<PAGE>
SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of
the Securities Exchange Act of 1934
Filed by the Registrant /X/
Filed by a Party other than the Registrant / /
Check the appropriate box:
/ / Preliminary Proxy Statement
/X/ Definitive Proxy Statement
/ / Definitive Additional Materials
/ / Soliciting Material Pursuant to Section 240.14a-11(c) or Section
240.142-12
COLUMBIA/HCA HEALTHCARE CORPORATION
- --------------------------------------------------------------------------------
(Name of Registrant as Specified In Its Charter)
- --------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement)
Payment of Filing Fee (Check the appropriate box):
/X/ $125 per Exchange Act Rules 0-11(c)(1)(ii), 14a-6(i)(1), or 14a-6(i)(2)
/ / $500 per each party to the controversy pursuant to Exchange Act Rule
14a-6(i)(3)
/ / Fee computed on table below per Exchange Act Rules 14a-6(i)(4)
and 0-11
1) Title of each class of securities to which transaction applies:
------------------------------------------------------------------------
2) Aggregate number of securities to which transaction applies:
------------------------------------------------------------------------
3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11:*
------------------------------------------------------------------------
4) Proposed maximum aggregate value of transaction:
------------------------------------------------------------------------
* Set forth the amount on which the filing fee is calculated and state how it
was determined.
/ / Check box if any part of the fee is offset as provided by Exchange Act Rule
0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number,
or the Form or Schedule and the date of its filing.
1) Amount Previously Paid:
------------------------------------------------------------------------
2) Form, Schedule or Registration Statement No.:
------------------------------------------------------------------------
3) Filing Party:
------------------------------------------------------------------------
4) Date Filed:
------------------------------------------------------------------------
<PAGE>
COLUMBIA/HCA HEALTHCARE CORPORATION
201 WEST MAIN STREET
LOUISVILLE, KENTUCKY 40202
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
MAY 12, 1994
Notice is hereby given that the Annual Meeting of Stockholders of
Columbia/HCA Healthcare Corporation, a Delaware corporation (the "Company"),
will be held at the Regency Ballroom of the Hyatt Regency Louisville, 320 West
Jefferson Street, Louisville, Kentucky, on Thursday, May 12, 1994 at 10:00 a.m.,
Eastern Daylight Time, for the following purposes:
(1) To elect five directors to serve until the Annual Meeting of
Stockholders in 1997, or until their successors shall have been duly elected
and qualified;
(2) To consider and approve an amendment to the Columbia Hospital
Corporation 1992 Stock and Incentive Plan which would increase the number of
authorized shares thereunder from 2,000,000 shares to 20,000,000 shares, and
certain other amendments;
(3) To consider and approve the adoption of the Columbia/HCA Healthcare
Corporation Annual Incentive Plan; and
(4) To transact such other business as may properly come before the
meeting.
Stockholders of record at the close of business on March 18, 1994, are
entitled to notice of and to vote at the Annual Meeting. A complete list of the
stockholders entitled to vote at the Annual Meeting will be available for
examination by any stockholder at the Company's executive offices, during
ordinary business hours, for a period of at least ten days prior to the Annual
Meeting.
WHETHER OR NOT YOU PLAN TO ATTEND THE MEETING, PLEASE COMPLETE, DATE, SIGN
AND RETURN AS PROMPTLY AS POSSIBLE THE ENCLOSED PROXY IN THE ACCOMPANYING REPLY
ENVELOPE. STOCKHOLDERS WHO ATTEND THE MEETING MAY REVOKE THEIR PROXIES AND VOTE
IN PERSON.
By Order of the Board of Directors,
JOAN O. KROGER
SECRETARY
Louisville, Kentucky
April 11, 1994
<PAGE>
COLUMBIA/HCA HEALTHCARE CORPORATION
201 WEST MAIN STREET
LOUISVILLE, KENTUCKY 40202
PROXY STATEMENT
ANNUAL MEETING OF STOCKHOLDERS
MAY 12, 1994
---------------------
INTRODUCTION
The accompanying proxy is solicited by the Board of Directors (the "Board")
of Columbia/HCA Healthcare Corporation, a Delaware corporation (the "Company"),
for use at the Annual Meeting of Stockholders of the Company (the "Annual
Meeting") to be held on the date, at the time and place and for the purposes set
forth in the accompanying Notice of Annual Meeting of Stockholders. The
Company's principal executive offices are located at 201 West Main Street,
Louisville, Kentucky 40202, and its telephone number is (502) 572-2000.
Stockholders of record at the close of business on March 18, 1994 are entitled
to notice of and to vote at the Annual Meeting. This Proxy Statement and the
accompanying proxy are first being mailed to stockholders on or about April 11,
1994.
THE ANNUAL MEETING
VOTING AT THE ANNUAL MEETING
On March 18, 1994, there were 318,711,668 shares of the Company's common
stock, $.01 par value (the "Common Stock"), issued and outstanding (which
includes 2,740,430 shares of the Common Stock not entitled to vote at the Annual
Meeting representing shares deliverable upon surrender of certificates for
shares of HCA Class A Common Stock) which were held by approximately 15,600
holders of record (which does not include approximately 500 persons who are
entitled to receive shares of the Common Stock upon surrender of certificates
for shares of HCA Class A Common Stock). Each share of Common Stock entitles the
holder thereof to one vote on all matters submitted to a vote of stockholders.
The Common Stock is the only class of capital stock of the Company having
general voting rights.
The presence in person or by proxy of the holders of a majority of the
Company's outstanding shares of Common Stock will constitute a quorum. The
affirmative vote of a plurality of the shares represented at the Annual Meeting,
in person or by proxy, will be necessary for the election of directors. The
affirmative vote of a majority of the shares represented at the Annual Meeting,
in person or by proxy, will be necessary (a) to approve the amendments to the
Columbia Hospital Corporation 1992 Stock and Incentive Plan (the "1992 Plan"),
(b) to approve the adoption of the Columbia/HCA Healthcare Corporation Annual
Incentive Plan (the "Incentive Plan"), and (c) for the taking of all other
actions which may properly come before the Annual Meeting.
PROXIES AND PROXY SOLICITATION
All shares of Common Stock represented by properly executed proxies will be
voted at the Annual Meeting in accordance with the directions marked on the
proxies, unless such proxies have previously been revoked. If no directions are
indicated on such proxies, they will be voted "For" (a) the election of each
nominee named below under "Election of Directors", (b) the approval of the
amendments to the 1992 Plan, and (c) the approval of the adoption of the
Incentive Plan. If any other matters are properly presented at the Annual
Meeting for action, which is not presently anticipated, the proxy holders will
vote the proxies (which confer discretionary authority upon such holders to vote
on such matters) in accordance with their best judgment. Any stockholder present
(including broker non-votes) at the Annual Meeting, but who abstains from
voting, shall be counted for purposes of determining whether a quorum exists.
With respect to all matters other than the election of directors, an abstention
(or broker non-vote) has the same effect as a vote against the proposal. Each
proxy executed and returned
<PAGE>
by a stockholder may be revoked at any time before it is voted by timely
submission of written notice of revocation or by submission of a duly executed
proxy bearing a later date (in either case directed to the Secretary of the
Company) or, if a stockholder is present at the Annual Meeting, he or she may
elect to revoke his or her proxy and vote his or her shares personally.
The cost of soliciting proxies will be borne by the Company. In addition,
Corporate Investor Communications, Inc., a proxy soliciting firm, has been
retained by the Company to assist in the solicitation at a cost of approximately
$5,000, plus out-of-pocket expenses. Certain directors, officers and other
employees of the Company, not specially employed for this purpose, may also
solicit proxies, without additional remuneration therefor, by personal
interview, mail, telephone or telegram. The Company will also request brokers
and other fiduciaries to forward proxy soliciting material to the beneficial
owners of shares of the Common Stock which are held of record by such brokers
and fiduciaries and will reimburse such persons for their reasonable
out-of-pocket expenses.
PRINCIPAL STOCKHOLDERS
The following table sets forth as of March 18, 1994, certain information
concerning shares of the Common Stock held by (a) each stockholder owning
beneficially at least 5% of the outstanding Common Stock, (b) each director or
nominee for director of the Company, (c) each executive officer of the Company
named in the "Summary Compensation Table" and (d) all directors and executive
officers of the Company as a group.
<TABLE>
<CAPTION>
Number of
Name of Individual or Number in Group Shares(1)(2) Percent
- -------------------------------------------------------------------------------- ---------------- ---
<S> <C> <C>
The Hospital Corporation of America Stock Bonus Plan............................ 26,370,000(3) 8.3
FMR Corp. and Edward C. Johnson 3d.............................................. 19,153,186(3)(4) 6.0
Magdalena Averhoff, M.D......................................................... 5,000(5) *
Thomas F. Frist, Jr., M.D....................................................... 12,507,896(6) 3.9
J. David Grissom................................................................ 70,812(7) *
Ethan Jackson................................................................... 1,321,526(8) *
Charles J. Kane................................................................. 81,954(9) *
John W. Landrum................................................................. 218,858(10) *
T. Michael Long................................................................. 2,569,037(11) *
Darla D. Moore.................................................................. 190,314(12) *
Rodman W. Moorhead III.......................................................... 8,084(13) *
Carl F. Pollard................................................................. 723,591(14) *
Carl E. Reichardt............................................................... 169,524(15) *
Frank S. Royal, M.D............................................................. 78,720(16) *
Richard L. Scott................................................................ 6,070,788(17) 1.9
Robert D. Walter................................................................ 21,875(18) *
William T. Young................................................................ 889,738(19) *
Stephen T. Braun................................................................ 20,488(20) *
David C. Colby.................................................................. 132,898(21) *
Samuel A. Greco................................................................. 31,834(22) *
David T. Vandewater............................................................. 253,672(23) *
All directors and executive officers as a group (27 persons).................... 26,376,121(24) 8.3
<FN>
- ------------------------
* Less than one percent.
(1) Unless otherwise indicated, each stockholder shown on the table has sole
voting and investment power with respect to the shares beneficially owned.
The number of shares shown does not include the interest of certain persons
in shares held by family members in their own right.
(2) Each named person or group is deemed to be the beneficial owner of
securities which may be acquired within 60 days through the exercise or
conversion of options, warrants and rights, if any,
</TABLE>
2
<PAGE>
<TABLE>
<S> <C>
and such securities are deemed to be outstanding for the purpose of
computing the percentage
beneficially owned by such person or group. Such securities are not deemed
to be outstanding for the purpose of computing the percentage of class
beneficially owned by any other person or group. Accordingly, the indicated
number of shares includes shares issuable upon conversion of convertible
securities or upon exercise of options (including employee stock options)
held by such person or group.
(3) The addresses of the persons known to the Company to be the beneficial
owners of more than five percent of the outstanding Common Stock are as
follows: The Hospital Corporation of America Stock Bonus Plan -- One Park
Plaza, Nashville, Tennessee 37203; and FMR Corp. and Edward C. Johnson 3d
-- 82 Devonshire Street, Boston, Massachusetts 02109.
(4) This information is taken from the most recent Schedule 13G filed with the
Securities and Exchange Commission (dated February 11, 1994). Such Schedule
13G was filed (1) as if all shares set forth as owned by FMR Corp. or
Edward C. Johnson 3d ("Mr. Johnson") were owned by both such holders on a
joint basis and (2) as if 18,004,010 of such 19,153,186 shares were jointly
owned by FMR Corp., Mr. Johnson and Fidelity Management & Research Company
("Fidelity"), which is a wholly-owned subsidiary of FMR Corp. It was
reported in such Schedule 13G that Mr. Johnson (i) owns 34.0% of the
outstanding voting common stock of FMR Corp., (ii) is Chairman of FMR Corp.
and (iii) along with various trusts for the benefit of Johnson family
members constitute a controlling group with respect to FMR Corp. FMR Corp.
has reported that it has sole voting power with respect to 614,101 of these
19,153,186 shares and sole dispositive power with respect to all 19,153,186
of these shares. Mr. Johnson has reported that he has no voting power with
respect to any of these shares, but also claimed sole dispositive power
with respect to all 19,153,186 of these shares.
(5) Includes 5,000 shares issuable upon exercise of options.
(6) Dr. Frist has shared voting and investment power with respect to 1,071,000
of these shares held by a trust of which he is a contingent beneficiary.
(7) Includes 3,000 shares issuable upon exercise of options.
(8) Includes 5,000 shares issuable upon exercise of options.
(9) Includes 1,314 shares issuable upon exercise of options.
(10) Includes 3,000 shares issuable upon exercise of options.
(11) Includes 400,000 shares issuable upon exercise of the Warrant (hereinafter
defined) and 2,162,162 shares issuable upon conversion of the 9% Note
(hereinafter defined), both of which are held by The 1818 Fund, L.P. Mr.
Long is a co-manager of The 1818 Fund, L.P. and disclaims beneficial
ownership of such shares. Also includes 6,875 shares issuable upon exercise
of options.
(12) Includes 1,314 shares issuable upon exercise of options.
(13) Includes 3,000 shares issuable upon exercise of options.
(14) Includes 418,575 shares issuable upon exercise of options.
(15) Includes 1,314 shares issuable upon exercise of options.
(16) Includes 1,314 shares issuable upon exercise of options.
(17) Includes 45,000 shares issuable upon exercise of options.
(18) Includes 3,000 shares issuable upon exercise of options.
(19) Includes 3,000 shares issuable upon exercise of options. Also includes
661,796 shares with respect to which Mr. Young has sole voting and
investment power and 224,942 shares with respect to which Mr. Young has
shared voting and investment power with other persons. Excludes 625,655
</TABLE>
3
<PAGE>
<TABLE>
<S> <C>
shares held by other family members, and in trusts for their benefit, with
respect to which Mr. Young has no voting or investment power. Also excludes
74,303 shares held by educational and other non-profit institutions of
which Mr. Young serves as a member of the governing boards.
(20) Includes 19,416 shares issuable upon exercise of options.
(21) Includes 102,708 shares issuable upon exercise of options.
(22) Includes 30,125 shares issuable upon exercise of options.
(23) Includes 79,375 shares issuable upon exercise of options and 64,000 shares
of which Mr. Vandewater is trustee for the minor children of Mr. Scott,
over which Mr. Vandewater has sole voting and investment power.
(24) Includes shares issuable upon exercise of options to purchase 823,293
shares of Common Stock and 2,562,162 shares issuable upon conversion of the
9% Note and exercise of the Warrant.
</TABLE>
ELECTION OF DIRECTORS
In accordance with the Restated Certificate of Incorporation of the Company,
directors of the Company are divided into three classes, such classes being as
nearly equal in number as possible. The term of office of each class is three
years. The Board of Directors has fixed the number of members of the Board of
Directors at 15, currently consisting of five members whose term of office
expires in 1994 (Class I Directors), five members whose term of office expires
in 1995 (Class II Directors) and five members whose term of office expires in
1996 (Class III Directors).
At the Annual Meeting it is proposed that the nominees listed below be
elected as Class I members of the Board of Directors. Each such director shall
be elected to serve in such capacity until the Annual Meeting of Stockholders in
1997 or until his or her respective successor is duly elected and qualified.
INFORMATION CONCERNING DIRECTORS
Information concerning the five nominees proposed by the Board of Directors
for election as Class I Directors along with information concerning the present
Class II and Class III Directors, whose terms of office will continue after the
Annual Meeting, is set forth below.
In the event that any of the above-named nominees for director becomes
unable or unwilling to accept nomination or election, the person or persons
voting the proxy will vote for the election in his or
4
<PAGE>
her stead of such person as the Nominating Committee may recommend. Unless
otherwise instructed on the proxy, the proxy holders will vote the proxies
received by them FOR the election of the nominees shown below:
<TABLE>
<CAPTION>
Principal Occupation and Director
Name Age Offices with the Company Since
- ---------------------------- --- ----------------------------------------------------------------- -----------
<S> <C> <C> <C>
NOMINEES
CLASS I -- PRESENT TERM EXPIRES 1994
Magdalena Averhoff, M.D. 43 Practicing Physician 1992
Charles J. Kane 73 Retired Chairman of the Board, 1994
Third National Corporation
John W. Landrum 71 Owner, Springlake Farms 1993
Frank S. Royal, M.D. 54 Practicing Physician 1994
Robert D. Walter 48 Chairman of the Board and Chief 1993
Executive Officer, Cardinal Health, Inc.
DIRECTORS CONTINUING IN OFFICE
CLASS II -- PRESENT TERM EXPIRES 1995
Ethan Jackson 56 Co-Chairman, Basic American Industries, Inc. 1992
T. Michael Long 49 Partner, Brown Brothers Harriman & Co. 1991
Rodman W. Moorhead III 50 Senior Managing Director, 1993
E. M. Warburg Pincus & Co., Inc.
Carl E. Reichardt 62 Chairman of the Board and Chief 1994
Executive Officer, Wells Fargo & Company
William T. Young 75 Chairman of the Board, 1993
W. T. Young, Inc.
CLASS III -- PRESENT TERM EXPIRES 1996
Thomas F. Frist, Jr., M.D. 55 Chairman of the Board, 1994
Columbia/HCA Healthcare Corporation
J. David Grissom 55 Chairman of the Board, Mayfair Capital 1993
Darla D. Moore 39 Investor 1994
Carl F. Pollard 55 Chairman of the Executive Committee, Columbia/HCA Healthcare 1993
Corporation and former Chairman of the Board, Columbia Healthcare
Corporation
Richard L. Scott 41 President and Chief Executive Officer, Columbia/HCA Healthcare 1990
Corporation
</TABLE>
Magdalena Averhoff, M.D. is a physician specializing in gastroenterology
practicing in Miami, Florida. Dr. Averhoff has practiced medicine in Miami for
more than five years.
Thomas F. Frist, Jr., M.D. has been Chairman of the Board of the Company
since February 1994. Dr. Frist was Chairman of the Board, President and Chief
Executive Officer of HCA-Hospital Corporation of America ("HCA") from 1988 to
February 1994. Dr. Frist, a founder of the predecessor of HCA, was previously
Chairman and Chief Executive Officer of such predecessor from August 1985 until
September 1987 and in September 1987 he was also named President. Dr. Frist is
Chairman of the Board of Governors of the United Way of America and is a member
of the Board of Trustees of Vanderbilt University.
J. David Grissom is Chairman of the Board of Mayfair Capital, a private
investment firm in Louisville, Kentucky, having held such position since March
1989. Prior to that, he was Chairman of the Board and Chief Executive Officer of
Citizens Fidelity Corporation from April 1977 until March 1989. Mr. Grissom is
also a director of Capital Holding Corporation, Churchill Downs Incorporated,
LG&E Energy Corp., Regal Cinemas, Sphere Drake Holdings, Ltd. and Transco
Energy.
5
<PAGE>
Ethan Jackson is a Co-Chairman of Basic American Industries, Inc. (real
estate development and investments). From January 1991 until its acquisition by
the Company on July 15, 1992, Mr. Jackson was Chairman of the Board of Basic
American Medical, Inc. During the past five years, Mr. Jackson has also been
involved in several other companies and partnerships engaged in diversified
industries, including construction, housing, management of owned rental
properties, coal mining and processing, farming, retail and wholesale groceries,
retirement living facilities and nursing homes.
Charles J. Kane is the retired Chairman of the Board of Third National
Corporation (a bank holding company) and was the Senior Chairman and Chief
Executive Officer of Third National Bank in Nashville from 1983 until 1985 and
President and Chief Executive Officer of Third National Bank in Nashville from
1975 to 1983. Mr. Kane is an emeritus director of Third National Bank in
Nashville and of American General Corporation.
John W. Landrum is the owner of Springlake Farms, a farm operations and real
estate management company in Harrodsburg, Kentucky.
T. Michael Long is a partner with Brown Brothers Harriman & Co., a private
banking firm, where he has been employed for more than five years. Mr. Long is
also a director of Ekco Group, Inc. and Neuvo Energy Company.
Darla D. Moore is presently engaged in private investment activities. For
the past five years until January 1994, Ms. Moore was a Managing Director of
Chemical Bank in New York, New York, where she headed the bank's Restructuring
and Reorganization Unit as well as the Retail Industries Group. She is also a
director of the University of South Carolina Educational Endowment Board.
Rodman W. Moorhead III has been employed since 1973 by E.M. Warburg, Pincus
& Co., Inc., a specialized financial services firm in New York, where he
currently serves as Senior Managing Director. He is also a director of Agridyne
Technologies, Inc., Cambridge NeuroScience, Inc., NeXagen, Inc., Value Health,
Inc. and Vestar, Inc.
Carl F. Pollard has served as Chairman of the Executive Committee of the
Board of Directors of the Company since February 1994. Mr. Pollard was Chairman
of the Board of the Company from September 1993 to February 1994, and was
Chairman and Chief Executive Officer of Galen Health Care, Inc. ("Galen") from
March 1, 1993 to September 1, 1993. Mr. Pollard was President and Chief
Operating Officer of Humana Inc. from March 1991 to March 1993 and held various
other executive positions with Humana prior thereto. He is also a director of
Churchill Downs Incorporated and Vestar, Inc.
Carl E. Reichardt has been Chairman of the Board and Chief Executive Officer
of Wells Fargo & Company (a bank holding company) and of its subsidiary, Wells
Fargo Bank, N.A., since 1983. Mr. Reichardt is also a director of ConAgra, Inc.,
Ford Motor Company, Newhall Management Corporation, which is the managing
general partner of the Newhall Land & Farming Company (a California limited
partnership), and of Pacific Gas & Electric Co.
Frank S. Royal, M.D. has been a practicing physician in Richmond, Virginia
for over 20 years. He is Past President/Former Board Chairman of the National
Medical Association. He also serves as a member of the Boards of Directors of
Best Products Company, Inc., Crestar Financial Corporation (a bank holding
company), Chesapeake Corporation and CXS Corporation and is on the Boards of
Trustees of Meharry Medical College (Chairman of the Board), Virginia Union
University (Chairman of the Board) and Richmond Metropolitan YMCA.
Richard L. Scott has been President and Chief Executive Officer of the
Company since September 1993. Mr. Scott was Chairman of the Board and Chief
Executive Officer of the Company or its predecessor entities from October 1987
until September 1, 1993. Mr. Scott was a founder of the Company and its
predecessor entities.
Robert D. Walter is Chairman of the Board and Chief Executive Officer of
Cardinal Health, Inc., a pharmaceutical distribution company located in Dublin,
Ohio. Mr. Walter serves on the Board of Directors of Banc One Corporation.
William T. Young is Chairman of the Board of W.T. Young, Inc., a warehousing
company and horse farm located in Lexington, Kentucky.
6
<PAGE>
In connection with the acquisition of Basic American Medical, Inc., the
Company agreed to nominate for election to the Board of Directors any two of the
following three persons (as determined by a majority of such persons): Ethan
Jackson, Franklin L. Jackson and Brady R. Justice, Jr. This obligation remains
in effect until July 15, 1997 or so long as these three individuals and their
affiliates own in the aggregate at least 1,875,952 shares of the Common Stock.
This agreement has been amended to require the Company to name only one of such
persons as a nominee. The designation of Ethan Jackson complies with this
obligation.
The Board of Directors of the Company has adopted a mandatory retirement
policy for members of the Company's Board of Directors, with the policy being
effective as of July 1, 1994. Pursuant to the policy, no person may be nominated
to a term of office on the Board of Directors if he or she has attained the age
of 70 before the first day of the proposed term of office. The policy does not
apply to present directors of the Company aged 70 or more whose current term of
office expires subsequent to the Annual Meeting. As a result of this policy,
William T. Young will be "grandfathered" from the provision. If Charles J. Kane
and John W. Landrum are elected to the Board of Directors at the Annual Meeting,
they each have agreed to resign effective June 30, 1995. The Board of Directors
will then have the power under the Company's Restated Certificate of
Incorporation to appoint successors to fill out the remainder of Messrs. Kane
and Landrum's terms.
Certain entities controlled by Ethan Jackson have experienced financial
difficulties. In 1989, three corporations engaged in retail and wholesale
grocery operations and controlled by Mr. Jackson filed for protection under the
federal bankruptcy laws. The assets of the corporation engaged in the wholesale
grocery operations are being liquidated and such entity will be dissolved and
the retail grocery operations were reorganized under new ownership under the
supervision of the bankruptcy court. Also during 1989, three partnerships with
which Mr. Jackson was affiliated filed for protection under the federal
bankruptcy laws in order to facilitate the sales of their retirement living
facilities to Marriott Retirement Communities, Inc. In 1990, an Arizona
partnership engaged in farming operations and controlled by Mr. Jackson filed
for protection under the federal bankruptcy laws, and substantially all of the
partnership's assets have been liquidated. In June 1992, another Arizona
partnership engaged in farming operations and controlled by Mr. Jackson filed a
petition for liquidation under Chapter 7 of the federal bankruptcy laws. The
partnership has no assets and has ceased operations.
MEETINGS AND COMMITTEES OF THE BOARD OF DIRECTORS
During 1993, the Company's Board of Directors held nine meetings. Also,
there are five committees of the Board of Directors which assist the Board in
discharging its responsibilities. These committees, their members and functions
are discussed below.
Each incumbent director attended during 1993 at least 75% of the aggregate
of the total number of meetings of the Board of Directors and the total number
of meetings held by all committees on which the individual director served.
The Audit Committee is presently comprised of four directors: Carl E.
Reichardt (Chairman), Magdalena Averhoff, M.D., John W. Landrum and T. Michael
Long, none of whom are officers or employees of the Company. The functions of
this Committee include review of the programs of the Company's internal
auditors, the results of their audits, and the adequacy of the Company's system
of internal controls and accounting practices. In addition, the Committee
reviews the scope of the annual audit by the Company's independent auditors
prior to its commencement and reviews the types of services for which the
Company retains independent auditors. In 1993, this Committee met four times.
The Compensation Committee is presently comprised of four directors: Darla
D. Moore (Chairman), Charles J. Kane, Robert D. Walter and William T. Young,
none of whom are officers or employees of the Company. Responsibilities of this
Committee include approval of compensation arrangements
7
<PAGE>
for executive management, review of compensation plans relating to officers,
grants of options and other benefits under the Company's employee benefit plans
and general review of the Company's employee compensation policies. In 1993,
this Committee met two times.
The Executive Committee is presently comprised of three directors: Carl F.
Pollard (Chairman), Thomas F. Frist, Jr., M.D. and Richard L. Scott. This
Committee has the authority to exercise all of the powers of the full Board of
Directors, with certain exceptions relating to major corporate matters. This
Committee is available to review with members of management certain areas of the
Company's operations and to act when it is impractical to assemble the entire
Board for a meeting. In 1993, this Committee did not meet.
The Investment Committee is presently comprised of four directors: Rodman W.
Moorhead III (Chairman), J. David Grissom, Ethan Jackson and Frank S. Royal,
M.D., none of whom are officers or employees of the Company. The functions of
this Committee are to establish guidelines for and to analyze the investment
performance decisions of the various funds, assets and portfolios of the
Company. In 1993, this Committee met one time.
The Nominating Committee is presently comprised of four directors: Richard
L. Scott (Chairman), Thomas F. Frist, Jr., M.D., J. David Grissom and Carl F.
Pollard. Until September 1, 1996, this Committee will have the exclusive power
to nominate persons on behalf of the Board of Directors to serve as directors of
the Company. The Nominating Committee will consider nominees for the Board of
Directors recommended by stockholders. Directors are selected on the basis of
their demonstrated broad knowledge, experience and ability in their chosen
endeavors and, most importantly, on the basis of their ability to represent the
interests of the stockholders. Recommendations by stockholders for such
nominees, which must include biographical information and the proposed nominee's
written consent to nomination, must be made in writing to the Secretary of the
Company not less than 60 days nor more than 90 days prior to the scheduled date
of the meeting (or, if less than 70 days' notice or prior public disclosure of
the date of the meeting is given, the 10th day following the earlier of (i) the
day such notice was mailed or (ii) the day such public disclosure was made). In
1993, this Committee did not meet.
Directors are elected by a plurality of the votes cast by the holders of the
shares present in person or represented by proxy at a meeting at which a quorum
is present. "Plurality" means that the individuals who receive the largest
number of votes cast are elected as directors up to the maximum number of
directors to be chosen at the meeting. Consequently, any shares not voted
(whether by withholding authority or broker non-vote) have no impact in the
election of directors, except to the extent the failure to vote for the
individual results in another individual receiving a larger number of votes.
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
Section 16(a) of the Securities Exchange Act of 1934 requires the Company's
officers and directors, and persons who own more than ten percent of a
registered class of the Company's equity securities, to file reports of
ownership and changes in ownership with the Securities and Exchange Commission
and provide the Company with copies of such reports.
Based solely on its review of the copies of such forms received by it, or
written representations from certain reporting persons that no Forms 5 were
required for those persons, the Company believes that, during the past fiscal
year all filing requirements applicable to its officers, directors, and greater
than ten-percent stockholders were complied with except that: (a) James D.
Bohanon, formerly a Chief Operating Officer of the Company, failed to file a
Form 4 covering one transaction, but did report the transaction in an amended
Form 4 filed the following day; (b) Ethan Jackson failed to include a transfer
of stock to a family partnership in his Form 5 filed for 1992, but did include
it in his Form 5 filed for 1993; and (c) Carl F. Pollard amended his Form 5
filed for 1993 to include one stock option grant not previously reported.
8
<PAGE>
EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
The following table sets forth certain information regarding compensation
paid during each of the Company's last three fiscal years to the Company's Chief
Executive Officer and each of the Company's five other most highly compensated
executive officers, based on salary and bonus earned during 1993.
<TABLE>
<CAPTION>
LONG TERM COMPENSATION
----------------------------
ANNUAL COMPENSATION
--------------------------------------------- AWARDS
OTHER ANNUAL ----------------------------
NAME AND PRINCIPAL COMPENSATION RESTRICTED OPTIONS/
POSITIONS FISCAL YEAR SALARY($) BONUS($)(1) ($)(2)(3) STOCK AWARDS($) SARS (#)(4)
- ---------------------------- ----------- ----------- ----------- ------------------- --------------- -----------
<S> <C> <C> <C> <C> <C> <C>
Richard L. Scott ........... 1993 371,000 350,000 0 -- 60,000
President and Chief 1992 275,000 175,000 0 -- 50,000
Executive Officer 1992 240,000 125,000 -- --
David T. Vandewater ........ 1993 318,000 300,000 0 -- 50,000
Chief Operating Officer 1992 250,000 150,000 0 -- 100,000
1991 215,000 100,000 -- 60,000
David C. Colby ............. 1993 239,000 200,000 0 -- 40,000
Senior Vice President, 1992 175,000 120,000 0 -- 60,000
Chief Financial Officer and 1991 150,000 70,000 -- 40,000
Treasurer
Samuel A. Greco ............ 1993 183,000 150,000 0 -- 21,000
Senior Vice President, 1992 161,000 83,000 0 -- 36,000
Finance 1991 155,000 60,000 -- 5,000
Stephen T. Braun(7) ........ 1993 164,000 250,000 0 -- 17,000
Senior Vice President and 1992 138,000 75,000 0 -- 15,000
General Counsel 1991 34,000 10,000 -- 12,500
Carl F. Pollard(8) ......... 1993 201,000 159,000 0 -- 300,000
Chairman of the Board 1992 -- -- 0 -- --
1991 -- -- -- --
<CAPTION>
PAYOUTS ALL OTHER
NAME AND PRINCIPAL --------------- COMPENSATION
POSITIONS LTIP PAYOUTS($) ($)(3)(5)
- ---------------------------- --------------- -------------
<S> <C> <C>
Richard L. Scott ........... -- 5,396
President and Chief -- 4,364
Executive Officer --
David T. Vandewater ........ -- 5,396(6)
Chief Operating Officer -- 4,364
--
David C. Colby ............. -- 5,396
Senior Vice President, -- 4,364
Chief Financial Officer and --
Treasurer
Samuel A. Greco ............ -- 3,082
Senior Vice President, -- 2,300
Finance --
Stephen T. Braun(7) ........ -- 5,396
Senior Vice President and -- 1,719
General Counsel --
Carl F. Pollard(8) ......... -- 3,391,500(9)
Chairman of the Board -- --
--
<FN>
- ------------------------------
(1) Reflects bonus earned during the fiscal year. In some instances all or a
portion of the bonus was paid during the following fiscal year.
(2) Perquisites and other personal benefits did not exceed the lesser of
either $50,000 or 10% of the total of annual salary and bonus for any
named executive officer.
(3) The 1991 amounts were omitted pursuant to the transitional provisions in
the revised rules on executive officer and director compensation
disclosure adopted by the Securities and Exchange Commission.
(4) Options to acquire shares of the Common Stock.
(5) Consists of the Company contributions to the Company's Savings and
Investment Plan, except with respect to Mr. Pollard.
(6) On October 11, 1993, Mr. Vandewater received 109,237 shares of the Common
Stock, in a transfer from Richard L. Scott, the President and Chief
Executive Officer of the Company. On such date, the value of such shares
was $3,004,018, which the Company recorded as compensation expense.
(7) Mr. Braun's employment by the Company commenced October 1, 1991.
(8) Mr. Pollard's employment by the Company commenced September 1, 1993 and
ended as of December 31, 1993.
(9) The amount paid in connection with the termination of such executive
officer's employment with the Company.
</TABLE>
9
<PAGE>
OPTION GRANTS DURING 1993 FISCAL YEAR
The following table provides information related to options granted to the
named executive officers during fiscal 1993.
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
INDIVIDUAL GRANTS VALUE AT ASSUMED
- ------------------------------------------------------------------------------------------------------ ANNUAL RATES
% OF TOTAL OF STOCK PRICE
OPTIONS/ OPTIONS/SARS APPRECIATION
SARS GRANTED TO EXERCISE OR FOR OPTION TERM (1)
GRANTED EMPLOYEES IN BASE PRICE EXPIRATION 0% --------------------------
NAME (#)(2) FISCAL YEAR ($/SH)(3) DATE(4) -- 5% ($) 10% ($)
- -------------------------------------- --------- --------------- ----------- ---------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Richard L. Scott...................... 60,000 6.1 19.50 3/01/97 -- 252,142 542,997
David T. Vandewater................... 50,000 5.1 28.13 8/18/97 -- 303,056 652,641
David C. Colby........................ 40,000 4.1 19.50 3/01/97 -- 168,095 361,998
Samuel A. Greco....................... 21,000 2.1 19.50 3/01/97 -- 88,250 190,049
Stephen T. Braun...................... 17,000 1.7 19.50 3/01/97 -- 71,440 153,849
Carl F. Pollard....................... 300,000 30.5 33.38 12/31/03 -- 6,296,807 15,957,346
<FN>
- ------------------------
(1) The potential realizable value portion of the foregoing table illustrates
value that might be realized upon exercise of the options immediately
prior to the expiration of their term, assuming the specified compounded
rates of appreciation on the Common Stock over the term of the options.
These amounts do not take into account provisions of the options relating
to termination of the option following termination of employment,
nontransferability or vesting over periods of up to three years.
(2) Options to acquire shares of the Common Stock. Each executive officer
received a single grant of options during the fiscal year.
(3) The option exercise price may be paid in shares of the Common Stock owned
by the executive officer, in cash, or a combination of the foregoing.
(4) The four-year options become exercisable with respect to 33 1/3% of the
shares covered thereby on the first, second and third anniversary dates
following the date of grant. Mr. Pollard's options are immediately
exercisable. The exercise price was equal to the fair market value of the
Common Stock on the date of grant.
</TABLE>
OPTION EXERCISES DURING 1993 FISCAL YEAR
AND FISCAL YEAR END OPTION VALUES
The following table provides information related to options exercised by the
named executive officers during the 1993 fiscal year and the number and value
of options held at fiscal year end. The Company has not issued stock
appreciation rights or warrants to its executive officers.
<TABLE>
<CAPTION>
VALUE OF UNEXERCISED
NUMBER OF UNEXERCISED IN-THE-MONEY
OPTIONS/SARS OPTIONS/SARS
SHARES ACQUIRED AT FY-END (#) AT FY-END ($)(2)
ON VALUE -------------------------- --------------------------
NAME EXERCISE(#)(1) REALIZED($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---------------------------- ---------------- ------------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Richard L. Scott............ -- -- 12,500 97,500 207,813 1,440,938
David T. Vandewater......... -- -- 66,875 102,500 1,266,484 1,179,063
David C. Colby.............. -- -- 74,375 105,000 1,409,922 1,700,625
Samuel A. Greco............. -- -- 14,125 50,500 250,766 785,938
Stephen T. Braun............ -- -- 10,000 34,500 181,875 538,188
Carl F. Pollard............. 113,731 1,657,005 418,575 0 1,203,513 0
<FN>
- ------------------------
(1) With the exception of Mr. Pollard, the named executive officers did not
exercise any stock options during 1993.
</TABLE>
10
<PAGE>
<TABLE>
<S> <C>
(2) The closing price for the Common Stock as reported by the New York Stock
Exchange, Inc. on December 31, 1993 was $33.125. Value is calculated on
the basis of the difference between the option exercise price and $33.125
multiplied by the number of shares of Common Stock underlying the option.
</TABLE>
DIRECTORS' COMPENSATION
Prior to September 1, 1993, the Company's policy for compensating directors
who were not employees of the Company was to pay each director $1,250 for each
regular Board of Directors meeting which was attended. In addition, the Columbia
Hospital Corporation Outside Directors' Nonqualified Stock Option Plan (the
"Directors Plan") was adopted by the Board of Directors on November 12, 1992,
which provided for the grant of an initial option for 3,000 shares of the Common
Stock upon election to the Board of Directors (or adoption of the plan), with
the subsequent grant of an option for 2,000 shares each year thereafter that the
director served on the Board (following the Annual Meeting of Stockholders). The
policy for compensating directors was revised on September 9, 1993 and February
10, 1994, in connection with the addition of new directors from Galen and HCA.
The current policy provides that outside directors are paid an annual retainer
of $26,000 for serving on the Board of Directors, a fee of $1,000 per Board
meeting attended and reimbursement of expenses incurred relating to attendance
at meetings. In addition, committee chairpersons receive $1,000 per committee
meeting attended, and all other committee members receive a fee of $500 per
committee meeting attended, in both cases payable only with respect to committee
meetings which are not held in conjunction with a meeting of the Board of
Directors. On February 10, 1994, the Directors Plan was amended to provide that
new directors will receive an initial option to acquire shares of the Common
Stock (exercisable at the shares' fair market value on the date of grant of the
option) having an aggregate exercise price equal to two times the outside
director's annual retainer fee then in effect, but in no event more than 3,000
shares. Following each succeeding annual meeting, each outside director who
continues in office will receive an option to acquire shares of the Common Stock
(exercisable at the shares' fair market value on the date of grant of the
option) having an aggregate exercise price equal to the outside director's
annual retainer fee then in effect, but in no event more than 2,000 shares.
Finally, for directors who were former directors of Galen, the Company matches,
on an annual basis, up to $20,000 in charitable contributions and such directors
are eligible to participate in the Company's self-funded medical and dental
plans.
EMPLOYMENT AGREEMENTS
Effective December 31, 1993, Carl F. Pollard, formerly Chairman of the Board
of the Company, and James D. Bohanon, formerly Co-Chief Operating Officer of the
Company, resigned as employees of the Company. Mr. Pollard continues to serve as
the Chairman of the Executive Committee of the Board of Directors of the
Company. At the time of their resignations, Messrs. Pollard and Bohanon received
the benefits they would have received under their employment agreements with the
Company if their employment had been terminated by the Company other than for
cause. Thus, Messrs. Pollard and Bohanon received lump sum payments of
$3,391,500 and $2,719,425, respectively, and the Company accelerated the vesting
of all stock options which were not exercisable as of the date of termination of
employment. The Company is obligated to continue life and health insurance
coverage on both men until they reach the age of 65. In addition, Mr. Pollard
was granted stock options to purchase 300,000 shares of the Common Stock at an
exercise price equal to the fair market value of the Common Stock on the date of
grant ($33.375). The stock options have a ten-year term. Mr. Pollard also was
granted a ten-year right to use office space, furniture and equipment and
secretarial staff, and certain rights to use company provided transportation
while he is an officer or director of the Company. Mr. Pollard is also entitled
to additional benefits equivalent to any benefits granted to certain executive
officers of HCA in regard to resignation, retirement or other change in status
during the three years after Mr. Pollard's termination of employment which in
the aggregate are greater than those granted to Mr. Pollard.
11
<PAGE>
EXECUTIVE SEVERANCE PAY AGREEMENTS
The Company has entered into severance pay agreements with thirteen
employees of the Company, including all of the named executive officers other
than Richard L. Scott. Under the terms of such severance agreements, in the
event that at any time prior to September 1, 1995, Mr. Scott does not retain the
position and duties of Chief Executive Officer of the Company for any reason (a
"Scott Constructive Termination") and at any time prior to 12 months after the
Scott Constructive Termination, the employment of any of such covered
individuals with the Company is terminated for any reason or his or her
responsibilities are significantly reduced from those held just prior to the
date of the Scott Constructive Termination (an "Employee's Constructive
Termination"), the Company will pay to any such individual a lump sum severance
payment. Such severance payment shall be in an amount equal to the greater of
the employee's annual base salary in effect at September 1, 1993 or the date of
the Employee's Constructive Termination multiplied by two in the case of David
T. Vandewater; by one and one-half in the case of David C. Colby, Samuel A.
Greco and Stephen T. Braun; and by one in the case of all other covered
individuals. In addition, upon a Scott Constructive Termination, the severance
pay arrangements will allow an employee to receive, in cash, a proportionate
interest in an unfunded bonus pool. The pool was set at an initial level of
approximately $6.3 million and will be increased or decreased by approximately
$506,000 each month for each whole dollar increase or decrease in the month-end
closing price of the Common Stock over the August 31, 1993 closing price
($27.625). The employees' proportionate interests in the fund range between 1.3%
and 32.6%.
COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION
Decisions on compensation of the Company's executives are made by the
four-member Compensation Committee (the "Compensation Committee") of the
Company's Board of Directors. Each member of the Compensation Committee is a
non-employee director. No member of the Compensation Committee is a current or
former employee or officer of the Company or any of its affiliates.
Responsibilities of the Compensation Committee include approval of compensation
arrangements for executive management, review of compensation plans relating to
officers, grants of options and other benefits under the Company's employee
benefit plans and general review of the Company's employee compensation policy.
Pursuant to recently adopted rules of the Securities and Exchange Commission
designed to enhance disclosure of corporate policies toward executive
compensation, set forth below is a report submitted by the Compensation
Committee.
COMPENSATION PHILOSOPHY AND POLICIES FOR EXECUTIVE OFFICERS
The Compensation Committee believes the most effective executive
compensation program aligns the interests of stockholders and executives. The
Company's primary objective is to provide quality health care while enhancing
long-term stockholder value. The Compensation Committee is committed to a
strong, positive link between the Company's strategic business goals and its
compensation and benefit goals. The Company does not generally have contractual
agreements of employment with executive officers. The Company provides its
executive officers with a minimal number of perquisites.
The Company's executive compensation program is consistent with the
Company's overall compensation philosophy for all management levels. The
Compensation Committee believes that the greater the number of employees aligned
with the overall Company objectives, the greater the common focus and ultimate
success on both a short-term and long-term basis. To support this philosophy,
substantially all of the Company's approximately 130,000 employees will be
afforded the opportunity to participate in one or more of the Company's
stock-based compensation plans.
The Company's executive compensation program has been designed to support
the objective of creating stockholder value by:
- Directly aligning the interests of executives with the long-term interests
of stockholders by making stock appreciation over the long run the
cornerstone of executive compensation through award opportunities that can
result in the ownership of substantial amounts of the Common Stock.
12
<PAGE>
- Providing compensation opportunities that create an environment that
attracts and retains talented executives on a long-term basis.
- Emphasizing pay for performance by having a meaningful portion of
executive compensation "at-risk".
- Appropriately balancing the Company's short-term and long-term business
and financial and strategic goals.
At present, the Company's executive compensation program is comprised of
three components: base salary, annual cash incentive (bonus) and long-term
incentive opportunity in the form of non-qualified stock options. Two of the
three components of the Company's executive compensation (the annual incentive
bonus and the long-term stock-based incentive) are directly related to actual
individual business unit and overall Company performance, as explained below. In
addition, the greater the person's responsibility in his position with the
Company, the greater the mix of compensation shifts to reliance on the value of
the Common Stock through the grant of stock options. The annual executive pay
targets (base salary plus incentive) are designed to be market competitive with
U.S. corporations having similar revenues (or at the same relative size if a
business unit is applicable) when (but only when) the Company or the individual
business units meet or exceed their operating targets.
BASE SALARY
The base salaries of the Company's five highest paid executives are listed
in the Summary Compensation Table found under "Executive Compensation" in this
Proxy Statement. These salaries are evaluated annually. In determining
appropriate salary levels and salary increases, the Compensation Committee
considers level of responsibility, individual performance, internal equity and
external pay practices. In this latter regard, the Compensation Committee
attempts to set base salaries of all executive officers at a level which is
below the "market" rate, as determined from information gathered by the Company
from independent compensation consulting firms.
The Compensation Committee increased the base salaries of the named
executive officers during the last fiscal year based upon an evaluation of each
executive's performance. The Compensation Committee considered the success of
the executive officers in developing and executing the Company's strategic
plans, developing management employees and exercising leadership. The
Compensation Committee also considered the Company's recent growth in assets and
revenues. Based upon information provided by management, the Compensation
Committee believes that executive officer base salaries for 1993 were generally
lower than the average salaries paid by other comparable healthcare companies,
including the companies included in the Standard & Poor's Hospital Management
Composite Index (the "Hospital Index").
ANNUAL INCENTIVES
Annual incentive (bonus) award opportunities at the Company are designed to:
- Focus management attention on key operational goals deemed important for
the upcoming fiscal year.
- Support the Company's strategic goal for consistent growth by highlighting
corporate and business unit earnings as the main performance measure
affecting incentive bonus payments.
- Tie management's interests to the stockholders' interests by conditioning
the targeted bonus on the attainment of earnings per share goals.
The amounts individual executives may earn under the incentive plan is
dependent upon the individual's position, responsibility and ability to impact
the Company's financial success. Annual bonuses are designed to provide
competitive incentive pay only for meeting or exceeding budgeted financial
performance.
The Compensation Committee awards bonuses based upon the attainment of
specific earnings criteria. This approach creates a direct incentive for
executive officers to achieve desired performance
13
<PAGE>
goals and places a significant percentage of each executive officer's
compensation at risk. The bonuses which were awarded in 1994 to reflect 1993
performance, while significant with respect to the named executive officers,
reflect a very successful year that saw the Company grow from $1 billion in
total assets to $10 billion in total assets. Despite the efforts required and
complexities encountered in accomplishing two of the largest mergers in the
health care industry, the Company achieved strong financial results in 1993.
After giving effect to the acquisitions of Galen and HCA (on a pooled basis),
earnings per common share from continuing operations before non-recurring
transactions increased from $1.82 in 1992 to $1.99 in 1993. On December 31,
1992, the Common Stock closed at $21.25 per share. On December 31, 1993, the
Common Stock closed at $33.13 per share. For the foregoing reasons, the
Compensation Committee determined that the named executive officers should be
paid significant bonuses for the 1993 fiscal year and in no event may such bonus
exceed $1,000,000.
The Columbia/HCA Healthcare Corporation Annual Incentive Plan (the
"Incentive Plan") will determine future bonus levels. The Incentive Plan
provides for targeted bonuses equal to 80% of base salaries for the Chief
Executive Officer and Chief Operating Officer, and 50% of base salaries for
other executive officers, contingent in all cases upon the Company's achievement
of certain earnings per share criteria. The targeted bonus amount is comprised
of two components, an earnings per share component and a discretionary
component. The earnings per share component comprises 75% of the target bonus,
and is contingent upon the Company meeting its budgeted earnings per share
level. The discretionary component comprises 25% of the target bonus, and will
be determined by the Compensation Committee based upon the executive's
accomplishment of certain goals and objectives. The maximum bonus for executive
officers under the Incentive Plan is 150% of the target bonus. See "Approval of
the Columbia/HCA Healthcare Corporation Annual Incentive Plan."
LONG-TERM INCENTIVES
The Company's only current long-term incentive compensation is non-qualified
stock options which are directly related to improvement in long-term stockholder
value.
Stock option grants provide an incentive that focuses the executive's
attention on managing the Company from the perspective of an owner with an
equity stake in the business. These grants also help ensure that operating
decisions are based on long-term results that benefit the Company and ultimately
the stockholders.
Specifically, the option grants to executive officers provide the right to
purchase shares of Common Stock at the fair market value on the date of grant.
Usually, each stock option becomes vested and exercisable only over a period of
time, generally one to five years, usually with no options vesting until at
least one year after grant. The number of shares covered by each grant reflects
the executive's level of responsibility and past and anticipated contributions
to the Company.
Options to purchase 488,000 shares of the Common Stock were granted to the
named executive officers in 1993 with an exercise price equal to the fair market
value of the underlying Common Stock on the date of grant. The four-year options
vest cumulatively in three annual installments of 33 1/3% and expire four years
after the date of grant. The Compensation Committee granted this number of
options based on its judgment that this number is appropriate considering the
executive officers' actual and potential contribution to the Company. The
assessment of actual and potential contribution was based on the Compensation
Committee's evaluation of each executive officer's ability, skills, efforts and
leadership. In determining the number of options to grant to the named executive
officers, the Compensation Committee did not consider outstanding stock options,
but did consider the other items of compensation, giving special weight to the
relatively low base salaries. Mr. Pollard's options were granted in connection
with his termination of employment with the Company.
CHIEF EXECUTIVE OFFICER COMPENSATION
Securities and Exchange Commission regulations require all corporate
Compensation Committees to disclose the bases for the compensation of a
corporation's chief executive officer relative to such corporation's
performance.
14
<PAGE>
Richard L. Scott, an original founder of the Company in 1987, is eligible to
participate in the same executive compensation plans available to the other
senior executive officers which are described above. The Compensation
Committee's general approach in setting Mr. Scott's target annual compensation
is to seek to be competitive with other large U.S. corporations with similar
revenues, but also to have a large percentage of his target compensation based
upon specific corporate-wide operating performance criteria.
Consistent with the executive compensation policy and components described
above, the Compensation Committee determined the salary, bonus and stock options
received by Richard L. Scott, the President and Chief Executive Officer of the
Company, for services rendered in 1993. Mr. Scott received a base salary of
$371,000 for 1993. The Compensation Committee did not establish a specific
target or formula to determine Mr. Scott's salary. Based on information provided
by management, the Compensation Committee believes that this base salary was
below average base salaries paid to chief executive officers of other publicly
held healthcare companies, including those companies included in the Hospital
Index. Mr. Scott also earned a $350,000 bonus. Mr. Scott received the bonus for
the Company's surpassing the earnings per share goal specified in advance by the
Compensation Committee and for the key part Mr. Scott played in initiating,
negotiating and accomplishing two of the largest mergers in the healthcare
industry. Mr. Scott also received options to purchase 60,000 shares of the
Common Stock. The Compensation Committee determined the number of options
granted to Mr. Scott based on its subjective evaluation of Mr. Scott's
abilities, skills, efforts and leadership. Based on information provided by
management and derived from publicly available data, the Compensation Committee
believes that the number of options granted to Mr. Scott is below the average
number of options granted to the chief executive officers of other healthcare
companies, including those in the Hospital Index.
OMNIBUS BUDGET RECONCILIATION ACT OF 1993
Under the Omnibus Budget Reconciliation Act of 1993 ("OBRA"), subject to
certain exceptions and transition provisions, the allowable deduction for
compensation paid or accrued with respect to the chief executive officer and
each of the four most highly compensated employees of a publicly held
corporation is limited to $1 million per year for fiscal years beginning on or
after January 1, 1994. The Company's Board of Directors has reviewed and
approved amendments to the 1992 Plan intended to preserve the deductibility of
certain awards under the plan to the Company's executive officers. The
amendments are presented in this Proxy Statement for review and approval by
stockholders at the Annual Meeting. In addition, the Board of Directors is
submitting the Columbia/HCA Healthcare Corporation Annual Incentive Plan for
stockholder approval, in order to preserve the deductibility of certain
incentives available for award under the plan to the Company's executive
officers.
The foregoing report is submitted by all of the members of the Compensation
Committee of the Company's Board of Directors whose members are as follows:
Darla D. Moore (Chairman)
Charles J. Kane
Robert D. Walter
William T. Young
The forgoing report of the Compensation Committee shall not be deemed
incorporated by reference by any general statement incorporating by reference
the Proxy Statement into any filing under the Securities Act of 1933 or the
Securities Exchange Act of 1934, except to the extent that the Company
specifically incorporates this information by reference, and shall not otherwise
be deemed filed under such Acts.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
During fiscal 1993, the members of the Compensation Committee were
responsible for determining executive compensation and stock option grants to
executive officers. The following directors currently serve on the Compensation
Committee: Darla D. Moore, Charles J. Kane, Robert D. Walter
15
<PAGE>
and William T. Young. During 1993, Magdalena Averhoff, M.D., Ethan Jackson and
T. Michael Long also served on the Compensation Committee. Richard L. Scott, the
President and Chief Executive Officer of the Company, submitted recommendations
to the Compensation Committee concerning key executive officer compensation, but
did not participate in deliberations regarding the compensation of such key
executive officers.
On November 12, 1992, the Board of Directors of the Company adopted the
Columbia Hospital Corporation Outside Directors Nonqualified Stock Option Plan
(the "Directors Plan"), which provides for option grants to non-employee
directors, including those directors that serve on the Compensation Committee.
The stockholders of the Company approved the adoption of the Directors Plan on
May 20, 1993. See "Directors' Compensation" above.
Mr. Robert D. Walter, the Chairman, Chief Executive Officer and a principal
stockholder of Cardinal Health, Inc., became a member of the Board of Directors
of the Company on September 1, 1993. Mr. Walter is a member of the Compensation
Committee. A wholly-owned subsidiary of Cardinal Health, Inc. supplies
therapeutic plasma products to certain of the Company's subsidiaries. During the
year ended December 31, 1993, the Company's subsidiaries purchased $2,500,000 in
supplies from the Cardinal Health, Inc. subsidiary, which accounted for less
than 1/10 of 1% of Cardinal Health, Inc.'s revenues for the same period.
T. Michael Long, co-manager of The 1818 Fund, L.P. (the "Fund"), became a
member of the Board of Directors of the Company on March 18, 1991, in connection
with the Fund's purchase of a $40 million principal amount 9% Subordinated
Mandatory Convertible Note due June 30, 1999 (the "9% Note"). The 9% Note is
convertible, at the option of the holder, into Common Stock at a conversion
price of $18.50 per share, subject to adjustment to prevent dilution in the
event of stock splits, recapitalizations and reorganizations. The Company also
issued a warrant to purchase 400,000 shares of Common Stock (the "Warrant") to
the Fund. The Warrant is exercisable at any time prior to March 31, 1998, at an
exercise price of $20.00 per share, subject to adjustment to prevent dilution in
the event of stock splits, recapitalizations and reorganizations. The Fund was
also granted certain incidental and demand registration rights by the Company
with respect to the shares of Common Stock issuable upon conversion of the 9%
Note and exercise of the Warrant (the "Registrable Securities"). As a result,
the Fund is entitled to notice of any registration statement filed by the
Company on Form S-1, S-2, or S-3 with respect to the registration of shares of
Common Stock (other than registration of shares to be issued in exchange for
partnership interests), and the Company is required, subject to certain
limitations, to use its best efforts to include the Registrable Securities in
such registration at the Company's expense. The registration rights granted to
the Fund may, in certain transactions, adversely affect the market price of the
Common Stock and limit the Company's ability to raise capital through the public
markets. In connection with the purchase of the 9% Note and the Warrant, the
Company agreed that the Fund would have the right to nominate one director to
the Board so long as the Fund owned shares of the Common Stock, or notes
convertible into shares of the Common Stock, representing at least five percent
of the fully-diluted outstanding Common Stock of the Company. The Company is no
longer obligated to nominate a director on behalf of the Fund.
CERTAIN TRANSACTIONS
Certain of the Company's subsidiaries owed amounts to Richard L. Scott, an
executive officer and a director, and Richard E. Rainwater, a former director
and the spouse of Darla D. Moore, a director, which totaled $1,336,286 and
$588,753, respectively, as of December 31, 1992. Such amounts accumulated prior
to May 16, 1990, and consisted primarily of partnership distributions and
management fees payable to such individuals prior to that date. Such amounts
bore interest at the prime lending rate of the Company's primary lender plus 2%.
The obligations had no fixed payment terms. The Company's subsidiaries repaid
such amounts in full during 1993.
On August 9, 1990, the Company entered into a five-year non-cancelable lease
to rent office space for corporate offices in Fort Worth, Texas from an
affiliate of Mr. Rainwater. The lease was amended in
16
<PAGE>
September 1991 to provide for more leased space and an extension of the lease
term until November 1, 1998. The minimum annual rental payment under the lease
is approximately $342,000 payable in equal monthly installments. The Company
paid rent of $350,491 in 1993. Management believes that the lease is on terms
generally available in the market.
Effective as of January 4, 1994, Samuel A. Greco, an executive officer of
the Company, exchanged partnership interests valued by the Company at $988,679
for 35,538 shares of the Common Stock. The exchange price for the shares of the
Common Stock was $27.82 per share, the average of the high and low prices on the
date the parties agreed to exchange the partnership interests for shares of the
Common Stock.
See "Compensation Committee Interlocks and Insider Participation" concerning
certain other transactions between the Company and certain executive officers,
directors and principal stockholders of the Company.
SELECTION OF AUDITORS
As a result of the merger involving the Company and HCA, management
requested proposals on March 3, 1994 from two independent public accounting
firms, Coopers & Lybrand (the Company's independent accountants) and Ernst &
Young (formerly the independent accountants for HCA), to provide audit services
in connection with the Company's consolidated financial statements. The Audit
Committee of the Board of Directors, upon review of the proposals and
discussions with each firm, will recommend the selection of the Company's
principal independent accountants to the Board of Directors. Neither firm has a
direct or indirect interest in the Company.
On September 9, 1993, in connection with the merger involving the Company
and Galen, the Audit Committee of the Board of Directors of the Company reviewed
proposals from three independent accounting firms to provide audit services. The
Audit Committee then selected Coopers & Lybrand to serve as the Company's
principal independent accountants and discontinued its client-auditor
relationship with Arthur Andersen & Co., which had audited the Company's
consolidated financial statements since 1990.
The Company did not contact Coopers & Lybrand during its two prior fiscal
years, or any subsequent interim period regarding (a) the application of
accounting principles to a specified transaction, either completed or proposed,
or the type of audit opinion that might be rendered on the Company's
consolidated financial statements, or (b) any matter that was the subject of a
disagreement. Prior to its engagement, Coopers & Lybrand was neither asked for,
nor has it expressed any opinion on any accounting issues concerning the
Company.
There were no disagreements with Arthur Andersen & Co. during the fiscal
years ended December 31, 1991 and December 31, 1992, or any subsequent interim
period, on any matters involving accounting principles or practices, financial
statement disclosure or auditing scope or procedures. The reports of Arthur
Andersen & Co. for the fiscal years ended December 31, 1991 and December 31,
1992, or any subsequent interim period, did not contain an adverse opinion,
disclaimer of opinion, qualification, or modification as to uncertainty, audit
scope or accounting principles.
Representatives from Coopers & Lybrand will be at the Annual Meeting, will
have an opportunity to make a statement if desired and will be available to
respond to questions.
AMENDMENT TO THE COLUMBIA HOSPITAL CORPORATION
1992 STOCK AND INCENTIVE PLAN
The Columbia Hospital Corporation 1992 Stock and Incentive Plan (the "1992
Plan") was adopted by the Company's Board of Directors on March 3, 1992 and
approved by the stockholders on May 28, 1992. The 1992 Plan was amended
effective May 20, 1993, to increase the number of authorized shares thereunder
from 1,000,000 shares to 2,000,000 shares. The Board of Directors has determined
that it is in the best interests of the Company to amend the 1992 Plan (a) by
increasing the
17
<PAGE>
number of authorized shares thereunder from 2,000,000 shares to 20,000,000
shares and (b) to permit options granted pursuant to the 1992 Plan to qualify as
performance based compensation not subject to the limit on deductibility of
compensation in excess of $1 million paid to certain executive officers (the "$1
Million Cap"). The 1992 Plan is intended to facilitate stock ownership and
increase the interest of employees in the growth and performance of the Company.
The 1992 Plan is administered by the Compensation Committee. The
Compensation Committee, by action of a majority of its members, has the
authority to establish rules for administering and interpreting the 1992 Plan.
An amendment to the 1992 Plan would require administration of the 1992 Plan by
persons satisfying the definition of "outside director" within the meaning of
Section 162(m) of the Internal Revenue Code of 1986, as amended (the "Code").
The Board of Directors is authorized to terminate, amend or modify the 1992
Plan, except that stockholder approval is required for any amendment which would
increase the number of shares available, decrease the minimum option price,
extend the maximum option term, or materially modify the eligibility
requirements for participation in the 1992 Plan.
All full or part-time employees of the Company, its subsidiaries and its
affiliated partnerships are eligible to be participants in the 1992 Plan. At
March 31, 1994, the Company had approximately 130,000 employees. In addition,
consultants and independent contractors providing valuable services to the
Company, its subsidiaries and its affiliated partnerships are eligible to
receive nonqualified stock options under the 1992 Plan. The Compensation
Committee has the authority to select individuals to whom awards are granted and
the timing of such awards. Under the amendment, no person may be granted options
during the life of the 1992 Plan in respect of more than an aggregate of 10% of
the shares of Common Stock authorized from time to time under the 1992 Plan. The
purpose of this amendment is to comply with Section 162(m) of the Code.
Subject to adjustment as described below, a maximum of 20,000,000 shares of
the Common Stock would be available for distribution under the 1992 Plan,
assuming the stockholders approve the proposed amendment to the 1992 Plan. If
awards lapse, expire, terminate, or are cancelled prior to the issuance of
shares, such shares will be available for new awards. The total number of shares
which may be awarded is subject to adjustment to reflect capital changes. As of
February 11, 1994, the 1992 Plan authorized 2,000,000 shares for issuance. On
such date, however, the Compensation Committee granted options under the 1992
Plan to approximately 8,100 employees (including the named executive officers),
to purchase approximately 5,300,000 shares of the Common Stock. If the amendment
to the 1992 Plan is not approved by the stockholders, the options granted to
employees in February 1994 will terminate and options for 707,300 shares will
still be available for grant. If the amendment is approved, options for
approximately 13,407,300 shares will be available for grant under the 1992 Plan.
The 1992 Plan permits the granting of all or any of the following types of
awards: (1) stock options, including both incentive stock options ("ISOs") (as
defined under Section 422 of the Code) and options which do not qualify for
special tax treatment ("nonqualified stock options"); and (2) restricted stock.
The vesting of any award granted under the 1992 Plan may be conditioned upon the
meeting of specified performance criteria selected by the Compensation
Committee. No award granted under the 1992 Plan may be assigned, transferred,
pledged or otherwise encumbered by a participant, other than by will or by the
laws of descent and distribution. Each award will be exercisable during the
participant's lifetime only by the participant, or if permissible under
applicable law, by the participant's guardian or legal representatives.
18
<PAGE>
The purchase price per share of stock purchasable under any nonqualified
stock option granted pursuant to the 1992 Plan will be determined by the
Compensation Committee, but shall not be less than 50% of the fair market value
of the stock on the date of the grant of such option. The purchase price per
share of stock purchasable under any ISO will also be determined by the
Compensation Committee but shall not be less than 100% of the fair market value
on the date of the grant. The term of each option shall be fixed by the
Compensation Committee and the options may be exercised at such time or times as
determined by the Compensation Committee, but no ISOs will be exercisable after
the expiration of ten years from the date the option is granted and no
nonqualified options will be exercisable after the expiration of 15 years from
the date the option is granted. The fair market value of ISOs first exercisable
in any one year as to any participant may not exceed $100,000.
Options may be exercised by paying the purchase price and withholding taxes,
if any, either in cash or, at the discretion of the Compensation Committee, in
the stock of the Company or a combination of cash and stock of the Company. The
Compensation Committee may, in its discretion, allow the optionee to deliver a
notice of exercise and sale of shares by a brokerage firm. The Committee may
include a provision in an option permitting the grant of a new option when
payment of the exercise price upon exercise of an option is made in shares of
Common Stock (an accelerated ownership option). If the participant's employment
with the Company ceases during the term of an option because of serious
misconduct, the option will terminate as of the date of the misconduct. If
termination is due to the death or disability of a participant while in the
employ of the Company, or the death of a participant within three months of
termination of employment by the participant, the optionee, or his or her
beneficiary, personal representative or guardian may exercise the option at any
time, within a period determined by the Compensation Committee (not to exceed
five years), to the extent of the full number of shares which the participant
was entitled to purchase on the date of termination. If termination is for any
reason other than the employee's serious misconduct, death or disability (such
as, for example, retirement), the Compensation Committee will determine the
appropriate period following termination in which the option may be exercised,
provided such period will not exceed five years.
The grant of an option under the 1992 Plan will not result in taxable income
at the time of grant for the optionee or the Company. The optionee will not have
taxable income upon exercising an ISO (except that the alternative minimum tax
may apply), and the Company will receive no deduction when an ISO is exercised.
Upon exercising a nonqualified stock option, the optionee will recognize
ordinary income in the amount by which the fair market value on the date of
exercise exceeds the option price; the Company will be entitled to a deduction
for the same amount. The tax treatment to an optionee of a disposition of shares
acquired through the exercise of an option is dependent upon the length of time
the shares have been held and on whether such shares were acquired by exercising
an ISO or a nonqualified stock option. Generally, there will not be tax
consequence to the Company in connection with the disposition of shares acquired
under an option except that the Company may be entitled to a deduction in the
case of a disposition of shares under an ISO before the applicable ISO holding
periods have been satisfied.
At the time of an award of restricted stock under the 1992 Plan, a
restriction period will be established for each participant. During the
restricted period, the restricted stock may not be transferred, encumbered or
sold, unless the Compensation Committee may otherwise determine. The
participant, as owner of such shares, will have the rights of a stockholder,
including the right to receive cash dividends and the right to vote.
Recipients of restricted stock are not required to provide consideration
other than the rendering of services. Except as otherwise may be determined by
the Committee, all shares are forfeited unless the participant remains in the
continuous employment of the Company for the entire restricted period with
respect to which the shares were granted.
Stockholder approval of the amendment to the 1992 Plan is also being sought
in order to qualify the plan under Rule 16b-3 promulgated by the Securities and
Exchange Commission as a stockholder
19
<PAGE>
approved plan. Once approved, grants of options would not be treated as
purchases for purposes of the Section 16(b) short swing profit rules. Management
believes that the approval of the amendment to the 1992 Plan does not conflict
with or impede the policy behind the short-swing profit provisions of the
securities laws.
THE BOARD OF DIRECTORS RECOMMENDS THAT YOU VOTE "FOR" THE APPROVAL OF THE
AMENDMENTS TO THE COLUMBIA HOSPITAL CORPORATION 1992 STOCK AND INCENTIVE PLAN.
SUMMARY OF BENEFITS UNDER THE 1992 PLAN
It is not possible to determine the number of shares that will in the future
be awarded under the 1992 Plan to any particular individual, or the dollar value
of the options or restricted stock awards. The following table sets forth the
number of options that were awarded on February 11, 1994, to certain individuals
and groups under the 1992 Plan, subject to stockholder approval.
<TABLE>
<CAPTION>
Number of
Name and Position Shares(1)
- ----------------------------------------------------------------------------------- -----------------
<S> <C>
Richard L. Scott, President and Chief Executive Officer............................ 150,000(2)(3)
David T. Vandewater, Chief Operating Officer....................................... 125,000(2)(3)
David C. Colby, Senior Vice President, Chief
Financial Officer and Treasurer................................................... 50,000(2)(3)
Samuel A. Greco, Senior Vice President -- Finance.................................. 50,000(2)(3)
Stephen T. Braun, Senior Vice President and General Counsel........................ 50,000(2)(3)
All Executive Officers as a group.................................................. 600,000(2)(3)
All employees, who are not executive officers, as a group.......................... 4,700,000(2)(3)
Outside directors are not eligible for participation in the 1992 Plan.
<FN>
- ------------------------
(1) The dollar values of the options are not determinable. The exercise price
of such options was $38.625 per share. On April 6, 1994, the closing sales
price of the Common Stock was $40.50 per share.
(2) The number of options to be granted under the 1992 Plan is not
determinable. The Compensation Committee has complete authority to
determine which persons will be granted options under the 1992 Plan and
the number of options to be granted. For information concerning the number
of options granted to all named executed officers under the 1992 Plan
during 1993, see "Executive Compensation -- Options Granted During 1993
Fiscal Year."
(3) If the amendments to the 1992 Plan are not approved, no shares will be
issued to the optionees pursuant to the grant of such options.
</TABLE>
APPROVAL OF THE COLUMBIA/HCA HEALTHCARE CORPORATION
ANNUAL INCENTIVE PLAN
Section 162(m) of the Code and the proposed regulations thereunder provide
that for all years commencing on or after January 1, 1994, a publicly held
corporation may not deduct compensation in excess of the $1 Million Cap paid to
the chief executive officer and certain other designated officers (generally,
the four most highly compensated executive officers), unless such compensation
is paid pursuant to qualified performance-based compensation plans approved by
the Company's stockholders before payment.
The compensation of some of the Company's executive officers could possibly
exceed the $1 Million Cap for 1994 and subsequent years. The Board of Directors
is therefore seeking stockholder approval of the Columbia/HCA Healthcare
Corporation Annual Incentive Plan (the "Incentive
20
<PAGE>
Plan"). The Incentive Plan provides for annual bonuses based upon the
performance of the Company or certain business units. The amounts individual
executives may earn under the Incentive Plan is dependent upon the individual's
position, responsibility and ability to impact the Company's financial success.
Payments pursuant to the Incentive Plan will be in lieu of other cash
bonuses pursuant to other incentive plans. The Incentive Plan provides for
targeted bonuses equal to 80% of base salaries for the Chairman of the Board,
the Chief Executive Officer and the Chief Operating Officer, and 50% of base
salaries for other executive officers, contingent in all cases upon the
Company's achievement of certain earnings per share criteria. The targeted bonus
amount is comprised of two components, an earnings per share component and a
discretionary component. The earnings per share component comprises 75% of the
target bonus, and is contingent upon the Company meeting its budgeted earnings
per share level. The discretionary component comprises 25% of the target bonus,
and will be determined by the Compensation Committee based upon the executive's
accomplishment of certain other goals and objectives. The maximum bonus for
executive officers under the Incentive Plan is 150% of the target bonus and in
no event may such bonus exceed $1,000,000.
If the executive officer is terminated by the Company during the year the
executive officer will forfeit the executive officer's right to receive a bonus.
If the executive officer retires or dies before the end of a year, the executive
officer will receive a bonus for the year in which the executive officer retires
or dies based on results for the period through the end of the month preceding
the executive officer's death or retirement.
The Compensation Committee believes that the Incentive Plan is consistent
with its overall compensation policy, and will effectively serve the goals of
its executive compensation program. The Compensation Committee further believes,
based on its review of internal surveys of pay practices at other healthcare
companies, as well as other general pay surveys, that the proposed Incentive
Plan is commensurate with the compensation package for executive officers of
similar companies. The bonus formula links the executive officer's bonus closely
to the financial interests of the Company's stockholders, by rewarding the
executive officer only if there are significant improvements in the Company's
earnings per share. If earnings per share do not exceed the minimum required
level, the executive officer will not receive the earnings per share component
of the target bonus, although the executive officer could receive the
discretionary component of the target bonus. The bonus formula is designed to
focus the executive officers on increasing stockholder value and to encourage
the effective management of the Company.
A favorable vote of a majority of the stockholders present at the meeting in
person or by proxy is required for approval of the Incentive Plan. If the
Incentive Plan is not approved, the Board of Directors intends to reexamine its
compensation plan for its executive officers, with a view to developing a plan
that maintains the executive officers' compensation at competitive levels and
provides appropriate incentives. If the Incentive Plan is disapproved, and the
competitive compensation program developed by the Compensation Committee as a
replacement for the Incentive Plan results in compensation to the executive
officers in excess of the $1 Million Cap in a given year, the Company may not
deduct the amount of the excess for federal tax purposes.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" THE PROPOSAL TO APPROVE THE
INCENTIVE PLAN. PROXIES SOLICITED BY THE BOARD OF DIRECTORS WILL BE SO VOTED
UNLESS STOCKHOLDERS OTHERWISE SPECIFY IN THEIR PROXIES.
21
<PAGE>
GENERAL INFORMATION
STOCKHOLDER PROPOSALS
Any proposals that stockholders of the Company desire to have presented at
the 1995 Annual Meeting of Stockholders must be received by the Company at its
principal executive offices not less than 60 days nor more than 90 days prior to
the scheduled date of the meeting (or, if less than 70 days' notice or prior
public disclosure of the date of the meeting is given, the 10th day following
the earlier of (i) the day such notice was mailed or (ii) the day such public
disclosure was made) for inclusion in the Company's 1995 proxy materials.
ANNUAL REPORT
The Company's 1993 Annual Report to Stockholders is being mailed to
stockholders with this proxy statement. The Annual Report is not part of the
proxy solicitation materials.
ADDITIONAL INFORMATION
The audited financial statements of the Company for the year ended December
31, 1993 are included in the Appendix to this Proxy Statement.
A COPY OF THE COMPANY'S ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED
DECEMBER 31, 1993, EXCLUDING CERTAIN OF THE EXHIBITS THERETO, MAY BE OBTAINED
WITHOUT CHARGE BY WRITING TO COLUMBIA/HCA HEALTHCARE CORPORATION, INVESTOR
RELATIONS DEPARTMENT, 201 WEST MAIN STREET, LOUISVILLE, KENTUCKY 40202.
By Order of the Board of Directors
JOAN O. KROGER
SECRETARY
Louisville, Kentucky
April 11, 1994
22
<PAGE>
PERFORMANCE GRAPH
The following Performance Graph shall not be deemed incorporated by
reference by any general statement incorporating by reference the Proxy
Statement into any filing under the Securities Act of 1933 or the Securities
Exchange Act of 1934, except to the extent that the Company specifically
incorporates this information by reference, and shall not otherwise be deemed
filed under such Acts.
The graph below compares the cumulative total stockholder return on the
Company's Common Stock for the period since the Company became a publicly-held
company on May 16, 1990, with the cumulative total return of companies on the
Standard & Poor's 500 Index (S&P 500 Index) and the Standard & Poor's Hospital
Management Index (S&P Hospital Index) over the same period (assuming the
investment of $100 in the Company's Common Stock, the S&P 500 Index and the S&P
Hospital Index on May 16, 1990 and reinvestment of all dividends).
COLUMBIA/HCA HEALTHCARE CORPORATION
COMPARISON OF CUMULATIVE TOTAL RETURNS
<TABLE>
<S> <C> <C> <C>
5/16/90 100.00 100.00 100.00
12/31/90 83.93 95.94 98.66
12/31/91 121.43 125.17 87.32
12/31/92 151.79 134.71 67.89
12/31/93 237.06 148.28 102.35
</TABLE>
23
<PAGE>
APPENDIX
COLUMBIA HEALTHCARE CORPORATION
AND
COLUMBIA/HCA HEALTHCARE CORPORATION
FINANCIAL INFORMATION
---------------------------------------
COLUMBIA HEALTHCARE CORPORATION
INDEX TO CONSOLIDATED FINANCIAL INFORMATION
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
Market for Registrant's Common Equity and Related Stockholder Matters...................................... F-2
Selected Financial Data.................................................................................... F-3
Management's Discussion and Analysis of Financial Condition and Results of Operations...................... F-4
Report of Independent Accountants.......................................................................... F-9
Consolidated Financial Statements:
Consolidated Statement of Income for the years ended
December 31, 1993, 1992 and 1991........................................................................ F-10
Consolidated Balance Sheet, December 31, 1993 and 1992................................................... F-11
Consolidated Statement of Common Stockholders' Equity for the years ended December 31, 1993, 1992 and
1991.................................................................................................... F-12
Consolidated Statement of Cash Flows for the years ended
December 31, 1993, 1992 and 1991........................................................................ F-13
Notes to Consolidated Financial Statements............................................................... F-14
Quarterly Consolidated Financial Information (Unaudited)................................................. F-28
</TABLE>
<PAGE>
MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock has been primarily traded on the New York Stock
Exchange (the "NYSE") (symbol "COL") since July 14, 1993. Prior to that date,
the Company's Common Stock was traded through the National Association of
Securities Dealers Automated Quotation National Market System ("NASDAQ/NMS").
The table below sets forth, for the calendar quarters indicated, the high and
low sales prices per share reported on the NYSE Composite Tape or NASDAQ/NMS for
the Company's Common Stock. The information with respect to NASDAQ/NMS
quotations was obtained from the National Association of Securities Dealers,
Inc. and reflects interdealer prices, without retail markup, markdown or
commissions and may not represent actual transactions.
<TABLE>
<CAPTION>
HIGH LOW
--------- ---------
<S> <C> <C>
1992:
First Quarter.................................................................. $ 21.25 $ 16.50
Second Quarter................................................................. 22.00 16.25
Third Quarter.................................................................. 19.25 16.25
Fourth Quarter................................................................. 21.75 13.75
1993:
First Quarter.................................................................. 24.50 16.25
Second Quarter................................................................. 27.75 19.25
Third Quarter.................................................................. 31.00 25.38
Fourth Quarter................................................................. 33.88 27.00
</TABLE>
The Company's registrar and transfer agent for its Common Stock is First
Union National Bank of North Carolina. At the close of business on February 28,
1994, there were 15,600 holders of record of the Company's Common Stock and one
holder of record of the Company's Nonvoting Common Stock.
The Company commenced the payment of a quarterly dividend of $.03 per share
in the fourth quarter of 1993. Prior to that time, the Company did not pay any
cash dividends. While it is the present intention of the Company's Board of
Directors to continue paying a quarterly dividend of $.03 per share, the
declaration and payment of future dividends by the Company will depend upon many
factors, including the Company's earnings, financial condition, business needs,
capital and surplus and regulatory considerations.
F-2
<PAGE>
COLUMBIA HEALTHCARE CORPORATION
SELECTED FINANCIAL DATA
AS OF AND FOR THE YEARS ENDED DECEMBER 31
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
1993 1992 1991 1990 1989
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
SUMMARY OF OPERATIONS:
Revenues................................ $ 5,130 $ 4,806 $ 4,612 $ 4,010 $ 3,450
---------- ---------- ---------- ---------- ----------
Salaries, wages and benefits............ 2,217 2,069 2,004 1,666 1,366
Supplies................................ 842 788 720 624 513
Other operating expenses................ 916 833 717 653 600
Provision for doubtful accounts......... 282 285 277 233 203
Depreciation and amortization........... 298 276 248 220 196
Interest expense........................ 129 117 111 119 147
Investment income....................... (34) (39) (34) (34) (34)
Non-recurring transactions.............. 151 138 - - (13)
---------- ---------- ---------- ---------- ----------
4,801 4,467 4,043 3,481 2,978
---------- ---------- ---------- ---------- ----------
Income from continuing operations before
minority interests and income taxes.... 329 339 569 529 472
Minority interests in earnings of
consolidated entities.................. 9 10 9 4 4
---------- ---------- ---------- ---------- ----------
Income from continuing operations before
income taxes........................... 320 329 560 525 468
Provision for income taxes.............. 127 118 202 190 167
---------- ---------- ---------- ---------- ----------
Income from continuing operations....... 193 211 358 335 301
Discontinued operations:
Income (loss) from operations of
discontinued health plan segment, net
of income tax (benefit).............. 16 (108) 16 (6) (18)
Costs associated with discontinuance
of health plan segment, net of income
tax benefit.......................... - (17) - - -
Extraordinary loss on extinguishment of
debt, net of income tax benefit........ (70) - - - (9)
Cumulative effect on prior years of a
change in accounting for income
taxes.................................. - 51 - - -
---------- ---------- ---------- ---------- ----------
Net income.......................... $ 139 $ 137 $ 374 $ 329 $ 274
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
Earnings per common share (a):
Income from continuing operations..... $ 1.28 $ 1.45 $ 2.58 $ 2.51
Discontinued operations:
Income (loss) from operations of
discontinued health plan segment... .10 (.75) .11 (.04)
Costs associated with discontinuance
of health plan segment............. - (.12) - -
Extraordinary loss on extinguishment
of debt.............................. (.46) - - -
Cumulative effect on prior years of a
change in accounting for income
taxes................................ - .36 - -
---------- ---------- ---------- ----------
Net income.......................... $ .92 $ .94 $ 2.69 $ 2.47
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Shares used in earnings per common share
computations (in thousands)............ 150,017 144,897 138,936 134,128
Net cash provided by continuing
operations............................. $ 493 $ 668 $ 655 $ 552 $ 456
Cash dividends per common share......... .06 - - - -
FINANCIAL POSITION:
Assets.................................. $ 4,619 $ 4,891 $ 4,541 $ 4,100 $ 3,583
Working capital......................... 374 392 374 374 353
Net assets of discontinued operations... - 376 411 303 312
Long-term debt, including amounts due
within one year........................ 1,651 1,288 1,159 1,144 1,239
Minority interests in equity of
consolidated entities.................. 57 31 23 16 10
Common stockholders' equity............. 1,656 2,276 2,168 1,836 1,371
OPERATING DATA:
Number of hospitals at end of period.... 97 101 91 93 87
Number of licensed beds at end of
period................................. 21,742 21,922 19,992 19,393 18,254
Weighted average licensed beds.......... 21,733 21,019 20,132 19,237 18,288
Average daily census.................... 9,249 9,277 9,502 9,145 8,719
Occupancy............................... 43% 44% 47% 48% 48%
Admissions.............................. 596,300 586,500 587,800 566,200 529,800
Length of stay.......................... 5.7 5.8 5.9 5.9 6.0
Surgery cases........................... 424,200 437,300 425,900 399,000 374,000
Emergency room visits................... 1,563,200 1,537,400 1,519,700 1,432,000 1,330,900
Outpatient registrations................ 2,541,900 2,537,100 2,401,600 1,899,300 1,666,400
Outpatient revenues as a percentage of
patient revenues....................... 26% 26% 24% 23% 22%
<FN>
- ------------------------------
(a) Earnings per common share are not presented for periods prior to the
initial public offering of Columbia Hospital Corporation common stock in
May 1990.
</TABLE>
F-3
<PAGE>
COLUMBIA HEALTHCARE CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The accompanying Selected Financial Data set forth certain information with
respect to the financial position, results of operations and cash flows of
Columbia Healthcare Corporation ("Columbia") which should be read in conjunction
with the following discussion and analysis.
HCA MERGER
The HCA Merger was completed on February 10, 1994. Although the HCA Merger
will be treated as a pooling of interests for accounting purposes, the
accompanying consolidated financial statements and financial and operating data
included in this discussion and analysis do not include the retroactive effect
of the HCA Merger. See Note 3 of the Notes to Consolidated Financial Statements
of Columbia and the Supplemental Consolidated Financial Statements of
Columbia/HCA Healthcare Corporation ("Columbia/HCA") included herein for further
information.
BACKGROUND INFORMATION AND BUSINESS STRATEGY
As discussed in Notes 1 and 2 of the Notes to the Consolidated Financial
Statements, Columbia began operations on September 1, 1993 as a result of a
merger involving Columbia Hospital Corporation ("CHC") and Galen Health Care,
Inc. ("Galen") (the "Galen Merger"), which was accounted for as a pooling of
interests. Accordingly, the accompanying financial statements and financial and
operating data included in this discussion and analysis give retroactive effect
to the Galen Merger and include the combined operations of CHC and Galen for all
periods presented. In addition, the historical financial information related to
Galen (which prior to the Galen Merger was reported on a fiscal year ending
August 31) has been recast to conform to Columbia's annual reporting period
ending December 31.
Prior to the merger with CHC, Galen became a publicly held corporation as a
result of a spinoff transaction by Humana Inc. ("Humana") which was completed on
March 1, 1993 (the "Spinoff"). The Spinoff separated Humana's previously
integrated hospital and managed care health plan businesses and was effected
through the distribution of Galen common stock to then current Humana common
stockholders on a one-for-one basis. For accounting purposes, because of the
relative significance of the hospital business, the pre-Spinoff financial
statements of Galen (and now those of Columbia) include the separate results of
Humana's hospital business, while the operating results and net assets of
Humana's managed care health plans have been classified as discontinued
operations.
At the time of the Galen Merger, CHC operated 22 hospitals (5,226 licensed
beds) and certain ancillary health care facilities in five major markets located
in Florida and Texas. Annualized revenues of CHC were in excess of $1 billion.
Galen operated 71 hospitals (16,251 licensed beds) located in 18 states and two
foreign countries with annualized revenues of approximately $4 billion.
Columbia primarily operates hospitals and ancillary health care facilities
through either (i) wholly owned subsidiaries or (ii) ownership of controlling
interests in various partnerships in which subsidiaries of Columbia serve as the
managing general partner. Columbia's business strategy centers on the
development of comprehensive, integrated health care delivery networks with
physicians and other health care providers in targeted markets, which typically
involves significant health care facility acquisition and consolidation
activities.
During the past several years, hospital inpatient admission trends have been
adversely impacted by cost containment efforts initiated by federal and state
governments and various third-party payers, including HMOs, PPOs, commercial
insurance companies and employer-sponsored networks. In addition, a significant
number of medical procedures have shifted from inpatient to less expensive
outpatient settings as a result of both cost containment pressures and advances
in medical technology.
F-4
<PAGE>
In response to changes in the health care industry, Columbia has developed
the following operating strategy to provide the highest quality health care
services at the lowest possible cost:
BECOME A SIGNIFICANT PROVIDER OF SERVICES -- Columbia attempts to (i)
consolidate services to reduce costs and (ii) develop the geographic
coverage necessary for inclusion in most managed care and
employer-sponsored networks in each market.
PROVIDE A COMPREHENSIVE RANGE OF SERVICES -- In addition to the
operation of general, acute care hospitals, Columbia also operates
psychiatric and rehabilitation facilities, outpatient surgery and
diagnostic centers, home health agencies and other services. This
strategy enables Columbia to attract business from managed care plans
and major employers seeking efficient access to a wide array of health
care services.
DELIVER HIGH QUALITY SERVICES -- Through the use of clinical information
systems, Columbia focuses on patient outcomes and strives to
continuously improve the quality of care and service provided to
patients.
INTEGRATE FRAGMENTED DELIVERY SYSTEMS -- Through its networks, Columbia
focuses on coordinating pricing, contracting, information systems and
quality assurance activities among providers in each market.
Management intends to implement its strategy discussed above in a
substantial number of former Galen markets as well as new markets, and further
develop the integrated health care networks in its five pre-Galen Merger
markets.
F-5
<PAGE>
RESULTS OF OPERATIONS
Revenues increased 7% to $5.1 billion in 1993 and 4% to $4.8 billion in
1992. Increases in both periods resulted primarily from price increases,
acquisitions and, in 1992, growth in outpatient services.
During 1992 and 1993, Columbia acquired or constructed 21 hospitals
containing 3,474 licensed beds and sold or closed 14 hospitals containing 1,682
licensed beds. The following table summarizes percentage changes in
same-hospital admissions and outpatient registrations for each respective period
of 1993 compared to the same period of 1992, and changes in same-hospital
admissions and outpatient registrations for each period of 1992 compared to the
same period of 1991.
<TABLE>
<CAPTION>
1993 VS. 1992 1992 VS. 1991
------------------------------------- ---------------------------------------
CHC GALEN COMBINED CHC GALEN COMBINED
--------- ----------- ------------- ----- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
ADMISSIONS:
Quarter:
First...................... 6.7 (2.1) (1.5) 8.4 - 0.6
Second..................... 8.9 (1.3) (0.5) 2.4 (4.8) (4.3)
Third...................... 5.9 (1.0) (0.4) 4.6 (4.1) (3.5)
Fourth..................... 5.9 1.3 1.7 4.6 (3.6) (3.0)
Year..................... 6.8 (0.8) (0.2) 5.0 (3.1) (2.5)
OUTPATIENT REGISTRATIONS:
Quarter:
First...................... 10.1 (7.2) (5.0) 54.5 4.6 8.7
Second..................... 8.0 (4.2) (2.6) 35.1 (3.6) (0.2)
Third...................... 13.3 (2.1) (0.1) 35.8 (4.4) (1.5)
Fourth..................... 6.8 (0.9) 0.2 31.9 (2.3) 0.9
Year..................... 9.5 (3.6) (1.9) 39.0 (1.5) 1.9
</TABLE>
Since it began operations in 1988, CHC had experienced significant growth in
patient volumes, revenues and net income, primarily as a result of successful
implementation of its strategy.
The historical operating results of Galen's hospitals (which include the
hospital operations of Humana prior to the Spinoff) had been adversely impacted
as a result of such hospitals' pre-Spinoff relationship with Humana's managed
care health plan business in certain markets. Management believes that this
relationship caused some physicians to discontinue referrals of their patients
to the company's hospitals, and had precluded these hospitals from contracting
with unaffiliated insurers. In addition, Galen's volume of patients covered by
traditional insurance (who pay amounts which more closely approximate
established charges) declined significantly in 1992 due in part to increased
price consciousness of patients and physicians with respect to Galen's pricing
policies. Same-hospital volume trends at former Galen facilities have improved
in 1993 primarily as a result of increased volumes from discounted managed care
health plans other than Humana.
Income from continuing operations before non-recurring transactions,
depreciation, interest, minority interests, income taxes and amortization
("EBDITA") increased 4% to $907 million in 1993 from $870 million in 1992. The
decline in EBDITA margins to 17.7% from 18.1% resulted primarily from
deterioration in payer mix. Medicare admissions as a percentage of total
admissions increased from 35% in 1992 to 36% in 1993, while discounted and
managed care admissions grew from 44% to 45%, respectively. EBDITA declined 6%
in 1992 from 1991 due to a decline in same-hospital admissions at former Galen
facilities and deterioration in Galen's payer mix.
During the third quarter of 1993, Columbia recorded non-recurring charges of
$151 million ($98 million net of tax) of costs related to the Galen Merger.
Results of operations in 1992 include $138 million ($86 million net of tax) of
costs incurred in connection with the Spinoff. See Note 5 of the Notes to
Consolidated Financial Statements.
F-6
<PAGE>
Excluding the effects of the non-recurring transactions, income from
continuing operations declined 2% to $291 million ($1.95 per share) in 1993 and
17% to $297 million ($2.05 per share) in 1992.
During the third quarter of 1993, in an effort to reduce future interest
expense and eliminate certain restrictive covenants, Columbia effected the
refinancing of $787 million of its long-term debt bearing interest at an average
rate of 8.5% primarily through the issuance of commercial paper. After-tax
losses from these refinancing activities aggregated $70 million or $.46 per
share.
DISCONTINUED OPERATIONS
Results of operations include income from discontinued operations of $16
million in 1993, a loss of $125 million in 1992 and income of $16 million in
1991. Losses from discontinued operations in 1992 include costs of $135 million
(net of tax) incurred by Humana in connection with the Spinoff.
LIQUIDITY
Cash provided by continuing operations totaled $493 million in 1993 compared
to $668 million in 1992 and $655 million in 1991. The decrease in 1993 resulted
primarily from a slower decline in the number of days of revenues in accounts
receivable, and an acceleration in the payment of income taxes and funding of
retirement plan obligations.
Working capital totaled $374 million at December 31, 1993 compared to $392
million at December 31, 1992. Management believes that cash flows from
operations and amounts available under Columbia's revolving credit facilities
and related commercial paper programs are sufficient to meet expected future
liquidity needs.
Investments of Columbia's professional liability insurance subsidiary to
maintain statutory equity and pay claims totaled $376 million and $347 million
at December 31, 1993 and 1992, respectively.
In September 1993 the Board of Directors initiated the payment of a regular
quarterly cash dividend of $.03 per common share. Management anticipates that
this dividend policy will continue after consummation of the HCA Merger.
CAPITAL RESOURCES
Excluding acquisitions, capital expenditures totaled $382 million in 1993
compared to $359 million in 1992 and $453 million in 1991. Planned capital
expenditures in 1994 (excluding acquisitions) are expected to approximate $400
million. Management believes that its capital expenditure program is adequate to
expand, improve and equip existing health care facilities.
In addition, Columbia expended $79 million, $36 million and $96 million for
acquisitions during 1993, 1992 and 1991, respectively. See Note 6 of the Notes
to Consolidated Financial Statements for a description of these activities.
As part of its business strategy, Columbia intends to acquire additional
health care facilities in the future. Since December 31, 1993, Columbia has
expended $114 million toward the purchase of four hospitals (or controlling
interests therein) containing 1,264 licensed beds. These transactions, which
will be accounted for by the purchase method, were financed through the use of
internally generated funds and issuance of long-term debt.
Columbia expects to finance all capital expenditures with internally
generated and borrowed funds. Available sources of capital include public or
private debt, commercial paper, unused bank revolving credits and equity. At
December 31, 1993, there were projects under construction which had an estimated
additional cost to complete of approximately $149 million.
In connection with the Spinoff, common stockholders' equity was reduced by
$802 million in 1993 as a result of the following transactions with Humana: (i)
distribution of the net assets of the health plan business ($392 million) and
the net assets of a hospital facility ($25 million), (ii) payment of cash
F-7
<PAGE>
($135 million) and (iii) issuance of notes ($250 million). The notes were
refinanced in September 1993. Including the pro forma effect of the Spinoff, the
ratio of debt to debt plus common stockholders' equity improved from 53% at
December 31, 1992 to 50% at December 31, 1993.
Upon consummation of the HCA Merger in February 1994, Columbia entered into
revolving credit agreements in the aggregate amount of $3 billion and refinanced
certain HCA and other long-term debt. The refinancings were effected primarily
through the issuance of commercial paper, $175 million of 6 1/2% Notes due 1999
and $150 million of 7.15% Notes due 2004. Management anticipates that losses
resulting from these refinancing activities will reduce the combined entity's
first quarter 1994 net income by approximately $80 million.
Columbia's credit facilities contain customary covenants which include (i)
limitations on additional debt, (ii) limitations on sales of assets, mergers and
changes of ownership and (iii) maintenance of certain interest coverage ratios.
Columbia was in compliance with all such covenants at December 31, 1993.
EFFECTS OF INFLATION AND CHANGING PRICES
Various federal, state and local laws have been enacted that, in certain
cases, limit Columbia's ability to increase prices. Revenues for hospital
services rendered to Medicare patients are established under the federal
government's prospective payment system. Medicare revenues approximated 33%, 31%
and 30% of revenues in 1993, 1992 and 1991, respectively.
Management believes that hospital operating margins have been, and may
continue to be, under significant pressure because of deterioration in inpatient
volumes and payer mix, and growth in operating expenses in excess of the
increase in prospective payments under the Medicare program. Columbia expects
that the average rate of increase in Medicare prospective payments will
approximate 2% in 1994. In addition, as a result of increasing regulatory and
competitive pressures, Columbia's ability to maintain operating margins through
price increases to non-Medicare patients is limited.
HEALTH CARE REFORM
In recent years, an increasing number of legislative proposals have been
introduced or proposed in Congress and some state legislatures that would
significantly affect health care systems in Columbia's markets. Proposals under
consideration include cost controls on hospitals, insurance market reforms that
increase the availability of group health insurance to small businesses,
requirements that all businesses offer health insurance to their employees and
creation of a single government health insurance plan that would cover all
citizens.
President Clinton's health care reform bill, introduced as legislation in
November 1993, includes certain measures that could significantly reduce future
payments to providers of health care services.
OTHER INFORMATION
Resolution of various loss contingencies, including litigation pending
against Columbia in the ordinary course of business, is not expected to have a
material adverse effect on its financial position or results of operations.
During 1992 Columbia adopted the provisions of Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes," which increased
last year's first quarter net income by $51 million or $.36 per share. See Note
7 of the Notes to Consolidated Financial Statements.
Columbia expects to incur certain expenses related to the HCA Merger, the
amounts of which have not been determined. These costs will include, among other
things, amounts for investment advisory and professional fees, expenses of
printing and distributing proxy materials, severance payments and provisions for
loss related to the consolidation of the operations of Columbia and HCA.
Management anticipates that these expenses will be recorded in the first quarter
of 1994.
F-8
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders
Columbia/HCA Healthcare Corporation
We have audited the consolidated financial statements of Columbia Healthcare
Corporation listed in the index on page F-1 of the Appendix to the accompanying
Proxy Statement. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Columbia
Healthcare Corporation as of December 31, 1993 and 1992, and the consolidated
results of operations and cash flows for each of the three years in the period
ended December 31, 1993 in conformity with generally accepted accounting
principles.
As discussed in Note 7 to the consolidated financial statements, effective
January 1, 1992, the Company adopted the provisions of Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes."
COOPERS & LYBRAND
Louisville, Kentucky
February 28, 1994
F-9
<PAGE>
COLUMBIA HEALTHCARE CORPORATION
CONSOLIDATED STATEMENT OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 1993, 1992 AND 1991
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
1993 1992 1991
--------- --------- ---------
<S> <C> <C> <C>
Revenues........................................................................... $ 5,130 $ 4,806 $ 4,612
--------- --------- ---------
Salaries, wages and benefits....................................................... 2,217 2,069 2,004
Supplies........................................................................... 842 788 720
Other operating expenses........................................................... 916 833 717
Provision for doubtful accounts.................................................... 282 285 277
Depreciation and amortization...................................................... 298 276 248
Interest expense................................................................... 129 117 111
Investment income.................................................................. (34) (39) (34)
Non-recurring transactions......................................................... 151 138 -
--------- --------- ---------
4,801 4,467 4,043
--------- --------- ---------
Income from continuing operations before minority interests and income taxes....... 329 339 569
Minority interests in earnings of consolidated entities............................ 9 10 9
--------- --------- ---------
Income from continuing operations before income taxes.............................. 320 329 560
Provision for income taxes......................................................... 127 118 202
--------- --------- ---------
Income from continuing operations.................................................. 193 211 358
Discontinued operations:
Income (loss) from operations of discontinued health plan segment, net of income
tax (benefit) of $9 in 1993, ($46) in 1992 and $9 in 1991....................... 16 (108) 16
Costs associated with discontinuance of health plan segment,
net of income tax benefit of $2................................................. - (17) -
Extraordinary loss on extinguishment of debt, net of income tax benefit of $42..... (70) - -
Cumulative effect on prior years of a change in accounting for
income taxes...................................................................... - 51 -
--------- --------- ---------
Net income................................................................... $ 139 $ 137 $ 374
--------- --------- ---------
--------- --------- ---------
Earnings per common share:
Income from continuing operations................................................ $ 1.28 $ 1.45 $ 2.58
Discontinued operations:
Income (loss) from operations of discontinued health plan
segment....................................................................... .10 (.75) .11
Costs associated with discontinuance of health plan segment.................... - (.12) -
Extraordinary loss on extinguishment of debt..................................... (.46) - -
Cumulative effect on prior years of a change in accounting for income taxes...... - .36 -
--------- --------- ---------
Net income................................................................... $ .92 $ .94 $ 2.69
--------- --------- ---------
--------- --------- ---------
</TABLE>
The accompanying notes are an integral part of
the consolidated financial statements.
F-10
<PAGE>
COLUMBIA HEALTHCARE CORPORATION
CONSOLIDATED BALANCE SHEET
DECEMBER 31, 1993 AND 1992
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
ASSETS
<TABLE>
<CAPTION>
1993 1992
--------- ---------
<S> <C> <C>
Current assets:
Cash and cash equivalents................................................................. $ 72 $ 95
Accounts receivable less allowance for loss of $160 -- 1993 and
$166 -- 1992............................................................................. 787 827
Inventories............................................................................... 139 138
Other..................................................................................... 217 204
--------- ---------
1,215 1,264
Property and equipment, at cost:
Land...................................................................................... 273 268
Buildings................................................................................. 2,402 2,269
Equipment................................................................................. 1,785 1,663
Construction in progress (estimated cost to complete and equip after December 31, 1993 --
$149).................................................................................... 121 109
--------- ---------
4,581 4,309
Accumulated depreciation.................................................................. (1,792) (1,651)
--------- ---------
2,789 2,658
Net assets of discontinued operations....................................................... - 376
Investments of professional liability insurance subsidiary.................................. 318 302
Intangible assets........................................................................... 225 195
Other....................................................................................... 72 96
--------- ---------
$ 4,619 $ 4,891
--------- ---------
--------- ---------
LIABILITIES AND COMMON STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................................................... $ 232 $ 199
Salaries, wages and other compensation.................................................... 141 124
Other accrued expenses.................................................................... 375 425
Income taxes.............................................................................. 22 92
Long-term debt due within one year........................................................ 71 32
--------- ---------
841 872
Long-term debt.............................................................................. 1,580 1,256
Deferred credits and other liabilities...................................................... 485 456
Minority interests in equity of consolidated entities....................................... 57 31
Contingencies
Common stockholders' equity:
Common stock $.01 par; authorized 400,000,000 shares; issued and outstanding 151,060,400
shares -- 1993 and 148,927,400 shares -- 1992............................................ 2 1
Capital in excess of par value............................................................ 784 740
Other..................................................................................... (2) (9)
Retained earnings......................................................................... 872 1,544
--------- ---------
1,656 2,276
--------- ---------
$ 4,619 $ 4,891
--------- ---------
--------- ---------
</TABLE>
The accompanying notes are an integral part of
the consolidated financial statements.
F-11
<PAGE>
COLUMBIA HEALTHCARE CORPORATION
CONSOLIDATED STATEMENT OF COMMON STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1993, 1992 AND 1991
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
COMMON STOCK
-------------- CAPITAL IN
SHARES PAR EXCESS OF RETAINED
(000) VALUE PAR VALUE OTHER EARNINGS TOTAL
------- ----- ---------- ----- -------- ------
<S> <C> <C> <C> <C> <C> <C>
Balances, December 31, 1990........................... 136,122 $ 1 $ 523 $ (2) $ 1,314 $1,836
Net income.......................................... 374 374
Cash dividends (Galen Health Care, Inc.)............ (138) (138)
Issuance of common stock............................ 4,310 61 61
Stock options exercised and related tax
benefits, net of 224,000 shares
tendered in partial payment therefor............... 797 24 24
Other............................................... 24 2 9 11
------- ----- ----- ----- -------- ------
Balances, December 31, 1991........................... 141,253 1 610 7 1,550 2,168
Net income.......................................... 137 137
Cash dividends (Galen Health Care, Inc.)............ (143) (143)
Issuance of common stock............................ 7,227 119 119
Stock options exercised and related tax
benefits, net of 30,000 shares
tendered in partial payment therefor............... 430 9 9
Other............................................... 17 2 (16) (14)
------- ----- ----- ----- -------- ------
Balances, December 31, 1992........................... 148,927 1 740 (9) 1,544 2,276
Net income.......................................... 139 139
Cash dividends (Columbia Healthcare Corporation --
$.06 per share).................................... (9) (9)
Stock options exercised and related tax
benefits, net of 81,000 shares
tendered in partial payment therefor............... 1,728 1 30 31
Spinoff transaction with Humana Inc.:
Cash payment to Humana Inc........................ (135) (135)
Noncash transactions:
Issuance of notes payable....................... (250) (250)
Distribution of net investment in
discontinued health plan operations............ (392) (392)
Transfer of a hospital facility................. (25) (25)
Net unrealized gains on investment securities....... 9 9
Other............................................... 405 14 (2) 12
------- ----- ----- ----- -------- ------
Balances, December 31, 1993........................... 151,060 $ 2 $ 784 $ (2) $ 872 $1,656
------- ----- ----- ----- -------- ------
------- ----- ----- ----- -------- ------
</TABLE>
The accompanying notes are an integral part of
the consolidated financial statements.
F-12
<PAGE>
COLUMBIA HEALTHCARE CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1993, 1992 AND 1991
(DOLLARS IN MILLIONS)
<TABLE>
<CAPTION>
1993 1992 1991
--------- --------- ---------
<S> <C> <C> <C>
Cash flows from continuing operations:
Net income.......................................................................... $ 139 $ 137 $ 374
Adjustments to reconcile net income to net cash provided by operating activities:
Discontinued operations........................................................... (16) 127 (16)
Minority interests in earnings of consolidated entities........................... 9 10 9
Non-recurring transactions........................................................ 151 138 -
Depreciation and amortization..................................................... 298 276 248
Deferred income taxes............................................................. (51) (41) 27
Change in operating assets and liabilities:
(Increase) decrease in accounts receivable...................................... 9 115 (17)
(Increase) decrease in inventories and other assets............................. 1 (49) (28)
Decrease in income taxes........................................................ (50) (12) (15)
Increase (decrease) in other liabilities........................................ (99) 36 82
Change in accounting for income taxes............................................. - (51) -
Extraordinary loss on extinguishment of debt...................................... 112 - -
Other............................................................................. (10) (18) (9)
--------- --------- ---------
Net cash provided by continuing operations...................................... 493 668 655
--------- --------- ---------
Cash flows from investing activities:
Purchase of property and equipment.................................................. (382) (359) (453)
Acquisition of hospitals and health care facilities................................. (79) (36) (96)
Sale of assets...................................................................... 130 53 116
Investment in discontinued operations............................................... - (71) (76)
Change in investments............................................................... 33 3 (35)
Other............................................................................... (22) (2) (6)
--------- --------- ---------
Net cash used in investing activities........................................... (320) (412) (550)
--------- --------- ---------
Cash flows from financing activities:
Issuance of long-term debt.......................................................... 400 239 194
Net change in commercial paper borrowings and lines of credit....................... 342 (143) 161
Repayment of long-term debt......................................................... (779) (150) (354)
Payment to Humana Inc. in spinoff transaction....................................... (135) - -
Payment of cash dividends........................................................... (40) (143) (134)
Issuance of common stock............................................................ 30 7 71
Other............................................................................... (14) (13) (6)
--------- --------- ---------
Net cash used in financing activities........................................... (196) (203) (68)
--------- --------- ---------
Change in cash and cash equivalents................................................... (23) 53 37
Cash and cash equivalents at beginning of period...................................... 95 42 5
--------- --------- ---------
Cash and cash equivalents at end of period............................................ $ 72 $ 95 $ 42
--------- --------- ---------
--------- --------- ---------
Interest payments..................................................................... $ 122 $ 111 $ 114
Income tax payments, net of refunds................................................... 186 169 190
</TABLE>
The accompanying notes are an integral part of
the consolidated financial statements.
F-13
<PAGE>
COLUMBIA HEALTHCARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 -- ACCOUNTING POLICIES
Columbia Healthcare Corporation ("Columbia") is a Delaware corporation which
began operations on September 1, 1993 as a result of a merger involving Columbia
Hospital Corporation ("CHC") and Galen Health Care, Inc. ("Galen") (the "Galen
Merger"). See Note 2 for a description of the specific terms of the Galen
Merger. Columbia primarily operates hospitals and ancillary health care
facilities through either (i) wholly owned subsidiaries or (ii) ownership of
controlling interests in various partnerships in which subsidiaries of Columbia
serve as the managing general partner.
BASIS OF PRESENTATION
The consolidated financial statements include all subsidiaries and
partnerships controlled by Columbia as the managing general partner. Significant
intercompany transactions have been eliminated.
For accounting purposes, the Galen Merger has been treated as a pooling of
interests. Accordingly, the consolidated financial statements included herein
give retroactive effect to the transaction and include the combined operations
of CHC and Galen for all periods presented. In addition, the historical
financial information related to Galen (which prior to the Galen Merger was
reported on a fiscal year ending August 31) has been recast to conform to
Columbia's annual reporting period ending December 31.
On February 10, 1994, Columbia consummated a merger with HCA -- Hospital
Corporation of America ("HCA") (the "HCA Merger"). Although the HCA Merger will
be treated as a pooling of interests for accounting purposes, the accompanying
consolidated financial statements do not give retroactive effect to this
transaction. See Note 3 for a description of the HCA Merger.
REVENUES
Columbia's health care facilities have entered into agreements with
third-party payers, including government programs and managed care health plans,
under which Columbia is paid based upon established charges, cost of providing
services, predetermined rates by diagnosis, fixed per diem rates or discounts
from established charges.
Revenues are recorded at estimated amounts due from patients and third-party
payers for health care services provided, including anticipated settlements
under reimbursement agreements with third-party payers.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents include highly liquid investments with an original
maturity of three months or less. Carrying values of cash and cash equivalents
approximate fair value due to the short-term nature of these instruments.
ACCOUNTS RECEIVABLE
Accounts receivable consist primarily of amounts due from the Medicare and
Medicaid programs, other government programs, managed care health plans,
commercial insurance companies and individual patients.
INVENTORIES
Inventories are stated at the lower of cost (last-in, first-out) or market.
PROPERTY AND EQUIPMENT
Depreciation expense, computed by the straight-line method, was $279 million
in 1993, $264 million in 1992 and $241 million in 1991. Columbia uses component
depreciation for buildings. Depreciation rates for buildings are equivalent to
useful lives ranging generally from 20 to 25 years. Estimated useful lives of
equipment vary from 3 to 10 years.
F-14
<PAGE>
COLUMBIA HEALTHCARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 1 -- ACCOUNTING POLICIES (CONTINUED)
INVESTMENTS
On December 31, 1993, Columbia adopted the provisions of Statement of
Financial Accounting Standards No. 115, "Accounting for Certain Investments in
Debt and Equity Securities" ("SFAS 115"), which requires that investments in
debt and equity securities be classified according to certain criteria.
INTANGIBLE ASSETS
Intangible assets consist primarily of costs in excess of the fair value of
identifiable net assets of acquired entities and are amortized using the
straight-line method over periods ranging from 10 to 40 years. Noncompete
agreement and debt issuance costs are amortized based upon the lives of the
respective contracts or loans.
PROFESSIONAL LIABILITY INSURANCE CLAIMS
Provisions for loss for professional liability risks are based upon
actuarially determined estimates. To the extent that subsequent claims
information varies from management's estimates, earnings are charged or
credited.
MINORITY INTERESTS IN CONSOLIDATED ENTITIES
The consolidated financial statements include all assets, liabilities and
earnings of Columbia's partnerships, certain partnership interests of which are
not owned by Columbia. Accordingly, management has recorded minority interests
in the earnings and equity of such partnerships.
EARNINGS PER COMMON SHARE
Earnings per common share are based upon the weighted average number of
common shares outstanding, retroactively adjusted for the exchange of common
shares in connection with the Galen Merger.
Shares used in computing earnings per common share in 1993 were 150,017,000.
The following is a summary of shares used in the computation for periods prior
to the Galen Merger (amounts in thousands):
<TABLE>
<CAPTION>
1992 1991
--------- ---------
<S> <C> <C>
CHC weighted average shares outstanding.......................................... 21,967 16,540
--------- ---------
Galen weighted average shares outstanding........................................ 158,620 157,931
Merger exchange ratio............................................................ 0.775 0.775
--------- ---------
Adjusted Galen weighted average shares outstanding............................. 122,930 122,396
--------- ---------
Shares used in computation of earnings per common share.......................... 144,897 138,936
--------- ---------
--------- ---------
</TABLE>
NOTE 2 -- GALEN MERGER
On August 31, 1993, the stockholders of both CHC and Galen approved the
Galen Merger, effective as of September 1, 1993. In connection with the Galen
Merger, CHC, a Nevada corporation, was merged into Columbia. Each CHC share of
common stock was converted on a tax-free basis into one share of Columbia common
stock. Immediately subsequent thereto, a wholly owned subsidiary of Columbia was
merged into Galen, at which time Galen became a wholly owned subsidiary of
Columbia. In connection with this transaction, Columbia issued approximately
123,830,000 shares of common stock in a tax-free exchange for all of the
outstanding common shares of Galen (an exchange ratio of 0.775 of a share of
Columbia common stock for each share of Galen common stock).
F-15
<PAGE>
COLUMBIA HEALTHCARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 2 -- GALEN MERGER (CONTINUED)
The Galen Merger has been accounted for as a pooling of interests, and
accordingly, the consolidated financial statements give retroactive effect to
the combined operations of CHC and Galen for all periods presented. The
following is a summary of the results of operations of the separate entities for
periods prior to the Galen Merger (dollars in millions):
<TABLE>
<CAPTION>
CHC GALEN COMBINED
--------- --------- -----------
<S> <C> <C> <C>
Eight months ended August 31, 1993 (unaudited):
Revenues...................................................... $ 823 $ 2,600 $ 3,423
Income from continuing operations............................. 17 176 193
Net income.................................................... 17 192 209
1992:
Revenues...................................................... $ 819 $ 3,987 $ 4,806
Income from continuing operations............................. 26 185 211
Net income.................................................... 26 111 137
1991:
Revenues...................................................... $ 499 $ 4,113 $ 4,612
Income from continuing operations............................. 15 343 358
Net income.................................................... 15 359 374
</TABLE>
NOTE 3 -- HCA MERGER
On October 2, 1993, Columbia entered into a definitive agreement to merge
with HCA. This transaction was completed on February 10, 1994. In connection
with the HCA Merger, Columbia stockholders approved an amendment to Columbia's
Certificate of Incorporation changing the name of the corporation to
Columbia/HCA Healthcare Corporation ("Columbia/HCA"). HCA was then merged into a
wholly owned subsidiary of Columbia/HCA. Shares of HCA Class A voting common
stock and Class B nonvoting common stock were converted on a tax-free basis into
approximately 166,846,000 shares of Columbia/HCA voting common stock and
approximately 18,990,000 shares of Columbia/HCA nonvoting common stock,
respectively (an exchange ratio of 1.05 shares of Columbia/ HCA common stock for
each share of HCA voting and nonvoting common stock).
These financial statements do not give retroactive effect to the HCA Merger,
which will be accounted for as a pooling of interests. See the Supplemental
Consolidated Financial Statements of Columbia/HCA Healthcare Corporation
included elsewhere herein for additional information regarding the HCA Merger.
NOTE 4 -- SPINOFF TRANSACTION AND DISCONTINUED OPERATIONS
Prior to the Galen Merger, Galen began operating its hospital business as an
independent publicly held corporation on March 1, 1993 as a result of a tax-free
spinoff transaction (the "Spinoff") by Humana Inc. ("Humana"), which retained
its managed care health plan business. The Spinoff separated Humana's previously
integrated hospital and managed care health plan businesses and was effected
through the distribution of Galen common stock to then current Humana common
stockholders on a one-for-one basis.
For accounting purposes, because of the relative significance of the
hospital business, the pre-Spinoff consolidated financial statements of Galen
(and now those of Columbia) include the separate results of Humana's hospital
business, while the operations and net assets of Humana's managed care health
plans have been classified as discontinued operations.
F-16
<PAGE>
COLUMBIA HEALTHCARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 4 -- SPINOFF TRANSACTION AND DISCONTINUED OPERATIONS (CONTINUED)
In connection with the Spinoff, Galen entered into various agreements with
Humana which were intended to facilitate orderly changes for both the hospital
and managed care health plan businesses in a way which would be minimally
disruptive to each entity. Principal contracts are summarized below:
OPERATIONS -- Certain former Galen hospitals will provide medical services
to insureds of Humana for three years subsequent to the Spinoff. The contract
includes, among other things, established payment rates for various inpatient
and outpatient services and annual increases therein, and hospital utilization
guarantees and related penalties.
LIABILITIES AND INDEMNIFICATION -- Each entity assumed liability for
specified claims. The entities will also share risks with respect to certain
litigation and other contingencies, both identified and unknown.
INCOME TAXES -- Each entity entered into risk-sharing arrangements in
connection with the ultimate resolution of various income tax disputes.
FINANCING -- In January 1993 certain subsidiaries issued $250 million of
notes payable to Humana, and paid to Humana $135 million in cash on March 1,
1993 which was financed principally through the issuance of commercial paper.
The $250 million of notes were repaid in September 1993 in connection with the
refinancing of certain long-term debt.
ADMINISTRATION -- These arrangements relate to leasing of certain
administrative facilities, division of information systems, employee benefit and
stock option plans, and various administrative service arrangements.
Revenues of the discontinued managed care health plan business (included in
discontinued operations in the accompanying consolidated statement of income)
were $523 million in 1993, $2.9 billion in 1992 and $2.5 billion in 1991.
NOTE 5 -- NON-RECURRING TRANSACTIONS
In September 1993 Columbia recorded the following charges in connection with
the Galen Merger (dollars in millions):
<TABLE>
<S> <C>
Investment advisory and professional fees, and employee benefit plan costs... $ 62
Writedown of assets in connection with the consolidation of the combined
entity's operations......................................................... 63
Administrative facility asset writedowns and conversion costs associated with
the transaction............................................................. 16
Provision for loss on planned sales of assets................................ 10
---------
$ 151
---------
---------
</TABLE>
Income from continuing operations in 1992 includes $138 million of charges
incurred primarily in connection with the Spinoff, including a provision for
loss on the planned sale of hospitals, writedowns of assets in markets with
significant declines in operations, administrative facility asset writedowns and
certain other costs associated with the separation of the hospital and health
plan businesses. Costs aggregating $171 million (before income taxes) incurred
by Humana primarily in connection with the Spinoff are included in discontinued
operations in 1992.
Continuing operations in 1991 include a gain of $51 million on the sale of a
hospital, a provision for loss of $46 million primarily in connection with the
planned disposition of certain hospitals, and charitable contributions of $5
million.
F-17
<PAGE>
COLUMBIA HEALTHCARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 6 -- OTHER BUSINESS COMBINATIONS
During the past three years, Columbia has acquired various hospitals and
related ancillary health care facilities (or controlling interests in such
facilities), all of which have been accounted for by the purchase method.
Accordingly, the aggregate purchase price of these transactions has been
allocated to tangible and identifiable intangible assets acquired and
liabilities assumed based upon their respective fair values. The consolidated
financial statements include the operations of acquired entities since the
respective acquisition dates.
The following is a summary of acquisitions consummated during the last three
years (dollars in millions):
<TABLE>
<CAPTION>
1993 1992 1991
--------- --------- ---------
<S> <C> <C> <C>
Number of hospitals.................................................... 3 15 2
Number of licensed beds................................................ 903 2,345 1,420
Purchase price information:
Fair value of assets acquired........................................ $ 164 $ 490 $ 165
Liabilities assumed.................................................. (76) (279) (48)
--------- --------- ---------
Net assets acquired................................................ 88 211 117
--------- --------- ---------
Issuance of common stock............................................. - 119 1
Cash acquired........................................................ 9 15 15
Cash received from sale of certain acquired assets................... - 40 -
Other................................................................ - 1 5
--------- --------- ---------
9 175 21
--------- --------- ---------
Net cash paid for acquisitions..................................... $ 79 $ 36 $ 96
--------- --------- ---------
--------- --------- ---------
</TABLE>
In July 1992 Columbia acquired Basic American Medical, Inc. ("BAMI")
(included in the table above) through a merger into a wholly owned subsidiary.
The assets of BAMI included eight hospitals containing 1,203 licensed beds and
certain other health care businesses. The transaction was financed through the
assumption of approximately $140 million of long-term debt, issuance of
6,995,000 shares of common stock and payment of $38 million in cash to BAMI
stockholders.
The purchase price paid in excess of the fair value of identifiable net
assets of acquired entities aggregated $7 million in 1993, $97 million in 1992
and $19 million in 1991.
The pro forma effect of Columbia's acquisitions on its results of operations
was not significant.
NOTE 7 -- INCOME TAXES
Provision for income taxes consists of the following (dollars in millions):
<TABLE>
<CAPTION>
1993 1992 1991
--------- --------- ---------
<S> <C> <C> <C>
Current:
Federal.............................................................. $ 153 $ 135 $ 151
State................................................................ 25 24 24
--------- --------- ---------
178 159 175
--------- --------- ---------
Deferred:
Federal.............................................................. (47) (36) 19
State................................................................ (4) (5) 8
--------- --------- ---------
(51) (41) 27
--------- --------- ---------
$ 127 $ 118 $ 202
--------- --------- ---------
--------- --------- ---------
</TABLE>
F-18
<PAGE>
COLUMBIA HEALTHCARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 7 -- INCOME TAXES (CONTINUED)
Reconciliation of federal statutory rate to effective income tax rate
follows:
<TABLE>
<CAPTION>
1993 1992 1991
--------- --------- ---------
<S> <C> <C> <C>
Federal statutory rate................................................... 35.0% 34.0% 34.0%
State income taxes, net of federal income
tax benefit............................................................. 3.5 2.9 2.8
Merger costs............................................................. 1.8 - -
Tax exempt investment income............................................. (1.3) (1.4) (0.6)
Other items, net......................................................... 0.6 0.3 (0.2)
--------- --------- ---------
Effective income tax rate................................................ 39.6% 35.8% 36.0%
--------- --------- ---------
--------- --------- ---------
</TABLE>
In August 1993 Congress enacted the Omnibus Budget Reconciliation Act of
1993 which included, among other things, an increase in corporate income tax
rates retroactive to January 1, 1993. This legislation had no material effect on
1993 net income.
Effective January 1, 1992, Columbia adopted the provisions of Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes," which
requires, among other things, recognition of deferred income taxes using
statutory rates at which temporary differences in the tax and book bases of
assets and liabilities are expected to affect taxable income in future years.
The cumulative effect of this change as of the beginning of the year increased
1992 net income by $51 million.
A summary of deferred income taxes by source included in the consolidated
balance sheet at December 31, 1993 and 1992 follows (dollars in millions):
<TABLE>
<CAPTION>
1993 1992
---------------------- ----------------------
ASSETS LIABILITIES ASSETS LIABILITIES
--------- ----------- --------- -----------
<S> <C> <C> <C> <C>
Depreciation.................................................. $ - $ 316 $ - $ 297
Professional liability risks.................................. 99 - 109 -
Doubtful accounts............................................. 30 - 32 -
Property losses............................................... 63 - 48 -
Cash basis.................................................... - 5 - 18
Compensation.................................................. 24 - 18 -
Capitalized leases............................................ 11 - 12 -
Other......................................................... 57 7 32 2
--------- ----- --------- -----
$ 284 $ 328 $ 251 $ 317
--------- ----- --------- -----
--------- ----- --------- -----
</TABLE>
Management believes that the deferred tax assets in the table above will
ultimately be realized. Management's conclusion is based primarily on its
expectation of future taxable income and the existence of sufficient taxable
income within the allowable carryback periods to realize the tax benefits of
deductible temporary differences recorded at December 31, 1993.
Deferred income taxes totaling $119 million and $96 million at December 31,
1993 and 1992, respectively, are included in other current assets. Noncurrent
deferred income taxes, included in deferred credits and other liabilities,
totaled $163 million and $162 million at December 31, 1993 and 1992,
respectively.
NOTE 8 -- PROFESSIONAL LIABILITY RISKS
Columbia insures a substantial portion of its professional liability risks
through a wholly owned insurance subsidiary. Provisions for such risks
underwritten by the subsidiary and deductibles at
F-19
<PAGE>
COLUMBIA HEALTHCARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 8 -- PROFESSIONAL LIABILITY RISKS (CONTINUED)
certain hospitals, including expenses incident to claim settlements, were $64
million for 1993 and $58 million for both 1992 and 1991. Amounts approximating
the provision for loss are funded annually.
Allowances for professional liability risks, included principally in
deferred credits and other liabilities, were $327 million and $290 million at
December 31, 1993 and 1992, respectively.
As discussed in Note 1, Columbia adopted the provisions of SFAS 115 on
December 31, 1993. Accordingly, common stockholders' equity was increased by $9
million (net of deferred income taxes) to reflect the net unrealized gain on
investments classified as available for sale. Prior to the adoption of SFAS 115,
debt securities were recorded at amortized cost (which approximated fair value),
while equity securities were recorded at the lower of aggregate cost or fair
value. The adoption of SFAS 115 had no effect on earnings in 1993.
The provisions of SFAS 115 require that investments in debt and equity
securities be classified according to the following criteria:
TRADING ACCOUNT -- Assets held for resale in anticipation of short-term
changes in market conditions are recorded at fair value and gains and losses,
both realized and unrealized, are included in income. Columbia does not maintain
a trading account portfolio.
HELD TO MATURITY -- Certain debt securities of Columbia's professional
liability insurance subsidiary are expected to be held to maturity as a result
of management's intent and ability to do so. These investments are carried at
amortized cost.
AVAILABLE FOR SALE -- Debt and equity securities not classified as either
trading securities or held to maturity are classified as available for sale and
recorded at fair value. Unrealized gains and losses are excluded from income and
recorded as a separate component of common stockholders' equity.
F-20
<PAGE>
COLUMBIA HEALTHCARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 8 -- PROFESSIONAL LIABILITY RISKS (CONTINUED)
The following is a summary of the insurance subsidiary's investments at
December 31, 1993 and 1992 (dollars in millions):
<TABLE>
<CAPTION>
DECEMBER 31, 1993
------------------------------------------
UNREALIZED AMOUNTS
-------------------- FAIR
COST GAINS LOSSES VALUE
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Held to maturity:
United States Government obligations.............................. $ 44 $ - $ - $ 44
--------- --------- --------- ---------
Available for sale:
Bonds:
United States Government........................................ 16 1 - 17
States and municipalities....................................... 143 4 - 147
Mortgage-backed securities...................................... 47 1 - 48
Corporate and other............................................. 23 1 - 24
Redeemable preferred stocks....................................... 17 1 - 18
--------- --------- --------- ---------
246 8 - 254
--------- --------- --------- ---------
Equity securities:
Adjustable rate preferred stocks................................ 13 1 - 14
Common stocks................................................... 59 6 (1) 64
--------- --------- --------- ---------
72 7 (1) 78
--------- --------- --------- ---------
$ 362 $ 15 $ (1) 376
--------- --------- ---------
--------- --------- ---------
Amounts classified as current assets................................ (58)
---------
Investment carrying value........................................... $ 318
---------
---------
</TABLE>
F-21
<PAGE>
COLUMBIA HEALTHCARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 8 -- PROFESSIONAL LIABILITY RISKS (CONTINUED)
<TABLE>
<CAPTION>
DECEMBER 31, 1992
------------------------------------------
UNREALIZED AMOUNTS
-------------------- FAIR
COST GAINS LOSSES VALUE
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Held to maturity:
United States Government obligations.............................. $ 19 $ - $ - $ 19
Certificates of deposit........................................... 20 - - 20
--------- --------- --------- ---------
39 - - 39
--------- --------- --------- ---------
Available for sale:
Bonds:
United States Government........................................ 22 1 - 23
States and municipalities....................................... 102 2 - 104
Mortgage-backed securities...................................... 55 - - 55
Corporate and other............................................. 25 2 - 27
Redeemable preferred stocks....................................... 18 - - 18
--------- --------- --------- ---------
222 5 - 227
--------- --------- --------- ---------
Equity securities:
Adjustable rate preferred stocks................................ 20 1 - 21
Common stocks................................................... 66 6 (4) 68
--------- --------- --------- ---------
86 7 (4) 89
--------- --------- --------- ---------
347 $ 12 $ (4) $ 355
--------- --------- ---------
--------- --------- ---------
Amounts classified as current assets................................ (45)
---------
Investment carrying value........................................... $ 302
---------
---------
</TABLE>
The cost and estimated fair value of debt and equity securities at December
31, 1993 by contractual maturity are shown below (dollars in millions). Expected
and contractual maturities will differ because the issuers of certain securities
may have the right to prepay or otherwise redeem such obligations without
penalty.
<TABLE>
<CAPTION>
FAIR
COST VALUE
----------- ---------
<S> <C> <C>
Held to maturity:
Due in one year or less......................................................... $ 44 $ 44
----- ---------
Available for sale:
Due in one year or less......................................................... 14 14
Due after one year through five years........................................... 45 47
Due after five years through ten years.......................................... 78 81
Due after ten years............................................................. 109 112
----- ---------
246 254
Equity securities............................................................... 72 78
----- ---------
318 332
----- ---------
$ 362 $ 376
----- ---------
----- ---------
</TABLE>
The fair value of the subsidiary's investments is based generally on quoted
market prices.
F-22
<PAGE>
COLUMBIA HEALTHCARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 8 -- PROFESSIONAL LIABILITY RISKS (CONTINUED)
The average life of the above investments (excluding common stocks)
approximated four years at December 31, 1993 and three years at December 31,
1992, and the tax equivalent yield on such investments averaged 9% for the last
three years. Tax equivalent yield is the rate earned on invested assets,
excluding unrealized gains and losses, adjusted for the benefit of nontaxable
investment income.
Sales of securities for the year ended December 31, 1993 are summarized
below (dollars in millions):
<TABLE>
<CAPTION>
TYPE OF SECURITY
------------------------
DEBT EQUITY
----------- -----------
<S> <C> <C>
Cash proceeds..................................................................... $ 70 $ 67
Gross realized gains.............................................................. 2 8
Gross realized losses............................................................. - 7
</TABLE>
NOTE 9 -- LONG-TERM DEBT
A summary of long-term debt at December 31 follows (dollars in millions):
<TABLE>
<CAPTION>
1993 1992
--------- ---------
<S> <C> <C>
Senior collateralized debt, 5% to 13.8% (rates generally fixed) payable in periodic
installments through 2034......................................................... $ 136 $ 338
6 1/8% Notes due 2000.............................................................. 149 -
7 1/2% Notes due 2023.............................................................. 147 -
10 7/8% Senior Subordinated Notes due 2002......................................... 2 99
11 1/2% Senior Subordinated Notes due 2002......................................... 1 134
Other senior debt, 8% to 13.3% (rates generally fixed) payable in periodic
installments through 1998......................................................... 194 132
Commercial paper (rates fixed under interest rate agreements averaging four years
at 7.9%).......................................................................... 380 380
Commercial paper (floating rates averaging 3.4%)................................... 495 153
Bank line of credit (floating rates averaging 3.6%)................................ 100 -
9% Subordinated Mandatory Convertible Note due 1999................................ 40 40
Other subordinated debt, 10% to 15% (rates generally fixed) payable
in periodic installments through 2000............................................. 7 12
--------- ---------
Total debt, average life of five years (rates averaging 5.3%)...................... 1,651 1,288
Amounts due within one year........................................................ 71 32
--------- ---------
Long-term debt..................................................................... $ 1,580 $ 1,256
--------- ---------
--------- ---------
</TABLE>
Borrowings under the commercial paper programs are classified as long-term
debt due to the credit available under the revolving credit agreements discussed
below and management's intention to refinance these borrowings on a long-term
basis.
Maturities of long-term debt (including maturities of short-term debt
supported by the revolving credit agreements) in years 1995 through 1998 are $73
million, $13 million, $32 million and $1.1 billion, respectively. Approximately
10% of Columbia's property and equipment is pledged on senior collateralized
debt.
During the past three years Columbia has reduced interest costs and
eliminated certain restrictive covenants by refinancing or prepaying high
interest rate debt, primarily through the use of
F-23
<PAGE>
COLUMBIA HEALTHCARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 9 -- LONG-TERM DEBT (CONTINUED)
existing cash and cash equivalents and issuance of long-term debt and commercial
paper. Amounts refinanced or prepaid totaled $787 million in 1993, $116 million
in 1992 and $275 million in 1991. After-tax losses from refinancing activities
in 1993 aggregated $70 million or $.46 per share.
In February 1994 Columbia entered into revolving credit agreements (the
"Credit Facilities") in the aggregate amount of $3 billion. The Credit
Facilities comprise a four-year $1 billion revolving credit agreement and a
364-day $2 billion revolving credit agreement. The Credit Facilities were
established to support Columbia's commercial paper programs and replace $3.2
billion of prior revolving credit agreements associated with HCA ($1.6 billion)
and Columbia ($1.6 billion). Interest is payable generally at either LIBOR plus
1/4% to 1/2% (depending on Columbia's credit rating), or the higher of prime,
the bank certificate of deposit rate plus 1% or the Federal Funds rate plus
1/2%.
In December 1993 Columbia issued $150 million of 6 1/8% Notes due 2000 and
$150 million of 7 1/2% Notes due 2023.
During 1992 Columbia sold $100 million face amount of 10 7/8% Senior
Subordinated Notes due 2002 and $135 million face amount of 11 1/2% Senior
Subordinated Notes due 2002. In September 1993 Columbia retired $232 million
face amount of these notes through the completion of a tender offer.
In connection with the acquisition of BAMI in 1992, Columbia assumed
approximately $140 million of long-term debt, including approximately $64
million of senior collateralized notes payable in quarterly installments through
1998 at interest rates ranging from 10.7% to 11.7%. In September 1993 Columbia
effected the defeasance of these notes.
In 1991 one of Columbia's partnerships issued $95 million of 11.45% Senior
Secured Notes due 2001. Proceeds from the issuance were used to repay $66
million of bank debt and finance expansion. These notes were retired in
connection with Columbia's refinancing of debt in September 1993. Columbia also
issued in 1991 a $40 million face amount 9% Subordinated Mandatory Convertible
Note due 1999. The note is convertible at the option of the holder into Columbia
common stock at a price of $18.50 per share (adjusted for stock splits,
recapitalizations and reorganizations). The note will be automatically converted
into common stock if the average per share market price for four months
preceding the July 1 anniversary exceeds a specified amount ranging from $27.00
in 1994 to $34.00 in 1996.
Columbia's credit facilities contain customary covenants which include (i)
limitations on additional debt, (ii) limitations on sales of assets, mergers and
changes of ownership and (iii) maintenance of certain interest coverage ratios.
The estimated fair value of Columbia's long-term debt was $1.7 billion and
$1.46 billion at December 31, 1993 and 1992, respectively, compared to carrying
amounts aggregating $1.65 billion and $1.29 billion. Certain subsidiaries of
Columbia have entered into agreements which reduce the impact of changes in
interest rates on $380 million of floating rate long-term debt. At December 31,
1993 and 1992, the fair value of Columbia's net payable position under these
agreements (included in the aggregate fair value amounts above) totaled $34
million and $29 million, respectively. The estimate of fair value is based upon
the quoted market prices for the same or similar issues of long-term debt, or on
rates available to Columbia as a result of the Galen Merger for debt of the same
remaining maturities.
As discussed in Note 4, in connection with the Spinoff, certain subsidiaries
issued notes payable ($250 million) and paid cash ($135 million financed
primarily through the issuance of commercial paper) to Humana in 1993. If the
Spinoff had occurred on December 31, 1992, Columbia's ratio of debt to debt plus
common stockholders' equity would have increased from 36% to 53%.
F-24
<PAGE>
COLUMBIA HEALTHCARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 10 -- LEASES
Columbia leases real estate and equipment under cancelable and
non-cancelable arrangements. Future minimum payments under non-cancelable
operating leases are as follows (dollars in millions):
<TABLE>
<S> <C>
1994......................................................................... $ 50
1995......................................................................... 43
1996......................................................................... 34
1997......................................................................... 31
1998......................................................................... 21
Thereafter................................................................... 127
</TABLE>
Rent expense aggregated $79 million, $82 million and $72 million for the
years ended December 31, 1993, 1992 and 1991, respectively.
NOTE 11 -- CONTINGENCIES
Management continually evaluates contingencies based upon the best available
evidence. In addition, allowances for loss are provided currently for disputed
items that have continuing significance, such as certain third-party
reimbursements and deductions that continue to be claimed in current cost
reports and tax returns.
Management believes that allowances for loss have been provided to the
extent necessary and that its assessment of contingencies is reasonable.
Management believes that resolution of contingencies will not materially affect
Columbia's financial position or results of operations.
Principal contingencies are described below:
REVENUES -- Certain third-party payments are subject to examination by
agencies administering the programs. Columbia is contesting certain issues
raised in audits of prior year cost reports.
PROFESSIONAL LIABILITY RISKS -- Columbia has provided for loss for
professional liability risks based upon actuarially determined estimates. Actual
settlements and expenses incident thereto may differ from the provisions for
loss.
INTEREST RATE AGREEMENTS -- Certain subsidiaries of Columbia are parties to
agreements which reduce the impact of changes in interest rates on its floating
rate long-term debt. In the event of nonperformance by other parties to these
agreements, Columbia may incur a loss on the difference between market rates and
contract rates.
INCOME TAXES -- Columbia is contesting adjustments proposed by the Internal
Revenue Service for years 1987 through 1989.
SPINOFF -- Certain subsidiaries of Columbia are parties to risk-sharing
arrangements with Humana.
LITIGATION -- Various suits and claims arising in the ordinary course of
business are pending against Columbia.
F-25
<PAGE>
COLUMBIA HEALTHCARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 12 -- CAPITAL STOCK
The following shares of common stock were reserved at December 31, 1993
(amounts in thousands):
<TABLE>
<S> <C>
Stock option plans......................................................... 4,139
Retirement and savings plans............................................... 5,285
Other...................................................................... 2,853
---------
12,277
---------
---------
</TABLE>
Columbia has plans under which options to purchase common stock may be
granted to officers, employees and directors. Options have been granted at not
less than market price on the date of grant. Exercise provisions vary, but most
options are exercisable in whole or in part beginning one to four years after
grant and ending four to ten years after grant. Activity in the plans is
summarized below (share amounts in thousands):
<TABLE>
<CAPTION>
SHARES
UNDER OPTION PRICE
OPTION PER SHARE
--------- --------------------
<S> <C> <C>
Balances, December 31, 1990............................................. 3,631 $7.21 to $37.00
Granted............................................................... 1,188 11.75 to 25.24
Exercised............................................................. (1,021) 7.21 to 23.37
Cancelled or lapsed................................................... (51) 8.50 to 37.00
---------
Balances, December 31, 1991............................................. 3,747 8.23 to 25.71
Granted............................................................... 758 15.00 to 22.62
Conversion of BAMI stock options...................................... 466 3.18 to 11.59
Exercised............................................................. (460) 3.18 to 17.25
Cancelled or lapsed................................................... (74) 8.50 to 23.37
---------
Balances, December 31, 1992............................................. 4,437 3.18 to 25.71
Granted............................................................... 982 19.50 to 33.38
Exercised............................................................. (1,835) 3.18 to 23.37
Cancelled or lapsed................................................... (152) 3.18 to 25.71
---------
Balances, December 31, 1993............................................. 3,432 $3.18 to $33.38
---------
---------
</TABLE>
At December 31, 1993, options for 2,028,900 shares were exercisable. Shares
of common stock available for future grants were 707,300 at December 31, 1993
and 2,721,000 at December 31, 1992.
In connection with the Galen Merger, Columbia redeemed certain preferred
stock purchase rights previously issued to Galen common stockholders. The cost
of this transaction was not significant. In addition, Columbia adopted a
stockholder rights plan (similar to that of Galen) upon consummation of the
Galen Merger under which common stockholders have the right to purchase Series A
Preferred Stock in the event of accumulation of or tender offer for certain
percentages of Columbia's common stock. The rights will expire in 2003 unless
redeemed earlier by Columbia.
In September 1993 the Board of Directors initiated a regular quarterly cash
dividend on common stock of $.03 per share.
In connection with the HCA Merger, Columbia stockholders voted to increase
the aggregate number of authorized voting shares of common stock from 400
million to 800 million, and the number of authorized nonvoting shares of common
stock was established at 25 million. In addition, authorized shares of preferred
stock (none of which are outstanding) were increased from 10 million to 25
million.
F-26
<PAGE>
COLUMBIA HEALTHCARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 13 -- EMPLOYEE BENEFIT PLANS
Certain subsidiaries of Columbia maintain a noncontributory defined
contribution retirement plan covering substantially all Columbia employees.
Benefits are determined as a percentage of a participant's earned income and are
vested annually. Retirement plan expense was $40 million for 1993, $37 million
for 1992 and $34 million for 1991. Amounts equal to retirement plan expense are
funded annually.
Columbia maintains various contributory savings plans which are available to
employees who meet certain minimum requirements. The plans require that Columbia
match an amount ranging from 50% to 60% of a participant's contribution up to
certain maximum levels. The cost of these plans totaled $20 million for 1993,
$19 million for 1992 and $15 million for 1991. Columbia contributions are funded
periodically during the year.
NOTE 14 -- ACCRUED EXPENSES
The following is a summary of other accrued expenses at December 31 (dollars
in millions):
<TABLE>
<CAPTION>
1993 1992
--------- ---------
<S> <C> <C>
Workers' compensation................................................................... $ 82 $ 70
Taxes other than income................................................................. 73 51
Professional liability risks............................................................ 54 45
Retirement plan......................................................................... 15 48
Dividends............................................................................... 5 36
Interest................................................................................ 33 37
Other................................................................................... 113 138
--------- ---------
$ 375 $ 425
--------- ---------
--------- ---------
</TABLE>
F-27
<PAGE>
COLUMBIA HEALTHCARE CORPORATION
QUARTERLY CONSOLIDATED FINANCIAL INFORMATION (UNAUDITED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
1993
--------------------------------------------------
FIRST SECOND THIRD FOURTH
---------- --------- --------- ----------
<S> <C> <C> <C> <C>
Revenues................................................... $1,329 $1,262 $1,238 $1,301
Net income (loss):
Continuing operations (a)................................ 90 70 (45 ) 78
Discontinued operations.................................. 16 - - -
Extraordinary loss on extinguishment of debt............. - - (70 ) -
Net income (loss).................................... 106 70 (115 ) 78
Per common share:
Earnings (loss):
Continuing operations (a).............................. .61 .46 (.31 ) .52
Discontinued operations................................ .10 - - -
Extraordinary loss on extinguishment of debt........... - - (.46 ) -
Net income (loss).................................... .71 .46 (.77 ) .52
Market prices (b):
High................................................... 24 1/2 27 3/4 31 33 7/8
Low.................................................... 16 1/4 19 1/4 25 3/8 27
</TABLE>
<TABLE>
<CAPTION>
1992
--------------------------------------------------------
FIRST SECOND THIRD FOURTH
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Revenues................................................... $ 1,227 $ 1,163 $ 1,182 $ 1,234
Net income (loss):
Continuing operations.................................... 97 73 (32 ) 73
Discontinued operations.................................. 3 (2 ) (132 ) 6
Change in accounting for income taxes.................... 51 - - -
Net income (loss) (c)................................ 151 71 (164 ) 79
Per common share:
Earnings (loss):
Continuing operations.................................. .69 .51 (.24 ) .49
Discontinued operations................................ .02 (.01 ) (.93 ) .05
Change in accounting for income taxes.................. .36 - - -
Net income (loss) (c)................................ 1.07 .50 (1.17 ) .54
Market prices (b):
High................................................... 21 1/4 22 19 1/4 21 3/4
Low.................................................... 16 1/2 16 1/4 16 1/4 13 3/4
<FN>
- ------------------------
(a) Third quarter loss includes $98 million ($.67 per share) of costs related
to the Galen Merger. See Note 5 of the Notes to Consolidated Financial
Statements.
(b) Represents high and low sales prices of CHC common stock for periods prior
to the Galen Merger. Columbia common stock is traded on the New York Stock
Exchange (ticker symbol -- COL).
(c) Third quarter net loss includes $221 million ($1.54 per share) related
primarily to the Spinoff, of which $86 million ($.60 per share) is
included in continuing operations and $135 million ($.94 per share) is
included in discontinued operations. See Note 5 of the Notes to
Consolidated Financial Statements.
</TABLE>
F-28
<PAGE>
COLUMBIA/HCA HEALTHCARE CORPORATION
INDEX TO SUPPLEMENTAL CONSOLIDATED FINANCIAL INFORMATION
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
Supplemental Selected Financial Data...................................................................... F-30
Supplemental Management's Discussion and Analysis of Financial Condition and Results of Operations........ F-31
Report of Independent Accountants......................................................................... F-37
Supplemental Consolidated Financial Statements:
Supplemental Consolidated Statement of Income for the years ended December 31, 1993, 1992 and 1991...... F-38
Supplemental Consolidated Balance Sheet, December 31, 1993 and 1992..................................... F-39
Supplemental Consolidated Statement of Common Stockholders' Equity for the years ended December 31,
1993, 1992 and 1991.................................................................................... F-40
Supplemental Consolidated Statement of Cash Flows for the years ended December 31, 1993, 1992 and
1991................................................................................................... F-41
Notes to Supplemental Consolidated Financial Statements................................................. F-42
Supplemental Quarterly Consolidated Financial Information (Unaudited)................................... F-60
</TABLE>
F-29
<PAGE>
COLUMBIA/HCA HEALTHCARE CORPORATION
SUPPLEMENTAL SELECTED FINANCIAL DATA
AS OF AND FOR THE YEARS ENDED DECEMBER 31
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
1993 1992 1991 1990 1989
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
SUMMARY OF OPERATIONS:
Revenues................................................................... $ 10,252 $ 9,932 $ 9,598 $ 8,641 $ 7,724
--------- --------- --------- --------- ---------
Salaries, wages and benefits............................................... 4,215 4,112 3,976 3,510 3,066
Supplies................................................................... 1,664 1,613 1,467 1,314 1,135
Other operating expenses................................................... 1,893 1,849 1,739 1,586 1,483
Provision for doubtful accounts............................................ 542 515 508 444 407
Depreciation and amortization.............................................. 554 541 524 499 468
Interest expense........................................................... 321 401 597 694 667
Investment income.......................................................... (66) (81) (64) (69) (103)
Non-recurring transactions................................................. 151 439 300 22 (10)
--------- --------- --------- --------- ---------
9,274 9,389 9,047 8,000 7,113
--------- --------- --------- --------- ---------
Income from continuing operations before minority interests and income
taxes..................................................................... 978 543 551 641 611
Minority interests in earnings of consolidated entities.................... 9 10 9 4 4
--------- --------- --------- --------- ---------
Income from continuing operations before income taxes...................... 969 533 542 637 607
Provision for income taxes................................................. 394 294 189 240 223
--------- --------- --------- --------- ---------
Income from continuing operations.......................................... 575 239 353 397 384
Discontinued operations:
Income (loss) from operations of discontinued health plan segment, net of
income tax (benefit).................................................... 16 (108) 16 (6) (18)
Costs associated with discontinuance of health plan segment, net of
income tax benefit...................................................... - (17) - - -
Extraordinary loss on extinguishment of debt, net of income tax
benefit................................................................. (84) - - - (9)
Cumulative effect on prior years of a change in accounting for income
taxes................................................................... - 51 - - -
--------- --------- --------- --------- ---------
Net income............................................................. $ 507 $ 165 $ 369 $ 391 $ 357
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Earnings per common and common equivalent share (a):
Income from continuing operations........................................ $ 1.70 $ .73 $ 1.20 $ 1.28
Discontinued operations:
Income (loss) from operations of discontinued health plan segment........ .04 (.33) .05 (.02)
Costs associated with discontinuance of health plan segment.............. - (.06) - -
Extraordinary loss on extinguishment of debt............................. (.24) - - -
Cumulative effect on prior years of a change in accounting for income
taxes................................................................... - .16 - -
--------- --------- --------- ---------
Net income............................................................. $ 1.50 $ .50 $ 1.25 $ 1.26
--------- --------- --------- ---------
--------- --------- --------- ---------
Shares used in earnings per common and common equivalent share computations
(in thousands)............................................................ 339,222 328,564 279,954 262,552
Net cash provided by continuing operations................................. $ 1,298 $ 1,287 $ 1,257 $ 1,191 $ 919
FINANCIAL POSITION:
Assets................................................................... $ 10,216 $ 10,347 $ 10,843 $ 10,391 $ 10,461
Working capital.......................................................... 573 606 635 482 379
Net assets of discontinued operations.................................... - 376 411 303 312
Long-term debt, including amounts due within one year.................... 3,698 3,656 5,158 5,139 6,022
Minority interests in equity of consolidated entities.................... 57 31 23 16 10
Common stockholders' equity.............................................. 3,471 3,691 2,822 2,099 1,585
OPERATING DATA (B):
Number of hospitals at end of period..................................... 193 200 219 221 218
Number of licensed beds at end of period................................. 42,237 42,245 43,231 42,789 42,433
Weighted average licensed beds........................................... 41,263 40,608 42,437 42,264 41,452
Average daily census..................................................... 18,702 19,253 21,255 21,351 21,155
Occupancy................................................................ 45% 47% 50% 51% 51%
Admissions............................................................... 1,158,400 1,161,100 1,189,700 1,174,700 1,139,300
Length of stay........................................................... 5.9 6.1 6.5 6.6 6.8
Emergency room visits.................................................... 3,139,700 3,042,900 3,028,600 2,894,800 2,756,900
Outpatient revenues as a percentage of patient revenues.................. 27% 26% 24% 22% 21%
<FN>
- ------------------------------
(a) Earnings per common and common equivalent share are not presented for
periods prior to the initial public offering of Columbia Hospital
Corporation common stock in May 1990. Earnings per common and common
equivalent share include the effect of preferred stock dividend
requrements totaling $18 million in 1991 and $63 million in 1990.
(b) Operating data for 1992 exclude the twenty-two divested psychiatric
hospitals discussed in Note 5 of the Notes to Supplemental Consolidated
Financial Statements.
</TABLE>
F-30
<PAGE>
COLUMBIA/HCA HEALTHCARE CORPORATION
SUPPLEMENTAL MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The accompanying Supplemental Selected Financial Data set forth certain
information with respect to the financial position, results of operations and
cash flows of Columbia/HCA which should be read in conjunction with the
following discussion and analysis.
BACKGROUND INFORMATION AND BUSINESS STRATEGY
HCA MERGER
As discussed in Notes 1 and 2 of the Notes to Supplemental Consolidated
Financial Statements of Columbia/HCA, on October 2, 1993, Columbia entered into
a definitive agreement to merge with HCA. This transaction was completed on
February 10, 1994 and will be accounted for as a pooling of interests.
Accordingly, the accompanying supplemental consolidated financial statements and
financial and operating data included in this supplemental discussion and
analysis give retroactive effect to the combined operations of Columbia and HCA
for all periods presented.
GALEN MERGER
The Galen Merger was completed on September 1, 1993 and was also accounted
for as a pooling of interests. Accordingly, the accompanying financial
statements and financial and operating data included in this supplemental
discussion and analysis give retroactive effect to the Galen Merger and include
the combined operations of CHC and Galen for all periods presented. In addition,
the historical financial information related to Galen (which prior to the Galen
Merger was reported on a fiscal year ending August 31) has been recast to
conform to Columbia/HCA's annual reporting period ending December 31.
SPINOFF TRANSACTION
Prior to the merger with CHC, Galen became a publicly held corporation as a
result of the Spinoff which was completed on March 1, 1993. The Spinoff
separated Humana's previously integrated hospital and managed care health plan
businesses and was effected through the distribution of Galen common stock to
then current Humana common stockholders on a one-for-one basis. For accounting
purposes, because of the relative significance of the hospital business, the
pre-Spinoff financial statements of Galen (and now those of Columbia/HCA)
include the separate results of Humana's hospital business, while the operating
results and net assets of Humana's managed care health plans have been
classified as discontinued operations.
BUSINESS STRATEGY
Columbia/HCA primarily operates hospitals and ancillary health care
facilities through either (i) wholly owned subsidiaries or (ii) ownership of
controlling interests in various partnerships in which subsidiaries of
Columbia/HCA serve as the managing general partner. Columbia/HCA's business
strategy centers on the development of comprehensive, integrated health care
delivery networks with physicians and other health care providers in targeted
markets, which typically involves significant health care facility acquisition
and consolidation activities.
During the past several years, hospital inpatient admission trends have been
adversely impacted by cost containment efforts initiated by federal and state
governments and various third-party payers, including HMOs, PPOs, commercial
insurance companies and employer-sponsored networks. In addition, a significant
number of medical procedures have shifted from inpatient to less expensive
outpatient settings as a result of both cost containment pressures and advances
in medical technology.
F-31
<PAGE>
In response to changes in the health care industry, Columbia/HCA has
developed the following operating strategy to provide the highest quality health
care services at the lowest possible cost:
BECOME A SIGNIFICANT PROVIDER OF SERVICES -- Columbia/HCA attempts to
(i) consolidate services to reduce costs and (ii) develop the geographic
coverage necessary for inclusion in most managed care and employer-sponsored
networks in each market.
PROVIDE A COMPREHENSIVE RANGE OF SERVICES -- In addition to the
operation of general, acute care hospitals, Columbia/HCA also operates
psychiatric and rehabilitation facilities, outpatient surgery and diagnostic
centers, home health agencies and other services. This strategy enables
Columbia/HCA to attract business from managed care plans and major employers
seeking efficient access to a wide array of health care services.
DELIVER HIGH QUALITY SERVICES -- Through the use of clinical
information systems, Columbia focuses on patient outcomes and strives to
continuously improve the quality of care and service provided to patients.
INTEGRATE FRAGMENTED DELIVERY SYSTEMS -- Through its networks,
Columbia/HCA focuses on coordinating pricing, contracting, information
systems and quality assurance activities among providers in each market.
Management intends to implement its strategy discussed above in a
substantial number of former Galen and HCA markets as well as new markets, and
further develop the integrated health care networks in its five pre-Galen Merger
markets.
RESULTS OF OPERATIONS
At the time of the HCA Merger, Columbia/HCA operated 195 hospitals (43,075
licensed beds) and certain ancillary health care facilities in forty major
markets located in twenty-six states and two foreign countries. Operating data
related to the pre-HCA Merger entities follows (dollars in millions):
<TABLE>
<CAPTION>
COLUMBIA HCA COMBINED
---------- ---------- -----------
<S> <C> <C> <C>
Revenues:
1993........................................................... $ 5,130 $ 5,122 $ 10,252
1992........................................................... 4,806 5,126 9,932
1991........................................................... 4,612 4,986 9,598
EBDITA (a):
1993........................................................... $ 907 $ 1,097 $ 2,004
1992........................................................... 870 1,054 1,924
1991........................................................... 928 1,044 1,972
Income from continuing operations (b):
1993........................................................... $ 291 $ 382 $ 673
1992........................................................... 297 300 597
1991........................................................... 358 156 514
Admissions (in thousands):
1993........................................................... 596.3 562.1 1,158.4
1992........................................................... 586.5 574.6 1,161.1
1991........................................................... 587.8 601.9 1,189.7
Emergency room visits (in thousands):
1993........................................................... 1,563.2 1,576.5 3,139.7
1992........................................................... 1,537.4 1,505.5 3,042.9
1991........................................................... 1,519.7 1,508.9 3,028.6
<FN>
- ------------------------
(a) Income from continuing operations before non-recurring transactions,
depreciation, interest, minority interests, income taxes and amortization.
(b) Excludes the after-tax effect of non-recurring transactions. See Note 5 of
the Notes to Supplemental Consolidated Financial Statements for a
description of these transactions.
</TABLE>
F-32
<PAGE>
Revenues increased 3% to $10.3 billion in 1993 and 3% to $9.9 billion in
1992. Increases in both periods resulted primarily from price increases,
acquisitions and growth in outpatient services.
During 1992 and 1993, Columbia/HCA completed numerous acquisitions and
divestitures of hospitals, most of which are discussed in Notes 5 and 6 of the
Notes to Supplemental Consolidated Financial Statements. The following table
summarizes percentage changes in same-hospital volumes for each respective
period of 1993 compared to the same period of 1992, and changes in same-hospital
volumes in each respective period of 1992 compared to the same period of 1991.
<TABLE>
<CAPTION>
1993 VS 1992 1992 VS 1991
-------------------------------- --------------------------------
COLUMBIA COLUMBIA
------------ ------------
CHC GALEN HCA COMBINED CHC GALEN HCA COMBINED
---- ------ ----- --------- ---- ------ ----- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
ADMISSIONS:
Quarter:
First................ 6.7 (2.1) (1.5) (1.5) 8.4 -- 3.5 2.1
Second............... 8.9 (1.3) (2.5) (1.6) 2.4 (4.8) 1.2 (1.5)
Third................ 5.9 (1.0) (3.0) (1.8) 4.6 (4.1) (0.4) (1.9)
Fourth............... 5.9 1.3 (0.4) 0.6 4.6 (3.6) (2.2) (2.6)
Year............... 6.8 (0.8) (1.8) (1.1) 5.0 (3.1) 0.6 (1.0)
EMERGENCY ROOM VISITS:
Quarter:
First................ 19.2 4.4 9.0 7.3 6.3 2.2 0.9 1.7
Second............... 11.7 (0.1) 4.2 2.6 8.0 (1.8) -- (0.5)
Third................ 5.8 (2.2) 1.9 0.3 16.5 0.2 7.0 4.0
Fourth............... 6.9 2.4 5.7 4.3 8.9 (2.2) (0.5) (1.0)
Year............... 10.6 1.1 5.1 3.6 9.1 (0.4) 1.8 1.0
</TABLE>
In addition to the above, same-hospital outpatient volumes for CHC
facilities increased 9.5% in 1993 and 39% in 1992, while such volumes for Galen
facilities declined 3.6% and 1.5%, respectively. Same-hospital outpatient
volumes for HCA (denominated differently than those of CHC and Galen) increased
9.6% in 1993 and 14.6% in 1992 compared to the respective prior year.
Since it began operations in 1988, CHC had experienced significant growth in
patient volumes, revenues and net income, primarily as a result of successful
implementation of its strategy.
The historical operating results of Galen's hospitals (which include the
hospital operations of Humana prior to the Spinoff) had been adversely impacted
as a result of such hospitals' pre-Spinoff relationship with Humana's managed
care health plan business in certain markets. Management believes that this
relationship caused some physicians to discontinue referrals of their patients
to the company's hospitals, and had precluded these hospitals from contracting
with unaffiliated insurers. In addition, Galen's volume of patients covered by
traditional insurance (who pay amounts which more closely approximate
established charges) declined significantly in 1992 due in part to increased
price consciousness of patients and physicians with respect to Galen's pricing
policies. Same-hospital volume trends at former Galen facilities have improved
in 1993 primarily as a result of increased volumes from discounted managed care
health plans other than Humana.
During 1993 HCA facilities experienced declines in inpatient admissions and
increases in outpatient volumes primarily as a result of the previously
discussed cost containment efforts and outpatient utilization trends. In
addition, volumes in HCA's psychiatric facilities had been adversely impacted in
both 1992 and 1993 as a result of negative publicity in the psychiatric hospital
industry.
Despite declines in same-hospital admissions and deterioration in payer mix,
EBDITA for Columbia/HCA increased 4% to $2 billion in 1993 from $1.9 billion in
1992. EBDITA margins improved slightly to 19.5% from 19.4% primarily as a result
of improvements in staffing levels and increased medical supply discounts.
Medicare admissions as a percentage of total admissions increased from 37% in
1992 to 39% in 1993, while discounted and managed care admissions grew from 32%
to 35%, respectively. EBDITA declined 3% in 1992 from 1991 due to a decline in
same-hospital admissions at former Galen facilities and deterioration in Galen's
payer mix.
F-33
<PAGE>
During the third quarter of 1993, Columbia/HCA recorded non-recurring
charges of $151 million ($98 million net of tax) of costs related to the Galen
Merger.
Results of operations in 1992 include (i) $394 million ($330 million net of
tax) of losses associated with divestitures of certain hospitals, (ii) $138
million ($86 million net of tax) of costs related primarily to the Spinoff and
(iii) a gain of $93 million ($58 million net of tax) on the sale of HealthTrust
common stock.
Income from continuing operations in 1991 includes (i) a charge of $413
million ($256 million net of tax) in connection with the acceleration of vesting
of stock options under the HCA Nonqualified Stock Option Plan and the
establishment of exercise prices at levels substantially less than the then fair
value of the underlying common stock, (ii) a charge of $159 million ($99 net of
tax) primarily in connection with the anticipated loss on the disposition of
certain hospitals and other assets, (iii) a gain of $51 million ($32 million net
of tax) on the sale of a hospital, and (iv) a gain of $221 million ($162 million
net of tax) on the sale of an investment in preferred stock and warrants of
HealthTrust.
See Note 5 of the Notes to Supplemental Consolidated Financial Statements
for a discussion of non-recurring transactions.
Excluding the effects of the non-recurring transactions, income from
continuing operations increased 13% to $673 million ($1.99 per share) in 1993
and 16% to $597 million ($1.82 per share) in 1992. Improvements in both years
resulted primarily from reductions in interest expense, and in 1993, growth in
EBDITA.
During the third quarter of 1993, in an effort to reduce future interest
expense and eliminate certain restrictive covenants, Columbia/HCA effected the
refinancing of $787 million of its long-term debt (bearing interest at an
average rate of 8.5%) primarily through the issuance of commercial paper, and
renegotiated HCA's bank credit agreement (subsequently replaced upon
consummation of the HCA Merger). After-tax losses from these refinancing
activities aggregated $84 million or $.24 per share.
DISCONTINUED OPERATIONS
Results of operations include income from discontinued operations of $16
million in 1993, a loss of $125 million in 1992 and income of $16 million in
1991. Losses from discontinued operations in 1992 include costs of $135 million
(net of tax) incurred by Humana in connection with the Spinoff.
LIQUIDITY
Cash provided by continuing operations totaled $1.3 billion in each of the
last three years. Cash flows in excess of Columbia/HCA's capital expenditure
program were used primarily to reduce long-term debt. Working capital totaled
$573 million at December 31, 1993 compared to $606 million at December 31, 1992.
Management believes that cash flows from operations and amounts available under
Columbia/HCA's revolving credit facilities and related commercial paper programs
are sufficient to meet expected future liquidity needs.
Investments of Columbia/HCA's professional liability insurance subsidiaries
to maintain statutory equity and pay claims totaled $778 million and $709
million at December 31, 1993 and 1992, respectively.
In September 1993 the Board of Directors initiated the payment of a regular
quarterly cash dividend of $.03 per common share. Management anticipates that
this dividend policy will continue after consummation of the HCA Merger.
CAPITAL RESOURCES
Excluding acquisitions, capital expenditures totaled $836 million in 1993
compared to $668 million in 1992 and $645 million in 1991. Planned capital
expenditures in 1994 (excluding acquisitions) are expected to approximate $800
million. Management believes that its capital expenditure program is adequate to
expand, improve and equip existing health care facilities.
F-34
<PAGE>
In addition, Columbia/HCA expended $79 million, $36 million and $96 million
for acquisitions during 1993, 1992 and 1991, respectively. See Note 6 of the
Notes to Supplemental Consolidated Financial Statements for a description of
these activities.
As part of its business strategy, Columbia/HCA intends to acquire additional
health care facilities in the future. Since December 31, 1993, Columbia/HCA has
expended $114 million toward the purchase of four hospitals (or a controlling
interest therein) containing 1,264 licensed beds. These transactions, which will
be accounted for by the purchase method, were financed through the use of
internally generated funds and issuance of long-term debt.
Columbia/HCA expects to finance all capital expenditures with internally
generated and borrowed funds. Available sources of capital include public or
private debt, commercial paper, unused bank revolving credits and equity. At
December 31, 1993, there were projects under construction which had an estimated
additional cost to complete of approximately $299 million.
In connection with the Spinoff, common stockholders' equity was reduced by
$802 million in 1993 as a result of the following transactions with Humana: (i)
distribution of the net assets of the health plan business ($392 million) and
the net assets of a hospital facility ($25 million), (ii) payment of cash ($135
million) and (iii) issuance of notes ($250 million). The notes were refinanced
in September 1993. Including the pro forma effect of the Spinoff, the ratio of
debt to debt plus common stockholders' equity improved from 58% at December 31,
1992 to 52% at December 31, 1993.
Upon consummation of the HCA Merger in February 1994, Columbia/HCA entered
into revolving credit agreements in the aggregate amount of $3 billion and
refinanced certain HCA and other long-term debt. The refinancings were effected
primarily through the issuance of commercial paper, $175 million of 6 1/2% Notes
due 1999 and $150 million of 7.15% Notes due 2004. Management anticipates that
losses resulting from these refinancing activities will reduce Columbia/HCA's
first quarter 1994 net income by approximately $80 million.
Columbia's credit facilities contain customary covenants which include (i)
limitations on additional debt, (ii) limitations on sales of assets, mergers and
changes of ownership and (iii) maintenance of certain interest coverage ratios.
Columbia/HCA was in compliance with all such covenants at December 31, 1993.
EFFECTS OF INFLATION AND CHANGING PRICES
Various federal, state and local laws have been enacted that, in certain
cases, limit Columbia/ HCA's ability to increase prices. Revenues for hospital
services rendered to Medicare patients are established under the federal
government's prospective payment system. Medicare revenues approximated 34%, 30%
and 29% of revenues in 1993, 1992 and 1991, respectively.
Management believes that hospital operating margins have been, and may
continue to be, under significant pressure because of deterioration in inpatient
volumes and payer mix, and growth in operating expenses in excess of the
increase in prospective payments under the Medicare program. Columbia expects
that the average rate of increase in Medicare prospective payments will
approximate 2% in 1994. In addition, as a result of increasing regulatory and
competitive pressures, Columbia/HCA's ability to maintain operating margins
through price increases to non-Medicare patients is limited.
HEALTH CARE REFORM
In recent years, an increasing number of legislative proposals have been
introduced or proposed in Congress and some state legislatures that would
significantly affect health care systems in Columbia/HCA's markets. Proposals
under consideration include cost controls on hospitals, insurance market reforms
that increase the availability of group health insurance to small businesses,
requirements that all businesses offer health insurance to their employees and
creation of a single government health insurance plan that would cover all
citizens.
F-35
<PAGE>
President Clinton's health care reform bill, introduced as legislation in
November 1993, includes certain measures that could significantly reduce future
payments to providers of health care services.
OTHER INFORMATION
As discussed in Note 7 of the Notes to Supplemental Consolidated Financial
Statements, Columbia/HCA is contesting certain income taxes and related interest
aggregating $1.3 billion at December 31, 1993 proposed by the Internal Revenue
Service (the "Service") for prior years. Management believes that final
resolution of these disputes will not have a material adverse effect on the
financial position, results of operations or liquidity of Columbia/HCA. However,
if all or a majority of the positions of the Service are upheld, the financial
position, results of operations and liquidity of Columbia/HCA would be
materially adversely affected.
On March 24, 1994, Columbia/HCA made an advance payment to the IRS of
approximately $75 million in connection with certain disputed prior year income
taxes and related interest. This transaction will not have a material effect on
1994 earnings.
Resolution of various other loss contingencies, including litigation pending
against Columbia/ HCA in the ordinary course of business, is not expected to
have a material adverse effect on its financial position or results of
operations.
During 1992 Columbia/HCA adopted the provisions of Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes," which increased
last year's first quarter net income by $51 million or $.16 per share. See Note
7 of the Notes to Supplemental Consolidated Financial Statements.
Columbia/HCA expects to incur certain expenses related to the HCA Merger,
the amounts of which have not been determined. These costs will include, among
other things, amounts for investment advisory and professional fees, expenses of
printing and distributing proxy materials, severance payments and provisions for
loss related to the consolidation of the operations of Columbia and HCA.
Management anticipates that these expenses will be recorded in the first quarter
of 1994.
F-36
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders
Columbia/HCA Healthcare Corporation
We have audited the supplemental consolidated financial statements of
Columbia/HCA Healthcare Corporation listed in the index on page F-29 of the
Appendix to the accompanying Proxy Statement. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
The supplemental consolidated financial statements give retroactive effect
to the merger of Columbia Healthcare Corporation and HCA -- Hospital Corporation
of America on February 10, 1994, which will be accounted for as a pooling of
interests as described in Notes 1 and 2 to the supplemental consolidated
financial statements. Generally accepted accounting principles proscribe giving
effect to a consummated business combination accounted for by the pooling of
interests method in financial statements that do not include the date of
consummation. These financial statements do not extend through the date of
consummation; however, they will become the historical consolidated financial
statements of Columbia/HCA Healthcare Corporation after financial statements
covering the date of consummation of the merger are issued.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Columbia/HCA
Healthcare Corporation as of December 31, 1993 and 1992, and the consolidated
results of operations and cash flows for each of the three years in the period
ended December 31, 1993 in conformity with generally accepted accounting
principles applicable after financial statements are issued for the period which
includes the date of consummation of the merger.
As discussed in Note 7 to the supplemental consolidated financial
statements, effective January 1, 1992, the Company adopted the provisions of
Statement of Financial Accounting Standards No. 109, "Accounting for Income
Taxes."
COOPERS & LYBRAND
Louisville, Kentucky
February 28, 1994,
except for Note 15,
as to which the date
is March 24, 1994
F-37
<PAGE>
COLUMBIA/HCA HEALTHCARE CORPORATION
SUPPLEMENTAL CONSOLIDATED STATEMENT OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 1993, 1992 AND 1991
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
1993 1992 1991
--------- --------- ---------
<S> <C> <C> <C>
Revenues.......................................................................... $ 10,252 $ 9,932 $ 9,598
--------- --------- ---------
Salaries, wages and benefits...................................................... 4,215 4,112 3,976
Supplies.......................................................................... 1,664 1,613 1,467
Other operating expenses.......................................................... 1,893 1,849 1,739
Provision for doubtful accounts................................................... 542 515 508
Depreciation and amortization..................................................... 554 541 524
Interest expense.................................................................. 321 401 597
Investment income................................................................. (66) (81) (64)
Non-recurring transactions........................................................ 151 439 300
--------- --------- ---------
9,274 9,389 9,047
--------- --------- ---------
Income from continuing operations before minority interests and income taxes...... 978 543 551
Minority interests in earnings of consolidated entities........................... 9 10 9
--------- --------- ---------
Income from continuing operations before income taxes............................. 969 533 542
Provision for income taxes........................................................ 394 294 189
--------- --------- ---------
Income from continuing operations................................................. 575 239 353
Discontinued operations:
Income (loss) from operations of discontinued health plan segment, net of income
tax (benefit) of $9 in 1993, ($46) in 1992 and $9 in 1991...................... 16 (108) 16
Costs associated with discontinuance of health plan segment, net
of income tax benefit of $2.................................................... - (17) -
Extraordinary loss on extinguishment of debt, net of income tax benefit of $51.... (84) - -
Cumulative effect on prior years of a change in accounting for income taxes....... - 51 -
--------- --------- ---------
Net income.................................................................... $ 507 $ 165 $ 369
--------- --------- ---------
--------- --------- ---------
Earnings per common and common equivalent share:
Income from continuing operations............................................... $ 1.70 $ .73 $ 1.20
Discontinued operations:
Income (loss) from operations of discontinued health plan segment............. .04 (.33) .05
Costs associated with discontinuance of health plan segment................... - (.06) -
Extraordinary loss on extinguishment of debt.................................... (.24) - -
Cumulative effect on prior years of a change in accounting for income taxes..... - .16 -
--------- --------- ---------
Net income.................................................................. $ 1.50 $ .50 $ 1.25
--------- --------- ---------
--------- --------- ---------
</TABLE>
The accompanying notes are an integral part of
the supplemental consolidated financial statements.
F-38
<PAGE>
COLUMBIA/HCA HEALTHCARE CORPORATION
SUPPLEMENTAL CONSOLIDATED BALANCE SHEET
DECEMBER 31, 1993 AND 1992
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
ASSETS
<TABLE>
<CAPTION>
1993 1992
--------- ---------
<S> <C> <C>
Current assets:
Cash and cash equivalents...................................................................... $ 224 $ 217
Accounts receivable less allowance for loss of $513 -- 1993 and $475 -- 1992................... 1,566 1,624
Inventories.................................................................................... 245 238
Other.......................................................................................... 453 496
--------- ---------
2,488 2,575
Property and equipment, at cost:
Land........................................................................................... 568 553
Buildings...................................................................................... 4,049 3,741
Equipment...................................................................................... 3,442 3,133
Construction in progress (estimated cost to complete and equip after December 31, 1993 --
$299)......................................................................................... 333 258
--------- ---------
8,392 7,685
Accumulated depreciation....................................................................... (2,792) (2,437)
--------- ---------
5,600 5,248
Net assets of discontinued operations............................................................ - 376
Investments of professional liability insurance subsidiaries..................................... 700 644
Intangible assets net of accumulated amortization of $178 -- 1993
and $233 -- 1992................................................................................ 1,232 1,247
Other............................................................................................ 196 257
--------- ---------
$ 10,216 $ 10,347
--------- ---------
--------- ---------
LIABILITIES AND COMMON STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable............................................................................... $ 445 $ 410
Salaries, wages and other compensation......................................................... 232 211
Other accrued expenses......................................................................... 853 903
Income taxes................................................................................... 22 92
Long-term debt due within one year............................................................. 363 353
--------- ---------
1,915 1,969
Long-term debt................................................................................... 3,335 3,303
Deferred credits and other liabilities........................................................... 1,438 1,353
Minority interests in equity of consolidated entities............................................ 57 31
Contingencies
Common stockholders' equity:
Common stock $.01 par; authorized 800,000,000 voting shares and 25,000,000 nonvoting shares;
issued and outstanding 317,686,800 voting shares and 18,990,000 nonvoting shares -- 1993 and
308,252,100 voting shares and 23,421,700 nonvoting shares -- 1992............................. 3 3
Capital in excess of par value................................................................. 2,164 2,070
Other.......................................................................................... 59 69
Retained earnings.............................................................................. 1,245 1,549
--------- ---------
3,471 3,691
--------- ---------
$ 10,216 $ 10,347
--------- ---------
--------- ---------
</TABLE>
The accompanying notes are an integral part of
the supplemental consolidated financial statements.
F-39
<PAGE>
COLUMBIA/HCA HEALTHCARE CORPORATION
SUPPLEMENTAL CONSOLIDATED STATEMENT OF COMMON STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1993, 1992 AND 1991
(DOLLARS IN MILLIONS)
<TABLE>
<CAPTION>
COMMON STOCK
-------------- CAPITAL IN
SHARES PAR EXCESS OF RETAINED
(000) VALUE PAR VALUE OTHER EARNINGS TOTAL
------- ----- ---------- ----- -------- ------
<S> <C> <C> <C> <C> <C> <C>
Balances, December 31, 1990......................... 255,276 $ 3 $ 734 $ 48 $ 1,314 $2,099
Net income........................................ 369 369
Cash dividends (Galen Health Care, Inc.).......... (138) (138)
Paid-in-kind dividend on cumulative exchangeable
preferred stock.................................. (18) (18)
Issuance of common stock.......................... 4,310 61 61
Stock options exercised and related tax benefits,
net of 224,000 shares tendered in partial payment
therefor......................................... 797 24 24
Accumulated credit under stock option contract.... 413 413
Other............................................. 24 2 10 12
------- ----- ---------- ----- -------- ------
Balances, December 31, 1991......................... 260,407 3 821 471 1,527 2,822
Net income........................................ 165 165
Cash dividends (Galen Health Care, Inc.).......... (143) (143)
Issuance of common stock.......................... 48,282 916 916
Stock options exercised and related tax benefits,
net of 30,000 shares tendered in partial payment
therefor......................................... 22,967 331 (386) (55)
Other............................................. 18 2 (16) (14)
------- ----- ---------- ----- -------- ------
Balances, December 31, 1992......................... 331,674 3 2,070 69 1,549 3,691
Net income........................................ 507 507
Cash dividends (Columbia Healthcare
Corporation)..................................... (9) (9)
Stock options exercised and related tax benefits,
net of 81,000 shares tendered in partial payment
therefor......................................... 4,000 71 (35) 36
Spinoff transaction with Humana Inc.:
Cash payment to Humana Inc...................... (135) (135)
Noncash transactions:
Issuance of notes payable..................... (250) (250)
Distribution of net investment in discontinued
health plan operations....................... (392) (392)
Transfer of a hospital facility............... (25) (25)
Net unrealized gains on investment securities..... 27 27
Other............................................. 1,003 23 (2) 21
------- ----- ---------- ----- -------- ------
Balances, December 31, 1993......................... 336,677 $ 3 $ 2,164 $ 59 $ 1,245 $3,471
------- ----- ---------- ----- -------- ------
------- ----- ---------- ----- -------- ------
</TABLE>
The accompanying notes are an integral part of
the supplemental consolidated financial statements.
F-40
<PAGE>
COLUMBIA/HCA HEALTHCARE CORPORATION
SUPPLEMENTAL CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1993, 1992 AND 1991
(DOLLARS IN MILLIONS)
<TABLE>
<CAPTION>
1993 1992 1991
--------- --------- ---------
<S> <C> <C> <C>
Cash flows from continuing operations:
Net income........................................................................ $ 507 $ 165 $ 369
Adjustments to reconcile net income to net cash provided by operating activities:
Discontinued operations......................................................... (16) 127 (16)
Minority interests in earnings of consolidated entities......................... 9 10 9
Non-recurring transactions...................................................... 151 439 300
Depreciation and amortization................................................... 554 541 524
Amortization of debt discounts and loan costs................................... 45 78 116
Noncash interest on exchange debentures......................................... - 4 57
Deferred income taxes........................................................... (28) 34 (210)
Change in operating assets and liabilities:
(Increase) decrease in accounts receivable.................................... 19 98 (53)
Increase in inventories and other assets...................................... (7) (58) (42)
Increase (decrease) in income taxes........................................... 19 (160) 53
Increase (decrease) in other liabilities...................................... (87) 83 164
Change in accounting for income taxes........................................... - (51) -
Extraordinary loss on extinguishment of debt.................................... 135 - -
Other........................................................................... (3) (23) (14)
--------- --------- ---------
Net cash provided by continuing operations.................................... 1,298 1,287 1,257
--------- --------- ---------
Cash flows from investing activities:
Purchase of property and equipment................................................ (836) (668) (645)
Acquisition of hospitals and health care facilities............................... (79) (36) (96)
Sale of assets.................................................................... 191 225 860
Investment in discontinued operations............................................. - (71) (76)
Change in investments............................................................. 21 (35) (33)
Other............................................................................. (34) (8) (25)
--------- --------- ---------
Net cash used in investing activities......................................... (737) (593) (15)
--------- --------- ---------
Cash flows from financing activities:
Issuance of long-term debt........................................................ 1,586 240 216
Net change in commercial paper borrowings and lines of credit..................... 342 (176) 124
Repayment of long-term debt....................................................... (2,325) (1,799) (890)
Payment to Humana Inc. in spinoff transaction..................................... (135) - -
Payment of cash dividends......................................................... (40) (143) (134)
Issuance of common stock.......................................................... 43 741 71
Other............................................................................. (25) (15) (6)
--------- --------- ---------
Net cash used in financing activities......................................... (554) (1,152) (619)
--------- --------- ---------
Change in cash and cash equivalents................................................. 7 (458) 623
Cash and cash equivalents at beginning of period.................................... 217 675 52
--------- --------- ---------
Cash and cash equivalents at end of period.......................................... $ 224 $ 217 $ 675
--------- --------- ---------
--------- --------- ---------
Interest payments................................................................... $ 278 $ 319 $ 469
Income tax payments, net of refunds................................................. 347 360 385
</TABLE>
The accompanying notes are an integral part of
the supplemental consolidated financial statements.
F-41
<PAGE>
COLUMBIA/HCA HEALTHCARE CORPORATION
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 -- ACCOUNTING POLICIES
Columbia/HCA Healthcare Corporation ("Columbia/HCA") is a Delaware
corporation which began operations on February 10, 1994 as a result of a merger
involving Columbia Healthcare Corporation ("Columbia") and HCA -- Hospital
Corporation of America ("HCA") (the "HCA Merger"). See Note 2 for a description
of the specific terms of the HCA Merger.
Prior to the HCA Merger, Columbia began operations on September 1, 1993 as a
result of a merger involving Columbia Hospital Corporation ("CHC") and Galen
Health Care, Inc. ("Galen") (the "Galen Merger"). See Note 3 for a description
of the specific terms of the Galen Merger.
Columbia/HCA primarily operates hospitals and ancillary health care
facilities through either (i) wholly owned subsidiaries or (ii) ownership of
controlling interests in various partnerships in which subsidiaries of
Columbia/HCA serve as the managing general partner.
BASIS OF PRESENTATION
The supplemental consolidated financial statements include substantially all
subsidiaries and partnerships controlled by Columbia/HCA as the managing general
partner. Significant intercompany transactions have been eliminated.
The HCA Merger and the Galen Merger have been accounted for by the
pooling-of-interests method. Accordingly, the supplemental consolidated
financial statements included herein give retroactive effect to these
transactions and include the combined operations of CHC, Galen and HCA for all
periods presented. In addition, the historical financial information related to
Galen (which prior to the Galen Merger was reported on a fiscal year ending
August 31) has been recast to conform to Columbia's annual reporting period
ending December 31.
Generally accepted accounting principles proscribe giving effect to a
consummated business combination accounted for by the pooling-of-interests
method in financial statements that do not include the date of consummation.
These financial statements do not extend through the date of consummation of the
HCA Merger; however, they will become the historical consolidated financial
statements of Columbia/HCA after the financial statements including the date of
consummation of the HCA Merger are issued.
REVENUES
Columbia/HCA's health care facilities have entered into agreements with
third-party payers, including government programs and managed care health plans,
under which Columbia/HCA is paid based upon established charges, cost of
providing services, predetermined rates by diagnosis, fixed per diem rates or
discounts from established charges.
Revenues are recorded at estimated amounts due from patients and third-party
payers for health care services provided, including anticipated settlements
under reimbursement agreements with third-party payers.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents include highly liquid investments with an original
maturity of three months or less. Carrying values of cash and cash equivalents
approximate fair value due to the short-term nature of these instruments.
ACCOUNTS RECEIVABLE
Accounts receivable consist primarily of amounts due from the Medicare and
Medicaid programs, other government programs, managed care health plans,
commercial insurance companies and individual patients.
F-42
<PAGE>
COLUMBIA/HCA HEALTHCARE CORPORATION
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 1 -- ACCOUNTING POLICIES (CONTINUED)
INVENTORIES
Inventories are stated at the lower of cost (first-in, first-out) or market.
PROPERTY AND EQUIPMENT
Depreciation expense, computed by the straight-line method, was $504 million
in 1993, $493 million in 1992 and $478 million in 1991. Columbia/HCA uses
component depreciation for buildings. Depreciation rates for buildings are
equivalent to useful lives ranging generally from 20 to 25 years. Estimated
useful lives of equipment vary generally from 3 to 10 years.
INVESTMENTS
On December 31, 1993, Columbia/HCA adopted the provisions of Statement of
Financial Accounting Standards No. 115, "Accounting for Certain Investments in
Debt and Equity Securities" ("SFAS 115"), which requires that investments in
debt and equity securities be classified according to certain criteria.
INTANGIBLE ASSETS
Intangible assets consist primarily of costs in excess of the fair value of
identifiable net assets of acquired entities and are amortized using the
straight-line method over periods ranging from 10 to 40 years. Noncompete and
debt issuance costs are amortized based upon the lives of the respective
contracts or loans.
PROFESSIONAL LIABILITY INSURANCE CLAIMS
Provisions for loss for professional liability risks are based upon
actuarially determined estimates. To the extent that subsequent claims
information varies from management's estimates, earnings are charged or
credited.
MINORITY INTERESTS IN CONSOLIDATED ENTITIES
The supplemental consolidated financial statements include all assets,
liabilities and earnings of Columbia/HCA's partnerships, certain partnership
interests of which are not owned by Columbia/ HCA. Accordingly, management has
recorded minority interests in the earnings and equity of such partnerships.
EARNINGS PER COMMON AND COMMON EQUIVALENT SHARE
Earnings per common and common equivalent share are based upon the weighted
average number of common shares outstanding adjusted for the dilutive effect of
common stock equivalents consisting primarily of stock options. The computation
also gives retroactive effect to the exchange of common shares in connection
with the HCA Merger.
F-43
<PAGE>
COLUMBIA/HCA HEALTHCARE CORPORATION
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 1 -- ACCOUNTING POLICIES (CONTINUED)
The following is a summary of shares used in the computation of earnings per
common and common equivalent share (amounts in thousands):
<TABLE>
<CAPTION>
1993 1992 1991
--------- --------- ---------
<S> <C> <C> <C>
Columbia:
Weighted average shares outstanding................................ 150,017 144,897 138,936
Common stock equivalents........................................... 966 718 750
--------- --------- ---------
Columbia common and common equivalent shares....................... 150,983 145,615 139,686
--------- --------- ---------
HCA:
Weighted average shares outstanding................................ 175,374 149,547 113,480
Common stock equivalents........................................... 3,901 24,690 20,109
--------- --------- ---------
HCA common and common equivalent shares............................ 179,275 174,237 133,589
Merger exchange ratio.............................................. 1.05 1.05 1.05
--------- --------- ---------
Adjusted HCA common and common equivalent shares................... 188,239 182,949 140,268
--------- --------- ---------
Shares used in computation of earnings per common and common
equivalent share.................................................. 339,222 328,564 279,954
--------- --------- ---------
--------- --------- ---------
</TABLE>
Fully diluted earnings per common and common equivalent share is not
presented because it approximates earnings per common and common equivalent
share.
NOTE 2 -- HCA MERGER
On October 2, 1993, Columbia entered into a definitive agreement to merge
with HCA. This transaction was completed on February 10, 1994. In connection
with the HCA Merger, Columbia stockholders approved an amendment to Columbia's
Certificate of Incorporation changing the name of the corporation to
Columbia/HCA Healthcare Corporation. HCA was then merged into a wholly owned
subsidiary of Columbia/HCA. Shares of HCA Class A voting common stock and Class
B nonvoting common stock were converted on a tax-free basis into approximately
166,846,000 shares of Columbia/HCA voting common stock and approximately
18,990,000 shares of Columbia/HCA nonvoting common stock, respectively (an
exchange ratio of 1.05 shares of Columbia/HCA common stock for each share of HCA
voting and nonvoting common stock).
F-44
<PAGE>
COLUMBIA/HCA HEALTHCARE CORPORATION
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 2 -- HCA MERGER (CONTINUED)
The HCA Merger has been accounted for as a pooling of interests, and
accordingly, the supplemental consolidated financial statements give retroactive
effect to the combined operations of Columbia and HCA for all periods presented.
The following is a summary of the results of operations of the separate entities
for periods prior to the HCA Merger (dollars in millions):
<TABLE>
<CAPTION>
COLUMBIA HCA COMBINED
----------- --------- ---------
<S> <C> <C> <C>
1993:
Revenues............................................................. $ 5,130 $ 5,122 $ 10,252
Income from continuing operations.................................... 193 382 575
Net income........................................................... 139 368 507
1992:
Revenues............................................................. $ 4,806 $ 5,126 $ 9,932
Income from continuing operations.................................... 211 28 239
Net income........................................................... 137 28 165
1991:
Revenues............................................................. $ 4,612 $ 4,986 $ 9,598
Income (loss) from continuing operations............................. 358 (5) 353
Net income (loss).................................................... 374 (5) 369
</TABLE>
NOTE 3 -- GALEN MERGER
On August 31, 1993, the stockholders of both CHC and Galen approved the
Galen Merger, effective as of September 1, 1993. In connection with the Galen
Merger, CHC, a Nevada corporation, was merged into Columbia. Each CHC share of
common stock was converted on a tax-free basis into one share of Columbia common
stock. Immediately subsequent thereto, a wholly owned subsidiary of Columbia was
merged into Galen, at which time Galen became a wholly owned subsidiary of
Columbia. In connection with this transaction, Columbia issued approximately
123,830,000 shares of common stock in a tax-free exchange for all of the
outstanding common shares of Galen (an exchange ratio of 0.775 of a share of
Columbia common stock for each share of Galen common stock).
The Galen Merger has been accounted for as a pooling of interests, and
accordingly, the supplemental consolidated financial statements give retroactive
effect to the combined operations of CHC and Galen for all periods presented.
The following is a summary of the results of operations of the separate entities
for periods prior to the Galen Merger (dollars in millions):
<TABLE>
<CAPTION>
CHC GALEN COMBINED
--------- --------- -----------
<S> <C> <C> <C>
Eight months ended August 31, 1993 (unaudited):
Revenues................................................................ $ 823 $ 2,600 $ 3,423
Income from continuing operations....................................... 17 176 193
Net income.............................................................. 17 192 209
1992:
Revenues................................................................ $ 819 $ 3,987 $ 4,806
Income from continuing operations....................................... 26 185 211
Net income.............................................................. 26 111 137
1991:
Revenues................................................................ $ 499 $ 4,113 $ 4,612
Income from continuing operations....................................... 15 343 358
Net income.............................................................. 15 359 374
</TABLE>
F-45
<PAGE>
COLUMBIA/HCA HEALTHCARE CORPORATION
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 4 -- SPINOFF TRANSACTION AND DISCONTINUED OPERATIONS
Prior to the Galen Merger, Galen began operating its hospital business as an
independent publicly held corporation on March 1, 1993 as a result of a tax-free
spinoff transaction (the "Spinoff") by Humana Inc. ("Humana"), which retained
its managed care health plan business. The Spinoff separated Humana's previously
integrated hospital and managed care health plan businesses and was effected
through the distribution of Galen common stock to then current Humana common
stockholders on a one-for-one basis.
For accounting purposes, because of the relative significance of the
hospital business, the pre-Spinoff consolidated financial statements of Galen
(and now those of Columbia/HCA) include the separate results of Humana's
hospital business, while the operations and net assets of Humana's managed care
health plans have been classified as discontinued operations.
In connection with the Spinoff, Galen entered into various agreements with
Humana which were intended to facilitate orderly changes for both the hospital
and managed care health plan businesses in a way which would be minimally
disruptive to each entity. Principal contracts are summarized below:
OPERATIONS -- Certain former Galen hospitals will provide medical services
to insureds of Humana for three years subsequent to the Spinoff. The contract
includes, among other things, established payment rates for various inpatient
and outpatient services and annual increases therein, and hospital utilization
guarantees and related penalties.
LIABILITIES AND INDEMNIFICATION -- Each entity assumed liability for
specified claims. The entities will also share risks with respect to certain
litigation and other contingencies, both identified and unknown.
INCOME TAXES -- Each entity entered into risk-sharing arrangements in
connection with the ultimate resolution of various income tax disputes.
FINANCING -- In January 1993 certain subsidiaries issued $250 million of
notes payable to Humana, and paid to Humana $135 million in cash on March 1,
1993 which was financed principally through the issuance of commercial paper.
The $250 million of notes were repaid in September 1993 in connection with the
refinancing of certain long-term debt.
ADMINISTRATION -- These arrangements relate to leasing of certain
administrative facilities, division of information systems, employee benefit and
stock option plans, and various administrative service arrangements.
Revenues of the discontinued managed care health plan business (included in
discontinued operations in the accompanying supplemental consolidated statement
of income) were $523 million in 1993, $2.9 billion in 1992 and $2.5 billion in
1991.
F-46
<PAGE>
COLUMBIA/HCA HEALTHCARE CORPORATION
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 5 -- NON-RECURRING TRANSACTIONS
1993
In September 1993 the following charges were recorded in connection with the
Galen Merger (dollars in millions):
<TABLE>
<S> <C>
Investment advisory and professional fees, and employee benefit plan
costs............................................................... $ 62
Writedown of assets in connection with the consolidation of the
combined entity's operations........................................ 63
Administrative facility asset writedowns and conversion costs
associated with the transaction..................................... 16
Provision for loss on planned sales of assets........................ 10
---------
$ 151
---------
---------
</TABLE>
1992
In September 1992 a pretax charge of $394 million was recorded in connection
with the planned divestiture of twenty-two psychiatric hospitals and the
unrelated sale of two other facilities. The charge included the writedown to
estimated net realizable value of the hospitals to be sold, a $231 million
writeoff of permanently impaired cost in excess of net assets acquired, and the
costs associated with the replacement of certain credit agreements.
Income from continuing operations in 1992 also includes a gain of $93
million on the sale of an investment in common stock of HealthTrust, Inc. -- The
Hospital Company ("HealthTrust").
Income from continuing operations in 1992 includes $138 million of charges
incurred primarily in connection with the Spinoff, including a provision for
loss on the planned sale of hospitals, writedowns of assets in markets with
significant declines in operations, administrative facility asset writedowns and
certain other costs associated with the separation of the hospital and health
plan businesses. Costs aggregating $171 million (before income taxes) incurred
by Humana primarily in connection with the Spinoff are included in discontinued
operations in 1992.
1991
Income from continuing operations in 1991 includes (i) a charge of $413
million in connection with the acceleration of vesting of stock options under
the HCA Nonqualified Stock Option Plan and the establishment of exercise prices
at levels substantially less than the then fair value of the underlying common
stock, (ii) a charge of $159 million primarily in connection with the
anticipated loss on the disposition of certain hospitals and other assets, (iii)
a gain of $51 million on the sale of a hospital, and (iv) a gain of $221 million
on the sale of an investment in preferred stock and warrants of HealthTrust.
NOTE 6 -- OTHER BUSINESS COMBINATIONS
During the past three years, Columbia/HCA has acquired various hospitals and
related ancillary health care facilities (or controlling interests in such
facilities), all of which have been accounted for by the purchase method.
Accordingly, the aggregate purchase price of these transactions has been
allocated to tangible and identifiable intangible assets acquired and
liabilities assumed based upon their respective fair values. The supplemental
consolidated financial statements include the operations of acquired entities
since the respective acquisition dates.
F-47
<PAGE>
COLUMBIA/HCA HEALTHCARE CORPORATION
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 6 -- OTHER BUSINESS COMBINATIONS (CONTINUED)
The following is a summary of acquisitions consummated during the last three
years (dollars in millions):
<TABLE>
<CAPTION>
1993 1992 1991
--------- --------- ---------
<S> <C> <C> <C>
Number of hospitals........................................................ 3 15 2
Number of licensed beds.................................................... 903 2,345 1,420
Purchase price information:
Fair value of assets acquired............................................ $ 164 $ 490 $ 165
Liabilities assumed...................................................... (76) (279) (48)
--------- --------- ---------
Net assets acquired.................................................... 88 211 117
--------- --------- ---------
Issuance of common stock................................................. - 119 1
Cash acquired............................................................ 9 15 15
Cash received from sale of certain acquired assets....................... - 40 -
Other.................................................................... - 1 5
--------- --------- ---------
9 175 21
--------- --------- ---------
Net cash paid for acquisitions......................................... $ 79 $ 36 $ 96
--------- --------- ---------
--------- --------- ---------
</TABLE>
In July 1992 Columbia/HCA acquired Basic American Medical, Inc. ("BAMI")
(included in the table above) through a merger into a wholly owned subsidiary.
The assets of BAMI included eight hospitals containing 1,203 licensed beds and
certain other health care businesses. The transaction was financed through the
assumption of approximately $140 million of long-term debt, issuance of
6,995,000 shares of common stock and payment of $38 million in cash to BAMI
stockholders.
The purchase price paid in excess of the fair value of identifiable net
assets of acquired entities aggregated $7 million in 1993, $97 million in 1992
and $19 million in 1991.
The pro forma effect of these acquisitions on Columbia/HCA's results of
operations was not significant.
NOTE 7 -- INCOME TAXES
Provision for income taxes consists of the following (dollars in millions):
<TABLE>
<CAPTION>
1993 1992 1991
--------- --------- ---------
<S> <C> <C> <C>
Current:
Federal..................................................................... $ 357 $ 232 $ 375
State....................................................................... 69 34 64
--------- --------- ---------
426 266 439
--------- --------- ---------
Deferred:
Federal..................................................................... (36) 22 (218)
State....................................................................... 4 6 (32)
--------- --------- ---------
(32) 28 (250)
--------- --------- ---------
$ 394 $ 294 $ 189
--------- --------- ---------
--------- --------- ---------
</TABLE>
F-48
<PAGE>
COLUMBIA/HCA HEALTHCARE CORPORATION
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 7 -- INCOME TAXES (CONTINUED)
Reconciliation of federal statutory rate to effective income tax rate
follows:
<TABLE>
<CAPTION>
1993 1992 1991
--------- --------- ---------
<S> <C> <C> <C>
Federal statutory rate..................................................... 35.0% 34.0% 34.0%
State income taxes, net of federal income tax benefit...................... 4.6 4.4 2.9
Gain on sale of HealthTrust investments.................................... - - (3.5)
Merger costs............................................................... 0.6 - -
Costs in excess of net assets acquired..................................... 1.2 16.6 2.3
Tax exempt investment income............................................... (0.9) (1.7) (1.5)
Other items, net........................................................... 0.1 1.8 0.7
--- --- ---
Effective income tax rate.................................................. 40.6% 55.1% 34.9%
--- --- ---
--- --- ---
</TABLE>
In August 1993 Congress enacted the Omnibus Budget Reconciliation Act of
1993 which included, among other things, an increase in corporate income tax
rates retroactive to January 1, 1993. This legislation had no material effect on
1993 net income.
Columbia/HCA adopted the provisions of Statement of Financial Accounting
Standards No. 109, "Accounting for Income Taxes" ("SFAS 109"), as of January 1,
1992, the effect of which increased 1992 net income by $51 million. The
provisions of SFAS 109 require, among other things, recognition of deferred
income taxes using statutory rates at which temporary differences in the tax and
book bases of assets and liabilities are expected to affect taxable income in
future years.
A summary of deferred income taxes by source included in the consolidated
balance sheet at December 31, 1993 and 1992 follows (dollars in millions):
<TABLE>
<CAPTION>
1993 1992
---------------------- ----------------------
ASSETS LIABILITIES ASSETS LIABILITIES
--------- ----------- --------- -----------
<S> <C> <C> <C> <C>
Depreciation................................................ $ - $ 766 $ - $ 748
Long-term debt.............................................. - 26 - 71
Professional liability risk................................. 329 - 336 -
Doubtful accounts........................................... 91 - 85 -
Property losses............................................. 87 - 111 -
Cash basis.................................................. - 60 - 89
Compensation................................................ 24 - 18 -
Capitalized leases.......................................... 11 - 12 -
Other....................................................... 215 167 202 106
--------- ----------- --------- -----------
$ 757 $ 1,019 $ 764 $ 1,014
--------- ----------- --------- -----------
--------- ----------- --------- -----------
</TABLE>
Management believes that the deferred tax assets in the table above will
ultimately be realized. Management's conclusion is based primarily on its
expectation of future taxable income and the existence of sufficient taxable
income within the allowable carryback periods to realize the tax benefits of
deductible temporary differences recorded at December 31, 1993.
Deferred income taxes totaling $295 million and $257 million at December 31,
1993 and 1992, respectively, are included in other current assets. Noncurrent
deferred income taxes, included in deferred credits and other liabilities,
totaled $557 million and $507 million at December 31, 1993 and 1992,
respectively.
The Internal Revenue Service (the "Service") has issued statutory notices of
deficiency in connection with its examinations of HCA's federal income tax
returns for 1981 through 1988. Columbia/HCA is currently contesting these
claimed deficiencies in the United States Tax Court. In addition, the
F-49
<PAGE>
COLUMBIA/HCA HEALTHCARE CORPORATION
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 7 -- INCOME TAXES (CONTINUED)
Service has proposed certain adjustments in connection with its examinations of
HCA's 1989 and 1990 federal income tax returns. The following is a discussion of
the disputed items with respect to these years.
METHOD OF ACCOUNTING
For years 1981 through 1986, most of HCA's hospital subsidiaries (the
"Subsidiaries") reported taxable income primarily using the cash method of
accounting. This method was prevalent within the hospital industry and the
Subsidiaries applied the method in accordance with prior agreements with the
Service. The Service now asserts that the accrual method of accounting should
have been used by the Subsidiaries. The Tax Reform Act of 1986 (the "1986 Act")
requires the use of the accrual method of accounting beginning in 1987.
Consequently, the Subsidiaries changed to the accrual method beginning January
1, 1987. In accordance with the provisions of the 1986 Act, income that had been
deferred at the end of 1986 is being recognized as taxable income by the
Subsidiaries in equal annual installments over ten years. If the Service should
ultimately prevail in its claim that the Subsidiaries should have used the
accrual method for 1981 through 1986, the claim would be reduced to the extent
that HCA has recognized as taxable income a portion of such deferred income
taxes since 1986. In addition, the sale by HCA of numerous Subsidiaries in 1987
that had been using the cash method resulted in the recognition of a substantial
gain that would not have been recognized had the Subsidiaries been using the
accrual method. If the Service were successful with respect to this issue,
Columbia/HCA would owe an additional $110 million in income taxes and $432
million in interest as of December 31, 1993.
HOSPITAL ACQUISITIONS
In connection with hospitals acquired by HCA in 1981 and 1985, the Service
has asserted that a portion of the costs allocated to identifiable assets with
ascertainable useful lives should be reclassified as nondeductible goodwill. If
the Service ultimately prevails in this regard, Columbia/HCA would owe an
additional $113 million in income taxes and $139 million in interest as of
December 31, 1993.
INSURANCE SUBSIDIARY
Based on a Sixth Circuit Court of Appeals decision (the Court having
jurisdiction over the HCA issues), HCA has claimed that insurance premiums paid
to its wholly owned insurance subsidiary ("Parthenon") are deductible, while the
Service asserts that such premiums are not deductible and that corresponding
losses are only deductible at the time and to the extent that claims are
actually paid. HCA has claimed the additional deductions in its Tax Court
petitions. Through December 31, 1993, Columbia/HCA is seeking a refund totaling
$51 million in income taxes and $93 million in interest in connection with this
issue.
As an alternative to its position, HCA has asserted that in connection with
the sale of hospitals to HealthTrust in 1987, premiums paid to Parthenon by the
sold hospitals, if not deductible as discussed above, became deductible at the
time of the sale. Accordingly, HCA claimed such deduction in its 1987 federal
income tax return. The Service has disallowed the deduction and is claiming an
additional $5 million in income taxes and $15 million in interest. A final
determination that the premiums are not deductible either when paid to Parthenon
or upon the sale of certain hospitals to HealthTrust would increase the taxable
basis in the hospitals sold, thereby reducing HCA's gain realized on the sale.
HEALTHTRUST SALE
In connection with its sale of certain Subsidiaries to HealthTrust in 1987
in exchange for cash, HealthTrust preferred stock and stock purchase warrants,
HCA calculated its gain based on the valuation of such stock and warrants by an
independent appraiser. The Service claims a higher
F-50
<PAGE>
COLUMBIA/HCA HEALTHCARE CORPORATION
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 7 -- INCOME TAXES (CONTINUED)
aggregate valuation, based on the face amount of the preferred stock and a
separate appraisal HealthTrust obtained for the stock purchase warrants.
Application of the higher valuation would increase the gain recognized by HCA on
the sale. However, if the Service succeeds in its assertion, HCA's tax basis in
its HealthTrust preferred stock and warrants will be increased accordingly,
thereby substantially reducing the tax from the sale of such preferred stock and
warrants by a corresponding amount. By December 31, 1992, HCA had sold its
entire interest in the HealthTrust preferred stock and warrants. Including the
effect of the sales of these securities, the Service is claiming additional
interest of $64 million through December 31, 1993.
Also in connection with the 1987 sale of certain Subsidiaries to
HealthTrust, the Service claims that HCA's basis in the stock of the
Subsidiaries sold to HealthTrust should be calculated by adjusting such basis to
reflect accelerated rather than straight-line depreciation, which would reduce
HCA's basis in the stock sold and increase the taxable gain on the sale. The
Service position is contrary to a Tax Court decision in a similar case. The
Service is claiming additional income taxes of $79 million and interest of $66
million through December 31, 1993.
In connection with the 1987 HealthTrust transactions, the Service further
asserts that, to the extent the Subsidiaries were properly on the cash method
through 1986, and therefore properly recognizing taxable income over the
ten-year transition period, HCA should have additional income in 1987 equal to
the unamortized portion of the deferred income. It is HCA's position that no
additional income need be included in 1987 and that the deferred income
continues to qualify for the ten-year transition period after the sale. Should
the Service prevail, Columbia/HCA would owe $11 million of additional income
taxes and $17 million of interest through December 31, 1993. The position of the
Service is an alternative to its denial of the use of the cash method of
accounting previously discussed.
DOUBTFUL ACCOUNTS
The Service is asserting that in 1986 HCA was not entitled to include
charity care writeoffs in the formula used to calculate its deduction for
doubtful accounts. For years 1987 and 1988, the Service is asserting that HCA
was not entitled to exclude from income amounts which are unlikely to be
collected. Management believes that such exclusions are permissible under an
accrual method of accounting, and because HCA is a "service business" and not a
"merchandising business," it is entitled to a special exclusion provided to
service businesses by the 1986 Act. The Service disagrees, asserting that HCA is
engaged, at least in part, in a merchandising business. Notwithstanding this
assertion, the Service contends that the exclusion taken by HCA is excessive
under applicable Temporary Treasury Regulations. Columbia/HCA believes that the
calculation of the exclusion is inaccurate since it does not permit the
exclusion in accordance with the controlling statute. If the Service prevails,
Columbia/HCA would owe additional income taxes of $102 million and interest of
$48 million through December 31, 1993.
LEVERAGED BUY-OUT EXPENSES
The Service has asserted that no deduction is allowed for various expenses
incurred in connection with HCA's leveraged buy-out transaction in 1989,
including the amortization of loan costs incurred to borrow funds to acquire the
stock of the former shareholders, certain fees incurred by the Special Committee
of HCA's Board of Directors to evaluate the buy-out proposal, compensation
payments to cancel employee stock plans, and various other costs incurred after
the buy-out which have been treated as part of the transaction by the Service.
Columbia/HCA believes that all of these costs are deductible. If the Service
prevails on these issues, Columbia/HCA would owe income taxes of $94 million and
interest of $24 million through December 31, 1993.
F-51
<PAGE>
COLUMBIA/HCA HEALTHCARE CORPORATION
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 7 -- INCOME TAXES (CONTINUED)
OTHER ISSUES
Additional federal income tax issues primarily concern disputes over the
depreciable lives utilized by HCA for constructed hospital facilities,
investment tax credits, vacation pay deductions and income from foreign
operations. Many of these items, including depreciation, investment tax credits
and foreign issues, have been resolved favorably in previous settlements. The
Service is claiming an additional $44 million in income taxes and $28 million in
interest through December 31, 1993 with respect to these issues.
Management believes that HCA had properly reported its income and paid its
taxes in accordance with applicable laws and agreements established with the
Service 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 Columbia/HCA.
NOTE 8 -- PROFESSIONAL LIABILITY RISKS
Columbia/HCA insures a substantial portion of its professional liability
risks through wholly owned insurance subsidiaries. Provisions for such risks
underwritten by the subsidiaries and deductibles at certain hospitals, including
expenses incident to claim settlements, were $96 million for 1993, $102 million
for 1992 and $111 million for 1991. Amounts funded to the insurance subsidiaries
were $62 million for 1993, $55 million for 1992 and $56 million for 1991.
Allowances for professional liability risks, included principally in
deferred credits and other liabilities, were $817 million and $791 million at
December 31, 1993 and 1992, respectively.
As discussed in Note 1, Columbia/HCA adopted the provisions of SFAS 115 on
December 31, 1993. Accordingly, common stockholders' equity was increased by $27
million (net of deferred income taxes) to reflect the net unrealized gain on
investments classified as available for sale. Prior to the adoption of SFAS 115,
debt securities were recorded at amortized cost (which approximated fair value),
while equity securities were recorded at the lower of aggregate cost or fair
value. The adoption of SFAS 115 had no effect on earnings in 1993.
The provisions of SFAS 115 require that investments in debt and equity
securities be classified according to the following criteria:
TRADING ACCOUNT -- Assets held for resale in anticipation of short-term
changes in market conditions are recorded at fair value and gains and losses,
both realized and unrealized, are included in income. Columbia/HCA does not
maintain a trading account portfolio.
HELD TO MATURITY -- Certain debt securities of Columbia/HCA's professional
liability insurance subsidiaries are expected to be held to maturity as a result
of management's intent and ability to do so. These investments are carried at
amortized cost.
AVAILABLE FOR SALE -- Debt and equity securities not classified as either
trading securities or held to maturity are classified as available for sale and
recorded at fair value. Unrealized gains and losses are excluded from income and
recorded as a separate component of common stockholders' equity.
F-52
<PAGE>
COLUMBIA/HCA HEALTHCARE CORPORATION
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 8 -- PROFESSIONAL LIABILITY RISKS (CONTINUED)
The following is a summary of the insurance subsidiaries' investments at
December 31, 1993 and 1992 (dollars in millions):
<TABLE>
<CAPTION>
DECEMBER 31, 1993
----------------------------
UNREALIZED
AMOUNTS
-------------- FAIR
COST GAINS LOSSES VALUE
---- ----- ------- -----
<S> <C> <C> <C> <C>
Held to maturity:
United States Government obligations................................. $ 44 $ - $ - $ 44
---- ----- ------- -----
Available for sale:
Bonds:
United States Government........................................... 19 1 - 20
States and municipalities.......................................... 372 16 - 388
Mortgage-backed securities......................................... 54 1 - 55
Corporate and other................................................ 51 2 (1) 52
Money market funds................................................... 31 - - 31
Redeemable preferred stocks.......................................... 17 1 - 18
---- ----- ------- -----
544 21 (1) 564
---- ----- ------- -----
Equity securities:
Adjustable rate preferred stocks................................... 13 1 - 14
Common stocks...................................................... 133 27 (4) 156
---- ----- ------- -----
146 28 (4) 170
---- ----- ------- -----
$734 $ 49 $ (5) 778
---- ----- -------
---- ----- -------
Amounts classified as current assets................................... (78)
-----
Investment carrying value.............................................. $ 700
-----
-----
</TABLE>
F-53
<PAGE>
COLUMBIA/HCA HEALTHCARE CORPORATION
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 8 -- PROFESSIONAL LIABILITY RISKS (CONTINUED)
<TABLE>
<CAPTION>
DECEMBER 31, 1992
----------------------------
UNREALIZED
AMOUNTS
--------------
FAIR
COST GAINS LOSSES VALUE
---- ----- ------- -----
<S> <C> <C> <C> <C>
Held to maturity:
United States Government obligations................................. $ 19 $ - $ - $ 19
Certificates of deposit.............................................. 20 - - 20
---- ----- ------- -----
39 - - 39
---- ----- ------- -----
Available for sale:
Bonds:
United States Government........................................... 22 1 - 23
States and municipalities.......................................... 312 9 - 321
Mortgage-backed securities......................................... 55 - - 55
Corporate and other................................................ 39 2 - 41
Money market funds................................................... 68 - - 68
Redeemable preferred stocks.......................................... 18 - - 18
---- ----- ------- -----
514 12 - 526
---- ----- ------- -----
Equity securities:
Adjustable rate preferred stocks................................... 20 1 - 21
Common stocks...................................................... 136 21 (9) 148
---- ----- ------- -----
156 22 (9) 169
---- ----- ------- -----
709 $ 34 $ (9) $ 734
----- ------- -----
----- ------- -----
Amounts classified as current assets................................... (65)
----
Investment carrying value.............................................. $644
----
----
</TABLE>
The cost and estimated fair value of debt and equity securities at December
31, 1993 by contractual maturity are shown below (dollars in millions). Expected
and contractual maturities will differ because the issuers of certain securities
may have the right to prepay or otherwise redeem such obligations without
penalty.
<TABLE>
<CAPTION>
FAIR
COST VALUE
--------- ---------
<S> <C> <C>
Held to maturity:
Due in one year or less..................................................... $ 44 $ 44
--------- ---------
Available for sale:
Due in one year or less..................................................... 34 34
Due after one year through five years....................................... 134 136
Due after five years through ten years...................................... 131 137
Due after ten years......................................................... 245 257
--------- ---------
544 564
Equity securities........................................................... 146 170
--------- ---------
690 734
--------- ---------
$ 734 $ 778
--------- ---------
--------- ---------
</TABLE>
The fair value of the subsidiaries' investments is based generally on quoted
market prices.
F-54
<PAGE>
COLUMBIA/HCA HEALTHCARE CORPORATION
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 8 -- PROFESSIONAL LIABILITY RISKS (CONTINUED)
The average life of the above investments (excluding common stocks)
approximated five years at December 31, 1993 and four years at December 31,
1992, and the tax equivalent yield on such investments averaged 10% for the last
three years. Tax equivalent yield is the rate earned on invested assets,
excluding unrealized gains and losses, adjusted for the benefit of nontaxable
investment income.
Sales of securities for the year ended December 31, 1993 are summarized
below (dollars in millions):
<TABLE>
<CAPTION>
TYPE OF SECURITY
----------------------
DEBT EQUITY
--------- -----------
<S> <C> <C>
Cash proceeds....................................................................... $ 185 $ 106
Gross realized gains................................................................ 4 19
Gross realized losses............................................................... - 10
</TABLE>
NOTE 9 -- LONG-TERM DEBT
A summary of long-term debt at December 31 follows (dollars in millions):
<TABLE>
<CAPTION>
1993 1992
--------- ---------
<S> <C> <C>
Senior collateralized debt, 5% to 13.8% (rates generally fixed) payable in periodic
installments through 2034......................................................... $ 211 $ 401
Senior debt, 8% to 13.3% (rates generally fixed) payable in periodic installments
through 2023...................................................................... 1,158 1,166
Fixed rate note agreement (13% rate)............................................... 100 100
Commercial paper (rates fixed under interest rate agreements averaging four years
at 7.9%).......................................................................... 380 380
Commercial paper (floating rates averaging 3.4%)................................... 495 153
Bank credit agreement (floating rates averaging 4.4%).............................. 1,172 1,067
Bank line of credit (floating rates averaging 3.6%)................................ 100 -
Subordinated credit agreement (floating rates averaging 5.9%)...................... - 300
Subordinated debt, 8.5% to 15% (rates generally fixed) payable in periodic
installments through 2008......................................................... 82 89
--------- ---------
Total debt, average life of six years (rates averaging 6.7%)....................... 3,698 3,656
Amounts due within one year........................................................ 363 353
--------- ---------
Long-term debt..................................................................... $ 3,335 $ 3,303
--------- ---------
--------- ---------
</TABLE>
Borrowings under the commercial paper programs are classified as long-term
debt due to the credit available under the revolving credit agreements discussed
below and management's intention to refinance these borrowings on a long-term
basis.
Maturities of long-term debt in years 1995 through 1998 are $1.1 billion,
$161 million, $64 million and $1.1 billion, respectively. Such amounts reflect
maturities of debt issued for refinancings through March 24, 1994 and, as to
short-term debt classified as long-term, are based upon maturities of the
revolving credit agreements. Approximately 8% of Columbia/HCA's property and
equipment is pledged on senior collateralized debt.
During the past three years Columbia/HCA has reduced interest costs and
eliminated certain restrictive covenants by refinancing or prepaying high
interest rate debt, primarily through the use of existing cash and cash
equivalents and issuance of long-term debt, commercial paper and equity. Amounts
refinanced or prepaid totaled $787 million in 1993, $1 billion in 1992 and $275
million in 1991. After-tax losses from refinancing activities in 1993 aggregated
$84 million or $.24 per share.
F-55
<PAGE>
COLUMBIA/HCA HEALTHCARE CORPORATION
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 9 -- LONG-TERM DEBT (CONTINUED)
In February 1994 Columbia/HCA entered into revolving credit agreements (the
"Credit Facilities") in the aggregate amount of $3 billion. The Credit
Facilities comprise a four-year $1 billion revolving credit agreement and a
364-day $2 billion revolving credit agreement. The Credit Facilities were
established to support Columbia/HCA's commercial paper programs and replace $3.2
billion of prior revolving credit agreements associated with HCA ($1.6 billion)
and Columbia ($1.6 billion). Interest is payable generally at either LIBOR plus
1/4% to 1/2% (depending on Columbia/HCA's credit rating), or the higher of
prime, the bank certificate of deposit rate plus 1% or the Federal Funds rate
plus 1/2%.
In December 1993 Columbia/HCA issued $150 million of 6 1/8% Notes due 2000
and $150 million of 7 1/2% Notes due 2023.
During 1992 Columbia/HCA sold $100 million face amount of 10 7/8% Senior
Subordinated Notes due 2002 and $135 million face amount of 11 1/2% Senior
Subordinated Notes due 2002. In September 1993 $232 million face amount of these
notes were retired through the completion of a tender offer.
Proceeds from the public offering of 41,055,000 shares of voting common
stock in 1992 were used to repay $352 million of debt outstanding under a bank
credit agreement and redeem the 15 3/4% Subordinated Discount Debentures and
related interest aggregating $444 million.
In connection with the acquisition of BAMI in 1992, Columbia/HCA assumed
approximately $140 million of long-term debt, including approximately $64
million of senior collateralized notes payable in quarterly installments through
1998 at interest rates ranging from 10.7% to 11.7%. In September 1993
Columbia/HCA effected the defeasance of these notes.
In 1991 one of Columbia/HCA's partnerships issued $95 million of 11.45%
Senior Secured Notes due 2001. Proceeds from the issuance were used to repay $66
million of bank debt and finance expansion. These notes were retired in
connection with the refinancing of debt in September 1993. Columbia/HCA also
issued in 1991 a $40 million face amount 9% Subordinated Mandatory Convertible
Note due 1999. The note is convertible at the option of the holder into
Columbia/HCA voting common stock at a price of $18.50 per share (adjusted for
stock splits, recapitalizations and reorganizations). The note will be
automatically converted into common stock if the average per share market price
for four months preceding the July 1 anniversary exceeds a specified amount
ranging from $27.00 in 1994 to $34.00 in 1996.
In 1991 Columbia/HCA exchanged its Cumulative Exchangeable Preferred Stock
for 17 1/2% Junior Subordinated Exchangeable Debentures due 2005. These
debentures were redeemed in 1992 from proceeds on the 1991 sale of HealthTrust
preferred stock and warrants.
Columbia/HCA's credit facilities contain customary covenants which include
(i) limitations on additional debt, (ii) limitations on sales of assets, mergers
and changes of ownership and (iii) maintenance of certain interest coverage
ratios.
The estimated fair value of Columbia/HCA's long-term debt was $4.1 billion
at both December 31, 1993 and 1992, compared to carrying amounts aggregating
$3.7 billion at the end of each year. Certain subsidiaries of Columbia/HCA have
entered into agreements which reduce the impact of changes in interest rates on
$380 million of floating rate long-term debt. At December 31, 1993 and 1992, the
fair value of Columbia/HCA's net payable position under these agreements
(included in the aggregate fair value amounts above) totaled $34 million and $29
million, respectively. The estimate of fair value is based upon the quoted
market prices for the same or similar issues of long-term debt, or on rates
available to Columbia/HCA as a result of the HCA Merger for debt of the same
remaining maturities.
F-56
<PAGE>
COLUMBIA/HCA HEALTHCARE CORPORATION
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 9 -- LONG-TERM DEBT (CONTINUED)
As discussed in Note 4, in connection with the Spinoff, certain subsidiaries
issued notes payable ($250 million) and paid cash ($135 million financed
primarily through the issuance of commercial paper) to Humana in 1993. If the
Spinoff had occurred on December 31, 1992, Columbia/HCA's ratio of debt to debt
plus common stockholders' equity would have increased from 50% to 58%.
NOTE 10 -- LEASES
Columbia/HCA leases real estate and equipment under cancelable and
non-cancelable arrangements. Future minimum payments under non-cancelable
operating leases are as follows (dollars in millions):
<TABLE>
<S> <C>
1994................................................................. $ 123
1995................................................................. 102
1996................................................................. 78
1997................................................................. 63
1998................................................................. 43
Thereafter........................................................... 242
</TABLE>
Rent expense aggregated $196 million, $190 million and $170 million for the
years ended December 31, 1993, 1992 and 1991, respectively.
NOTE 11 -- CONTINGENCIES
Management continually evaluates contingencies based upon the best available
evidence. In addition, allowances for loss are provided currently for disputed
items that have continuing significance, such as certain third-party
reimbursements and deductions that continue to be claimed in current cost
reports and tax returns.
Management believes that allowances for loss have been provided to the
extent necessary and that its assessment of contingencies is reasonable.
Management believes that resolution of contingencies will not materially affect
Columbia/HCA's financial position or results of operations.
Principal contingencies are described below:
REVENUES -- Certain third-party payments are subject to examination by
agencies administering the programs. Columbia/HCA is contesting certain
issues raised in audits of prior year cost reports.
PROFESSIONAL LIABILITY RISKS -- Columbia/HCA has provided for loss for
professional liability risks based upon actuarially determined estimates.
Actual settlements and expenses incident thereto may differ from the
provisions for loss.
INTEREST RATE AGREEMENTS -- Certain subsidiaries of Columbia/HCA are
parties to agreements which reduce the impact of changes in interest rates
on its floating rate long-term debt. In the event of nonperformance by other
parties to these agreements, Columbia/HCA may incur a loss on the difference
between market rates and contract rates.
INCOME TAXES -- Columbia/HCA is contesting adjustments proposed by the
IRS.
SPINOFF -- Certain subsidiaries of Columbia/HCA are parties to
risk-sharing arrangements with Humana.
REGULATORY REVIEW -- Federal regulators are investigating certain
financial arrangements with physicians at two psychiatric hospitals.
LITIGATION -- Various suits and claims arising in the ordinary course of
business are pending against Columbia/HCA.
F-57
<PAGE>
COLUMBIA/HCA HEALTHCARE CORPORATION
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 12 -- CAPITAL STOCK
The terms and conditions associated with each class of Columbia/HCA common
stock are substantially identical except for voting rights. All nonvoting common
stockholders may convert their shares on a one-for-one basis into voting common
stock, subject to certain limitations. In addition, certain voting common
stockholders may convert their shares on a one-for-one basis into nonvoting
common stock.
The following shares of common stock were reserved at December 31, 1993
(amounts in thousands):
<TABLE>
<S> <C>
Stock option plans......................................................... 20,118
Retirement and savings plans............................................... 8,887
Other...................................................................... 2,853
---------
31,858
---------
---------
</TABLE>
Columbia/HCA has plans under which options to purchase common stock may be
granted to officers, employees and directors. Except for those discussed in Note
5, options have been granted at not less than market price on the date of grant.
Exercise provisions vary, but most options are exercisable in whole or in part
beginning one to four years after grant and ending four to fifteen years after
grant. Activity in the plans is summarized below (share amounts in thousands):
<TABLE>
<CAPTION>
SHARES
UNDER OPTION PRICE
OPTION PER SHARE
--------- ------------------
<S> <C> <C>
Balances, December 31, 1990.......................................... 37,163 $ 0.22 to $37.00
Granted............................................................ 4,078 0.60 to 25.24
Exercised.......................................................... (1,021) 7.21 to 23.37
Cancelled or lapsed................................................ (1,142) 0.60 to 37.00
---------
Balances, December 31, 1991.......................................... 39,078 0.22 to 25.71
Granted............................................................ 3,950 0.60 to 22.62
Conversion of BAMI stock options................................... 466 3.18 to 11.59
Exercised.......................................................... (22,998) 0.22 to 17.25
Cancelled or lapsed................................................ (7,399) 0.22 to 23.37
---------
Balances, December 31, 1992.......................................... 13,097 0.22 to 25.71
Granted............................................................ 1,660 0.60 to 33.38
Exercised.......................................................... (4,018) 0.22 to 23.37
Cancelled or lapsed................................................ (709) 0.22 to 25.71
---------
Balances, December 31, 1993.......................................... 10,030 $ 0.22 to $33.38
---------
---------
</TABLE>
At December 31, 1993, options for 4,026,700 shares were exercisable. Shares
of common stock available for future grants were 10,088,000 at December 31, 1993
and 11,442,900 at December 31, 1992.
In connection with the Galen Merger, certain preferred stock purchase rights
were redeemed which were previously issued to Galen common stockholders. The
cost of this transaction was not significant. In addition, a stockholder rights
plan was adopted upon consummation of the Galen Merger (similar to that of
Galen) under which common stockholders have the right to purchase Series A
Preferred Stock in the event of accumulation of or tender offer for certain
percentages of Columbia/HCA's common stock. The rights will expire in 2003
unless redeemed earlier by Columbia/ HCA.
F-58
<PAGE>
COLUMBIA/HCA HEALTHCARE CORPORATION
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 12 -- CAPITAL STOCK (CONTINUED)
In September 1993 the Board of Directors initiated a regular quarterly cash
dividend on common stock of $.03 per share.
In March 1992 Columbia/HCA issued 41,055,000 shares of voting common stock,
the net proceeds from which ($796 million) were used to reduce long-term debt.
Assuming that these shares were issued and the proceeds therefrom were used to
reduce long-term debt at the beginning of the year, earnings per common and
common equivalent share would have been $.53 in 1992.
In connection with the HCA Merger, Columbia/HCA stockholders voted to
increase the aggregate number of authorized voting shares of common stock from
400 million to 800 million, and the number of authorized nonvoting common shares
was established at 25 million. In addition, authorized shares of preferred stock
(none of which are outstanding) were increased from 10 million to 25 million.
NOTE 13 -- EMPLOYEE BENEFIT PLANS
Columbia/HCA maintains noncontributory defined contribution retirement plans
covering substantially all employees. Benefits are determined as a percentage of
a participant's earned income and are vested over specified periods of employee
service. Retirement plan expense was $97 million for 1993, $102 million for 1992
and $86 million for 1991. Amounts equal to retirement plan expense are funded
annually.
Columbia/HCA maintains various contributory savings plans which are
available to employees who meet certain minimum requirements. Certain of the
plans require that Columbia/HCA match an amount ranging from 50% to 60% of a
participant's contribution up to certain maximum levels. The cost of these plans
totaled $20 million for 1993, $19 million for 1992 and $15 million for 1991.
Columbia/HCA contributions are funded periodically during the year.
NOTE 14 -- ACCRUED EXPENSES
The following is a summary of other accrued expenses at December 31 (dollars
in millions):
<TABLE>
<CAPTION>
1993 1992
--------- ---------
<S> <C> <C>
Workers' compensation................................................................ $ 102 $ 90
Taxes other than income.............................................................. 143 118
Professional liability risks......................................................... 89 80
Employee benefit plans............................................................... 158 197
Interest............................................................................. 181 167
Other................................................................................ 180 251
--------- ---------
$ 853 $ 903
--------- ---------
--------- ---------
</TABLE>
NOTE 15 -- SUBSEQUENT EVENTS
INCOME TAXES
On March 24, 1994, Columbia/HCA made an advance payment to the IRS of
approximately $75 million in connection with certain disputed prior year income
taxes and related interest. This transaction will not have a material effect on
1994 earnings.
LONG-TERM DEBT
Since completion of the HCA Merger, certain HCA and other long-term debt has
been refinanced in an effort to reduce future interest expense. These
transactions were financed primarily through the issuance of commercial paper,
$175 million of 6 1/2% Notes due 1999 and $150 million of 7.15% Notes due 2004.
Management anticipates that losses resulting from these refinancing activities
will reduce Columbia/HCA's first quarter 1994 net income by approximately $80
million.
F-59
<PAGE>
COLUMBIA/HCA HEALTHCARE CORPORATION
SUPPLEMENTAL QUARTERLY CONSOLIDATED FINANCIAL INFORMATION (UNAUDITED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
1993
--------------------------------------------------------
FIRST SECOND THIRD FOURTH
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Revenues................................................... $ 2,654 $ 2,536 $ 2,491 $ 2,571
Net income (loss):
Continuing operations (a)................................ 205 166 28 176
Discontinued operations.................................. 16 - - -
Extraordinary loss on extinguishment of
debt.................................................... - - (84 ) -
Net income (loss)...................................... 221 166 (56 ) 176
Per common share:
Earnings (loss):
Continuing operations (a).............................. .61 .49 .08 .52
Discontinued operations................................ .04 - - -
Extraordinary loss on extinguishment of
debt.................................................. - - (.24 ) -
Net income (loss).................................... .65 .49 (.16 ) .52
Market prices (b):
High................................................... 24 1/2 27 3/4 31 33 7/8
Low.................................................... 16 1/4 19 1/4 25 3/8 27
<CAPTION>
1992
--------------------------------------------------------
FIRST SECOND THIRD FOURTH
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Revenues................................................... $ 2,559 $ 2,450 $ 2,451 $ 2,472
Net income (loss):
Continuing operations (c)(d)............................. 174 158 (300 ) 207
Discontinued operations (c).............................. 3 (2 ) (132 ) 6
Change in accounting for income taxes.................... 51 - - -
Net income (loss)...................................... 228 156 (432 ) 213
Per common share:
Earnings (loss):
Continuing operations (c)(d)........................... .57 .48 (.89 ) .61
Discontinued operations (c)............................ .02 (.02 ) (.39 ) .02
Change in accounting for income taxes.................. .16 - - -
Net income (loss).................................... .75 .46 (1.28 ) .63
Market prices (b):
High................................................... 21 1/4 22 19 1/4 21 3/4
Low.................................................... 16 1/2 16 1/4 16 1/4 13 3/4
<FN>
- ------------------------
(a) Third quarter loss includes $98 million ($.29 per share) of costs related
to the Galen Merger. See Note 5 of the Notes to Supplemental Consolidated
Financial Statements.
(b) Represents high and low sales prices of CHC common stock for periods prior
to the Galen Merger and Columbia common stock prior to the HCA Merger.
Columbia/HCA common stock is traded on the New York Stock Exchange (ticker
symbol -- COL).
(c) Third quarter net loss includes charges of $221 million ($.65 per share)
related primarily to the Spinoff, of which $86 million ($.25 per share) is
included in continuing operations and $135 million ($.40 per share) is
included in discontinued operations. The loss also includes $330 million
($.98 per share) associated with divestitures of certain assets. See Note
5 of the Notes to Supplemental Consolidated Financial Statements.
(d) Fourth quarter net income includes a gain of $58 million ($.17 per share)
on the sale of HealthTrust common stock. See Note 5 of the Notes to
Supplemental Consolidated Financial Statements.
</TABLE>
F-60
<PAGE>
The following plans are filed with the Commission pursuant to
Instruction 3 of Item 10 of Schedule 14A. These plans are not being sent to
shareholders with the Definitive Proxy Statement.
<PAGE>
Attachment A
COLUMBIA HOSPITAL CORPORATION
1992 STOCK AND INCENTIVE PLAN
1. PURPOSE OF PLAN.
This Plan shall be known as the "Columbia Hospital Corporation 1992
Stock and Incentive Plan" and is hereinafter referred to as the "Plan". The
purpose of the Plan is to aid in maintaining and developing personnel capable
of assuring the future success of Columbia Hospital Corporation, a Nevada
corporation (the "Company"), to offer such personnel additional incentives to
put forth maximum efforts for the success of the business, and to afford them
an opportunity to acquire a proprietary interest in the Company through stock
options and restricted stock awards as provided herein. Options granted
under this Plan may be either incentive stock options ("Incentive Stock
Options") within the meaning of Section 422 of the Internal Revenue Code of
1986, as amended (the "Code"), or options which do not qualify as Incentive
Stock Options.
2. STOCK SUBJECT TO PLAN.
Subject to the provisions of Section 7 hereof, the stock to be
subject to options and restricted stock awards under the Plan shall be the
Company's authorized Common Stock, par value $.01 per share (the "Common
Stock"). Such shares may be either authorized but unissued shares or issued
shares which have been reacquired by the Company. Subject to adjustment as
provided in Section 7 hereof, the maximum number of shares which may be
issued pursuant to options and other awards under this Plan shall be
1,000,000 shares. If an option or restricted stock award under the Plan is
canceled, terminates, expires unexercised or is exchanged for other options
without the issuance of shares of Common Stock, the shares of Common Stock
shall, to the extent of such termination or nonuse, again be available for
options and restricted stock awards thereafter granted during the term of the
Plan. Any shares issued by the Company in connection with the assumption or
substitution of outstanding grants from any acquired corporation shall not
reduce the shares available for option grants and restricted stock awards
under the Plan.
3. ADMINISTRATION OF PLAN.
(a) The Plan shall be administered by a Committee (the
"Committee") of two or more directors of the Company, none of whom shall be
officers or employees of the Company and all of whom shall be "disinterested
persons" with respect to the Plan within the meaning of Rule 16b-3(c)(2)(i)
under the Securities Exchange Act of 1934 as in effect on the date this Plan
is adopted by the Board of Directors. The members of the Committee shall be
appointed by and serve at the pleasure of the Board of Directors.
(b) The Committee shall have plenary authority in its discretion,
but subject to the express provisions of the Plan: (i) to determine the
purchase price of the Common Stock covered by each option, (ii) to determine
the persons to whom and the time or times at which such options or restricted
stock awards shall be granted and the number of shares to be subject
<PAGE>
to each option or restricted stock award, (iii) to determine the terms of
exercise of each option or receipt of each restricted stock award, (iv) to
accelerate the time at which all or any part of an option may be exercised or
an award may be received, (v) to amend or modify the terms of any option or
award with the consent of the holder of the option or other award, (vi) to
interpret the Plan, (vii) to prescribe, amend and rescind rules and
regulations relating to the Plan, (viii) to determine the terms and
provisions of each option or award agreement under the Plan (any of which
agreements need not be identical), including the designation of those options
intended to be Incentive Stock Options, and (ix) to make all other
determinations necessary or advisable for the administration of the Plan,
subject to the exclusive authority of the Board of Directors under Section 8
herein to amend or terminate the Plan. The Committee's determinations on the
foregoing matters shall be final and conclusive.
(c) The Committee shall select one of its members as its
Chairperson and shall hold its meetings at such times and places as it may
determine. A majority of its members shall constitute a quorum. All
determinations of the Committee shall be made by not less than a majority of
its members. Any decision or determination reduced to writing and signed by
all of the members of the Committee shall be fully effective as if it had
been made by a majority vote at a meeting duly called and held. The exercise
of an option or receipt of an award shall be effective only if a written
agreement shall have been duly executed and delivered by and on behalf of the
Company following the grant of the option or other award. The Committee may
appoint a Secretary and may make such rules and regulations for the conduct
of its business as it shall deem advisable.
4. OPTIONS.
(a) ELIGIBILITY. Incentive Stock Options may only be granted
under this Plan to any full or part-time employee (which term as used herein
includes, but is not limited to, officers and directors who are also
employees) of the Company and of its present and future subsidiary
corporations (herein called "subsidiaries"). Any full or part-time employee
of the Company and of its subsidiaries, any full or part-time employee of an
affiliated partnership of the Company, and consultants or independent
contractors providing valuable services to the Company, one of its
subsidiaries or one of its affiliated partnerships who are not also employees
thereof, shall be eligible to receive options which do not qualify as
Incentive Stock Options. In determining the persons to whom options shall be
granted and the number of shares subject to each option, the Committee may
take into account the nature of services rendered by the respective persons,
their present and potential contributions to the success of the Company and
such other factors as the Committee in its discretion shall deem relevant. A
person who has been granted an option under this Plan may be granted an
additional option or options under the Plan if the Committee shall so
determine, provided, however, that to the extent the aggregate fair market
value (determined at the time the Incentive Stock Option is granted) of the
Common Stock with respect to which all Incentive Stock Options are
exercisable for the first time by an employee during any calendar year (under
all plans described in subsection (d) of Section 422 of the Code of his or
her employer corporation and its parent and subsidiary corporations)
2
<PAGE>
exceeds $100,000, such options shall be treated as options which do not
qualify as Incentive Stock Options.
(b) EXERCISE PRICE. The option price for all Incentive Stock
Options granted under the Plan shall be determined by the Committee but shall
not be less than 100% of the fair market value of the Common Stock at the
date of granting such option. The option price for options granted under the
Plan which do not qualify as Incentive Stock Options shall also be determined
by the Committee but may not be less than 50% of the fair market value of the
Common Stock at the date of granting of such option. For purposes of the
preceding two sentences and for all other valuation purposes under the Plan,
the fair market value of the Common Stock shall be as reasonably determined
by the Committee, but shall not be less than (i) the closing price of the
stock as reported for composite transactions, if the Common Stock is then
traded on a national securities exchange, (ii) the last sale price if the
Common Stock is then quoted on the NASDAQ National Market System or (iii) the
average of the closing representative bid and asked prices of the Common
Stock as reported on NASDAQ on the date as of which fair market value is
being determined. If on the date of grant of any option granted under the
Plan, the Common Stock of the Company is not publicly traded, the Committee
shall make a good faith attempt to satisfy the option price requirement of
this Section 4(b) and in connection therewith shall take such action as it
deems necessary or advisable.
(c) TERM. Each option and all rights and obligations thereunder
shall, subject to the provisions of Section 4(f), expire on the date
determined by the Committee and specified in the option agreement. The
Committee shall be under no duty to provide terms of like duration for
options granted under the Plan, but the term of an Incentive Stock Option may
not extend more than ten (10) years from the date of granting of such option
and the term of options granted under the Plan which do not qualify as
Incentive Stock Options may not extend more than fifteen (15) years from the
date of granting of such option.
(d) EXERCISE.
(i) The Committee shall have full and complete authority to
determine, subject to Section 4(f) herein, whether the option will be
exercisable in full at any time or from time to time during the term of the
option, or to provide for the exercise thereof in such installments, upon the
occurrence of such events and at such times during the term of the option as
the Committee may determine.
(ii) The exercise of any option granted hereunder shall be
effective only at such time as the sale of Common Stock pursuant to such
exercise will not violate any state or federal securities or other laws.
(iii) An optionee electing to exercise an option shall give
written notice to the Company of such election and of the number of shares
subject to such exercise. The full purchase price of such shares shall be
tendered with such notice of exercise. Payment shall be made to the Company
in cash (including bank check, certified check, personal check, or money
3
<PAGE>
order), or, at the discretion of the Committee and as specified by the
Committee, (A) by delivering certificates for the Company's Common Stock
already owned by the optionee having a fair market value as of the date of
exercise equal to the full purchase price of the shares, together with any
applicable withholding taxes, or (B) a combination of cash and such shares;
provided, however, that an optionee shall not be entitled to tender shares of
the Company's Common Stock pursuant to successive, substantially simultaneous
exercises of options granted under this or any other stock option plan of the
Company. The fair market value of such tendered shares shall be determined
as provided in Section 4(b) herein. The Committee may also, in its sole
discretion, permit option holders to deliver a notice of exercise of options
and simultaneously to sell the shares of Common Stock thereby acquired
pursuant to a brokerage or similar arrangement approved in advance by proper
officers of the Company, using the proceeds of such sale as payment of the
exercise price. Until such person has been issued the shares subject to such
exercise, he or she shall possess no rights as a stockholder with respect to
such shares.
(e) ACCELERATED OWNERSHIP FEATURE. An option may, in the
discretion of the Committee, include the right to acquire an accelerated
ownership stock option ("AO Option"). An option which provides for the grant
of an AO Option shall entitle the option holder upon exercise of that option
and payment of the appropriate exercise price in shares of Common Stock that
have been owned by such option holder for not less than six months prior to
the date of exercise, to receive an AO Option. An AO Option is an option to
purchase, at fair market value at the date of grant of the AO Option, a
number of shares of Common Stock equal to the sum of the number of whole
shares delivered by the option holder in payment of the exercise price of the
original option and the number of whole shares, if any, withheld by the
Company as payment for withholding taxes. An AO Option shall expire on the
same date that the original option would have expired had it not been
exercised. All AO Options shall be nonqualified options.
(f) EFFECT OF TERMINATION OF EMPLOYMENT OR DEATH.
(i) In the event that an optionee shall cease to be employed
by the Company, its subsidiaries or its affiliated partnerships, if any, for
any reason other than his or her serious misconduct or his or her death or
disability, such optionee shall have the right to exercise the option to the
extent of the full number of shares the optionee was entitled to purchase
under the option on the date of termination, as follows: (A) with respect to
an Incentive Stock Option, such optionee shall have the right to exercise the
option at any time within three (3) months after such termination of
employment, subject to the condition that no option shall be exercisable
after the expiration of the term of the option; and (B) with respect to an
option that does not qualify as an Incentive Stock Option, such optionee
shall have the right to exercise the option at any time within a period
determined by the Committee (which in no event shall be less than three
months or more than five years after such termination), subject to the
condition that no option shall be exercisable after the expiration of the
term of the option.
4
<PAGE>
(ii) In the event that an optionee shall cease to be employed
by the Company, its subsidiaries or its affiliated partnerships, if any, by
reason of his or her serious misconduct during the course of his or her
employment, the option shall be terminated as of the date of the misconduct.
(iii) If the optionee shall die while in the employ of the
Company, a subsidiary or an affiliated partnership, if any, or within three
(3) months after termination of employment, for any reason other than serious
misconduct, or if employment is terminated because the optionee has become
disabled (within the meaning of Code Section 22(e)(3)) while in the employ of
the Company, a subsidiary or an affiliated partnership, if any, and such
optionee shall not have fully exercised the option, such option may be
exercised at any time within a period determined by the Committee (which in
no event shall be less than three (3) months or more than five (5) years
after his or her death or date of termination of employment for such
disability) by the optionee, personal representatives, administrators, or
guardians of the optionee, as applicable, or by any person or persons to whom
the option is transferred by will or the applicable laws of descent and
distribution, to the extent of the full number of shares he or she was
entitled to purchase under the option on the date of death, termination of
employment, if earlier, or date of termination for such disability and
subject to the condition that no option shall be exercisable after the
expiration of the term of the option.
(iv) The Committee may extend the period during which an
Incentive Stock Option is exercisable following termination of employment
beyond the maximum period set forth in Section 4(f)(i)(A) above up to five
(5) years after such termination of employment, subject to the condition that
no option shall be exercisable after the expiration of the term of the
option; PROVIDED, HOWEVER, that in such event, such option or a portion of
such option may not qualify for treatment as an incentive stock option within
the meaning of Section 422 of the Code.
(v) Nothing in the Plan or in any agreement thereunder shall
confer on any employee any right to continue in the employ of the Company,
any of its subsidiaries or any of its affiliated partnerships or affect, in
any way, the right of the Company, any of its subsidiaries or any of its
affiliated partnerships to terminate his or her employment at any time.
(g) TEN PERCENT STOCKHOLDER RULE. Notwithstanding any other
provisions in the Plan, if at the time an option is otherwise to be granted
pursuant to the Plan the optionee owns directly or indirectly (within the
meaning of Section 424(d) of the Code) Common Stock of the Company possessing
more than ten percent (10%) of the total combined voting power of all classes
of stock of the Company or its parent or subsidiary corporations, if any
(within the meaning of Section 422(b)(6) of the Code), then any Incentive
Stock Option to be granted to such optionee pursuant to the Plan shall
satisfy the requirements of Section 422(c)(5) of the Code, and the option
price shall be not less than 110% of the fair market value of the Common
Stock of the Company determined as described herein, and such option by its
terms shall not be exercisable after the expiration of five (5) years from
the date such option is granted.
5
<PAGE>
(h) NONTRANSFERABILITY. No option granted under the Plan shall be
transferrable by an optionee, other than by will or the laws of descent or
distribution as provided in Section 4(f)(iii) herein. During the lifetime of
an optionee the option shall be exercisable only by such optionee (except as
provided in Section 4(f)(iii) herein).
5. RESTRICTED STOCK AWARDS.
Awards of Common Stock subject to forfeiture and transfer
restrictions may be granted to any full or part-time employee of the Company,
any of its subsidiaries or any of its affiliated partnerships, at any time or
from time to time as determined by the Committee. The restricted stock
awards shall be evidenced by agreements in such form as the Committee shall
from time to time approve, which agreements shall comply with and be subject
to the following terms and conditions and any additional terms and conditions
established by the Committee that are consistent with the terms of the Plan:
(a) GRANT OF RESTRICTED STOCK AWARDS. Each restricted stock award
made under the Plan shall be for such number of shares of Common Stock as
shall be determined by the Committee and set forth in the agreement
containing the terms of such restricted stock award. Such agreement shall
set forth a period of time during which the grantee must remain in the
continuous employment of the Company in order for the forfeiture and transfer
restrictions to lapse. If the Committee so determines, the restrictions may
lapse during such restricted period in installments with respect to specified
portions of the shares covered by the restricted stock award. The agreement
may also, in the discretion of the Committee, set forth performance or other
conditions that will subject the shares to forfeiture and transfer
restrictions. The Committee may, at its discretion, waive all or any part of
the restrictions applicable to any or all outstanding restricted stock
awards.
(b) DELIVERY OF COMMON STOCK AND RESTRICTIONS. At the time of a
restricted stock award, a certificate representing the number of shares of
Common Stock awarded thereunder shall be registered in the name of the
grantee. Such certificate shall be held by the Company or any custodian
appointed by the Company for the account of the grantee subject to the terms
and conditions of the Plan, and shall bear such a legend setting forth the
restrictions imposed thereon as the Committee, in its discretion, may
determine. The grantee shall have all rights of a stockholder with respect
to the shares, including the right to receive dividends and the right to vote
such shares, subject to the following restrictions: (i) the grantee shall not
be entitled to delivery of the stock certificate until the expiration of the
restricted period and the fulfillment of any other restrictive conditions set
forth in the restricted stock agreement with respect to such shares; (ii)
none of the shares may be sold, assigned, transferred, pledged, hypothecated
or otherwise encumbered or disposed of during such restricted period or until
after the fulfillment of any such other restrictive conditions; and (iii)
except as otherwise determined by the Committee, all of the shares shall be
forfeited and all rights of the grantee to such shares shall terminate,
without further obligation on the part of the Company, unless the grantee
remains in the continuous employment of the Company for the entire restricted
period in relation to which such Common Stock was granted and unless any
other restrictive conditions relating
6
<PAGE>
to the restricted stock award are met. Any Common Stock, any other
securities of the Company and any other property (except for cash dividends)
distributed with respect to the shares of Common Stock subject to restricted
stock awards shall be subject to the same restrictions, terms and conditions
as such restricted shares of Common Stock.
(c) TERMINATION OF RESTRICTIONS. At the end of the restricted
period and provided that any other restrictive conditions of the restricted
stock award are met, or at such earlier time as otherwise determined by the
Committee, all restrictions set forth in the agreement relating to the
restricted stock award or in the Plan shall lapse as to the restricted shares
of Common Stock subject thereto, and a stock certificate for the appropriate
number of shares of Common Stock, free of the restrictions and restricted
stock legend, shall be delivered to the grantee or his or her beneficiary or
estate, as the case may be.
6. TAX WITHHOLDING.
The Company shall have the right to deduct from any settlement,
including the delivery or vesting of shares, made under the Plan any federal,
state or local taxes of any kind required by law to be withheld with respect
to such payments or to take such other action as may be necessary in the
opinion of the Company to satisfy all obligations for the payment of such
taxes. If Common Stock is used to satisfy tax withholding, such stock shall
be valued based on the fair market value of such Common Stock when the tax
withholding is required to be made.
7. DILUTION AND OTHER ADJUSTMENTS.
In the event of any merger, reorganization, consolidation,
recapitalization, stock dividend, stock split or other change in corporate
structure affecting the Common Stock, such substitution or adjustment shall
be made in the aggregate number of shares reserved for issuance under the
Plan, in the number and option price of shares subject to outstanding options
granted under the Plan, and in the number of shares subject to other
outstanding awards granted under the Plan as may be determined to be
appropriate by the Committee, in its sole discretion, provided that the
number of shares subject to any award shall always be a whole number.
8. AMENDMENT OR DISCONTINUANCE OF PLAN.
The Board of Directors of the Company may amend or discontinue the
Plan at any time. Subject to the provisions of Section 7, no amendment of
the Plan shall, without stockholder approval: (a) increase the maximum number
of shares under the Plan as provided in Section 2 herein, (b) decrease the
minimum option price provided in Section 4(b) herein, (c) extend the maximum
option term under Section 4(c), or (d) materially modify the eligibility
requirements for participation in the Plan. The above notwithstanding, the
Board of Directors may amend the Plan to take into account changes in
applicable securities, federal income tax laws and other applicable laws.
The Board of Directors shall not alter or impair any option or other award
theretofore granted under the Plan without the consent of the holder of the
option or other award.
7
<PAGE>
9. ADDITIONAL RESTRICTIONS.
The Committee shall have full and complete authority to determine
whether all or any part of the Common Stock of the Company acquired upon
exercise of any of the options or other awards granted under the Plan shall
be subject to restrictions on the transferability thereof or any other
restrictions affecting in any manner the recipient's rights with respect
thereto, but any such restriction shall be contained in the agreement
relating to such options or other awards.
10. EFFECTIVE DATE AND TERMINATION OF PLAN.
(a) The Plan was approved by the Board of Directors effective as
of March 3, 1992, and shall be approved by the stockholders of the Company
within twelve (12) months thereof.
(b) Unless the Plan shall have been discontinued as provided in
Section 8 hereof, the Plan shall terminate on March 3, 2002. No option or
other award may be granted after such termination, but termination of the
Plan shall not, without the consent of the holder of the option or other
award, alter or impair any rights or obligations under any option or other
award theretofore granted.
8
<PAGE>
AMENDMENT NO. 1 TO
COLUMBIA HOSPITAL CORPORATION
1992 STOCK AND INCENTIVE PLAN
On February 11, 1993, the Board of Directors of Columbia Hospital
Corporation (the "Company") approved an amendment to the Columbia Hospital
Corporation 1992 Stock and Incentive Plan (the "Plan") to increase the number
of authorized shares under the Plan from 1,000,000 shares to 2,000,000
shares. The stockholders of the Company approved such amendment on May 20,
1993. Thus the increased number of shares which may be issued pursuant to
options and other awards under the Plan shall be 2,000,000 shares. Section 2
of the Plan is hereby amended accordingly.
Dated: May 20, 1993
COLUMBIA HOSPITAL CORPORATION
By: /s/ Stephen T. Braun
--------------------------------
Stephen T. Braun, Secretary
<PAGE>
ATTACHMENT B
COLUMBIA/HCA HEALTHCARE CORPORATION
ANNUAL INCENTIVE PLAN SUMMARY
PURPOSE AND ADMINISTRATION OF THE PLAN
The Annual Incentive Plan ("Plan") is established to encourage outstanding
performance of employees who are in a position to make substantial
contributions to the success of the Company. The SVP, Human Resources shall
be responsible for administration of the Plan. The CEO of Columbia/HCA
Healthcare Corporation shall have full power and final authority to interpret
the Plan.
PARTICIPATION
Eligibility to participate in the Plan shall be extended generally to all full
time regular/corporate employees with at least 3 months employment in the
fiscal year ("Participants") subject to approval by the CEO of Columbia/HCA
Healthcare Corporation. For a Participant added during the Fiscal Year, the
payout shall be determined pursuant to the Plan and prorated. Proration shall
also be condsidered for employees who transfer to a position eligible for a
different incentive target. Employees are not eligible to participate in more
than one plan at a time.
INCENTIVE CALCULATION AND PAYMENT
Plan payments for Participants are based on criteria detailed on Exhibit A
attached. As soon as practical, after the Fiscal Year, when the financial
results of the Company are known, the appropriate senior officer will review
and recommend plan payments. The CEO of Columbia/HCA Healthcare Corporation
may make adjustments to performance targets deemed necessary to avoid
unwarranted penalties or windfalls. Such adjustments will recognize
uncontrollable outside factors and will be kept to a minimum. Payments shall
be made as soon as practicable, after the annual audit report has been issued,
but in no event later than three months after the Fiscal Year. The Plan
payment for each Participant will be paid in accordance with a payout schedule
after it has been reviewed by the CEO of Columbia/HCA Healthcare Corporation.
This Plan is not a "qualified" plan for tax purposes, and any payments are
subject to tax withholding requirements.
TERMINATION OF PARTICIPANT
In the event a payment is due pursuant to the Plan and a Participant's
employment with the Company is terminated prior to the payment by reason of
retirement, total and permanent disability or death, such Participant (or
estate in event of death) shall receive a pro rata payment as soon as
practical after the Fiscal Year, but in no event later than three months after
the Fiscal Year. A Participant who is otherwise voluntarily or involuntarily
separated prior to the PAYMENT of any Incentive Compensation shall cease to
be a Participant and shall not have earned any right to receive any payments
pursuant to the Plan.
MISCELLANEOUS
The CEO of Columbia/HCA Healthcare Corporation may interpret, modify, amend or
terminate the Plan in whole or in part at any time, provided that no such
action shall negatively affect the payment of Incentive Compensation allocated
with respect to any Fiscal Year which has ended.
<PAGE>
EXHIBIT A
COLUMBIA/HCA HEALTHCARE CORPORATION
ANNUAL INCENTIVE PLAN
Participant:___________________________________________Title:___________________
Department:___________________________________ Incentive Target:________
INCENTIVE COMPONENT % OF TOTAL AWARD
------------------- ----------------
Achievement of Earnings per Share 75%
(before extraordinary events)
Discretionary 25%
---
100%
EARNINGS PER SHARE COMPONENT DISCRETIONARY COMPONENT
Performance Factor Specific departmental goals
and objectives
% OF TARGET % PAYOUT may be applied to
----------- -------- completely or partially
< 95 0 replace discretionary
95 to 97 50 criteria
97 to 99 75
99 to 102 100
102 to 105 120
105 to 110 140
> 110 150
INCENTIVE CALCULATION:
STANDARD AWARD: ADJUSTED AWARD:
AWARD
__________________________
<TABLE>
<S> <C> <C> <C> <C>
Base salary (end of year): $ _______________ Component STANDARD PERF.FACTOR
TOTAL
Incentive Compensation Target:__________% EPS (75%) $___________ x __________%
= $__________
Standard Award: $_______________ Discrect. (25%) $___________ x (1)_______
% ? $__________
$
_(1) Discretionary component "pool" can be adjusted by EPS performance factor.
</TABLE>
Note: Proration of components or target due to employee transfer or change in
status will be made at the discretion of Columbia/HCA Healthcare
Corporation CEO.
<PAGE>
COLUMBIA/HCA HEALTHCARE CORPORATION
PROXY
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
The undersigned hereby (1) acknowledges receipt of the Notice of
Annual Meeting of Stockholders (the "Meeting") of Columbia/ HCA Healthcare
Corporation, a Delaware corporation (the "Company"), to be held at the
Regency Ballroom of the Hyatt Regency Louisville, 320 West Jefferson
Street, Louisville, Kentucky on May 12, 1994 at 10:00 a.m., Eastern
Daylight Time, and the Proxy Statement in connection therewith (the
"Proxy Statement") and (2) appoints Richard L. Scott and David T.
Vandewater, and each of them, his proxies with full power of substitution
for and in the name, place, and stead of the undersigned, to vote upon
and act with respect to all of the shares of Common Stock of the Company
standing in the name of the undersigned, or with respect to which the
undersigned is entitled to vote and act, at the Meeting and at any
adjournment(s) or postponement(s) thereof.
The undersigned directs that this proxy be voted as follows:
1. ELECTION OF DIRECTORS
<TABLE>
<S> <C>
/ / FOR all nominees listed below (except as marked to
the contrary below) / / WITHHOLD AUTHORITY to vote for all nominees listed below
</TABLE>
Magdalena Averhoff, M.D., Charles J. Kane, John W. Landrum,
Frank S. Royal, M.D. and Robert D. Walter
(INSTRUCTION: TO WITHHOLD AUTHORITY TO VOTE FOR ANY INDIVIDUAL NOMINEE,
WRITE THAT NOMINEE'S NAME IN THE SPACE PROVIDED BELOW.)
_________________________________________________________________________
2. APPROVAL OF AMENDMENTS TO THE COLUMBIA HOSPITAL CORPORATION 1992
STOCK AND INCENTIVE PLAN, AS DESCRIBED IN THE PROXY STATEMENT.
/ / FOR / / AGAINST / / ABSTAIN
3. APPROVAL OF THE ADOPTION OF THE COLUMBIA/HCA HEALTHCARE CORPORATION
ANNUAL INCENTIVE PLAN, AS DESCRIBED IN THE PROXY STATEMENT.
/ / FOR / / AGAINST / / ABSTAIN
4. IN THE DISCRETION OF THE PROXIES, ON ANY OTHER MATTER THAT MAY
PROPERLY COME BEFORE THE MEETING.
THIS PROXY WILL BE VOTED AS SPECIFIED ABOVE. IF NO SPECIFICATION IS
MADE, THIS PROXY WILL BE VOTED FOR EACH OF THE PROPOSALS.
<PAGE>
The undersigned hereby revokes any proxy heretofore given to vote or act
with respect to the Common Stock of the Company and hereby ratifies and confirms
all that the proxies, their substitutes, or any of them may lawfully do by
virtue hereof.
If one or more of the proxies named shall be present in person or by
substitute at the Meeting or at any adjournment(s) or postponement(s) thereof,
the proxies so present and voting, either in person or by substitute, shall
exercise all of the powers hereby given.
Please date, sign, and mail this proxy in the enclosed envelope. No postage
is required.
Date: ____________________________ , 1994
_________________________________________
Signature of Stockholder
_________________________________________
Signature of Stockholder
Please date this proxy and sign your name
exactly as it appears hereon. Where there
is more than one owner, each should sign.
When signing as an attorney,
administrator, executor, guardian, or
trustee, please add your title as such.
If executed by a corporation, the proxy
should be signed by a duly authorized
officer. If a partnership, please sign in
partnership name by authorized person.
