48
10.15/(m)/ Credit Agreement between Gaffney H.M.A., Inc. and First Union
National Bank of North Carolina, dated September 2, 1993, and
Guaranty Agreement between the Company and First Union National
Bank of North Carolina, dated as of September 2, 1993. (Exhibit
4.2)
10.16/(m)/ Modification Agreement (to Guaranty Agreement between the Company
and First Union National Bank of North Carolina relating to
Credit Agreement dated September 2, 1993 between Gaffney H.M.A.,
Inc. and First Union National Bank of North Carolina) between the
Company and First Union National Bank of North Carolina, dated as
of December 16, 1994. (Exhibit 4.3)
10.17/(c)/ Loan Agreement between City of Paintsville, Kentucky and
Paintsville Hospital Company; Indenture of Trust between City of
Paintsville, Kentucky and Liberty National Bank and Trust Company
of Louisville, as Trustee; Guaranty Agreement between the Company
and Liberty National Bank and Trust Company of Louisville, as
Trustee; Stock Pledge Agreement between Health Management
Associates, Inc., a Kentucky corporation and Liberty National
Bank and Trust Company of Louisville, as Trustee; Arbitrage
Agreement between Paintsville Hospital Company, the City of
Paintsville and Liberty National Bank and Trust Company of
Louisville; and Mortgage and Security Agreement between
Paintsville Hospital Company and Liberty National Bank and Trust
Company of Louisville, all dated as of September 1, 1991.
(Exhibit 10.70)
10.18/(d)/ Pledge Agreement dated as of October 1, 1986 between Health
Management Associates, Inc., a Kentucky corporation, and Liberty
National Bank and Trust Company of Louisville; Security Agreement
dated as of October 1, 1986 between Health Management Associates
of West Virginia, Inc. and Liberty National Bank and Trust
Company of Louisville; and Guaranty Agreement dated as of October
1, 1986 between Health Management Associates of West Virginia,
Inc. and Liberty National Bank and Trust Company of Louisville.
(Exhibit 10.71)
10.19/(m)/ First Amended and Restated Lease Agreement, dated as of January
1, 1995 between The Board of Commissioners of the Highlands
County Hospital District and Sebring Hospital Management
Associates, Inc. (Exhibit 10.1)
10.20/(e)/ Lease dated as of July 1, 1986 between Fishermen's Hospital, Inc.
and Marathon H.M.A., Inc. (Exhibit 28.1)
10.21/(h)/ First Amendment of the July 1, 1986 Lease Agreement by and
between Fisher men's Hospital, Inc. and Marathon H.M.A., Inc.
dated December 18, 1991. (Exhibit 28.1)
10.22/(b)/ Lease Agreement dated January 12, 1990 between Biloxi Regional
Medical Center, Inc. and Biloxi H.M.A., Inc. (Exhibit 10.54)
10.23/(b)/ Letter Agreement Regarding Old Hospital from the Company to
Biloxi Regional Medical Center, dated January 5, 1990. (Exhibit
10.56)
49
10.24/(k)/ Lease Agreement between Heart of Florida Hospital Association,
Inc., Haines City HMA, Inc. and the Company, dated April 30,
1993. (Exhibit 10.49)
10.25/(d)/ BancFlorida Center Lease dated October 29, 1991 between the
Company and BancFlorida. (Exhibit 10.72)
10.26/(l)/ Aircraft Purchase Agreement between Gulfstream Aerospace
Corporation and the Company, dated December 16, 1993. (Exhibit
10.31)
10.27/(l)/ Aircraft Security Agreement between the Company and NationsBank
Leasing Corporation of North Carolina, dated January 5, 1994.
(Exhibit 10.34)
10.28/(l)/ Agreement between Paintsville Hospital Company, Inc. and United
Steel Workers of America, AFL-CIO-CLC, dated February 24, 1994.
(Exhibit 10.20)
10.29/(j)/ Amended and Restated Employment Agreement dated December 15, 1992
between Health Management Associates, Inc. and William J. Schoen.
(Exhibit 10.46)
10.30/(a)/ Health Management Associates, Inc. Incentive Compensation Plan
for Corporate Officers and Management Staff. (Exhibit 10.28)
10.31/(g)/ Health Management Associates, Inc. Stock Incentive Plan for
Corporate Officers and Management Staff. (Exhibit 10.56)
10.32/(m)/ Amendment No. 1 to the Health Management Associates, Inc. Stock
Incentive Plan for Corporate Officers and Management Staff.
(Exhibit 10.2)
10.33/(k)/ Health Management Associates, Inc. Supplemental Executive
Retirement Plan, dated July 12, 1990. (Exhibit 10.22)
10.34/(l)/ First Amendment to the Health Management Associates, Inc.
Supplemental Executive Retirement Plan, dated January 1, 1994.
(Exhibit 10.51)
10.35/(b)/ Registration Agreement dated September 2, 1988 between HMA
Holding Corp., First Chicago Investment Corporation, Madison
Dearborn Partners IV, Prudential Venture Partners, Prudential
Venture Partners II, William J. Schoen, Kelly E. Curry, Stephen
M. Ray, Robb L. Smith, George A. Taylor and Earl P. Holland.
(Exhibit 10.23)
10.36/(c)/ Health Management Associates, Inc. 1991 Non-Statutory Stock
Option Plan. (Exhibit 10.67)
10.37/(j)/ Amendment No. 1 and Amendment No. 2 to the Health Management
Associates, Inc. 1991 Non-Statutory Stock Option Plan. (Exhibit
10.44)
10.38/(j)/ Health Management Associates, Inc. 1993 Non-Statutory Stock
Option Plan. (Exhibit 10.45)
50
10.39/(m)/ Health Management Associates, Inc. Stock Option Plan for Outside
Directors. (Exhibit 10.5)
10.40/(c)/ Stock Option Agreement dated as of May 14, 1991 between the
Company and Kenneth D. Lewis. (Exhibit 10.68)
10.41/(c)/ Stock Option Agreement dated as of May 14, 1991 between the
Company and Charles R. Lees. (Exhibit 10.69)
10.42/(j)/ Stock Option Agreement, dated May 14, 1992, between the Company
and Kenneth D. Lewis. (Exhibit 10.41)
10.43/(j)/ Stock Option Agreement, dated May 14, 1992, between the Company
and Charles R. Lees. (Exhibit 10.42)
10.44/(k)/ Stock Option Agreement, dated May 18, 1993, between the Company
and Kenneth D. Lewis. (Exhibit 10.47)
10.45/(k)/ Stock Option Agreement, dated May 18, 1993, between the Company
and Charles R. Lees. (Exhibit 10.48)
10.46/(l)/ Stock Option Agreement dated May 20, 1994, between the Company
and Charles R. Lees. (Exhibit 10.52)
10.47/(l)/ Stock Option Agreement dated May 17, 1994, between the Company
and Kenneth D. Lewis. (Exhibit 10.53)
10.48/(l)/ Stock Option Agreement dated May 17, 1994, between the Company
and Kent P. Dauten. (Exhibit 10.54)
10.49/(l)/ Stock Option Agreement dated May 17, 1994, between the Company
and William E. Mayberry. (Exhibit 10.55)
10.50/(o)/ Stock Purchase Agreement dated as of January 31, 1995 among The
Cape Coral Medical Center, Inc. and Subsidiaries and the Company.
(Exhibit 10.54)
10.51/(o)/ Asset Purchase Agreement dated as of July 31, 1995, and Lease
Agreement dated as of August 31, 1995, among The Byerly Hospital,
the Company and Hartsville HMA, Inc. (Exhibit 10.55)
10.52/(o)/ Master Agreement dated as of August 16, 1995, and Authority Lease
Agreement dated as of October 1, 1995 among The Hospital
Authority of Bulloch County, Georgia, the Company and Statesboro
HMA, Inc., and County Lease Agreement dated as of October 1, 1995
among the Board of Commissioners of Bulloch County, Georgia, the
Company and Statesboro HMA, Inc. (Exhibit 10.56)
51
10.53/(o)/ Amendment No. 5 to the Health Management Associates, Inc. 1991
Non-Statutory Stock Option Plan. (Exhibit 10.57)
10.54/(o)/ Amendment No. 3 to the Health Management Associates, Inc. 1993
Non-Statutory Stock Option Plan. (Exhibit 10.58)
10.55/(o)/ Amendment No. 1 to the Health Management Associates, Inc. Stock
Option Plan for Outside Directors. (Exhibit 10.59)
10.56/(q)/ Lease Agreement dated as of December 28, 1995 among Coahoma
County, Mississippi, Clarksdale HMA, Inc. and the Company.
(Exhibit 10.1)
10.57/(s)/ Definitive Agreement and Lease Agreement, both dated May 21,
1996, among Midwest City Memorial Hospital Authority, an Oklahoma
Public Trust, and Midwest City HMA, Inc. and Health Management
Associates, Inc. (Exhibit 2.1)
10.58/(q)/ Amendment No. 6 to the Health Management Associates, Inc. 1991
Non-Statutory Stock Option Plan. (Exhibit 10.2)
10.59/(q)/ Amendment No. 7 to the Health Management Associates, Inc. 1991
Non-Statutory Stock Option Plan. (Exhibit 10.3)
10.60/(q)/ Amendment No. 4 to the Health Management Associates, Inc. 1993
Non-Statutory Stock Option Plan. (Exhibit 10.4)
10.61/(q)/ Amendment No. 5 to the Health Management Associates, Inc. 1993
Non-Statutory Stock Option Plan. (Exhibit 10.5)
10.62/(p)/ Health Management Associates, Inc. 1996 Executive Incentive
Compensation Plan. (Exhibit 99.15)
10.63/(r)/ Amendment No. 1 to the Health Management Associates, Inc. 1996
Executive Incentive Compensation Plan. (Exhibit 10.1)
10.64/(t)/ Second Amendment to the Health Management Associates, Inc.
Supplemental Executive Retirement Plan, dated September 17, 1996.
(Exhibit 10.64)
10.65/(u)/ Hospital Management Agreement by and between Anniston HMA, Inc.
and the Trust created under the last will and testament of Susie
P. Stringfellow, entered into on January 24, 1997. (Exhibit 10.1)
10.66/(v)/ Amendment Agreement No. 1 to Term Loan Agreement by and among
Riverview Regional Medical Center, Inc. and NationsBank, National
Association (South) and The Bank of Nova Scotia, made as of
December 5, 1996. (Exhibit 10.1)
52
(11) STATEMENT RE COMPUTATION OF PER SHARE EARNINGS
11.1 Statement re computation of per share earnings is included herein as
Exhibit 11.1 at page 58 of this Report.
(12) STATEMENTS RE COMPUTATION OF RATIOS
Not applicable.
(13) ANNUAL REPORT TO SECURITY HOLDERS, FORM 10-Q OR QUARTERLY REPORT TO
SECURITY HOLDERS
Not applicable.
(16) LETTER RE CHANGE IN CERTIFYING ACCOUNTANT
Not applicable.
(18) LETTER RE CHANGE IN ACCOUNTING PRINCIPLES
Not applicable.
(21) SUBSIDIARIES OF THE REGISTRANT
21.1 Subsidiaries of the registrant are listed on Exhibit 21.1 included
herein at page 59 of this Report.
(22) PUBLISHED REPORT REGARDING MATTERS SUBMITTED TO VOTE OF SECURITY HOLDERS
None.
(23) CONSENTS OF EXPERTS AND COUNSEL
23.1 Consents of Ernst & Young LLP are filed as part of this Report as
Exhibit 23.1 at page 60 hereof.
(24) POWER OF ATTORNEY
Not applicable.
(27) FINANCIAL DATA SCHEDULE
27.1 Financial Data Schedule is filed as part of this Report as Exhibit
27.1 at page 61 hereof.
53
(28) INFORMATION FROM REPORTS FURNISHED TO STATE INSURANCE REGULATORY
AUTHORITIES
Not applicable.
(99) ADDITIONAL EXHIBITS
None.
______________________________
(a) Exhibit previously filed as part of and is incorporated herein by reference
to the Company's Registration Statement on Form S-1 (Registration No. 33-
5341). The exhibit number contained in parenthesis refers to the exhibit
number in such Registration Statement.
(b) Exhibit previously filed as part of and is incorporated herein by reference
to the Company's Registration Statement on Form S-1 (Registration No. 33-
36406). The exhibit number contained in parenthesis refers to the exhibit
number in such Registration Statement.
(c) Exhibit previously filed as part of and is incorporated herein by reference
to the Company's Registration Statement on Form S-1 (Registration No. 33-
43193). The exhibit number contained in parenthesis refers to the exhibit
number in such Registration Statement.
(d) Exhibit previously filed as part of and is incorporated herein by reference
to the Company's Registration Statement on Form S-1, Amendment No. 2
(Registration No. 33-43193). The exhibit number contained in parenthesis
refers to the exhibit number in such Registration Statement.
(e) Exhibit previously filed as part of and is incorporated herein by reference
to the Company's Current Report on Form 8-K dated July 1, 1986. The
exhibit number contained in parenthesis refers to the exhibit number in
such Form 8-K.
(f) Exhibit previously filed as part of and is incorporated herein by reference
to the Company's Quarterly Report on Form 10-Q for the quarter ended
December 31, 1990. The exhibit number contained in parenthesis refers to
the exhibit number in such Form 10-Q.
(g) Exhibit previously filed as part of and is incorporated herein by reference
to the Company's Quarterly Report on Form 10-Q for the quarter ended June
30, 1991. The exhibit number contained in parenthesis refers to the
exhibit number in such Form 10-Q.
(h) Exhibit previously filed as part of and is incorporated herein by reference
to the Company's Quarterly Report on Form 10-Q for the quarter ended
December 31, 1991. The exhibit number contained in parenthesis refers to
the exhibit number in such Form 10-Q.
(i) Exhibit previously filed as part of and is incorporated herein by reference
to the Company's Quarterly Report on Form 10-Q for the quarter ended June
30, 1992. The exhibit number contained in parenthesis refers to the
exhibit number in such Form 10-Q.
(j) Exhibit previously filed as part of and is incorporated herein by reference
to the Company's Annual Report on Form 10-K for the fiscal year ended
September 30, 1992. The exhibit number contained in parenthesis refers to
the exhibit number in such Form 10-K.
(k) Exhibit previously filed as part of and is incorporated herein by reference
to the Company's Annual Report on Form 10-K for the fiscal year ended
September 30, 1993. The exhibit number contained in parenthesis refers to
the exhibit number in such Form 10-K.
(l) Exhibit previously filed as part of and is incorporated herein by reference
to the Company's Annual Report on Form 10-K for the fiscal year ended
September 30, 1994. The exhibit number contained in parenthesis refers to
the exhibit number in such Form 10-K.
54
(m) Exhibit previously filed as part of and is incorporated herein by reference
to the Company's Quarterly Report on Form 10-Q for the quarter ended March
31, 1995. The exhibit number contained in parenthesis refers to the
exhibit number in such Form 10-Q.
(n) Exhibit previously filed as part of and is incorporated herein by reference
to the Company's Quarterly Report on Form 10-Q for the quarter ended June
30, 1995. The exhibit number contained in parenthesis refers to the
exhibit number in such Form 10-Q.
(o) Exhibit previously filed as part of and is incorporated herein by reference
to the Company's Annual Report on Form 10-K for the fiscal year ended
September 30, 1995. The exhibit number contained in parenthesis refers to
the exhibit number in such Form 10-K.
(p) Exhibit previously filed as part of and is incorporated herein by reference
to the Company's Registration Statement on Form S-8 (Registration No. 33-
80433). The exhibit number contained in parenthesis refers to the exhibit
number in such Registration Statement.
(q) Exhibit previously filed as part of and is incorporated herein by reference
to the Company's Quarterly Report on Form 10-Q for the quarter ended
December 31, 1995. The exhibit number contained in parenthesis refers to
the exhibit number in such Form 10-Q.
(r) Exhibit previously filed as part of and is incorporated herein by reference
to the Company's Quarterly Report on Form 10-Q for the quarter ended March
31, 1996. The exhibit number contained in parenthesis refers to the
exhibit number in such Form 10-Q.
(s) Exhibit previously filed as part of and is incorporated herein by reference
to the Company's Current Report on Form 8-K dated June 10, 1996. The
exhibit number contained in parenthesis refers to the exhibit number in
such Form 8-K.
(t) Exhibit previously filed as part of and is incorporated herein by reference
to the Company's Annual Report on Form 10-K for the fiscal year ended
September 30, 1996. The exhibit number contained in parenthesis refers to
the exhibit number in such Form 10-K.
(u) Exhibit previously filed as part of and is incorporated herein by reference
to the Company's Quarterly Report on Form 10-Q for the quarter ended
December 31, 1996. The exhibit number contained in parenthesis refers to
the exhibit number in such Form 10-Q.
(v) Exhibit previously filed as part of and is incorporated herein by reference
to the Company's Quarterly Report on Form 10-Q for the quarter ended March
31, 1997. The exhibit number contained in parenthesis refers to the
exhibit number in such Form 10-Q.
55