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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 JUNE 30, 1998
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.
CLASS OF COMMON STOCK OUTSTANDING AT JULY 31, 1998
--------------------- ----------------------------
Voting common stock, $.01 par value 624,335,900 shares
Nonvoting common stock, $.01 par value 21,000,000 shares
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1 of 38
COLUMBIA/HCA HEALTHCARE CORPORATION
FORM 10-Q
JUNE 30, 1998
PAGE OF
PART I: FINANCIAL INFORMATION FORM 10-Q
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Item 1. Financial Statements
Condensed Consolidated Statements of Income--for the quarters and six
months ended June 30, 1998 and 1997................................. 3
Condensed Consolidated Balance Sheets--June 30, 1998 and December 31,
1997................................................................ 4
Condensed Consolidated Statements of Cash Flows--for the six months
ended
June 30, 1998 and 1997.............................................. 5
Notes to Condensed Consolidated Financial Statements................. 6
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations................................................... 12
PART II: OTHER INFORMATION
- --------------------------
Items 1 to 6............................................................. 27
2
COLUMBIA/HCA HEALTHCARE CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
FOR THE QUARTERS AND SIX MONTHS ENDED JUNE 30, 1998 AND 1997
UNAUDITED
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
QUARTER SIX MONTHS
-------------- --------------
1998 1997 1998 1997
------ ------ ------ ------
Revenues....................................... $4,781 $4,845 $9,682 $9,833
Salaries and benefits.......................... 1,998 1,850 4,011 3,726
Supplies....................................... 719 658 1,465 1,357
Other operating expenses....................... 961 943 1,901 1,905
Provision for doubtful accounts................ 340 310 683 607
Depreciation and amortization.................. 311 308 620 604
Interest expense............................... 145 123 298 236
Equity in earnings of affiliates............... (33) (35) (75) (97)
Restructuring of operations and investigation
related costs................................. 31 - 69 -
------ ------ ------ ------
4,472 4,157 8,972 8,338
------ ------ ------ ------
Income from continuing operations before
minority interests and income taxes........... 309 688 710 1,495
Minority interests in earnings of consolidated
entities...................................... 18 45 38 92
------ ------ ------ ------
Income from continuing operations before income
taxes......................................... 291 643 672 1,403
Provision for income taxes..................... 118 258 280 563
------ ------ ------ ------
Income from continuing operations.............. 173 385 392 840
Discontinued operations:
Income (loss) from operations of discontinued
businesses, net of income taxes (benefits)
of $2 and $18 for the quarters ended June
30, 1998 and 1997, respectively, and ($14)
and $34 for the six months ended June 30,
1998 and 1997, respectively................. (22) 27 (44) 51
Loss on disposal of certain discontinued
businesses.................................. (73) - (73) -
Cumulative effect of accounting change, net of
income tax benefit of $36..................... - - - (56)
------ ------ ------ ------
Net income................................... $ 78 $ 412 $ 275 $ 835
====== ====== ====== ======
Basic earnings per share:
Income from continuing operations............ $ .27 $ .58 $ .61 $ 1.25
Discontinued operations:
Income (loss) from operations of
discontinued businesses.................... (.04) .04 (.07) .08
Loss on disposal of certain discontinued
businesses................................. (.11) - (.11) -
Cumulative effect of accounting change....... - - - (.08)
------ ------ ------ ------
Net income................................. $ .12 $ .62 $ .43 $ 1.25
====== ====== ====== ======
Diluted earnings per share:
Income from continuing operations............ $ .27 $ .58 $ .61 $ 1.24
Discontinued operations:
Income (loss) from operations of
discontinued businesses.................... (.04) .04 (.07) .08
Loss on disposal of certain discontinued
businesses................................. (.11) - (.11) -
Cumulative effect of accounting change....... - - - (.08)
------ ------ ------ ------
Net income................................. $ .12 $ .62 $ .43 $ 1.24
====== ====== ====== ======
Cash dividends per share....................... $ .02 $ .02 $ .04 $ .04
====== ====== ====== ======
See accompanying notes.
3
COLUMBIA/HCA HEALTHCARE CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
UNAUDITED
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
JUNE 30, DECEMBER 31,
1998 1997
-------- ------------
ASSETS
Current assets:
Cash and cash equivalents.............................. $ 25 $ 110
Accounts receivable, less allowances for doubtful
accounts of $1,659 in 1998 and $1,661 in 1997......... 2,427 2,522
Inventories............................................ 462 452
Income taxes receivable................................ 227 532
Other.................................................. 905 807
------- -------
4,046 4,423
Property and equipment, at cost.......................... 16,814 16,254
Accumulated depreciation................................. (6,442) (6,024)
------- -------
10,372 10,230
Investments of insurance subsidiary...................... 1,508 1,422
Investments in and advances to affiliates................ 1,371 1,329
Intangible assets, net................................... 3,405 3,521
Net assets of discontinued operations.................... 141 841
Other.................................................... 205 236
------- -------
$21,048 $22,002
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable....................................... $ 727 $ 929
Accrued salaries....................................... 449 475
Other accrued expenses................................. 1,174 1,237
Long-term debt due within one year..................... 2,669 132
------- -------
5,019 2,773
Long-term debt........................................... 5,693 9,276
Professional liability risks, deferred taxes and other
liabilities............................................. 1,926 1,867
Minority interests in equity of consolidated entities.... 830 836
Stockholders' equity:
Common stock, $.01 par; authorized 1,600,000,000 voting
shares and 50,000,000 nonvoting shares; outstanding
623,961,300 voting shares and 21,000,000 nonvoting
shares--June 30, 1998 and 620,452,200 voting shares
and 21,000,000 nonvoting shares--December 31, 1997.... 6 6
Capital in excess of par value......................... 3,564 3,480
Other.................................................. 12 13
Accumulated other comprehensive income................. 90 92
Retained earnings...................................... 3,908 3,659
------- -------
7,580 7,250
------- -------
$21,048 $22,002
======= =======
See accompanying notes.
4
COLUMBIA/HCA HEALTHCARE CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 1998 AND 1997
UNAUDITED
(DOLLARS IN MILLIONS)
1998 1997
------ ----
Cash flows from continuing operating activities:
Net income..................................................... $275 $835
Adjustments to reconcile net income to net cash provided by
continuing operating activities:
Provision for doubtful accounts.............................. 683 607
Increase in accounts receivable.............................. (607) (819)
Depreciation and amortization................................ 620 604
Income taxes................................................. 296 (116)
Loss (income) from discontinued operations................... 117 (51)
Cumulative effect of accounting change....................... - 56
Changes in other operating assets and liabilities............ (367) (341)
Other........................................................ (10) 35
------ ----
Net cash provided by continuing operating activities....... 1,007 810
------ ----
Cash flows from investing activities:
Purchase of property and equipment............................. (666) (696)
Acquisition of hospitals and health care entities.............. (116) (133)
Investments in and advances to affiliates...................... - (29)
Disposition of hospitals and health care entities.............. 66 184
Change in other investments.................................... (107) (124)
Change in investment in discontinued operations, net........... 43 19
Sale of certain discontinued operations........................ 619 -
Other.......................................................... 72 61
------ ----
Net cash used in investing activities...................... (89) (718)
------ ----
Cash flows from financing activities:
Issuance of long-term debt..................................... - 209
Net change in commercial paper and bank borrowings............. (916) 622
Repayment of long-term debt.................................... (140) (187)
Payment of cash dividends...................................... (26) (27)
Issuances (repurchases) of common stock, net................... 78 (718)
Other.......................................................... 1 5
------ ----
Net cash used in financing activities...................... (1,003) (96)
------ ----
Change in cash and cash equivalents.............................. (85) (4)
Cash and cash equivalents at beginning of period................. 110 113
------ ----
Cash and cash equivalents at end of period....................... $ 25 $109
====== ====
Interest payments................................................ $ 294 $240
Income tax payments (refunds), net............................... $ (13) $709
See accompanying notes.
5
COLUMBIA/HCA HEALTHCARE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
UNAUDITED
NOTE 1--BASIS OF PRESENTATION
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 considered necessary for a fair presentation have been included.
Operating results for the quarter and six months ended June 30, 1998, are not
necessarily indicative of the results that may be expected for the year ending
December 31, 1998. For further information, refer to the consolidated
financial statements and footnotes thereto included in the Company's annual
report on Form 10-K for the year ended December 31, 1997.
Certain prior year amounts have been reclassified to conform to the current
year presentation.
NOTE 2--INVESTIGATIONS
The Company is currently the subject of several federal investigations into
its business practices, as well as governmental investigations by various
states. The Company is cooperating in these investigations and understands,
through written notice and other means, that it is a target in these
investigations. Given the scope of the ongoing investigations, the Company
expects additional subpoenas and other investigative and prosecutorial
activity to occur in these and other jurisdictions in the future.
The Company is the subject of a formal order of investigation by the
Securities and Exchange Commission. The Company understands that the
investigation includes the 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, 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 9--
Contingencies and Part II, Item 1: Legal Proceedings.)
NOTE 3--RESTRUCTURING OF OPERATIONS
The Company is currently in the process of restructuring its operations in
an effort to create a smaller and more focused company. The restructuring
includes divestitures of certain businesses as described in Note 5--
Discontinued Operations, divestitures of certain hospitals and surgery centers
to third parties and spin-offs of certain other assets to the Company's
stockholders.
Divestiture of Certain Hospitals and Surgery Centers
In May 1998, the Company announced agreements to sell 22 hospitals and
certain related facilities to a consortium of not-for-profit entities for an
aggregate sales price of approximately $1.2 billion. The agreements are
subject to customary conditions, including state regulatory, antitrust and
certain other approvals. The sales of 21 of these hospitals are expected to be
completed in the third quarter of 1998 and result in an after-tax gain of
approximately $300 million. Proceeds from the sales are expected to be used to
repay bank borrowings.
6
COLUMBIA/HCA HEALTHCARE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
UNAUDITED
NOTE 3--RESTRUCTURING OF OPERATIONS (CONTINUED)
Divestiture of Certain Hospitals and Surgery Centers (Continued)
In addition, during the first six months of 1998 the Company has completed
the sales of four hospitals and reached agreements to sell 11 more hospitals
to various entities for gross proceeds of approximately $300 million.These
transactions are not expected to have a material effect on results of
operations. Proceeds from the sales are expected to be used to repay bank
borrowings.
In April 1998, the Company announced an agreement to sell 34 of its
ambulatory surgery centers located in "non-core" markets. The sale of these
ambulatory surgery centers was completed during July 1998 (See Note 11--
Subsequent Events).
Spin-Offs
The Company is continuing with its previously announced plan of filing a
ruling request with the Internal Revenue Service (the "IRS") to create two
tax-free spin-off companies. In July 1998, the Company's board of directors
authorized the submission of the ruling request to the IRS. (See Note 11--
Subsequent Events). The two proposed spin-off companies currently represent
the Pacific and America operating groups.
The Pacific group is currently comprised of 42 consolidating hospitals with
approximately $460 million and $950 million in revenues for the quarter and
six months ended June 30, 1998, respectively. The Pacific group also has an
equity interest in one non-consolidated hospital.
The America group is currently comprised of 22 consolidating hospitals with
approximately $125 million and $260 million in revenues for the quarter and
six months ended June 30, 1998, respectively.
NOTE 4--CHARGES RELATED TO INVESTIGATIONS AND RESTRUCTURING OF OPERATIONS
During 1998, the Company recorded the following pretax charges related to
the investigations and restructuring of operations as discussed in Notes 2 and
3 (in millions):
QUARTER SIX MONTHS
------- ----------
Professional fees related to investigations............ $24 $52
Severance costs........................................ - 4
Other.................................................. 7 13
--- ---
$31 $69
=== ===
NOTE 5--DISCONTINUED OPERATIONS
Included in discontinued operations are three of the four business units
acquired in the August 1997 merger with Value Health, Inc. ("Value Health")
and the Company's home health care businesses. The Company implemented a plan
to dispose of these businesses during 1997.
Revenues of the home health care and Value Health businesses to be disposed
of totaled $181 million and $342 million for the quarter ended June 30, 1998
and 1997, respectively, and $822 million and $682 million for the six months
ended June 30, 1998 and 1997, respectively.
During the second quarter of 1998, the Company completed the sale of all
three Value Health units for proceeds totaling approximately $619 million. The
proceeds were used to repay bank borrowings. The Company recorded a $73
million loss upon completion of these disposals in 1998 which reflects changes
to the estimated loss on disposal of discontinued operations of $443 million
recorded in the fourth quarter of 1997.
7
COLUMBIA/HCA HEALTHCARE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
UNAUDITED
NOTE 5--DISCONTINUED OPERATIONS (CONTINUED)
In June 1998, the Company announced four separate agreements to sell the
majority of its home health care operations (except operations in the state of
Florida) for approximately $60 million. Subsequent to the second quarter of
1998, the Company announced the signing of an agreement to sell its home
health operations in Florida for approximately $30 million. All of these sales
are expected to be completed by the end of the year, subject to various
regulatory approvals, 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.
NOTE 6--INCOME TAXES
The Company is currently contesting before the United States Tax Court (the
"Tax Court") and the United States Court of Federal Claims certain claimed
deficiencies and adjustments proposed by the Internal Revenue Service (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-Hospital Corporation of America's ("HCA") 1981
through 1988 and 1991 through 1993 federal income tax returns and Healthtrust,
Inc.-The Hospital Company's ("Healthtrust") 1990 through 1994 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 and the
methods of accounting used by certain subsidiaries for calculating taxable
income related to vendor rebates and governmental receivables. The IRS is
claiming an additional $332 million in income taxes and interest through June
30, 1998.
Tax Court decisions received in 1996 and 1997 related to HCA's 1981 through
1988 federal income tax returns may be appealed by the IRS or the Company to
the United States Court of Appeals, Sixth Circuit. The Company expects any
decisions regarding the appeal of these rulings will 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 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.
8
COLUMBIA/HCA HEALTHCARE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
UNAUDITED
NOTE 7--EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted earnings
per share from continuing operations for the quarters and six months ended
June 30, 1998 and 1997 (dollars in millions, except per share amounts):
QUARTER SIX MONTHS
----------------- -----------------
1998 1997 1998 1997
-------- -------- -------- --------
Numerator(a):
Income from continuing operations........ $ 173 $ 385 $ 392 $ 840
Denominator:
Share reconciliation (in thousands):
Shares used for basic earnings per
share................................. 643,440 661,723 642,749 667,094
Effect of dilutive securities:
Stock options........................ 3,956 4,587 3,067 5,526
Warrants and other................... 597 796 651 756
-------- -------- -------- --------
Shares used for dilutive earnings per
share................................... 647,993 667,106 646,467 673,376
======== ======== ======== ========
Earnings per share:
Basic earnings per share from continuing
operations.............................. $ .27 $ .58 $ .61 $ 1.25
Diluted earnings per share from
continuing operations................... $ .27 $ .58 $ .61 $ 1.24
- --------
(a) Amount is used for both basic and diluted earnings per share computations
since there is no earnings effect related to the dilutive securities.
NOTE 8--LONG-TERM DEBT
Current portion of long-term debt at June 30, 1998 includes approximately
$2.4 billion outstanding under the Company's former 364-day revolving credit
facility which was converted to a one-year term loan (the "one- year term
loan").
On July 10, 1998, the Company amended its one-year term loan and $2.0
billion five-year revolving credit agreement (the "Revolving Credit
Facility"). The amendments were primarily made to allow the Company to
repurchase up to $1.0 billion of its common stock (see Note 11--Subsequent
Events).
On July 10, 1998, the Company entered into a $1.0 billion term loan
agreement with several banks which matures February 2002. Proceeds from the
$1.0 billion term loan were used to reduce borrowings under the Company's
Revolving Credit Facility, which the Company anticipates using to finance the
$1.0 billion stock repurchase program.
9
COLUMBIA/HCA HEALTHCARE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
UNAUDITED
NOTE 9--CONTINGENCIES
Significant Legal Proceedings
Various lawsuits, claims and legal proceedings (see Note 2--Investigations,
for a description of the ongoing government investigations) have been and are
expected to 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, as well as other violations and
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' 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 (see Part II, Item 1: Legal Proceedings).
NOTE 10--COMPREHENSIVE INCOME
The components of comprehensive income, net of related tax, for the quarters
and six months ended June 30, 1998 and 1997 are as follows (in millions):
SIX
QUARTER MONTHS
---------- ----------
1998 1997 1998 1997
---- ---- ---- ----
Net income............................................... $78 $412 $275 $835
Unrealized gains (losses) on securities.................. (24) 28 - 14
Foreign currency translation adjustments................. - 2 (2) 3
--- ---- ---- ----
Comprehensive income..................................... $54 $442 $273 $852
=== ==== ==== ====
The components of accumulated other comprehensive income, net of related
tax, at June 30, 1998 and December 31, 1997 are as follows:
1998 1997
---- ----
Unrealized gains on securities.................................. $90 $90
Foreign currency translation adjustments........................ - 2
--- ---
Accumulated other comprehensive income.......................... $90 $92
=== ===
10
COLUMBIA/HCA HEALTHCARE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
UNAUDITED
NOTE 11--SUBSEQUENT EVENTS
In July 1998, the Company completed the sale of 34 of its ambulatory surgery
centers for proceeds of approximately $550 million. The sale resulted in an
after-tax gain of approximately $100 million. Proceeds from the sale were used
to repay bank borrowings.
On July 16, 1998, the Company's board of directors authorized the submission
of a request for a ruling from the IRS for two tax-free spin-off Companies,
comprising the Pacific and America operating groups. The request is expected
to be filed in August 1998.
On July 29, 1998, the Company announced a stock repurchase program under
which up to $1 billion of the Company's common stock may be purchased. In
August 1998, the Company commenced the repurchase program by entering into a
series of forward purchase contracts. The number of shares to be purchased and
the timing of purchases will be based upon several factors, including the
price of the Company's common stock, general market conditions, the status of
the ongoing federal and state governmental investigations of the Company's
business practices and other factors. In light of the ongoing investigations,
prior to the completion of the stock repurchase program, the Company will
address any government concerns related to the program.
NOTE 12--DERIVATIVES
In June 1998, the Financial Accounting Standards Board issued Statement No.
133, Accounting for Derivative Instruments and Hedging Activities, which is
required to be adopted in years beginning after June 15, 1999. Because of the
Company's minimal use of derivatives, management does not anticipate that the
adoption of the new Statement will have a significant effect on earnings or
the financial position of the Company.
11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
INVESTIGATIONS
The Company is currently the subject of several federal investigations into
its business practices, as well as governmental investigations by various
states. The Company is cooperating in these investigations and understands,
through written notice and other means, that it is a target in these
investigations. Given the breadth of the ongoing investigations, the Company
expects additional subpoenas and other investigative and prosecutorial
activity to occur in these and other jurisdictions in the future.
The Company is the subject of a formal order of investigation by the
Securities and Exchange Commission. The Company understands that the
investigation includes the 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, 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 9--
Contingencies of the Notes to the Condensed Consolidated Financial Statements
and Part II, Item 1: Legal Proceedings.)
RESTRUCTURING OF OPERATIONS & DISCONTINUED OPERATIONS
The Company is currently in the process of restructuring its operations in
an effort to create a smaller and more focused company. The restructuring
includes divestitures of certain hospitals and surgery centers to third
parties and spin-offs of certain other assets to the Company's stockholders
(See in Note 3--Restructuring Operations of the Notes to the Condensed
Consolidated Financial Statements) and the divestitures of certain
discontinued business (See Note 5--Discontinued Operations of the Notes to the
Condensed Consolidated Financial Statements).
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 patients
and physicians. By developing a comprehensive health care network with a broad
range of health care services located throughout a community service area, the
Company is better able to attract and serve patients and physicians. 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.
12
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS--(CONTINUED)
RESULTS OF OPERATIONS
Revenue/Volume Trends
The Company has experienced a decline in volumes and revenues as well as
operational deficiencies. Management believes that the impact of the ongoing
government investigations and related media coverage, and the announced sale
of several hospitals as part of the Company's restructuring of operations has
created uncertainty in the respective communities.
The Company's revenues also continue to be adversely 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,
higher discount sources, including Medicare, Medicaid and managed care plans.
Admissions related to Medicare, Medicaid and managed care plan patients were
90% and 87% of total admissions for the six months ended June 30, 1998 and
1997, respectively.
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, including the Company, 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 payers to direct certain procedures
from inpatient care to outpatient care. Outpatient revenues grew to 37% of net
patient revenues for the six months ended June 30, 1998 from 36% during the
same period last year.
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. However, under the Balanced Budget Act of 1997 (the
"BBA-97"), the Company's reimbursement from the Medicare and Medicaid programs
were reduced and will be further reduced as some reductions will be phased in
over the next few years.
Reductions in Medicare and Medicaid 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 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.
13
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS--(CONTINUED)
RESULTS OF OPERATIONS (CONTINUED)
Operating Results Summary
The following is a summary of results from continuing operations for the
quarters and six months ended June 30, 1998 and 1997 (dollars in millions,
except per share amounts):
QUARTER
-----------------------------
1998 1997
-------------- -------------
AMOUNT RATIO AMOUNT RATIO
------ ----- ------ -----
Revenues........................................ $4,781 100.0 $4,845 100.0
Salaries and benefits........................... 1,998 41.8 1,850 38.2
Supplies........................................ 719 15.0 658 13.6
Other operating expenses........................ 961 20.2 943 19.4
Provision for doubtful accounts................. 340 7.1 310 6.4
Depreciation and amortization................... 311 6.4 308 6.4
Interest expense................................ 145 3.0 123 2.5
Equity in earnings of affiliates................ (33) (0.7) (35) (0.7)
Restructuring of operations and investigation
related costs.................................. 31 0.7 - -
------ ----- ------ -----
4,472 93.5 4,157 85.8
------ ----- ------ -----
Income from continuing operations before
minority interests and income taxes............ 309 6.5 688 14.2
Minority interests in earnings of consolidated
entities....................................... 18 0.4 45 0.9
------ ----- ------ -----
Income from continuing operations before income
taxes.......................................... 291 6.1 643 13.3
Provision for income taxes...................... 118 2.5 258 5.4
------ ----- ------ -----
Income from continuing operations............... $ 173 3.6 $ 385 7.9
====== ===== ====== =====
Diluted earnings per share from continuing
operations..................................... $ .27 $ .58
% changes from prior year:
Revenues...................................... (1.3%) 3.7%
Income from continuing operations before
income taxes................................. (54.7) 6.5
Income from continuing operations............. (55.0) 6.6
Diluted earnings per share from continuing
operations................................... (53.4) 7.4
Admissions (a)................................ (0.6)
Equivalent admissions (b)..................... 0.3
Revenues per equivalent admission............. (1.6)
Same-facility % changes from prior year (c):
Revenues...................................... (3.0%)
Admissions (a)................................ (0.5)
Equivalent admissions (b)..................... 0.6
Revenues per equivalent admission............. (3.7)
14
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS--(CONTINUED)
RESULTS OF OPERATIONS (CONTINUED)
SIX MONTHS
-----------------------------
1998 1997
-------------- -------------
AMOUNT RATIO AMOUNT RATIO
------ ----- ------ -----
Revenues........................................ $9,682 100.0% $9,833 100.0%
Salaries and benefits........................... 4,011 41.4 3,726 37.9
Supplies........................................ 1,465 15.1 1,357 13.8
Other operating expenses........................ 1,901 19.7 1,905 19.4
Provision for doubtful accounts................. 683 7.1 607 6.2
Depreciation and amortization................... 620 6.4 604 6.1
Interest expense................................ 298 3.1 236 2.4
Equity in earnings of affiliates................ (75) (0.8) (97) (1.0)
Restructuring of operations and investigation
related costs.................................. 69 0.7 - -
------ ----- ------ -----
8,972 92.7 8,338 84.8
------ ----- ------ -----
Income from continuing operations before
minority interests and income taxes............ 710 7.3 1,495 15.2
Minority interests in earnings of consolidated
entities....................................... 38 0.4 92 0.9
------ ----- ------ -----
Income from continuing operations before income
taxes.......................................... 672 6.9 1,403 14.3
Provision for income taxes...................... 280 2.8 563 5.7
------ ----- ------ -----
Income from continuing operations............... $ 392 4.1 $ 840 8.6
====== ===== ====== =====
Diluted earnings per share from continuing
operations..................................... $ .61 $ 1.24
% changes from prior year:
Revenues...................................... (1.5%) 5.0
Income from continuing operations before
income taxes................................. (52.1) 9.9
Income from continuing operations............. (53.3) 9.9
Diluted earnings per share from continuing
operations................................... (50.8) 9.7
Admissions (a)................................ 0.8
Equivalent admissions (b)..................... 1.8
Revenues per equivalent admission............. (3.3)
Same-facility % changes from prior year (c):
Revenues...................................... (2.8)
Admissions(a)................................. 0.3
Equivalent admissions (b)..................... 1.5
Revenues per equivalent admission............. (4.2)
- --------
(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) "Same facility" information excludes the operations of hospitals and their
related facilities which were either acquired or divested during the
current and prior year. The facilities to be sold as part of the Company's
restructuring of operations efforts will continue to be included in "same
facility" until the date they are divested.
15
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS--(CONTINUED)
RESULTS OF OPERATIONS (CONTINUED)
Quarters Ended June 30, 1998 and 1997
Income from continuing operations before income taxes declined 54.7% to $291
million in 1998 from $643 million in 1997, and pretax margins decreased to
6.1% in 1998 from 13.3% in 1997. The decrease in pretax income was primarily
attributable to the decline in revenues, a decrease in the operating margins
and costs associated with the restructuring of the Company's operations and
investigation related costs. The announced sale of several hospitals as part
of the Company's restructuring of operations also contributed to the declines
in revenues and admissions as well as operating margins.
Revenues decreased 1.3% to $4,781 million in 1998 compared to $4,845 million
in 1997. Inpatient admissions decreased 0.6% from a year ago and equivalent
admissions (adjusted to reflect combined inpatient and outpatient volume)
increased 0.3%. On a same-facility basis, revenues decreased 3.0%, admissions
decreased 0.5% and equivalent admissions increased 0.6% from a year ago. The
decline in both reported and same-facility revenues compared to increases in
equivalent admissions resulted from declines in revenue per equivalent
admissions of 1.6% on a reported basis and 3.7% on a same-facility basis. As
previously discussed, the increase in outpatient volume activity is primarily
a result of the continuing trend of certain services, previously provided in
an inpatient setting, being converted to an outpatient setting.
The decline in revenues was due to several factors including decreases in
Medicare reimbursement rates mandated by the BBA-97 which became effective
October 1, 1997 (lowered 1998 revenues by approximately $55 million for the
quarter), continued increases in discounts from the growing number of managed
care payers (managed care as a percentage of total admissions increased to 39%
in 1998 compared to 35% during 1997) and delays experienced in obtaining
Medicare cost report settlements (cost report filings and settlements resulted
in favorable revenue adjustments of $18 million in 1998 compared to $72
million in 1997).
Operating expenses increased as a percentage of revenues in almost every
expense category, except depreciation and amortization, which remained
unchanged, and minority interests, which declined 0.5% from 1997 due to
decreased income from joint ventures that included minority partners. The
primary reason for the increases as a percentage of revenues in all other
expense categories, as described below, was the Company's inability to adjust
expenses in line with the decreases experienced in volumes and reimbursement
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 continue to contribute
to the Company's inability to implement changes to reduce operating expenses
in response to the volume and revenue declines.
Salaries and benefits, as a percentage of revenues, increased to 41.8% in
1998 from 38.2% in 1997. The decline in revenues per equivalent admission was
a primary factor in the increase. In addition, the Company was unable to
adjust staffing levels corresponding with the declining equivalent admission
growth (man hours per equivalent admission increased slightly compared to last
year).
Supply costs increased as a percentage of revenues to 15.0% in 1998 from
13.6% in 1997 due to a decline in net revenue per equivalent admission while
the cost of supplies per equivalent admission increased.
Other operating expenses (primarily consisting of contract services,
professional fees, repairs and maintenance, rents and leases, utilities,
insurance and non-income taxes) increased as a percentage of revenues to 20.2%
in 1998 from 19.4% in 1997. The increase was due to small increases in several
of these areas as a percentage of revenues.
16
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS--(CONTINUED)
RESULTS OF OPERATIONS (CONTINUED)
Quarters Ended June 30, 1998 and 1997 (Continued)
Provision for doubtful accounts, as a percentage of revenues, increased to
7.1% in 1998 from 6.4% in 1997 due to internal factors such as continued
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 are directed to installing and
converting systems and building new data files, rather than devoting full
effort to billing and collecting receivables. The Company continues to
experience increased occurrences 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
result 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.
Interest expense increased to $145 million in 1998 compared to $123 million
in 1997 primarily as a result of an increase in average outstanding debt
during 1998 compared to last year. This was due, in part, to the additional
debt incurred during the third and fourth quarters of 1997 related to the
Company's $1.0 billion common stock repurchase program which was completed in
the fourth quarter of 1997. Interest expense associated with the increase in
debt related to the funding of the 1997 merger with Value Health has been
allocated to "Discontinued operations" for the periods prior to the sales of
the respective Value Health businesses and is therefore excluded from interest
expense from continuing operations for certain periods.
Equity in earnings of affiliates remained unchanged at 0.7% of revenues as
compared to last year.
During 1998, the Company incurred $31 million ($18 million after-tax or $.03
per diluted share) of costs in connection with the restructuring of operations
and investigations. These costs included $24 million in professional fees
related to the investigations and $7 million in various other costs.
The Company incurred a $22 million net loss from operations of its
discontinued businesses in 1998 compared to net income of $27 million during
the prior year. The majority of the loss, which is primarily related to the
Company's home health care business, is due to revenue reductions related to
Medicare rates of reimbursement for home health visits under the BBA-97, and a
decline in home health visits from 4.3 million last year to 2.1 million in
1998. The Company also incurred a $73 million loss on disposal of three Value
Health business units acquired in 1997. The loss reflects adjustments to the
Company's 1997 estimated loss on disposal for these businesses.
Six Months Ended June 30, 1998 and 1997
Income from continuing operations before income taxes declined 52.1% to $672
million in 1998 from $1,403 million in 1997, and pretax margins decreased to
6.9% in 1998 from 14.3% in 1997. The decrease in pretax income was primarily
attributable to the decline in revenues, decreases in the operating margin and
costs associated with the restructuring of operations and investigation
related costs. The announced sale of several hospitals as part of the
Company's restructuring of operations also contributed to the declines in both
revenues and operating margins.
Revenues decreased 1.5% to $9.7 billion in 1998 compared to $9.8 billion in
1997. Inpatient admissions increased 0.8% from a year ago and equivalent
admissions (adjusted to reflect combined inpatient and outpatient volume)
increased 1.8%. On a same-facility basis, revenues decreased 2.8%, admissions
increased 0.3% and equivalent admissions increased 1.5% from a year ago. The
decline in both reported and same-facility revenues compared to increases in
equivalent admissions resulted from declines in revenue per equivalent
admission of
17
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS--(CONTINUED)
RESULTS OF OPERATIONS (CONTINUED)
Six Months Ended June 30, 1998 and 1997 (Continued)
3.3% on a reported basis and 4.2% on a same-facility basis. As previously
discussed, the increase in outpatient volume activity is primarily a result of
the continuing trend of certain services, previously provided in an inpatient
setting, being converted to an outpatient setting.
The decline in revenues was due to several factors including decreases in
Medicare reimbursement rates mandated by the BBA-97 which became effective
October 1, 1997 (lowered 1998 revenues by approximately $100 million),
continued increases in discounts from the growing number of managed care
payers (managed care as a percentage of total admissions increased to 38% in
1998 compared to 33% during 1997) and delays experienced in obtaining Medicare
cost report settlements (cost report filings and settlements resulted in
favorable revenue adjustments of $39 million in 1998 compared to $101 million
in 1997).
Operating expenses increased as a percentage of revenues in almost every
expense category except minority interests which declined 0.5% from 1997 due
to decreased income from joint ventures that included minority partners. The
primary reason for the increases as a percentage of revenues in all other
expense categories, as described below, was the Company's inability to adjust
expenses in line with the decreases experienced in volumes and reimbursement
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 continue to contribute
to the Company's inability to implement changes to reduce operating expenses
in response to the volume and revenue declines.
Salaries and benefits, as a percentage of revenues, increased to 41.4% in
1998 from 37.9% in 1997. The decline in revenues per equivalent admission was
a primary factor in the increase. In addition, the Company was unable to
adjust staffing levels corresponding with the declining equivalent admission
growth (man hours per equivalent admission increased slightly compared to last
year).
Supply costs increased as a percentage of revenues to 15.1% in 1998 from
13.8% in 1997 due to a decline in net revenue per equivalent admission while
the cost of supplies per equivalent admission increased.
Other operating expenses (which includes various expense categories)
increased as a percentage of revenues to 19.7% in 1998 from 19.4% in 1997.
Provision for doubtful accounts, as a percentage of revenues, increased to
7.1% in 1998 from 6.2% in 1997 due to internal factors such as continued
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 are 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.
Depreciation and amortization increased as a percentage of revenues to 6.4%
in 1998 from 6.1% in 1997, 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.
18
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS--(CONTINUED)
RESULTS OF OPERATIONS (CONTINUED)
Six Months Ended June 30, 1998 and 1997 (Continued)
Interest expense increased to $298 million in 1998 compared to $236 million
in 1997, primarily as a result of an increase in average outstanding debt
during 1998 compared to last year. This was due, in part, to the additional
debt incurred during the third and fourth quarters of 1997 related to the
Company's $1.0 billion common stock repurchase program which was completed in
the fourth quarter of 1997. Interest expense associated with the increase in
debt related to the funding of the 1997 merger with Value Health has been
allocated to "Discontinued operations" for periods prior to the sales of the
respective Value Health businesses and is therefore excluded from interest
expense from continuing operations for certain periods.
Equity in earnings of affiliates decreased as a percentage of revenues to
0.8% in 1998 from 1.0% in 1997 primarily due to decreased profitability at
certain non-consolidated joint venture facilities.
During 1998, the Company incurred $69 million ($40 million after-tax or $.06
per diluted share) of costs in connection with the restructuring of operations
and investigations. These costs included $52 million in professional fees
related to the investigations and $17 million in various other costs.
The Company incurred a $44 million net loss from operations of it's
discontinued businesses in 1998 compared to net income of $51 million during
the prior year. The majority of the loss, which is primarily related to the
Company's home health care business, is due to revenue reductions related to
Medicare rates of reimbursement for home health visits under the BBA-97 and a
decline in home health visits from 8.5 million last year to 4.7 million in
1998.
Liquidity
Cash provided by continuing operating activities totaled approximately $1.0
billion during the first six months of 1998 compared to $810 million in 1997.
The increase was primarily due to a $350 million federal income tax refund
received during 1998 related to excess estimated payment amounts made during
1997. The refund was partially offset by a decline in net income from 1997 to
1998.
Cash used in investing activities declined to $89 million during the first
six months of 1998 from $718 million for the same period of 1997. The decline
was primarily due to $619 million in proceeds from the sale of certain
discontinued businesses offsetting capital expenditures of $666 million, which
were comparable to $696 million of capital expenditures in 1997.
Cash flows used in financing activities totaled approximately $1.0 billion
during the first six months of 1998 compared to $96 million in 1997. The
excess of cash flows from continuing operations over cash used in investing
activities was primarily used to pay down debt during the first six months of
1998. During 1997, the excess cash flow from continuing operations over cash
used in investing activities along with net additional borrowings of $644
million were used to repurchase $718 million of the Company's common stock
under its share repurchase program.
At June 30, 1998, current liabilities exceeded current assets by $973
million. Included in current liabilities is approximately $2.4 billion
outstanding under the Company's former 364-day revolving credit facility which
was converted to a one-year term loan (the "one-year term loan"). The Company
expects to repay the one-year term loan primarily through proceeds from
facility sales. Working capital balances totaled $1.7 billion at December 31,
1997. Management believes that proceeds from expected asset sales, cash flows
from operations and amounts available under the Company's $2.0 billion five-
year revolving credit facility due February 2002 (the "Revolving Credit
Facility") will be sufficient to meet expected liquidity needs during the next
twelve months.
Investments of the Company's professional liability insurance subsidiary to
maintain statutory equity and pay claims totaled $1.7 billion at June 30, 1998
and $1.5 billion at December 31, 1997.
19
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS--(CONTINUED)
RESULTS OF OPERATIONS (CONTINUED)
Liquidity (Continued)
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 June 30, 1998. During April 1998, the partner in
the Memorial Healthcare Group, Inc. joint venture exercised their put option
whereby the Company purchased their remaining interest in the joint venture
for approximately $40 million. The Company cannot predict if, or when, other
joint venture partners will exercise such options.
During the first quarter of 1998, the Internal Revenue Service (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 and is consulting with its
joint venture partners and tax advisers to develop an appropriate course of
action. The tax ruling could require the restructuring of certain joint
ventures with not-for-profits or influence the exercise of the put agreements
by certain joint venture partners.
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 $666 million during the
first six months of 1998 compared to $696 million for the same period in 1997.
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 the Company's
existing health care facilities.
Acquisition of hospitals and health care entities and investments in and
advances to affiliates (generally 50% interests in joint ventures that are
accounted for using the equity method) totaled $116 million during the first
six months of 1998 and $162 million in 1997.
The Company expects to finance all capital expenditures with internally
generated and borrowed funds. Available sources of capital include public or
private debt, amounts available under the Company's Revolving Credit Facility
(approximately $1.8 billion as of July 31,1998) and equity. At June 30, 1998,
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.
During July 1998, the Company amended the one-year term loan and the
Revolving Credit Facility primarily to allow for a $1.0 billion share
repurchase of its common stock. Also during July 1998, the Company entered
into a $1.0 billion term loan agreement with several banks which matures
February 2002. Proceeds from $1.0 billion term loan were used to reduce
borrowings under the Company's Revolving Credit Facility which the Company
anticipates using to finance the $1.0 billion stock repurchase program.
The one-year term loan, the Revolving Credit Facility and the new $1.0
billion term loan 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,
20
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS--(CONTINUED)
RESULTS OF OPERATIONS (CONTINUED)
Capital Resources (Continued)
depreciation and amortization. The Revolving Credit Facility and one-year term
loan 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 the third quarter of 1997, the Company began replacing amounts
outstanding under its commercial paper programs with borrowings under its bank
credit facilities. This was due to the limited access of commercial paper as a
funding source caused by downgrades of the Company's senior debt and
commercial paper credit ratings by Moody's Investor Service ("Moody's") and
Standard and Poor's. In February 1998, Moody's further downgraded the
Company's senior debt credit rating to Ba2 from Baa2 and the commercial paper
rating to NP (not prime) from P-3.
As part of the Company's restructuring of operations discussed earlier, the
Company announced it is pursuing various restructuring alternatives which
include divestitures of certain assets to third parties and spin-offs of
certain assets to the Company's stockholders. These restructuring alternatives
could have the effect of materially changing the capital structure of the
Company. At this time, management has not determined the future capital
structure of the Company.
YEAR 2000 ISSUES
The Year 2000 problem is the result of two potential malfunctions that could
have an impact on the Company's systems and equipment. The first problem
arises due to computers being programmed to use two rather than four digits to
define the applicable year. The second problem arises in embedded chips, where
microchips and microcontrollers have been designed using two rather than four
digits to define the applicable year. Certain of the Company's computer
programs, building infrastructure components (e.g. alarm systems and HVAC
systems) and medical devices that are date sensitive, may recognize a date
using "00" as the year 1900 rather than the year 2000. If uncorrected, the
problem could result in computer system and program failures or equipment and
medical device malfunctions that could result in a disruption of business
operations or that could affect patient diagnosis and treatment.
With respect to the information technology ("IT") portions of the Company's
Year 2000 project, which address the inventory, assessment, remediation,
testing and implementation of internally developed software, the Company has
identified various software applications that are being addressed on separate
time lines. The Company has begun remediating for all these software
applications and is testing the software applications where remediation has
been completed. The Company has also completed the assessment of mission
critical third party software (i.e., that software which is essential for day
to day operations) and has developed testing and implementation plans with
separate time lines. The Company anticipates completing, in all material
respects, remediation, testing and implementation for internally developed and
mission critical third party software by June 1999. The Company's efforts are
currently on schedule.
With respect to the IT infrastructure portion of the Company's Year 2000
project, the Company has undertaken a program to inventory, assess and
correct, replace or otherwise address impacted vendor products (hardware,
systems software, business software, and telecommunication equipment). The
Company has implemented a program to contact vendors, analyze information
provided, and to remediate, replace or otherwise address IT products that pose
a material Year 2000 Impact. The Company anticipates completion, in all
material respects, of the IT infrastructure portion of its program by June
1999. The IT infrastructure portion of the Company's Year 2000 project is
currently on schedule.
21
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS--(CONTINUED)
YEAR 2000 ISSUES (CONTINUED)
The Company presently believes that with modifications to existing software
or the installation of upgraded software under the IT infrastructure portion,
the Year 2000 will not pose material operational problems for its computer
systems. However, if such modifications or upgrades are not accomplished in a
timely manner, Year 2000 related failures may present a material adverse
impact on the operations of the Company. Contingency planning will be
established and implemented in an effort to minimize any impact from Year 2000
related failures.
With respect to the non-IT infrastructure portion of the Company's Year 2000
project, the Company has undertaken a program to inventory, assess and
correct, replace or otherwise address impacted vendor products, medical
equipment and other related equipment with embedded chips. The Company has
implemented a program to contact vendors, analyze information provided, and to
remediate, replace or otherwise address devices or equipment that pose a
material Year 2000 impact. The Company anticipates completion, in all material
respects, of the non-IT infrastructure portion of its program by June 1999.
The non-IT infrastructure portion of the Company's Year 2000 project is
currently on schedule.
The Company is prioritizing its non-IT infrastructure efforts by focusing on
equipment and medical devices that will have a direct impact on patient safety
and health. The Company is directing the majority of its efforts to repair,
replace, upgrade or otherwise address this equipment and these medical devices
in order to minimize risk to patient safety and health. The Company is relying
on information that is being provided to it by equipment and medical device
manufacturers regarding the Year 2000 status of their products. While the
Company is attempting to evaluate information provided by its present vendors,
there can be no assurance that in all instances accurate information is being
provided. The Company also cannot in all instances guarantee that the repair,
replacement or upgrade of all non-IT infrastructure systems will occur on a
timely basis. Contingency planning will be established and implemented in an
effort to minimize any impact from Year 2000 related failures.
The Company has initiated communications with its major third party payers
and intermediaries, including government payers and intermediaries. The
Company relies on these entities for accurate and timely reimbursement of
claims, often through the use of electronic data interfaces. The Company has
not received assurances that these interfaces will be timely converted.
Failure of these third party systems could have a material adverse affect on
the Company's results of operations. The Company also has initiated
communications with its mission critical suppliers and vendors (i.e. those
suppliers and vendors whose products and services are essential for day to day
operations) to assure their continued operation through the Year 2000. The
Company is continuing its efforts to obtain such assurances from all mission
critical suppliers and vendors. Failure of these third parties could have a
material impact on operations and/or the ability to provide health care
services. Contingency planning will be established and implemented in an
effort to minimize any impact from Year 2000 related failures.
The Company is utilizing both internal and external resources to manage and
implement its Year 2000 program. With the assistance of such resources, the
Company has recently undertaken the development of contingency plans in the
event that its Year 2000 efforts, or the failures of third parties upon which
the Company relies, are not accurately or timely completed. This development
phase will continue through the end of 1998 with the implementation of
contingency plans occuring in 1999.
The Year 2000 project is currently estimated to have a minimum total cost of
$75 million, of which the Company has incurred $18 million through the first
six months of 1998. Cumulatively, the Company has incurred $33 million of
costs related to the Year 2000 project. The increase to the estimated minimum
total cost is related to estimates for repair or replacement of non-IT
systems. The Company recognizes that the total cost is likely to increase as
it completes its assessment of non-IT systems and as it continues its
remediation and testing of IT systems. The Company is not currently able to
reasonably estimate the ultimate cost to be incurred for the
22
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS--(CONTINUED)
YEAR 2000 ISSUES (CONTINUED)
assessment, remediation, upgrade, replacement and testing of its impacted non-
IT systems. 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 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 guarantees 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.
HEALTH CARE REFORM
In recent years, an increasing number of legislative proposals have been
introduced or proposed in 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.
PENDING IRS DISPUTES
The Company is contesting income taxes and related interest proposed by the
IRS for prior years aggregating approximately $332 million as of June 30,
1998. Management believes that final resolution of these disputes will not
have a material adverse effect on the results of operations or financial
position of the Company. (See Note 6--Income Taxes of the Notes to Condensed
Consolidated Financial Statements for a description of the pending IRS
disputes).
23
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS--(CONTINUED)
SUBSEQUENT EVENTS
In July 1998, the Company completed the sale of 34 of its ambulatory surgery
centers for proceeds of approximately $550 million. The sale resulted in an
after-tax gain of approximately $100 million. Proceeds from the sale were used
to repay bank borrowings.
On July 16, 1998, the Company's board of directors authorized the submission
of a request for a ruling from the IRS for two tax-free spin-off Companies,
comprising the Pacific and America operating groups. The request is expected
to be filed in August 1998.
On July 29, 1998, the Company announced a stock repurchase program under
which up to $1 billion of the Company's common stock may be purchased. In
August 1998, the Company commenced the repurchase program by entering into a
series of forward purchase contracts. The number of shares to be purchased and
the timing of purchases will be based upon several factors, including the
price of the Company's common stock, general market conditions, the status of
the ongoing federal and state governmental investigations of the Company's
business practices and other factors. In light of the ongoing investigations,
prior to the completion of the stock repurchase program, the Company will
address any government concerns related to the program.
FORWARD-LOOKING STATEMENTS
Certain statements contained in this Quarterly Report on Form 10-Q,
including, without limitation, statements containing the words "believes,"
"anticipates," "expects," "estimates" 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) general economic and business conditions,
(ii) competition; (iii) existing laws and governmental regulations and changes
in, or the failure to comply with laws on governmental regulations; (iv) the
outcome of the known and unknown governmental investigations of the Company's
business practices; (v) the recently enacted changes in the Medicare and
Medicaid programs affecting reimbursement to healthcare providers and
insurers; (vi) legislative proposals for healthcare reform; (vii) the ability
to enter into managed care provider arrangements on acceptable terms; (viii)
liability and other claims asserted against the Company; (ix) changes in
business strategy or development plans; (x) the ability to attract and retain
qualified management and personnel, including physicians; (xi) the
availability and terms of capital to fund the expansion of the Company's
business, including the acquisition of additional facilities; (xii) Year 2000
issues. 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.
24
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS--(CONTINUED)
OPERATING DATA
CONSOLIDATED 1998 1997
- ------------ ------- ---------
Number of hospitals in operation at:
March 31.................................................. 310 314
June 30................................................... 309 315
September 30.............................................. 314
December 31............................................... 309
Number of freestanding outpatient surgical centers in
operation at:
March 31.................................................. 142 143
June 30 (a)............................................... 139 145
September 30.............................................. 143
December 31............................................... 140
Licensed hospital beds at (b):
March 31.................................................. 60,739 60,993
June 30................................................... 60,418 61,275
September 30.............................................. 61,071
December 31............................................... 60,643
Weighted average licensed beds (c):
Quarter:
First..................................................... 60,765 61,222
Second.................................................... 60,712 61,203
Third..................................................... 60,981
Fourth.................................................... 60,983
Year....................................................... 61,096
Average daily census (d):
Quarter:
First..................................................... 28,758 28,401
Second.................................................... 25,515 25,921
Third..................................................... 24,343
Fourth.................................................... 25,411
Year....................................................... 26,006
Admissions (e):
Quarter:
First..................................................... 507,600 497,200
Second.................................................... 474,400 477,200
Third..................................................... 461,700
Fourth.................................................... 479,000
Year....................................................... 1,915,100
Equivalent Admissions (f):
Quarter:
First..................................................... 755,800 731,900
Second.................................................... 731,900 729,600
Third..................................................... 711,300
Fourth.................................................... 728,600
Year....................................................... 2,901,400
Average length of stay (days) (g):
Quarter:
First..................................................... 5.1 5.1
Second.................................................... 4.9 4.9
Third..................................................... 4.9
Fourth.................................................... 4.9
Year....................................................... 5.0
25
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS--(CONTINUED)
OPERATING DATA (CONTINUED)
NON-CONSOLIDATED (h) 1998 1997
- -------------------- ----- -----
Number of hospitals in
operation at:
March 31................ 26 27
June 30................. 26 27
September 30............ 27
December 31............. 27
Number of freestanding
outpatient surgical
centers in operation at:
March 31................ 5 5
June 30................. 5 5
September 30............ 5
December 31............. 5
Licensed hospital beds at:
March 31................ 6,357 6,537
June 30................. 6,317 6,641
September 30............ 6,455
December 31............. 6,455
- --------
(a) Amounts include 34 surgery centers which were sold by the Company in July
1998.
(b) Licensed beds are those beds for which a facility has been granted
approval to operate from the applicable state licensing agency.
(c) Weighted average licensed beds represents the average number of licensed
beds weighted based on periods owned.
(d) Average daily census represents the average number of patients in hospital
beds each day.
(e) Admissions represent the total number of patients admitted (in the
facility for a period in excess of 23 hours) to the Company's hospitals.
(f) Equivalent admissions are computed by multiplying admission (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.
(g) Average length of stay represents the average number of days admitted
patients stay in the Company's hospitals.
(h) 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 therefore, are not included
on a fully consolidated basis in the condensed consolidated financial
statements.
26
PART II: OTHER INFORMATION
ITEM 1: 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.
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 and diagnosis related group ("DRG") coding in various
states and home health operations in various jurisdictions, including, but not
limited to, Florida. 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. A
fourth employee of a subsidiary of the Company was indicted on July 22, 1998
by a superseding indictment.
In addition, several hospital facilities affiliated with the Company in
various states have received individual federal and/or state government
inquiries, both informal and formal, requesting information related to
reimbursement from government programs.
The Company is cooperating in these investigations and understands, through
written notice and other means, that it is a target in these investigations.
Given the scope of the ongoing investigations, the Company expects
additional subpoenas and other investigative and prosecutorial activity to
occur in these and other jurisdictions in the future.
The Company is also the subject of a formal order of investigation by the
Securities and Exchange Commission. The Company understands that the
investigation relates to the anti-fraud, periodic reporting and internal
accounting control provisions of the federal securities laws.
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 2 and NOTE 9 of the Notes to Condensed Consolidated
Financial Statements.)
LAWSUITS
Qui Tam Actions
Several qui tam actions have been brought by private parties ("relators") on
behalf of the United States of America and have been unsealed and served on
the Company. The government has declined to intervene in the qui tam actions
unsealed to date. 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, 31 U.S.C. (S)3729 et seq., for
improper claims submitted to the government for reimbursement. The lawsuits
seek damages of three times the amount of all Medicare or Medicaid claims
(involving false claims) presented by the defendants to the federal
government, civil penalties of not less than $5,000 nor more than $10,000 for
each such Medicare or Medicaid claim, attorneys' fees and costs. The Company
is aware of additional qui tam actions that remain under seal and believes
that there are other sealed qui tam cases that it is unaware of.
27
The matter of United States of America, ex rel. Scott Pogue v. Diabetes
Treatment Centers of America, 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. In general, the relator contends that sums paid to
physicians by the Diabetes Treatment Centers of America, who served as Medical
Directors at a hospital affiliated with the Company, were unlawful payments
for the referrals of their patients. Plaintiffs have filed a motion for
partial summary judgment which is pending.
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). In general, 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; (vii) providing free or reduced rate opportunities for additional
medical training; (viii) providing income guarantees; and (ix) granting
physicians exclusive rights to perform procedures in particular fields of
practice. The defendants filed a Motion to Dismiss the Second Amended
Complaint in November 1995 which was granted by the Court in July 1996. In
August 1996, the relator appealed to the United States Court of Appeals for
the Fifth Circuit, and in October 1997, the Fifth Circuit affirmed in part and
vacated and remanded in part the Trial Court's rulings. Defendants filed a
Second Amended Motion to Dismiss which is currently pending and has not yet
been ruled on.
On December 21, 1995, a matter entitled United States of America ex rel.,
Roy Meidinger vs. Lee Memorial Health System, et al., Case No. 95-423-FTM-99D,
was filed in the United States District Court for the Middle District Court of
Florida, Fort Myers Division. This case was brought against approximately
2,500 health care providers and insurance companies, including Columbia
Southwest Regional Medical Center, and generally concerns misrepresentation of
customary charges to HCFA. In December 1996, the United States declined to
intervene. In June 1997, the District Court entered an order directing relator
to serve the defendants. In late November and early December 1997, each of the
six defendants moved to dismiss the Complaint. In January 1998, relator filed
his opposition to the defendants' motion to dismiss. The Court has not yet
ruled on the defendants' motions.
The matter of United States of America ex rel. Sandra Russell; and Sandra
Russell, in her own right v. EPIC Healthcare Management Group, et al., No. H-
95-99151, was filed on January 18, 1995 in the United States District Court
for the Southern District of Texas, Houston Division. The complaint alleges
that the defendants submitted claims, records and/or statements for Medicare
reimbursement in connection with home health services which were false. The
defendants moved to dismiss in May 1997. The Court granted defendants' motion
giving relator the right to replead. Relator filed an amended complaint.
Defendants filed a second motion to dismiss which was granted on June 25,
1998. To date, no Notice of Appeal has been filed.
The matter of Mary Ann Wisz, Individually, and ex rel. United States of
America v. C/HCA Development, Inc. d/b/a Columbia-Olympia Fields Osteopathic
Hospital and Medical Center, Inc., et al., Case No. 97-C-2646, was filed on
April 16, 1998 in the United States District Court for the Northern District
of Illinois, Eastern Division. An amended complaint was filed on February 17,
1998 and on May 15, 1998, plaintiff was permitted leave to file its Second
Amended Complaint. In addition to adding Midwestern University as a party
defendant, the Second Amended Complaint contained allegations that Olympia
Fields Osteopathic Hospital and Medical Center and/or the Chicago Osteopathic
Hospital changed dates on out-patient surgical procedures. That portion of the
Second Amended Complaint has been answered and discovery is ongoing. The
Second Amended Complaint also alleges that one or both hospitals directed
surgical nurses to misdesignate the severity of surgeries. That portion of the
Second Amended Complaint is subject to a partial motion to dismiss, which
motion has been fully briefed and is currently pending.
28
The Company intends to pursue the defense of the qui tam actions vigorously.
Shareholder Derivative and Class Action Complaints Filed in the U.S. District
Courts
Since April 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/or employees.
On October 10, 1997, the Court entered an order consolidating all of the
securities class action claims into a single-captioned case, Morse, Sidney, et
al. v. R. Clayton McWhorter, et al., 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
was 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 damages, costs and expenses. Plaintiffs filed their
Motion for Class Certification in February 1998, and defendants filed
responsive briefs. No ruling has been made on class certification.
On October 10, 1997, the Court entered an order consolidating all of the
derivative law claims into a single-captioned case, McCall, H. Carl, as
Comptroller of the State of New York and as Trustee of the New York State
Common Retirement Fund, derivatively on behalf of Columbia/HCA Healthcare
Corporation v. Richard L. Scott, et al., No. 3-97-0838. All of the other
derivative lawsuits were administratively closed by the Court. The
consolidated McCall lawsuit was 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 defendants filed motions to dismiss in both the Morse and McCall
lawsuits. These motions were referred to the Magistrate Judge for
consideration. In June 1998, the Magistrate Judge recommended that the Court
grant the motions to dismiss in both cases. Plaintiffs in both cases have
filed objections to the Magistrate's recommendations with the District Court,
and defendants will be filing responsive pleadings.
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.
29
Two purported derivative actions entitled Barron, Evelyn, et al. v.
Magdelena Averhoff, et al., Civil Action No. 15822NC, filed on July 22, 1997,
and Kovalchick, John E. v. Magdelena Averhoff, et al. Civil Action No.
15829NC, filed on July 29, 1997, 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.
The suits seek damages, attorneys' fees and costs. In the Barron lawsuit,
plaintiffs also seek an Order (i) requiring individual defendants to return to
the Company all salaries or remunerations paid them by the Company, together
with proceeds of the sale of Columbia stock made in breach of their fiduciary
duties; (ii) prohibiting the Company from paying any individual defendant any
benefits pursuant to the terms of employment, consulting or partnership
agreements; and (iii) terminating all improper business relationships between
the Company and any individual defendant. In the Kovalchick lawsuit,
plaintiffs also seek an Order (i) requiring individual defendants to return to
the Company all salaries or remunerations paid to them by the Company and all
proceeds from the sale of Columbia stock made in breach of their fiduciary
duties; (ii) requiring that an impartial Compliance Committee be appointed to
meet regularly; and (iii) requiring that the Company be prohibited from paying
any director/defendant any benefits pursuant to terms of employment,
consulting or partnership agreements. On August 14, 1997, a similar purported
derivative action entitled State Board of Administration of Florida, the
public pension fund of the State of Florida in behalf of itself and in behalf
of all other stockholders of Columbia/HCA Healthcare Corporation derivatively
in behalf of Columbia/HCA Healthcare Corporation vs. 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.
These lawsuits seek damages and costs as well as orders (i) enjoining the
Company from paying benefits to individual defendants; (ii) requiring
termination of all improper business relationships with individual defendants;
(iii) requiring the Company to provide for "independent public directors"; and
(iv) requiring the Company to put in place proper mechanisms of corporate
governance.
The matter of Louisiana State Employees Retirement System, a public pension
fund of the State of Louisiana, in behalf of itself and in behalf of all other
stockholders of Columbia/HCA Healthcare Corporation derivatively in behalf of
Columbia/HCA Healthcare Corporation v. Magdalena Averhoff, et al., another
derivative action, was filed on March 19, 1998 in the Circuit Court of the
Eleventh Judicial Circuit, Dade County, Florida, General Jurisdiction Division
(Case No. 98-6050 CA04) and the defendants removed it to the United States
District Court, Southern District of Florida (Case No. 98-814-CIV). The
Louisiana State Employees Retirement System is the public pension fund of the
State of Louisiana. The suit alleges, among other things, breach of fiduciary
duties resulting in damage to the Company. The lawsuit seeks damages from the
individual defendants to be paid to the Company and attorneys' fees, costs and
expenses. In addition, the lawsuit seeks orders (i) requiring the individual
defendants to pay to the Company all benefits received by them from the
Company; (ii) enjoining the Company from paying any benefits to individual
defendants; (iii) requiring that defendants terminate all improper business
relationships with the Company and any individual defendants; (iv) requiring
that the Company provide for appointment of a majority of "independent public
directors"; and (v) requiring that the Company put in place proper mechanisms
of corporate governance. On August 10, 1998, the Court transferred this case
to the Middle District of Tennessee.
The Company intends to pursue the defense of these federal and state
Shareholder Derivative and Class Action Complaints vigorously.
Patient/Payer Actions and Other Class Actions
The Company has from time to time received several purported class action
lawsuits which have been filed by patients and/or payers against the Company
and/or certain of its current and/or former officers and/or directors
alleging, in general, improper and fraudulent billing, overcharging, coding
and physician referrals, as well as other violations of law. Certain of the
lawsuits have been conditionally certified as class actions.
The matter of Boyson, Cordula, on behalf of herself and all others similarly
situated v. Columbia/HCA Healthcare Corporation was filed on September 8, 1997
in the United States District Court for the Middle
30
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. This lawsuit seeks injunctive relief requiring the Company to
perform an accounting to identify and disgorge medical bill overcharges. It
also seeks damages, attorneys' fees, interest and costs. The defendant filed
its Answer in November 1997. Plaintiff filed a Motion for Class Certification,
and the defendant's opposition to this motion was filed in March 1998. A first
case management conference is scheduled to take place on August 21, 1998 in
the lawsuits against the Company, including the Boyson suit, that have been
consolidated by the Judicial Panel on Multi-District Litigation (the "MDL
Panel") in the Middle District of Tennessee. (See below) At the conference,
the Court is expected to set a schedule for pre-certification discovery and
class certification motion practice.
The matter of Brown, Nancy, individually and on behalf of all others
similarly situated v. Columbia/HCA Healthcare Corporation was filed on
November 16, 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 items such as pharmaceuticals, medical supplies, laboratory tests,
medical equipment and related medical services. 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 as well as interest, attorneys' fees and costs. Plaintiff amended the
Complaint and the defendant filed an Answer and defenses in June 1996. In
October 1997, Harald Jackson moved to intervene in the lawsuit. The Court
denied Jackson's Motion in December 1997, and he filed a separate lawsuit
referenced below. No class has been certified.
In October 1997, Colville, Douglas, et al. v. Columbia/Palm Drive Hospital,
et al., inclusive 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, among other things, that the Company fraudulently
overcharged the plaintiffs and that it unlawfully charged uninsured patients
at a higher rate for the same services, compared to patients with insurance or
Medicare. This lawsuit seeks damages, attorneys' fees and costs, restitution,
and injunctive relief. In March 1998, the Company filed a Demurrer Motion. The
Demurrer was granted in part and denied in part. Plaintiff filed an Amended
Complaint and the defendants filed a Second Demurrer Motion in June 1998. The
Court has not yet ruled on the Motion.
Jane Doe and her husband, John Doe, on their own behalf, and on behalf of
all other persons similarly situated vs. HCA Health Services of Tennessee,
Inc. dba HCA Donelson Hospital nka Summit Medical Center is a class action
suit filed on August 17, 1992 in the First Circuit Court for Davidson County,
Tennessee, Case No. 92C-2041. The suit principally alleges that Summit Medical
Center'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 as well as a breach of the duty of good
faith and fair dealing. This suit seeks damages, costs and attorneys' fees. In
addition, the suit seeks a declaratory judgment recognizing plaintiffs' rights
to be free from predatory billing and collection practices and an Order (i)
requiring defendants to notify plaintiff class members of entry of declaratory
judgment and (ii) enjoining defendants from further efforts to collect charges
from the plaintiffs. 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 ordered the
parties into mediation. In June 1998, the Court of Appeals denied defendant's
application for permission to appeal the trial court's denial of the summary
judgment motion. At this time, the defendant is working on an application for
permission to appeal to the Supreme Court of Tennessee. In addition, the trial
court withdrew the order for mediation pending defendant's appeal of the
summary judgment denial.
31
Ferguson, Charles, on behalf of himself and all other similarly situated v.
Columbia/HCA Healthcare Corporation, et al., 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. The suit seeks damages, interest, attorneys' fees, costs and
expenses. In addition, the suit seeks an Order (i) requiring defendants to
provide an accounting of plaintiffs and class members who overpaid or were
obligated to overpay; and (ii) requiring defendants to disgorge all monies
illegally collected from plaintiffs and the class. Plaintiff filed a Motion
for Class Certification in September 1997 which has not been ruled on. In
December 1997, the Company filed a Motion for Summary Judgment which was
denied. In January 1998, plaintiff filed a Motion for Leave to File a Second
Amended Class Action Complaint to Add an Additional Class Representative which
was granted but the Court dismissed the claims asserted by the additional
plaintiff.
The matter of Douglas, Cheryl, individually, and on behalf of all others
similarly situated v. Columbia/HCA Healthcare Corporation, et al., is a
purported class action filed on March 5, 1998 in the Circuit Court of Cook
County, Illinois, County Department, Chancery Division, Case No. 98 CH 2942.
The suit is very similar to the Ferguson case and generally 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. The suit
seeks damages, costs and expenses. Various defendants have filed a motion to
dismiss, which has now been fully briefed, and the parties await the court's
ruling.
The matter of Hoop, Kemp, et al. v. Columbia/HCA Healthcare Corporation, et
al. 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 Texas
class 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 suit seeks damages, attorneys' fees, costs and
expenses, as well as restitution to plaintiffs and the class in the amount by
which defendants have been unjustly enriched and equitable and injunctive
relief. The lawsuit principally alleges that 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
also alleges that the Company systematically entered into illegal kickback
schemes with doctors for patient referrals. The Company filed its answer in
November 1997.
The matter of Jackson, Harald F., individually and on behalf of all others
similarly situated 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, alleging, among other
things, that the Company systematically and unlawfully inflated prices,
concealed its practice of inflating prices and engaged in and concealed a
uniform practice of overbilling and damages. The lawsuit seeks damages.
Defendant has filed a motion to dismiss which is pending.
The matter of Johnson, Bruce A., et al. v. Plantation General Hospital,
Limited Partnership was filed on March 9, 1992 in the Circuit Court for the
Seventeenth Judicial Circuit, State of Florida, Broward County, Case No. 92-
06823 Division 2. In general, the suit alleges that the hospital charged
excessive amounts for pharmaceuticals, medical supplies and laboratory tests.
The suit sought certification of a class. Count I sought a price reduction on
all outstanding bills in the amount of the allegedly excessive portion of the
charges. Counts II and III sought damages for patients who have paid bills
containing allegedly excessive amounts for the alleged unreasonable portion of
the charges. Plaintiffs also included a claim for attorneys' fees. On
September 18, 1995, the trial court certified a class and the Fourth District
Court of Appeals affirmed. In October 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 in November 1997. In April 1998,
following the hospital's statement that it would deem
32
the six to eleven year old outstanding debt of class members to be fully
satisfied, summary judgment was granted to the class on Count I. No monetary
judgment was recovered. In July 1998, the Court orally denied plaintiffs'
motion for attorneys' fees. Time to appeal that decision has not expired.
The matter of Operating Engineers Local No. 312 Health & Welfare Fund, on
behalf of itself and as representative of a class of those similarly situated
v. Columbia/HCA Healthcare Corporation was filed on August 6, 1997 in the
United States District Court for the Eastern District of Texas, Civil Action
No. 597CV203. The original complaint alleged violations of the Racketeering
Influenced and Corrupt Organization Act ("RICO") based on allegations that the
defendant 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. In October 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 was also
denied. In February 1998, defendant filed a petition with the MDL Panel to
consolidate this case with Boyson for pretrial proceedings in the Middle
District of Tennessee. During the pendency of the motion to consolidate,
plaintiff amended its complaint to add allegations under the Employee
Retirement Income Security Act of 1974 ("ERISA"), as well as state law claims.
The amended complaint seeks damages, attorneys' fees and costs, as well as
disgorgement and injunctive relief. The MDL Panel granted defendant's motion
to consolidate on June 11, 1998, and this action was transferred to the Middle
District of Tennessee.
On April 24, 1998, two matters, Board of Trustees of the Carpenters &
Millwrights of Houston & Vicinity Welfare Trust Fund v. Columbia/HCA
Healthcare Corporation, No. 598CV157, and Board of Trustees of the Texas
Ironworkers' Health Benefit Plan v. Columbia/HCA Healthcare Corporation, Case
No. 598CV158, were filed in the United States District Court for the Eastern
District of Texas. The original complaint in these suits alleged violations of
RICO only. Plaintiffs in both cases principally alleged that in order to
inflate its revenues and profits, defendant engaged in fraudulent billing for
services not performed, fraudulent overcharging in excess of correct rates and
fraudulent concealment and misrepresentation. These suits seek damages,
attorneys' fees and costs, as well as disgorgement and injunctive relief.
Plaintiffs subsequently amended their complaint to add allegations under ERISA
as well as state law claims. These suits have been consolidated by the MDL
Panel with Boyson and transferred to the Middle District of Tennessee for
pretrial proceedings.
The matter of Tennessee Laborers Health and Welfare Fund, on behalf of
itself and all others similarly situated vs. Columbia/HCA Healthcare
Corporation, No. 3-98-0437, was filed in the United States District Court of
the Middle District of Tennessee, Nashville Division, on May 14, 1998. The
lawsuit seeks certification of a national class comprised of all employee
welfare benefit plans that have paid for medical services provided by the
Company. This case involves allegations under ERISA, as well as state law
claims which are similar to those alleged in Boyson. Plaintiff, an Employee
Welfare Benefit Plan, alleges that defendant violated the terms of the Plan
documents by overbilling the Plans, including but not limited to, exaggerating
the severity of illnesses, providing unnecessary treatment, billing for
services not rendered and other methods of overbilling and further violated
the terms of the Plan documents by taking Plan assets in payment of such
improper bills. Plaintiff further alleges that defendant intentionally
concealed or suppressed the true nature of its patients' illnesses, and the
actual treatment provided to those patients, and its improper billing. The
suit seeks injunctive relief in the form of an accounting, damages, attorneys'
fees, interest, and costs.
The matter of Landgraff, Anne M. and Gina Magarian, on behalf of the
Columbia/HCA Stock Bonus Plan v. Columbia/HCA Healthcare Corporation of
America, et al., 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
generally alleges that 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. The suit seeks damages, interest,
attorneys' fees and costs, as well as an Order requiring defendants to
transfer management of Plan to a third-party. In January 1998, the parties
33
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 in
March 1998 which was denied. A scheduling order has been entered and a trial
date of June 8, 1999 has been set.
The Company intends to pursue the defense of these class 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 NOTES 2 and 9 of the Notes to
Consolidated Financial Statements.
The Company believes the ongoing investigations, qui tam, shareholder cases,
class action 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
A class action styled Mary Forsyth, et al. vs. 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. 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 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. The suit seeks attorneys' fees and costs, as well as
injunctive relief and insurance benefits for plaintiffs. In 1993, the United
States District Court granted summary judgment dismissing most of plaintiff's
claims but granted plaintiffs judgment on one claim that is assessed as having
a maximum exposure of under $4 million, plus attorneys' fees. Plaintiffs
appealed to the United States Court of Appeals for the Ninth Circuit which, in
May 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. In their
current complaint, plaintiffs claim approximately $133 million in antitrust
damages that is subject to statutory trebling. However, in their most recent
expert report, plaintiff's expert claims antitrust damages of approximately
$13-$21 million. Humana has petitioned the Supreme Court for a Writ of
Certiorari on the RICO claims which was granted. The antitrust claims have
been remanded to the United States District Court in Nevada. The District
Court has indicated that it is unlikely to set a trial date until the United
States Supreme Court rules on the merits of the claims presented in the
Petition for Writ of Certiorari. Humana filed a Motion for Summary Judgment on
all remaining antitrust claims raising issues that were not reached by the
District Court.
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 defendant 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 damages, attorneys' fees and costs, as well as
injunctive relief.
The Company intends to pursue the defense of these actions vigorously.
The Company is also 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
34
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.
The above information updates the Legal Proceedings section of the Company's
annual report on Form 10-K for the year ended December 31, 1997 and the
Company's quarterly report Form 10-Q for the period ended March 31, 1998.
35
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company's annual meeting of stockholders was held on May 14, 1998. The
following matters were voted upon at the meeting:
1. Election of directors:
VOTES IN VOTES
FAVOR WITHHELD
----------- -----------
Frederick W. Gluck.................. 540,122,876 6,665,545
T. Michael Long..................... 533,818,901 12,969,520
Carl E. Reichardt................... 533,710,020 13,078,401
VOTES IN VOTES
FAVOR AGAINST ABSTENTIONS
----------- ----------- -----------
2. Amendment to the Company's Restated
Certificate of Incorporation to
provide for the annual election of
directors........................... 492,615,837 3,552,188 907,056
3. Amendments to the Columbia Hospital
Corporation Outside Directors
Nonqualified Stock Option Plan...... 470,705,843 74,934,716 1,147,854
4. Ratification of Ernst & Young LLP as
the Company's auditors.............. 545,464,624 848,985 474,809
5. Stockholder proposal relating to
tobacco investments................. 21,610,438 468,877,914 6,586,420
6. Stockholder proposal related to
equal access to proxy statement..... 32,215,038 462,652,399 2,207,633
ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K.
(a) List of Exhibits:
Exhibit 3(a) --Amendment to the Restated Certificate of Incorporation.*
Exhibit 3(b) --Amendment to the By-laws of the Company.*
Exhibit 10(a) --Third Amendment to the 364 Day Agreement, dated as of July 10,
1998.*
Exhibit 10(b) --Fourth Amendment to the Five-Year Agreement and Amendment,
dated as of July 10, 1998.*
Exhibit 10(c) --$1,000,000,000 Agreement dated as of July 10, 1998 among the
Company, The Several Banks and Other Financial Institutions and
NationsBank, N.A. as Documentation Agent, The Bank of Nova
Scotia and Deutsche Bank Securities, as Co-Syndication Agents
and The Chase Manhattan Bank, as Agent.*
Exhibit 12 --Statement re Computation of Ratio of Earnings to Fixed
Charges.
Exhibit 27 --Financial Data Schedule*
- --------
* Included only in filings under the Electronic Data, Gathering, Analysis, and
Retrieval system.
(b) Reports on Form 8-K filed during the quarter ended June 30, 1998:
On May 19, 1998, the Company filed a report on Form 8-K announcing it had
reached an agreement to sell 22 hospitals to a consortium of not-for-profit
entities.
36
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: August 13, 1998 SENIOR VICE PRESIDENT AND
CONTROLLER
(PRINCIPAL ACCOUNTING
OFFICER)
37