UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1994
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 1-11239
COLUMBIA/HCA HEALTHCARE CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 75-2497104
(State or other jurisdiction of (I.R.S.Employer
incorporation or organization) Identification No.)
201 West Main Street, Louisville, Kentucky 40202
(Address of principal executive offices) (Zip Code)
(502) 572-2000
(Registrant's telephone number, including area code)
Not Applicable
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange
Act of 1934 during the preceding 12 months, and (2) has been subject to
such filing requirements for the past 90 days.
YES X NO
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
Outstanding at
Class of Common Stock April 30, 1994
Voting common stock, $.01 par value 319,079,300 shares
Nonvoting common stock, $.01 par value 18,990,000 shares
1 of 25
COLUMBIA/HCA HEALTHCARE CORPORATION
FORM 10-Q
MARCH 31, 1994
<TABLE>
<S> <C> Page of
Part I: Financial Information Form 10-Q
Item 1. Financial Statements
Condensed Consolidated Statement of Income - for the
quarters ended March 31, 1994 and 1993 ...................... 3
Condensed Consolidated Balance Sheet - March 31, 1994
and December 31, 1993 ....................................... 4
Consolidated Statement of Cash Flows - for the quarters
ended March 31, 1994 and 1993 ............................... 5
Notes to Condensed Consolidated Financial Statements ........ 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations ......................... 13
Part II: Other Information
Items 1 to 6 ..................................................... 21
COLUMBIA/HCA HEALTHCARE CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF INCOME
For the quarters ended March 31, 1994 and 1993
Unaudited
(Dollars in millions, except per share amounts)
1994 1993
Revenues ............................................ $ 2,778 $ 2,654
Salaries, wages and benefits ........................ 1,113 1,072
Supplies ............................................ 434 433
Other operating expenses ............................ 492 478
Provision for doubtful accounts ..................... 150 126
Depreciation and amortization ....................... 144 136
Interest expense .................................... 64 85
Investment income ................................... (14) (12)
Non-recurring transactions .......................... 159 -
2,542 2,318
Income from continuing operations before
minority interests and income taxes ............... 236 336
Minority interests in earnings of consolidated
entities .......................................... 3 4
Income from continuing operations before
income taxes ...................................... 233 332
Provision for income taxes .......................... 96 127
Income from continuing operations ................... 137 205
Income from operations of discontinued
health plan segment, net of income taxes .......... - 16
Extraordinary loss on extinguishment of
debt, net of income tax benefit ................... (92) -
Net income ..................................... $ 45 $ 221
Earnings per common and common equivalent share:
Income from continuing operations ................. $ .40 $ .61
Income from operations of discontinued
health plan segment ............................. - .04
Extraordinary loss on extinguishment of
debt ............................................ (.27) -
Net income ..................................... $ .13 $ .65
Cash dividends declared and paid per common share ... $ .03 $ -
Shares used in earnings per common and common
equivalent share computation (000) ................ 341,621 337,739
See accompanying notes.
COLUMBIA/HCA HEALTHCARE CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEET
Unaudited
(Dollars in millions, except per share amounts)
March 31, December 31,
ASSETS 1994 1993
Current assets:
Cash and cash equivalents .......................... $ 109 $ 224
Accounts receivable less allowance for loss of
$544 - March 31, 1994 and $513 -
December 31,1993 ................................. 1,625 1,566
Inventories ........................................ 258 245
Other .............................................. 516 453
2,508 2,488
Property and equipment, at cost ...................... 8,589 8,392
Accumulated depreciation ............................. (2,947) (2,792)
5,642 5,600
Investments of professional liability insurance
subsidiaries........................................ 688 700
Intangible assets .................................... 1,277 1,232
Other ................................................ 237 196
$ 10,352 $ 10,216
LIABILITIES AND COMMON STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable ................................... $ 414 $ 445
Salaries, wages and other compensation ............. 260 232
Other accrued expenses ............................. 924 853
Income taxes ....................................... 71 22
Long-term debt due within one year ................. 81 363
1,750 1,915
Long-term debt ....................................... 3,533 3,335
Deferred credits and other liabilities ............... 1,421 1,438
Minority interests in equity of consolidated
entities ........................................... 134 57
Contingencies
Common stockholders' equity:
Common stock, $.01 par; authorized 800,000,000
voting shares and 25,000,000 nonvoting
shares; issued and outstanding 318,806,900
voting shares and 18,990,000 nonvoting shares
- March 31, 1994 and 317,686,800 voting shares
and 18,990,000 nonvoting shares - December 31,
1993 ............................................. 3 3
Other .............................................. 3,511 3,468
3,514 3,471
$ 10,352 $ 10,216
See accompanying notes.
COLUMBIA/HCA HEALTHCARE CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
For the quarters ended March 31, 1994 and 1993
Unaudited
(Dollars in millions)
1994 1993
Cash flows from continuing operations:
Net income ............................................. $ 45 $ 221
Adjustments to reconcile net income to net
cash provided by operating activities:
Income from discontinued operations ................. - (16)
Non-recurring transactions .......................... 159 -
Depreciation and amortization ....................... 144 136
Deferred income taxes ............................... (64) (6)
Change in operating assets and liabilities:
Increase in accounts receivable ................... (35) (112)
(Increase) decrease in inventories and other
assets ......................................... (53) 31
Increase in income taxes .......................... 64 110
Decrease in other liabilities ..................... (55) (8)
Extraordinary loss on extinguishment of debt ........ 149 -
Other ............................................... 13 20
Net cash provided by continuing operations ........ 367 376
Cash flows from investing activities:
Purchase of property and equipment ..................... (214) (181)
Acquisition of hospitals and health care facilities .... (114) (75)
Disposition of property and equipment .................. 62 54
Change in investments .................................. (12) -
Other .................................................. (64) (3)
Net cash used in investing activities ............. (342) (205)
Cash flows from financing activities:
Issuance of long-term debt ............................. 325 -
Net changes in commercial paper borrowings and lines
of credit ............................................ 1,461 103
Repayment of long-term debt ............................ (1,954) (126)
Payment of cash dividends .............................. (5) (36)
Issuance of common stock ............................... 11 2
Payment to Humana Inc. in spinoff transaction .......... - (135)
Other .................................................. 22 (2)
Net cash used in financing activities ............. (140) (194)
Change in cash and cash equivalents ..................... (115) (23)
Cash and cash equivalents at beginning of period ........ 224 217
Cash and cash equivalents at end of period .............. $ 109 $ 194
Interest payments ....................................... $ 106 $ 77
Income tax payments, net of refunds ..................... 38 23
See accompanying notes.
COLUMBIA/HCA HEALTHCARE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Unaudited
NOTE 1 - REPORTING ENTITY
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 4 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 5 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.
NOTE 2 - BASIS OF PRESENTATION
The accompanying condensed consolidated financial statements do not include
all of the disclosures normally required by generally accepted accounting
principles or those normally required in annual reports filed on Form 10-K.
Accordingly, these financial statements should be read in conjunction with
the audited supplemental consolidated financial statements of Columbia/HCA
for the year ended December 31, 1993 filed on Form 10-K with the Securities
and Exchange Commission.
The financial information has been prepared in accordance with Columbia/HCA's
customary accounting practices and has not been audited. Management believes
that the financial information presented reflects all adjustments necessary
for a fair statement of interim results. All such adjustments are of a
normal and recurring nature.
For accounting purposes, the HCA and Galen Mergers have been treated as
poolings of interests. Accordingly, these financial statements give
retroactive effect to the mergers and include the combined operations of the
respective former entities 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.
NOTE 3 - EARNINGS PER SHARE
Earnings per common and common equivalent share are based upon weighted
average common shares outstanding adjusted for the dilutive effect of common
stock equivalents consisting primarily of stock options. Fully diluted
earnings per common and common equivalent share is not presented because it
approximates earnings per common and common equivalent share.
NOTE 4 - 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
COLUMBIA/HCA HEALTHCARE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
Unaudited
NOTE 4 - HCA MERGER (Continued)
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).
The HCA Merger has been accounted for as a pooling of interests, and
accordingly, the condensed consolidated financial statements give retroactive
effect to the HCA Merger and include 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):
Columbia HCA Consolidated
One month ended January 31, 1994:
Revenues .......................... $ 480 $ 460 $ 940
Net income ........................ 33 44 77
Three months ended March 31, 1993:
Revenues .......................... $1,329 $1,325 $2,654
Net income:
Continuing operations ........... $ 90 $ 115 $ 205
Discontinued operations ......... 16 - 16
$ 106 $ 115 $ 221
NOTE 5 - 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 condensed consolidated financial statements give retroactive
effect to the Galen Merger and include 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 the first quarter of 1993 (dollars
in millions):
CHC Galen Consolidated
Revenues ......................... $ 312 $1,017 $1,329
Net income:
Continuing operations .......... $ 10 $ 80 $ 90
Discontinued operations ........ - 16 16
$ 10 $ 96 $ 106
COLUMBIA/HCA HEALTHCARE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
Unaudited
NOTE 6 - 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
spinoff transaction by Humana Inc. ("Humana")(the "Spinoff"), 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 stockholders on a one-for-one basis.
For accounting purposes, because of the relative significance of the hospital
business, the 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.
Revenues of the discontinued managed care health plan business (included in
discontinued operations in the condensed consolidated statement of income)
were $523 million for the three months ended March 31, 1993.
NOTE 7 - NON-RECURRING TRANSACTIONS AND EXTINGUISHMENT OF DEBT
In the first quarter of 1994 Columbia/HCA recorded the following charges in
connection with the HCA Merger (dollars in millions):
Employee benefit and certain severance actions ........... $ 40
Investment advisory and professional fees ................ 12
Costs of information systems consolidations
primarily related to the writedown of assets ........... 42
Writedown of assets in connection with
consolidation of duplicative facilities ................ 53
Other .................................................... 12
$ 159
In addition to employee severance costs above, Columbia/HCA is a party to
employment agreements with certain key employees as a result of the Galen and
HCA Mergers. Future severance payments under these agreements, which may
occur as a result of continued consolidation activities, will be charged to
earnings as incurred.
In the first quarter of 1994, Columbia/HCA refinanced approximately $2
billion of HCA's high coupon fixed and floating rate long-term debt. These
transactions were effected to reduce future interest expense and eliminate
certain restrictive covenants. After-tax losses from these extinguishments
of debt aggregated $92 million or $.27 per share.
COLUMBIA/HCA HEALTHCARE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
Unaudited
NOTE 8 - ACQUISITIONS
The following is a summary of acquisitions and joint ventures consummated
during the respective three month periods (dollars in millions):
1994 1993
Number of hospitals ............................... 4 2
Number of licensed beds ........................... 1,264 843
Purchase price information:
Fair value of assets acquired ................... $ 192 $ 145
Liabilities assumed ............................. (31) (32)
Net assets acquired ........................... 161 113
Contributions from minority partners ............ (47) (27)
Cash acquired ................................... - (11)
Net cash paid for acquisitions ............. $ 114 $ 75
NOTE 9 - INCOME TAXES
The Internal Revenue Service (the "IRS") 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 IRS
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
IRS. The IRS 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 of accounting
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 IRS 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
IRS were successful with respect to this issue, Columbia/HCA would owe an
additional $110 million in income taxes and $444 million in interest as of
March 31, 1994.
Hospital Acquisitions
In connection with hospitals acquired by HCA in 1981 and 1985, the IRS has
asserted that a portion of the costs allocated to identifiable assets with
ascertainable useful lives should be reclassified as nondeductible goodwill.
If the IRS ultimately prevails in this regard, Columbia/HCA would owe an
additional $113 million in income taxes and $145 million in interest as of
March 31, 1994.
COLUMBIA/HCA HEALTHCARE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
Unaudited
NOTE 9 - INCOME TAXES (Continued)
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 IRS 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 March 31, 1994, Columbia/HCA is seeking a
refund totaling $51 million in income taxes and $95 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, Inc.-The Hospital Company ("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 IRS has
disallowed the deduction and is claiming an additional $5 million in income
taxes and $16 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 IRS claims a higher 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 IRS 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 IRS is claiming
additional interest of $66 million through March 31, 1994.
Also in connection with the 1987 sale of certain Subsidiaries to HealthTrust,
the IRS 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 IRS
position is contrary to a Tax Court decision in a similar case. The IRS is
claiming additional income taxes of $79 million and interest of $69 million
through March 31, 1994.
In connection with the 1987 HealthTrust transactions, the IRS 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 IRS prevail, Columbia/HCA would owe $11 million of additional
income taxes and $17 million of interest through March 31, 1994. The
COLUMBIA/HCA HEALTHCARE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
Unaudited
NOTE 9 - INCOME TAXES (Continued)
position of the IRS is an alternative to its denial of the use of the cash
method of accounting previously discussed.
Doubtful Accounts
The IRS 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 IRS 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 the 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 IRS disagrees,
asserting that HCA is engaged, at least in part, in a merchandising business.
Notwithstanding this assertion, the IRS 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 IRS prevails, Columbia/HCA would owe additional income taxes
of $102 million and interest of $51 million through March 31, 1994.
Leveraged Buy-out Expenses
The IRS 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 IRS. Columbia/HCA believes that all of these costs are deductible.
If the IRS prevails on these issues, Columbia/HCA would owe income taxes of
$94 million and interest of $26 million through March 31, 1994.
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 IRS is claiming an additional $44 million in income taxes
and $29 million in interest through March 31, 1994.
On March 24, 1994, Columbia/HCA made an advance payment to the IRS of
approximately $75 million in connection with certain disputed prior years
income taxes and related interest. This payment will not have a material
effect on 1994 earnings.
Management believes that HCA had properly reported its income and paid its
taxes in accordance with applicable laws and agreements established with the
IRS during previous examinations, and that final resolution of these disputes
will not have a material adverse effect on the results of operations or
financial position of Columbia/HCA.
COLUMBIA/HCA HEALTHCARE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
Unaudited
NOTE 10 - 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.
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.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Background Information and Business Strategy
HCA Merger
As discussed in Note 4 of the Notes to Condensed Consolidated Financial
Statements, the HCA Merger was completed on February 10, 1994. For
accounting purposes, this transaction was treated as a pooling of interests.
Accordingly, the accompanying condensed consolidated financial statements and
financial and operating data included in this discussion and analysis give
retroactive effect to the HCA Merger and include 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. See Note 5 of the Notes to Condensed
Consolidated Financial Statements for a discussion of the Galen Merger. The
accompanying condensed consolidated 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/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 healthcare
delivery networks with physicians and other healthcare providers in targeted
markets, which typically involves significant health care facility
acquisitions and consolidation activities.
During the past several years, hospital industry inpatient admission trends
have been adversely impacted by cost containment efforts initiated by federal
and state governments and various third-party payers, including health
maintenance organizations, preferred provider organizations, 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.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (Continued)
Background Information and Business Strategy (Continued)
In response to changes in the health care industry, Columbia/HCA has
developed the following 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
rehabilitationfacilities, outpatient surgery and diagnostic centers, home health
agencies andother 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 and continuous quality enhancement programs, Columbia/HCA 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, economic
incentives 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
Revenues increased 5% to $2.8 billion in the first quarter of 1994 compared
to the same period last year primarily as a result of price increases, growth
in inpatient and outpatient volumes and acquisitions. On a same-hospital
basis, first quarter 1994 admissions increased 1.4% and outpatient visits
increased 8.1% from a year ago.
Despite a continued deterioration in payer mix, income from continuing
operations before non-recurring transactions, depreciation, interest expense,
minority interests, income taxes and amortization ("EBDITA") increased 8% to
$603 million from $557 million last year. The increase in EBDITA margins to
21.7% this year from 21.0% last year resulted primarily from volume growth,
improvements in staffing levels, increased discounts on medical supplies and
other operating efficiencies related to growth in volume of services.
Medicare admissions as a percentage of total admissions increased from 40%
in the first quarter of 1993 to 41% in the first quarter this year, while
discounted and managed care admissions grew from 32% to 37%, respectively.
During the first quarter of 1994, Columbia/HCA recorded $159 million (before
income taxes) of certain non-recurring charges in connection with the HCA
Merger. In addition to investment and advisory fees associated with the HCA
Merger, these charges reflect management's actions to reduce overhead costs,
eliminate duplicative operating facilities in certain markets and consolidate
management information systems. These cost-saving measures should be
completed during 1994. Management believes that these actions related to the
HCA Merger, combined with cost reductions from renegotiations of medical
supply contracts and interest savings from the first quarter 1994 refinancing
of long term debt, could result in annual pretax savings of approximately
$130 million, of which as much as $75 million could be realized in 1994.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (Continued)
Results of Operations (Continued)
Excluding the effects of the non-recurring transactions, income from
continuing operations totaled $239 million or $.70 per share, an increase of
15% over last year's $205 million or $.61 per share. The increase was
attributable to the previously discussed growth of EBDITA and a $21 million
decline in interest expense resulting from refinancing activities and
reductions of long-term debt.
Results of operations for the first quarter of 1993 include income from
discontinued operations of $16 million or $.04 per share related to Humana's
health plan business prior to the Spinoff. See Note 6 of the Notes to
Condensed Consolidated Financial Statements.
In the first quarter of 1994, Columbia/HCA refinanced approximately $2
billion of HCA's high coupon fixed and floating rate long-term debt. These
transactions were effected to reduce future interest expense and eliminate
certain restrictive covenants. After-tax losses from these extinguishments
of debt aggregated $92 million or $.27 per share.
In connection with the Galen Merger, Columbia/HCA recorded charges in the
third quarter of 1993 totaling $151 million (before income taxes) for
management actions similar to those previously discussed as part of the HCA
Merger. As of March 31, 1994, consolidation and cost-saving activities
related to these charges were substantially completed. Management believes
that these actions related to the Galen Merger, combined with cost reductions
from renegotiations of medical supply contracts and interest savings from the
third quarter 1993 refinancing of long-term debt, could result in annual
pretax savings in 1994 of approximately $30 million.
Liquidity
Cash provided by continuing operations totaled $367 million for the three
months ended March 31, 1994 compared to $376 million last year. Cash flows
in 1994 were reduced by approximately $75 million in connection with the
payment to the IRS related to disputed prior year income taxes and interest.
In both periods, cash flows in excess of Columbia/HCA's capital expenditure
program were used primarily to reduce long-term debt and in 1993, to finance
a payment of $135 million to Humana in connection with the Spinoff. Working
capital totaled $758 million at March 31, 1994 compared to $573 million at
December 31, 1993. 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.
A substantial portion of the non-recurring transactions recorded in the first
quarter of 1994 comprises the writedown of recorded assets and, accordingly,
management does not expect that these transactions will have a material
adverse affect on cash flows from continuing operations in 1994.
Investments of Columbia/HCA's professional liability insurance subsidiaries
to maintain statutory equity and pay claims totaled $778 million at both
March 31, 1994 and December 31, 1993.
Capital Resources
Excluding acquisitions, capital expenditures totaled $214 million in the
first quarter of 1994 compared to $181 million in 1993. 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.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (Continued)
Capital Resources (continued)
Columbia/HCA also expended $114 million and $75 million for acquisitions and
joint ventures during the respective first quarters of 1994 and 1993. See
Note 8 of the Notes to Condensed 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.
Columbia/HCA intends 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 March 31, 1994, there were projects under construction which had an
estimated additional cost to complete of approximately $285 million.
On April 29, 1994, Columbia/HCA filed a registration statement on Form S-3
with the Securities and Exchange Commission in connection with the planned
public offering of up to $1.5 billion of long-term debt. The proceeds from
the sales of such securities will be used for general corporate purposes,
which may include repayment of commercial paper and other indebtedness,
additional capitalization of Columbia/HCA's subsidiaries, capital
expenditures and possible acquisitions.
Other Information
As discussed in Note 9 of the Notes to Condensed Consolidated Financial
Statements, Columbia/HCA is contesting certain income taxes and related
interest aggregating $1.3 billion at March 31, 1994 proposed by the IRS 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 IRS 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 payment 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.
Agreements relating to long-term debt require, among other things,
maintenance of certain levels of interest coverage and provide limitations
on long-term debt, sales of assets, mergers, changes in ownership and certain
other financing activities. Columbia/HCA was in compliance with all such
covenants at March 31, 1994.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (Continued)
Operating Data
1994 1993
Number of hospitals in operation at:
March 31 ...................................... 196 197
June 30 ....................................... 195
September 30 .................................. 191
December 31 ................................... 193
Licensed beds at:
March 31 ...................................... 43,171 42,786
June 30 ....................................... 42,576
September 30 .................................. 42,170
December 31 ................................... 42,237
Weighted average licensed beds:
Quarter:
First ........................................ 41,955 41,525
Second ....................................... 41,824
Third ........................................ 41,149
Fourth ....................................... 41,221
Year .......................................... 41,263
Average daily census:
Quarter:
First ........................................ 20,341 20,880
Second ....................................... 18,634
Third ........................................ 17,425
Fourth ....................................... 17,917
Year .......................................... 18,702
Admissions:
Quarter:
First ........................................ 309,800 306,200
Second ....................................... 286,500
Third ........................................ 278,600
Fourth ....................................... 287,100
Year .......................................... 1,158,400
Length of stay:
Quarter:
First ........................................ 5.9 6.1
Second ....................................... 5.9
Third ........................................ 5.8
Fourth ....................................... 5.7
Year .......................................... 5.9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (Continued)
Operating Data
1994 1993
Outpatient visits:
Quarter:
First ........................................ 1,459,400 1,378,500
Second ....................................... 1,411,800
Third ........................................ 1,311,600
Fourth ....................................... 1,389,000
Year .......................................... 5,490,900
Emergency room visits:
Quarter:
First ........................................ 788,300 791,900
Second ....................................... 792,600
Third ........................................ 778,500
Fourth ....................................... 776,700
Year .......................................... 3,139,700
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (Continued)
Condensed Consolidated Statement Of Income
1993 Quarters
Unaudited
(Dollars in millions, except per share amounts)
First Second Third Fourth Year
Revenues ................................ $2,654 $2,536 $2,491 $2,571 $10,252
Salaries, wages and benefits ............ 1,072 1,049 1,034 1,060 4,215
Supplies ................................ 433 413 405 413 1,664
Other operating expenses ................ 478 461 474 480 1,893
Provision for doubtful accounts ......... 126 132 152 132 542
Depreciation and amortization ........... 136 138 140 140 554
Interest expense ........................ 85 85 81 70 321
Investment income ....................... (12) (15) (18) (21) (66)
Non-recurring transactions .............. - - 151 - 151
2,318 2,263 2,419 2,274 9,274
Income from continuing operations
before minority interests and income
taxes ................................. 336 273 72 297 978
Minority interests in earnings of
consolidated entities ................. 4 3 3 (1) 9
Income from continuing operations
before income taxes ................... 332 270 69 298 969
Provision for income taxes .............. 127 104 41 122 394
Income from continuing operations ....... 205 166 28 176 575
Income from operations of discontinued
health plan segment, net of income
taxes ................................. 16 - - - 16
Extraordinary loss on extinguishment
of debt, net of income tax benefit .... - - (84) - (84)
Net income (loss) .................. $ 221 $ 166 $ (56) $ 176 $ 507
Earnings (loss) per common and common
equivalent share:
Income from continuing operations ..... $ .61 $ .49 $ .08 $ .52 $ 1.70
Income from operations of discontinued
health plan segment ................. .04 - - - .04
Extraordinary loss on extinguishment
of debt ............................. - - (.24) - (.24)
Net income (loss) .................. $ .65 $ .49 $ (.16) $ .52 $ 1.50
Shares used in earnings per common
and common equivalent share
computation (000) .....................337,739 338,544 340,145 340,642 339,222
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (Continued)
Condensed Consolidated Statement Of Income
1992 Quarters
Unaudited
(Dollars in millions, except per share amounts)
First Second Third Fourth Year
Revenues ................................ $2,559 $2,450 $2,451 $2,472 $9,932
Salaries, wages and benefits ............ 1,037 1,006 1,028 1,041 4,112
Supplies ................................ 407 390 405 411 1,613
Other operating expenses ................ 466 456 479 448 1,849
Provision for doubtful accounts ......... 121 126 144 124 515
Depreciation and amortization ........... 135 136 139 131 541
Interest expense ........................ 127 95 89 90 401
Investment income ....................... (20) (19) (26) (16) (81)
Non-recurring transactions .............. - - 532 (93) 439
2,273 2,190 2,790 2,136 9,389
Income (loss) from continuing operations
before minority interests and income
taxes ................................. 286 260 (339) 336 543
Minority interests in earnings of
consolidated entities ................. 3 3 2 2 10
Income (loss) from continuing operations
before income taxes ................... 283 257 (341) 334 533
Provision for income taxes .............. 109 99 (41) 127 294
Income (loss) from continuing
operations ............................ 174 158 (300) 207 239
Income (loss) from operations of
discontinued health plan segment,
net of income taxes (benefit) ......... 3 (2) (132) 6 (125)
Cumulative effect on prior years of a
change in accounting for income
taxes ................................. 51 - - - 51
Net income (loss) .................. $ 228 $ 156 $ (432) $ 213 $ 165
Earnings (loss) per common and common
equivalent share:
Income from continuing operations ..... $ .57 $ .48 $ (.89) $ .61 $ .73
Income (loss) from operations of
discontinued health plan segment .... .02 (.02) (.39) .02 (.39)
Cumulative effect on prior years of a
change in accounting for income
taxes ............................... .16 - - - .16
Net income (loss) .................. $ .75 $ .46 $(1.28) $ .63 $ .50
Shares used in earnings per common
and common equivalent share
computation (000) .....................304,401 331,969 337,675 340,065 328,564
</TABLE>
Part II: Other Information
Item 1: Legal Proceedings.
A purported class action had been filed against HCA, the directors of
HCA, and Columbia, in the Delaware Court of Chancery entitled 7547
Partners v. HCA Hospital Corp. of America, Jack O. Bovender, Jr.,
Thomas F. Frist, Jr., Charles T. Harris, III, Charles J. Kane, Richard
E. Rainwater, Carl E. Reichardt, Frank S. Royal and Columbia Healthcare
Corporation, C.A. No. 13159. The complaint, brought by a purported
stockholder of HCA, alleged that the defendants breached their
fiduciary duties to plaintiff and other members of the purported class
and also alleged that the defendants aided and abetted a gross abuse of
trust. The complaint alleged that the directors of HCA wrongfully
failed to hold an open auction and encourage bona fide bids for HCA and
failed to take action to maximize value to HCA stockholders. The
complaint was voluntarily dismissed without prejudice subsequent to
December 31, 1993.
Item 4: Submission of Matters to a Vote Security Holders.
Special meetings of the stockholders of both Columbia and HCA were held
on February 10, 1994 in Louisville, Kentucky and Nashville, Tennessee,
respectively, for the purpose of approving the HCA Merger. The results
of the stockholder votes follow:
Columbia - The agreement related to the HCA Merger was approved with
118,169,792 affirmative votes, 238,696 negative votes and 279,113
abstentions. A second proposal to change the name of the corporation
to "Columbia/HCA Healthcare Corporation" was approved with 117,996,979
affirmative votes, 417,457 negative votes and 273,165 abstentions. A
third proposal to increase the number of authorized shares of common
stock from 400 million to 800 million and the number of authorized
preferred shares from 10 million to 25 million was approved with
90,745,909 affirmative votes, 27,337,129 negative votes and 604,563
abstentions.
HCA - The agreement related to the HCA Merger was approved with
131,025,221 affirmative votes, 73,552 negative votes and 27,428
abstentions.
Item 5: Other Information.
Columbia/HCA's ratio of earnings to fixed charges was 3.82 and 4.17 for
the three months ended March 31, 1994 and 1993, respectively.
Item 6: Exhibits and Reports on Form 8-K.
(a) Exhibits:
Exhibit 11 - Statement re Computation of Earnings Per Common and Common
Equivalent Share.
Exhibit 12 - Statement re Computation of Ratio of Earnings to Fixed
Charges.
(b) Reports on Form 8-K:
On April 25, 1994, Columbia/HCA filed a report on Form 8-K in
connection with the issuance of $150 million of 8.36% Debentures Due
2024.
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
COLUMBIA/HCA HEALTHCARE
CORPORATION
Date: May 16, 1994 /s/ David C. Colby
David C. Colby
Senior Vice President,
Chief Financial Officer
and Treasurer
(Principal Financial
Officer)
Date: May 16, 1994 /s/ Richard A. Lechleiter
Richard A. Lechleiter
Vice President and
Controller
(Principal Accounting
Officer)
Exhibit 11
COLUMBIA/HCA HEALTHCARE CORPORATION
COMPUTATION OF EARNINGS PER COMMON AND COMMON EQUIVALENT SHARE
For the quarters ended March 31, 1994 and 1993
(Dollars in millions, except per share amounts)
<TABLE>
<S> <C> <C>
1994 1993
Primary Earnings per Common and Common Equivalent Share:
Earnings:
Income from continuing operations ............................... $ 137 $ 205
Income from operations of discontinued health plan segment,
net of income taxes ......................................... - 16
Extraordinary loss on extinguishment of debt, net of income
tax benefit ................................................. (92) -
Net income .................................................. $ 45 $ 221
Shares used in the computation (000):
Weighted average common shares outstanding ...................... 337,222 332,142
Dilutive effect of common stock equivalents ..................... 4,399 5,597
Shares used in earnings per common and common equivalent
share computation ................................... 341,621 337,739
Primary earnings per common and common equivalent share:
Income from continuing operations ............................... $ .40 $ .61
Income from operations of discontinued health plan segment ...... - .04
Extraordinary loss on extinguishment of debt .................... (.27) -
Net income .................................................. $ .13 $ .65
Exhibit 11
COLUMBIA/HCA HEALTHCARE CORPORATION
COMPUTATION OF EARNINGS PER COMMON AND COMMON EQUIVALENT SHARE
For the quarters ended March 31, 1994 and 1993
(Dollars in millions, except per share amounts)
1994 1993
Fully Diluted Earnings per Common and Common Equivalent Share:
Earnings:
Income from continuing operations ............................... $ 137 $ 205
Interest addback on convertible securities, net of income
taxes ......................................................... - 1
Income applicable to common stock ........................... 137 206
Income from operations of discontinued health plan segment,
net of income taxes ........................................... - 16
Extraordinary loss on extinguishment of debt, net of income
tax benefit ................................................... (92) -
Net income .................................................. $ 45 $ 222
Shares used in the computation (000):
Weighted average common shares outstanding ...................... 337,222 332,142
Dilutive effect of common stock equivalents and other
dilutive securities ........................................... 4,399 7,874
Shares used in earnings per common and common equivalent
share computations ........................................ 341,621 340,016
Fully diluted earnings per common and common equivalent share:
Income from continuing operations ............................... $ .40 $ .60
Income from operations of discontinued health plan segment ...... - .04
Extraordinary loss on extinguishment of debt .................... (.27) -
Net income .................................................. $ .13 $ .64
Exhibit 12
</TABLE>
Exhibit 12
COLUMBIA/HCA HEALTHCARE CORPORATION
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
For the quarters ended March 31, 1994 and 1993
(Dollars in millions)
<TABLE>
<S> <C> <C>
1994 1993
Earnings:
Income from continuing operations
before minority interests and income taxes .... $ 236 $ 336
Fixed charges, exclusive of capitalized
interest ...................................... 80 103
$ 316 $ 439
Fixed Charges:
Interest charged to expense ..................... $ 64 $ 85
One-third of rent expense and amortization
of deferred loan costs (a) .................... 16 18
Fixed charges, exclusive of capitalized
interest ...................................... 80 103
Capitalized interest ............................ 3 2
$ 83 $ 105
Ratio of earnings to fixed charges .............. 3.82 4.17
(a) One-third of rent expense is considered representative of the underlying interest.
</TABLE>
