- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1997
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ______________ TO ______________
COMMISSION FILE NUMBER 1-11239
COLUMBIA/HCA HEALTHCARE CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 75-2497104
(STATE OR OTHER JURISDICTION (I.R.S. EMPLOYER
OF INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
ONE PARK PLAZA 37203
NASHVILLE, TENNESSEE (ZIP CODE)
(ADDRESS OF PRINCIPAL EXECUTIVE
OFFICES)
(615) 344-9551
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
NOT APPLICABLE
(FORMER NAME, FORMER ADDRESS AND FORMER FISCAL YEAR,
IF CHANGED SINCE LAST REPORT)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months, and (2) has been subject to such filing
requirements for the past 90 days.
YES X NO
-----
Indicate the number of shares outstanding of each of the issuer's classes of
common stock of the latest practical date.
OUTSTANDING AT OCTOBER
CLASS OF COMMON STOCK 31, 1997
--------------------- ----------------------
Voting common stock, $.01 par value 626,553,000 shares
Nonvoting common stock, $.01 par value 21,000,000 shares
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1 of 26
COLUMBIA/HCA HEALTHCARE CORPORATION
FORM 10-Q
SEPTEMBER 30, 1997
PAGE OF
PART I: FINANCIAL INFORMATION FORM 10-Q
- ----------------------------- ---------
Item 1. Financial Statements
Condensed Consolidated Statements of Income--for the quarters and
nine months ended September 30, 1997 and 1996...................... 3
Condensed Consolidated Balance Sheets--September 30, 1997 and Decem-
ber 31, 1996....................................................... 4
Condensed Consolidated Statements of Cash Flows--for the nine months
ended September 30, 1997 and 1996.................................. 5
Notes to Condensed Consolidated Financial Statements................ 6
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.................................................. 10
PART II: OTHER INFORMATION
- --------------------------
Items 1 to 6............................................................ 22
2
COLUMBIA/HCA HEALTHCARE CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
FOR THE QUARTERS AND NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
UNAUDITED
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
QUARTER NINE MONTHS
---------------- ----------------
1997 1996 1997 1996
------- ------- ------- -------
Revenues................................... $ 4,612 $ 4,605 $14,445 $13,969
Salaries and benefits...................... 1,895 1,792 5,621 5,412
Supplies................................... 653 649 2,010 1,992
Other operating expenses................... 1,023 939 2,928 2,738
Provision for doubtful accounts............ 369 311 976 865
Depreciation and amortization.............. 319 300 923 842
Interest expense........................... 125 119 361 371
Equity in earnings of affiliates........... (19) (39) (116) (127)
Restructuring of operations and investiga-
tion related costs........................ 64 -- 64 --
------- ------- ------- -------
4,429 4,071 12,767 12,093
------- ------- ------- -------
Income from continuing operations before
minority interests and income taxes....... 183 534 1,678 1,876
Minority interests in earnings of consoli-
dated entities............................ 33 36 125 102
------- ------- ------- -------
Income from continuing operations before
income taxes.............................. 150 498 1,553 1,774
Provision for income taxes................. 59 199 622 711
------- ------- ------- -------
Income from continuing operations.......... 91 299 931 1,063
Income from discontinued operations, net of
income taxes.............................. 6 12 57 28
------- ------- ------- -------
Net income............................. $ 97 $ 311 $ 988 $ 1,091
======= ======= ======= =======
Earnings per share:
Income from continuing operations........ $ .15 $ .44 $ 1.39 $ 1.57
Income from discontinued operations...... .01 .02 .09 .04
------- ------- ------- -------
Net income............................. $ .16 $ .46 $ 1.48 $ 1.61
======= ======= ======= =======
Cash dividends per share................... $ .01 $ .02 $ .05 $ .06
Redemption of preferred stock purchase
rights.................................... $ .01 -- $ .01 --
Shares used in computing earnings per share
(in thousands)............................ 657,807 677,417 668,136 677,814
See accompanying notes.
3
COLUMBIA/HCA HEALTHCARE CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
UNAUDITED
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
SEPTEMBER 30, DECEMBER 31,
1997 1996
------------- ------------
ASSETS
Current assets:
Cash and cash equivalents......................... $ 28 $ 113
Accounts receivable, less allowances for doubtful
accounts of $1,569 and $1,380.................... 2,889 2,842
Inventories....................................... 458 438
Other............................................. 984 806
------- -------
4,359 4,199
Property and equipment, at cost..................... 16,500 15,687
Accumulated depreciation............................ (5,894) (5,314)
------- -------
10,606 10,373
Investments of insurance subsidiary................. 1,359 1,119
Investments in and advances to affiliates........... 1,425 1,293
Intangible assets, net.............................. 3,744 3,582
Net assets of discontinued operations............... 1,349 212
Other............................................... 281 338
------- -------
$23,123 $21,116
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.................................. $ 790 $ 790
Accrued salaries.................................. 404 430
Other accrued expenses............................ 1,317 1,292
Income taxes...................................... -- 97
Long-term debt due within one year................ 132 201
------- -------
2,643 2,810
Long-term debt...................................... 8,693 6,781
Deferred taxes and other liabilities................ 2,016 2,080
Minority interests in equity of consolidated enti-
ties............................................... 900 836
Stockholders' equity:
Common stock, $.01 par; authorized 1,600,000,000
voting shares and 50,000,000 nonvoting shares;
issued and outstanding 630,848,900 voting shares
and 21,000,000 nonvoting shares--September 30,
1997 and 650,499,400 voting shares and 21,000,000
nonvoting shares December 31, 1996............... 7 7
Capital in excess of par value.................... 3,789 4,519
Other............................................. 110 66
Retained earnings................................. 4,965 4,017
------- -------
8,871 8,609
------- -------
$23,123 $21,116
======= =======
See accompanying notes.
4
COLUMBIA/HCA HEALTHCARE CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
UNAUDITED
(DOLLARS IN MILLIONS)
1997 1996
------ ------
Cash flows from continuing operating activities:
Net income .................................................. $ 988 $1,091
Adjustments to reconcile net income to net cash provided by
continuing operating activities:
Depreciation and amortization.............................. 923 842
Income from discontinued operations........................ (57) (28)
Changes in operating assets and liabilities................ (355) (79)
Other...................................................... 78 77
------ ------
Net cash provided by continuing operating activities..... 1,577 1,903
------ ------
Cash flows from investing activities:
Purchase of property and equipment........................... (1,107) (1,057)
Acquisition of hospitals and health care entities............ (398) (638)
Investments in and advances to affiliates.................... (29) (37)
Disposition of property and equipment........................ 194 142
Change in other investments.................................. (145) (112)
Change in net assets of discontinued operations.............. (1,079) (24)
Other........................................................ (115) (1)
------ ------
Net cash used in investing activities.................... (2,679) (1,727)
------ ------
Cash flows from financing activities:
Issuance of long-term debt................................... 251 435
Net changes in commercial paper borrowings and lines of cred-
it.......................................................... 1,878 (506)
Repayment of long-term debt.................................. (310) (291)
Repurchases of common stock, net............................. (765) (3)
Payment of cash dividends and redemption of preferred stock
purchase rights............................................. (40) (40)
Other........................................................ 3 7
------ ------
Net cash provided by (used in) used in financing activi-
ties.................................................... 1,017 (398)
------ ------
Change in cash and cash equivalents............................ (85) (222)
Cash and cash equivalents at beginning of period............... 113 232
------ ------
Cash and cash equivalents at end of period..................... $ 28 $ 10
====== ======
Interest payments.............................................. $ 308 $ 337
Income tax payments, net of refunds............................ $1,014 $ 602
See accompanying notes.
5
COLUMBIA/HCA HEALTHCARE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
UNAUDITED
NOTE 1--BASIS OF PRESENTATION
Columbia/HCA Healthcare Corporation ("Columbia" or the "Company") is a
Delaware corporation that owns and operates hospitals and related health care
entities through (i) affiliated subsidiaries, (ii) joint ventures or (iii)
ownership of interests in various partnerships in which subsidiaries of the
Company serve as the managing general partner. At September 30, 1997, Columbia
owned and operated 314 hospitals, 143 freestanding surgery centers, more than
500 home health locations (see Note 7) and numerous other facilities providing
a variety of health care services. Columbia is also a partner in several 50/50
joint ventures that own and operate 27 hospitals and five freestanding surgery
centers which are accounted for using the equity method. Columbia's facilities
are located in 35 states, England, Switzerland and Spain.
The accompanying unaudited condensed consolidated financial statements have
been prepared in accordance with generally accepted accounting principles for
interim financial information and with the instructions to Form 10-Q and
Article 10 of Regulation S-X. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements. In the opinion of management, all
adjustments (consisting of normal recurring accruals) considered necessary for
a fair presentation have been included. Operating results for the quarter and
nine months ended September 30, 1997, are not necessarily indicative of the
results that may be expected for the year ending December 31, 1997. For
further information, refer to the consolidated financial statements and
footnotes thereto included in Columbia's annual report on Form 10-K/A for the
year ended December 31, 1996.
Certain prior year amounts have been reclassified to conform to the current
year presentation (see Note 7).
NOTE 2--EARNINGS PER SHARE
Earnings per share is based upon the weighted average number of common
shares outstanding adjusted for the dilutive effect of common stock
equivalents, consisting primarily of stock options. Fully diluted earnings per
share is not presented because such amounts approximate earnings per share.
NOTE 3--VALUE HEALTH MERGER
On August 6, 1997, Columbia 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. In connection with the
Value Health Merger, Value Health stockholders received $20.50 in cash for
each Value Health 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 Columbia since August 1997. The excess of aggregate purchase price
over the estimated fair value of net assets acquired was approximately $916
million and is being amortized over a 30 year period.
On August 28, 1997, Columbia 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).
NOTE 4--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. The Company is cooperating
in this investigation and has met with the Assistant United States Attorney
(the "Assistant U.S. Attorney") responsible for conducting this investigation.
The Company believes it may be a target in this investigation.
6
COLUMBIA/HCA HEALTHCARE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
UNAUDITED
NOTE 4--INVESTIGATIONS (CONTINUED)
In July 1997, various Columbia affiliated facilities and offices were
searched pursuant to search warrants issued by the United States District
Court in various states. During July and September 1997, the Company was also
served with subpoenas requesting various records and documents related to
laboratory billing, Diagnostic Related Group ("DRG") coding and home health
operations in various states. The Company is cooperating in these
investigations and has met with Department of Justice attorneys responsible
for conducting these investigations. The Company believes that it may be a
target in these investigations.
Also, in July 1997, the United States District Court for the Middle District
of Florida, in Ft. Myers, issued an indictment against three Columbia
employees. 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 Columbia in 1992. The Company
has been served with subpoenas for various records and documents. The Company
is cooperating in this investigation and has met with the Assistant U.S.
Attorney responsible for conducting this investigation. The Company has been
informed that it is a target in this investigation.
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.
Management believes the ongoing investigations 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 investigations and related media coverage could have
on the Company's future results of operations and financial position.
NOTE 5--CHANGE IN MANAGEMENT AND BUSINESS STRATEGY
On July 25, 1997, Columbia 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 (as described in
Note 4), management announced several significant steps that it will take 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,
discontinued sales of interests in hospitals to physicians and the unwinding
of existing physician interests in hospitals, continued compliance program
efforts, 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 are currently
being developed and implemented in consideration of laws, regulations and
existing contractual agreements. Management is not currently able to predict
what effects such actions might have on the Company's financial position or
results of operations.
The Company is currently considering a Company wide internal operating
reorganization. In addition, the Company is evaluating various restructuring
alternatives which include asset divestitures to third parties, spin-offs of
certain assets to the Company's shareholders and the reorganization of the
Company's businesses into distinct operating units. Each of the restructuring
alternatives may be subject to various legal and regulatory approvals. There
can be no assurance, which, if any of these alternatives may be adopted or
implemented.
7
COLUMBIA/HCA HEALTHCARE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
UNAUDITED
NOTE 6--RESTRUCTURING OF OPERATIONS AND INVESTIGATION RELATED COSTS
In the third quarter of 1997, Columbia recorded the following charges in
connection with the investigations and the changes in management and business
strategy discussed in NOTES 4 and 5 (in millions):
Severance costs (approximately 120 employees)....................... $40
Professional fees related to investigations......................... 11
Cancelled projects.................................................. 10
Other............................................................... 3
---
$64
===
NOTE 7--DISCONTINUED OPERATIONS
As part of the Company's change in business strategy (as described in NOTE
5), Columbia has implemented a plan to sell its home health care business and
divest three of the four business units acquired in the Value Health Merger.
As a result of the plan to divest these businesses, the Company's condensed
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.
Revenues of the home health care and Value Health businesses to be disposed
of totaled $585 million and $282 million for the three months ended September
30, 1997 and 1996, respectively, and $1.3 billion and $802 million for the
nine months ended September 30, 1997 and 1996, respectively. Results of
operations for these businesses are included in "Income from discontinued
operations" in the condensed consolidated statements of income. Management is
not able at this time to reasonably estimate the timing, structure or expected
gain or loss that will result from the disposition of these businesses.
NOTE 8--INCOME TAXES
The Company is currently contesting before the United States Tax Court (the
"Tax Court"), the United States Court of Federal Claims (the "Court of Federal
Claims") and the Appeals Division of the Internal Revenue Service (the "IRS")
certain claimed deficiencies and adjustments proposed by the IRS in
conjunction with its examination of HCA-Hospital Corporation of America's
("HCA") federal income tax returns for 1981 through 1992 and of Healthtrust,
Inc.--The Hospital Company's ("Healthtrust") federal income tax returns for
1990 through 1992. The disputed items include the disallowance of certain
stock option compensation which HCA deducted in calculating taxable income for
1992 and the disallowance of certain executive compensation which Healthtrust
deducted in calculating taxable income for 1991.
In September 1997, the IRS issued statutory notices of deficiency in
connection with its examination of the 1993 and 1994 federal income tax
returns for HCA, Columbia Healthcare Corporation ("CHC") and the Company. The
disputed items include: the disallowance of certain acquisition-related costs,
executive compensation, systems conversion costs and insurance premiums which
were deducted in calculating taxable income in 1993 and 1994; the method of
accounting used by certain subsidiaries for calculating taxable income related
to vendor rebates and governmental receivables in 1993 and 1994; and certain
carryover issues related to the 1981 through 1992 IRS examinations of HCA. The
Company intends to file petitions with the Tax Court in December 1997
contesting the claimed deficiencies.
The IRS is claiming an additional $551 million in income taxes and interest
through September 30, 1997. Management believes that adequate provisions have
been recorded to satisfy final resolution of these issues.
8
COLUMBIA/HCA HEALTHCARE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
UNAUDITED
NOTE 8--INCOME TAXES (CONTINUED)
In October 1997, the Tax Court ruled in HCA's favor with respect to its
claim that insurance premiums paid to its wholly-owned insurance subsidiary
from 1981 through 1988 were deductible. Through September 30, 1997, the
Company was seeking a refund of income tax and interest of $204 million. The
Tax Court decision may be appealed by the IRS to the United States Court of
Appeals, Sixth Circuit. This ruling will not have any material effect on the
results of operations.
Management believes that Columbia, CHC, HCA and Healthtrust properly
reported 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 (excluding any possible refunds) will not
have a material adverse effect on the results of operations or financial
position of the Company.
NOTE 9--STOCK REPURCHASE PROGRAM AND REDEMPTION OF PREFERRED STOCK PURCHASE
RIGHTS
The Company announced on April 14, 1997 that the Company's board of
directors authorized the repurchase of up to $1 billion of Columbia common
stock. As of September 30, 1997, the Company had repurchased approximately
20.4 million shares for a total cost of approximately $737 million.
Repurchased shares are available for reissuance for general corporate
purposes.
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 a quarterly dividend of $.01 per share.
9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
The following is a summary of certain information from continuing operations
for the quarters and nine months ended September 30, 1997 and 1996 (dollars in
millions, except per share amounts):
QUARTER
----------------------------
1997 1996
------------- -------------
AMOUNT RATIO AMOUNT RATIO
------ ----- ------ -----
Revenues......................................... $4,612 100.0 $4,605 100.0
Salaries and benefits............................ 1,895 41.1 1,792 38.9
Supplies......................................... 653 14.2 649 14.1
Other operating expenses......................... 1,023 22.1 939 20.4
Provision for doubtful accounts.................. 369 8.0 311 6.8
Depreciation and amortization.................... 319 6.9 300 6.5
Interest expense................................. 125 2.7 119 2.6
Equity in earnings of affiliates................. (19) (0.4) (39) (0.9)
Restructuring of operations and investigation re-
lated costs..................................... 64 1.4 -- --
------ ----- ------ -----
4,429 96.0 4,071 88.4
------ ----- ------ -----
Income from continuing operations before minority
interests and income taxes...................... 183 4.0 534 11.6
Minority interests in earnings of consolidated
entities........................................ 33 0.7 36 0.8
------ ----- ------ -----
Income from continuing operations before income
taxes........................................... 150 3.3 498 10.8
Provision for income taxes....................... 59 1.3 199 4.3
------ ----- ------ -----
Income from continuing operations................ $ 91 2.0 $ 299 6.5
====== ===== ====== =====
Earnings per share from continuing operations.... $ .15 $ .44
====== ======
% changes from prior year:
Revenues....................................... 0.2%
Income from continuing operations before income
taxes......................................... (69.8)
Income from continuing operations.............. (69.7)
Earnings per share from continuing operations.. (65.9)
Admissions (a)................................. (0.2)
Equivalent admissions (b)...................... 1.3
Revenues per equivalent admission.............. (1.1)
Same--hospital % changes from prior year (c):
Revenues....................................... 0.7%
Admissions (a)................................. 1.0
Equivalent admissions (b)...................... 2.6
Revenues per equivalent admission.............. (1.9)
10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS--(CONTINUED)
RESULTS OF OPERATIONS (CONTINUED)
NINE MONTHS
------------------------------
1997 1996
-------------- --------------
AMOUNT RATIO AMOUNT RATIO
------- ----- ------- -----
Revenues....................................... $14,445 100.0 $13,969 100.0
Salaries and benefits.......................... 5,621 38.9 5,412 38.7
Supplies....................................... 2,010 13.9 1,992 14.3
Other operating expenses....................... 2,928 20.2 2,738 19.6
Provision for doubtful accounts................ 976 6.8 865 6.2
Depreciation and amortization.................. 923 6.5 842 6.0
Interest expense............................... 361 2.5 371 2.7
Equity in earnings of affiliates............... (116) (0.8) (127) (0.9)
Restructuring of operations and investigation
related costs................................. 64 0.4 -- --
------- ----- ------- -----
12,767 88.4 12,093 86.6
------- ----- ------- -----
Income from continuing operations before
minority interests and income taxes........... 1,678 11.6 1,876 13.4
Minority interests in earnings of consolidated
entities...................................... 125 0.8 102 0.7
------- ----- ------- -----
Income from continuing operations before income
taxes......................................... 1,553 10.8 1,774 12.7
Provision for income taxes..................... 622 4.4 711 5.1
------- ----- ------- -----
Income from continuing operations.............. $ 931 6.4 $ 1,063 7.6
======= ===== ======= =====
Earnings per share from continuing operations.. $ 1.39 $ 1.57
======= =======
% changes from prior year:
Revenues..................................... 3.4%
Income from continuing operations before in-
come taxes.................................. (12.5)
Income from continuing operations............ (12.4)
Earnings per share from continuing opera-
tions....................................... (11.5)
Admissions (a)............................... 1.4
Equivalent admissions (b).................... 3.1
Revenues per equivalent admission............ 0.3
Same--hospital % changes from prior year (c):
Revenues..................................... 4.1%
Admissions(a)................................ 2.0
Equivalent admissions (b).................... 3.9
Revenues per equivalent admission............ 0.2
- --------
(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) Excludes the operations of hospitals and their related facilities which
were either acquired or divested during the current and prior year.
11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS--(CONTINUED)
RESULTS OF OPERATIONS (CONTINUED)
General
The Company is currently the subject of a government investigation into the
Company's business practices in several states. The Company has also
experienced a change in management and business strategy during the current
period. The uncertainties surrounding 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.
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. The Company is cooperating
in this investigation and has met with the Assistant U.S. Attorney responsible
for conducting this investigation. The Company believes it may be a target in
this investigation.
In July 1997, various Columbia affiliated facilities and offices were
searched pursuant to search warrants issued by the United States District
Court in various states. During July and September 1997, the Company was also
served with subpoenas requesting various records and documents related to
laboratory billing, DRG coding and home health operations in various states.
The Company is cooperating in these investigations and has met with Department
of Justice attorneys responsible for conducting these investigations. The
Company believes that it may be a target in these investigations.
Also, in July 1997, the United States District Court for the Middle District
of Florida, in Ft. Myers, issued an indictment against three Columbia
employees. 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 Columbia in 1992. The Company
has been served with subpoenas for various records and documents. The Company
is cooperating in this investigation and has met with the Assistant U.S.
Attorney responsible for conducting this investigation. The Company has been
informed that it is a target in this investigation.
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.
Management believes the ongoing investigations 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 investigations and related media coverage could have
on the Company's future results of operations and financial position.
Change in Management and Business Strategy
On July 25, 1997, Columbia 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.
12
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS--(CONTINUED)
RESULTS OF OPERATIONS (CONTINUED)
Change in Management and Business Strategy (continued)
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 it will take 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, discontinued sales of
interests in hospitals to physicians and the unwinding of existing physician
interests in hospitals, continued compliance program efforts, 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 are currently being developed and
implemented in consideration of 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.
The Company is currently considering a Company wide internal operating
reorganization. In addition, the Company is evaluating various restructuring
alternatives which include asset divestitures to third parties, spin-offs of
certain assets to the Company's shareholders and the reorganization of the
Company's businesses into distinct operating units. Each of the restructuring
alternatives may be subject to various legal and regulatory approvals. There
can be no assurance, which, if any of these alternatives may be adopted or
implemented.
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 (87.9% of
admissions for the nine months ended September 30, 1997 and 85.7% in the same
period last year relate to Medicare, Medicaid and managed care plan patients).
Insurance companies, government programs (other than Medicare) and employers
purchasing health care services for their employees are negotiating discounted
amounts they will pay health care providers rather than paying standard
prices. This leads to these purchasers of health care services becoming
discounted payors, similar to HMO's and PPO's, in virtually all markets and
making 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 procedures to an outpatient
basis is also influenced by pressures from payors to direct certain procedures
from inpatient care to outpatient care.
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
state Medicaid programs. The Medicare program reimburses the Company's
inpatient services 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. Medicare
reimbursement for outpatient services is based primarily upon the provider's
cost to treat the patient and certain government fee schedules and blended
rates. 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. The
Balanced Budget Act of 1997 (the "97 Budget Act"), enacted in August 1997,
will have the effect of reducing reimbursements from the Medicare program as
well as various states' Medicaid programs effective over various periods
beginning October 1, 1997. Management believes the reduction in payments could
be significant, but cannot at this time, predict the ultimate effect of such
reductions on the Company's results of operations.
13
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS--(CONTINUED)
RESULTS OF OPERATIONS (CONTINUED)
Year 2000 Computer Issues
The Company is aware of the issues associated with the programming code in
existing computer systems as the year 2000 approaches. The year 2000 problem
is pervasive and complex as virtually every computer operation will be
affected in some way by the rollover of the two digit year value to 00. The
issue is whether computer systems will properly recognize date sensitive
information when the year changes to 2000. Systems that do not properly
recognize such information could generate erroneous data or cause a system to
fail.
Columbia has initiated a company-wide program to prepare its computer
systems and applications for the year 2000. The Company expects to incur
internal staff costs as well as external consulting and other expenses related
to infrastructure and facility enhancements necessary to prepare the systems
for the year 2000. The Company expects its year 2000 project to be completed
during 1999 with a total estimated minimum cost of $60 million (these costs
will be expensed as incurred). However, there can be no assurance that the
systems of other companies, on which the Company's systems rely, will be
converted on a timely basis or that any such failure to convert by another
company (such as third party payors) would not have an adverse effect on the
Company's systems.
Quarters Ended September 30, 1997 and 1996
Revenues increased 0.2% to $4,612 million in 1997 compared to $4,605 million
in 1996, primarily as a result of growth in outpatient volumes. Inpatient
admissions declined 0.2% from a year ago. On a same-hospital basis, revenues
increased 0.7%, admissions increased 1.0% and equivalent admissions (adjusted
to reflect outpatient activity) increased 2.6% from a year ago. The growth
rates experienced this quarter are less than the rates experienced in prior
quarters which management believes were due in part to the reactions of
certain physicians and patients to the negative media coverage related to the
ongoing government investigations, changes in patient mix (increase in managed
care volumes as a percentage in total volumes), changes in management and
increased competition. The increase in outpatient activity is primarily a
result of increases in outpatient services (average daily outpatient visits
increased 7.0 % in 1997). The consolidated revenue growth rate was less than
the same hospital revenue growth rate due to a net decrease of consolidated
hospitals since September 30, 1996. The decrease in consolidated hospitals was
primarily due to contributions of facilities to joint ventures accounted for
using the equity method.
Income from continuing operations before income taxes declined 69.8% to $150
million in 1997 from $498 million in 1996 and pretax margins decreased to 3.3%
in 1997 from 10.8% in 1996. The decrease in pretax income was attributable to
a decline in revenue growth, as described above and declines in the margin.
Several factors contributed to declines in the margin including increases as a
percentage of revenues in every expense category except minority interest. The
increases are attributable to both external and internal factors. The external
factors relate primarily to the ongoing government investigations and related
media coverage. The internal factors relate to the Company's inability to
respond timely to adjust expenses in line with the decreases in volume trends
associated with the investigation and other internal factors as described
below.
Salaries and benefits, as a percentage of revenues, increased to 41.1% in
1997 from 38.9% in 1996. This increase was due, in part, to declines in labor
productivity (man hours per equivalent admission increased 2.5%) as the
Company has been unable to make staffing level changes on a timely basis in
response to the changing patient volume and patient mix trends.
Supply costs increased as a percentage of revenues to 14.2% in 1997 from
14.1% in 1996.
Other operating expenses, as a percentage of revenues, increased to 22.1% in
1997 from 20.4% in 1996. The increase was due, in part, to an increase in
contract services as a percentage of revenues to 9.2% in 1997 from 8.0% in
1996 which resulted from payments to third parties on a fee basis for both new
services and 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 percentage of revenues.
14
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS--(CONTINUED)
RESULTS OF OPERATIONS (CONTINUED)
Quarters Ended September 30, 1997 and 1996 (continued)
Provision for doubtful accounts, as a percentage of revenues, increased to
8.0% in 1997 from 6.8% in 1996 due to internal factors such as computer
information system conversions (including patient accounting systems) at
various facilities and external factors such as payor mix shifts from Medicare
to managed care and payor 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 payors due to the negative
publicity surrounding the investigations which 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.
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. As of
September 30, 1997, there were 27 hospitals and five freestanding surgery
centers compared to 18 hospitals and three freestanding surgery centers at
September 30, 1996, which are being accounted for using the equity method.
Depreciation and amortization increased as a percentage of revenues to 6.9%
in 1997 from 6.5% in 1996, primarily due to the slowdown in revenue growth and
increased capital 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 hospital acquisitions.
Interest expense increased to $125 million or 2.7 % of revenues in 1997
compared to $119 million or 2.6% of revenues last year primarily as a result
of an increase in the average outstanding debt during the third quarter of
1997 compared to last year. This was due, in part, to the additional debt
incurred related to the share repurchase program. The interest expense
associated with the increase in debt related to the Value Health Merger has
been allocated to "Discontinued operations" and is therefore not included in
interest expense from continuing operations.
The Company incurred $64 million of costs during 1997 in connection with the
investigations and changes in management and business strategy. These costs
included $40 million in severance costs, $11 million in professional fees
related to the investigations, $10 million related to certain cancelled
projects and $3 million in other costs.
Minority interests declined to $33 million in 1997 compared to $36 million
in 1996 primarily due to decreased profitability in entities with minority
ownerships as compared to last year. As a percentage of revenues, minority
interests declined to 0.7% in 1997 compared to 0.8% in 1996.
Income from continuing operations decreased 69.7% to $91 million ($.15 per
share) during 1997 compared to $299 million ($.44 per share) in 1996.
Income from discontinued operations totaled $6 million ($.01 per share) in
1997 compared to $12 million ($.02 per share) in 1996. The decline was
primarily due to a decrease in the profitability of the home health care
operations. Home health care operations is one of the focus areas of the
government investigations. Management believes these operations have been
negatively impacted in response to the investigations and the announced
intention to divest the home health care business.
15
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS--(CONTINUED)
RESULTS OF OPERATIONS (CONTINUED)
Nine Months Ended September 30, 1997 and 1996
Revenues increased 3.4% to $14.4 billion in 1997 compared to $14.0 billion
in 1996, primarily as a result of growth in inpatient and outpatient volumes.
On a same-hospital basis, revenues increased 4.1%, admissions increased 2.0%
and equivalent admissions (adjusted to reflect outpatient activity) increased
3.9% from a year ago. Management believes the growth rates experienced during
1997 were negatively impacted by the decline in revenue and volume growth in
the third quarter ended September 30, 1997. The increase in outpatient
activity is primarily a result of increases in outpatient services (average
daily outpatient visits increased 8.8% in 1997). The consolidated revenue
growth rate was less than the same hospital revenue growth rate because of a
net decrease of consolidated hospitals since September 30, 1996. The decrease
in consolidated hospitals was primarily due to contributions of facilities to
joint ventures accounted for using the equity method.
Income from continuing operations before income taxes decreased 12.5% to
$1.6 billion in 1997 from $1.8 billion in 1996 and pretax margins decreased to
10.8% in 1997 from 12.7% in 1996. The decrease in pretax income was
attributable to a decline in revenue growth described above and declines in
the margin. Several factors contributed to declines in the margin including
increases as a percentage of revenues in most expense categories. The
increases are attributable to both external and internal factors. The external
factors relate primarily to the ongoing government investigations and related
media coverage. The internal factors relate to the Company's inability to
respond timely to adjust expenses in line with decreases in volume trends
associated with the investigation and other internal factors as described
below.
Salaries and benefits, as a percentage of revenues, increased slightly to
38.9 % in 1997 from 38.7% in 1996.
Supply costs declined as a percentage of revenues to 13.9% in 1997 from
14.3% in 1996 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 Columbia).
While the Company expects to continue to benefit from its volume purchasing
power, there can be no assurance that such benefits will continue to be
realized in the relative amounts realized to date.
Other operating expenses, as a percentage of revenues, increased to 20.2% in
1997 from 19.6% in 1996. The increase was primarily due to an increase in
contract services as a percentage of revenues to 8.5% in 1997 from 7.4% in
1996 which resulted from payments to third parties on a fee basis for both new
services and 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 percentage of revenues.
Provision for doubtful accounts, as a percentage of revenues, increased to
6.8% in 1997 from 6.2% in 1996 due to internal factors such as computer
information system conversions (including patient accounting systems) at
various facilities and external factors such as payor mix shifts from Medicare
to managed care and payor 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 payors due to the negative
publicity surrounding the investigations which 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.
Equity in earnings of affiliates, as a percentage of revenues, decreased
slightly to 0.8% in 1997 from 0.9% in 1996.
16
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS--(CONTINUED)
RESULTS OF OPERATIONS (CONTINUED)
Nine Months Ended September 30, 1997 and 1996 (continued)
Depreciation and amortization increased as a percentage of revenues to 6.5%
in 1997 from 6.0% in 1996, primarily due to the slowdown in revenue growth and
increased capital 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 hospital acquisitions.
Interest expense declined to $361 million or 2.5% of revenues in 1997
compared to $371 million or 2.7% of revenues last year primarily as a result
of a decrease in the average outstanding debt during the nine months ended
1997 compared to the same period last year.
The Company incurred $64 million of costs during 1997 in connection with the
investigations and changes in management and business strategy.
Minority interests increased to $125 million or 0.8% in 1997 compared to
$102 million or 0.7% in 1996 primarily due to both increased profitability and
minority ownership in equity of additional consolidated entities compared to
last year.
Income from continuing operations decreased 12.4% to $931 million ($1.39 per
share) during 1997 compared to $1.1 billion ($1.57 per share) in 1996.
Income from discontinued operations totaled $57 million ($.09 per share) in
1997 compared to $28 million ($.04 per share) in 1996. The increase was
primarily due to an increase in home health care income resulting from
acquisitions and start-up of new agencies. Management believes the increase in
income was partially offset by the government investigations and related media
coverage and the Company's announcement during the quarter ended September 30,
1997 of its intention to divest the home health care business.
Liquidity
Cash provided by operating activities totaled $1.6 billion for the nine
months ended September 30, 1997 compared to $1.9 billion in the same period
last year. The decrease in 1997 from 1996 is primarily due to decreases in
accrued expenses, income taxes payable and net income.
Cash used in investing activities in the first nine months of 1997 exceeded
cash provided by operating activities by $1.1 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 from operating
activities exceeded cash used in investing activities by $176 million. The
excess funds generated from operations were used to pay down long-term debt
and commercial paper borrowings.
During the first nine months of 1997, the Company repurchased approximately
20.4 million shares of its common stock for a total cost of approximately $737
million and was funded by the issuance of long-term debt, commercial paper and
bank borrowings.
Working capital totaled $1.7 billion at September 30, 1997 and $1.4 billion
at December 31, 1996. Management believes that cash flows from operations and
amounts available under Columbia's revolving credit facilities and related
commercial paper programs are sufficient to meet expected future liquidity
needs.
Investments of Columbia's professional liability insurance subsidiary to
maintain statutory equity and pay claims totaled $1.5 billion and $1.3 billion
at September 30, 1997 and December 31, 1996, respectively.
17
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS--(CONTINUED)
RESULTS OF OPERATIONS (CONTINUED)
Liquidity (continued)
The Company has entered into various agreements with joint venture partners
whereby the partners have an option to sell or "put" their interest in the
joint venture back to the Company within specified periods at fixed prices or
prices based on certain formulas. The combined put price under all such
agreements was approximately $1.1 billion at September 30, 1997. While the
Company cannot predict if, or when, their joint venture partners will exercise
such options (no put options have been exercised through September 30, 1997),
it is not expected that the majority of the puts would be exercised in any one
period.
Capital Resources
Excluding acquisitions, capital expenditures totaled $1.1 billion for the
nine months ended September 30, 1997, and 1996. Planned capital expenditures
in 1997 are expected to approximate $1.5 billion. Management believes that its
capital expenditure program is adequate to expand, improve and equip its
existing health care facilities.
Columbia also expended $398 million and $638 million for acquisitions during
the nine months ended September 30, 1997 and 1996, respectively. The decline
in acquisitions 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. Also, as part of its new
business strategy, the Company announced a slowdown in its current acquisition
program. Columbia also made investments in and advances to affiliates
(generally 50% interests in joint ventures that are accounted for using the
equity method) of $29 million in the nine months ended September 30, 1997
compared to $37 million for the same period in 1996.
Columbia expects to finance all capital expenditures with internally
generated and borrowed funds. Available sources of capital include public or
private debt, commercial paper, unused bank revolving credit facilities and
equity. At September 30, 1997, there were projects under construction which
had an estimated additional cost to complete and equip of approximately $ 1.1
billion.
The Company's revolving credit agreements (the "Credit Facilities") are
comprised of a $2.0 billion five-year revolving credit facility expiring
February 2002 and a $3.0 billion 364-day revolving credit facility expiring
June 1998. Borrowings under the 364-day revolving credit facility do not
mature until one year subsequent to the end of the 364-day period. The Credit
Facilities support Columbia's commercial paper programs. As of October 31,
1997, Columbia had approximately $850 million of credit available (net of
outstanding commercial paper) under the Credit Facilities.
Columbia's revolving credit agreements contain customary covenants which
include (i) limitations on additional debt, (ii) limitations on sales of
assets, mergers and changes of ownership, and (iii) maintenance of certain
interest coverage ratios. Columbia was in compliance with all such covenants
at September 30, 1997.
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 Columbia's markets. The cost of
certain proposals would be funded in significant part by reductions in
payments by government programs, including Medicare and Medicaid, to health
care providers (similar to the reductions to be incurred as part of the 97
Budget Act 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 Columbia will not be
adopted.
18
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS--(CONTINUED)
VALUE HEALTH MERGER AND DISCONTINUED OPERATIONS
On August 6, 1997, Columbia completed a merger transaction with Value
Health. (See Note 3 of the Notes to Condensed Consolidated Financial
Statements for a description of the merger transaction.)
As part of the Company's change in business strategy, Columbia 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 condensed 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.
OTHER INFORMATION
Columbia is contesting income taxes and related interest proposed by the IRS
for prior years aggregating approximately $551 million as of September 30,
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 Columbia.
See Note 8 of the Notes to Condensed Consolidated Financial Statements for a
description of the pending IRS disputes.
FORWARD-LOOKING STATEMENTS
Certain statements contained in this Quarterly Report on Form 10-Q,
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 of the Company's business practices; (ii) the
recently enacted changes in the Medicare and Medicaid programs affecting
reimbursement to healthcare providers and insurers; (iii) legislative
proposals for healthcare 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 revisions to any of the forward-looking statements contained herein to
reflect future events or developments.
19
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS--(CONTINUED)
OPERATING DATA
1997 1996
------- ---------
CONSOLIDATED
Number of hospitals in operation at:
March 31.................................................. 314 320
June 30................................................... 315 326
September 30.............................................. 314 325
December 31............................................... 319
Number of freestanding outpatient surgical centers in opera-
tion at:
March 31.................................................. 143 127
June 30................................................... 145 130
September 30.............................................. 143 130
December 31............................................... 132
Licensed hospital beds at:
March 31.................................................. 60,993 62,197
June 30................................................... 61,275 63,217
September 30.............................................. 61,071 63,063
December 31............................................... 61,931
Weighted average licensed beds (a):
Quarter:
First..................................................... 61,222 62,330
Second.................................................... 61,203 62,937
Third..................................................... 60,981 63,179
Fourth.................................................... 62,385
Year....................................................... 62,708
Average daily census (b):
Quarter:
First..................................................... 28,401 28,428
Second.................................................... 25,921 26,193
Third..................................................... 24,343 25,111
Fourth.................................................... 26,437
Year....................................................... 26,538
Admissions:
Quarter:
First..................................................... 497,200 490,800
Second.................................................... 477,200 463,100
Third..................................................... 461,700 462,400
Fourth.................................................... 479,100
Year....................................................... 1,895,400
Average length of stay (days) (c):
Quarter:
First..................................................... 5.1 5.3
Second.................................................... 4.9 5.1
Third..................................................... 4.9 5.0
Fourth.................................................... 5.1
Year....................................................... 5.1
20
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS--(CONTINUED)
OPERATING DATA (CONTINUED)
1997 1996
----- -----
NON-CONSOLIDATED(D)
Number of hospitals in op-
eration at:
March 31................ 27 17
June 30................. 27 17
September 30............ 27 18
December 31............. 22
Number of freestanding
outpatient surgical cen-
ters in operation at:
March 31................ 5 3
June 30................. 5 3
September 30............ 5 3
December 31............. 4
Licensed hospital beds at:
March 31................ 6,537 4,393
June 30................. 6,641 4,393
September 30............ 6,455 4,768
December 31............. 5,451
- --------
(a) 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.
(b) Represents the average number of patients in hospital beds each day.
(c) Represents the average number of days admitted patients stay in Columbia's
hospitals.
(d) The non-consolidated facilities include facilities operated through 50/50
joint ventures which are not controlled by Columbia. They are accounted
for using the equity method of accounting and are, therefore, not included
on a fully consolidated basis in the condensed consolidated financial
statements.
21
PART II: OTHER INFORMATION
ITEM 1: LEGAL PROCEEDINGS.
Shareholder Derivative and Class Action Complaints filed in the U.S. District
Court
Beginning in April 1997, several shareholder class action complaints and
derivative complaints were filed by certain purported current and former
shareholders of the Company against the Company and certain of its current and
former directors and officers in the United States District Court for the
Middle District of Tennessee. The allegations and requested relief are
generally described in the Company's prior Form 10-Q. On October 9, 1997,
Judge Higgins of the United States District Court for the Middle District of
Tennessee ordered that (i) all the shareholder class action claims before the
U.S. District Court for the Middle District of Tennessee be consolidated under
the caption Sidney Morse, et al. v. R. Clayton McWhorter, et al. (Civil Action
No. 3-97-0370) (Higgins, J.) and (ii) all the derivative claims before the
United States District Court for the Middle District of Tennessee be
consolidated under the caption McCall, et al. v. Richard L. Scott, et al.
(Civil Action No. 3-97-0038) (Higgins, J.).
The Company intends to pursue the defense of these actions vigorously.
Shareholder Derivative Actions filed in State Courts
As previously reported in the Company's prior Form 10-Q, 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) were 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 Company intends to pursue the defense of these actions vigorously.
Patient/Payor Actions
In addition, several purported class action lawsuits were filed by patients
and/or payors 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 Company intends to pursue the defense of these actions vigorously.
Qui Tam Action
As previously reported in the Company's Form 10-K, a qui tam action entitled
United States, ex rel. James M. Thompson v. Columbia/HCA Healthcare
Corporation, et al. (No. 96-40868) had been dismissed by the District Court.
On October 23, 1997, the U.S. Court of Appeals for the Fifth Circuit affirmed
the dismissal in part, vacated it in part and remanded for further proceedings
issues that will require the District Court to further consider certain
elements of the Complaint.
Other
On November 7, 1997, a purported class action entitled Landgraff, et al. v.
Columbia/HCA Healthcare Corporation of America and the Columbia/HCA Retirement
Plan Committee (No. 97-CV-3381) was filed in the U.S. District Court for the
Northern District of Georgia by purported former employees of the Company on
behalf of members of the Company's Stock Bonus Plan (the "Plan"). In general,
it is alleged that the defendants breached their fiduciary duties in
administering the Plan.
The Company intends to pursue the defense of this action vigorously.
22
PART II: OTHER INFORMATION (CONTINUED)
ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K.
(a) List of Exhibits:
Exhibit 10(a)--Separation Agreement--Richard L. Scott.*
Exhibit 10(b)--Separation Agreement--David T. Vandewater.*
Exhibit 10(c)--Agreement and Amendment to the 364-day Agreement and
Amendment dated as of June 17, 1997.*
Exhibit 10(d)--First Amendment to the Five-Year Agreement and Amendment
dated as of June 17, 1997.*
Exhibit 11--Statement re Computation of Earnings Per Share.
Exhibit 12--Statement re Computation of Ratio of Earnings to Fixed Charges.
Exhibit 27--Financial Data Schedule*
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*Included only in filings under the Electronic Data, Gathering, Analysis, and
Retrieval system
(b) Reports on Form 8-K filed during the quarter ended September 30, 1997:
On July 24, 1997, Columbia filed a report of Form 8-K related to government
investigations and the issuance of search warrants at various Columbia
affiliated locations.
On July 25, 1997, Columbia filed a report of Form 8-K related to 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, was named Chairman and Chief
Executive Officer. A copy of the press release issued by Columbia was attached
to the filing.
On August 8, 1997, Columbia filed a report on Form 8-K related to the
completion of the acquisition of Value Health, Inc. and the announced planned
changes in the Company's business approach. Copies of both press releases
issued by Columbia were attached to the filing.
On September 3, 1997, Columbia filed a report on Form 8-K related to the
redemption of the all outstanding preferred stock purchase rights and the
declaration of a quarterly dividend. A copy of the letter to Stockholders was
attached to the filing.
On September 12, 1997, Columbia filed a report on Form 8-K related to the
announcement of weaker than expected financial results for the third quarter
ended September 30, 1997. A copy of the press release issued by Columbia was
attached to the filing.
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SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THE
REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED ON ITS BEHALF BY THE
UNDERSIGNED THEREUNTO DULY AUTHORIZED.
Columbia/HCA Healthcare Corporation
/s/ Kenneth C. Donahey
-------------------------------------
KENNETH C. DONAHEY
Date: November 13, 1997 SENIOR VICE PRESIDENT AND CONTROLLER
(PRINCIPAL ACCOUNTING OFFICER)
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