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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
Mark One:
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the Fiscal Year Ended December 31, 1997
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EX-
CHANGE ACT OF 1934
For the Transition Period from to .
COMMISSION FILE NUMBER 1-11239
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COLUMBIA/HCA HEALTHCARE CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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DELAWARE 75-2497104
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
ONE PARK PLAZA
NASHVILLE, TENNESSEE 37203
(Address of Principal Executive (Zip Code)
Offices)
Registrant's Telephone Number, Including Area Code: (615) 344-9551
Securities Registered Pursuant to Section 12(b) of the Act:
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
New York Stock Exchange
Common Stock, $.01 Par Value
Securities Registered Pursuant to Section 12(g) of the Act: None
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 [_]
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. [_]
As of March 16, 1998, there were outstanding 621,527,226 shares of the Reg-
istrant's Common Stock and 21,000,000 shares of the Registrant's Nonvoting
Common Stock. As of March 16, 1998 the aggregate market value of the Common
Stock held by non-affiliates was approximately $17,188,414,000. For purposes
of the foregoing calculation only, the Registrant's directors, executive offi-
cers, and The Columbia/HCA Healthcare Corporation Stock Bonus Plan, The
Columbia/HCA Healthcare Corporation Salary Deferral Plan and the San Leandro
Retirement and Savings Plan have been deemed to be affiliates.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's definitive Proxy Statement for its 1998 Annual
Meeting of Stockholders are incorporated by reference into Part III hereof.
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INDEX
PAGE
REFERENCE
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PART I
Item 1. Business.......................................... 1
Item 2. Properties........................................ 20
Item 3. Legal Proceedings................................. 21
Submission of Matters to a Vote of Security
Item 4. Holders........................................... 27
PART II
Item 5. Market for the Registrant's Common Equity and
Related Stockholder Matters...................... 28
Item 6. Selected Financial Data........................... 29
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations.............. 31
Item 8. Financial Statements and Supplementary Data....... 45
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure.............. 45
PART III
Directors and Executive Officers of the
Item 10. Registrant........................................ 45
Item 11. Executive Compensation............................ 45
Security Ownership of Certain Beneficial Owners
Item 12. and Management.................................... 45
Item 13. Certain Relationships and Related Transactions.... 45
PART IV
Exhibits, Financial Statement Schedules and
Item 14. Reports on Form 8-K............................... 46
PART I
ITEM 1. BUSINESS.
GENERAL
Columbia/HCA Healthcare Corporation is one of the leading providers of
health care services in the United States. At December 31, 1997, the Company
operated 318 general, acute care hospitals and 18 psychiatric hospitals. In
addition, as part of its comprehensive health care networks, the Company
operated 145 outpatient surgery centers and provided extensive outpatient and
ancillary services, including home health (the Company plans to divest its
home health business, see NOTE 7 of the notes to consolidated financial
statements). The facilities "operated" by the Company included 27 hospitals
and five surgery centers which were operated through 50/50 joint ventures that
were managed by the Company, but which were not consolidated for financial
reporting purposes. The term the "Company" as used herein refers to
Columbia/HCA Healthcare Corporation and its affiliates unless otherwise stated
or indicated by context.
The Company's primary objective is to provide the communities it serves a
comprehensive array of quality health care services in the most cost effective
manner possible. The Company's general, acute care hospitals usually provide a
full range of services commonly available in hospitals to accommodate such
medical specialties as internal medicine, general surgery, cardiology,
oncology, neurosurgery, orthopedics and obstetrics, as well as diagnostic and
emergency services. Outpatient and ancillary health care services are provided
by the Company's general, acute care hospitals as well as at freestanding
facilities operated by the Company including outpatient surgery and diagnostic
centers, rehabilitation facilities, home health care agencies and other
facilities. In addition, the Company operates psychiatric hospitals which
generally provide a full range of mental health care services in inpatient,
partial hospitalization and outpatient settings.
In August 1997, the Company acquired Value Health, Inc. ("Value Health") in
a transaction accounted for as a purchase (the "Value Health Merger"). The
Company plans to divest three of the four primary Value Health business units
(see NOTE 7 of the notes to consolidated financial statements.) During April
1995, the Company acquired Healthtrust, Inc.--The Hospital Company
("Healthtrust") in a merger transaction accounted for as a pooling of
interests (the "Healthtrust Merger"). Healthtrust began operations through the
acquisition of a group of hospitals and related assets from Hospital
Corporation of America (the predecessor to HCA) in September 1987. During May
1994, Healthtrust acquired EPIC Holdings, Inc. ("EPIC") in a transaction
accounted for as a purchase. During September 1994, the Company acquired
Medical Care America, Inc. ("MCA") in a transaction accounted for as a
purchase. During February 1994, the Company acquired HCA-Hospital Corporation
of America ("HCA") in a merger transaction accounted for as a pooling of
interests. Effective September 1993, the Company acquired Galen Health Care,
Inc. ("Galen") in a merger transaction accounted for as a pooling of
interests. Galen began operations as an independent publicly held corporation
upon the distribution of all of its common stock by its then 100% owner,
Humana Inc., in March 1993.
The Company, through various predecessor entities, began operations on July
1, 1988. The Company was incorporated in Nevada in January 1990 and
reincorporated in Delaware in September 1993. The Company's principal
executive offices are located at One Park Plaza, Nashville, Tennessee 37203,
and its telephone number at such address is (615) 344-9551.
1
CHALLENGES AND REORGANIZATION OF THE COMPANY
The Company encountered significant challenges and changes during 1997. The
Company is currently the subject of several federal investigations into its
business practices, as well as governmental investigations by numerous states.
The Company is also named in various legal proceedings. In addition, the
Company experienced changes in numerous management positions. The new
management team developed and initiated significant changes in business
strategy for the Company during 1997. These factors, along with the
unfavorable media coverage related to the investigations, may have contributed
to a slowdown in the Company's revenue growth and a decline in results of
operations. Management is unable to predict if, or when, the Company can
return to its historical revenue growth rates, historical operating margins or
historical net income growth rates.
The Company is facing significant legal challenges. The Company is the
subject of various federal and state investigations, qui tam actions,
stockholder derivative and class action complaints filed in federal court,
stockholder derivative actions filed in state courts, patient/payer actions
and general liability claims. See Item 3--"Legal Proceedings."
Management believes the ongoing investigations, litigation and related media
coverage are having a negative effect on the Company's results of operations.
It is too early to predict the outcome or effect that the ongoing
investigations and litigation, the initiation of additional investigations or
litigation, if any, and the related media coverage will have on the Company's
financial condition or results of operations in future periods. Were the
Company to be found in violation of federal or state laws relating to
Medicare, Medicaid or similar programs, the Company could be subject to
substantial monetary fines, civil and criminal penalties and exclusion from
participation in the Medicare and Medicaid programs. Any such sanctions could
have a material adverse effect on the Company's financial position and results
of operations.
During 1997, the Company experienced a significant change in management and
changes in its business strategy. On July 25, 1997, the Company announced the
resignations of Richard L. Scott, Chairman and Chief Executive Officer and
David T. Vandewater, President and Chief Operating Officer. Thomas F. Frist,
Jr., M.D., Vice Chairman of the Company's Board of Directors, was named
Chairman and Chief Executive Officer. On August 4, 1997, the Company named
Jack O. Bovender, Jr. as President and Chief Operating Officer.
On August 7, 1997, in an effort to address some areas of concern that may
have led to the investigations by certain government agencies, management
announced several significant steps that are being implemented to redefine the
Company's approach to a number of business practices. Some of the steps
include: elimination of annual cash incentive compensation for the Company's
employees, divestiture of the home health care business, the unwinding of
physician interests in hospitals, significant expansion of compliance
programs, increased disclosures in Medicare cost reports, changes in
laboratory billing procedures, increased reviews of Medicare coding and
further guidelines on any transactions with physicians. These changes have
been developed and are being implemented with consideration to laws,
regulations and existing contractual agreements. Management is not currently
able to predict what effect such actions might have on the Company's financial
position or results of operations.
On November 17, 1997, the Company announced that its Board of Directors had
approved an internal operating reorganization plan. Effective January 1, 1998,
the Company was organized into five principal groups--Eastern, Western,
Atlantic, Pacific and America.
The Board of Directors also authorized the evaluation of various
restructuring alternatives which could include divestitures of certain assets
to third parties and spin-offs of certain other
2
assets to the Company's stockholders. As part of these alternatives, the
Company is considering restructuring into a smaller, more focused company
located in strategic markets. No restructuring plan has been approved by the
Board of Directors and there can be no assurances that a plan will ultimately
be approved or implemented. Any spin-off or other restructuring alternative
would require Board of Directors approval as well as legal, regulatory and
governmental approvals.
BUSINESS STRATEGY
The Company's strategy is to be a comprehensive provider of quality health
care services in select markets. The Company maintains and replaces equipment,
renovates and constructs replacement facilities and adds new services to
increase the attractiveness of its hospitals and other facilities to local
physicians and patients. By developing a comprehensive health care network
with a broad range of health care services located throughout a market area,
the Company achieves greater visibility and is better able to attract and
serve physicians and patients. The Company is also able to reduce operating
costs by sharing certain services among several facilities in the same market
and is better positioned to work with health maintenance organizations
("HMOs"), preferred provider organizations ("PPOs") and employers.
The Company generally seeks to operate each of its facilities as part of a
network with other health care facilities that it owns or operates within the
same region. In instances where acquisitions of additional facilities in the
area are not possible or practical, the Company may seek joint ventures or
partnership arrangements with other local facilities.
HEALTH CARE FACILITIES
The Company currently owns, manages or operates hospitals, ambulatory
surgery centers, diagnostic centers, cardiac rehabilitation centers, physical
therapy centers, radiation oncology centers, comprehensive outpatient
rehabilitation centers and home health care agencies and programs. The Company
plans to divest its home health business and significant portions of Value
Health, Inc. as a component of the change in business strategy and
restructuring program. See Note 7 of the notes to consolidated financial
statements.
The Company currently operates 318 general, acute care hospitals with 65,184
licensed beds. Most of the Company's general, acute care hospitals provide
medical and surgical services, including inpatient care, intensive and cardiac
care, diagnostic services and emergency services. The general, acute care
hospitals also provide outpatient services such as outpatient surgery,
laboratory, radiology, respiratory therapy, cardiology and physical therapy. A
local advisory board, which usually includes members of the hospital's medical
staff, generally makes recommendations concerning the medical, professional
and ethical practices at each hospital and monitors such practices. However,
the hospital is ultimately responsible for ensuring that these practices
conform to established standards. When the Company acquires a hospital, it
establishes quality assurance programs to support and monitor quality of care
standards and to meet accreditation and regulatory requirements. Patient care
evaluations and other quality of care assessment activities are monitored on a
continuing basis.
Like most hospitals, the Company's hospitals do not engage in extensive
medical research and medical education programs. However, some of the
Company's hospitals have an affiliation with medical schools, including the
clinical rotation of medical students.
The Company currently operates 18 psychiatric hospitals with 1,914 licensed
beds. The Company's psychiatric hospitals provide therapeutic programs
tailored to child psychiatric, adolescent psychiatric, adult psychiatric,
adolescent alcohol or drug abuse and adult alcohol or drug abuse patients. The
hospitals use the "treatment team" concept whereby the admitting
3
physician, team psychologist, social workers, nurses, therapists and
counselors coordinate each phase of therapy. Services provided by this team
include crisis intervention, individual psychotherapy, group and family
therapy, social services, chemical dependency counseling, behavioral
modification and physical therapy. Family aftercare plans are actively
promoted from the time of admission, through hospitalization and after
discharge. An aftercare plan measures each patient's post-program progress and
utilizes one or more self-help groups. Program procedures are designed to
ensure that quality standards are achieved and maintained. Certain of the
Company's general, acute care hospitals also have a limited number of licensed
psychiatric beds.
Other outpatient or related health care services operated by the Company
include ambulatory surgery centers, diagnostic centers, outpatient physical
therapy/rehabilitation centers, outpatient radiation therapy centers, cardiac
rehabilitation centers and skilled nursing services. These outpatient and
related services are an integral component of the Company's strategy to
develop a comprehensive health care network in each of its target markets.
In addition to providing capital resources, the Company makes available a
variety of management services to its health care facilities, most
significantly: ethics and compliance programs; national supply and equipment
purchasing and leasing contracts; accounting, financial and clinical systems;
governmental reimbursement assistance; construction planning and coordination;
information systems; legal; personnel management and internal audit.
SOURCES OF REVENUE
Hospital revenues depend upon inpatient occupancy levels, the ancillary
services and therapy programs ordered by physicians and provided to patients,
the volume of outpatient procedures and the charges or negotiated payment
rates for such services. Charges and reimbursement rates for inpatient routine
services vary significantly depending on the type of service (e.g.,
medical/surgical, 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. This increase is
primarily the result of advances in technology (which allow more services to
be provided on an outpatient basis), acquisitions of additional outpatient
facilities and increased pressures from Medicare, Medicaid, HMOs, PPOs,
employers and insurers to reduce hospital stays and provide services, where
possible, on a less expensive outpatient basis.
The Company receives payment for patient services from the federal
government primarily under the Medicare program, state governments under their
respective Medicaid programs, HMOs, PPOs and other private insurers as well as
directly from patients. The approximate percentages of patient revenues from
continuing operations of the Company's facilities from such sources during the
periods specified below were as follows:
YEARS ENDED DECEMBER 31,
------------------------------
1997 1996 1995
-------- -------- --------
Medicare...................................... 34% 35% 36%
Medicaid...................................... 6 6 6
Other sources................................. 60 59 58
-------- -------- --------
Total......................................... 100% 100% 100%
======== ======== ========
Medicare is a federal program that provides certain hospital and medical
insurance benefits to persons age 65 and over, some disabled persons and
persons with end-stage renal disease. Medicaid is a federal-state program
administered by the states which provides hospital benefits
4
to qualifying individuals who are unable to afford care. Substantially all of
the Company's hospitals are certified as providers of Medicare and Medicaid
services. Amounts received under the Medicare and Medicaid programs are
generally significantly less than the hospital's customary charges for the
services provided.
To attract additional volume, most of the Company's hospitals offer
discounts from established charges to certain large group purchasers of health
care services, including Blue Cross, other private insurance companies,
employers, HMOs, PPOs and other managed care plans. Blue Cross is a private
health care program that funds hospital benefits through independent plans
that vary in each state. These discount programs limit the Company's ability
to increase charges in response to increasing costs. See "Competition."
Patients are generally not responsible for any difference between customary
hospital charges and amounts reimbursed for such services under Medicare,
Medicaid, some Blue Cross plans, HMOs or PPOs, but are responsible to the
extent of any exclusions, deductibles or co-insurance features of their
coverage. The amount of such exclusions, deductibles and co-insurance has
generally been increasing each year. Collection of amounts due from
individuals is typically more difficult than from governmental or business
payers.
Medicare
Under the Medicare program the Company receives reimbursement under a
prospective payment system ("PPS") for the routine and ancillary operating
costs of most Medicare inpatient hospital services. Psychiatric, long-term
care, rehabilitation, specially designated children's hospitals and certain
designated cancer research hospitals, as well as psychiatric or rehabilitation
units that are distinct parts of a hospital and meet Health Care Financing
Administration ("HCFA") criteria for exemption, are currently exempt from PPS
and are reimbursed on a cost based system, subject to certain cost limits. The
Balanced Budget Act of 1997 ("BBA-97") mandates a prospective payment system
for skilled nursing facility services for Medicare cost reporting periods
commencing after June 30, 1998, hospital outpatient services beginning
January 1, 1999, home health services for Medicare cost reporting periods
beginning after September 30, 1999, and inpatient rehabilitation hospital
services for Medicare cost reporting periods beginning after September 30,
2000. Prior to the commencement of the prospective payment systems, payment
constraints will be applied to home health services and inpatient
rehabilitation, psychiatric and long-term hospital services for Medicare cost
reporting periods beginning on or after October 1, 1997.
Under PPS, fixed payment amounts per inpatient discharge were established
based on the patient's assigned diagnosis related group ("DRG"). DRGs classify
patients' treatments for illnesses according to the estimated intensity of
hospital resources necessary to furnish care for each principal diagnosis. DRG
rates have been established for each individual hospital participating in the
Medicare program and are based upon a statistically normal distribution of
severity. When treatments for certain patients fall well outside the normal
distribution (defined as "outliers"), providers are afforded additional
payments. Under PPS, hospitals may retain payments in excess of costs but must
absorb costs in excess of such payments; therefore, hospitals are encouraged
to operate more efficiently.
DRG rates are updated and recalibrated annually and have been affected by
several recent federal enactments. The index used by HCFA to adjust the DRG
rates gives consideration to the inflation experienced by hospitals in
purchasing goods and services ("market basket"). However, for several years
the percentage increases to the DRG rates have been lower than the percentage
increases in the costs of goods and services purchased by hospitals. The
market basket is adjusted each federal fiscal year ("FY"), which begins on
October 1. The market basket for FY 1995 was 3.6%, FY 1996 was 3.5%, FY 1997
was 2.5% and for FY 1998 will be 2.7%.
5
The Omnibus Budget Reconciliation Act of 1993 ("OBRA-93") set the updates to
the DRG rates for FY 1995 as market basket minus 2.5%; FY 1996 as market
basket minus 2%; and FY 1997 as market basket minus 0.5%. The BBA-97
establishes the DRG updates as follows: FY 1998 0%; FY 1999 as market basket
minus 1.9%; FY 2000 as market basket minus 1.8%; FY 2001 and 2002 as market
basket minus 1.1%; and FY 2003 and after as market basket.
The BBA-97 establishes a prospective payment system for all hospital
outpatient services based upon hospital costs (with the exception of physical,
occupational and speech therapies) for services provided after December 31,
1998. These therapy services will be reimbursed based upon a separate fee
schedule. The hospital outpatient payments for 1998 are required to be set at
the same amount as would have been paid under the present system which is the
lesser of 94.2% of reasonable costs, charges, or a blend of fees and costs for
approved ambulatory surgery procedures, diagnostic radiology procedures, and
other diagnostic procedures. The BBA-97 also made a change in the formula for
determining the amount of the fees in the aforementioned blend that
effectively reduces payment amounts.
Subsequent to September 30, 1991 and through FY 1992, capital related pay-
ments for inpatient hospital services were made at the rate of 90% of reason-
able capital costs. The PPS capital costs reimbursement applies an estimated
national average of FY 1989 Medicare capital costs per patient discharge up-
dated to FY 1992 by the estimated increase in Medicare capital costs per dis-
charge (the "Federal Rate"). Capital PPS is applicable to cost reports begin-
ning on or after October 1, 1991. Under capital PPS reimbursement, a 10 year
transition period has been established. A hospital is paid under one of the
following two different payment methodologies during this transition period:
(i) hospitals with a hospital-specific rate (the rate established for a hospi-
tal based on the cost report ending on or before December 31, 1990) below the
Federal Rate would be paid on a fully prospective payment methodology and (ii)
hospitals with a hospital-specific rate above the Federal Rate would be paid
based on a hold-harmless payment methodology or 100% of the Federal Rate,
whichever results in a higher payment. A hospital is generally paid under one
methodology throughout the entire transition, although a hospital can transi-
tion to the full Federal Rate if it exceeds the hold-harmless payment rate.
After the transition period, all hospitals will be paid the Federal Rate.
The impact of PPS capital reimbursement in the first two years was not
material to Medicare capital reimbursement. The hospital-specific rates for FY
1994 decreased 2.16%. The established Federal Rate for FY 1994 was reduced by
9.33% to $378 per patient discharge and for FY 1995 was reduced by 0.4% to
$377 per patient discharge. The hospital-specific rate for FY 1996 increased
21.1% and decreased by 4.32% for FY 1997. The Federal Rate for FY 1996
increased 22.5% to $462 and decreased to $439 for FY 1997 per patient
discharge. These changes were primarily the result of the expiration of a
budget neutrality provision of The Omnibus Budget Reconciliation Act of 1990
that limited payments to 90% of payments estimated to have been made on a
reasonable cost basis during the fiscal year. Legislation passed by Congress
and vetoed by the President would have resulted in a reduction of capital
payment rates for FY 1996. The BBA-97 reduces the hospital-specific rate for
FY 1998 by 14.4% and the Federal Rate for FY 1998 decreases to $371 per
patient discharge.
Home health visits are paid based upon reasonable costs, subject to
aggregated cost per visit limits. For Medicare cost reporting periods
beginning after September 30, 1997, these limits are reduced by the amount of
the update for Medicare cost reporting periods beginning after June 30, 1994
and before July 1, 1996 and are further reduced by calculating the limits to
equal 105% of the median costs of freestanding home health agencies rather
than 112% of such median costs as was the case before October 1, 1997.
Further, aggregate payments are limited to an agency-
specific per-beneficiary cost from the 12 month Medicare cost reporting period
ending after September 30, 1993 and before October 1, 1994, updated for
inflation. The per beneficiary limit will be a blend of 75% of 98% of the
agency-specific amount and 25% of 98% of a standardized regional average.
6
Payments to PPS-exempt hospitals and units, (i.e., inpatient psychiatric,
rehabilitation and long-term hospital services), are based upon reasonable
cost, subject to a cost per discharge target. These limits are updated
annually by a market basket index. For FY 1995, 1996 and 1997, the market
basket was 4.7%, 4.4%, and 3.5% respectively. The update for each year was
market basket minus 1%. The BBA-97 reduces the FY 1998 update to 0%. Capital
payments, which have been 100% of reasonable cost will be reduced by 15% for
FY 1998 through 2002. Furthermore, limits have been established for the cost
per discharge target at the 75th percentile for each category of PPS-exempt
hospitals and hospital units, i.e., psychiatric, rehabilitation and long-term
hospitals. These caps are $10,547, $19,250, and $37,688 per discharge,
respectively, for FY 1998. In addition the cost per discharge for new
hospitals/hospital units cannot exceed 110% of the national median target rate
for hospitals in the same category. For FY 1998 these amounts are $8,517,
$16,738, and $18,947 per discharge for psychiatric, rehabilitation and long-
term hospital services, respectively.
Prospective payments for skilled nursing facilities ("SNFs") will be based
upon per diems, which will be phased in over a four-year period starting with
cost reporting periods beginning after June 30, 1998. In the first year,
payments will be based on 75% of facility-specific rates and 25% federal rate;
year two will be 50% facility-specific rates and 50% federal rate; year three
will be 25% facility-specific rates and 75% federal rate; and year four 100%
federal rate. The facility-specific and federal rates will be updated
annually. For 1999, the facility-specific rate will be updated by the SNF
market basket minus 1% and thereafter by the SNF market basket. For 1999
through 2002 the federal rate will be updated by the SNF market basket minus
1%.
The BBA-97 reduced Medicare payment for enrollees' bad debts resulting from
non-payment of deductibles and coinsurance by 25% in FY 1998, 40% in FY 1999
and 45% in FY 2000 and after.
The BBA-97 also mandates a change in payment for certain hospital discharges
to post acute care providers. Beginning October 1, 1998, the Secretary of
Health and Human Services is required to identify 10 high-volume DRGs that
utilize a disproportionate amount of post discharge services to SNFs, PPS-
exempt hospitals and units, and home health agencies. Payments to a hospital
for these 10 DRGs, if the patient is discharged to one of the aforementioned
post acute services, will be a per-diem not to exceed the DRG payment (the so-
called transfer payment rate).
The changes in Medicare payments as a result of the BBA-97 may have a
material effect on the Company's results of operation.
Medicaid
Most state Medicaid payments are made under a prospective payment system or
under programs which negotiate payment levels with individual hospitals.
Medicaid reimbursement is often less than a hospital's cost of services.
Medicaid is currently funded approximately 50% by the states and approximately
50% by the federal government. The federal government and many states are
currently considering significant reductions in the level of Medicaid funding
while at the same time expanding Medicaid benefits, which could adversely
affect future levels of Medicaid reimbursement received by the Company's
hospitals.
On November 27, 1991, Congress enacted the Medicaid Voluntary Contribution
and Provider-Specific Tax Amendments of 1991 (the "Medicaid Amendments"),
which limit the amount of voluntary contributions and provider-specific taxes
that can be used by states to fund Medicaid and require the use of broad-based
taxes for such funding. As a result of enactment of the Medicaid Amendments,
certain states in which the Company operates have adopted broad-based provider
taxes to fund their Medicaid programs. To date, the impact upon the Company of
these new taxes has not been materially adverse. However, the Company is
unable to predict whether any additional broad-based provider taxes will be
adopted by the states in which it operates and, accordingly, is unable to
assess the effect thereof on its results of operations or financial position.
7
Annual Cost Reports
Review of previously submitted annual cost reports and the cost report
preparation process are areas included in the ongoing government
investigations. It is too early to predict the outcome of these
investigations, but if the Company were found to be in violation of federal or
state laws relating to Medicare, Medicaid or similar programs, the Company
could be subject to substantial monetary fines, civil and criminal penalties
and exclusion from participation in the Medicare and Medicaid programs. Any
such sanctions could have a material adverse effect on the Company's financial
position and results of operations.
The Company's annual cost reports which are required under the Medicare and
Medicaid programs are subject to routine audits, which may result in
adjustments to the amounts ultimately determined to be due the Company under
these reimbursement programs. These audits often require several years to
reach the final determination of amounts earned under the programs. Providers
also have rights of appeal, and the Company is currently contesting certain
issues raised in audits of prior years' reports. Management believes that
adequate provision has been made in its financial statements for any material
retroactive adjustments that might result from such audits and that final
resolution of the contested issues will not have a material adverse effect
upon the Company's results of operations or financial position.
Managed Care
Pressures to control the cost of health care have resulted in increases to
the percentage of admissions and net revenues attributable to managed care
payers. The percentage of the Company's admissions attributable to managed
care payers increased from 31.9% in 1996 to 35.2% in 1997 and the percentage
of the Company's net revenue from continuing operations attributable to
managed care payers increased from 25.2% in 1996 to 28.4% in 1997. The Company
expects that the trend of increasing percentages related to managed care
payers will continue in the future. The Company generally receives lower
payments from managed care payers than from traditional commercial/indemnity
insurers.
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 hospitals based upon
the particular hospital's established charges and the particular coverage
provided in the insurance policy. Blue Cross is a health care financing
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.
Commercial insurers are continuing efforts to limit the costs of hospital
services by adopting prospective payment or DRG based payment systems for more
inpatient and outpatient services. To the extent such efforts are successful
and reduce the insurers' reimbursements to hospitals for the costs of
providing services to their beneficiaries, such efforts may have a negative
impact on the operating results of the Company's hospitals.
HOSPITAL UTILIZATION
The Company believes that the two most important factors relating to the
overall utilization of a hospital are the quality and market position of the
hospital and the number and quality of physicians providing patient care
within the facility. Generally, the Company believes that the ability of a
hospital to be a market leader is determined by its breadth of services, level
of technology, emphasis on quality of care and convenience for patients and
physicians. Other factors
8
which impact utilization include the growth in local population, local
economic conditions and market penetration of managed care programs.
The following table sets forth certain operating statistics for hospitals
owned by the Company for each of the most recent five years. Medical/surgical
hospital operations are subject to certain seasonal fluctuations, including
decreases in patient utilization during holiday periods and increases in the
cold weather months. Psychiatric hospital operations are also subject to
certain seasonal fluctuations, including decreases in patient occupancy during
the summer months and holiday periods.
YEARS ENDED DECEMBER 31,
-----------------------------------------------------
1997(g) 1996(g) 1995(g) 1994 1993
--------- --------- --------- --------- ---------
Number of hospitals (a). 309 319 319 311 274
Weighted average
licensed beds (b)...... 61,096 62,708 61,617 57,517 53,247
Admissions (c).......... 1,915,100 1,895,400 1,774,800 1,565,500 1,451,000
Average length of stay
(days) (d)............. 5.0 5.1 5.3 5.6 5.8
Average daily census
(e).................... 26,006 26,583 25,917 23,841 22,973
Occupancy rate (f)...... 43% 42% 42% 41% 43%
- --------
(a) End of period.
(b) Represents the average number of licensed beds weighted based on periods
owned. Licensed beds are those beds for which a facility has been granted
approval to operate from the applicable state licensing agency.
(c) Represents the total number of patients admitted (in the facility for a
period in excess of 23 hours) to the Company's hospitals.
(d) Represents the average number of days admitted patients stay in the
Company's hospitals.
(e) Represents the average number of patients in the Company's hospital beds
each day.
(f) Represents the percentage of hospital licensed beds occupied by patients.
(g) Excludes 27 facilities in 1997, 22 facilities in 1996 and 19 facilities in
1995 that are not consolidated (accounted for using the equity method) for
financial reporting purposes.
Hospitals have experienced significant shifts from inpatient to outpatient
care as well as decreases in average lengths of inpatient stay, primarily as a
result of hospital payment changes by Medicare, insurance carriers, managed
care programs and self-insured employers. These changes generally encouraged
the utilization of outpatient, rather than inpatient, services whenever
possible, and shortened lengths of stay for inpatient care. Another factor
affecting hospital utilization levels is improved treatment protocols as a
result of medical technology and pharmacological advances.
COMPETITION
Generally, other hospitals in the local markets served by most of the
Company's hospitals provide services that are offered by the Company's
hospitals. Additionally, in the past several years, the number of freestanding
outpatient surgery and diagnostic centers in the geographic areas in which the
Company operates has increased significantly. As a result, most of the
Company's hospitals operate in an increasingly competitive environment. The
rates charged by the Company's hospitals are intended to be competitive with
those charged by other local hospitals for similar services. In some cases,
competing hospitals are more established than the Company's hospitals. Some
competing hospitals are owned by tax-supported government agencies and many
others by tax-exempt entities which may be supported by endowments and
charitable contributions and are exempt from sales, property and income taxes.
Such exemptions and support are not available to the Company's hospitals. In
addition, in certain localities served by the Company, there are large
teaching hospitals which provide highly specialized facilities,
9
equipment and services which may not be available at most of the Company's
hospitals. Psychiatric hospitals frequently attract patients from areas
outside their immediate locale and, therefore, the Company's psychiatric
hospitals compete with both local and regional hospitals, including the
psychiatric units of general, acute care hospitals.
The Company believes that its hospitals compete within local markets on the
basis of many factors, including the quality of care, ability to attract and
retain quality physicians, location, breadth of services, technology offered
and prices charged. The competition among hospitals and other health care
providers has intensified in recent years as hospital occupancy rates have
declined. The Company's strategies are designed, and management believes that
its hospitals are positioned, to be competitive under these changing
circumstances.
One of the most significant factors in the competitive position of a
hospital is the number and quality of physicians affiliated with the hospital.
Although physicians may at any time terminate their affiliation with a
hospital operated by the Company, the Company's hospitals seek to retain
physicians of varied specialties on the hospitals' medical staffs and to
attract other qualified physicians. The Company believes that physicians refer
patients to a hospital primarily on the basis of the quality of services it
renders to patients and physicians, the quality of other physicians on the
medical staff, the location of the hospital and the quality of the hospital's
facilities, equipment and employees. Accordingly, the Company strives to
maintain high ethical and professional standards and quality facilities,
equipment, employees and services for physicians and their patients.
Another major factor in the competitive position of a hospital is
management's ability to negotiate service contracts with purchasers of group
health care services. HMOs and PPOs attempt to direct and control the use of
hospital services through managed care programs and to obtain discounts from
hospitals' established charges. 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. Generally, hospitals compete for service contracts with group health
care service purchasers on the basis of price, market reputation, geographic
location, quality and range of services, quality of the medical staff and
convenience. The importance of obtaining contracts with managed care
organizations varies from market to market depending on the market strength of
such organizations.
State certificate of need ("CON") laws, which place limitations on a
hospital's ability to expand hospital services and add new equipment, may also
have the effect of restricting competition. The application process for
approval of covered services, facilities, changes in operations and capital
expenditures is, therefore, highly competitive. In those states which have no
CON laws or which set relatively high levels of expenditures before they
become reviewable by state authorities, competition in the form of new
services, facilities and capital spending is more prevalent. The Company has
not experienced, and does not expect to experience, any material adverse
effects from state CON requirements or from the imposition, elimination or
relaxation of such requirements. See "Regulation and Other Factors."
The Company, and the health care industry as a whole, face the challenge of
continuing to provide quality patient care while dealing with rising costs,
strong competition for patients and a general reduction of reimbursement rates
by both private and government payers. As both private and government payers
reduce the scope of what may be reimbursed and reduce reimbursement levels for
what is covered, federal and state efforts to reform the United States health
care system may further impact reimbursement rates. Changes in medical
technology, existing and future legislation, regulations and interpretations
and competitive contracting for provider services by private and government
payers may require changes in the Company's facilities, equipment, personnel,
rates and/or services in the future.
10
The hospital industry and the Company's hospitals continue to have
significant unused capacity and substantial competition for patients.
Inpatient utilization, average lengths of stay and average occupancy rates
continue to be negatively affected by payer-required pre-admission
authorization, utilization review and by payer pressure to maximize outpatient
and alternative health care delivery services for less acutely ill patients.
Increased competition, admissions constraints and payer pressures are expected
to continue. To meet these challenges, the Company expands many of its
facilities to include outpatient centers, offers discounts to private payer
groups, enters into capitation contracts in some service areas, upgrades
facilities and equipment and offers new programs and services.
REGULATION AND OTHER FACTORS
Licensure, Certification and Accreditation
Health care facility construction and operation is subject to federal, state
and local regulations 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. Substantially
all of the Company's general, acute care hospitals are certified under the
Medicare program or are accredited by the Joint Commission on Accreditation of
Healthcare Organizations ("Joint Commission"), the effect of which is to
permit the facilities to participate in the Medicare and Medicaid programs.
Certain of the Company's psychiatric hospitals do not participate in these
programs. Should any facility lose its Joint Commission accreditation, or
otherwise lose its certification under the Medicare program, the facility
would be unable to receive reimbursement from the Medicare and 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.
Certificates of Need
The construction of new facilities, the acquisition of existing facilities,
and the addition of new beds or services may be subject to review by state
regulatory agencies under a CON program. The Company operates hospitals in
some states that require approval under a CON program. Such laws generally
require appropriate state agency determination of public need and approval
prior to the addition of beds or services or certain other capital
expenditures. Failure to obtain necessary state approval can result in the
inability to expand facilities, complete an acquisition or change ownership.
Further, violation may result in the imposition of civil or, in some cases,
criminal sanctions, the denial of Medicare or Medicaid reimbursement or the
revocation of a facility's license.
State Rate Review
Some states in which the Company owns hospitals have adopted legislation
mandating rate or budget review for hospitals or have adopted taxes on
hospital revenues, assessments or licensure fees to fund indigent health care
within the state.
In Florida, a budget review process and limitations on net revenue increases
per admission have been in effect with respect to the Company's hospitals
since January 1, 1986. The increase in hospital net revenues per admission is
limited to an annually-determined percentage increase in costs that Florida
hospitals pay for goods and services plus a statutory 2%, plus additional
amounts which recognize the effect of patient days related to Medicare,
Medicaid and
11
uncompensated charity care. This law limits the ability of Florida hospitals
to increase rates to maintain operating margins. The Company operated 52
hospitals aggregating 12,105 beds in Florida as of December 31, 1997.
In the aggregate, state rate or budget review and indigent tax provisions
have not materially adversely affected the Company's results of operations.
The Company is unable to predict whether any additional state rate or budget
review or indigent tax provisions will be adopted and, accordingly, is unable
to assess the effect thereof on its results of operations or financial
condition.
Utilization Review
Federal law contains numerous provisions designed to ensure that services
rendered by hospitals to Medicare and Medicaid patients meet professionally
recognized standards, are medically necessary and that claims for
reimbursement are properly filed. These provisions include a requirement that
a sampling of admissions of Medicare and Medicaid patients must be reviewed by
peer review organizations ("PROs"), which review the appropriateness of
Medicare and Medicaid patient admissions and discharges, the quality of care
provided, the validity of DRG classifications and the appropriateness of cases
of extraordinary length of stay or cost. PROs may deny payment for services
provided, may assess fines and also have the authority to recommend to the
Department of Health and Human Services ("HHS") that a provider which is in
substantial noncompliance with the standards of the PRO be excluded from
participating in the Medicare program. Utilization review is also a
requirement of most non-governmental managed care organizations.
Medicare Regulations and Fraud and Abuse
Participation in the Medicare program is heavily regulated by federal
statute and regulation. If a hospital provider fails substantially to comply
with the numerous conditions of participation in the Medicare program or
performs certain prohibited acts (e.g., (i) making false claims to Medicare
for services not rendered or misrepresenting actual services rendered in order
to obtain higher reimbursement; (ii) paying remuneration for Medicare
referrals (so called "fraud and abuse" which is prohibited by the "anti-
kickback" provisions of the Social Security Act); (iii) failing to stabilize
all individuals who come to its emergency room who have an "emergency medical
condition," whether or not any such individual is eligible for Medicare; (iv)
transferring any stabilized patient to another health care facility before
such other facility has agreed to the transfer of such patient, while such
other facility does not have sufficient room and staff to treat the patient,
without the patient's emergency department medical records, or without
appropriate life support equipment; and (v) transferring any unstabilized
patient (except those transferred at the patient's request or with physician
certification that the medical risks from the transfer are less harmful than
continued treatment at the transferring facility), such hospital's
participation in the Medicare program may be terminated or civil or criminal
penalties may be imposed upon such hospital under certain provisions of the
Social Security Act.
Moreover, HHS and the courts have interpreted the "fraud and abuse" anti-
kickback provisions of the Social Security Act (presently codified in Section
1128B(b) of the Social Security Act, hereinafter the "Antifraud Amendments")
broadly to include the intentional offer, payment, solicitation or receipt of
anything of value if one purpose of the payment is to induce the referral of
Medicare business. Health care providers generally are concerned that many
relatively innocuous, or even beneficial, commercial arrangements with their
physicians may technically violate this strict interpretation of the Antifraud
Amendments.
In 1976 Congress established the Office of Inspector General ("OIG") at HHS
to identify and eliminate fraud, abuse and waste in HHS programs and to
promote efficiency and economy in HHS departmental operations. The OIG carries
out this mission through a nationwide program
12
of audits, investigations and inspections. In order to provide guidance to
health care providers on ways to engage in legitimate business practices and
avoid scrutiny under the fraud and abuse statutes, the OIG has from time to
time issued "fraud alerts" identifying features of transactions, which, if
present, may indicate that the transaction violates the fraud and abuse law.
In May 1992, the OIG issued a special fraud alert regarding hospital
incentives to physicians. The alert identified the following incentive
arrangements as potential violations of the statute: (a) payment of any sort
of incentive by the hospital each time a physician refers a patient to the
hospital, (b) the use of free or significantly discounted office space or
equipment (in facilities usually located close to the hospital), (c) provision
of free or significantly discounted billing, nursing or other staff services,
(d) free training for a physician's office staff in areas such as management
techniques and laboratory techniques, (e) guarantees which provide that, if
the physician's income fails to reach a predetermined level, the hospital will
supplement the remainder up to a certain amount, (f) low-interest or interest-
free loans, or loans which may be forgiven if a physician refers patients (or
some number of patients) to the hospital, (g) payment of the costs of a
physician's travel and expenses for conferences, (h) coverage on the
hospital's group health insurance plans at an inappropriately low cost to the
physician and (i) payment for services (which may include consultations at the
hospital) which require few, if any, substantive duties by the physician, or
payment for services in excess of the fair market value of services rendered.
In this fraud alert the OIG encouraged persons having information about
hospitals who offer the above types of incentives to physicians to report such
information to the OIG.
In addition, on July 29, 1991, the OIG issued final regulations outlining
certain "safe harbor" practices, which, although potentially capable of
inducing prohibited referrals of business under Medicare or state health
programs, would not be subject to enforcement action under the Social Security
Act. The practices covered by the regulations include certain physician joint
venture transactions, rental of space and equipment, personal services and
management contracts, sales of physician practices, referral services,
warranties, discounts, payments to employees, group purchasing organizations
and waivers of beneficiary deductibles and co-payments. Certain of the
Company's current arrangements with physicians, including joint ventures, do
not qualify for the current safe harbor exemptions and, as a result, such
arrangements risk scrutiny by the OIG and may be subject to enforcement
action. The failure of these arrangements to satisfy all of the conditions of
the applicable safe harbor criteria does not mean that the arrangements are
illegal. Nevertheless, certain of the Company's current financial arrangements
with physicians, including joint ventures, and the Company's future financial
arrangements with physicians, could be adversely affected by the failure of
such arrangements to comply with the safe harbor regulations, or the future
adoption of other legislation or regulation in these areas.
Section 1877 of the Social Security Act (commonly known as "Stark I")
prohibits referrals of Medicare and Medicaid patients to clinical laboratories
with which a referring physician has a financial relationship. OBRA-93
included certain amendments to Section 1877 (such amendments commonly known as
"Stark II") which substantially broadened the scope of prohibited physician
self-referrals to include referrals by physicians to entities with which the
physician has a financial relationship and which provide certain "designated
health services" which are reimbursable by Medicare or Medicaid. "Designated
health services" include not only the clinical laboratory services which were
the only such services covered by Stark I, but also, among other things,
physical and occupational therapy services, radiology services, durable
medical equipment, home health, and inpatient and outpatient hospital
services. Sanctions for violating Stark I or II include civil money penalties
up to $15,000 per prohibited service provided, assessments equal to 200% of
the dollar value of each such service provided and exclusion from the Medicare
and Medicaid programs. Stark II contains certain exceptions to the self-
referral prohibition, including an exception if the physician has an ownership
interest in the entire hospital. Stark II became effective January 1, 1995 and
proposed regulations implementing the new provisions were
13
published on January 9, 1998. The Company cannot predict the final form that
such regulations will take or the effect that Stark II or the regulations
promulgated thereunder will have on the Company.
Many states in which the Company operates also have laws that prohibit
payments to physicians for patient referrals with statutory language similar
to the Antifraud Amendments, but with broader effect since they apply
regardless of the source of payment for care. These statutes typically provide
criminal and civil penalties as well as loss of licensure. Many states also
have passed legislation similar to Stark II, but with broader effect, since
the legislation applies regardless of the source of payment for care. The
scope of these state laws is broad, and little precedent exists for their
interpretation or enforcement.
On August 21, 1996, President Clinton signed significant new federal health
reform legislation known as the Health Insurance Portability and
Accountability Act of 1996 ("HIPAA"). Most important for health care
providers, the new law includes comprehensive and far-reaching amendments or
supplements to the Antifraud Amendments. It also contains substantive
provisions relating to portability of health insurance coverage and
limitations on preexisting condition exclusions. Under HIPAA, health care
fraud, now defined as knowingly and willfully executing or attempting to
execute a "scheme or device" to defraud any health care benefit program, is
made a federal criminal offense. In addition, for the first time, federal
enforcement officials will have the ability to exclude from Medicare and
Medicaid any investors, officers and managing employees associated with
business entities that have committed health care fraud, even if the investor,
officer or employee had no knowledge of the fraud. HIPAA also establishes a
new violation for the payment of inducements to Medicare or Medicaid
beneficiaries in order to influence those beneficiaries to order or receive
services from a particular provider or practitioner. Most of the provisions of
HIPAA became effective January 1, 1997.
HIPAA was followed by BBA-97 which was enacted by Congress on August 5,
1997. BBA-97 contains a significant number of new fraud and abuse provisions.
Civil monetary penalties ("CMP") may now be imposed for violations of the
anti-kickback provisions of the Medicare and Medicaid statute (previously,
exclusion or criminal prosecution were the only actions under the anti-
kickback statute) as well as contracting with an individual or entity that the
provider knows or should know is excluded from a federal health care program.
BBA-97 provides for a CMP of $50,000 and damages of not more than three times
the amount of remuneration in the prohibited activity. In addition, BBA-97
also has important discharge planning and reimbursement provisions as well as
surety bond requirements for home health agencies.
The Social Security Act also imposes criminal and civil penalties for making
false claims to Medicare and Medicaid for services not rendered or for
misrepresenting actual services rendered in order to obtain higher
reimbursement. Like the Antifraud Amendments, this statute is very broad.
Careful and accurate coding of claims for reimbursement must be performed to
avoid liability under the false claims statutes.
The Company is currently the subject of government investigations into the
Company's business practices in several states. See Item 3--"Legal
Proceedings."
Certain of the Company's current financial arrangements with physicians,
including joint ventures, and the Company's future development of joint
ventures and other financial arrangements with physicians, could be adversely
affected by the failure of such arrangements to comply with the Antifraud
Amendments, Section 1877, current state laws or other legislation or
regulation in these areas adopted in the future. The Company is unable to
predict the effect of such regulations, whether other legislation or
regulations at the federal or state level in any of
14
these areas will be adopted, what form such legislation or regulations may
take or their impact on the Company. The Company is continuing to enter into
new financial arrangements with physicians and other providers in a manner
structured to comply in all material respects with these laws. There can be no
assurance, however, that (i) governmental officials charged with the
responsibility for enforcing these laws will not assert that the Company is in
violation thereof or (ii) such statutes will ultimately be interpreted by the
courts in a manner consistent with the Company's interpretation.
The federal Medicaid regulations also prohibit fraudulent and abusive
practices and authorize the exclusion from such program of providers in
violation of such regulations.
State Legislation
Some of the states in which the Company operates have laws that prohibit
corporations and other entities from employing physicians and practicing
medicine for a profit or that prohibit certain direct and indirect payments or
fee-splitting arrangements between health care providers that are designed to
induce or encourage the referral of patients to, or the recommendation of,
particular providers for medical products and services. In addition, some
states restrict certain business relationships between physicians and
pharmacies. Possible sanctions for violation of these restrictions include
loss of licensure and civil and criminal penalties. These statutes vary from
state to state, are often vague and have seldom been interpreted by the courts
or regulatory agencies. Although the Company exercises care in an effort to
structure its arrangements with health care providers to comply with the
relevant state statutes, and although management believes that the Company is
in compliance with these laws, there can be no assurance that (i) governmental
officials charged with responsibility for enforcing these laws will not assert
that the Company or certain transactions in which it is involved are in
violation of such laws and (ii) such state laws will ultimately be interpreted
by the courts in a manner consistent with the practices of the Company.
Health Care Reform
Health care, as one of the largest industries in the United States,
continues to attract much legislative interest and public attention. In recent
years, an increasing number of legislative proposals have been introduced or
proposed in Congress and in some state legislatures that would effect major
changes in the health care system, either nationally or at the state level.
Among the proposals under consideration are cost controls on hospitals,
insurance market reforms to increase the availability of group health
insurance to small businesses, requirements that all businesses offer health
insurance coverage to their employees and the creation of a single government
health insurance plan that would cover all citizens. The costs of certain
proposals would be funded in significant part by reductions in payments by
governmental programs, including Medicare and Medicaid, to health care
providers such as hospitals. There can be no assurance that future health care
legislation or other changes in the administration or interpretation of
governmental health care programs will not have a material adverse effect on
the Company's business, financial condition or results of operations.
Conversion Legislation
Many states have enacted or are considering enacting laws affecting the
conversion or sale of not-for-profit hospitals. These laws, in general,
include provisions relating to attorney general approval, advance notification
and community involvement. In addition, state attorneys general in states
without specific conversion legislation may exercise authority over these
transactions based upon existing law. In many states there has been an
increased interest in the oversight of
15
not-for-profit conversions. The adoption of conversion legislation and the
increased review of not-for-profit hospital conversions may limit the
Company's ability to grow through acquisitions of not-for-profit hospitals.
Revenue Ruling 98-15
During March 1998, the IRS issued guidance regarding the tax consequences of
joint ventures between for-profit and not-for-profit hospitals. The Company
has not determined the impact of the tax ruling on its existing joint
ventures, or the development of future ventures, and is consulting with its
joint venture partners and tax advisers to develop an appropriate course of
action. The tax ruling could limit joint venture development with not-for-
profit hospitals, require the restructuring of certain existing joint ventures
with not-for-profits and influence the exercise of "put agreements" (that
require the Company to purchase the partner's interest in the joint venture)
by certain existing joint venture partners.
15(a)
ENVIRONMENTAL MATTERS
The Company is subject to various federal, state and local statutes and
ordinances regulating the discharge of materials into the environment.
Management does not believe that the Company will be required to expend any
material amounts in order to comply with these laws and regulations or that
compliance will materially affect its capital expenditures, earnings or
competitive position.
INSURANCE
As is typical in the health care industry, the Company is subject to claims
and legal actions by patients in the ordinary course of business. Through a
wholly-owned insurance subsidiary, the Company insures a substantial portion
of its general and professional liability risks. The Company's health care
facilities are insured by the insurance subsidiary for losses of up to $25
million per occurrence, a portion of which is reinsured with unrelated
commercial carriers. The Company also maintains general and professional
liability insurance with unrelated commercial carriers for losses in excess of
amounts insured by its insurance subsidiary.
The Company and its insurance subsidiary maintain allowances for loss for
professional and general liability risks which totalled $1.3 billion at
December 31, 1997. Management considers such allowances, which are based on
actuarially determined estimates, to be adequate for such liability risks. Any
losses incurred in excess of the established allowances for loss will be
reflected as a charge to earnings of the Company. Any losses incurred in
excess of amounts funded and maintained with commercial excess liability
insurance carriers will be funded from the Company's working capital. While
the Company's cash flow has been adequate to provide for professional and
general liability claims in the past, there can be no assurance that such
amounts will continue to be adequate. If payments for general and professional
liabilities exceed anticipated losses, the results of operations and financial
condition of the Company could be adversely affected.
EMPLOYEES AND MEDICAL STAFFS
At December 31, 1997, the Company had approximately 295,000 employees,
including approximately 65,000 part-time employees. Employees at 14 hospitals
are represented by various labor unions. The Company considers its employee
relations to be satisfactory. While the Company's hospitals experience union
organizational activity from time to time, the Company does not expect such
efforts to materially affect its future operations. The Company's hospitals,
like most hospitals, have experienced labor costs rising faster than the
general inflation rate. In recent years, the Company generally has not
experienced material difficulty in recruiting and retaining employees,
including nurses and professional staff members, primarily as a result of
staff retention programs and general economic conditions. There can be no
assurance as to future availability and cost of qualified medical personnel.
References herein to "employees" refer to employees of affiliates of the
Company.
The Company's hospitals are staffed by licensed physicians who have been
admitted to the medical staff of individual hospitals. With certain
exceptions, physicians generally are not employees of the Company's hospitals.
However, some physicians provide services in the Company's hospitals under
contracts, which generally describe a term of service, provide and establish
the duties and obligations of such physicians, require the maintenance of
certain performance criteria and fix compensation for such services. Any
licensed physician may apply to be admitted to the medical staff of any of the
Company's hospitals, but admission to the staff must be approved by the
hospital's medical staff and the appropriate governing board of the hospital
in accordance with established credentialling criteria. Members of the medical
staffs of the Company's hospitals often also serve on the medical staffs of
other hospitals, and may terminate their affiliation with a hospital at any
time.
16
EXECUTIVE OFFICERS OF THE REGISTRANT
The executive officers of the Company as of March 16, 1998, were as follows:
NAME AGE POSITION(S)
---- --- -----------
Chairman of the Board and Chief Executive
Thomas F. Frist, Jr., M.D.. 59 Officer
Jack O. Bovender, Jr....... 52 President and Chief Operating Officer
David G. Anderson.......... 50 Vice President--Finance and Treasurer
Richard M. Bracken......... 45 President--Western Group
Victor L. Campbell......... 51 Senior Vice President
Kenneth C. Donahey......... 47 Senior Vice President and Controller
W. Leon Drennan............ 42 President--Physician Services
Rosalyn S. Elton........... 36 Vice President--Financial Planning
James A. Fitzgerald, Jr.... 43 Vice President--Operations Support
James M. Fleetwood, Jr..... 50 President--America Group
V. Carl George............. 54 Vice President--Development
Jay F. Grinney............. 47 President--Eastern Group
Neil D. Hemphill........... 44 Senior Vice President--Human Resources
Senior Vice President--Quality and Medical
Frank M. Houser, M.D....... 57 Director
Daniel J. Moen............. 46 President--Columbia Sponsored Networks
A. Bruce Moore, Jr......... 38 Vice President--Operations Administration
Senior Vice President--Columbia Sponsored
Richard A. Schweinhart..... 48 Networks
James D. Shelton........... 44 President--Pacific Group
Joseph N. Steakley......... 43 Vice President--Audit and Consulting Services
Robert A. Waterman......... 44 Senior Vice President and General Counsel
David R. White............. 50 President--Atlantic Group
Noel Brown Williams........ 43 Senior Vice President and Chief Information
Officer
Alan R. Yuspeh............. 48 Senior Vice President--Ethics, Compliance and
Corporate Responsibility
Thomas F. Frist, Jr., M.D. has served as Chairman of the Board and Chief
Executive Officer since July 1997. Previously, he served as Vice Chairman of
the Board of the Company since April 1995. From February 1994 to April 1995,
he was Chairman of the Board of the Company. Dr. Frist was Chairman of the
Board, President and Chief Executive Officer of HCA-Hospital Corporation of
America ("HCA") from 1988 to February 1994. Dr. Frist was previously Chairman
and Chief Executive Officer of Hospital Corporation of America from August
1985 until September 1987.
Jack O. Bovender, Jr. has served as President and Chief Operating Officer of
the Company since August 1997. From April 1994 to August 1997, he was retired
after serving as Chief Operating Officer of HCA from 1992 until 1994. Prior to
1992, Mr. Bovender held several senior level positions with HCA.
David G. Anderson has served as Vice President--Finance of the Company since
September 1993 and was elected to the additional position of Treasurer in
November 1996. From March 1993 until September 1993, Mr. Anderson served as
Vice President Finance and Treasurer of Galen Health Care, Inc. From July 1988
to March 1993, Mr. Anderson served as Vice President Finance and Treasurer of
Humana Inc.
Richard M. Bracken has served as President--Western Group of the Company
since August 1997. From January 1995 to August 1997, Mr. Bracken served as
President of the Pacific Division of the Company. From July 1993 to December
1994, he served as President of Nashville Healthcare Network, Inc. From
December 1981 to June 1993, he served in various hospital Chief Executive
Officer and Administrator positions with HCA.
17
Victor L. Campbell has served as Senior Vice President of the Company since
February 1994. Prior to that time, Mr. Campbell served as HCA's Vice President
for Investor, Corporate, and Government Relations. Mr. Campbell joined HCA in
1972. Mr. Campbell is currently a director of the Federation of American
Health Systems and the American Hospital Association.
Kenneth C. Donahey has served as Senior Vice President and Controller of the
Company since April 1995. Prior to that time, Mr. Donahey served as Senior
Vice President and Controller of Healthtrust from April 1993 to April 1995.
Mr. Donahey served as Vice President and Controller of Healthtrust from 1987
to 1993.
W. Leon Drennan has served as President--Physician Services for the Company
since January 1998. Mr. Drennan served as Senior Vice President--Internal
Audit of the Company from February 1995 to December 1997. From February 1994
to January 1995, Mr. Drennan served as Vice President--Internal Audit of the
Company. Mr. Drennan served as Vice President--Internal Audit for HCA from
1987 until 1994.
Rosalyn S. Elton has served as Vice President--Financial Planning of the
Company since August 1993. From October 1990 to August 1993, Ms. Elton served
as Vice President--Financial Planning and Treasury.
James A. Fitzgerald, Jr. has served as Vice President--Operations Support of
the Company since 1994. From 1993 to 1994, he served as the Assistant Vice
President of Operations Support. From July 1981 to 1993, Mr. Fitzgerald served
as Director of Internal Audit for HCA.
James M. Fleetwood, Jr. has served as President--America Group of the
Company since January 1, 1998. Mr. Fleetwood served as President--Florida
Group of the Company from May 1996 to January 1998. Mr. Fleetwood served as
President of the Company's North Florida Division from April 1995 to May 1996.
From August 1992 to April 1995, Mr. Fleetwood was a Regional Vice President of
Healthtrust. Mr. Fleetwood served as the Administrator and Chief Executive
Officer of Plantation General Hospital in Plantation, Florida from July 1989
to August 1992.
V. Carl George has served as Vice President --Development of the Company
since April 1995. From August 1987 to April 1995, Mr. George served as
Director of Development for Healthtrust.
Jay F. Grinney has served as President--Eastern Group of the Company since
May 1996. From October 1993 to May 1996, Mr. Grinney served as President of
the Greater Houston Division of the Company. From November 1992 to October
1993, Mr. Grinney served as Chief Operating Officer of the Houston Region of
the Company. From June 1990 to November 1992, Mr. Grinney served as President
and Chief Executive Officer of Rosewood Medical Center in Houston, Texas.
Neil D. Hemphill has served as Senior Vice President--Human Resources of the
Company since February 1994. Mr. Hemphill served as Vice President--Human
Resources of the Company from June 1992 to February 1994. Mr. Hemphill was a
Director of Human Resources of Republic Health Corporation from January 1985
to June 1992.
Frank M. Houser, M.D. has served as Senior Vice President --Quality and
Medical Director of the Company since November 1997. Dr. Houser served as
President--Physician Management Services of the Company from May 1996 to
November 1997. Dr. Houser served as President of the Georgia Division of the
Company from December 1994 to May 1996. From May 1993 to December 1994, Dr.
Houser served as the Medical Director of External Operations at The Emory
Clinic, Inc. in Atlanta, Georgia. Dr. Houser served as State Public Health
Director, Georgia Department of Human Resources, from July 1991 to May 1993.
18
Daniel J. Moen has served as President--Columbia Sponsored Networks since
March 1996, and served as President of the Company's Florida Group from
February 1994 until March 1996. Mr. Moen was President of the Company's South
Florida Division from October 1991 until February 1994.
A. Bruce Moore, Jr. has served as Vice President--Operations Administration
of the Company since September 1997. From October 1996 to September 1997
Mr. Moore served as Vice President--Benefits of the Company. Mr. Moore served
as Vice President of Compensation of the Company from March 1995 until October
1996. From February 1994 to March 1995, Mr. Moore served as Director--
Compensation of the Company. Mr. Moore also served as Director--Compensation
for HCA from November 1987 until February 1994.
Richard A. Schweinhart has served as Senior Vice President--Columbia
Sponsored Networks of the Company since March 1996. From April 1995 until
March 1996, Mr. Schweinhart served as Senior Vice President--Nonhospital
Operations, and from September 1993 until April 1995 as Senior Vice
President--Finance of the Company. Mr. Schweinhart served as Senior Vice
President--Finance for both Galen and Humana from November 1991 to September
1993.
James D. Shelton has served as President--Pacific Group since January 1,
1998. Mr. Shelton served as President--Central Group of the Company from June
1994 until January 1998. From May 1993 to June 1994, Mr. Shelton was employed
by National Medical Enterprises, Inc. ("NME") (presently called Tenet
Healthcare Corporation) as Executive Vice President of the Central Division.
Mr. Shelton served as Senior Vice President of Operations for NME from August
1986 until May 1993.
Joseph N. Steakley has served as Vice President--Audit and Consulting
Services since November 1997. From December 1975 until October 1997, Mr.
Steakley worked for Ernst & Young LLP where he served as a partner from
October 1989.
Robert A. Waterman has served as Senior Vice President and General Counsel
of the Company since November 1997. Mr. Waterman served as a partner in the
law firm of Latham & Watkins from September 1993 to October 1997; he was also
Chair of the firm's healthcare group during 1997. Prior to September 1993, Mr.
Waterman was a partner in the law firm of McCutchen, Doyle, Brown & Enersen.
David R. White has served as President--Atlantic Group since January 1,
1998. Mr. White joined the Company in March 1994 and served as President--
Mid-America Group of the Company since June 1995. Before this period, he
served as Executive Vice President and Chief Operating Officer with Community
Health Systems, Inc. for eight years.
Noel Brown Williams has served as Senior Vice President and Chief
Information Officer of the Company since October 1997. From October 1996 to
September 1997, Ms. Williams served as Chief Information Officer for American
Services Group/Prison Health Services, Inc. From September 1995 to September
1996, Ms. Williams worked as an independent consultant. From June 1993 to June
1995, Ms. Williams served as Vice President, Information Services for
Columbia/HCA Information Services. From February 1979 to June 1993, she held
various positions with HCA Information Services.
Alan R. Yuspeh has served as Senior Vice President--Ethics, Compliance and
Corporate Responsibility of the Company since October 1997. From September
1991 until October 1997, Mr. Yuspeh was a partner with the law firm of Howrey
& Simon. As a part of his law practice, Mr. Yuspeh served from 1987 to 1997 as
Coordinator of the Defense Industry Initiative on Business Ethics and Conduct.
19
ITEM 2. PROPERTIES.
The following table lists, by state, the number of hospitals owned, managed
or operated by the Company as of December 31, 1997:
LICENSED
STATE HOSPITALS BEDS
----- --------- --------
Alabama................................................ 9 1,303
Alaska................................................. 1 254
Arizona................................................ 5 789
Arkansas............................................... 4 909
California............................................. 16 3,006
Colorado............................................... 9 2,226
Florida................................................ 52 12,105
Georgia................................................ 19 3,193
Idaho.................................................. 2 462
Illinois............................................... 8 2,584
Indiana................................................ 2 460
Kansas................................................. 5 1,707
Kentucky............................................... 13 2,505
Louisiana.............................................. 20 3,093
Massachusetts.......................................... 2 501
Mississippi............................................ 2 284
Missouri............................................... 3 767
Nevada................................................. 2 808
New Hampshire.......................................... 2 295
New Mexico............................................. 2 381
North Carolina......................................... 7 996
Ohio................................................... 4 1,617
Oklahoma............................................... 8 1,532
Oregon................................................. 2 198
South Carolina......................................... 5 932
Tennessee.............................................. 29 4,271
Texas.................................................. 66 13,150
Utah................................................... 7 951
Virginia............................................... 15 3,534
Washington............................................. 1 119
West Virginia.......................................... 7 1,284
Wyoming................................................ 1 70
INTERNATIONAL
-------------
Spain.................................................. 1 110
Switzerland............................................ 1 185
United Kingdom......................................... 4 517
--- ------
336 67,098
=== ======
In addition to the hospitals listed in the above table, the Company operates
145 outpatient surgery centers. The Company also operates medical office
buildings in conjunction with its hospitals. These office buildings are pri-
marily occupied by physicians who practice at the Company's hospitals.
The Company owns and maintains its headquarters in approximately 580,000
square feet of space in five office buildings in Nashville, Tennessee.
20
The Company's headquarters, hospitals and other facilities are suitable for
their respective uses and are, in general, adequate for the Company's present
needs.
ITEM 3. LEGAL PROCEEDINGS.
FEDERAL AND STATE INVESTIGATIONS
In March 1997, various facilities of the Company's El Paso, Texas operations
were searched by federal authorities pursuant to search warrants, and the
government removed various records and documents. In February 1998, an
additional warrant was executed and a single computer was seized. The Company
believes it may be a target in this investigation.
In July 1997, various Company affiliated facilities and offices were
searched pursuant to search warrants issued by the United States District
Court in several states. During July, September and November 1997, the Company
was also served with subpoenas requesting records and documents related to
laboratory billing, diagnosis related group ("DRG") coding and home health
operations in various states. In January 1998, the Company received a subpoena
which requested records and documents relating to physician relationships.
Also, in July 1997, the United States District Court for the Middle District
of Florida, in Fort Myers, issued an indictment against three employees of a
subsidiary of the Company. The indictment relates to the alleged false
characterization of interest payments on certain debt resulting in Medicare
and CHAMPUS overpayments since 1986 to Columbia Fawcett Memorial Hospital, a
Port Charlotte, Florida hospital that was acquired by the Company in 1992. The
Company has been served with subpoenas for various records and documents.
The Company is cooperating in these investigations and understands it is a
target in these investigations.
In addition, several hospital facilities affiliated with the Company have
received individual governmental inquiries, both informal and formal,
requesting information related to reimbursement from government programs.
While it is too early to predict the outcome of any of the ongoing
investigations or the initiation of any additional investigations, were the
Company to be found in violation of federal or state laws relating to
Medicare, Medicaid or similar programs, the Company could be subject to
substantial monetary fines, civil and criminal penalties and exclusion from
participation in the Medicare and Medicaid programs. Any such sanctions could
have a material adverse effect on the Company's financial position and results
of operations. See NOTE 15 of the notes to consolidated financial statements.
The Company is the subject of a formal order of investigation by the
Securities and Exchange Commission (the "Commission"). The Company understands
that the investigation includes the anti-fraud, periodic reporting and
internal accounting control provisions of the federal securities laws.
QUI TAM ACTIONS
Several qui tam actions have been brought by private parties ("relators") on
behalf of the United States of America. To the best of the Company's
knowledge, the actions allege, in general, that the Company and certain
subsidiaries and/or affiliated partnerships violated the False Claims Act for
improper claims submitted to the government for reimbursement. The government
has declined to intervene in any qui tam actions filed to date.
21
The matter of United States of America, ex rel. Scott Pogue v. American
Healthcorp, Inc., et al. (Civil Action No. 3-94-0515) was filed under seal on
June 23, 1994, in the United States District Court for the Middle District of
Tennessee. On February 6, 1995, the United States filed its Notice of Non-
Intervention and on that same date, the District Court ordered the Complaint
unsealed. The relator contends that sums paid to Medical Directors by the
Diabetes Treatment Centers of America and those who served as Medical
Directors at a hospital or facility affiliated with the Company, were, in
fact, unlawful payments for the referrals of their patients.
A lawsuit captioned United States of America ex rel. James Thompson v.
Columbia/HCA Healthcare Corporation, et al, was filed on March 10, 1995 in the
United States District Court for the Southern District of Texas, Corpus
Christi Division (Civil Action No. C-95-110). The relator claims that the
defendants (the Company and certain subsidiaries and affiliated partnerships)
engaged in a widespread strategy to pay physicians money for referrals and
engaged in other conduct to induce referrals, such as: (i) offering physicians
equity interests in hospitals; (ii) offering loans to physicians; (iii) paying
money under the guise of "consultation fees" to physicians to guarantee their
capital investment; (iv) paying consultation fees, rent or other monies to
physicians; (v) providing free or reduced rate rents for office space; (vi)
providing free or reduced-rate vacations and trips; (viii) providing income
guarantees; and (ix) granting physicians exclusive rights to perform
procedures in particular fields of practice. The lawsuit is premised on
alleged violations of the False Claims Act, 31 U.S.C. (S)3729 et seq. The
complaint seeks damages of three times the amount of all Medicare or Medicaid
claims (involving false claims) presented by the defendants to the federal
government, a civil penalty of not less than $5,000 nor more than $10,000 for
each such Medicare or Medicaid claim, attorneys' fees and costs. Although
expressly permitted to do so, the United States has thus far declined to
intervene in the case and assume prosecution of the claims asserted by the
relator. The defendants filed a Motion to Dismiss the Second Amended Complaint
on November 29, 1995, which was granted by the Court on July 22, 1996. On
August 20, 1996, the relator appealed to the United States Court of Appeals
for the Fifth Circuit and, on October 23, 1997, the Fifth Circuit affirmed in
part and vacated and remanded in part the Trial Court's rulings.
On or around December 21, 1995, a matter entitled United States of America,
ex rel. Roy Meidinger v. Lee Memorial Health Systems, Case No. 95-423-FTM-99D,
was filed in the United States District Court for the Middle District Court of
Florida, Fort Myers Division. In this matter, the plaintiff filed under seal,
a False Claims Act case against approximately 2,500 health care providers and
insurance companies, including Columbia Southwest Regional Medical Center. On
December 16, 1996, the United States declined to intervene. In June 1997, the
District Court entered an order directing plaintiff to serve the defendants.
In late November and early December 1997, each of the six defendants moved to
dismiss the Complaint. On January 20, 1998, plaintiff filed his opposition to
the defendant's motion to dismiss. The Court has not yet ruled on the
defendant's motions.
The matter of United States of American, ex rel. Sandra Russell; and Sandra
Russell in her own right v. EPIC Healthcare Management Group, and Hearthstone
Home Health, Inc. d/b/a Continue Care Health Services, No. H-95-00151, was
filed in the United States District Court for the Southern District of Texas,
Houston Division, in January, 1995. This matter was filed under seal. The
Complaint alleges that the relator was required to submit claims, records
and/or statements for Medicare reimbursement which were false. The government
declined to intervene in May 1996, and the defendant moved to dismiss in May
1997. No ruling has been made on the motion to dismiss.
The Company intends to pursue the defense of the Qui Tam actions vigorously.
22
SHAREHOLDER DERIVATIVE AND CLASS ACTION COMPLAINTS FILED IN THE U.S.
DISTRICT COURTS
Since April 8, 1997, numerous securities class action and derivative
lawsuits have been filed in the United States District Court for the Middle
District of Tennessee against the Company and a number of its current and
former directors, officers and employees.
On August 26, 1997, the Court entered an order consolidating all of the
securities class action claims into a single-captioned case, Morse v.
McWhorter, Case No. 3-97-0370. All of the other individual securities class
action lawsuits were administratively closed by the Court. The consolidated
Morse lawsuit is a purported class action seeking the certification of a class
of persons or entities who acquired the Company's common stock from April 9,
1994 to September 9, 1997. The consolidated lawsuit is brought against the
Company, Richard Scott, David Vandewater, Thomas Frist, Jr., R. Clayton
McWhorter, Carl E. Reichardt, Magdalena Averhoff, M.D., T. Michael Long, and
Donald S. MacNaughton. The lawsuit alleges, among other things, that the
defendants committed violations of the federal securities laws by materially
inflating the Company's revenues and earnings through a number of practices,
including upcoding, maintaining reserve cost reports, disseminating false and
misleading statements, cost shifting, illegal reimbursements, improper
billing, unbundling, and violating various Medicare laws. The lawsuit seeks
compensatory damages, costs, and expenses. Plaintiffs filed their Motion for
Class Certification on February 11, 1998. The defendants' motions to dismiss
and motion for oral argument have been referred to the Magistrate Judge for
consideration.
On August 26, 1997, the Court entered an order consolidating all of the
derivative law claims into a single-captioned case, McCall v. Scott, No. 3-97-
0838. All of the other derivative lawsuits were administratively closed by the
Court. The consolidated McCall lawsuit is brought against the Company, Thomas
Frist, Jr., Richard L. Scott, David T. Vandewater, R. Clayton McWhorter,
Magdalena Averhoff, M.D., Frank S. Royal, M.D., T. Michael Long, William T.
Young and Donald S. MacNaughton. The lawsuit alleges, among other things,
derivative claims against the individual defendants that they intentionally or
negligently breached their fiduciary duties to the Company by authorizing,
permitting, or failing to prevent the Company from engaging in various schemes
to improperly increase revenue, upcoding, improper cost reporting, improper
referrals, improper acquisition practices, and overbilling. In addition, the
lawsuit asserts a derivative claim against some of the individual defendants
for breaching their fiduciary duties by engaging in insider trading. The
lawsuit seeks restitution, damages, recoupment of fines or penalties paid by
the Company, restitution and pre-judgment interest against the alleged insider
trading defendants, and costs and disbursements. In addition, the lawsuit
seeks orders: (i) prohibiting the Company from paying individual defendants
employment benefits, (ii) terminating all improper business relationships with
individual defendants, and (iii) requiring the Company to implement effective
corporate governance and internal control mechanisms designed to monitor
compliance with federal and state laws and ensure reports to the Board of
Material Violations.
The matter of Landgraff v. Columbia/HCA Healthcare Corporation was filed on
November 7, 1997, in the United States District Court for the Northern
District of Georgia, Atlanta Division, Civil Action No. 97-CV-3381. The suit
seeks certification of a class of all participants in the Columbia/HCA Stock
Bonus Plan, alleging violations of ERISA. The suit alleges the Company
breached its fiduciary duty to plan participants, fraudulently concealed
information from the public and fraudulently inflated the Company's stock
price through billing fraud and illegal kickbacks for physician referrals. On
January 9, 1998, the parties stipulated to transfer venue of the case to the
United States District Court for the Middle District of Tennessee. Defendants
filed a Motion to Dismiss on March 6, 1998.
The Company intends to pursue the defense of these Shareholder Derivative
and Class Action Complaints vigorously.
23
SHAREHOLDER DERIVATIVE ACTIONS FILED IN STATE COURTS
Several derivative actions have been filed in State Court by certain
purported stockholders of the Company against certain of the Company's current
and former officers and directors alleging breach of fiduciary duty, and
failure to take reasonable steps to ensure that the Company did not engage in
illegal practices thereby exposing the Company to significant damages. The
Company intends to pursue the defense of these shareholder derivative actions
vigorously.
Two purported derivative actions entitled Evelyn Barron, et al. v. Magdalena
Averhoff, et al. (Civil Action No. 15822NC) and John Kovalchick v. Magdalena
Averhoff, et al. (Civil Action No. 15829NC) have been filed in the Court of
Chancery of the State of Delaware in and for New Castle County. The actions
were brought on behalf of the Company by certain purported shareholders of the
Company against certain of the Company's current and former officers and
directors. On approximately August 14, 1997, a similar purported derivative
action entitled State Board of Administration of Florida v. Magdalena
Averhoff, et al. (No. 97-2729) was filed in the Circuit Court in Davidson
County, Tennessee on behalf of the Company by certain purported shareholders
of the Company against certain of the Company's current and former directors
and officers.
The matter of Louisiana State Employees Retirement System v. Averhoff, et al
and Columbia/HCA Healthcare Corporation, another derivative action, was filed
on March 20, 1998, in the Circuit Court of the Eleventh Judicial Circuit, Dade
County, Florida, General Jurisdiction Division, Case No. 98-6050 CA04. The
Louisiana State Employees Retirement System is the public pension fund of the
State of Louisiana. The suit alleges breach of fiduciary duties resulting in
damage to the Company's good will, business reputation and the ability to
consummate future mergers and acquisitions.
PATIENT/PAYER ACTIONS
The Company has from time to time received several purported class action
lawsuits which have been filed by patients or payers against the Company
and/or certain of its current and former officers and directors alleging, in
general, improper and fraudulent billing, coding and physician referrals, as
well as other violations of law.
The matter of Boysen v. Columbia/HCA Healthcare Corporation was filed
September 8, 1997, in the United States District Court for the Middle District
of Tennessee, Nashville Division, (Civil Action No. 3-97-0936). The lawsuit,
which seeks certification of a national class comprised of all persons or
entities who have paid for medical services provided by the Company, alleges,
among other things, that the Company has engaged in a pattern and practice of
(i) inflating diagnosis and medical treatments of its patients to receive
larger payments from the purported class members; (ii) providing unnecessary
medical care; and (iii) billing for services never rendered. The lawsuit seeks
equitable relief in the form of an accounting, as well as damages, attorneys'
fees and costs of suit. The Company filed its Answer on November 17, 1997.
Plaintiff has filed a Motion for Class Certification, and the Company's
opposition to this motion was filed in March 1998.
The matter of Brown v. Columbia/HCA Healthcare Corporation was filed on
November 28, 1995, in the Circuit Court of Palm Beach County, Florida, Case
No. 95-9102 AD. This suit alleges that the hospital has charged excessive
amounts for pharmaceuticals, medical supplies, laboratory tests, medical
equipment and related medical services such as x-rays. The suit seeks
certification of a nationwide class, and damages for patients who have paid
bills containing allegedly excessive amounts for the allegedly unreasonable
portion of the charges and attorneys' fees. The Company filed a Motion to
Dismiss on December 18, 1995, and an Amended Motion to Dismiss on January 3,
1996. Plaintiff amended the Complaint and the Company filed an Answer and
defenses on June 19, 1996. On October 15, 1997, Harald Jackson moved to
intervene in the lawsuit. The Court denied Jackson's Motion on December 19,
1997. No class has been certified. Discovery is ongoing.
24
On October 27, 1997, Colville v. Columbia/Palm Drive Hospital was filed in
the Sonoma County Superior Court, California, Case No. 217646. The suit seeks
certification of a class comprised of uninsured patients treated at the
Company's hospitals and entities in California who have been treated and
charged different fees than any other patient. The suit alleges that the
Company fraudulently overcharged the plaintiffs and that it unlawfully charges
uninsured patients at a higher rate for the same services, compared to
patients with insurance or Medicare. On March 6, 1998, the Company filed a
Demurrer Motion and Motion to Quash. A hearing is set for May 13, 1998.
Doe v. HCA Health Services of Tennessee, Inc. dba Donelson Hospital fka
Summit Medical Center is a class action suit filed on August 17, 1992 in the
First Circuit Court for Davidson County, Tennessee. This suit claims the
Company's charges for hospital services and supplies for medical services (a
hysterectomy in the plaintiff's case) exceeded the reasonable costs of its
goods and services, that the overcharges constitute a breach of contract and
an unfair or deceptive trade practice within the meaning of the Tennessee
Consumer Protection Act, and a breach of the duty of good faith and fair
dealing under Tennessee statute and common law. In 1997, this case was
certified as a class action consisting of all past, present and future
patients at Summit Medical Center. Defendant filed a Motion for Summary
Judgment relying upon the favorable decision of another Nashville Circuit
Judge in a factually similar case. In March 1997, the Court denied the Motion
for Summary Judgment and has ordered the parties into mediation.
The matter of Douglas v. Columbia/HCA Healthcare Corporation is a class
action filed on March 5, 1998, in the Circuit Court of Cook County, Illinois,
County Department, Chancery Division, Case No. 98 02942. This suit alleges
that defendants were involved in fraudulent and deceptive acts including
wrongful billing, unnecessary treatment and wrongful diagnosis of patients
with illnesses that necessitate higher medical fees for financial gain. This
matter was served on March 18, 1998 and no answer has been filed at this time.
Ferguson v. Columbia/HCA Healthcare Corporation was filed on September 16,
1997, in the Circuit Court for Washington County, Tennessee, Civil Action No.
18679. This lawsuit seeks certification of a national class comprised of all
those who paid or were responsible for payment of any portion of a bill for
medical care or treatment provided by the Company and alleges, among other
things, that the Company engaged in billing fraud by excessively billing
patients for services rendered, billing patients for services not rendered or
not medically necessary, uniformly using improper codes to report patient
diagnosis, and improperly and illegally recruiting doctors to refer patients
to the Company's hospitals. Plaintiff filed a Motion for Class Certification
on September 16, 1997. On December 15, 1997, the Company filed a Motion for
Summary Judgment. On January 28, 1998, plaintiff filed a Motion for Leave to
File a Second Amended Class Action Complaint to Add an Additional Class
Representative.
The matter of Hoop v. Columbia/HCA Healthcare Corporation was filed on
August 18, 1997, in the District Court of Johnson County, Texas, Civil Action
No. 249-171-97. This suit seeks certification of a class in Texas comprised of
persons who paid for any portion of an improper or fraudulent bill for medical
services rendered by any Texas facility owned or operated by the Company. The
lawsuit alleges the Company perpetrated a fraudulent scheme that consisted of
systematic and routine overbilling through false and inaccurate bills,
including padding, billing for services never provided, and exaggerating the
seriousness of patients' illnesses. The lawsuit alleges the Company
systematically entered into illegal kickback schemes with doctors for patient
referrals. The Company filed its answer on November 7, 1997.
The matter of Jackson v. Columbia/HCA Healthcare Corporation was filed on
December 23, 1997, in the Circuit Court, Palm Beach County, Florida, Civil
Action No. 97-011419. The suit seeks certification of a national class of
persons or entities that have paid for medical services,
25
alleging the Company systematically and unlawfully inflated prices, concealed
its practice of inflating prices and engaged in and concealed a uniform
practice of overbilling.
The matter of Johnson v. Plantation General Hospital was filed on August 5,
1991, in the Circuit Court for the Seventeenth Judicial Circuit, State of
Florida, Broward County, Case No. 92-06823 Div. 2. The suit alleges the
hospital charged excessive amounts for pharmaceuticals, medical supplies and
laboratory tests. The suit sought certification of a class, a price reduction
on all outstanding bills in the amount of the allegedly excessive portion of
the charges, damages for patients who have paid bills containing allegedly
excessive amounts for the alleged unreasonable portion of the charges and
attorneys' fees. On September 18, 1995, the trial court certified the class
and the Fourth District Court of Appeal affirmed. On October 22, 1996, the
hospital filed a Motion for Summary Judgment on Counts II and III on the basis
of the voluntary payment defense. The Court granted the motion on November 19,
1997. Count I is still pending. Trial has been set for June 29, 1998.
The matter of Operating Engineers Local No. 312 Health & Welfare Fund v.
Columbia/HCA Healthcare Corporation was filed on October 6, 1997 in the United
States District Court for the Eastern District of Texas, Civil Action No.
597CV203. The suit alleges four counts of violations of RICO. The alleged RICO
violations are based on allegations that the Company has employed one or more
schemes or artifices to defraud the plaintiff and purported class members
through fraudulent billing for services not performed, fraudulent overcharging
in excess of correct rates and fraudulent concealment and misrepresentation.
On October 22, 1997, the Company filed a Motion to Transfer Venue and to
Dismiss the Lawsuit on Jurisdiction and Venue Grounds because the RICO claims
are deficient. The motion to transfer was denied on January 23, 1998. The
motion to dismiss has not yet been ruled upon.
The Company denies the aforementioned allegations and intends to pursue the
defense of these actions vigorously.
While it is premature to predict the outcome of the qui tam, shareholder
derivative and class action lawsuits, the amounts claimed may be substantial.
It is possible that an adverse resolution, individually or in the aggregate,
could have a materially adverse impact on the Company's liquidity, financial
position and results of operations. See NOTE 15 of the notes to consolidated
financial statements.
The Company believes the ongoing investigations, qui tam, shareholder cases,
class action overcharging cases and related media coverage are having a
negative effect on the Company's financial position and results of operations.
However, the Company is unable to measure the effect or predict the magnitude
that these matters and the related media coverage could have on the Company's
future results of operations and financial position.
GENERAL LIABILITY CLAIMS
The Company is subject to claims and suits arising in the ordinary course of
business, including claims for personal injuries or for wrongful restriction
of, or interference with, physicians' staff privileges. In certain of these
actions the claimants have asked for punitive damages against the Company,
which are usually not covered by insurance. In the opinion of management, the
ultimate resolution of these pending claims and legal proceedings will not
have a material adverse effect on the Company's results of operations or
financial position.
A class action styled Mary Forsyth, et al v. Humana, Inc., et al, Case No.
CV-S-89-249-DWH, was filed on March 29, 1989, in the United States District
Court for the District of Nevada (the "Forsyth" case). Plaintiffs are two
classes of individuals who paid for, or received coverage under, group
insurance policies sold in the State of Nevada by Humana Insurance. They
allege violations
26
of antitrust laws, ERISA and RICO which arise from the sale of the policies
and from incentives provided under the policies for insureds to use Humana
Sunrise Hospital in Las Vegas. In 1993, the United States District Court
granted summary judgment dismissing most of plaintiff's claims but granted
plaintiffs judgment on one claim that the client assesses as having a maximum
exposure of under $4 million, plus attorney's fees. Plaintiffs appealed to the
United States Court of Appeals for the Ninth Circuit which, on May 23, 1997,
affirmed the judgment on the ERISA claims; reversed as to the antitrust
claims; and reversed in part as to the RICO claims, but affirmed the District
Court's grant of summary judgment limiting RICO damages to three times the
ERISA damages, with exposure assessed at under $12 million. Plaintiffs claim
approximately $133 million in antitrust damages that is subject to statutory
trebling. Humana has petitioned the Supreme Court for a Writ of Certiorari on
the RICO claims, which is pending. The antitrust claims have been remanded to
the United States District Court in Nevada. Trial of these claims is stayed
pending a decision on the Petition for Writ of Certiorari. Humana has filed a
Motion for Summary Judgment on all remaining antitrust claims raising issues
that were not reached by the District Court. The court vacated the February
trial date and set oral argument for January 30, 1998. The Court has ordered
that a status report be filed on March 23, 1998.
On December 4, 1997, a lawsuit captioned Florida Software Systems, Inc., a
Florida corporation v. Columbia/HCA Healthcare Corporation, a Delaware
corporation, was filed in the United States District Court for the Middle
District of Florida (Civil Action No. 97-2866-C.V.-T-17b). The lawsuit alleges
that the Company breached an agreement under which Florida Software Systems,
Inc. was allegedly granted the exclusive right to provide medical claims
management for certain claims made by the Company for payment to any third
party payors in connection with the rendition of medical care or services. The
lawsuit alleges claims for fraud, breach of implied contract, and breach of
contract. The lawsuit seeks compensatory and punitive damages, attorney's fees
and costs of the suit. The Company believes that the allegations in the
Complaint are without merit and intends to pursue the defense of this action
vigorously.
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 1997.
27
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
The Company's Common Stock is traded on the New York Stock Exchange, Inc.
(the "NYSE") (symbol "COL"). The table below sets forth, for the calendar
quarters indicated, the high and low sales prices per share reported on the
NYSE Composite Tape for the Company's Common Stock. All prices have been
adjusted to reflect a 3-for-2 stock split in the form of a stock dividend
effective October 15, 1996.
HIGH LOW
------ ------
1997:
First Quarter................................................ $44.88 $31.25
Second Quarter............................................... 40.00 30.38
Third Quarter................................................ 40.44 26.63
Fourth Quarter............................................... 32.13 25.75
1996:
First Quarter................................................ $39.08 $33.42
Second Quarter............................................... 38.17 32.92
Third Quarter................................................ 39.25 31.67
Fourth Quarter............................................... 41.88 34.50
At the close of business on March 23, 1998, there were approximately 18,700
holders of record of the Company's Common Stock and one holder of record of
the Company's Nonvoting Common Stock.
The Company currently pays a regular quarterly dividend of $.02 per share.
While it is the present intention of the Company's Board of Directors to
continue paying a quarterly dividend of $.02 per share, the declaration and
payment of future dividends by the Company will depend upon many factors,
including the Company's earnings, financial condition, business needs, capital
and surplus and regulatory considerations.
28
ITEM 6. SELECTED FINANCIAL DATA
COLUMBIA/HCA HEALTHCARE CORPORATION
SELECTED FINANCIAL DATA
AS OF AND FOR THE YEARS ENDED DECEMBER 31
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
1997 1996 1995 1994 1993
-------- -------- -------- -------- --------
SUMMARY OF OPERATIONS:
Revenues........................................................... $ 18,819 $ 18,786 $ 17,132 $ 14,543 $ 12,678
Salaries and benefits.............................................. 7,631 7,205 6,779 5,963 5,202
Supplies........................................................... 2,722 2,655 2,536 2,144 2,015
Other operating expenses........................................... 4,263 3,689 3,203 2,661 2,286
Provision for doubtful accounts.................................... 1,420 1,196 994 853 699
Depreciation and amortization...................................... 1,238 1,143 976 804 689
Interest expense................................................... 493 488 458 387 415
Equity in earnings of affiliates................................... (68) (173) (28) (8) (9)
Restructuring of operations and investigation related costs........ 140 -- -- -- --
Impairment of long-lived assets.................................... 442 -- -- -- --
Merger, facility consolidation and other costs..................... -- -- 387 159 151
-------- -------- -------- -------- --------
18,281 16,203 15,305 12,963 11,448
-------- -------- -------- -------- --------
Income from continuing operations before minority interests and
income taxes...................................................... 538 2,583 1,827 1,580 1,230
Minority interests in earnings of consolidated entities............ 150 141 113 40 18
-------- -------- -------- -------- --------
Income from continuing operations before income taxes.............. 388 2,442 1,714 1,540 1,212
Provision for income taxes......................................... 206 981 689 611 492
-------- -------- -------- -------- --------
Income from continuing operations.................................. 182 1,461 1,025 929 720
Discontinued operations:
Income from operations of discontinued businesses, net of income
taxes............................................................ 12 44 39 -- 16
Estimated loss on disposal of discontinued businesses, net of
income tax benefit............................................... (443) -- -- -- --
Extraordinary charges on extinguishments of debt, net of income tax
benefits.......................................................... -- -- (103) (115) (97)
Cumulative effect of accounting change, net of income tax benefit.. (56) -- -- -- --
-------- -------- -------- -------- --------
Net income (loss)............................................... $ (305) $ 1,505 $ 961 $ 814 $ 639
======== ======== ======== ======== ========
Basic earnings (loss) per share:
Income from continuing operations................................. $ .28 $ 2.17 $ 1.54 $ 1.46 $ 1.18
Discontinued operations:
Income from operations of discontinued businesses................ .02 .07 .06 -- .03
Estimated loss on disposal of discontinued businesses............ (.67) -- -- -- --
Extraordinary charges on extinguishments of debt.................. -- -- (.16) (.18) (.16)
Cumulative effect of accounting change............................ (.09) -- -- -- --
-------- -------- -------- -------- --------
Net income (loss)............................................... $ (.46) $ 2.24 $ 1.44 $ 1.28 $ 1.05
======== ======== ======== ======== ========
Shares used in computing basic earnings per share (in thousands)... 657,931 670,774 665,407 634,837 608,345
Diluted earnings (loss) per share:
Income from continuing operations................................. $ .27 $ 2.15 $ 1.52 $ 1.44 $ 1.16
Discontinued operations:
Income from operations of discontinued businesses................ .02 .07 .06 -- .03
Estimated loss on disposal of discontinued businesses............ (.67) -- -- -- --
Extraordinary charges on extinguishments of debt.................. -- -- (.15) (.18) (.16)
Cumulative effect of accounting change............................ (.08) -- -- -- --
-------- -------- -------- -------- --------
Net income (loss)............................................... $ (.46) $ 2.22 $ 1.43 $ 1.26 $ 1.03
======== ======== ======== ======== ========
Shares used in computing diluted earnings per share (in thousands). 663,090 677,886 673,071 643,943 619,554
Cash dividends per common share.................................... $ .07 $ .08 $ .08 $ .08 $ .04
Redemption of preferred stock purchase rights...................... $ .01 -- -- -- --
29
ITEM 6. SELECTED FINANCIAL DATA (CONTINUED)
COLUMBIA/HCA HEALTHCARE CORPORATION
SELECTED FINANCIAL DATA
AS OF AND FOR THE YEARS ENDED DECEMBER 31--(CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
1997 1996 1995 1994 1993
--------- --------- --------- --------- ---------
FINANCIAL POSITION:
Assets.................. $ 22,002 $ 21,116 $ 19,805 $ 16,278 $ 12,685
Working capital......... 1,650 1,389 1,409 1,092 835
Net assets of
discontinued
operations............. 841 212 142 -- --
Long-term debt,
including amounts due
within one year........ 9,408 6,982 7,380 5,672 4,682
Minority interests in
equity of consolidated
entities............... 836 836 722 278 67
Stockholders' equity.... 7,250 8,609 7,129 6,090 4,158
CASH FLOW DATA:
Cash provided by
continuing operating
activities............. $ 1,483 $ 2,589 $ 2,264 $ 1,747 $ 1,585
Cash used in investing
activities............. (2,746) (2,219) (3,610) (1,946) (967)
Cash provided by (used
in) financing
activities............. 1,260 (489) 1,510 (81) (684)
OPERATING DATA:
Number of hospitals at
end of period.......... 309 319 319 311 274
Number of licensed beds
at end of period (a)... 60,643 61,931 61,347 59,595 53,245
Weighted average
licensed beds (b)...... 61,096 62,708 61,617 57,517 53,247
Average daily census
(c).................... 26,006 26,538 25,917 23,841 22,973
Occupancy (d)........... 43% 42% 42% 41% 43%
Admissions (e).......... 1,915,100 1,895,400 1,774,800 1,565,500 1,451,000
Average length of stay
(days) (f)............. 5.0 5.1 5.3 5.6 5.8
- --------
(a) Licensed beds are those beds for which a facility has been granted
approval to operate from the applicable state licensing agency.
(b) Weighted average licensed beds represents the average number of licensed
beds weighted based on periods owned.
(c) Represents the average number of patients in hospital beds each day.
(d) Represents the percentage of hospital licensed beds occupied by patients.
(e) Represents the total number of patients admitted (in the facility for a
period in excess of 23 hours) to the Company's hospitals.
(f) Represents the average number of days admitted patients stay in the
Company's hospitals.
30
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
COLUMBIA/HCA HEALTHCARE CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The Selected Financial Data and the accompanying consolidated financial
statements set forth certain information with respect to the financial
position, results of operations and cash flows of Columbia/HCA Healthcare
Corporation (the "Company") which should be read in conjunction with the
following discussion and analysis.
INVESTIGATIONS AND CHANGES IN MANAGEMENT AND BUSINESS STRATEGY
The Company encountered significant challenges and changes during 1997. The
Company is currently the subject of several federal investigations into its
business practices, as well as governmental investigations by numerous states.
In addition, the Company is named in various legal proceedings. The Company
also experienced changes in numerous management positions. The new management
team has developed and initiated significant changes in business strategy for
the Company during 1997. These factors, along with the unfavorable media
coverage related to the investigations, may have contributed to a slowdown in
the Company's revenue growth and
30(a)
COLUMBIA/HCA HEALTHCARE CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS--(CONTINUED)
INVESTIGATIONS AND CHANGES IN MANAGEMENT AND BUSINESS STRATEGY (CONTINUED)
a decline in results of operations. Management is unable to predict if, or
when, the Company can return to its historical revenue growth rates,
historical operating margins or historical net income growth rates.
Investigations
In March 1997, various facilities of the Company's El Paso, Texas operations
were searched by federal authorities pursuant to search warrants and the
government removed various records and documents. In February 1998, an
additional warrant was executed and a single computer was seized. The Company
believes it may be a target in this investigation.
In July 1997, various Company affiliated facilities and offices were
searched pursuant to search warrants issued by the United States District
Court in several states. During July, September and November 1997, the Company
was also served with subpoenas requesting records and documents related to
laboratory billing, diagnosis related group ("DRG") coding and home health
operations in various states. In January 1998, the Company received a subpoena
which requested records and documents relating to physician relationships.
Also, in July 1997, the United States District Court for the Middle District
of Florida, in Fort Myers, issued an indictment against three employees of a
subsidiary of the Company. The indictment relates to the alleged false
characterization of interest payments on certain debt resulting in Medicare
and CHAMPUS overpayments since 1986 to Columbia Fawcett Memorial Hospital, a
Port Charlotte, Florida hospital that was acquired by the Company in 1992. The
Company has been served with subpoenas for various records and documents.
The Company is cooperating in these investigations and understands it is a
target in these investigations.
Management believes the ongoing investigations, litigation and related media
coverage are having a negative effect on the Company's results of operations.
It is too early to predict the outcome or effect that the ongoing
investigations and litigation, the initiation of additional investigations or
litigation if any, and the related media coverage will have on the Company's
financial condition or results of operations in future periods. Were the
Company to be found in violation of federal or state laws relating to
Medicare, Medicaid or similar programs, the Company could be subject to
substantial monetary fines, civil and criminal penalties and exclusion from
participation in the Medicare and Medicaid programs. Any such sanctions could
have a material adverse effect on the Company's financial position and results
of operations. See NOTE 15 of the notes to consolidated financial statements.
The Company is the subject of a formal order of investigation by the
Securities and Exchange Commission (the "Commission"). The Company understands
that the investigation includes the anti-fraud, periodic reporting and
internal accounting control provisions of the federal securities laws.
Changes in Management and Business Strategy
During 1997, the Company experienced a significant change in management and
changed its business strategy. On July 25, 1997, the Company announced the
resignations of Richard L. Scott,
31
COLUMBIA/HCA HEALTHCARE CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS--(CONTINUED)
INVESTIGATIONS AND CHANGES IN MANAGEMENT AND BUSINESS STRATEGY (CONTINUED)
Chairman and Chief Executive Officer and David T. Vandewater, President and
Chief Operating Officer. Thomas F. Frist, Jr., M.D., Vice Chairman of the
Company's Board of Directors, was named Chairman and Chief Executive Officer.
On August 4, 1997, the Company named Jack O. Bovender, Jr. as President and
Chief Operating Officer.
On August 7, 1997, in an effort to address some areas of concern that may
have led to the investigations by certain government agencies, management
announced several significant steps that are being implemented to redefine the
Company's approach to a number of business practices. Some of the steps
include: elimination of annual cash incentive compensation for the Company's
employees, divestiture of the home health care business, unwinding of
physician interests in hospitals, significant expansion of compliance
programs, increased disclosures in Medicare cost reports, changes in
laboratory billing procedures, increased reviews of Medicare coding and
further guidelines on any transactions with physicians. These changes have
been developed and are being implemented with consideration to laws,
regulations and existing contractual agreements. Management is not currently
able to predict what effect such actions might have on the Company's financial
position or results of operations.
On November 17, 1997, the Company announced that its Board of Directors had
approved an internal operating reorganization plan. Effective January 1, 1998,
the Company was organized into five principal groups--Eastern, Western,
Atlantic, Pacific and America.
The Board of Directors also authorized the evaluation of various
restructuring alternatives which could include divestitures of certain assets
to third parties and spin-offs of certain other assets to the Company's
stockholders. As part of these alternatives, the Company is considering
restructuring into a smaller, more focused company located in strategic
markets. No restructuring plan has been approved by the Board and there can be
no assurances that a plan will ultimately be approved or implemented. Any
spin-off or other restructuring alternative would require Board of Directors
approval as well as various legal, regulatory and governmental approvals.
BUSINESS STRATEGY
The Company's strategy is to be a comprehensive provider of quality health
care services in select markets. The Company maintains and replaces equipment,
renovates and constructs replacement facilities and adds new services to
increase the attractiveness of its hospitals and other facilities to local
physicians and patients. By developing a comprehensive health care network
with a broad range of health care services located throughout a market area,
the Company achieves greater visibility and is better able to attract and
serve physicians and patients. The Company is also able to reduce operating
costs by sharing certain services among several facilities in the same market
and is better positioned to work with health maintenance organizations
("HMOs"), preferred provider organizations ("PPOs") and employers.
The Company generally seeks to operate each of its facilities as part of a
network with other health care facilities that it owns or operates within the
same region. In instances where acquisitions of additional facilities in the
area are not possible or practical, the Company may seek joint ventures or
partnership arrangements with other local facilities.
32
COLUMBIA/HCA HEALTHCARE CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS--(CONTINUED)
RESULTS OF OPERATIONS
Background Information
Value Health Merger
On August 6, 1997, the Company completed a merger transaction with Value
Health, Inc. ("Value Health") (the "Value Health Merger"). Value Health is a
provider of specialty managed care benefit programs. The Value Health Merger
has been accounted for by the purchase method and accordingly, the results of
operations of Value Health have been included with those of the Company for
periods subsequent to the acquisition date (see NOTE 8 of the notes to
consolidated financial statements.)
Discontinued Operations
As part of the Company's change in business strategy, the Company
implemented a plan to sell its home health care business and divest three of
the four business units acquired through the Value Health Merger. As a result
of the plan to divest these businesses, the Company's consolidated financial
statements and related notes have been adjusted and restated to reflect the
results of operations and net assets of the home health care and Value Health
businesses to be disposed of as discontinued operations (see NOTE 7 of the
notes to consolidated financial statements.)
Healthtrust Merger
In April 1995, the Company completed a merger transaction with Healthtrust,
Inc.-The Hospital Company ("Healthtrust") (the "Healthtrust Merger"). For
accounting purposes, the Healthtrust Merger was treated as a pooling of
interests. Accordingly, the accompanying consolidated financial statements and
selected financial and operating data included in this discussion and analysis
include the operations of Healthtrust for all periods presented.
Revenue/Volume Trends
In addition to the impact of the ongoing government investigations and
related media coverage, the Company's revenues continue to be affected by the
trend toward certain services being performed more frequently on an outpatient
basis and an increasing proportion of revenue being derived from fixed payment
sources, including Medicare, Medicaid and managed care plans. Admissions
related to Medicare, Medicaid and managed care plan patients during 1997, 1996
and 1995 were 88%, 86% and 82%, respectively, of total admissions.
Insurance companies, government programs (other than Medicare) and employers
purchasing health care services for their employees are negotiating discounted
amounts that they will pay health care providers rather than paying standard
prices. These purchasers then become discounted payers, similar to HMOs and
PPOs, in virtually all markets and make it increasingly difficult for
providers to maintain their historical revenue growth trends. Revenues from
capitation arrangements (prepaid health service agreements) are less than 1%
of consolidated revenues.
The growth in outpatient services is expected to continue in the health care
industry as procedures performed on an inpatient basis are converted to
outpatient procedures through continuing advances in pharmaceutical and
medical technologies. The redirection of certain
33
COLUMBIA/HCA HEALTHCARE CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS--(CONTINUED)
RESULTS OF OPERATIONS (CONTINUED)
Revenue/Volume Trends (Continued)
procedures to an outpatient basis is also influenced by pressures from payers
to direct certain procedures from inpatient care to outpatient care.
Outpatient revenues grew to 37% of net patient revenues in 1997 from 36% in
1996 and 35% in 1995.
The Company expects patient volumes from Medicare and Medicaid to continue
to increase due to the general aging of the population and the expansion of
the state Medicaid programs. The Medicare program currently reimburses the
Company under a prospective payment system ("PPS") for routine and ancillary
operating costs of most Medicare inpatient services. PPS reimburses the
Company primarily based on established rates that are dependent on each
patient's diagnosis, regardless of the provider's cost to treat the patient or
the length of time the patient stays in the hospital. Some inpatient services
and most outpatient services are currently exempt from PPS and are reimbursed
on a cost based system in which reimbursement is based primarily upon the
provider's cost to treat the patient and certain government fee schedules and
blended rates, subject to certain cost limits. Under the Balanced Budget Act
of 1997 (the "BBA-97"), reimbursement for some inpatient and outpatient
services previously reimbursed on a cost based system is being converted to
the PPS method, effective over various periods, beginning June 30, 1998.
Services being converted to the PPS method include skilled nursing facility
services, hospital outpatient services, home health services and inpatient
rehabilitation hospital services. Prior to the commencement to the PPS method,
payment constraints will be applied to home health services and inpatient
rehabilitation, psychiatric and long-term hospital services for Medicare cost
reporting periods beginning on or after October 1, 1997.
The Medicare program's established rates are indexed for inflation annually,
but these increases have historically been less than the actual inflation rate
and the Company's increases to its standard charges. BBA-97 reduces
reimbursements from the various states' Medicaid programs in addition to the
Medicare program. Management believes the reduction in payments could be
significant, but cannot at this time, predict the ultimate effect on the
Company's future results of operations.
Reductions in Medicare reimbursement, increasing percentages of the patient
volume being related to patients participating in managed care plans and
continuing trends toward more services being performed on an outpatient basis
are expected to present an ongoing challenge to the Company. To achieve and
maintain a reasonable operating margin in the future periods, the Company must
increase patient volumes while controlling the costs of providing services.
Management believes that the proper response to this challenge includes the
delivery of a broad range of quality health care services to patients through
comprehensive health care networks with operating decisions being made by the
local management teams and local physicians.
34
COLUMBIA/HCA HEALTHCARE CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS--(CONTINUED)
RESULTS OF OPERATIONS (CONTINUED)
The following is a summary of results from continuing operations for the
years ended December 31, 1997, 1996 and 1995 (dollars in millions, except per
share amounts):
1997 1996 1995
-------------- -------------- --------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
------- ----- ------- ----- ------- -----
Revenues....................... $18,819 100.0 $18,786 100.0 $17,132 100.0
Salaries and benefits.......... 7,631 40.6 7,205 38.4 6,779 39.6
Supplies....................... 2,722 14.5 2,655 14.1 2,536 14.8
Other operating expenses....... 4,263 22.6 3,689 19.6 3,203 18.7
Provision for doubtful
accounts...................... 1,420 7.5 1,196 6.4 994 5.8
Depreciation and amortization.. 1,238 6.6 1,143 6.1 976 5.6
Interest expense............... 493 2.6 488 2.6 458 2.7
Equity in earnings of
affiliates.................... (68) (0.4) (173) (0.9) (28) (0.2)
Restructuring of operations and
investigation related costs... 140 0.7 -- -- -- --
Impairment of long-lived
assets........................ 442 2.4 -- -- -- --
Merger and facility
consolidation costs........... -- -- -- -- 387 2.3
------- ----- ------- ----- ------- -----
18,281 97.1 16,203 86.3 15,305 89.3
------- ----- ------- ----- ------- -----
Income from continuing
operations before minority
interests and income taxes.... 538 2.9 2,583 13.7 1,827 10.7
Minority interests in earnings
of consolidated entities...... 150 0.8 141 0.7 113 0.7
------- ----- ------- ----- ------- -----
Income from continuing
operations before income
taxes......................... 388 2.1 2,442 13.0 1,714 10.0
Provision for income taxes..... 206 1.1 981 5.2 689 4.0
------- ----- ------- ----- ------- -----
Income from continuing
operations.................... $ 182 1.0 $ 1,461 7.8 $ 1,025 6.0
======= ===== ======= ===== ======= =====
Basic earnings per share from
continuing operations......... $ .28 $ 2.17 $ 1.54
Diluted earnings per share from
continuing operations......... $ .27 $ 2.15 $ 1.52
% changes from prior year:
Revenues...................... 0.2% 9.7% 17.8%
Income from continuing
operations before income
taxes........................ (84.1) 42.4 11.3
Income from continuing
operations................... (87.5) 42.5 10.4
Basic earnings per share from
continuing operations........ (87.1) 40.9 5.5
Diluted earnings per share
from continuing operations... (87.4) 41.4 5.6
Admissions (a)................ 1.0 6.8 13.4
Equivalent admissions (b)..... 2.7 8.8 18.0
Revenues per equivalent
admission.................... (2.4) 0.8 (0.1)
Same--facility % changes from
prior year (c):
Revenues...................... 1.1 6.6 10.2
Admissions (a)................ 1.7 3.8 4.6
Equivalent admissions (b)..... 3.5 5.8 8.6
Revenues per equivalent
admission.................... (2.3) 0.7 1.5
- --------
(a) Admissions represent the total number of patients admitted (in the
facility for a period in excess of 23 hours) to the Company's hospitals.
(b) Equivalent admissions is used by management and certain investors as a
general measure of combined inpatient and outpatient volume. Equivalent
admissions are computed by multiplying admissions (inpatient volume) by
the sum of gross inpatient revenue and gross outpatient revenue and then
dividing the resulting amount by gross inpatient revenue. The equivalent
admissions computation "equates" outpatient revenue to the volume measure
(admissions) used to measure inpatient volume resulting in a general
measure of combined inpatient and outpatient volume.
(c) "Same-facility" information excludes the operations of hospitals and their
related facilities which were either acquired or divested during the
current and prior year.
35
COLUMBIA/HCA HEALTHCARE CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS--(CONTINUED)
RESULTS OF OPERATIONS (CONTINUED)
Years Ended December 31, 1997 and 1996
Income from continuing operations before income taxes declined 84.1% to $388
million in 1997 from $2.4 billion in 1996 and pretax margins decreased to 2.1%
in 1997 from 13.0% in 1996. The decrease in pretax income was primarily
attributable to the impairment charges on long-lived assets, restructuring and
investigation related costs, a decline in revenue growth rates and decreases
in the operating margin. Excluding the asset impairment charges and
restructuring and investigation related costs, income from continuing
operations before income taxes declined 60.3% to $970 million in 1997 from
$2.4 billion in 1996 and pretax margins decreased to 5.2% in 1997 from 13.0%
in 1996. The operating results declines, excluding the significant non-
recurring charges, were attributable to declines in revenue growth rates and
increases in operating expenses as a percent of revenues.
Revenues increased 0.2% to $18.82 billion in 1997 compared to $18.79 billion
in 1996. Inpatient admissions increased 1.0% from a year ago. On a same-
facility basis, revenues increased 1.1%, admissions increased 1.7% and
equivalent admissions (adjusted to reflect combined inpatient and outpatient
volume) increased 3.5% from a year ago. The increase in outpatient activity is
primarily a result of the continuing trend of certain services, previously
being provided in an inpatient setting, being converted to an outpatient
setting (average daily outpatient visits increased 7.1% in 1997 compared to
1996).
The volume growth rates experienced in 1997 were less than the rates
experienced in prior years, which management believes was due, in part, to the
reactions of certain physicians and patients to the negative media coverage
related to the ongoing governmental investigations and increased competition.
The revenue growth rate in 1997 was less than rates experienced in prior
years which management believes was attributable to several factors,
including, divestitures of facilities (there were 10 fewer consolidated
facilities at the end of 1997 compared to 1996), delays experienced in
obtaining Medicare cost report settlements (cost report settlements resulted
in favorable revenue adjustments of $43 million in 1997 compared to $242
million in 1996) and decreases in Medicare rates of reimbursement mandated by
BBA-97 which became effective October 1, 1997 (lowered 1997 revenues by
approximately $50 million). Also contributing to the decline were continued
increases in discounts from the growing number of managed care payers which
required management to increase estimates for discounts from managed care
payers. During 1997, managed care as a percent of total admissions increased
to 35% compared to 32% during 1996. Net revenues per equivalent admission
declined 2.4% to $6,486 in 1997 from $6,648 in 1996.
Operating expenses increased as a percentage of revenues in every expense
category. The increases, as described below, were primarily attributable to
the Company's inability during the third and fourth quarters of 1997 to adjust
expenses on a timely basis in line with the decreases experienced in volume
trends. Management attention to the investigations, reactions by certain
physicians and patients to the negative media coverage and management changes
at several levels and locations throughout the Company contributed to the
Company's inability to implement changes to reduce operating expenses in
response to the volume and revenue growth rate declines.
36
COLUMBIA/HCA HEALTHCARE CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS--(CONTINUED)
RESULTS OF OPERATIONS (CONTINUED)
Years Ended December 31, 1997 and 1996 (Continued)
Salaries and benefits, as a percentage of revenues, increased to 40.6% in
1997 from 38.4% in 1996. The primary reason for the increase was the decline
in revenues per equivalent admission. In addition, the Company was unable to
adjust staffing on a timely basis corresponding with the declining equivalent
admission growth rate.
Supply costs increased as a percentage of revenues to 14.5% in 1997 from
14.1% in 1996 due to a decline in net revenue per equivalent admission while
the cost of supplies per equivalent admission remained relatively unchanged.
Other operating expenses, as a percentage of revenues, increased to 22.6% in
1997 from 19.6% in 1996. The increase was due, in part, to an increase in
contract services as a percentage of revenues to 8.9% in 1997 from 7.6% in
1996, which resulted from payments to third parties on a fee basis for both
new services and services previously performed by Company employees. Included
in other operating expenses in 1997 are costs associated with start-up
activities which were previously capitalized and subsequently amortized. The
Company changed its policy on accounting for start-up costs effective January
1, 1997, which resulted in approximately $106 million being recorded as other
operating expenses for 1997, compared to such costs being capitalized and the
related expense recorded as amortization expense during 1996. (See NOTE 11 of
the notes to consolidated financial statements.) Also included in other
operating expenses are professional fees, repairs and maintenance, rents and
leases, utilities, insurance and non-income taxes. There were no significant
changes in any of these expenses as a percentage of revenues.
Provision for doubtful accounts, as a percentage of revenues, increased to
7.5% in 1997 from 6.4% in 1996 due to internal factors such as computer
information system conversions (including patient accounting systems) at
various facilities and external factors such as payer mix shifts to managed
care plans (resulting in increased amounts of patient co-payments and
deductibles) and payer remittance slowdowns. The information system
conversions hampered the business office billing functions and collection
efforts in those facilities as some resources were directed to installing and
converting systems and building new data files, rather than devoting full
effort to billing and collecting receivables. The Company experienced an
increased occurrence of charge audits from certain payers due to the negative
publicity surrounding the government investigations which have resulted in
delays in the collection of receivables. The delays in collections resulted in
an increase in receivables reserved under the Company's bad debt allowance
policy. Management is unable at this time to predict when or if, these delays
in collecting accounts receivable will improve or the effect these delays will
have on the ultimate amounts collected.
Equity in earnings of affiliates decreased as a percentage of revenues to
0.4% in 1997 from 0.9% in 1996 primarily due to decreased profitability at
certain facilities acquired through joint ventures during 1995 and 1996.
Offsetting the decreased profitability were increases in the number of
facilities accounted for using the equity method of accounting. As of December
31, 1997, there were 27 hospitals and five freestanding surgery centers
compared to 22 hospitals and four freestanding surgery centers at December 31,
1996.
Depreciation and amortization increased as a percentage of revenues to 6.6%
in 1997 from 6.1% in 1996, primarily due to the slowdown in revenue growth and
increased capital
37
COLUMBIA/HCA HEALTHCARE CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS--(CONTINUED)
RESULTS OF OPERATIONS (CONTINUED)
Years Ended December 31, 1997 and 1996 (Continued)
expenditures related to ancillary services (such as outpatient services) and
information systems. Capital expenditures in these areas generally result in
shorter depreciation and amortization lives for the assets acquired than
typical hospitals acquisitions. Included in the overall increase in
depreciation and amortization was a decrease in amortization during 1997
related to the Company's new policy of expensing start-up costs through
operating expenses rather than capitalizing and expensing through
amortization.
Interest expense increased to $493 million in 1997 compared to $488 million
last year primarily as a result of an increase in the average outstanding debt
during 1997 compared to last year. This was due, in part, to the additional
debt incurred in 1997 related to the Company's $1.0 billion common stock
repurchase program. The interest expense associated with the increase in debt
incurred related to the Value Health Merger has been allocated to
"Discontinued operations" and is therefore not included in interest expense
from continuing operations.
During 1997, the Company recorded $442 million of asset impairment charges.
The charges primarily relate to hospital and surgery center facilities to be
sold or closed ($402 million) and physician practices where projected future
cash flows were less than the carrying value of the related assets ($40
million). See NOTE 6 of the notes to consolidated financial statements.
The Company incurred $140 million of costs during 1997 in connection with
the investigations and changes in management and business strategy. These
costs included $61 million in severance costs, $44 million in professional
fees related to the investigations, $20 million related to certain cancelled
projects and $15 million in other costs.
Minority interests increased slightly as a percentage of revenues to 0.8% in
1997 from 0.7% in 1996.
Income from continuing operations decreased 87.5% to $182 million ($.27 per
diluted share) during 1997 compared to $1.5 billion ($2.15 per diluted share)
in 1996. Excluding the asset write-downs, restructuring and investigation
related costs, income from continuing operations declined 61.3% to $565
million ($.85 per diluted share) in 1997 from $1.5 billion ($2.15 per diluted
share) in 1996.
Years Ended December 31, 1996 and 1995
Income from continuing operations before income taxes increased 42.4% to
$2.4 billion in 1996 from $1.7 billion in 1995 and pretax margins increased to
13.0% in 1996 from 10.0% in 1995. Excluding the effects of merger and facility
consolidation costs charged in 1995, income from continuing operations before
income taxes increased 16.1% to $2.4 billion from $2.1 billion in 1995 and
pretax margins increased to 13.0% in 1996 from 12.3% in 1995. The increase in
pretax income was attributable to growth in revenues and improvements in the
margin.
Revenues increased 9.7% to $18.8 billion in 1996 compared to $17.1 billion
in 1995. Revenues from facilities acquired during 1996 (including 14
hospitals) and increased revenues from facilities acquired during 1995
(including 29 hospitals) totaled $1.5 billion. The revenue increases from
acquisitions were partially offset by $800 million in revenues related to
facilities sold and facilities contributed to joint ventures which are
accounted for under the equity method.
38
COLUMBIA/HCA HEALTHCARE CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS--(CONTINUED)
RESULTS OF OPERATIONS (CONTINUED)
Years Ended December 31, 1996 and 1995 (Continued)
On a same-facility basis, revenues increased 6.6%, admissions increased 3.8%
and equivalent admissions (adjusted to reflect combined inpatient and
outpatient volume) increased 5.8% from a year ago. The increase in outpatient
activity is primarily a result of continued increases in outpatient services.
Salaries and benefits as a percentage of revenues declined to 38.4% in 1996
from 39.6% in 1995. This was due, in part, to improvements in labor
productivity (man hours per equivalent admission declined 7.1%) resulting from
the sharing of "best demonstrated processes" among certain Company facilities.
The outsourcing of certain services (services outsourced at various
facilities, included, among others, laboratory, rehabilitation, dietary and
linen services) also contributed to the improvement in this area while
shifting some salaries and benefits cost to other operating expenses.
Supply costs declined as a percentage of revenues to 14.1% in 1996 from
14.8% in 1995 due to enhanced levels of participation in the Company's
standard purchasing contracts for medical supplies (which provide for
progressive discounts based upon the volume of purchases made by the Company).
The improvement in pretax margin was partially offset by increases in other
operating expenses and the provision for doubtful accounts.
Other operating expenses, as a percentage of revenues, increased to 19.6% in
1996 from 18.7% in 1995. This was primarily due to contract services expense
which increased to 7.6% from 6.7% of revenues in the prior year. Contributing
to this increase was the outsourcing of certain services which are paid on a
fee basis to third parties for services previously performed by Company
employees. Also included in other operating expenses are professional fees,
repairs and maintenance, rents and leases, utilities, insurance and non-income
taxes. There were no significant changes in any of these expenses as a percent
of revenues.
Provision for doubtful accounts, as a percent of revenues, increased to 6.4%
in 1996 from 5.8% in 1995 due, in part, to computer information system
conversions (including patient accounting systems) at various facilities. The
information systems conversions hampered the business office billing functions
and collection efforts in those facilities as some facility resources were
directed to installing and converting systems and building new data files
rather than devoting their full effort to billing and collecting receivables.
Equity in earnings of affiliates increased as a percentage of revenues to
0.9% in 1996 from 0.2% in 1995 primarily due to more of the Company's
development activities being structured as non-consolidated joint ventures. As
of December 31, 1996, there were 22 non-consolidated hospitals and 4 non-
consolidated surgery centers compared to 19 non-consolidated hospitals and 3
non-consolidated surgery centers at December 31, 1995 (most 1995 joint venture
activity occurred during the fourth quarter).
Depreciation and amortization increased as a percentage of revenues to 6.1%
in 1996 from 5.6% in 1995 primarily due to increased capital expenditures in
outpatient services and information systems areas, all of which generally
result in shorter depreciation and amortization lives for the assets acquired
than typical hospital acquisitions.
39
COLUMBIA/HCA HEALTHCARE CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS--(CONTINUED)
RESULTS OF OPERATIONS (CONTINUED)
Years Ended December 31, 1996 and 1995 (Continued)
Interest expense and minority interests in earnings of consolidated entities
as a percentage of revenues remained relatively flat compared to last year.
During 1995, the Company recorded $387 million of merger and facility
consolidation costs in connection with the Healthtrust Merger. The Company did
not record any such costs in 1996.
Income from continuing operations increased 42.5% to $1.5 billion ($2.15 per
diluted share) during 1996 compared to $1.0 billion ($1.52 per diluted share)
in 1995. Excluding the effects of the merger and facility consolidation costs
in 1995, income from continuing operations increased 15.9% to $1.5 billion
($2.15 per diluted share) in 1996 compared to $1.3 billion ($1.87 per diluted
share) in 1995.
Liquidity
Cash provided by continuing operating activities totaled $1.5 billion in
1997 compared to $2.6 billion in 1996 and $2.3 billion in 1995. The decrease
in 1997 from 1996 and 1995 was primarily due to the $305 million net loss
incurred during 1997. Also contributing to the decline was an increase in
income taxes receivable resulting from estimated tax payments made based upon
more profitable prior quarters (subsequent to year end, the Company applied
for and received a refund for approximately $350 million of excess estimated
payment amounts). The cash flow impact of the approximate $1.8 billion decline
in net income from 1996 to 1997 was partially offset by the significant
noncash charges incurred in 1997 related to asset impairments and discontinued
operations of approximately $730 million.
Cash used in investing activities in 1997 exceeded cash provided by
continuing operating activities by $1.3 billion and was funded by the issuance
of long-term debt, commercial paper and bank borrowings. Included in investing
activities for 1997 is the cash required to acquire Value Health, Inc.
(approximately $1.2 billion). During 1996, cash flows provided by continuing
operating activities exceeded cash used in investing activities by $370
million. The excess funds generated from operations were used to pay down
long-term debt and commercial paper borrowings. Cash flows from investing
activities during 1995 exceeded cash provided by continuing operating
activities by $1.3 billion primarily due to $1.5 billion in acquisitions of
hospitals and health care entities. The acquisitions were funded by the
issuance of long term debt, commercial paper and bank borrowings.
The Company repurchased approximately 29.4 million shares of its common
stock pursuant to its $1.0 billion stock repurchase program announced and
completed in 1997. The repurchase was funded by the issuance of long-term
debt, commercial paper and bank borrowings.
Working capital totaled $1.7 billion at December 31, 1997 and $1.4 billion
at December 31, 1996. Management believes that cash flows from operations,
amounts available under the Company's bank revolving credit facilities and
proceeds from expected asset sales will be sufficient to meet expected
liquidity needs during 1998.
Investments of the Company's professional liability insurance subsidiary to
maintain statutory equity and pay claims totaled $1.4 billion and $1.1 billion
at December 31, 1997 and 1996, respectively.
40
COLUMBIA/HCA HEALTHCARE CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS--(CONTINUED)
RESULTS OF OPERATIONS (CONTINUED)
Liquidity (Continued)
As discussed previously, the Company announced the cessation of sales of
interests in hospitals to physicians and its intention to repurchase existing
physician interests in the Company's hospitals. As of December 31, 1997, the
Company had repurchased approximately $73 million of physician interests and
intends to repurchase the remaining physician interests of approximately $130
million during 1998 or 1999.
The Company has various agreements with joint venture partners whereby the
partners have an option to sell or "put" their interests in the joint venture
back to the Company within specific periods at fixed prices or prices based on
certain formulas. The combined put price under all such agreements was
approximately $1.0 billion at December 31, 1997. The Company cannot predict
if, or when, their joint venture partners will exercise such options (no put
options have been exercised through December 31, 1997). During March 1998, the
Internal Revenue Service ("IRS") issued guidance regarding the tax
consequences of joint ventures between for-profit and not-for-profit
hospitals. The Company has not determined the impact of the tax ruling on its
existing joint ventures and is consulting with its joint venture partners and
tax advisers to develop an appropriate course of action. The tax ruling could
require the restructing of certain joint ventures with not-for-profits or
influence the exercise of the put agreements by certain joint venture
partners.
The Company has announced agreements to sell Value Behavioral Health and
Value Rx (businesses recently acquired through the Value Health Merger), for
$230 million and $445 million in cash, respectively. The sales of both
businesses are expected to be completed during the second quarter of 1998 and
the net proceeds will be used to repay bank borrowings (see NOTE 21 of the
notes to consolidated financial statements).
The settlement of the government investigations and the various lawsuits and
legal proceedings that have been asserted could result in substantial
liabilities to the Company. The ultimate liabilities cannot be reasonably
estimated, as to the timing or amounts, at this time; however, it is possible
that results of operations, financial position and liquidity could be
materially, adversely affected upon the resolution of certain of these
contingencies.
Capital Resources
Excluding acquisitions, capital expenditures were $1.4 billion in both 1997
and 1996 and $1.5 billion in 1995. Planned capital expenditures (including
construction projects) in 1998 are expected to approximate $1.4 billion.
Management believes that its capital expenditure program is adequate to
expand, improve and equip its existing health care facilities.
The Company expended $411 million (excluding the Value Health Merger, see
NOTE 8 of the notes to consolidated financial statements), $748 million and
$1.5 billion for acquisitions during 1997, 1996 and 1995, respectively. The
continued decline in acquisitions from prior years can be partially attributed
to increased regulatory review procedures in certain states that have extended
the timing between the initiation and consummation of certain transactions.
The government investigations and changes in management and business strategy
have resulted in declines in the Company's acquisition plans compared to prior
years. The Company's investments in and advances to affiliates (generally 50%
interests in joint ventures that are accounted for using the equity method)
also declined to $29 million and $61 million in 1997 and 1996, respectively,
compared to $609 million in 1995.
41
COLUMBIA/HCA HEALTHCARE CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS--(CONTINUED)
RESULTS OF OPERATIONS (CONTINUED)
Capital Resources (Continued)
The Company expects to finance all capital expenditures with internally
generated and borrowed funds. Available sources of capital include public or
private debt, unused bank revolving credit facilities and equity. At December
31, 1997, there were projects under construction which had an estimated
additional cost to complete and equip over the next few years of approximately
$1.3 billion.
The Company's bank revolving credit facilities (the "Credit Facilities") are
comprised of a $2.0 billion five-year revolving credit agreement expiring
February 2002 and a $3.0 billion 364-day revolving credit agreement expiring
June 1998. Borrowings under the 364-day revolving credit agreement do not
mature until one year subsequent to the end of the 364-day period. As of
February 28, 1998, Columbia had approximately $650 million of credit available
under the Credit Facilities.
The Company's Credit Facilities contain customary covenants which include
(i) limitations on additional debt, (ii) limitations on sales of assets,
mergers and changes of ownership, (iii) limitations on repurchases of the
Company's common stock, (iv) maintenance of certain interest coverage ratios
and (v) attaining certain minimum levels of consolidated earnings before
interest, taxes, depreciation and amortization. The Credit Facilities also
provide for the mandatory prepayment of loans thereunder, and a corresponding
reduction of commitments in the case of certain asset sales and certain debt
or equity issuances. The Company is currently in compliance with all such
covenants.
During 1997, the Company's senior debt credit ratings were downgraded from
A2 to Baa2 and from A- to BBB by Moody's Investors Service ("Moody's") and
Standard and Poor's ("S&P"), respectively. The Company's commercial paper
ratings were downgraded from P-1 to P-3 and from A-2 to A-3 by Moody's and
S&P, respectively. The decline in the Company's commercial paper ratings has
significantly limited access to this financing source. As such, during the
third quarter of 1997, the Company began replacing amounts outstanding under
its commercial paper programs with borrowings under its Credit Facilities. In
February 1998, Moody's further downgraded the Company's senior debt credit
rating to Ba2 and its commercial paper rating to NP (not prime).
As part of the Company's new business strategy discussed earlier, the
Company announced it is evaluating various restructuring alternatives which
could include divestitures of certain assets to third parties and spin-offs of
certain assets to the Company's shareholders. These restructuring alternatives
could have the effect of materially changing the capital structure of the
Company. At this time, management has not determined the composition of the
future capital structure of the Company.
IMPACT OF YEAR 2000 COMPUTER ISSUES
The Year 2000 issue is the result of computer programs being written using
two digits rather than four to define the applicable year. The Company's
computer programs, certain building infrastructure components (including,
elevators, alarm systems and certain HVAC systems) and certain computer aided
medical equipment that have time-sensitive software may recognize a date using
"00" as the year 1900 rather than the year 2000. This could result in system
failures or miscalculations causing disruption of operations or medical
equipment malfunctions that could affect patient diagnosis and treatment.
42
COLUMBIA/HCA HEALTHCARE CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS--(CONTINUED)
IMPACT OF YEAR 2000 COMPUTER ISSUES (CONTINUED)
The Company has completed the assessment phase of its Year 2000 project and
determined that it will be required to evaluate, test and modify (when needed)
approximately 8,000 internally developed software programs and approximately
350,000 pieces of equipment. The Company presently believes that with
modifications to existing software and conversions to new software, the Year
2000 Issue will not pose material operational problems for its computer
systems. However, if such modifications and conversions are not made, or are
not completed timely, the Year 2000 Issue could have a material impact on the
operations of the Company.
The Company has initiated formal communications with its significant
suppliers and large customers to determine the extent to which the Company's
interface systems are vulnerable to those third parties' failure to remediate
their own Year 2000 Issues. However, there can be no guarantee that the
systems of other companies on which the Company's systems rely will be timely
converted and would not have an adverse effect on the Company's systems.
The Company will utilize both internal and external resources to reprogram
or replace and test software and medical equipment for Year 2000
modifications. The Company anticipates that the various components of the Year
2000 project procedures will continue throughout 1998 and 1999. The Year 2000
project is currently estimated to have a minimum total cost of $60 million
related to the review and modification of the Company's computer and software
systems. The Company is not able to reasonably estimate the costs to be
incurred for the review and modification of the medical equipment and
infrastructure elements at this time. The majority of the costs related to the
Year 2000 project will be expensed as incurred and are expected to be funded
through operating cash flows. The Company has incurred approximately $15
million of costs related to the assessment of, and preliminary efforts on its
Year 2000 project.
The costs of the project and estimated completion dates for the Year 2000
modifications are based on management's best estimates, which were derived
utilizing numerous assumptions of future events, including the continued
availability of certain resources, third party modification plans and other
factors. However, there can be no guarantee that these estimates will be
achieved and actual results could differ materially from those anticipated.
Specific factors that might cause such material differences include, but are
not limited to, the availability and cost of personnel trained in this area,
the ability to locate and correct all relevant computer codes and all medical
equipment.
EFFECTS OF INFLATION AND CHANGING PRICES
Various federal, state and local laws have been enacted that, in certain
cases, limit the Company's ability to increase prices. Revenues for acute care
hospital services rendered to Medicare patients are established under the
federal government's prospective payment system. Total Medicare revenues
approximated 34% in 1997, 35% in 1996 and 36% in 1995.
Management believes that hospital industry operating margins have been, and
may continue to be, under significant pressure because of deterioration in
inpatient volumes, changes in payer mix, and growth in operating expenses in
excess of the increase in prospective payments under the Medicare program.
Management expects that the average rate of increase in Medicare prospective
payments will range from no increase to a 0.6% increase in 1998. In addition,
as a result of increasing regulatory and competitive pressures, the Company's
ability to maintain operating margins through price increases to non-Medicare
patients is limited.
43
COLUMBIA/HCA HEALTHCARE CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS--(CONTINUED)
HEALTH CARE REFORM
In recent years, an increasing number of legislative proposals have been
introduced or proposed to Congress and in some state legislatures that would
significantly affect health care systems in the Company's markets. The cost of
certain proposals would be funded in significant part by reduction in payments
by government programs, including Medicare and Medicaid, to health care
providers (similar to the reductions incurred as part of BBA-97 as previously
discussed). While the Company is unable to predict which, if any, proposals
for health care reform will be adopted, there can be no assurance that
proposals adverse to the business of the Company will not be adopted.
OTHER INFORMATION
The Company is contesting income taxes and related interest proposed by the
IRS for prior years aggregating approximately $271 million as of December 31,
1997. Management believes that final resolution of these disputes will not
have a material adverse effect on the financial position, results of
operations or liquidity of the Company. (See NOTE 10 of the notes to
consolidated financial statements for a description of the pending IRS
disputes).
SUBSEQUENT EVENT
Subsequent to year end, the Company announced agreements to sell Value
Behavioral Health and Value Rx (two of the three Value Health units to be
divested) for $230 million and $445 million in cash, respectively. The
proceeds from the sales (expected to be completed in the second quarter of
1998) are expected to be used to repay bank borrowings.
FORWARD-LOOKING STATEMENTS
Certain statements contained in this Annual Report on Form 10-K including,
without limitation, statements containing the words "believes", "anticipates",
"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: (i) the outcome of the known and unknown governmental
investigations and litigation involving the Company's business practices; (ii)
the recently enacted changes in the Medicare and Medicaid programs affecting
reimbursement to health care providers and insurers; (iii) legislative
proposals for health care reform; (iv) the ability to enter into managed care
provider arrangements on acceptable terms; (v) liability and other claims
asserted against the Company; (vi) changes in business strategy or development
plans; (vii) the departure of key executive officers from the Company; and
(viii) the availability and terms of capital to fund the expansion of the
Company's business, including the acquisition of additional 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.
44
PART III
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
Information with respect to this Item is contained in the Company's
consolidated financial statements indicated in the Index on Page F-1 of this
Annual Report on Form 10-K.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The information required by this Item is set forth under the heading
"Election of Directors" in the definitive proxy materials of the Company to be
filed in connection with its 1998 Annual Meeting of Stockholders, except for
the information regarding executive officers of the Company, which is
contained in Item 1 of Part I of this Annual Report on Form 10-K. The
information required by this Item contained in such definitive proxy materials
is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION.
The information required by this Item is set forth under the heading
"Executive Compensation" in the definitive proxy materials of the Company to
be filed in connection with its 1998 Annual Meeting of Stockholders, which
information is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information required by this Item is set forth under the heading
"Principal Stockholders" in the definitive proxy materials of the Company to
be filed in connection with its 1998 Annual Meeting of Stockholders, which
information is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information required by this Item is set forth under the heading
"Compensation Committee Interlocks and Insider Participation" in the
definitive proxy materials of the Company to be filed in connection with its
1998 Annual Meeting of Stockholders, which information is incorporated herein
by reference.
45
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a) Documents filed as part of the report:
1. Financial Statements
The accompanying index to financial statements on page F-1 of
this Annual Report on Form 10-K is provided in response to this
item.
2. List of Financial Statement Schedules
All schedules are omitted because the required information is
not present, not present in material amounts or presented within
the financial statements.
3. List of Exhibits
3.1 Restated Certificate of Incorporation of the Company (filed as
Exhibit 3(a) to the Company's Current Report on Form 8-K dated
February 11, 1994, and incorporated herein by reference).
3.2(a) By-laws of the Company (filed as Exhibit 2.2 to the Company's
Registration Statement on Form 8-A dated August 31, 1993, and
incorporated herein by reference).
3.2(b) Amendment to By-laws of the Company (filed as Exhibit 3.1(b) to
the Company's Current Report on Form 8-K dated February 11,
1994, and incorporated herein by reference).
4.1 Specimen Certificate for shares of Common Stock, par value $.01
per share, of the Company (filed as Exhibit 4.1 to the Company's
Form SE to Form 10-K for the fiscal year ended December 31,
1993, and incorporated herein by reference).
4.2 Columbia Hospital Corporation 9% Subordinated Mandatory Convert-
ible Note Due June 30, 1999 (filed as Exhibit 4.4 to the
Company's Annual Report on Form 10-K for the fiscal year ended
December 31, 1990, and incorporated herein by reference).
4.3 Registration Rights Agreement between the Company and The 1818
Fund, L.P. dated March 18, 1991 (filed as Exhibit 4.5 to the
Company's Annual Report on Form 10-K for the fiscal year ended
December 31, 1990, and incorporated herein by reference).
4.4 Securities Purchase Agreement by and between the Company and The
1818 Fund, L.P. dated as of March 18, 1991 (filed as Exhibit 4.6
to the Company's Annual Report on Form 10-K for the fiscal year
ended December 31, 1990, and incorporated herein by reference).
4.5 Warrant to purchase shares of Common Stock, par value $.01 per
share, of the Company (filed as Exhibit 4.7 to the Company's
Annual Report on Form 10-K for the fiscal year ended December
31, 1990, and incorporated herein by reference).
4.6 Registration Rights Agreement dated as of March 16, 1989, by and
among HCA- Hospital Corporation of America and the persons
listed on the signature pages thereto (filed as Exhibit (g)(24)
to Amendment No. 3 to the Schedule 13E-3 filed by HCA-Hospital
Corporation of America, Hospital Corporation of America and The
HCA Profit Sharing Plan on March 22, 1989, and incorporated
herein by reference).
4.7 Assignment and Assumption Agreement dated as of February 10,
1994, between HCA-Hospital Corporation of America and the Com-
pany relating to the Regis-
46
tration Rights Agreement, as amended (filed as Exhibit 4.7 to
the Company's Annual Report on Form 10-K for the fiscal year
ended December 31, 1993, and incorporated herein by reference).
4.8 Amended and Restated Rights Agreement dated February 10, 1994
between the Company and Mid-America Bank of Louisville and Trust
Company (filed as Exhibit 4.8 to the Company's Annual Report on
Form 10-K for the fiscal year ended December 31, 1993, and in-
corporated herein by reference).
4.9(a) $1 Billion Credit Agreement dated as of February 10, 1994 (the
"364 Day Agreement"), among the Company, the Several Banks and
Other Financial Institutions, and Chemical Bank as Agent and as
CAF Loan Agent (filed as Exhibit 4.9 to the Company's Annual Re-
port on Form 10-K for the fiscal year ended December 31, 1993,
and incorporated herein by reference).
4.9(b) Agreement and Amendment to the 364 Day Agreement dated as of
September 26, 1994 (filed as Exhibit 4.9 to the Company's Regis-
tration Statement on Form S-4 (File No. 33-56803), and incorpo-
rated herein by reference).
4.9(c) Agreement and Amendment to the 364 Day Agreement dated as of
February 28, 1996 (filed as Exhibit 4.9(c) to the Company's An-
nual Report on Form 10-K for the fiscal year ended December 31,
1995).
4.9(d) Agreement and Amendment to the 364 Day Agreement dated as of
February 26, 1997 (filed as Exhibit 4.9(d) to the Company's An-
nual Report on Form 10-K for the fiscal year ended December 31,
1996, and incorporated herein by reference).
4.9(e) Agreement and Amendment to the 364 Day Agreement dated as of
June 17, 1997 (filed as Exhibit 10(c) to the Company's Quarterly
Report on Form 10-Q for the quarter ended September 30, 1997).
4.9(f) First Amendment to the 364 Day Agreement dated as of February 3,
1998 (which agreement is filed herewith).
4.9(g) Second Amendment to the 364 Day Agreement dated as of March 26,
1998 (which agreement is filed herewith).
4.10(a) $2 Billion Credit Agreement dated as of February 10, 1994 (the
"Credit Facility"), among the Company, the Several Banks and
Other Financial Institutions, and Chemical Bank as Agent and as
CAF Loan Agent (filed as Exhibit 4.10 to the Company's Annual
Report on Form 10-K for the fiscal year ended December 31, 1993,
and incorporated herein by reference).
4.10(b) Agreement and Amendment to the Credit Facility dated as of Sep-
tember 26, 1994 (filed as Exhibit 4.10 to the Company's Regis-
tration Statement on Form S-4 (File No. 33-56803), and incorpo-
rated herein by reference).
4.10(c) Agreement and Amendment to the Credit Facility dated as of Feb-
ruary 28, 1996 (filed as Exhibit 4.10(c) to the Company's Annual
Report on Form 10-K for the fiscal year ended December 31,
1995).
4.10(d) Agreement and Amendment to the Credit Facility dated as of Feb-
ruary 26, 1997 (filed as Exhibit 4.10(d) to the Company's Annual
Report on Form 10-K for the fiscal year ended December 31, 1996,
and incorporated herein by reference).
4.10(e) Agreement and Amendment to the Credit Facility dated as of June
17, 1997 (filed as Exhibit 10(d) to the Company's Quarterly Re-
port on Form 10-Q for the quarter ended September 30, 1997).
4.10(f) Second Amendment to the Credit Facility, dated as of February 3,
1998 (which agreement is filed herewith).
4.10(g) Third Amendment to the Credit Facility, dated as of March 26,
1998 (which agreement is filed herewith).
47
4.11 Indenture dated as of December 15, 1993 between the Company and
The First National Bank of Chicago, as Trustee (filed as Exhibit
4.11 to the Company's Annual Report on Form 10-K for the fiscal
year ended December 31, 1993, and incorporated herein by refer-
ence).
10.1 Agreement and Plan of Merger among the Company, COL Acquisition
Corporation and Healthtrust, Inc.--The Hospital Company dated as
of October 4, 1994 (filed as Exhibit 2 to the Company's Regis-
tration Statement on Form S-4 (File No. 33-56803), and incorpo-
rated herein by reference).
10.2 Agreement and Plan of Merger among the Company, CHOS Acquisition
Corporation and HCA-Hospital Corporation of America dated as of
October 2, 1993 (filed as Exhibit 2 to the Company's Registra-
tion Statement on Form S-4 (File No. 33-50735), and incorporated
herein by reference).
10.3 Agreement and Plan of Merger between Galen Health Care, Inc. and
the Company dated as of June 10, 1993 (filed as Exhibit 2 to the
Company's Registration Statement on Form S-4 (File No. 33-
49773), and incorporated herein by reference).
10.4 Agreement and Plan of Merger among Hospital Corporation of Amer-
ica, HCA- Hospital Corporation of America and TF Acquisition,
Inc. dated November 21, 1988 plus a list identifying the con-
tents of all omitted exhibits to the Agreement and Plan of
Merger plus an agreement of Hospital Corporation of America to
furnish supplementally to the Securities and Exchange Commission
upon request a copy of all omitted exhibits (filed as Exhibit 2
to Hospital Corporation of America's Current Report on Form 8-K
dated November 21, 1988, and incorporated herein by reference).
10.5 Amendment No. 1 to Agreement and Plan of Merger dated as of Feb-
ruary 7, 1989, among Hospital Corporation of America, HCA-Hospi-
tal Corporation of America and TF Acquisition, Inc. (filed as
Exhibit 2(b) to Hospital Corporation of America's Annual Report
on Form 10-K for the year ended December 31, 1988, and incorpo-
rated herein by reference).
10.6 Columbia Hospital Corporation Stock Option Plan (filed as Ex-
hibit 10.13 to the Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 1990, and incorporated herein by
reference).*
10.7 Columbia Hospital Corporation 1992 Stock and Incentive Plan
(filed as Exhibit 10.14 to the Company's Registration Statement
on Form S-1 (Reg. No. 33-48886), and incorporated herein by ref-
erence).*
10.8 Columbia Hospital Corporation Outside Directors Nonqualified
Stock Option Plan (filed as Exhibit 28.1 to the Company's Regis-
tration Statement on Form S-8 (File No. 33-55272), and incorpo-
rated herein by reference).*
10.9 HCA-Hospital Corporation of America 1989 Nonqualified Stock Op-
tion Plan, as amended through December 16, 1991 (filed as Ex-
hibit 10(g) to HCA-Hospital Corporation of America's Registra-
tion Statement on Form S-1 (File No. 33-44906), and incorporated
herein by reference).*
10.10 Form of Stock Option Agreement under the HCA-Hospital Corpora-
tion of America 1989 Nonqualified Stock Option Plan (filed as
Exhibit 10(j) to HCA-Hospital Corporation of America's Annual
Report on Form 10-K for the year ended December 31, 1989, and
incorporated herein by reference).*
10.11 HCA-Hospital Corporation of America Nonqualified Initial Option
Plan (filed as Exhibit 4.6 to the Company's Registration State-
ment on Form S-3 (File No. 33-52379), and incorporated herein by
reference).*
48
10.12 Termination Agreement between the Company and Carl F. Pollard
dated December 16, 1993 (filed as Exhibit 10.11 to the Company's
Annual Report on Form 10-K for the fiscal year ended December
31, 1993, and incorporated herein by reference).*
10.13 Form of Indemnity Agreement with certain officers and directors
(filed as Exhibit 10(kk) to Galen Health Care, Inc.'s Registra-
tion Statement on Form 10, as amended, and incorporated herein
by reference).
10.14 Form of Severance Pay Agreement between Galen Health Care, Inc.
and certain executives (filed as Exhibit 10(jj) to Galen Health
Care, Inc.'s Registration Statement on Form 10, as amended, and
incorporated herein by reference).*
10.15 Form of Severance Agreement between HCA-Hospital Corporation of
America and certain executives dated as of November 1, 1993
(filed as Exhibit 10.15 to the Company's Annual Report on Form
10-K for the fiscal year ended December 31, 1993, and incorpo-
rated herein by reference).*
10.16 Assumption Agreement among the Company, CHOS Acquisition Corpo-
ration and HCA-Hospital Corporation of America dated as of Feb-
ruary 10, 1994, relating to the Severance Agreements (filed as
Exhibit 10.16 to the Company's Annual Report on Form 10-K for
the fiscal year ended December 31, 1993, and incorporated herein
by reference).*
10.17 Form of Severance Pay Agreement between the Company and certain
executives dated as of June 10, 1993 (filed as Exhibit 10.17 to
the Company's Annual Report on Form 10-K for the fiscal year
ended December 31, 1993, and incorporated herein by reference).*
10.18 Form of Galen Health Care, Inc. 1993 Adjustment Plan (filed as
Exhibit 4.15 to the Company's Registration Statement on Form S-8
(File No. 33-50147), and incorporated herein by reference).*
10.19 Columbia/HCA Healthcare Corporation 1997 Annual Incentive Plan
(filed as Exhibit 10.19 to the Company's Annual Report on Form
10-K for the fiscal year ended December 31, 1996, and incorpo-
rated herein by reference).*
10.20 Columbia/HCA Healthcare Corporation Directors' Retirement Policy
(filed as Exhibit 10.20 to the Company's Annual Report on Form
10-K for the fiscal year ended December 31, 1993, and incorpo-
rated herein by reference).*
10.21 HCA-Hospital Corporation of America 1992 Stock Compensation Plan
(filed as Exhibit 10(t) to HCA-Hospital Corporation of America's
Registration Statement on Form S-1 (File No. 33-44906), and in-
corporated herein by reference).*
10.22 Columbia/HCA Healthcare Corporation 1995 Management Stock Pur-
chase Plan (filed as Exhibit 10.22 to the Company's Annual Re-
port on Form 10-K for the fiscal year ended December 31, 1995,
and incorporated herein by reference).*
10.23 Employment Agreement, dated November 15, 1993 by and between
Medical Care America, Inc. and Donald E. Steen (filed as Exhibit
10.23 to the Company's Annual Report on Form 10-K for the fiscal
year ended December 31, 1996, and incorporated herein by refer-
ence).*
10.24 Employment Agreement, dated April 24, 1995 by and between the
Company and R. Clayton McWhorter (filed as Exhibit 10.24 to the
Company's Annual Report on Form 10-K for the fiscal year ended
December 31, 1996, and incorporated herein by reference).*
10.25 Amended and Restated Agreement and Plan of Merger among the Com-
pany, CVH Acquisition Corporation and Value Health, Inc. dated
as of April 14, 1997 (filed as Exhibit 2 to the Company's Cur-
rent Report on Form 8-K dated April 22, 1997, and incorporated
herein by reference).
49
10.26 Separation Agreement between the Company and Richard L. Scott
datedJuly 25, 1997 (filed as Exhibit 10(a) to the Company's
Quarterly Report on Form 10-Q for the quarter ended September
30, 1997, and incorporated herein by reference).*
10.27 Separation Agreement between the Company and David T. Vandewater
dated July 25, 1997 (filed as Exhibit 10(b) to the Company's
Quarterly Report on Form 10-Q for the quarter ended September
30, 1997, and incorporated herein by reference).*
10.28 Columbia/HCA Healthcare Corporation 1997 Director's Plan as re-
vised May 15, 1997 and November 13, 1997 (which plan is filed
herewith).*
10.29 Columbia/HCA Healthcare Corporation Outside Directors Stock and
Incentive Compensation Plan (which plan is filed herewith).*
10.30 Columbia/HCA Healthcare Corporation Amended and Restated 1995
Management Stock Purchase Plan (which plan is filed herewith).*
10.31 Columbia/HCA Healthcare Corporation Performance Equity Incentive
Plan (which plan is filed herewith).*
10.32 Separation Agreement between the Company and Don Steen dated Oc-
tober 17, 1997 (which agreement is filed herewith).*
10.33 Separation Agreement between the Company and Dan Moen dated Sep-
tember 12, 1997, as amended (which agreement is filed here-
with).*
12 Statement re Computation of Ratio of Earnings to Fixed Charges.
18 Letter re Change in Accounting Principle.
21 List of Subsidiaries.
23 Consent of Ernst & Young LLP.
27.1 Financial Data Schedule for 1997 year-end information.
27.2 Restated Financial Data Schedules for periods ended September
30, 1997, June 30, 1997 and March 31, 1997 and year ended Decem-
ber 31, 1996.
27.3 Restated Financial Data Schedules for periods ended September
30, 1996, June 30, 1996 and March 31, 1996 and year ended Decem-
ber 31, 1995.
- --------
* Management compensatory plan or arrangement.
(b) Reports on Form 8-K.
On November 17, 1997, the Company announced that its Board of Directors
approved an internal operating reorganization plan and authorized the
evaluation of various restructuring alternatives.
50
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Ex-
change Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
Dated: March 30, 1998
COLUMBIA/HCA HEALTHCARE CORPORATION
/s/ Thomas F. Frist, Jr., M.D.
By: _________________________________
THOMAS F. FRIST, JR., M.D.
CHAIRMAN AND CHIEF EXECUTIVE
OFFICER
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 regis-
trant and in the capacities and on the dates indicated.
SIGNATURE TITLE DATE
/s/ Thomas F. Frist, Jr., M.D. Chairman of the March 30, 1998
- ------------------------------------- Board and Chief
THOMAS F. FRIST, JR., M.D. Executive Officer
/s/ Kenneth C. Donahey Senior Vice March 30, 1998
- ------------------------------------- President and
KENNETH C. DONAHEY Controller
(Principal
Financial
and Accounting Officer)
/s/ Magdalena Averhoff, M.D. Director March 30, 1998
- -------------------------------------
MAGDALENA AVERHOFF, M.D.
/s/ Sister Judith Ann Karam, CSA Director March 30, 1998
- -------------------------------------
SISTER JUDITH ANN KARAM, CSA
/s/ T. Michael Long Director March 30, 1998
- -------------------------------------
T. MICHAEL LONG
Director
- -------------------------------------
DONALD S. MACNAUGHTON
51
SIGNATURE TITLE DATE
/s/ R. Clayton McWhorter Director March 30, 1998
- -------------------------------------
R. CLAYTON MCWHORTER
/s/ Carl E. Reichardt Director March 30, 1998
- -------------------------------------
CARL E. REICHARDT
/s/ Frank S. Royal, M.D. Director March 30, 1998
- -------------------------------------
FRANK S. ROYAL, M.D.
Director
- -------------------------------------
WILLIAM T. YOUNG
52
COLUMBIA/HCA HEALTHCARE CORPORATION
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE
----
Report of Independent Auditors............................................ F-2
Consolidated Financial Statements:
Consolidated Statements of Operations for the years ended December 31,
1997, 1996 and 1995.................................................... F-3
Consolidated Balance Sheets, December 31, 1997 and 1996................. F-4
Consolidated Statements of Stockholders' Equity for the years ended
December 31, 1997, 1996 and 1995....................................... F-5
Consolidated Statements of Cash Flows for the years ended December 31,
1997, 1996 and 1995.................................................... F-6
Notes to Consolidated Financial Statements.............................. F-7
Quarterly Consolidated Financial Information (Unaudited)................ F-28
F-1
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors and Stockholders Columbia/HCA Healthcare Corporation
We have audited the accompanying consolidated balance sheets of Columbia/HCA
Healthcare Corporation as of December 31, 1997 and 1996, and the related
consolidated statements of operations, stockholders' equity and cash flows for
each of the three years in the period ended December 31, 1997. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with 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 Columbia/HCA
Healthcare Corporation at December 31, 1997 and 1996, and the consolidated
results of their operations and their cash flows for each of the three years
in the period ended December 31, 1997 in conformity with generally accepted
accounting principles.
As explained in Note 11 to the Consolidated Financial Statements, effective
January 1, 1997, the Company changed its method of accounting for start-up
costs.
/s/ ERNST & YOUNG LLP
Nashville, Tennessee
February 12, 1998, except for
Note 21, as to which the date is
February 20, 1998
F-2
COLUMBIA/HCA HEALTHCARE CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
1997 1996 1995
------- ------- -------
Revenues............................................ $18,819 $18,786 $17,132
Salaries and benefits .............................. 7,631 7,205 6,779
Supplies............................................ 2,722 2,655 2,536
Other operating expenses............................ 4,263 3,689 3,203
Provision for doubtful accounts..................... 1,420 1,196 994
Depreciation and amortization....................... 1,238 1,143 976
Interest expense.................................... 493 488 458
Equity in earnings of affiliates.................... (68) (173) (28)
Restructuring of operations and investigation
related costs...................................... 140 - -
Impairment of long-lived assets..................... 442 - -
Merger and facility consolidation costs............. - - 387
------- ------- -------
18,281 16,203 15,305
------- ------- -------
Income from continuing operations before minority
interests and income taxes......................... 538 2,583 1,827
Minority interests in earnings of consolidated
entities........................................... 150 141 113
------- ------- -------
Income from continuing operations before income
taxes.............................................. 388 2,442 1,714
Provision for income taxes.......................... 206 981 689
------- ------- -------
Income from continuing operations................... 182 1,461 1,025
Discontinued operations:
Income from operations of discontinued businesses,
net of income taxes of $18 in 1997, $29 in 1996
and $26 in 1995.................................. 12 44 39
Estimated loss on disposal of discontinued
businesses, net of income tax benefit of $124.... (443) - -
Extraordinary charges on extinguishments of debt,
net of income tax benefit of $67................... - - (103)
Cumulative effect of accounting change, net of
income tax benefit
of $36 ............................................ (56) - -
------- ------- -------
Net income (loss)............................. $ (305) $ 1,505 $ 961
======= ======= =======
Basic earnings (loss) per share:
Income from continuing operations................. $ .28 $ 2.17 $ 1.54
Discontinued operations:
Income from operations of discontinued
businesses..................................... .02 .07 .06
Estimated loss on disposal of discontinued
businesses..................................... (.67) - -
Extraordinary charges on extinguishments of debt.. - - (.16)
Cumulative effect of accounting change............ (.09) - -
------- ------- -------
Net income (loss)............................. $ (.46) $ 2.24 $ 1.44
======= ======= =======
Diluted earnings (loss) per share:
Income from continuing operations................. $ .27 $ 2.15 $ 1.52
Discontinued operations:
Income from operations of discontinued
businesses..................................... .02 .07 .06
Estimated loss on disposal of discontinued
businesses..................................... (.67) - -
Extraordinary charges on extinguishments of debt.. - - (.15)
Cumulative effect of accounting change............ (.08) - -
------- ------- -------
Net income (loss)............................. $ (.46) $ 2.22 $ 1.43
======= ======= =======
The accompanying notes are an integral part of the consolidated financial
statements
F-3
COLUMBIA/HCA HEALTHCARE CORPORATION
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1997 AND 1996
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
1997 1996
------- -------
ASSETS
Current assets:
Cash and cash equivalents.................................. $ 110 $ 113
Accounts receivable, less allowances for doubtful accounts
of $1,661--1997 and $1,380--1996.......................... 2,522 2,842
Inventories................................................ 452 438
Income taxes receivable.................................... 532 -
Other...................................................... 807 806
------- -------
4,423 4,199
Property and equipment, at cost:
Land....................................................... 967 970
Buildings.................................................. 7,257 7,390
Equipment.................................................. 7,461 6,725
Construction in progress (estimated cost to complete and
equip after December 31, 1997--$1,263).................... 569 602
------- -------
Accumulated depreciation................................... 16,254 15,687
(6,024) (5,314)
------- -------
10,230 10,373
Investments of insurance subsidiary.......................... 1,422 1,119
Investments in and advances to affiliates.................... 1,329 1,293
Intangible assets, net of accumulated amortization of $510--
1997 and $511--1996......................................... 3,521 3,582
Net assets of discontinued operations........................ 841 212
Other........................................................ 236 338
------- -------
$22,002 $21,116
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable........................................... $ 929 $ 790
Accrued salaries........................................... 475 430
Other accrued expenses..................................... 1,237 1,292
Income taxes payable ...................................... - 97
Long-term debt due within one year......................... 132 201
------- -------
2,773 2,810
Long-term debt............................................... 9,276 6,781
Professional liability risks, deferred taxes and other
liabilities................................................. 1,867 2,080
Minority interests in equity of consolidated entities........ 836 836
Stockholders' equity:
Common stock $.01 par; authorized 1,600,000,000 voting
shares and 50,000,000 nonvoting shares; outstanding
620,452,200 voting shares and 21,000,000 nonvoting
shares--1997 and 650,499,400 voting shares and 21,000,000
nonvoting shares--1996 ................................... 6 7
Capital in excess of par value............................. 3,480 4,519
Other...................................................... 13 14
Accumulated other comprehensive income..................... 92 52
Retained earnings.......................................... 3,659 4,017
------- -------
7,250 8,609
------- -------
$22,002 $21,116
======= =======
The accompanying notes are an integral part of the consolidated financial
statements
F-4
COLUMBIA/HCA HEALTHCARE CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(DOLLARS IN MILLIONS)
COMMON STOCK ACCUMULATED
-------------- CAPITAL IN OTHER
SHARES PAR EXCESS OF COMPREHENSIVE RETAINED
(000) VALUE PAR VALUE OTHER INCOME EARNINGS TOTAL
------- ----- ---------- ----- ------------- -------- ------
Balances, December 31,
1994................... 662,934 $ 7 $4,402 $27 ($4) $1,658 $6,090
Comprehensive income:
Net income............. 961 961
Other comprehensive
income, net of tax
(See NOTE 19):
Net unrealized gains
on investment
securities........... 31 31
Foreign currency
translation
adjustments.......... 7 7
--- ------ ------
38 -- 38
--- ------ ------
Total comprehensive
income.............. 38 961 999
Cash dividends......... (53) (53)
Stock options
exercised, net........ 5,187 100 (7) 93
Other.................. 607 (6) 6 --
------- --- ------ --- --- ------ ------
Balances, December 31,
1995................... 668,728 7 4,496 26 34 2,566 7,129
Comprehensive income:
Net income............. 1,505 1,505
Other comprehensive
income (loss), net of
tax (See NOTE 19):
Net unrealized gains
on investment
securities........... 24 24
Foreign currency
translation
adjustments.......... (6) (6)
--- ------ ------
18 -- 18
--- ------ ------
Total comprehensive
income.............. 18 1,505 1,523
Cash dividends......... (54) (54)
Stock options
exercised, net........ 3,859 81 (5) 76
Other.................. (1,088) (58) (7) (65)
------- --- ------ --- --- ------ ------
Balances, December 31,
1996................... 671,499 7 4,519 14 52 4,017 8,609
Comprehensive loss:
Net loss............... (305) (305)
Other comprehensive
income, net of tax
(See NOTE 19):
Net unrealized gains
on investment
securities........... 38 38
Foreign currency
translation
adjustments.......... 2 2
--- ------ ------
40 -- 40
--- ------ ------
Total comprehensive
loss................ 40 (305) (265)
Cash dividends......... (53) (53)
Stock repurchases...... (37,895) (1) (1,272) (1,273)
Stock options
exercised, net........ 4,108 100 (4) 96
Other employee benefit
plan issuances........ 3,740 108 108
Other.................. 25 3 28
------- --- ------ --- --- ------ ------
Balances, December 31,
1997................... 641,452 $ 6 $3,480 $13 $92 $3,659 $7,250
======= === ====== === === ====== ======
The accompanying notes are an integral part of the consolidated financial
statements
F-5
COLUMBIA/HCA HEALTHCARE CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
1997 1996 1995
------- ------- -------
Cash flows from continuing operating activities:
Net income (loss).................................. ($305) $ 1,505 $ 961
Adjustments to reconcile net income (loss) to net
cash provided by continuing operating activities:
Provision for doubtful accounts................. 1,420 1,196 994
Depreciation and amortization................... 1,238 1,143 976
Deferred income taxes........................... (163) 32 15
Write-down of long-lived assets................. 442 - 282
Loss (income) from discontinued operations...... 431 (44) (39)
Extraordinary charges on extinguishments of
debt........................................... - - 103
Cumulative effect of accounting change.......... 56 - -
Increase (decrease) in cash from operating
assets and liabilities:
Accounts receivable........................... (1,167) (1,360) (1,068)
Inventories and other assets.................. 25 (14) (157)
Income taxes.................................. (619) 237 (80)
Accounts payable and accrued expenses......... 121 (145) 157
Other........................................... 4 39 120
------- ------- -------
Net cash provided by continuing operating
activities................................... 1,483 2,589 2,264
------- ------- -------
Cash flows from investing activities:
Purchase of property and equipment................. (1,422) (1,391) (1,513)
Acquisition of hospitals and health care entities.. (411) (748) (1,478)
Investments in and advances to affiliates.......... (29) (61) (609)
Disposition of property and equipment.............. 212 166 334
Change in other investments........................ (45) (158) (283)
Investment in net assets of discontinued
operations, net................................... (1,060) (26) (103)
Other.............................................. 9 (1) 42
------- ------- -------
Net cash used in investing activities......... (2,746) (2,219) (3,610)
------- ------- -------
Cash flows from financing activities:
Issuance of long-term debt......................... 249 459 2,257
Net change in commercial paper and bank
borrowings........................................ 2,453 (579) 1,230
Repayment of long-term debt........................ (318) (303) (1,969)
Repurchases of common stock, net................... (1,082) (20) 42
Payment of cash dividends and redemption of
preferred stock purchase rights................... (53) (54) (50)
Other.............................................. 11 8 -
------- ------- -------
Net cash provided by (used in) financing
activities................................... 1,260 (489) 1,510
------- ------- -------
Change in cash and cash equivalents................. (3) (119) 164
Cash and cash equivalents at beginning of period.... 113 232 68
------- ------- -------
Cash and cash equivalents at end of period.......... $ 110 $ 113 $ 232
======= ======= =======
Interest payments................................... $ 471 $ 499 $ 479
Income tax payments, net of refunds................. $ 1,168 $ 709 $ 748
The accompanying notes are an integral part of the consolidated financial
statements
F-6
COLUMBIA/HCA HEALTHCARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1--ACCOUNTING POLICIES
Reporting Entity
Columbia/HCA Healthcare Corporation, together with its affiliated
subsidiaries, (the "Company") is a Delaware corporation that operates
hospitals and related health care entities. At December 31, 1997, the Company
owned and operated 309 hospitals, 140 freestanding surgery centers and
provided extensive outpatient and ancillary services, including home health
(the Company plans to divest its home health business. See NOTE 7). The
Company is also a partner in several 50/50 joint ventures that own and operate
27 hospitals and 5 freestanding surgery centers which are accounted for using
the equity method. The Company's facilities are located in 35 states, England,
Switzerland and Spain.
Basis of Presentation
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
The consolidated financial statements include all affiliated subsidiaries
and entities controlled by the Company. Significant intercompany transactions
have been eliminated. Investments in entities which the Company does not
control, but in which it has a substantial ownership interest and can exercise
significant influence, are accounted for using the equity method.
During August 1997, the Company completed a merger transaction with Value
Health, Inc. ("Value Health") (the "Value Health Merger"). The Value Health
Merger and various other acquisitions and joint venture transactions have been
accounted for under the purchase method. Accordingly, the accounts of these
entities have been consolidated with those of the Company for periods
subsequent to the acquisition of controlling interest. See NOTE 8 for a
description of the specific terms of the Value Health Merger.
During April 1995, the Company completed a merger transaction with
Healthtrust, Inc.--The Hospital Company ("Healthtrust") (the "Healthtrust
Merger"). The Healthtrust Merger has been accounted for by the pooling of
interests method. Accordingly, the consolidated financial statements include
the operations of Healthtrust for all periods presented. See NOTE 8 for a
description of the specific terms of the Healthtrust Merger.
Revenues
The Company's health care facilities have entered into agreements with
third-party payers, including government programs and managed care health
plans, under which the facilities are paid based upon established charges, the
cost of providing services, predetermined rates per diagnosis, fixed per diem
rates or discounts from established charges.
Revenues are recorded at estimated amounts due from patients and third-party
payers for the health care services provided. Settlements under reimbursement
agreements with third-party payers are estimated and recorded in the period
the related services are rendered and are adjusted in future periods as final
settlements are determined. The adjustments to estimated
F-7
COLUMBIA/HCA HEALTHCARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 1--ACCOUNTING POLICIES (CONTINUED)
settlements resulted in increases to revenues of $43 million, $242 million and
$145 million in 1997, 1996 and 1995, respectively. Management believes that
adequate provisions have been made for adjustments that may result from final
determination of amounts earned under these programs.
The Company provides care without charge to patients who are financially
unable to pay for the health care services they receive. Because the Company
does not pursue collection of amounts determined to qualify as charity care,
they are not reported in revenues.
Cash and Cash Equivalents
Cash and cash equivalents include highly liquid investments with a maturity
of three months or less when purchased. Carrying values of cash and cash
equivalents approximate fair value due to the short-term nature of these
instruments.
Accounts Receivable
The Company receives payment for services rendered from federal and state
agencies (under the Medicare, Medicaid and CHAMPUS programs), managed care
health plans, commercial insurance companies, employers and patients. During
the years ended December 31, 1997 and 1996, approximately 34% and 35%,
respectively, of the Company's revenues related to patients participating in
the Medicare program. The Company recognizes that revenues and receivables
from government agencies are significant to the Company's operations, but the
Company does not believe that there are significant credit risks associated
with these government agencies. The Company does not believe that there are
any other significant concentrations of revenues from any particular payer
that would subject the Company to any significant credit risks in the
collection of its accounts receivable.
Inventories
Inventories are stated at the lower of cost (first-in, first-out) or market.
Long-lived Assets
PROPERTY AND EQUIPMENT
Depreciation expense, computed using the straight-line method, was $1,082
million in 1997, $985 million in 1996 and $857 million in 1995. Buildings and
improvements are depreciated over estimated useful lives ranging generally
from 10 to 40 years. Estimated useful lives of equipment vary generally from 3
to 10 years.
INTANGIBLE ASSETS
Intangible assets consist primarily of costs in excess of the fair value of
identifiable net assets of acquired entities and are amortized using the
straight-line method generally over periods ranging from 30 to 40 years for
hospital acquisitions and periods ranging from 5 to 20 years for physician
practice, home health and clinic acquisitions. Noncompete agreements and debt
issuance costs are amortized based upon the terms of the respective contracts
or loans.
F-8
COLUMBIA/HCA HEALTHCARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 1--ACCOUNTING POLICIES (CONTINUED)
When events, circumstances and operating results indicate that the carrying
values of certain long-lived assets and the related identifiable intangible
assets might be impaired, the Company prepares projections of the undiscounted
future cash flows expected to result from the use of the assets and their
eventual disposition. If the projections indicate that the recorded amounts
are not expected to be recoverable, such amounts are reduced to estimated fair
value.
Professional Liability Insurance Claims
A substantial portion of the Company's professional liability risks is
insured through a wholly-owned insurance subsidiary of the Company which is
funded annually. Provisions for loss for professional liability risks are
based upon actuarially determined estimates.
Allowances for professional liability risks were $1.3 billion and $1.2
billion at December 31, 1997 and 1996, respectively. To the extent that
subsequent claims information varies from management's estimates, any
adjustments resulting therefrom are reflected in current operating results.
Investments of Insurance Subsidiary
Investments of the Company's wholly-owned insurance subsidiary are
predominantly classified as "available for sale" per the provisions of
Statement of Financial Accounting Standards No. 115, "Accounting for Certain
Investments in Debt and Equity Securities" ("SFAS 115"), (see NOTE 13).
During 1997, a portion of the insurance subsidiary's investments
(approximately $57 million of equity securities at December 31, 1997) were
classified as trading securities. Trading securities are bought and held
principally for the purpose of selling them in the near future. Trading
securities are recorded at fair value and unrealized gains and losses are
included in results of operations.
Minority Interests in Consolidated Entities
The consolidated financial statements include all assets, liabilities,
revenues and expenses of less than 100% owned entities controlled by the
Company. Accordingly, management has recorded minority interests in the
earnings and equity of such entities.
The Company is a party to several partnership agreements which generally
include provisions for the redemption of minority interests using specified
valuation techniques.
Earnings Per Share
In 1997, the Financial Accounting Standards Board issued Statement No. 128,
"Earnings per Share" ("SFAS 128"). SFAS 128 replaced the calculation of
primary and fully diluted earnings per share with basic and diluted earnings
per share. Unlike primary earnings per share, basic earnings per share
excludes any dilutive effects of options, warrants and convertible securities.
Diluted earnings per share is very similar to the previously reported fully
diluted earnings per share. Earnings per share amounts for all periods have
been presented, and restated where appropriate, to conform to the Statement
128 requirements.
Stock Based Compensation
The Company applies Accounting Principles Board Opinion No. 25, "Accounting
for Stock Issued to Employees" ("APB 25"), and related interpretations in
accounting for its employee stock benefit plans. Accordingly, no compensation
cost has been recognized for the Company's employee stock benefit plans.
F-9
COLUMBIA/HCA HEALTHCARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 1--ACCOUNTING POLICIES (CONTINUED)
Comprehensive Income
In June 1997, the Financial Accounting Standards Board issued Statement No.
130, "Reporting Comprehensive Income" ("SFAS 130"). SFAS 130 establishes
standards for the reporting and disclosure of comprehensive income and its
components in the financial statements. The Company has elected to report
comprehensive income and its components in the consolidated statements of
stockholders' equity.
Disclosures about Segments of an Enterprise
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 131, "Disclosures about Segments of an
Enterprise and Related Information" ("SFAS 131"). SFAS 131 establishes
standards for the way that public business enterprises report information
about operating segments in annual financial statements and requires that
those enterprises report selected information about operating segments in
interim financial reports. It also establishes standards for related
disclosures about products and services, geographic areas, and major
customers. SFAS 131 is effective for financial statements for fiscal years
beginning after December 15, 1997, and therefore, the Company will adopt the
new requirements retroactively in 1998. Management has not completed its
review of SFAS 131 and the identification of the reportable operating segments
has not been determined.
Reclassifications
Certain prior year amounts have been reclassified to conform to the 1997
presentation.
NOTE 2--INVESTIGATIONS
In March 1997, various facilities of the Company's El Paso, Texas operations
were searched by federal authorities pursuant to search warrants and the
government removed various records and documents. In February 1998, an
additional warrant was executed and a single computer was seized. The Company
believes it may be a target in this investigation.
In July 1997, various Company affiliated facilities and offices were
searched pursuant to search warrants issued by the United States District
Court in several states. During July, September and November 1997, the Company
was also served with subpoenas requesting records and documents related to
laboratory billing, diagnosis related group ("DRG") coding and home health
operations in various states. In January 1998, the Company received a subpoena
which requested records and documents relating to physician relationships.
Also, in July 1997, the United States District Court for the Middle District
of Florida, in Fort Myers, issued an indictment against three employees of a
subsidiary of the Company. The indictment relates to the alleged false
characterization of interest payments on certain debt resulting in Medicare
and CHAMPUS overpayments since 1986 to Columbia Fawcett Memorial Hospital, a
Port Charlotte, Florida hospital that was acquired by the Company in 1992. The
Company has been served with subpoenas for various records and documents.
The Company is cooperating in these investigations and understands it is a
target in these investigations
The Company is the subject of a formal order of investigation by the
Securities and Exchange Commission (the "Commission"). The Company understands
that the investigation includes the
F-10
COLUMBIA/HCA HEALTHCARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 2--INVESTIGATIONS (CONTINUED)
anti-fraud, periodic reporting and internal accounting control provisions of
the federal securities laws.
Management believes the ongoing investigations and related media coverage
are having a negative effect on the Company's results of operations. It is too
early to predict the outcome or effect that the ongoing investigations or the
initiation of additional investigations if any and the related media coverage
will have on the Company's financial condition or results of operations in
future periods. Were the Company to be found in violation of federal or state
laws relating to Medicare, Medicaid or similar programs, the Company could be
subject to substantial monetary fines, civil and criminal penalties and
exclusion from participation in the Medicare and Medicaid programs. Any such
sanctions could have a material adverse effect on the Company's financial
position and results of operations. (See NOTE 15.)
NOTE 3--CHANGE IN MANAGEMENT AND BUSINESS STRATEGY
Change in Management
During 1997, the Company experienced a significant change in management and
changed its business strategy. On July 25, 1997, the Company announced the
resignations of Richard L. Scott, Chairman and Chief Executive Officer and
David T. Vandewater, President and Chief Operating Officer. Thomas F. Frist,
Jr., M.D., Vice Chairman of the Company's Board of Directors, was named
Chairman and Chief Executive Officer. On August 4, 1997, the Company named
Jack O. Bovender, Jr. as President and Chief Operating Officer.
On August 7, 1997, in an effort to address some areas of concern that may
have led to the investigations by certain government agencies, management
announced several significant steps that are being implemented to redefine the
Company's approach to a number of business practices. Some of the steps
include: elimination of annual cash incentive compensation for the Company's
employees, divestiture of the home health care business, the unwinding of
physician interests in hospitals, significant expansion of compliance
programs, increased disclosures in Medicare cost reports, changes in
laboratory billing procedures, increased reviews of Medicare coding and
further guidelines on any transactions with physicians. These changes have
been developed and are being implemented with consideration to laws,
regulations and existing contractual agreements. Management is not currently
able to predict what effect such actions might have on the Company's financial
position or results of operations.
On November 17, 1997, the Company announced that its Board of Directors had
approved an internal operating reorganization plan. Effective January 1, 1998,
the Company was organized into five principal groups--Eastern, Western,
Atlantic, Pacific and America.
The Board of Directors also authorized the evaluation of various
restructuring alternatives which could include divestitures of certain assets
to third parties and spin-offs of certain other assets to the Company's
stockholders. As part of these alternatives, the Company is considering
restructuring into a smaller, more focused company located in strategic
markets. No restructuring plan has been approved by the Board of Directors and
there can be no assurances that a plan will ultimately be approved or
implemented. Any spin-off or other restructuring alternative would require
Board of Directors approval as well as various legal, regulatory and
governmental approvals.
F-11
COLUMBIA/HCA HEALTHCARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 3--CHANGE IN MANAGEMENT AND BUSINESS STRATEGY (CONTINUED)
Business Strategy
The Company's strategy is to be a comprehensive provider of quality health
care services in select markets. The Company maintains and replaces equipment,
renovates and constructs
replacement facilities and adds new services to increase the attractiveness of
its hospitals and other facilities to local physicians and patients. By
developing a comprehensive health care network with a broad range of health
care services located throughout a market area, the Company achieves greater
visibility and is better able to attract and serve physicians and patients.
The Company is also able to reduce operating costs by sharing certain services
among several facilities in the same market and is better positioned to work
with health maintenance organizations ("HMOs"), preferred provider
organizations ("PPOs") and employers.
The Company generally seeks to operate each of its facilities as part of a
network with other health care facilities that it owns or operates within the
same region. In instances where acquisitions of additional facilities in the
area are not possible or practical, the Company may seek joint ventures or
partnership arrangements with other local facilities.
NOTE 4--RESTRUCTURING OF OPERATIONS AND INVESTIGATION RELATED COSTS
During the third and fourth quarters of 1997, the Company recorded the
following pretax charges in connection with the restructuring of operations
(and the related changes in management and business strategy) and the
investigation related costs as discussed in NOTES 2 and 3 (in millions):
Severance costs...................................................... $ 61
Professional fees related to investigations.......................... 44
Cancelled projects................................................... 20
Other................................................................ 15
----
Total................................................................ $140
====
F-12
COLUMBIA/HCA HEALTHCARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 5--MERGER AND FACILITY CONSOLIDATION COSTS
In the second quarter of 1995, the Company recorded the following pretax
charges in connection with the Healthtrust Merger (in millions):
Severance costs...................................................... $ 46
Investment advisory and professional fees............................ 14
Costs of information systems consolidations.......................... 19
Other................................................................ 26
----
105
Write-down of assets in connection with consolidation of duplicative
facilities and facility replacements................................ 282
----
Total................................................................ $387
====
NOTE 6--IMPAIRMENT OF LONG-LIVED ASSETS
The Company adopted Statement of Financial Accounting Standards No. 121,
"Accounting for the Impairment of Long-Lived Assets and Long-Lived Assets to
be Disposed of" ("SFAS 121"), during the first quarter of 1996. SFAS 121
addresses accounting for the impairment of long-lived assets and long-lived
assets to be disposed of, certain identifiable intangibles and goodwill
related to those assets, and provides guidance for recognizing and measuring
impairment losses. The statement requires that the carrying amount of impaired
assets be reduced to fair value. SFAS 121 is not materially different from the
Company's prior policy related to regular periodic reviews of long-lived
assets for possible impairment.
During the fourth quarter of 1997, in connection with the changes in
management and business strategy (see NOTE 3), the Company decided to close or
sell twenty hospital facilities and fifteen surgery centers (primarily optical
surgery centers) that were identified as not compatible with the Company's
operating plans. The carrying value of these facilities was reduced to fair
value, based on estimates of selling values, for a total non-cash charge of
$402 million. The Company expects to complete the majority of these sales or
closures during 1998.
The Company recorded, during the fourth quarter of 1997, an impairment loss
of approximately $40 million related to the write-off of intangibles and other
long-lived assets of certain physician practices where the recorded asset
values were not deemed to be fully recoverable based upon the operating
results trend and projected future cash flows. These assets are now recorded
at estimated fair value.
The 1997 charges did not have a significant impact on the Company's 1997
cash flows and are not expected to significantly impact cash flows for future
periods. As a result of the write-downs, depreciation and amortization expense
related to these assets will decrease in future periods. In the aggregate, the
net effect of the change in depreciation and amortization expense is not
expected to have a material effect on operating results for future periods.
NOTE 7--DISCONTINUED OPERATIONS
As part of the Company's change in business strategy (as described in NOTE
3), the Company has implemented plans to sell its home health care businesses
and its pharmacy and behavioral health businesses (including three of the four
business units acquired in the Value Health Merger, as discussed in NOTE 8).
As a result of the plans to divest these businesses, the Company's
F-13
COLUMBIA/HCA HEALTHCARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 7--DISCONTINUED OPERATIONS (CONTINUED)
consolidated financial statements and related notes have been adjusted and
restated to reflect theresults of operations and net assets of the home health
care, pharmacy and behavioral health businesses to be disposed of as
discontinued operations.
Revenues of the businesses to be disposed of were approximately $2.0
billion, $1.1 billion and $563 million for the three years ended December 31,
1997, 1996 and 1995, respectively. Results of operations for these businesses,
including interest expense associated with the debt incurred to complete the
Value Health Merger, are included in "Income from operations of discontinued
businesses" in the consolidated statements of operations.
The Company anticipates that sales of these businesses will be completed
during 1998 (see NOTE 21). Management estimates the Company will incur
combined after-tax losses on disposals of the home health care business and
the pharmacy and behavioral health care businesses of approximately $443
million. Accordingly, the estimated loss was recorded in the fourth quarter of
1997 and is reflected in the "Discontinued operations" section of the
consolidated statements of operations.
NOTE 8--MERGERS
Value Health Merger
The Value Health Merger was completed on August 6, 1997. Value Health is a
provider of specialty managed care benefit programs. In connection with the
Value Health Merger, Value Health stockholders received $20.50 in cash for
each Value Health common share. The total purchase price, including
transaction costs and the assumption of $165 million of Value Health debt, was
approximately $1.4 billion.
The Value Health Merger has been accounted for by the purchase method and
accordingly, the results of operations of Value Health have been included with
those of the Company for periods subsequent to the acquisition date. The
excess of the aggregate purchase price over the estimated fair value of net
assets acquired, net of write-downs to expected net realizable value recorded
as part of the estimated loss discussed in NOTE 7, was approximately $470
million and is being amortized over a 30 year period.
On August 28, 1997, the Company announced plans to divest three of the four
business units acquired in the Value Health Merger. The Value Health
businesses to be divested include the managed behavioral health care unit, the
information technology unit (which develops disease management programs) and
the pharmacy benefit management unit. The results of operations and net assets
of these entities are included in discontinued operations (see NOTE 7).
Healthtrust Merger
The Healthtrust Merger was consummated during April 1995. Healthtrust was
one of the largest providers of health care services in the United States and,
at the merger date, owned and operated 117 acute care hospitals. In connection
with the Healthtrust merger, all the outstanding shares of Healthtrust common
stock were converted on a tax-free basis into approximately 120,617,700 shares
of the Company's voting common stock.
The Healthtrust Merger has been accounted for as a pooling of interests, and
accordingly, the consolidated financial statements include the operations of
Healthtrust for all periods presented.
F-14
COLUMBIA/HCA HEALTHCARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 9--OTHER BUSINESS COMBINATIONS
During the past three years, the Company has acquired various hospitals and
related health care entities (or controlling interests in such entities), all
of which have been accounted for by the purchase method. The aggregate
purchase price of these transactions has been allocated to the assets acquired
and liabilities assumed based upon their respective fair values. The
consolidated financial statements include the accounts and operations of
acquired entities for periods subsequent to the respective acquisition dates.
The following is a summary of hospitals and other health care entity
acquisitions consummated during the last three years under the purchase method
of accounting (excluding the Value Health Merger) (dollars in millions):
1997 1996 1995
---- ------ ------
Number of hospitals.................................. 5 14 29
Number of licensed beds.............................. 974 2,652 5,647
Purchase price information:
Hospitals:
Fair value of assets acquired.................... $162 $ 737 $1,812
Liabilities assumed.............................. (39) (103) (148)
---- ------ ------
Net assets acquired............................ 123 634 1,664
Contributions from minority partners............. (24) (133) (331)
---- ------ ------
99 501 1,333
Other health care entities......................... 312 247 145
---- ------ ------
Net cash paid.................................. $411 $ 748 $1,478
==== ====== ======
The purchase price paid in excess of the fair value of identifiable net
assets of acquired entities aggregated $221 million in 1997, $291 million in
1996 and $574 million in 1995.
The pro forma effect of these acquisitions on the Company's results of
operations for the periods prior to the respective consummation dates was not
significant.
NOTE 10--INCOME TAXES
Provision for income taxes consists of the following (dollars in millions):
1997 1996 1995
---- ---- ----
Current:
Federal.................................................. $313 $804 $572
State.................................................... 56 145 102
Deferred:
Federal.................................................. (134) 27 12
State.................................................... (29) 5 3
---- ---- ----
$206 $981 $689
==== ==== ====
F-15
COLUMBIA/HCA HEALTHCARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 10--INCOME TAXES (CONTINUED)
A reconciliation of the federal statutory rate to the effective income tax
rate follows:
1997 1996 1995
---- ---- ----
Federal statutory rate................................... 35.0% 35.0% 35.0%
State income taxes, net of federal income tax benefit.... 4.6 4.0 4.0
Non-deductible intangible assets......................... 12.7 1.3 1.7
Other items, net......................................... 0.6 (0.2) (0.5)
---- ---- ----
Effective income tax rate................................ 52.9% 40.1% 40.2%
==== ==== ====
A summary of the items comprising the deferred tax assets and liabilities at
December 31 follows (dollars in millions):
1997 1996
------------------ ------------------
ASSETS LIABILITIES ASSETS LIABILITIES
------ ----------- ------ -----------
Depreciation and fixed asset basis
differences....................... $ -- $648 $-- $ 793
Professional liability risks....... 395 -- 369 --
Doubtful accounts.................. 360 -- 158 --
Compensation....................... 104 -- 98 --
Other.............................. 170 260 202 262
------ ---- ---- ------
$1,029 $908 $827 $1,055
====== ==== ==== ======
Deferred income taxes of $423 million and $415 million at December 31, 1997
and 1996, respectively, are included in other current assets. Noncurrent
deferred income tax liabilities totaled $302 million and $643 million at
December 31, 1997 and 1996, respectively.
At December 31, 1997, federal and state net operating loss carryforwards
(expiring in years 1998 through 2003) available to offset future taxable
income approximated $96 million and $580 million, respectively. Utilization of
net operating loss carryforwards in any one year may be limited and, in
certain cases, result in a reduction of intangible assets. Net deferred tax
assets related to such carryforwards are not significant.
IRS Disputes Resolved During 1997
In October 1997, the United States Tax Court (the "Tax Court") ruled in
favor of HCA-Hospital Corporation of America ("HCA") with respect to its claim
that insurance premiums paid to its wholly-owned insurance subsidiary
("Parthenon") from 1981 through 1988 were deductible. Through December 31,
1997, the Company was seeking a refund of income tax and interest totaling
$207 million.
In December 1997, the Company and the Internal Revenue Service (the "IRS")
filed a stipulated settlement with the Tax Court regarding the IRS proposed
disallowance of certain stock option compensation which HCA deducted in
calculating its 1992 taxable income. As a result of the settlement, the
Company owed additional tax and interest of $71 million through December 31,
1997. Had the entire deduction been disallowed, the Company would have owed
additional tax and interest of $276 million.
F-16
COLUMBIA/HCA HEALTHCARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 10--INCOME TAXES (CONTINUED)
Neither the Parthenon decision nor the stock option compensation settlement
had a material impact on the Company's results of operations.
Pending IRS Disputes
The Company is currently contesting before the Tax Court and the United
States Court of Federal Claims certain claimed deficiencies and adjustments
proposed by the IRS in conjunction with its examination of the Company's 1994
federal income tax return, Columbia Healthcare Corporation's ("CHC") 1993 and
1994 federal income tax returns, HCA's 1981 through 1993 federal income tax
returns and Healthtrust's 1990 through 1992 federal income tax returns. The
disputed items include: the disallowance of certain acquisition-related costs,
executive compensation, system conversion costs and insurance premiums which
were deducted in calculating taxable income in 1993 and 1994; and the methods
of accounting used by certain subsidiaries for calculating taxable income
related to vendor rebates and governmental receivables in 1993 and 1994. The
IRS is claiming an additional $271 million in income taxes and interest
through December 31, 1997.
The Tax Court opinions received in 1996 and 1997 involving the use of the
cash method of accounting by certain of HCA's subsidiaries for the years 1981
through 1986, the timing of the recognition of certain deferred income by HCA
and the valuation of Healthtrust preferred stock and stock purchase warrants
HCA received in connection with its sale of certain subsidiaries to
Healthtrust in 1987, the formula which HCA utilized for calculating the tax
reserve for doubtful accounts and the eligibility of certain receivables for
the reserve method, and the deductibility of insurance premiums paid to
Parthenon may be appealed by the IRS or the Company to the United States Court
of Appeals, Sixth Circuit. Any decisions regarding appeal of these rulings are
expected to be made during 1998.
Management believes that adequate provisions have been recorded to satisfy
final resolution of the disputed issues. Management believes that the Company,
CHC, HCA and Healthtrust properly reported taxable income and paid taxes in
accordance with applicable laws and agreements established with the IRS during
previous examinations and that final resolution of these disputes will not
have a material adverse effect on the results of operations or financial
position of the Company.
NOTE 11--ACCOUNTING CHANGE
In the fourth quarter of 1997, the Company changed its method of accounting
for start-up costs. The change involved expensing these costs as incurred,
rather than capitalizing and subsequently amortizing such costs. The Company
believes the new method is preferable due to the changes in the Company's
business strategy and reviews of emerging accounting guidance on accounting
for similar (i.e., start-up, software system training and process
reengineering) costs.
The change in accounting principle resulted in the write-off of the costs
capitalized as of January 1, 1997. The cumulative effect of the write-off,
which totals $56 million (net of tax benefit), has been expensed and reflected
in the 1997 statement of operations. Had the new method been used in the past,
the pro forma effect on prior years would have primarily affected 1996 (such
costs incurred for periods prior to 1996 are considered immaterial to
operations for those periods). The pro forma effect on 1997 and 1996 follows
(dollars in millions, except per share amounts):
F-17
COLUMBIA/HCA HEALTHCARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 11--ACCOUNTING CHANGE (CONTINUED)
1997 1996
------------------ ------------------
AS AS
REPORTED PRO FORMA REPORTED PRO FORMA
-------- --------- -------- ---------
Income from continuing operations...... $ 182 $ 182 $1,461 $1,405
Earnings per share--basic............ $ .28 $ .28 $ 2.17 $ 2.08
Earnings per share--diluted.......... $ .27 $ .27 $ 2.15 $ 2.07
Net income (loss)...................... $(305) $(249) $1,505 $1,449
Earnings (loss) per share--basic..... $(.46) $(.37) $ 2.24 $ 2.15
Earnings (loss) per share--diluted... $(.46) $(.38) $ 2.22 $ 2.14
NOTE 12--EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted earnings
per share from continuing operations (dollars in millions, except per share
amounts):
1997 1996 1995
------- ------- -------
Numerator (a):
Income from continuing operations................. $ 182 $ 1,461 $ 1,025
======= ======= =======
Denominator:
Share reconciliation (in thousands):
Shares used for basic earnings per share........ 657,931 670,774 665,407
Effect of dilutive securities:
Stock options................................. 4,407 6,214 7,122
Warrants and other............................ 752 898 542
------- ------- -------
Shares used for dilutive earnings per share....... 663,090 677,886 673,071
======= ======= =======
Earnings per share:
Basic earnings per share from continuing
operations....................................... $ .28 $ 2.17 $ 1.54
======= ======= =======
Diluted earnings per share from continuing
operations....................................... $ .27 $ 2.15 $ 1.52
======= ======= =======
(a) Amount is used for both basic and diluted earnings per share
computations since there is no earnings effect related to the dilutive
securities.
F-18
COLUMBIA/HCA HEALTHCARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 13--INVESTMENTS OF INSURANCE SUBSIDIARY
A summary of the insurance subsidiary's available for sale investments at
December 31 follows (dollars in millions):
1997
-----------------------------
UNREALIZED
AMOUNTS
AMORTIZED ------------ FAIR
COST GAINS LOSSES VALUE
--------- ----- ------ ------
Fixed maturities:
United States Government....................... $ 17 $ - $ - $ 17
States and municipalities...................... 657 24 - 681
Mortgage-backed securities..................... 107 2 - 109
Corporate and other............................ 128 3 (1) 130
Money market funds............................. 63 - - 63
Redeemable preferred stocks.................... 64 - - 64
------ ---- ---- ------
1,036 29 (1) 1,064
------ ---- ---- ------
Equity securities:
Perpetual preferred stocks..................... 36 1 (1) 36
Common stocks.................................. 303 130 (18) 415
------ ---- ---- ------
339 131 (19) 451
------ ---- ---- ------
$1,375 $160 $(20) 1,515
====== ==== ====
Amounts classified as current assets........... (93)
------
Investment carrying value...................... $1,422
======
1996
-----------------------------
UNREALIZED
AMOUNTS
AMORTIZED ------------ FAIR
COST GAINS LOSSES VALUE
--------- ----- ------ ------
Fixed maturities:
United States Government....................... $ 28 $ - $ - $ 28
States and municipalities...................... 462 11 (1) 472
Mortgage-backed securities..................... 131 1 (1) 131
Corporate and other............................ 126 2 - 128
Money market funds............................. 86 - - 86
Redeemable preferred stocks.................... 24 - - 24
------ ---- ---- ------
857 14 (2) 869
------ ---- ---- ------
Equity securities:
Perpetual preferred stocks..................... 10 - - 10
Common stocks.................................. 308 83 (11) 380
------ ---- ---- ------
318 83 (11) 390
------ ---- ---- ------
$1,175 $ 97 $(13) 1,259
====== ==== ====
Amounts classified as current assets........... (140)
------
Investment carrying value...................... $1,119
======
The fair value of investment securities is generally based on quoted market
prices.
F-19
COLUMBIA/HCA HEALTHCARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 13--INVESTMENTS OF INSURANCE SUBSIDIARY (CONTINUED)
Scheduled maturities of investments in debt securities at December 31, 1997
were as follows (dollars in millions):
AMORTIZED FAIR
COST VALUE
--------- ------
Due in one year or less................................ $ 139 $ 139
Due after one year through five years.................. 228 232
Due after five years through ten years................. 323 336
Due after ten years.................................... 239 248
------ ------
929 955
Mortgage-backed securities............................. 107 109
------ ------
$1,036 $1,064
====== ======
The average expected maturity of the investments in debt securities listed
above approximated 4.5 years at December 31, 1997. Expected and scheduled
maturities may differ because the issuers of certain securities may have the
right to call, prepay or otherwise redeem such obligations without penalty.
The tax equivalent yield on investments (including common stocks) averaged
12% for 1997, 7% for 1996 and 9% for 1995. Tax equivalent yield is the rate
earned on invested assets, excluding unrealized gains and losses, adjusted for
the benefit of such investment income not being subject to taxation.
Sales of securities for the years ended December 31 are summarized below
(dollars in millions). The cost of securities sold is based on the specific
identification method.
1997 1996 1995
---- ---- ----
Fixed maturities:
Cash proceeds............................................. $364 $287 $427
Gross realized gains...................................... 3 3 3
Gross realized losses..................................... 1 3 1
Equity securities:
Cash proceeds............................................. $249 $135 $149
Gross realized gains...................................... 76 27 33
Gross realized losses..................................... 10 13 8
F-20
COLUMBIA/HCA HEALTHCARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 14--LONG TERM DEBT
Capitalization
A summary of long-term debt at December 31 follows (including related
interest rates for 1997) (dollars in millions):
1997 1996
------ ------
Senior collateralized debt, 3.5% to 18.0% (rates generally fixed)
payable in periodic installments through 2034................... $ 247 $ 207
Senior debt, 6.0% to 13.3% (rates generally fixed) payable in
periodic installments through 2095.............................. 4,283 4,219
Commercial paper (rates generally floating)...................... - 2,302
Bank credit agreements (floating rates averaging 6.2%)........... 4,755 -
Bank line of credit ............................................. - 130
Subordinated debt, 6.8% to 8.5% (rates generally fixed) payable
in periodic installments through 2015........................... 123 124
------ ------
Total debt, average life of nine years (rates averaging 7.0%).... 9,408 6,982
Less amounts due within one year................................. 132 201
------ ------
$9,276 $6,781
====== ======
Credit Facilities
The Company's revolving credit facilities (the "Credit Facilities") are
comprised of a $2.0 billion, five-year revolving credit agreement expiring
February 2002 and a $3.0 billion, 364-day revolving credit agreement expiring
June 1998. Borrowings under the 364-day revolving credit agreement do not
mature until one year subsequent to the end of the 364-day period. As of
December 31, 1997, the Company had $1.755 billion and $3.0 billion outstanding
under the five-year and 364-day revolving credit agreements, respectively.
Subsequent to December 31, 1997, the Company amended its Credit Facilities.
As of February 1998, interest is payable generally at either LIBOR plus .45%
to 1.75% (depending on the Company's credit ratings), the prime lending rate
or a competitive bid rate. The Credit Facilities contain customary covenants
which include (i) limitations on additional debt, (ii) limitations on sales of
assets, mergers and changes of ownership, (iii) limitations on repurchases of
the Company's common stock, (iv) maintenance of certain interest coverage
ratios and (v) attaining certain minimum levels of consolidated earnings
before interest, taxes, depreciation and amortization. The Credit Facilities
also provide for the mandatory prepayment of loans thereunder and a
corresponding reduction of commitments in the case of certain asset sales and
certain debt or equity issuances.
Significant Financing Activities
1997
During 1997, the Company's senior debt credit ratings were downgraded from
A2 to Baa2 and from A- to BBB by Moody's Investors Service ("Moody's") and
Standard and Poor's ("S&P"), respectively. The Company's commercial paper
ratings were downgraded from P-1 to P-3 and from A-2 to A-3 by Moody's and
S&P, respectively. The decline in the Company's commercial paper ratings has
significantly limited access to this financing source. As such, during the
third quarter of 1997, the Company began replacing amounts outstanding under
its commercial paper programs with borrowings under its Credit Facilities. In
February 1998, Moody's further downgraded the Company's senior debt credit
rating to Ba2 and its commercial paper rating to NP (not prime).
F-21
COLUMBIA/HCA HEALTHCARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 14--LONG TERM DEBT (CONTINUED)
In June 1997, the Company issued $200 million of 7.00% notes due 2007.
1996
During 1996, the Company issued $100 million of 6.875% notes due 2001; $200
million of 7.25% notes due 2008 and $100 million of 7.75% debentures due 2036.
1995
In connection with the Healthtrust Merger, the Company completed exchange
offers for substantially all of Healthtrust's $1.0 billion subordinated notes
and debentures. The Company defeased the remaining $44 million of unexchanged
subordinated notes and debentures.
Also during 1995, the Company issued $150 million of 6.63% notes due 2002;
$100 million of 6.73% notes due 2003; $125 million of 6.87% notes due 2003;
$150 million of 8.7% notes due 2010; $150 million of 9.0% notes due 2014; $150
million of 7.19% debentures due 2015; $125 million of 7.58% debentures due
2025; $150 million of 7.05% debentures due 2027 and $200 million of 7.5%
debentures due 2095.
General Information
Maturities of long-term debt in years 1999 through 2002 (excluding
borrowings under the Credit Facilities) are $228 million, $420 million, $229
million and $271 million, respectively.
During 1995, the Company reduced interest costs and eliminated certain
restrictive covenants by refinancing or prepaying high interest rate debt,
primarily through the use of existing cash and cash equivalents and issuance
of long-term debt, commercial paper and equity. Amounts refinanced or prepaid
totaled $1.8 billion in 1995. After tax losses from refinancing activities
aggregated $103 million.
The estimated fair value of the Company's long-term debt was $9.5 billion
and $7.3 billion at December 31, 1997 and 1996, respectively, compared to
carrying amounts aggregating $9.4 billion and $7.0 billion, respectively. The
estimate of fair value is based upon the quoted market prices for the same or
similar issues of long-term debt with the same maturities.
NOTE 15--CONTINGENCIES
Significant Legal Proceedings
Various lawsuits, claims and legal proceedings (see NOTE 2 for a description
of the ongoing government investigations) have been or may be instituted or
asserted against the Company, including those relating to shareholder
derivative and class action complaints; purported class action lawsuits filed
by patients and payers alleging, in general, improper and fraudulent billing,
coding and physician referrals, as well as other violations of law; certain
qui tam or "whistleblower" actions alleging, in general, unlawful claims for
reimbursement or unlawful payments to physicians for the referral of patients
and other litigation matters. While the amounts claimed may be substantial,
the ultimate liability cannot be determined or reasonably estimated at this
time due to the considerable uncertainties that exist. Therefore, it is
possible that results of operations, financial position and liquidity in a
particular period could be materially, adversely affected upon the resolution
of certain of these contingencies.
General Liability Claims
The Company is subject to claims and suits arising in the ordinary course of
business, including claims for personal injuries or wrongful restriction of,
or interference with, physicians'
F-22
COLUMBIA/HCA HEALTHCARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 15--CONTINGENCIES (CONTINUED)
staff privileges. In certain of these actions the claimants have asked for
punitive damages against the Company, which are usually not covered by
insurance. It is management's opinion that the ultimate resolution of these
pending claims and legal proceedings will not have a material adverse effect
on the Company's results of operations or financial position.
NOTE 16--CAPITAL STOCK AND STOCK REPURCHASES
Capital Stock
The terms and conditions associated with each class of the Company's common
stock are substantially identical except for voting rights. All nonvoting
common stockholders may convert their shares on a one-for-one basis into
voting common stock, subject to certain limitations. In addition, certain
voting common stockholders may convert their shares on a one-for-one basis
into nonvoting common stock.
On May 15, 1997, the Board of Directors of the Company authorized the
redemption of all outstanding preferred stock purchase rights. The redemption
price of $.01 per share was paid on September 1, 1997 and was distributed to
stockholders along with the quarterly dividend.
Stock Repurchase Program
The Company announced in April 1997 that the Company's Board of Directors
authorized the repurchase of up to $1 billion of the Company's common stock.
At December 31, 1997, the Company had completed the repurchase program by
acquiring approximately 29.4 million shares. Repurchased shares are available
for reissuance for general corporate purposes.
Other Stock Repurchases
The Board of Directors has authorized the Company to repurchase shares to be
used for stock issuances related to the Company's employee stock benefit
plans. During 1997, the Company repurchased approximately 8.5 million shares
(at a cost of approximately $273 million) to fund employee stock benefit plan
issuances.
NOTE 17--STOCK BENEFIT PLANS
The Columbia/HCA Healthcare Corporation 1992 Stock and Incentive Plan (the
"1992 Plan") is the primary plan under which options to purchase common stock
may be granted to officers, employees, and directors. In May 1996, the
stockholders approved an amendment to the 1992 Plan which increased the number
of options authorized to 60,000,000 of which 18,371,000 are available for
grant at December 31, 1997. Under the 1992 Plan, options are generally granted
at no less than market price on the date of grant. Options are exercisable in
whole or in part beginning two to five years after the grant and ending ten
years after the grant.
In October 1997, the Compensation Committee of the Company's Board of
Directors modified and amended the 1992 Plan agreements to provide for
immediate and 100% vesting upon a "change of control" of the Company as
defined in the 1992 Plan agreement amendment. The amendment is applicable for
all options available for grant as well as all options previously issued under
the 1992 Plan.
F-23
COLUMBIA/HCA HEALTHCARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 17--STOCK BENEFIT PLANS (CONTINUED)
In the past, Columbia has had various other plans under which options to
purchase common stock have been granted to officers, employees and directors.
Generally, options have been granted at no less than the market price on the
date of grant. Exercise provisions vary, but most options are exercisable in
whole or in part beginning two to four years after the grant and ending four
to fifteen years after grant.
Information regarding these option plans for 1997, 1996 and 1995 is
summarized below (share amounts in thousands):
STOCK OPTION PRICE WEIGHTED AVERAGE
OPTIONS PER SHARE EXERCISE PRICE
------- --------------- ----------------
Balances, December 31, 1994........... 24,848 $0.01 to $38.11 $15.29
Granted............................. 9,401 26.51 to 32.50 27.39
Exercised........................... (5,484) 0.01 to 31.36 10.81
Cancelled........................... (2,381) 0.14 to 38.11 22.86
------
Balances, December 31, 1995........... 26,384 0.14 to 38.11 19.87
Granted............................. 10,446 26.58 to 38.92 37.13
Exercised........................... (4,329) 0.14 to 35.25 13.27
Cancelled........................... (3,034) 0.40 to 38.11 26.87
------
Balances, December 31, 1996........... 29,467 0.14 to 38.92 26.23
Granted............................. 23,111 26.42 to 43.50 33.68
Conversion of Value Health Stock
Options............................ 3,189 7.11 to 62.72 32.93
Exercised........................... (4,138) 0.14 to 37.67 16.72
Cancelled........................... (6,614) 0.40 to 55.61 33.70
------
Balances, December 31, 1997........... 45,015 0.14 to 62.72 30.18
======
1997 1996 1995
------- ------- -------
Weighted average fair value for options granted during
the year.............................................. $ 11.98 $ 13.47 $ 9.91
Options exercisable.................................... 8,892 7,552 8,280
Options available for grant............................ 18,436 35,613 13,413
The following table summarizes information regarding the options outstanding
at December 31, 1997 (share amounts in thousands):
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
-------------------------------- --------------------
WEIGHTED
AVERAGE WEIGHTED WEIGHTED
NUMBER REMAINING AVERAGE NUMBER AVERAGE
RANGE OF OUTSTANDING CONTRACTUAL EXERCISE EXERCISABLE EXERCISE
EXERCISE PRICES AT 12/31/97 LIFE PRICE AT 12/31/97 PRICE
--------------- ----------- ----------- -------- ----------- --------
$ 3.26 to $38.11.......... 235 1 year $15.30 235 $15.30
12.60 to 35.25.......... 178 3 years 17.90 176 17.80
7.73 to 42.37.......... 2,370 5 years 13.04 2,370 13.04
0.14 to 60.51.......... 5,109 6 years 19.52 3,209 15.89
7.11 to 62.72.......... 5,903 7 years 28.70 1,505 30.11
25.92 to 47.67.......... 9,502 8 years 36.00 984 30.81
28.13 to 43.50.......... 21,452 10 years 33.01 147 37.82
0.14 to 12.86.......... 266 13 years 6.77 266 6.77
------ -----
45,015 8,892
====== =====
F-24
COLUMBIA/HCA HEALTHCARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 17--STOCK BENEFIT PLANS (CONTINUED)
The Company has an Employee Stock Purchase Plan ("ESPP") which provides to
substantially all employees an opportunity to purchase shares of its common
stock at a discount through payroll deductions over six month intervals.
Shares of common stock reserved for the Company's employee stock purchase plan
were 7,239,000 at December 31, 1997.
The Company applies APB 25 in accounting for its employee stock option and
stock purchase plans, and accordingly, compensation cost is not recognized in
the financial statements. As required by Statement of Financial Accounting
Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123"), the
Company has determined the pro forma net income (loss) and earnings (loss) per
share as if compensation cost for the Company's employee stock option and
stock purchase plans had been determined based upon their fair value at the
grant date. These pro forma amounts are as follows (dollars in millions,
except per share amounts):
1997 1996 1995
----- ------ -----
Net income (loss):
As reported: ....................................... $(305) $1,505 $ 961
Pro forma: ......................................... (344) 1,471 937
Basic earnings (loss) per share:
As reported: ....................................... $(.46) $ 2.24 $1.44
Pro forma: ......................................... (.52) 2.19 1.41
Diluted earnings (loss) per share:
As reported: ....................................... $(.46) $ 2.22 $1.43
Pro forma: ......................................... (.52) 2.17 1.39
The pro forma impact only takes into account employee stock options granted
since January 1, 1995 and is likely to increase in future years as additional
options are granted and amortized ratably over the vesting period.
For SFAS 123 purposes, the weighted average fair values of the Company's
stock options granted in 1997, 1996 and 1995 were $11.98, $13.47 and $9.91,
respectively. The fair values were estimated using the Black-Scholes option
valuation model with the following weighted average assumptions:
1997 1996 1995
---- ---- ----
Risk-free interest rate.................................. 5.61% 5.81% 5.74%
Expected volatility...................................... .239 .239 .239
Expected life, in years.................................. 6 6 6
Expected dividend yield.................................. .23% .19% .19%
The pro forma compensation costs related to the shares of common stock
issued under the ESPP were $14 million, $19 million and $18 million for the
years 1997, 1996 and 1995, respectively. These pro forma costs were estimated
based on the difference between the price paid and the fair market value of
the stock on the last day of the subscription period.
NOTE 18--EMPLOYEE BENEFIT PLANS
The Company maintains noncontributory defined contribution retirement plans
covering substantially all employees. Benefits are determined as a percentage
of a participant's earned
F-25
COLUMBIA/HCA HEALTHCARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 18--EMPLOYEE BENEFIT PLANS (CONTINUED)
income and are vested over specified periods of employee service. Retirement
plan expense was $194 million for 1997, $164 million for 1996 and $104 million
for 1995. Amounts approximately equal to retirement plan expenses are funded
annually.
The Company maintains various contributory benefit plans which are available
to employees who meet certain minimum requirements. Certain of the plans
require that the Company match amounts ranging from 25% to 100% of a
participant's contribution up to certain maximum levels. The cost of these
plans totaled $19 million for 1997, $18 million for 1996 and $24 million for
1995. The Company's contributions are funded periodically during the year.
NOTE 19--OTHER COMPREHENSIVE INCOME
The following table sets forth the components of other comprehensive income
along with the respective tax provision (benefit) and the reclassification
adjustments needed to exclude the portion of other comprehensive income
already included in net income (loss), (in millions):
TAX AFTER-
PRETAX PROVISION TAX
AMOUNT (BENEFIT) AMOUNT
------ --------- ------
1997
Unrealized gains on securities:
Unrealized holding gains arising during the period. $147 $51 $96
Less: reclassification adjustments for gains
realized in net income............................ (91) (33) (58)
---- --- ---
Net unrealized gains............................... 56 18 38
Foreign currency translation adjustments:
Unrealized translation adjustments arising during
the period........................................ 16 6 10
Less: reclassification adjustments for gain
realized in net income............................ (13) (5) (8)
---- --- ---
Net unrealized translation adjustments............. 3 1 2
---- --- ---
Other comprehensive income....................... $ 59 $19 $40
==== === ===
1996
Unrealized gains on securities:
Unrealized holding gains arising during the period. $ 53 $20 $33
Less: reclassification adjustments for gains
realized in net income............................ (14) (5) (9)
---- --- ---
Net unrealized gains............................... 39 15 24
Foreign currency translation adjustments............. (10) (4) (6)
---- --- ---
Other comprehensive income....................... $ 29 $11 $18
==== === ===
1995
Unrealized gains on securities:
Unrealized holding gains arising during the period. $ 77 $30 $47
Less: reclassification adjustments for gains
realized in net income............................ (27) (11) (16)
---- --- ---
Net unrealized gains............................... 50 19 31
Foreign currency translation adjustments............. 12 5 7
---- --- ---
Other comprehensive income....................... $ 62 $24 $38
==== === ===
F-26
COLUMBIA/HCA HEALTHCARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 20--ACCRUED EXPENSES AND ALLOWANCES FOR DOUBTFUL ACCOUNTS
A summary of other accrued expenses at December 31 follows (in millions):
1997 1996
------ ------
Workers compensation........................................ $ 105 $ 114
Taxes other than income..................................... 209 193
Professional liability risks................................ 200 240
Employee benefit plans...................................... 234 206
Interest.................................................... 194 213
Other....................................................... 295 326
------ ------
$1,237 $1,292
====== ======
A summary of activity in the Company's allowances for doubtful accounts
follows (in millions):
ADDITIONS ACCOUNTS
BALANCES AT CHARGED TO WRITTEN-OFF, BALANCE
BEGINNING COSTS AND NET OF AT END
OF PERIOD EXPENSES RECOVERIES OF PERIOD
----------- ---------- ------------ ---------
Allowances for doubtful
accounts:
Year-ended December 31,
1995.................... $1,054 $ 994 $ (883) $1,165
Year-ended December 31,
1996.................... 1,165 1,196 (981) 1,380
Year-ended December 31,
1997.................... 1,380 1,420 (1,139) 1,661
NOTE 21--SUBSEQUENT EVENT
Proposed Sales
Subsequent to year end, the Company announced agreements to sell Value
Behavioral Health ("VBH") and Value Rx for $230 million and $445 million in
cash, respectively. VBH is a provider of managed behavioral health care
services and Value Rx is a pharmacy benefit management company. VBH and Value
Rx represent two of the four businesses acquired through the Value Health
Merger (see NOTE 8). The sales of both businesses are anticipated to be
completed during the second quarter of 1998, subject to regulatory approval,
and are not expected to have a material effect on results of operations. The
proceeds from the sales are expected to be used to repay bank borrowings.
F-27
COLUMBIA/HCA HEALTHCARE CORPORATION
QUARTERLY CONSOLIDATED FINANCIAL INFORMATION
(UNAUDITED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
1997
-----------------------------
FIRST SECOND THIRD FOURTH
------ ------ ------ -------
Revenues........................................ $4,988 $4,845 $4,612 $ 4,374
Net income (loss):
Income (loss) from continuing operations (a)... $ 455 $ 385 $ 91 $ (749)
Income (loss) from discontinued operations
(b)........................................... 24 27 6 (488)
Cumulative effect of accounting change (c) .... (56) - - -
------ ------ ------ -------
Net income (loss)............................ $ 423 $ 412 $ 97 $(1,237)
====== ====== ====== =======
Basic earnings (loss) per share (d):
Income (loss) from continuing operations....... $ .67 $ .58 $ .15 $ (1.16)
Income (loss) from discontinued operations..... .04 .04 .01 (.76)
Cumulative effect of accounting change ........ (.08) - - -
------ ------ ------ -------
Net income (loss)............................ $ .63 $ .62 $ .16 $ (1.92)
====== ====== ====== =======
Diluted earnings (loss) per share (d):
Income (loss) from continuing operations....... $ .66 $ .58 $ .15 $ (1.16)
Income (loss) from discontinued operations..... .04 .04 .01 (.76)
Cumulative effect of accounting change ........ (.08) - - -
------ ------ ------ -------
Net income (loss)............................ $ .62 $ .62 $ .16 $ (1.92)
====== ====== ====== =======
Cash dividends.................................. $ .02 $ .02 $ .01 $ .02
Redemption of preferred stock purchase rights... - - .01 -
Market prices (e):
High........................................... $44.88 $40.00 $40.44 $ 32.13
Low............................................ 31.25 30.38 26.63 25.75
1996
-----------------------------
FIRST SECOND THIRD FOURTH
------ ------ ------ -------
Revenues........................................ $4,693 $4,671 $4,605 $ 4,817
Net income:
Income from continuing operations.............. $ 403 $ 361 $ 299 $ 398
Income from discontinued operations............ 13 3 12 16
------ ------ ------ -------
Net income................................... $ 416 $ 364 $ 311 $ 414
====== ====== ====== =======
Basic earnings per share (d):
Income from continuing operations.............. $ .60 $ .54 $ .45 $ .58
Income from discontinued operations............ .02 - .02 .03
------ ------ ------ -------
Net income................................... $ .62 $ .54 $ .47 $ .61
====== ====== ====== =======
Diluted earnings per share (d):
Income from continuing operations.............. $ .59 $ .54 $ .44 $ .58
Income from discontinued operations............ .02 - .02 .03
------ ------ ------ -------
Net income................................... $ .61 $ .54 $ .46 $ .61
====== ====== ====== =======
Cash dividends.................................. $ .02 $ .02 $ .02 $ .02
Market prices (e):
High........................................... $39.08 $38.17 $39.25 $ 41.88
Low............................................ 33.42 32.92 31.67 34.50
- -------
(a) Fourth quarter results include $290 million ($.45 per basic and diluted
share) of after-tax charges related to the impairment of long-lived assets
(see NOTE 6 of the notes to consolidated financial statements) and $55
million ($.08 per basic and diluted share) of after-tax costs related to
restructuring and investigations (see NOTE 4 of the notes to consolidated
financial statements).
(b) Fourth quarter results include $443 million ($.69 per basic and diluted
share) of after-tax charges related to the estimated loss on disposal of
discontinued businesses (see NOTE 7 of the notes to consolidated financial
statements).
(c) The first quarter of 1997 has been restated to reflect the effect of
adopting a change in accounting principle related to start-up costs (see
NOTE 11 of the notes to consolidated financial statements). The effect of
the accounting change was not material to the results of operations for
the other 1997 quarters or the 1996 quarters.
(d) The 1996 and the first three quarters of 1997 earnings per share amounts
have been restated to comply with the Statement of Financial Accounting
Standards No. 128, "Earnings per Share."
(e) Represents high and low sales prices of the Company's common stock, which
is traded on the New York Stock Exchange (ticker symbol COL).
F-28