Prepared by R.R. Donnelley Financial -- Form 10-Q Period 03/31/2002
Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 
Washington, D.C. 20549
 
FORM 10-Q
 
x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the Quarterly Period Ended March 31, 2002
 
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 Number 000-18799
 
HEALTH MANAGEMENT ASSOCIATES, INC.
(Exact name of Registrant as specified in its charter)
 
Delaware
 
61-0963645
(State or other jurisdiction
of incorporation or organization)
 
(I.R.S. Employer
Identification No.)
     
5811 Pelican Bay Boulevard, Suite 500,
Naples, Florida
 
34108-2710
(Address of principal executive offices)
 
(Zip Code)
     
(941)598-3131
(Registrant’s telephone number, including area code)
 
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 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  ¨
 
At May 3, 2002, the following number of shares of the Registrant were outstanding:
 
Class A Common Stock: 241,292,384 shares
 


Table of Contents
HEALTH MANAGEMENT ASSOCIATES, INC.
FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2002
 
INDEX
 
    
Page

PART I—FINANCIAL INFORMATION
    
Item 1.    Financial Statements
    
  
3
  
4
  
5
  
6
  
7-9
  
10-16
  
16
  
17-18
  
19
  
20-21

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Table of Contents
PART I—FINANCIAL INFORMATION
 
Item 1.    Financial Statements
 
HEALTH MANAGEMENT ASSOCIATES, INC.
 
CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share amounts)
(unaudited)
 
    
Three months ended March 31,

    
2002

    
2001

Net patient service revenue
  
$
579,948
    
$
481,144
Costs and expenses:
               
Salaries and benefits
  
 
219,044
    
 
177,520
Supplies and other
  
 
163,678
    
 
135,666
Provision for doubtful accounts
  
 
43,713
    
 
33,051
Depreciation and amortization
  
 
23,893
    
 
22,116
Rent expense
  
 
11,569
    
 
10,254
Interest, net
  
 
4,086
    
 
5,272
Non-cash charge for retirement benefits and write down of assets held for sale
  
 
—  
    
 
17,000
    

    

Total costs and expenses
  
 
465,983
    
 
400,879
    

    

Income before income taxes
  
 
113,965
    
 
80,265
Provision for income taxes
  
 
44,729
    
 
31,525
    

    

Net income
  
$
69,236
    
$
48,740
    

    

Net income per share:
               
Basic
  
$
.29
    
$
.20
    

    

Diluted
  
$
.27
    
$
.19
    

    

Weighted average number of shares outstanding:
               
Basic
  
 
241,259
    
 
244,117
    

    

Diluted
  
 
260,661
    
 
263,100
    

    

 
See accompanying notes.

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Table of Contents
HEALTH MANAGEMENT ASSOCIATES, INC.
 
CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share amounts)
(unaudited)
 
    
Six months ended
March 31,

    
2002

  
2001

Net patient service revenue
  
$
1,075,769
  
$
915,381
Costs and expenses:
             
Salaries and benefits
  
 
414,792
  
 
346,673
Supplies and other
  
 
307,111
  
 
261,735
Provision for doubtful accounts
  
 
80,591
  
 
68,956
Depreciation and amortization
  
 
45,541
  
 
43,546
Rent expense
  
 
22,495
  
 
19,776
Interest, net
  
 
8,202
  
 
11,308
Non-cash charge for retirement benefits and write down of assets held for sale
  
 
—  
  
 
17,000
    

  

Total costs and expenses
  
 
878,732
  
 
768,994
    

  

Income before income taxes
  
 
197,037
  
 
146,387
Provision for income taxes
  
 
77,335
  
 
57,469
    

  

Net income
  
$
119,702
  
$
88,918
    

  

Net income per share:
             
Basic
  
$
.49
  
$
.36
    

  

Diluted
  
$
.47
  
$
.35
    

  

Weighted average number of shares outstanding:
             
Basic
  
 
242,467
  
 
243,671
    

  

Diluted
  
 
262,035
  
 
263,689
    

  

 
See accompanying notes.

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Table of Contents
HEALTH MANAGEMENT ASSOCIATES, INC.
 
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
 
    
March 31, 2002

    
September 30, 2001

 
    
(Unaudited)
        
ASSETS
                 
Current assets:
                 
Cash and cash equivalents
  
$
113,015
 
  
$
70,263
 
Receivables—net
  
 
440,999
 
  
 
380,136
 
Supplies, prepaids and other assets
  
 
83,816
 
  
 
69,139
 
Funds held by trustee
  
 
4,402
 
  
 
1,892
 
Deferred income taxes
  
 
43,801
 
  
 
43,801
 
    


  


Total current assets
  
 
686,033
 
  
 
565,231
 
Property, plant and equipment
  
 
1,610,252
 
  
 
1,453,903
 
Less: accumulated depreciation and amortization
  
 
(405,857
)
  
 
(364,490
)
    


  


Net property, plant and equipment
  
 
1,204,395
 
  
 
1,089,413
 
Other assets:
                 
Funds held by trustee
  
 
1,511
 
  
 
1,791
 
Excess of cost over acquired net assets, net
  
 
304,118
 
  
 
251,315
 
Deferred charges and other assets
  
 
44,079
 
  
 
33,827
 
    


  


Total other assets
  
 
349,708
 
  
 
286,933
 
    


  


Total assets
  
$
2,240,136
 
  
$
1,941,577
 
    


  


LIABILITIES AND STOCKHOLDERS’ EQUITY
                 
Current liabilities:
                 
Accounts payable
  
$
136,025
 
  
$
91,862
 
Accrued expenses and other liabilities
  
 
121,715
 
  
 
88,117
 
Income taxes—currently payable and deferred
  
 
18,023
 
  
 
1,356
 
Current maturities of long-term debt
  
 
7,245
 
  
 
6,752
 
    


  


Total current liabilities
  
 
283,008
 
  
 
188,087
 
Deferred income taxes
  
 
34,286
 
  
 
34,286
 
Other long-term liabilities
  
 
40,232
 
  
 
36,565
 
Long-term debt
  
 
632,020
 
  
 
428,990
 
    


  


Total liabilities
  
 
989,546
 
  
 
687,928
 
Stockholders’ equity:
                 
Preferred stock, $.01 par value, 5,000 shares authorized
  
 
—  
 
  
 
—  
 
Common stock, Class A, $.01 par value, 750,000 shares authorized, 259,222 and 258,074 shares issued at March 31, 2002 and September 30, 2001, respectively
  
 
2,592
 
  
 
2,581
 
Additional paid-in capital
  
 
344,308
 
  
 
340,192
 
Retained earnings
  
 
1,144,854
 
  
 
1,025,147
 
    


  


    
 
1,491,754
 
  
 
1,367,920
 
Less treasury stock, 19,327 and 12,639 shares at cost at March 31, 2002 and September 30, 2001, respectively
  
 
(241,164
)
  
 
(114,271
)
    


  


Total stockholders’ equity
  
 
1,250,590
 
  
 
1,253,649
 
    


  


Total liabilities and stockholders’ equity
  
$
2,240,136
 
  
$
1,941,577
 
    


  


 
See accompanying notes.

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Table of Contents
HEALTH MANAGEMENT ASSOCIATES, INC.
 
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
 
    
Six months ended
March 31,

 
    
2002

    
2001

 
Cash flows from operating activities:
                 
Net income
  
$
119,702
 
  
$
88,918
 
Adjustments to reconcile net income to net cash provided by operating activities:
                 
Depreciation and amortization
  
 
45,541
 
  
 
43,546
 
Provision for doubtful accounts
  
 
80,591
 
  
 
68,956
 
Loss on sale of fixed assets
  
 
56
 
  
 
10
 
Charges for retirement benefits and write down of assets held for sale
  
 
—  
 
  
 
17,000
 
Changes in assets and liabilities:
                 
Receivables
  
 
(124,718
)
  
 
(88,827
)
Supplies and other current assets
  
 
(11,287
)
  
 
(8,688
)
Deferred charges and other assets
  
 
(6,112
)
  
 
(5,569
)
Accounts payable
  
 
33,130
 
  
 
9,113
 
Accrued expenses and other liabilities
  
 
16,415
 
  
 
(5,219
)
Income taxes—currently payable and deferred
  
 
16,667
 
  
 
2,163
 
Other long term liabilities
  
 
1,366
 
  
 
(6,363
)
    


  


Net cash provided by operating activities
  
 
171,351
 
  
 
115,040
 
    


  


Cash flows from investing activities:
                 
Acquisition of facilities, net of cash acquired
  
 
(186,956
)
  
 
—  
 
Additions to property, plant and equipment
  
 
(56,199
)
  
 
(53,737
)
Proceeds from sale of property, plant and equipment
  
 
40,734
 
  
 
2,929
 
    


  


Net cash used in investing activities
  
 
(202,421
)
  
 
(50,808
)
    


  


Cash flows from financing activities:
                 
Proceeds from long-term borrowings, net of issuance costs
  
 
452,212
 
  
 
5,314
 
Principal payments on debt
  
 
(253,394
)
  
 
(63,442
)
Increase in funds held by trustee
  
 
(2,230
)
  
 
(195
)
Purchases of treasury stock
  
 
(126,893
)
  
 
—  
 
Proceeds from issuance of common stock
  
 
4,127
 
  
 
19,168
 
    


  


Net cash provided by (used in) financing activities
  
 
73,822
 
  
 
(39,155
)
    


  


Net increase in cash and cash equivalents
  
 
42,752
 
  
 
25,077
 
Cash and cash equivalents at beginning of period
  
 
70,263
 
  
 
16,471
 
    


  


Cash and cash equivalents at end of period
  
$
113,015
 
  
$
41,548
 
    


  


 
See accompanying notes.

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HEALTH MANAGEMENT ASSOCIATES, INC.
 
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 
1.    Basis of Presentation
 
The condensed consolidated balance sheet as of September 30, 2001 has been derived from the audited consolidated financial statements included in Health Management Associates, Inc.’s (the “Company’s”) 2001 Annual Report on Form 10-K. The interim condensed consolidated financial statements at March 31, 2002 and for the three and six month periods ended March 31, 2002 and 2001 are unaudited; however, such interim statements reflect all adjustments (consisting only of a normal recurring nature) which are, in the opinion of management, necessary for a fair presentation of the financial position and results of operations for the interim periods presented. The results of operations for the interim periods presented are not necessarily indicative of the results to be expected for the full year. The interim financial statements should be read in conjunction with the audited consolidated financial statements included in the Company’s 2001 Annual Report on Form 10-K.
 
2.    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 condensed consolidated financial statements. Actual results could differ from these estimates.
 
3.    Earnings Per Share
 
The following table sets forth the computation of basic and diluted earnings per share (in thousands, except per share data):
 
    
Three months ended
March 31,

  
Six months ended
March 31,

    
2002

  
2001

  
2002

  
2001

Numerator:
                           
Numerator for basic earnings per share-net income
  
$
69,236
  
$
48,740
  
$
119,702
  
$
88,918
Effect of convertible debt
  
 
1,355
  
 
1,337
  
 
2,710
  
 
2,673
    

  

  

  

Numerator for diluted earnings per share
  
$
70,591
  
$
50,077
  
$
122,412
  
$
91,591
    

  

  

  

Denominator:
                           
Denominator for basic earnings per share-weighted average shares
  
 
241,259
  
 
244,117
  
 
242,467
  
 
243,671
Effect of dilutive securities:
                           
Employee stock options
  
 
4,953
  
 
4,534
  
 
5,119
  
 
5,569
Convertible debt
  
 
14,449
  
 
14,449
  
 
14,449
  
 
14,449
    

  

  

  

Denominator for diluted earnings per share
  
 
260,661
  
 
263,100
  
 
262,035
  
 
263,689
    

  

  

  

Basic earnings per share
  
$
.29
  
$
.20
  
$
.49
  
$
.36
    

  

  

  

Diluted earnings per share
  
$
.27
  
$
.19
  
$
.47
  
$
.35
    

  

  

  

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Table of Contents
HEALTH MANAGEMENT ASSOCIATES, INC.
 
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 
4.    Acquisitions
 
Effective December 1, 2001, the Company acquired the assets of East Pointe Hospital. The assets purchased included substantially all of the property, plant and equipment of the hospital. The total consideration approximated $16.5 million in cash. The Company used cash on hand to finance the cost of this transaction.
 
On December 31, 2001(with an effective date of January 1, 2002), the Company acquired four acute-care hospitals from Clarent Hospital Corporation for approximately $170.0 million in cash. On the same day the Company sold one of these hospitals to a third party for $40.0 million in cash. The Company used amounts available under its Credit Agreement to finance the net cost of these three hospitals.
 
On February 26, 2002, the Company announced the signing of agreements with Manor Care, Inc. related to the acquisition of Mesquite Community Hospital, a 172-bed acute care hospital located in Mesquite, Texas. The acquisition closed effective May 1, 2002. The Company purchased 100% of the assets of the hospital for $80.0 million using cash on hand and subsequently sold back to Manor Care, Inc. a 20% equity interest in such hospital for $16.0 million in cash. As part of the transaction, the Company also sold to Manor Care, Inc. a 20% equity interest in the Medical Center of Mesquite (acquired by the Company on December 31, 2001) for $16.0 million in cash.
 
5.    Recent Accounting Pronouncements
 
As of October 1, 2001, the Company adopted the provisions of SFAS No. 142, Goodwill and Other Intangible Assets. SFAS No. 142 requires that goodwill and intangible assets with indefinite useful lives no longer be amortized, but instead tested for impairment at least annually in accordance with the provisions of SFAS No. 142. The transition provisions of SFAS No. 142 require the completion of a transitional impairment test within six months of adoption of SFAS No. 142. The Company completed the required transitional impairment test in March 2002, which resulted in no goodwill impairment.
 
In accordance with SFAS No. 142, the Company discontinued the amortization of goodwill effective October 1, 2001. During the quarter and six months ended March 31, 2001, the Company recorded approximately $2.2 and $4.4 million, respectively, of goodwill amortization expense which reduced earnings by approximately $1.3 million and $2.6 million, respectively (net of tax expense of approximately $0.9 million and $1.8 million, respectively), or approximately $0.005 per share and $0.01 per share, respectively, on a diluted basis.
 
6.    Non-Cash Charge
 
The non-cash charge for retirement benefits and write down of assets held for sale for the three months and six months ended March 31, 2001, represents: (1) the present value of the future costs of retirement benefits granted to the Company’s chairman pursuant to an employment agreement which became effective January 2, 2001; and (2) the write down of two hospital assets held for sale in conjunction with their respective replacement.

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Table of Contents
HEALTH MANAGEMENT ASSOCIATES, INC.
 
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 
7.    Issuance of Convertible Notes
 
On January 28, 2002, the Company issued and sold $330.0 million in face value of Zero-Coupon Convertible Senior Subordinated Notes (the “Notes”) for gross proceeds of approximately $277.0 million. The Notes are the Company’s general unsecured obligations and are subordinated in right of payment to the Company’s existing and future indebtedness that is not, by its terms, expressly subordinated or pari passu in right of payment to the Notes. The Company’s Convertible Senior Subordinated Debentures due 2020 (the “Debentures”) rank pari passu with the Notes. The Notes mature on January 28, 2022, unless converted or redeemed earlier. Upon the occurrence of certain events, the Notes are convertible into the Company’s common stock at a conversion rate of 32.1644 shares of common stock for each $1,000 principal amount of the Notes (equivalent to a conversion price of $26.11 per share). The equivalent number of shares associated with the conversion of the Notes become dilutive (and thus are included in the Company’s earnings per share calculation) when the Company’s common stock attains a level of $31.33 for at least 20 trading days of the 30 trading days prior to the conversion or the Notes otherwise become convertible. The accrual of original issue discount represents a yield to maturity of 0.875% per year calculated from January 22, 2002, excluding any contingent interest.
 
Holders may require the Company to purchase all or a portion of their Notes on January 28, 2005, January 28, 2007, January 28, 2012 and January 28, 2017 for a purchase price per note of $862.07, $877.25, $916.40 and $957.29, respectively, plus accrued and unpaid interest to each purchase date. The Company will pay cash for all Notes so purchased on January 28, 2005. The Company may choose to pay the purchase price in cash or common stock or a combination of cash and common stock for purchases on or after January 28, 2007. In addition, upon a change in control of the Company occurring on or before January 28, 2007, each holder may require the Company to purchase all or a portion of such holder’s Notes. The Company may redeem all or a portion of the Notes at any time on or after January 28, 2007. The Company filed a Registration Statement on Form S-3 with the Securities and Exchange Commission with respect to the Notes and shares of common stock underlying the Notes on April 11, 2002.
 
8.    Share Repurchase Program
 
On January 29, 2002, the Company announced that it had completed the stock repurchase program it commenced in September 2001. The Company purchased a total of 5,000,000 shares of its common stock under this repurchase program.
 
In February 2002, the Board of Directors approved a new stock repurchase program to repurchase up to 5,000,000 shares of the Company’s common stock. Purchases will be made from time to time in the open market and will continue until all of such shares authorized for repurchase are purchased or until the Company decides to terminate the repurchase program. As of March 31, 2002, the Company had repurchased approximately 1,800,000 shares under this repurchase program at an average purchase price of $18.17 per share.

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Item 2.    Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
Critical Accounting Policies and Estimates
 
The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management of the Company to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes.
 
The Company considers its critical accounting policies to be those that require the more significant judgments and estimates in the preparation of the Company’s financial statements, including the following: recognition of net patient service revenues, including contractual allowances; impairment of long-lived assets; provisions for doubtful accounts; provision for income taxes; and reserves for losses related to professional liability risks. Management relies on historical experience and on other assumptions believed to be reasonable under the circumstances in making its judgment and estimates. Actual results could differ materially from those estimates. There have been no significant changes in assumptions and estimates in the preparation of these quarterly financial statements from the assumptions and estimates used in the preparation of the Company’s latest audited financial statements.
 
Results of Operations
 
Three months ended March 31, 2002 compared to three months ended March 31, 2001
 
Net patient service revenue for the three months ended March 31, 2002 (the “2002 Period”) was $579.9 million as compared to $481.1 million for the three months ended March 31, 2001 (the “2001 Period”). This represented an increase in net patient service revenue of $98.8 million or 21%. Hospitals in operation for the entire 2002 Period and 2001 Period (“same hospitals”) provided $29.8 million of the increase in net patient service revenue, resulting from overall increases in volume and pricing. The remaining increase of $69.0 million included $68.8 million of net patient service revenue from the June 2001 acquisition of a 200-bed hospital, the September 2001 acquisition of an 80-bed hospital, the December 2001 acquisition of an 88-bed hospital, and the January 2002 acquisition of a 176-bed hospital, a 129-bed hospital and an 85-bed hospital. The remaining increase of $0.2 million resulted from miscellaneous other revenue.
 
During the 2002 Period, the Company’s hospitals generated total patient days of service and an occupancy rate of 269,317 and 51.6%, respectively, versus 238,835 and 52.8%, respectively, for the 2001 Period. Same hospital patient days and occupancy for the 2002 Period were 229,154 and 51.9%, respectively, versus 227,729 and 51.6%, respectively for the 2001 Period. Same hospital admissions for the Company’s hospitals during the 2002 Period were 49,865, down 0.3% from the 50,004 admissions during the 2001 Period.

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Item 2.    Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued)
 
The Company’s operating expenses (salaries and benefits, supplies and other, provision for doubtful accounts and rent expense) for the 2002 Period were $438.0 million or 75.5% of net patient service revenue as compared to $356.5 million or 74.1% of net patient service revenue for the 2001 Period. Of the total $81.5 million increase, approximately $21.1 million related to same hospitals, which was largely attributable to overall increased patient volumes. Another $57.7 million of increased operating expense related to the acquisitions mentioned previously. The remaining increase of $2.7 million represented the net increase in corporate and other operating expenses.
 
During the 2002 Period, the Company’s depreciation and amortization costs increased by $1.8 million and interest expense decreased by $1.2 million, as compared to the 2001 Period. The increase in depreciation and amortization resulted primarily from the depreciation associated with the acquisitions mentioned previously, offset by a decrease in amortization expense related to the Company’s adoption of SFAS No. 142. The decrease in interest expense was due to lower interest rates on the Company’s outstanding debt in the 2002 Period. The non-cash charge for retirement benefits and write down of assets held for sale in the 2001 Period represents: (1)the present value of the future costs of retirement benefits granted to the Company’s chairman pursuant to an employment agreement which became effective January 2, 2001; and (2)the write down of two hospital assets held for sale in conjunction with their respective replacement.
 
The Company’s income before income taxes was $114.0 million for the 2002 Period as compared to $97.3 million for the 2001 Period, excluding the non-cash charge for retirement benefits and write down of assets held for sale of $17.0 million, an increase of $16.7 million or 17.2%. Including the non-cash charge, income before income taxes was $80.3 million in the 2001 Period. The Company’s provision for income taxes was $44.7 million for the 2002 Period as compared to $31.5 million for the 2001 Period. These provisions reflect effective income tax rates of approximately 39.3% for both periods. As a result of the foregoing, the Company’s net income was $69.2 million for the 2002 Period, and $59.1 million for the 2001 Period excluding the aforementioned non-cash charge and $48.7 million for the 2001 Period including such charge.

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Item 2.    Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued)
 
Results of Operations
 
Six months ended March 31, 2002 compared to six months ended March 31, 2001
 
Net patient service revenue for the six months ended March 31, 2002 (the “2002 Six Month Period”) was $1,075.8 million, as compared to $915.4 million for the six months ended March 31, 2001 (the “2001 Six Month Period”). This represented an increase in net patient service revenue of $160.4 million, or 18%. Same hospitals provided $66.4 million of the increase in net patient service revenue, resulting from patient volume increases and pricing increases. The remaining increase of $94.0 million included $93.7 million of net patient service revenue from the acquisitions mentioned previously, and an increase of $0.3 million in miscellaneous other revenue.
 
During the 2002 Six Month Period, the Company’s hospitals generated 493,019 total patient days of service and an occupancy rate of 48.6%, respectively, versus 448,266 and 48.7%, respectively, for the 2001 Six Month Period. Same hospital patient days and occupancy for the 2002 Six Month Period were 430,477 and 48.2%, respectively, versus 424,122 and 47.5%, respectively, for the 2001 Six Month Period. Same hospital admissions for the Company’s hospitals during the 2002 Six Month Period were 95,167, up 0.7% from the 94,490 admissions during the 2001 Six Month Period.
 
The Company’s operating expenses (salaries and benefits, supplies and other, provision for doubtful accounts and rent expense) for the 2002 Six Month Period were $825.0 million, or 76.7% of net patient service revenue as compared to $697.1 million or 76.2% of net patient service revenue for the 2001 Six Month Period. Of the total $127.9 million increase, approximately $43.2 million related to same hospitals, which was largely attributable to increased patient volumes. Another $80.3 million of increased operating expenses related to the hospital acquisitions mentioned previously. The remaining increase of $4.4 million represented the net increase in corporate and other operating expenses.
 
During the 2002 Period, the Company’s depreciation and amortization costs increased by $2.0 million and interest expense decreased by $3.1 million, as compared to the 2001 Period. The increase in depreciation and amortization resulted primarily from the depreciation associated with the acquisitions mentioned previously, offset by a decrease in amortization expense related to the Company’s adoption of SFAS No. 142. The decrease in interest expense was due to lower interest rates on the Company’s outstanding debt in the 2002 Six Month Period. The non-cash charge for retirement benefits and write down of assets held for sale in the 2001 Six Month Period represents: (1) the present value of the future costs of retirement benefits granted to the Company’s chairman pursuant to an employment agreement which became effective January 2, 2001; and (2) the write down of two hospital assets held for sale in conjunction with their respective replacement.

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Table of Contents
Item 2.    Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued)
 
The Company’s income before income taxes was $197.0 million for the 2002 Six Month Period and, excluding the non-cash charge for retirement benefits and write down of assets held for sale of $17.0 million, was $163.4 for the 2001 Six Month Period, an increase of $33.6 million, or 20.6%. Including the non-cash charge, income before income taxes was $146.4 million in the 2001 Six Month Period. The Company’s provision for income taxes was $77.3 million for the 2002 Six Month Period as compared to $57.5 million for the 2001 Six Month Period. These provisions reflect effective income tax rates of approximately 39.3% for both periods. As a result of the foregoing, the Company’s net income was $119.7 million for the 2002 Six Month Period and $99.3 million for the 2001 Six Month Period, excluding the non-cash charge, and $88.9 million including such charge.
 
Liquidity and Capital Resources
 
Liquidity
 
2002 Six Month Period Cash Flows compared to 2001 Six Month Period Cash Flows
 
The Company’s operating cash flows totaled $171.4 million for the 2002 Six Month Period as compared to $115.0 million for the 2001 Six Month Period. The continued positive cash flows from operating activities resulted from the Company’s profitability and management of working capital. The Company’s investing activities used $202.4 million and $50.8 million for the 2002 Six Month Period and 2001 Six Month Period, respectively. Acquisitions of hospitals accounted for the majority of the expenditures in the 2002 Six Month Period. Ongoing renovation and capital equipment costs accounted for the majority of the expenditures in the 2001 Six Month Period. Financing activities provided net cash of $73.8 million for the 2002 Six Month Period and used net cash of $39.2 million for the 2001 Six Month Period. Proceeds from debt issued (see “Capital Resources” below), offset by repayments on debt and purchases of treasury shares, accounted for the majority of net cash provided in the 2002 Six Month Period while payments on debt accounted for the majority of the net cash used in the 2001 Six Month Period. See the Condensed Consolidated Statements of Cash Flows for the six months ended March 31, 2002 and 2001 on page 6 of this Report.

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Item 2.    Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued)
 
Capital Resources
 
The Company currently has a 5-year $450 million Credit Agreement with a bank (the “Credit Agreement”) due November 30, 2004. The Credit Agreement is a term loan agreement which permits the Company to borrow under an unsecured revolving credit loan at any time through November 30, 2004, at which time the agreement terminates and all outstanding amounts become due and payable. The Company may choose a Base Rate Loan (prime interest rate) or a Eurodollar Rate Loan (LIBOR interest rate). The interest rate for a Eurodollar Rate Loan is currently LIBOR plus 1.00 percent, and will increase or decrease in relation to a change in the Company’s credit rating. Monthly or quarterly interest payments are required depending on the type of loan chosen by the Company. The interest rate at March 31, 2002, and March 31, 2001 was 2.9% and 6.1%, respectively. As of March 31, 2002, there were no amounts outstanding under this Credit Agreement.
 
The Company also has a $15 million unsecured revolving credit commitment with a bank. The $15 million credit is a working capital commitment which is tied to the Company’s cash management system, and renews annually in December. Currently, interest on any outstanding balance is payable monthly at a fluctuating rate not to exceed the bank’s prime rate less .25%. The interest rate at March 31, 2002 and 2001 was 4.50% and 7.25% respectively. As of March 31, 2002, there were no amounts outstanding under this credit commitment.
 
In addition, the Company is obligated to pay certain commitment fees based upon amounts available for borrowing during the terms of the credit agreements described above.
 
The credit agreements contain covenants which, without prior consent of the banks, limit certain activities, including those relating to mergers, consolidations and the Company’s ability to secure additional indebtedness, make guarantees, grant security interests and declare dividends. The Company must also maintain minimum levels of consolidated tangible net worth, debt service coverage and interest coverage. At March 31, 2002, the Company was in compliance with these covenants.
 
On August 16, 2000, the Company sold $488.8 million face value of Convertible Senior Subordinated Debentures due 2020 (the “Debentures”) for gross proceeds of $287.7 million. The Debentures mature on August 16, 2020 unless converted or redeemed earlier. The Debentures are convertible into the Company’s common stock at a conversion rate of 29.5623 shares of common stock for each $1,000 principal amount of the Debentures (equivalent to a conversion price of $19.9125 per share). Interest on the Debentures is payable semiannually in arrears on August 16 and February 16 of each year at a rate of .25% per year on the principal amount at maturity. The rate of cash interest and accrual of original issue discount represent a yield to maturity of 3% per year calculated from August 16, 2000.

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Table of Contents
Item 2.    Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued)
 
Holders may require the Company to purchase all or a portion of their Debentures on August 16, 2003, August 16, 2008 and August 16, 2013 for a purchase price per Debenture of $635.88, $724.85 and $827.53, respectively, plus accrued and unpaid interest to each purchase date. The Company may choose to pay the purchase price in cash or common stock or a combination of cash and common stock. In addition, upon a change in control of the Company occurring on or before August 16, 2003, each holder may require the Company to repurchase all or a portion of such holder’s Debentures. The Company may redeem all or a portion of the Debentures at any time on or after August 16, 2003.
 
On January 28, 2002, the Company issued and sold $330.0 million in face value of Zero-Coupon Convertible Senior Subordinated Notes (the “Notes”) for gross proceeds of approximately $277.0 million. The Notes are the Company’s general unsecured obligations and are subordinated in right of payment to the Company’s existing and future indebtedness that is not, by its terms, expressly subordinated or pari passu in right of payment to the Notes. The Company’s Debentures rank pari passu with the Notes. The Notes mature on January 28, 2022, unless converted or redeemed earlier. Upon the occurrence of certain events, the Notes are convertible into the Company’s common stock at a conversion rate of 32.1644 shares of common stock for each $1,000 principal amount of the Notes (equivalent to a conversion price of $26.11 per share). The equivalent number of shares associated with the conversion of the Notes become dilutive (and thus are included in the Company’s earnings per share calculation) when the Company’s common stock attains a level of $31.33 for at least 20 trading days of the 30 trading days prior to the conversion or the Notes otherwise become convertible. The accrual of original issue discount represents a yield to maturity of 0.875% per year calculated from January 22, 2002, excluding any contingent interest.
 
Holders may require the Company to purchase all or a portion of their Notes on January 28, 2005, January 28, 2007, January 28, 2012 and January 28, 2017 for a purchase price per note of $862.07, $877.25, $916.40 and $957.29, respectively, plus accrued and unpaid interest to each purchase date. The Company will pay cash for all Notes so purchased on January 28, 2005. The Company may choose to pay the purchase price in cash or common stock or a combination of cash and common stock for purchases on or after January 28, 2007. In addition, upon a change in control of the Company occurring on or before January 28, 2007, each holder may require the Company to purchase all or a portion of such holder’s Notes. The Company may redeem all or a portion of the Notes at any time on or after January 28, 2007. The Company filed a Registration Statement on Form S-3 (the “Registration Statement”) with the Securities and Exchange Commission with respect to the Notes and shares of common stock underlying the Notes on April 11, 2002. The Company expects that the Registration Statement will become effective on or before June 27, 2002.
 
On January 29, 2002, the Company announced that it had completed the stock repurchase program it commenced in September 2001. The Company purchased a total of 5,000,000 shares of its common stock under this repurchase program.
 

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Table of Contents
Item 2.    Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued)
 
In February 2002, the Board of Directors approved a new stock repurchase program to repurchase up to 5,000,000 shares of the Company’s common stock. Purchases will be made from time to time in the open market and will continue until all of such shares authorized for repurchase are purchased or until the Company decides to terminate the repurchase program. As of March 31, 2002, the Company had repurchased approximately 1,800,000 shares under this repurchase program at an average purchase price of $18.17 per share.
 
Forward-Looking Statements
 
Certain statements contained in this Form 10-Q, including, without limitation, statements containing the words “believes”, “anticipates”, “intends”, “expects” and words of similar import, constitute “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause the actual results, performance or achievements of the Company or industry results to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. Such factors include, among others, the following: general economic and business conditions, both nationally and in the regions in which the Company operates; industry capacity; demographic changes; existing governmental regulations and changes in, or the failure to comply with, governmental regulations; legislative proposals for health care reform; the ability to enter into managed care proposals for health care reform; the ability to enter into Medicare and Medicaid payment levels; liability and other claims asserted against the Company; competition; the loss of any significant ability to attract and retain qualified personnel, including physicians; the availability and terms of capital to fund additional acquisitions or replacement facilities. Given these uncertainties, prospective investors are cautioned not to place undue reliance on such forward-looking statements. The Company disclaims any obligation to update any such factors or to publicly announce the results of any revision to any of the forward-looking statements contained herein to reflect future events or developments.
 
Item 3.    Quantitative and Qualitative Disclosures About Market Risk
 
During the three months and six months ended March 31, 2002, there were no material changes in the quantitative and qualitative disclosures about market risks presented in Item 7A in the Company’s Annual Report on Form 10-K for the year ended September 30, 2001, other than the change as described below.
 
During the three months and six months ended March 31, 2002, the Company decreased its borrowings under its variable rate revolving line of credit agreement by $215 million, leaving no amounts outstanding under the Credit Agreement as of March 31, 2002.

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Table of Contents
PART II—OTHER INFORMATION
 
Item 1.    Legal Proceedings
 
None.
 
Item 2.    Changes in Securities
 
None.
 
Item 3.    Defaults Upon Senior Securities
 
None.
 
Item 4.    Submission of Matters to a Vote of Security Holders
 
At the Annual Meeting of Stockholders of the Company held on February 19, 2002, the stockholders of the Company adopted a proposal to elect eight directors of the Company, as follows:
 
    
Votes For

    
Withheld

William J. Schoen
  
214,061,136
    
1,794,908
Joseph V. Vumbacco
  
214,061,812
    
1,794,232
Kent P. Dauten
  
214,067,213
    
1,788,831
Donald E. Kiernan
  
214,052,862
    
1,803,182
Robert A. Knox
  
214,067,311
    
1,788,733
Kenneth D. Lewis
  
214,063,278
    
1,792,766
William E. Mayberry, M.D.
  
214,056,454
    
1,799,590
Randolph W. Westerfield, Ph.D.
  
213,936,611
    
1,919,433
 
Item 5.    Other Information
 
None.
 
Item 6.    Exhibits and Reports on Form 8-K
 
a.  Exhibits:
 
See Index to Exhibits located on page 20.
 
b.  Reports on Form 8-K:
 
Form 8-K Reporting Date—January 24, 2002
 
Item Reported—Item 5. Other Events and Regulation FD Disclosure. The Company reported the offering of approximately $277 million (gross proceeds) of Zero-Coupon Convertible Senior Subordinated Notes due 2022 to qualified institutional buyers.

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Table of Contents
PART II—OTHER INFORMATION (continued)
 
Item 6.    Exhibits and Reports on Form 8-K (continued)
 
Form 8-K Reporting Date—February 13, 2002
 
Item Reported—Item 5. Other Events and Regulation FD Disclosure. The Company reported the closing of the offering of approximately $277 million (gross proceeds) of Zero-Coupon Convertible Senior Subordinated Notes due 2022 to qualified institutional buyers.

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Table of Contents
SIGNATURES
 
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized.
 
 
 
HE
ALTH MANAGEMENT ASSOCIATES, INC.
DATE:    May 7, 2002
By:
 
/s/    ROBERT E. FARNHAM         

   
Robert E. Farnham
Senior Vice President-Finance
(Duly authorized officer and
Principal Financial Officer)

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Table of Contents
INDEX TO EXHIBITS
 
(2)
 
Plan of acquisition, reorganization, arrangement, liquidation or succession.
   
Not applicable.
(3)
 
(i)
  
Articles of Incorporation
   
3.1
  
Fifth Restated Certificate of Incorporation, previously filed and included as Exhibit 3.1 to the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 1995, is incorporated herein by reference.
   
3.2
  
Certificate of Amendment to Fifth Restated Certificate of Incorporation, previously filed and included as Exhibit 3.2 to the Company’s Annual Report on Form 10-K for the year ended September 30, 1999, is incorporated herein by reference.
   
(ii)
  
By-laws
        
The By-laws, as amended, previously filed and included as Exhibit 3.3 to the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2001, are incorporated herein by reference.
(4)
 
Instruments defining the rights of security holders, including indentures.
   
The Exhibits referenced under (3) of this Index to Exhibits are incorporated herein by reference.
4.1
 
Specimen Stock Certificate, previously filed and included as Exhibit 4.11 to the Company’s Annual Report on Form 10-K for the fiscal year ended September 30, 1992, is incorporated herein by reference.
4.5
 
Credit Agreement by and among Health Management Associates, Inc., as Borrower, Bank of America, N.A., as Administrative Agent and as Lender, First Union National Bank, as Syndication Agent and as Lender, and the Chase Manhattan Bank, as Syndication Agent and as Lender, and The Lenders Party Hereto From Time To Time, dated November 30, 1999, previously filed and included as Exhibit 4.5 to the Company’s Annual Report on Form 10-K for the fiscal year ended September 30, 1999, is incorporated herein by reference.
4.6
 
Credit Agreement dated March 23, 2000 between First Union National Bank and Health Management Associates, Inc., pertaining to a $15 million working capital and cash management line of credit, previously filed and included as Exhibit 4.1 to the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2000, is incorporated herein by reference.
4.7
 
Indenture dated August 16, 2000 between Health Management Associates, Inc. and First Union National Bank, pertaining to the $488.7 million face value of Convertible Senior Subordinated Debentures due 2020, previously filed and included as Exhibit 4.1(1) to the Company’s Form S-3 Registration Statement filed October 27, 2000, is incorporated herein by reference.

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Table of Contents
INDEX TO EXHIBITS (Continued)
 
4.8
 
  
Indenture, dated January 28, 2002, by and between Health Management Associates, Inc. and First Union National Bank, N.A., pertaining to the $330.0 million face value of Convertible Senior Subordinated Debentures due 2022, previously filed and included as Exhibit 4(a) to the Company’s Form 8-K filed February 13, 2002, is incorporated herein by reference.
(10
)
  
Material contracts.
      
Not applicable
(11
)
  
Statement re computation of per share earnings.
      
Not applicable.
(15
)
  
Letter re unaudited interim financial information.
      
Not applicable.
(18
)
  
Letter re change in accounting principles.
      
Not applicable.
(19
)
  
Report furnished to security holders.
      
Not applicable.
(22
)
  
Published report regarding matters submitted to vote of security holders.
      
Not applicable.
(23
)
  
Consents of experts and counsel.
      
Not applicable.
(24
)
  
Power of attorney.
      
Not applicable.
(99
)
  
Additional exhibits.
      
Not applicable.

21