<PAGE>
PROSPECTUS
6,000,000 SHARES
Columbia/HCA Healthcare Corporation
COMMON STOCK
($.01 PAR VALUE)
All of the shares of Common Stock offered hereby are being sold by a selling
stockholder of Columbia/HCA Healthcare Corporation (the "Company"). See "Selling
Stockholder." The Company will not receive any of the proceeds from the sale of
shares. Of the 6,000,000 shares of Common Stock offered hereby, 4,800,000 shares
initially are being offered in the United States and Canada by the U.S.
Underwriters (the "U.S. Underwriters") and 1,200,000 shares initially are being
offered outside of the United States and Canada by the International
Underwriters (the "International Underwriters," together with the U.S.
Underwriters, the "Underwriters").
The Company's Common Stock is listed on the New York Stock Exchange under the
symbol "COL." On June 7, 1994, the last reported sale price for the Common
Stock, as reported on the New York Stock Exchange Composite Tape, was $40.50 per
share. See "Price Range of Common Stock and Dividend Policy."
SEE "INVESTMENT CONSIDERATIONS" FOR CERTAIN CONSIDERATIONS RELEVANT TO AN
INVESTMENT IN THE COMMON STOCK.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
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PRICE TO UNDERWRITING PROCEEDS TO SELLING
PUBLIC DISCOUNT(1) STOCKHOLDER(2)
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Per Share $40.50 $1.22 $39.28
- --------------------------------------------------------------------------------------------------------
Total(3) $243,000,000 $7,290,000 $235,710,000
- ------------------------------------------------------------------------------------------------
<FN>
(1) The Company and the selling stockholder have agreed to indemnify the
Underwriters against certain liabilities, including liabilities under the
Securities Act of 1933, as amended. See "Underwriting."
(2) The Company will pay the expenses of the offering estimated at $250,000.
(3) The selling stockholder has granted to the U.S. Underwriters an option,
exercisable within 30 days of the date of this Prospectus, to purchase up
to an additional 900,000 shares of Common Stock, solely to cover
overallotments, if any. If such overallotment option is exercised in full,
the total Price to Public, Underwriting Discount and Proceeds to Selling
Stockholder will be $279,450,000, $8,383,500 and $271,066,500,
respectively. See "Underwriting."
</TABLE>
The shares offered by this Prospectus are being offered by the Underwriters,
subject to prior sale, when, as and if delivered to and accepted by the
Underwriters, and subject to the approval of certain legal matters by Davis Polk
& Wardwell, counsel for the Underwriters. It is expected that delivery of the
shares will be made against payment therefor on or about June 15, 1994 at the
offices of J.P. Morgan Securities Inc., 60 Wall Street, New York, New York
10260.
J.P. MORGAN SECURITIES INC.
DEAN WITTER REYNOLDS INC.
MORGAN STANLEY & CO.
INCORPORATED
JUNE 8, 1994
<PAGE>
[MAP]
IN CONNECTION WITH THE OFFERING, THE UNDERWRITERS MAY OVERALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK AT
A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH
TRANSACTIONS MAY BE EFFECTED ON THE NEW YORK STOCK EXCHANGE, IN THE OVER-THE-
COUNTER MARKET OR OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED
AT ANY TIME.
<PAGE>
No person has been authorized in connection with any offering made hereby to
give any information or to make any representation not contained in this
Prospectus, and, if given or made, such information or representation must not
be relied upon as having been authorized by the Company, the selling stockholder
or any Underwriter. This Prospectus does not constitute an offer to sell or a
solicitation of an offer to buy any security other than the shares of Common
Stock offered hereby, nor does it constitute an offer to sell or a solicitation
of an offer to buy any of the securities offered hereby to any person in any
jurisdiction in which it is unlawful to make such an offer or solicitation to
such person. Neither the delivery of this Prospectus nor any sale made hereunder
shall under any circumstances create any implication that there has been no
change in the affairs of the Company subsequent to the date hereof.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
<S> <C>
Incorporation of Certain Documents By Reference..... 3
Prospectus Summary.................................. 4
Investment Considerations........................... 7
Price Range of Common Stock and Dividend Policy..... 10
Use of Proceeds..................................... 11
Capitalization...................................... 11
Selected Consolidated Financial Data................ 12
<CAPTION>
Page
<S> <C>
Management's Discussion and Analysis of Financial
Condition and Results
of Operations...................................... 14
Selling Stockholder................................. 20
Underwriting........................................ 22
Legal Matters....................................... 24
Experts............................................. 24
Available Information............................... 24
Index to Consolidated Financial Statements.......... F-1
</TABLE>
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents filed by the Company with the Securities and Exchange
Commission (the "Commission") are incorporated herein by reference:
1. Annual Report on Form 10-K for the year ended December 31, 1993 (the
"Form 10-K").
2. Quarterly Report on Form 10-Q for the quarter ended March 31, 1994.
3. The portions of the Proxy Statement for the Annual Meeting of
Stockholders which was held May 12, 1994 that have been incorporated by
reference in the Form 10-K.
4. Current Reports on Form 8-K dated April 25, 1994, May 16, 1994 and May
23, 1994.
5. The description of the Common Stock contained in the Registration
Statement on Form 8-A dated August 31, 1993, as amended.
All reports and other documents subsequently filed by the Company pursuant to
Section 13(a), 13(c), 14 or 15(d) of the Securities Exchange Act of 1934, as
amended, after the date of this Prospectus and prior to the termination of this
offering shall be deemed to be incorporated by reference herein and to be a part
hereof from the date of filing of such reports and documents. Any statement set
forth herein or in a document, all or a portion of which is incorporated or
deemed to be incorporated by reference herein, will be deemed to be modified or
superseded for purposes of this Prospectus to the extent that a statement set
forth herein or in a subsequently filed document deemed to be incorporated by
reference herein modifies or supersedes such statement. Any statement so
modified or superseded shall not be deemed, except as so modified and
superseded, to constitute a part of this Prospectus.
THE COMPANY WILL FURNISH, WITHOUT CHARGE, TO EACH PERSON, INCLUDING ANY
BENEFICIAL OWNER, TO WHOM A PROSPECTUS IS DELIVERED, UPON WRITTEN OR ORAL
REQUEST, A COPY OF ANY OR ALL OF THE FOREGOING DOCUMENTS INCORPORATED HEREIN BY
REFERENCE OTHER THAN EXHIBITS TO SUCH DOCUMENTS (UNLESS SUCH EXHIBITS ARE
SPECIFICALLY INCORPORATED BY REFERENCE THEREIN). REQUESTS FOR SUCH DOCUMENTS
SHOULD BE SUBMITTED IN WRITING TO JOAN O. KROGER, SECRETARY, COLUMBIA/HCA
HEALTHCARE CORPORATION, 201 WEST MAIN STREET, LOUISVILLE, KENTUCKY 40202 OR BY
TELEPHONE AT (502) 572-2259.
3
<PAGE>
PROSPECTUS SUMMARY
THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE MORE DETAILED
INFORMATION AND CONSOLIDATED FINANCIAL STATEMENTS AND NOTES THERETO APPEARING
ELSEWHERE OR INCORPORATED BY REFERENCE IN THIS PROSPECTUS. THE OFFERING OF
4,800,000 SHARES INITIALLY BEING OFFERED IN THE UNITED STATES AND CANADA (THE
"U.S. OFFERING") AND THE OFFERING OF 1,200,000 SHARES INITIALLY BEING OFFERED
OUTSIDE THE UNITED STATES AND CANADA (THE "INTERNATIONAL OFFERING") ARE
COLLECTIVELY REFERRED TO AS THE "OFFERING." UNLESS OTHERWISE INDICATED, THE
INFORMATION CONTAINED IN THIS PROSPECTUS ASSUMES THAT THE U.S. UNDERWRITERS'
OVERALLOTMENT OPTION IS NOT EXERCISED. AS USED IN THIS PROSPECTUS, UNLESS THE
CONTEXT INDICATES OTHERWISE, THE "COMPANY" MEANS COLUMBIA/HCA HEALTHCARE
CORPORATION, ITS SUBSIDIARIES AND ALL PREDECESSORS OF COLUMBIA/HCA HEALTHCARE
CORPORATION AND ITS SUBSIDIARIES, "COMMON STOCK" MEANS THE COMMON STOCK ($.01
PAR VALUE) OF THE COMPANY AND "NONVOTING COMMON STOCK" MEANS THE NONVOTING
COMMON STOCK ($.01 PAR VALUE) OF THE COMPANY.
THE COMPANY
The Company is one of the largest health care services companies in the United
States. As of March 31, 1994, the Company operated 168 general, acute care
hospitals and 28 psychiatric hospitals in 26 states and two foreign countries.
In addition, as part of its comprehensive health care networks, the Company
operates facilities that provide a range of outpatient and ancillary services.
For the year ended December 31, 1993, the Company generated operating revenues
of $10.3 billion and income from continuing operations of $575 million. The
Company's outpatient and ancillary facilities accounted for 27 percent of total
operating revenues in 1993.
The Company's primary objective is to provide to the markets it serves a
comprehensive array of quality health care services in the most cost effective
manner possible. The Company's general, acute care hospitals usually provide a
full range of services commonly available in hospitals to accommodate such
medical specialties as internal medicine, general surgery, cardiology, oncology,
neurosurgery, orthopedics and obstetrics, as well as diagnostic and emergency
services. Outpatient and ancillary health care services are provided by the
Company's general, acute care hospitals as well as at freestanding facilities
operated by the Company including rehabilitation facilities, outpatient surgery
and diagnostic centers, home health care agencies and other facilities. In
addition, the Company operates psychiatric hospitals which generally provide a
full range of mental health care services in inpatient, partial hospitalization
and outpatient settings. The Company believes that its widespread and
comprehensive network of health care facilities enables it to attract business
from managed care plans and major employers seeking efficient access to a wide
array of health care services.
On February 10, 1994, the Company acquired HCA-Hospital Corporation of America
("HCA") in a transaction accounted for as a pooling of interests (the "HCA
Merger"). Effective September 1, 1993, the Company acquired Galen Health Care,
Inc. ("Galen") also in a pooling of interests transaction (the "Galen Merger").
Galen began operations as an independent publicly held corporation upon the
distribution of all of its common stock (the "Spinoff") by its then 100% owner,
Humana Inc. ("Humana"), on March 1, 1993. As a result of these acquisitions, the
Company added 167 hospitals. These acquisitions have allowed the Company to
establish a strong position in new markets. In addition, the Company expects
these acquisitions to enhance its relationships with managed care providers and
other payers by expanding its geographic coverage and the range of outpatient
services it offers, and to permit it to capture significant operating
efficiencies through the consolidation of supply purchasing activities,
information systems, office facilities and various support functions.
The Company intends to continue to pursue a strategy of acquisition and
integration of hospitals and other health care facilities that are complementary
to its existing facilities and that enhance both the array of services offered
by its facilities and the geographic coverage of the markets it serves.
Consistent with this strategy, the Company has in the first quarter of 1994
announced the expansion of a number of its regional networks including Atlanta,
Chicago, Dallas/Fort Worth, Kansas City and Orlando. The Company believes that
significant opportunities exist to integrate facilities that have formerly been
operated on a tax-exempt basis into its networks. In integrating the facilities
it acquires, the Company seeks to decentralize the management of its facilities
and provide local management and physicians with the opportunity to purchase
equity interests in their local operations through partnership or other
corporate structures. In addition to the acquisition of general, acute care
hospitals, the Company is in the process of adding additional sub-acute, home
health, rehabilitation, psychiatric and comprehensive outpatient services.
Along with the Company's focus on the acquisition of facilities that broaden its
range of services and geographic coverage, the Company's strategy also includes
a number of programs designed to enhance the quality of its
4
<PAGE>
health care services and the management and operating efficiency of its
facilities. The principal components of the Company's operating strategy are to:
(i) BECOME A SIGNIFICANT PROVIDER OF HEALTH CARE SERVICES in the markets that it
serves by consolidating services and operations to reduce costs and by
establishing the wide geographic coverage required by managed care and employer
sponsored health care plans; (ii) PROVIDE A COMPREHENSIVE RANGE OF HEALTH CARE
SERVICES in each of its markets to provide managed care and employer health care
plans and individuals with efficient, single provider access to health care
services; (iii) DELIVER HIGH QUALITY SERVICES by using clinical information
systems to focus on patient outcomes and by implementing other quality assurance
programs to support and monitor quality of care standards and to meet
accreditation and regulatory standards; and (iv) INTEGRATE FRAGMENTED DELIVERY
SYSTEMS through the consolidation of acquisitions and existing facilities to
maximize the efficiencies generated by contracting with managed care plans and
employers and coordinating supply purchasing, information systems, government
and private reimbursement and other support functions.
The Company, through various predecessor entities, began operations on July 1,
1988. The Company was incorporated in Nevada in January 1990 and reincorporated
in Delaware in September 1993. The Company's principal executive offices are
located at 201 West Main Street, Louisville, Kentucky 40202 and its telephone
number at such address is (502) 572-2000.
THE OFFERING
<TABLE>
<S> <C>
Common Stock offered by the selling
stockholder:
U.S. Offering............................. 4,800,000 shares (1)
International Offering.................... 1,200,000 shares
Total Offering...................... 6,000,000 shares (1)
Common Stock outstanding after the 338,069,320 shares (2)(3)
Offering..................................
NYSE symbol............................... COL
Use of Proceeds........................... All of the Common Stock is being
sold by the selling stockholder.
The Company will not receive any
proceeds from the sale of the
shares being offered hereby.
<FN>
- ------------
(1) Assumes the U.S. Underwriters' overallotment option is not exercised. See
"Underwriting."
(2) Does not include 18,198,524 shares as of April 30, 1994 which have been
reserved for issuance under the Company's stock option plans, pursuant to
the exercise of warrants and upon conversion of convertible securities.
(3) Includes 15,089,999 shares of Nonvoting Common Stock.
</TABLE>
5
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SUMMARY CONSOLIDATED FINANCIAL INFORMATION
The summary consolidated financial information set forth below gives effect to
the Galen Merger and the HCA Merger which were accounted for as poolings of
interests. The following financial information has been derived from, and should
be read in conjunction with, the Company's consolidated financial statements,
and notes thereto, included elsewhere in this Prospectus and with "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
<TABLE>
<CAPTION>
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THREE MONTHS ENDED
MARCH 31 YEAR ENDED DECEMBER 31
DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS 1994 1993 1993 1992 1991
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues....................................... $ 2,778 $ 2,654 $ 10,252 $ 9,932 $ 9,598
Non-recurring charges.......................... 159 - 151 439 300
Income from continuing operations before income
taxes......................................... 233 332 969 533 542
Extraordinary loss on extinguishment of debt,
net of income tax benefit..................... (92) - (84) - -
Net income..................................... 45 221 507 165 369
Earnings per common and common equivalent
share......................................... $ .13 $ .65 $ 1.50 $ .50 $ 1.25
BALANCE SHEET DATA (AT END OF PERIOD):
Assets......................................... $ 10,352 $ 10,068 $ 10,216 $ 10,347 $ 10,843
Working capital................................ 758 442 573 606 635
Long-term debt (including amounts due within
one year)..................................... 3,614 3,891 3,698 3,656 5,158
Common stockholders' equity.................... 3,514 3,114 3,471 3,691 2,822
SELECTED OTHER FINANCIAL DATA:
EBDITA(1)...................................... $ 603 $ 557 $ 2,004 $ 1,924 $ 1,972
EBDITA as a percent of revenues................ 21.7% 21.0% 19.5% 19.4% 20.6%
Interest expense............................... $ 64 $ 85 $ 321 $ 401 $ 597
Ratio of debt to debt plus common stockholders'
equity........................................ 50.7% 55.5% 51.6% 49.8% 64.6%
SELECTED OPERATING DATA:
Number of hospitals at end of period........... 196 197 193 200 219
Weighted average licensed beds(2).............. 41,955 41,525 41,263 40,608 42,437
Admissions(3).................................. 309,800 306,200 1,158,400 1,161,100 1,189,700
Average length of stay (days).................. 5.9 6.1 5.9 6.1 6.5
Average daily census........................... 20,341 20,880 18,702 19,253 21,255
Occupancy(4)................................... 48.5% 50.3% 45.3% 47.4% 50.1%
Emergency room visits.......................... 788,300 791,900 3,139,700 3,042,900 3,028,600
<FN>
- ------------
(1) Income from continuing operations before non-recurring transactions,
depreciation, interest expense, minority interests, income taxes and
amortization.
(2) Defined as the number of licensed beds after giving effect to the length
of time the beds have been licensed during the period.
(3) The number of patients admitted for inpatient treatment.
(4) Calculated by dividing average daily census by weighted average licensed
beds.
</TABLE>
6
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INVESTMENT CONSIDERATIONS
Prospective investors should consider carefully, in addition to the other
information contained or incorporated by reference in this Prospectus, the
following factors before purchasing the Common Stock offered hereby.
HEALTH CARE REFORM
In recent years, an increasing number of legislative proposals have been
introduced or proposed in Congress and in some state legislatures that would
effect major changes in the health care system, either nationally or at the
state level. Among the proposals under consideration are cost controls on
hospitals, insurance market reforms to increase the availability of group health
insurance to small businesses, requirements that all businesses offer health
insurance coverage to their employees and the creation of a single government
health insurance plan that would cover all citizens. President Clinton has
stated that one of his primary objectives is to reform the nation's health care
system to ensure universal coverage and address the rising costs of care. In
early 1993, President Clinton appointed Hillary Rodham Clinton to lead a health
care reform task force with the objective of developing a health care reform
proposal which could be submitted by the President. On September 22, 1993,
before a Joint Session of Congress, President Clinton outlined the basic
principles of his upcoming health care reform proposal. President Clinton's
Health Security Act, introduced as legislation on November 22, 1993, includes
certain measures that could be viewed as advancing the scope of government
regulation of the health care industry. Key elements in the President's proposal
include various insurance market reforms, the requirement that businesses
provide health insurance coverage for their full-time and part-time employees,
significant reductions in future Medicare and Medicaid payments to providers,
and stringent government cost controls that would directly control insurance
premiums and indirectly affect the fees of hospitals, physicians and other
health care providers. In addition to the President's reform proposal, several
other health care reform bills have recently been introduced, including The
Managed Competition Act of 1993, Affordable Health Care Now Act of 1993 and
Health Equity & Access Reform Today. There can be no assurance that health care
proposals adverse to the Company's business will not be adopted.
COMPETITION; IMPACT OF MANAGED CARE ORGANIZATIONS
The health care business is highly competitive and competition among hospitals
and other health care providers for patients has intensified in recent years.
During this period, U.S. hospital occupancy rates have declined as a result of
cost containment pressures, changing technology, changes in government
regulation and reimbursement, and changes in physician practice patterns from
inpatient to outpatient treatment. In most geographic areas in which the Company
operates, there are other hospitals, outpatient surgery and diagnostic centers
and other facilities that provide most of the services offered by the Company's
hospitals. Certain of these competing facilities offer services, including
extensive medical research and medical education programs, which are not offered
by the Company's hospitals. In addition, hospitals owned by governmental
agencies or other tax-exempt entities benefit from endowments, charitable
contributions, tax-exempt financing and exemptions from sales, property and
income taxes, which advantages are not available to the Company's hospitals.
The competitive position of the Company's hospitals also has been, and will
continue to be, affected by the increasing number of initiatives undertaken
during the past several years by major purchasers of health care, including
federal and state governments, insurance companies and employers, to revise
payment methodologies and monitor health care expenditures in order to contain
health care costs. As a result of these initiatives, managed care organizations,
which offer prepaid and discounted medical services packages, represent an
increasing segment of health care payers, the effect of which has been to reduce
hospital revenue growth.
LIMITS ON REIMBURSEMENT
A significant portion of the Company's revenue is derived from the Medicare
program, which is highly regulated and subject to frequent and substantial
changes. In recent years, fundamental changes in the Medicare program (including
the implementation of a prospective payment system for inpatient services at
medical/surgical hospitals) have resulted in reduced levels of payment for a
substantial portion of hospital procedures and costs. Certain existing payment
programs are scheduled to be revised in the future which will likely result in
further reductions in payment levels. Medicare programs that currently are on a
cost reimbursement basis, such as outpatient and psychiatric hospital services,
may be changed to a prospective payment basis in the future. Additionally,
hospitals have experienced increasing pressures from private payers attempting
to control health
7
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care costs through direct contracting with hospitals to provide services on a
discounted basis, increasing utilization review, and encouraging greater
enrollment in managed care programs such as health maintenance organizations
("HMOs") and preferred provider organizations ("PPOs"). 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.
EXTENSIVE REGULATION
The health care industry, including hospitals, is subject to extensive federal,
state and local regulation relating to licensure, conduct of operations,
ownership of facilities, addition of facilities and services and prices for
services, and there can be no assurance that future regulatory changes will not
have an adverse impact on the Company. In particular, Medicare and Medicaid
antifraud and abuse amendments codified under Section 1128(b) of the Social
Security Act (the "Antifraud Amendments") prohibit certain business practices
and relationships that might affect the provision and cost of health care
services reimbursable under Medicare and Medicaid. Sanctions for violating the
Antifraud Amendments include criminal penalties and civil sanctions, including
fines and possible exclusion from the Medicare and Medicaid programs. Pursuant
to the Medicare and Medicaid Patient and Program Protection Act of 1987, the
Department of Health and Human Services has issued regulations which describe
some of the conduct and business relationships permissible under the Antifraud
Amendments (the "Safe Harbors"). Certain of the Company's current arrangements
with physicians, including joint ventures, do not qualify for the current Safe
Harbors. Although the Company exercises care in an effort to structure its
arrangements with physicians to comply in all material respects with these laws,
and although management believes that the Company is in compliance with the
Antifraud Amendments, there can be no assurance that (i) government officials
charged with responsibility for enforcing the prohibitions of the Antifraud
Amendments will not assert that the Company or certain transactions in which it
is involved are in violation of the Antifraud Amendments and (ii) such statute
will ultimately be interpreted by the courts in a manner consistent with the
practices of the Company.
PENDING HCA TAX LITIGATION
As a result of examinations by the Internal Revenue Service (the "IRS") of HCA's
federal income tax returns, HCA received statutory notices of deficiency for the
years 1981 through 1988. HCA has filed petitions in the U.S. Tax Court opposing
these claimed deficiencies. Additionally, the IRS completed its examination for
the years 1989 and 1990 and has issued proposed adjustments, which HCA has
protested. In the aggregate, the IRS is claiming additional taxes of $516
million and interest of approximately $802 million through March 31, 1994. In
addition to disputing the IRS's positions, HCA is claiming refunds of $51
million and interest through March 31, 1994 of $95 million. Management is of the
opinion that HCA has properly reported its income and paid its taxes in
accordance with applicable laws and in accordance with agreements established
with the IRS during previous examinations. In management's opinion, the final
outcome from the IRS's examinations of prior years' income taxes will not have a
material adverse effect on the results of operations or financial position of
the Company. If all or the majority of the positions of the IRS are upheld,
however, the financial position, results of operations and liquidity of the
Company would be materially adversely affected. See Note 7 of the Notes to
Consolidated Financial Statements and Note 9 of the Notes to Condensed
Consolidated Financial Statements.
DEPENDENCE ON KEY PERSONNEL
The Company is dependent upon the continued services and management experience
of Richard L. Scott and other executive officers. If Mr. Scott or any of such
other executive officers were to leave the Company, the Company's operating
results could be adversely affected. In addition, the Company's continued growth
depends on its ability to attract and retain skilled employees, on the ability
of its officers and key employees to manage growth successfully and on the
Company's ability to attract and retain physicians at its hospitals.
PROFESSIONAL LIABILITY RISKS
As is typical in the health care industry, the Company is subject to claims and
legal actions by patients and others in the ordinary course of business. The
Company, through two wholly-owned subsidiaries, insures substantially all of its
professional and general liability risks. Subject to various deductibles, the
Company's hospitals are insured by these insurance subsidiaries for losses of up
to $25 million per occurrence for the former
8
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HCA hospitals and up to $5 million per occurrence for the former Columbia
Hospital Corporation and Galen hospitals. The Company currently carries general
and professional liability insurance from unrelated commercial carriers for
losses in excess of amounts insured by its insurance subsidiaries, subject to
certain limitations. While the Company's professional and other liability
insurance has been adequate to provide for liability claims in the past, there
can be no assurance that such insurance will continue to be adequate. If actual
payments of claims with respect to liabilities insured by the Company through
its subsidiaries exceed anticipated payments of claims, the results of
operations and cash flows of the Company could be adversely affected.
CERTAIN ANTI-TAKEOVER PROVISIONS
Certain provisions of the Company's Restated Certificate of Incorporation and
Bylaws may make an unsolicited acquisition of control of the Company more
difficult or expensive. Furthermore, the Company has adopted a stockholder
rights plan which may also make an unsolicited acquisition of the Company more
difficult or expensive.
9
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PRICE RANGE OF COMMON STOCK AND DIVIDEND POLICY
The 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 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 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>
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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
1994:
First Quarter...................................................... 45.25 33.25
Second Quarter (through June 7, 1994).............................. 43.00 36.50
</TABLE>
The registrar and transfer agent for the Common Stock is First Union National
Bank of North Carolina. At the close of business on March 31, 1994, there were
15,600 holders of record of the Common Stock and one holder of record of the
Nonvoting Common Stock. See the cover page of this Prospectus for a recent
closing sale price of the 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 Board of Directors to
continue paying a quarterly dividend of $.03 per share, the declaration and
payment of future dividends by the Company will be at the discretion of the
Board of Directors and will depend upon many factors, including the Company's
earnings, financial condition, business needs, capital and surplus and
regulatory considerations.
10
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USE OF PROCEEDS
All of the Common Stock is being offered by the selling stockholder. The Company
will not receive any of the proceeds from the sale of the shares being offered.
CAPITALIZATION
The following table sets forth as of March 31, 1994 the capitalization of the
Company. The table should be read in conjunction with the Company's condensed
consolidated financial statements, and the notes thereto, appearing elsewhere in
this Prospectus.
<TABLE>
<CAPTION>
-----------
AS OF
MARCH 31
1994
-----------
(UNAUDITED)
<S> <C>
DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS
SHORT-TERM DEBT:
Current portion of long-term debt................................................................. $ 81
------------
LONG-TERM DEBT:
Bank debt......................................................................................... 318
Other floating rate debt.......................................................................... 1,779
Fixed rate notes and debentures................................................................... 1,338
Capitalized leases................................................................................ 98
------------
Total long-term debt............................................................................ 3,533
------------
COMMON STOCKHOLDERS' EQUITY:
Common Stock, par value $.01 per share; 800,000,000 voting shares and 25,000,000 nonvoting shares
authorized; 318,806,900 voting shares and 18,990,000 nonvoting shares issued and
outstanding(1)................................................................................... 3
Capital in excess of par value.................................................................... 2,226
Other............................................................................................. 4
Retained earnings................................................................................. 1,281
------------
Total common stockholders' equity............................................................... 3,514
------------
TOTAL CAPITALIZATION................................................................................ $ 7,128
------------
------------
<FN>
- ------------
(1) Does not include 18,428,489 shares which have been reserved for issuance
under the Company's stock option plans, pursuant to the exercise of
warrants and upon conversion of convertible securities.
</TABLE>
11
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
The selected consolidated financial data set forth below gives effect to the
Galen Merger and the HCA Merger which were accounted for as poolings of
interests. The following financial information has been derived from, and should
be read in conjunction with, the Company's consolidated financial statements,
and notes thereto, included elsewhere in this Prospectus and with "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------
THREE MONTHS ENDED
DOLLARS IN MILLIONS, EXCEPT PER MARCH 31 YEAR ENDED DECEMBER 31
SHARE AMOUNTS 1994 1993 1993 1992 1991 1990 1989
-------- -------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues........................... $ 2,778 $ 2,654 $ 10,252 $ 9,932 $ 9,598 $ 8,641 $ 7,724
-------- -------- ---------- ---------- ---------- ---------- ----------
Salaries, wages and benefits....... 1,113 1,072 4,215 4,112 3,976 3,510 3,066
Supplies........................... 434 433 1,664 1,613 1,467 1,314 1,135
Other operating expenses........... 492 478 1,893 1,849 1,739 1,586 1,483
Provision for doubtful accounts.... 150 126 542 515 508 444 407
Depreciation and amortization...... 144 136 554 541 524 499 468
Interest expense................... 64 85 321 401 597 694 667
Investment income.................. (14) (12) (66) (81) (64) (69) (103)
Non-recurring transactions......... 159 - 151 439 300 22 (10)
-------- -------- ---------- ---------- ---------- ---------- ----------
2,542 2,318 9,274 9,389 9,047 8,000 7,113
-------- -------- ---------- ---------- ---------- ---------- ----------
Income from continuing operations
before minority interests and
income taxes...................... 236 336 978 543 551 641 611
Minority interests in earnings of
consolidated entities............. 3 4 9 10 9 4 4
-------- -------- ---------- ---------- ---------- ---------- ----------
Income from continuing operations
before income taxes............... 233 332 969 533 542 637 607
Provision for income taxes......... 96 127 394 294 189 240 223
-------- -------- ---------- ---------- ---------- ---------- ----------
Income from continuing
operations........................ 137 205 575 239 353 397 384
Income (loss) from operations of
discontinued health plan segment,
net of income taxes (benefit)..... - 16 16 (125) 16 (6) (18)
Extraordinary loss on
extinguishment of debt, net of
income tax benefit................ (92) - (84) - - - (9)
Cumulative effect on prior years of
a change in accounting for income
taxes............................. - - - 51 - - -
-------- -------- ---------- ---------- ---------- ---------- ----------
Net income..................... $ 45 $ 221 $ 507 $ 165 $ 369 $ 391 $ 357
-------- -------- ---------- ---------- ---------- ---------- ----------
-------- -------- ---------- ---------- ---------- ---------- ----------
Earnings per common and common
equivalent share (1):
Income from continuing
operations...................... $ .40 $ .61 $ 1.70 $ .73 $ 1.20 $ 1.28
Income (loss) from operations of
discontinued health plan
segment......................... - .04 .04 (.39) .05 (.02)
Extraordinary loss on
extinguishment of debt.......... (.27) - (.24) - - -
Cumulative effect on prior years
of a change in accounting for
income taxes.................... - - - .16 - -
-------- -------- ---------- ---------- ---------- ----------
Net income..................... $ .13 $ .65 $ 1.50 $ .50 $ 1.25 $ 1.26
-------- -------- ---------- ---------- ---------- ----------
-------- -------- ---------- ---------- ---------- ----------
Shares used in earnings per common
and common equivalent share
computations (in thousands)....... 341,621 337,739 339,222 328,564 279,954 262,552
Net cash provided by continuing
operations........................ $ 367 $ 376 $ 1,298 $ 1,287 $ 1,257 $ 1,191 $ 919
Cash dividends declared and paid
per common share.................. .03 - .03 - - - -
</TABLE>
12
<PAGE>
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------
AS OF MARCH 31 AS OF DECEMBER 31
1994 1993 1993 1992 1991 1990 1989
-------- -------- ---------- ---------- ---------- ---------- ----------
BALANCE SHEET DATA:
<S> <C> <C> <C> <C> <C> <C> <C>
Assets............................. $ 10,352 $ 10,068 $ 10,216 $ 10,347 $ 10,843 $ 10,391 $ 10,461
Working capital.................... 758 442 573 606 635 482 379
Long-term debt, including amounts
due within one year............... 3,614 3,891 3,698 3,656 5,158 5,139 6,022
Common stockholders' equity........ 3,514 3,114 3,471 3,691 2,822 2,099 1,585
<CAPTION>
-----------------------------------------------------------------------------
THREE MONTHS ENDED
MARCH 31 YEAR ENDED DECEMBER 31
1994 1993 1993 1992 1991 1990 1989
-------- -------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
SELECTED OTHER FINANCIAL DATA:
EBDITA (2)......................... $ 603 $ 557 $ 2,004 $ 1,924 $ 1,972 $ 1,856 $ 1,736
Percent of revenues:
Salaries, wages and benefits..... 40.1% 40.4% 41.1% 41.4% 41.4% 40.6% 39.7%
Supplies......................... 15.6 16.3 16.2 16.2 15.3 15.2 14.7
Other operating expenses......... 17.7 18.1 18.5 18.6 18.1 18.4 19.2
Provision for doubtful
accounts........................ 5.4 4.7 5.3 5.2 5.3 5.1 5.3
EBDITA........................... 21.7 21.0 19.5 19.4 20.6 21.5 22.5
Ratio of debt to debt plus common
stockholders' equity.............. 50.7% 55.5% 51.6% 49.8% 64.6% 71.0% 79.2%
SELECTED OPERATING DATA:
Number of hospitals at end of
period............................ 196 197 193 200 219 221 218
Weighted average licensed beds..... 41,955 41,525 41,263 40,608 42,437 42,264 41,452
Admissions......................... 309,800 306,200 1,158,400 1,161,100 1,189,700 1,174,700 1,139,300
Average length of stay (days)...... 5.9 6.1 5.9 6.1 6.5 6.6 6.8
Average daily census............... 20,341 20,880 18,702 19,253 21,255 21,351 21,155
Occupancy.......................... 48.5% 50.3% 45.3% 47.4% 50.1% 50.5% 51.0%
Emergency room visits.............. 788,300 791,900 3,139,700 3,042,900 3,028,600 2,894,800 2,756,900
<FN>
- -------------
(1) 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
requirements totaling $18 million in 1991 and $63 million in 1990.
(2) Income from continuing operations before non-recurring transactions,
depreciation, interest expense, minority interests, income taxes and
amortization.
</TABLE>
13
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
BACKGROUND INFORMATION AND BUSINESS STRATEGY
HCA MERGER
As discussed in Notes 1 and 2 of the Notes to the Consolidated Financial
Statements of the Company, on October 2, 1993, Columbia Healthcare Corporation
("Columbia") entered into a definitive agreement to merge with HCA. This
transaction was completed on February 10, 1994 and was accounted for as a
pooling of interests. Accordingly, the accompanying financial statements and the
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. Accordingly, the accompanying financial statements
and the financial and operating data included in this discussion and analysis
give retroactive effect to the Galen Merger and include the combined operations
of Columbia Hospital Corporation ("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 the Company'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 the Company) 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
The Company 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 the Company serve as
the managing general partner. The Company'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.
In response to changes in the health care industry, the Company 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 -- The Company 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, the Company also operates
psychiatric and rehabilitation facilities, outpatient surgery and diagnostic
centers, home health agencies and other services. This strategy enables the
Company to attract business from managed care plans and major employers
seeking efficient access to a wide array of health care services.
14
<PAGE>
DELIVER HIGH QUALITY SERVICES -- Through the use of clinical
information systems and continuous quality enhancement programs, the Company
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, the
Company focuses on coordinating 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.
COMPARISON OF RESULTS OF OPERATIONS FOR THE
QUARTERS ENDED MARCH 31, 1994 AND 1993
Revenues increased 5% to $2.8 billion in the first quarter of 1994 compared to
the same period of 1993 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 the same period of 1993.
Despite a continued deterioration in payer mix, EBDITA increased 8% to $603
million in the first quarter of 1994 from $557 million in the first quarter of
1993. The increase in EBDITA margins to 21.7% in the first quarter of 1994 from
21.0% in the first quarter of 1993 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 of 1994, while discounted and
managed care admissions grew from 32% to 37%, respectively.
During the first quarter of 1994, the Company recorded $159 million ($102
million net of tax) 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. The Company may incur additional charges related to the HCA Merger
during the remainder of 1994 in connection with severance payments resulting
from continued consolidation activities. 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, may result in annual pretax savings of
approximately $130 million, of which as much as $75 million may be realized in
1994.
Excluding the effects of the non-recurring transactions, income from continuing
operations in the first quarter of 1994 totaled $239 million or $.70 per share,
an increase of 15% over the $205 million or $.61 per share in the first quarter
of 1993. 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 for a description of the Spinoff.
In the first quarter of 1994, the Company 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, the Company recorded charges in the third
quarter of 1993 totaling $151 million ($98 million net of tax) 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
15
<PAGE>
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, should result in annual pretax savings in 1994 of approximately
$30 million.
COMPARISON OF RESULTS OF OPERATIONS FOR THE
YEARS ENDED DECEMBER 31, 1993, 1992 AND 1991
At the time of the HCA Merger, the Company 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 CONSOLIDATED
---------------------------------
<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:
1993............................................... $ 907 $ 1,097 $ 2,004
1992............................................... 870 1,054 1,924
1991............................................... 928 1,044 1,972
Income from continuing operations (a):
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) Excludes the after-tax effect of non-recurring transactions. See Note 5 of
the Notes to the Consolidated Financial Statements for a description of
these transactions.
</TABLE>
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, the Company completed numerous acquisitions and
divestitures of hospitals, most of which are discussed in Notes 5 and 6 of the
Notes to the 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 for
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 CONSOLIDATED CHC GALEN HCA CONSOLIDATED
---------------------------------------------------------------------
<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>
16
<PAGE>
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
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 Galen'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 the Company 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.
During the third quarter of 1993, the Company 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 the common stock of
HealthTrust, Inc. -- The Hospital Company ("HealthTrust").
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 million 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 Consolidated Financial Statements and Note 7 of the
Notes to Condensed 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, the Company 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.
17
<PAGE>
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 $367 million for the three months
ended March 31, 1994 compared to $376 million for the comparable period of 1993.
Cash flows in the first quarter of 1994 were reduced by approximately $75
million in connection with a payment to the IRS related to disputed prior year
income taxes and interest. In the first quarter of both 1994 and 1993, cash
flows in excess of the Company's capital expenditure program were used primarily
to reduce long-term debt and in the first quarter of 1993, to finance a payment
of $135 million to Humana in connection with the Spinoff. 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 effect on cash flows
from continuing operations in 1994.
Cash provided by continuing operations totaled $1.3 billion in each of the last
three fiscal years. Cash flows in excess of the Company's capital expenditure
program were used primarily to reduce long-term debt.
Working capital totaled $758 million at March 31, 1994, $573 million at December
31, 1993 and $606 million at December 31, 1992. Management believes that cash
flows from operations and amounts available under the Company's revolving credit
facilities and related commercial paper programs are sufficient to meet expected
future liquidity needs.
Investments of the Company's professional liability insurance subsidiaries to
maintain statutory equity and pay claims totaled $778 million at both March 31,
1994 and December 31, 1993, and $709 million at December 31, 1992.
In September 1993 the Board of Directors initiated the payment of a regular
quarterly cash dividend of $.03 per common share. While it is the present
intention of the Board of Directors to continue paying a quarterly dividend of
$.03 per share, the declaration and payment of future dividends by the Company
will be at the discretion of the Board of Directors and will depend upon many
factors, including the Company's earnings, financial condition, business needs,
capital and surplus and regulatory considerations.
CAPITAL RESOURCES
Excluding acquisitions, capital expenditures totaled $214 million and $181
million for the three months ended March 31, 1994 and 1993, respectively, and
$836 million in all of 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.
In addition, the Company expended $114 million and $75 million for acquisitions
in the respective first quarters of 1994 and 1993, and $79 million, $36 million
and $96 million during all of 1993, 1992 and 1991, respectively. See Note 6 of
the Notes to Consolidated Financial Statements and Note 8 of the Notes to
Condensed Consolidated Financial Statements for a description of these
activities. As part of its business strategy, the Company intends to acquire
additional health care facilities in the future.
The Company 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
March 31, 1994, there were projects under construction which had an estimated
additional cost to complete of approximately $285 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. The ratio of debt to debt plus common stockholders' equity
improved from 58% at December 31, 1992 (after giving pro forma effect to the
Spinoff) to 52% at December 31, 1993 and 51% at March 31, 1994.
18
<PAGE>
On April 29, 1994, the Company filed a Registration Statement on Form S-3 with
the 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 the
Company's subsidiaries, capital expenditures and possible acquisitions.
The Company's credit facilities contain customary covenants which include (i)
limitations on additional debt, (ii) limitations on sales of assets, mergers and
changes of ownership and (iii) maintenance of certain interest coverage ratios.
The Company was in compliance with all such covenants at March 31, 1994.
EFFECTS OF INFLATION AND CHANGING PRICES
Various federal, state and local laws have been enacted that, in certain cases,
limit the Company's ability to increase prices. Revenues for 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. The Company 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, the Company'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 the Company'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
As discussed in Note 9 of the Notes to Condensed Consolidated Financial
Statements, the Company is contesting certain income taxes and related interest,
aggregating approximately $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 the Company. However, if all or a majority of the
positions of the IRS are upheld, the financial position, results of operations
and liquidity of the Company would be materially adversely affected.
On March 24, 1994, the Company 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 the Company 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 the Company adopted the provisions of Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes," which increased
1992 first quarter net income by $51 million or $.16 per share. See Note 7 of
the Notes to Consolidated Financial Statements.
19
<PAGE>
SELLING STOCKHOLDER
The following table sets forth as of April 30, 1994, and after the sale of the
Common Stock offered hereby (assuming no exercise of the U.S. Underwriters'
overallotment option) certain information regarding the beneficial ownership of
the Common Stock by J.P. Morgan Capital Corporation ("J.P. Morgan Capital"), the
selling stockholder in the Offering. Information with respect to the ownership
of shares of the Common Stock by J.P. Morgan Capital has been furnished by J.P.
Morgan Capital to the Company.
<TABLE>
<CAPTION>
---------------------------------------------------------
SHARES BENEFICIALLY SHARES BENEFICIALLY
OWNED PRIOR TO SHARES OWNED AFTER
OFFERING BEING OFFERING
NAME AND ADDRESS NUMBER PERCENT OFFERED NUMBER PERCENT
- ----------------------------------------------------- ---------------------------------------------------------
<S> <C> <C> <C> <C> <C>
J.P. Morgan Capital Corporation ...................................... 16,683,122(1) 5% 6,000,000 15,089,999(2) 4.5%
60 Wall Street
New York, New York 10260
<FN>
- ------------
(1) J.P. Morgan Capital owns 2,100,000 shares of Common Stock and 18,989,999
shares of Nonvoting Common Stock. The number of shares shown in the table
includes 2,100,000 shares of Common Stock and 14,583,122 shares of
Nonvoting Common Stock which are immediately convertible into shares of
Common Stock, and excludes 4,406,877 shares of Nonvoting Common Stock
which are not immediately convertible into shares of Common Stock. In
addition, on April 30, 1994, J.P. Morgan Investment Management Inc. and
Morgan Guaranty Trust Company of New York, which are affiliates of J.P.
Morgan Capital, held for investment by their clients 2,269,858 shares of
Common Stock, as to which beneficial ownership is disclaimed by J.P.
Morgan Capital.
(2) The number of shares shown in the table represents 15,089,999 shares of
Nonvoting Common Stock which will be immediately convertible into shares
of Common Stock after the Offering.
</TABLE>
CERTAIN RELATIONSHIPS OF J.P. MORGAN CAPITAL AND ITS AFFILIATES TO THE COMPANY
J.P. Morgan Capital is an indirect wholly-owned subsidiary of J.P. Morgan & Co.
Incorporated and an affiliate of J.P. Morgan Securities Inc. ("J.P. Morgan
Securities") and J.P. Morgan Securities Ltd., which are the lead managers of the
Offering, and of Morgan Guaranty Trust Company of New York ("Morgan Guaranty")
and J.P. Morgan Delaware (together with Morgan Guaranty, the "J.P. Morgan Bank
Entities"), which are lenders to the Company.
In the ordinary course of their respective businesses, affiliates of J.P. Morgan
Capital have engaged, and may in the future engage, in commercial banking and
investment banking transactions with the Company and its subsidiaries, including
HCA and Galen. J.P. Morgan Securities was a co-managing underwriter of the
Company's public offerings in April and March, 1994 of $150 million of 8.36%
Debentures Due 2024 and $150 million of 7.15% Notes Due 2004 and the Company's
public offering in December 1993 of $150 million of 7 1/2% Debentures Due 2023
and $150 million of 6 1/8% Notes Due 2000. In addition, during the first quarter
of 1994, J.P. Morgan Securities assisted the Company in connection with certain
swap transactions. In 1993, J.P. Morgan Securities arranged a $1.6 billion
credit facility for HCA, and in 1992, J.P. Morgan Securities was a co-managing
underwriter of HCA's initial public offering.
Upon consummation of the HCA Merger, the Company entered into revolving credit
agreements in an aggregate amount of $3 billion. The J.P. Morgan Bank Entities,
which are wholly-owned subsidiaries of J.P. Morgan & Co. Incorporated, are
lenders in this credit facility, and Morgan Guaranty is a co-agent bank for this
credit facility. The Company's total indebtedness under this credit facility at
March 31, 1994 was approximately $218 million. The J.P. Morgan Bank Entities
have received certain commitment and other fees from the Company in connection
with the credit facility. Prior to the HCA Merger, Morgan Guaranty was the agent
bank, and the J.P. Morgan Bank Entities were lenders, in certain of HCA's credit
facilities, including a $1.6 billion credit facility. In addition, Morgan
Guaranty has engaged in certain transactions with, and provided certain products
and services to, the Company and its predecessors relating to the management of
interest rate and foreign exchange exposures.
20
<PAGE>
During the period beginning January 1, 1993 and ended December 31, 1993, the
Company and its subsidiaries paid underwriting, arrangement and other fees to
J.P. Morgan Securities, and commitment, agency and other fees to the J.P. Morgan
Bank Entities, in the aggregate amount of approximately $2.6 million.
Pursuant to a Registration Rights Agreement dated as of March 16, 1989, as
amended (the "Registration Rights Agreement"), J.P. Morgan Capital and certain
other original investors in HCA had demand registration rights to require four
registrations (and after completion of the Offering will have demand
registration rights to require three more registrations), and have unlimited
"piggyback" registration rights with respect to registrations of shares of
Common Stock under the Securities Act of 1933, as amended (the "Securities
Act"). The Company has agreed to pay all of the expenses of such registrations,
including the fees and disbursements of counsel for such stockholders. Pursuant
to the Registration Rights Agreement and the Underwriting Agreement dated the
date hereof, the Company has agreed to indemnify J.P. Morgan Capital against
certain liabilities, including liabilities under the Securities Act.
21
<PAGE>
UNDERWRITING
Under the terms and subject to the conditions contained in an Underwriting
Agreement dated the date hereof, the Underwriters named below have severally
agreed to purchase, and the selling stockholder has agreed to sell to them,
severally, the respective number of shares of the Company's Common Stock set
forth opposite their names below:
<TABLE>
<CAPTION>
----------
NUMBER
OF
SHARES
----------
<S> <C>
U.S. UNDERWRITERS
J.P. Morgan Securities Inc............................................................... 1,600,000
Dean Witter Reynolds Inc................................................................. 1,600,000
Morgan Stanley & Co. Incorporated........................................................ 1,600,000
----------
Subtotal............................................................................... 4,800,000
----------
INTERNATIONAL UNDERWRITERS
J.P. Morgan Securities Ltd............................................................... 360,000
Dean Witter International Ltd............................................................ 360,000
Morgan Stanley & Co. International Limited............................................... 360,000
Deutsche Bank Aktiengesellschaft......................................................... 24,000
Nikko Securities......................................................................... 24,000
Paribas Capital Markets Group............................................................ 24,000
Robert Fleming & Co. Limited............................................................. 24,000
UBS Limited.............................................................................. 24,000
----------
Subtotal............................................................................... 1,200,000
----------
Total................................................................................ 6,000,000
----------
----------
</TABLE>
The Underwriting Agreement provides that the obligations of the several
Underwriters to pay for and accept delivery of the shares of Common Stock
offered hereby are subject to the approval of certain legal matters by their
counsel and to certain other conditions. The Underwriters are committed to take
and pay for all of the shares of Common Stock offered hereby (other than those
covered by the overallotment option described below) if any are taken. The
closing of the U.S. Offering is a condition to the closing of the International
Offering, and the closing of the International Offering is a condition to the
closing of the U.S. Offering.
Pursuant to the Agreement Between U.S. and International Underwriters, each U.S.
Underwriter has represented and agreed that, with certain exceptions set forth
below, (a) it is not purchasing any shares of Common Stock being sold by it (the
"U.S. Shares") for the account of anyone other than a United States or Canadian
Person and (b) it has not offered or sold, and will not offer or sell, directly
or indirectly, any U.S. Shares or distribute any prospectus relating to the U.S.
Shares outside the United States or Canada or to anyone other than a United
States or Canadian Person. Pursuant to the Agreement Between U.S. and
International Underwriters, each International Underwriter has represented and
agreed that, with certain exceptions set forth below, (a) it is not purchasing
any shares of Common Stock being sold by it (the "International Shares") for the
account of any United States or Canadian Person and (b) it has not offered or
sold, and will not offer or sell, directly or indirectly, any International
Shares or distribute any prospectus relating to the International Shares within
the United States or Canada or to any United States or Canadian Person. The
foregoing limitations do not apply to stabilization transactions or to certain
other transactions specified in the Agreement Between U.S. and International
Underwriters. As used herein, "United States or Canadian Person" means any
national or resident of the United States or Canada or any corporation, pension,
profit-sharing or other trust or other entity organized under the laws of the
United States or Canada or of any political subdivision thereof (other than a
branch located outside the United States and Canada of any United States or
Canadian Person) and includes any United States or Canadian branch of a person
who is otherwise not a United States or Canadian Person.
22
<PAGE>
Pursuant to the Agreement Between U.S. and International Underwriters, sales may
be made between the U.S. Underwriters and the International Underwriters of any
number of shares of Common Stock to be purchased pursuant to the Underwriting
Agreement as may be mutually agreed. The per share price and currency of
settlement of any shares so sold shall be the Price to Public set forth on the
cover page hereof, in United States dollars, less an amount not greater than the
per share amount of the concession to dealers set forth below.
Pursuant to the Agreement Between U.S. and International Underwriters, each U.S.
Underwriter has represented that it has not offered or sold, and agreed not to
offer or sell, any Common Stock, directly or indirectly, in Canada in
contravention of the securities laws of Canada or any province or territory
thereof and has represented that any offer of Common Stock in Canada will be
made only pursuant to an exemption from the requirement to file a prospectus in
the province or territory of Canada in which such offer is made. Each U.S.
Underwriter has further agreed to send to any dealer who purchases from it any
Common Stock a notice stating in substance that, by purchasing such Common
Stock, such dealer represents and agrees that it has not offered or sold, and
will not offer or sell, directly or indirectly, any of such Common Stock in
Canada or to, or for the benefit of, any resident of Canada in contravention of
the securities laws of Canada or any province or territory thereof and that any
offer of Common Stock in Canada will be made only pursuant to an exemption from
the requirement to file a prospectus in the province of Canada in which such
offer is made, and that such dealer will deliver to any other dealer to whom it
sells any such Common Stock a notice containing substantially the same statement
as is contained in this sentence.
Pursuant to the Agreement Between U.S. and International Underwriters, each
International Underwriter has represented and agreed that (i) it has not offered
or sold and will not offer or sell in the United Kingdom by means of any
document, any shares of Common Stock, other than to persons whose ordinary
business it is to buy or sell shares or debentures, whether as principal or
agent, or in circumstances which do not constitute an offer to the public within
the meaning of the Companies Act of 1985, (ii) it has complied and will comply
with all applicable provisions of the Financial Services Act 1986 with respect
to anything done by it in relation to the shares of Common Stock in, from or
otherwise involving the United Kingdom, and (iii) it has only issued or passed
on and will only issue or pass on to any person in the United Kingdom any
document received by it in connection with the sale of the shares of Common
Stock if that person is of a kind described in Article 9(3) of the Financial
Services Act 1986 (Investment Advertisements) (Exemptions) Order 1988 or is a
person to whom the document may otherwise lawfully be issued or passed on.
The Underwriters propose to offer part of the shares of Common Stock offered
hereby directly to the public at the public offering price set forth on the
cover page hereof and part to certain dealers at a price that represents a
concession not in excess of $.74 a share under the public offering price. Any
Underwriter may allow, and such dealers may reallow, a concession not in excess
of $.10 a share to certain other dealers.
Pursuant to the Underwriting Agreement, J.P. Morgan Capital has granted to the
U.S. Underwriters an option, exercisable for 30 days from the date of this
Prospectus, to purchase up to an additional 900,000 shares of Common Stock at
the public offering price set forth on the cover page hereof less the
underwriting discount. The U.S. Underwriters may exercise such option to
purchase solely for the purpose of covering overallotments, if any, made in
connection with the sale of the shares of Common Stock offered hereby. To the
extent such option is exercised, each U.S. Underwriter will become obligated,
subject to certain conditions, to purchase approximately the same percentage of
such additional shares as the number set forth next to such U.S. Underwriter's
name in the preceding table bears to the total number of shares of Common Stock
offered hereby.
From time to time in the ordinary course of their respective businesses, J.P.
Morgan Securities, Dean Witter Reynolds Inc. and Morgan Stanley & Co.
Incorporated have engaged and may in the future engage in investment banking
transactions with, and provide financial advisory services to, the Company. For
additional information with respect to certain relationships with the Company
and its subsidiaries, see "Selling Stockholder -- Certain Relationships of J.P.
Morgan Capital and its Affiliates to the Company."
J.P. Morgan Capital will be the selling stockholder in the Offering. The
provisions of Section (c)(8) of the Corporate Financing Rule under Section 44 of
Article III of the Rules of Fair Practice of the National Association of
Securities Dealers, Inc., apply to this Offering since all of the net proceeds
of the Offering will be paid to J.P. Morgan Capital. See "Selling Stockholder."
23
<PAGE>
The selling stockholder has agreed in the Underwriting Agreement not to offer,
sell, contract to sell or otherwise dispose of any shares of Common Stock or any
securities convertible into or exchangeable for Common Stock (except for the
shares offered hereby) for a period of 90 days after the date of this
Prospectus, without the prior written consent of J.P. Morgan Securities, as
representative of the several Underwriters. The Company has agreed in the
Underwriting Agreement not to effect any registration of any shares of Common
Stock or any securities convertible into or exchangeable for Common Stock
(except for the shares offered hereby and shares registered in connection with
acquisitions and employee benefit plans) for a period of 90 days after the date
of this Prospectus, without the prior written consent of J.P. Morgan Securities,
as representative of the several Underwriters.
In the Underwriting Agreement, the Company and J.P. Morgan Capital have agreed
to indemnify the Underwriters against certain liabilities, including liabilities
under the federal securities laws, or to contribute to payments which the
Underwriters may be required to make in respect thereof.
LEGAL MATTERS
The validity of the issuance of the Common Stock offered hereby will be passed
upon for the Company by Stephen T. Braun, Senior Vice President and General
Counsel of the Company. Davis Polk & Wardwell, New York, New York, is acting as
counsel for the Underwriters in connection with certain legal matters relating
to the shares of Common Stock offered hereby. As of May 12, 1994, Mr. Braun
owned approximately 1,072 shares and had options to purchase 94,500 shares of
Common Stock.
EXPERTS
The annual consolidated financial statements of the Company, the consolidated
financial statements and financial statement schedules of Columbia and the
supplemental consolidated financial statements and supplemental financial
statement schedules of the Company, included or incorporated by reference in
this Prospectus, have been audited by Coopers & Lybrand, independent
accountants, to the extent and for the periods indicated in their reports
thereon included or incorporated by reference herein, which include explanatory
paragraphs regarding (as to the Company and Columbia) a change in accounting for
income taxes and (as to the supplemental financial statements and supplemental
financial statement schedules of the Company) the merger of Columbia and HCA.
Such financial statements and financial statement schedules audited by Coopers &
Lybrand have been included or incorporated by reference in reliance upon such
reports given upon the authority of said firm as experts in accounting and
auditing.
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended, and in accordance therewith files reports,
proxy statements and other information with the Commission. Such reports, proxy
statements and other information can be inspected and copied at the public
reference facilities maintained by the Commission at Judiciary Plaza, 450 Fifth
Street, N.W., Washington, D.C. 20549, and at the Commission's regional offices
at 500 West Madison Street, Suite 1400, Chicago, Illinois 60661 and 7 World
Trade Center, New York, New York 10048. Copies of such material can be obtained
from the Public Reference Section of the Commission at the Washington, D.C.
address. Such reports, proxy statements and other information concerning the
Company also may be inspected at the offices of the New York Stock Exchange,
Inc., 20 Broad Street, New York, New York 10005, on which the shares of Common
Stock of the Company are listed.
The Company has filed with the Commission a Registration Statement under the
Securities Act with respect to the Common Stock offered by this Prospectus. This
Prospectus does not contain all the information set forth in the Registration
Statement and exhibits and schedules thereto, certain portions of which have
been omitted pursuant to the rules and regulations of the Commission. The
information so omitted, including exhibits, may be obtained from the Commission
at its principal office in Washington, D.C. upon the payment of the prescribed
fees, or may be examined without charge at the Public Reference Section of the
Commission, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549. For
further information, reference is made to the Registration Statement and
exhibits thereto.
24
<PAGE>
COLUMBIA/HCA HEALTHCARE CORPORATION
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
----
PAGE
----
<S> <C>
Report of Independent Accountants.......................................................................... F-2
Consolidated Financial Statements:
Consolidated Statement of Income for the years ended December 31, 1993,
1992 and 1991........................................................................................... F-3
Consolidated Balance Sheet, December 31, 1993 and 1992................................................... F-4
Consolidated Statement of Common Stockholders' Equity for the years ended December 31, 1993,
1992 and 1991........................................................................................... F-5
Consolidated Statement of Cash Flows for the years ended December 31, 1993, 1992 and 1991................ F-6
Notes to Consolidated Financial Statements............................................................... F-7
Quarterly Consolidated Financial Information (Unaudited)................................................. F-24
Condensed Consolidated Financial Statements:
Condensed Consolidated Statement of Income for the three months ended March 31, 1994 and March 31, 1993
(Unaudited)............................................................................................. F-25
Condensed Consolidated Balance Sheet, March 31, 1994 and December 31, 1993 (Unaudited)................... F-26
Consolidated Statement of Cash Flows for the three months ended March 31, 1994 and March 31, 1993
(Unaudited)............................................................................................. F-27
Notes to Condensed Consolidated Financial Statements (Unaudited)......................................... F-28
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders
Columbia/HCA Healthcare Corporation
We have audited the accompanying consolidated balance sheet of Columbia/HCA
Healthcare Corporation as of December 31, 1993 and 1992, and the related
consolidated statements of income, common stockholders' equity and cash flows
for each of the three years in the period ended December 31, 1993, which
statements give retroactive effect to the pooling of interests described in Note
2 to the consolidated financial statements. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Columbia/HCA
Healthcare Corporation 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."
[LOGO]
COOPERS & LYBRAND
Louisville, Kentucky
February 28, 1994,
except for Note 15,
as to which the date
is March 24, 1994
F-2
<PAGE>
COLUMBIA/HCA 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............................................................................ $ 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 consolidated financial statements.
F-3
<PAGE>
COLUMBIA/HCA 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................................................................. $ 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 consolidated financial statements.
F-4
<PAGE>
COLUMBIA/HCA HEALTHCARE CORPORATION
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 consolidated financial statements.
F-5
<PAGE>
COLUMBIA/HCA 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.......................................................................... $ 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 consolidated financial statements.
F-6
<PAGE>
COLUMBIA/HCA HEALTHCARE CORPORATION
NOTES TO 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 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 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/HCA's annual reporting period ending December 31.
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.
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.
F-7
<PAGE>
COLUMBIA/HCA HEALTHCARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 1 -- ACCOUNTING POLICIES (CONTINUED)
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 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.
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
F-8
<PAGE>
COLUMBIA/HCA HEALTHCARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 2 -- HCA MERGER (CONTINUED)
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).
The HCA Merger has been accounted for as a pooling of interests, and
accordingly, the 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).
F-9
<PAGE>
COLUMBIA/HCA HEALTHCARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 3 -- 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 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.
F-10
<PAGE>
COLUMBIA/HCA HEALTHCARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 4 -- SPINOFF TRANSACTION AND DISCONTINUED OPERATIONS (CONTINUED)
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
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
F-11
<PAGE>
COLUMBIA/HCA HEALTHCARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 6 -- OTHER BUSINESS COMBINATIONS (CONTINUED)
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 and joint ventures 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-12
<PAGE>
COLUMBIA/HCA 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........................... 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 risks.................................................... 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
F-13
<PAGE>
COLUMBIA/HCA HEALTHCARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 7 -- INCOME TAXES (CONTINUED)
these claimed deficiencies in the United States Tax Court. In addition, the
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 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
F-14
<PAGE>
COLUMBIA/HCA HEALTHCARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 7 -- INCOME TAXES (CONTINUED)
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.
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.
F-15
<PAGE>
COLUMBIA/HCA HEALTHCARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 7 -- INCOME TAXES (CONTINUED)
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-16
<PAGE>
COLUMBIA/HCA HEALTHCARE CORPORATION
NOTES TO 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-17
<PAGE>
COLUMBIA/HCA 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..................... 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>
F-18
<PAGE>
COLUMBIA/HCA HEALTHCARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 8 -- PROFESSIONAL LIABILITY RISKS (CONTINUED)
The fair value of the subsidiaries' investments is based generally on quoted
market prices.
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-19
<PAGE>
COLUMBIA/HCA HEALTHCARE CORPORATION
NOTES TO 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-20
<PAGE>
COLUMBIA/HCA HEALTHCARE CORPORATION
NOTES TO 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-21
<PAGE>
COLUMBIA/HCA HEALTHCARE CORPORATION
NOTES TO 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.
In September 1993 the Board of Directors initiated a regular quarterly cash
dividend on common stock of $.03 per share.
F-22
<PAGE>
COLUMBIA/HCA HEALTHCARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 12 -- CAPITAL STOCK (CONTINUED)
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-23
<PAGE>
COLUMBIA/HCA 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.................................... $ 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
</TABLE>
<TABLE>
<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 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 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
Consolidated Financial Statements.
</TABLE>
F-24
<PAGE>
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)
<TABLE>
<CAPTION>
---------------------
1994 1993
---------------------
<S> <C> <C>
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
</TABLE>
See accompanying notes.
F-25
<PAGE>
COLUMBIA/HCA HEALTHCARE CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEET
UNAUDITED
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
------------------------
ASSETS MARCH 31, DECEMBER 31,
1994 1993
------------------------
<S> <C> <C>
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
--------- ------------
--------- ------------
</TABLE>
See accompanying notes.
F-26
<PAGE>
COLUMBIA/HCA HEALTHCARE CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE QUARTERS ENDED MARCH 31, 1994 AND 1993
UNAUDITED
(DOLLARS IN MILLIONS)
<TABLE>
<CAPTION>
----------------
1994 1993
----------------
<S> <C> <C>
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 change 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
</TABLE>
See accompanying notes.
F-27
<PAGE>
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
consolidated financial statements of Columbia/HCA for the year ended December
31, 1993 contained in this Prospectus.
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 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-28
<PAGE>
COLUMBIA/HCA HEALTHCARE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
UNAUDITED
NOTE 4 -- HCA MERGER (CONTINUED)
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 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 CONSOLIDATED
--------------------------------
<S> <C> <C> <C>
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
----------- --------- ------
----------- --------- ------
</TABLE>
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 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):
<TABLE>
<CAPTION>
-----------------------------
CHC GALEN CONSOLIDATED
-----------------------------
<S> <C> <C> <C>
Revenues...................................................... $ 312 $ 1,017 $ 1,329
Net income:
Continuing operations....................................... $ 10 $ 80 $ 90
Discontinued operations..................................... - 16 16
--------- --------- ------
$ 10 $ 96 $ 106
--------- --------- ------
--------- --------- ------
</TABLE>
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.
F-29
<PAGE>
COLUMBIA/HCA HEALTHCARE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
UNAUDITED
NOTE 6 -- SPINOFF TRANSACTION AND DISCONTINUED OPERATIONS (CONTINUED)
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):
<TABLE>
<S> <C>
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
---------
---------
</TABLE>
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.
NOTE 8 -- ACQUISITIONS
The following is a summary of acquisitions and joint ventures consummated during
the respective three month periods (dollars in millions):
<TABLE>
<CAPTION>
-----------------
1994 1993
-----------------
<S> <C> <C>
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
--------- ---------
--------- ---------
</TABLE>
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
F-30
<PAGE>
COLUMBIA/HCA HEALTHCARE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
UNAUDITED
NOTE 9 -- INCOME TAXES (CONTINUED)
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.
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
F-31
<PAGE>
COLUMBIA/HCA HEALTHCARE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
UNAUDITED
NOTE 9 -- INCOME TAXES (CONTINUED)
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 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.
F-32
<PAGE>
COLUMBIA/HCA HEALTHCARE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
UNAUDITED
NOTE 9 -- INCOME TAXES (CONTINUED)
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.
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.
F-33
<PAGE>
(This page has been left blank intentionally.)
<PAGE>
COLUMBIA/HCA A New Commitment To Healthcare . . . Together
- --------------------------------------------------------------------------------
HEALTHCARE CORPORATION
<PAGE>
PROSPECTUS
6,000,000 SHARES
Columbia/HCA Healthcare Corporation
COMMON STOCK
($.01 PAR VALUE)
All of the shares of Common Stock offered hereby are being sold by a selling
stockholder of Columbia/HCA Healthcare Corporation (the "Company"). See "Selling
Stockholder." The Company will not receive any of the proceeds from the sale of
shares. Of the 6,000,000 shares of Common Stock offered hereby, 1,200,000 shares
initially are being offered outside of the United States and Canada by the
International Underwriters (the "International Underwriters") and 4,800,000
shares initially are being offered in the United States and Canada by the U.S.
Underwriters (the "U.S. Underwriters," together with the International
Underwriters, the "Underwriters").
The Company's Common Stock is listed on the New York Stock Exchange under the
symbol "COL." On June 7, 1994, the last reported sale price for the Common
Stock, as reported on the New York Stock Exchange Composite Tape, was $40.50 per
share. See "Price Range of Common Stock and Dividend Policy."
SEE "INVESTMENT CONSIDERATIONS" FOR CERTAIN CONSIDERATIONS RELEVANT TO AN
INVESTMENT IN THE COMMON STOCK.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------
PROCEEDS TO
PRICE TO UNDERWRITING SELLING
PUBLIC DISCOUNT(1) STOCKHOLDER(2)
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Per Share $40.50 $1.22 $39.28
- ---------------------------------------------------------------------------------------------------
Total(3) $243,000,000 $7,290,000 $235,710,000
- ---------------------------------------------------------------------------------------------------
<FN>
(1) The Company and the selling stockholder have agreed to indemnify the
Underwriters against certain liabilities, including liabilities under the
Securities Act of 1933, as amended. See "Underwriting."
(2) The Company will pay the expenses of the offering estimated at $250,000.
(3) The selling stockholder has granted to the U.S. Underwriters an option,
exercisable within 30 days of the date of this Prospectus, to purchase up
to an additional 900,000 shares of Common Stock, solely to cover
overallotments, if any. If such overallotment option is exercised in full,
the total Price to Public, Underwriting Discount and Proceeds to Selling
Stockholder will be $279,450,000, $8,383,500 and $271,066,500,
respectively. See "Underwriting."
</TABLE>
The shares offered by this Prospectus are being offered by the Underwriters,
subject to prior sale, when, as and if delivered to and accepted by the
Underwriters, and subject to the approval of certain legal matters by Davis Polk
& Wardwell, counsel for the Underwriters. It is expected that delivery of the
shares will be made against payment therefor on or about June 15, 1994 at the
offices of J.P. Morgan Securities Inc., 60 Wall Street, New York, New York
10260.
J.P. MORGAN SECURITIES LTD.
DEAN WITTER INTERNATIONAL LTD.
MORGAN STANLEY & CO.
INTERNATIONAL
JUNE 8, 1994
<PAGE>
[MAP]
IN CONNECTION WITH THE OFFERING, THE UNDERWRITERS MAY OVERALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK AT
A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH
TRANSACTIONS MAY BE EFFECTED ON THE NEW YORK STOCK EXCHANGE, IN THE OVER-THE-
COUNTER MARKET OR OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED
AT ANY TIME.
<PAGE>
No person has been authorized in connection with any offering made hereby to
give any information or to make any representation not contained in this
Prospectus, and, if given or made, such information or representation must not
be relied upon as having been authorized by the Company, the selling stockholder
or any Underwriter. This Prospectus does not constitute an offer to sell or a
solicitation of an offer to buy any security other than the shares of Common
Stock offered hereby, nor does it constitute an offer to sell or a solicitation
of an offer to buy any of the securities offered hereby to any person in any
jurisdiction in which it is unlawful to make such an offer or solicitation to
such person. Neither the delivery of this Prospectus nor any sale made hereunder
shall under any circumstances create any implication that there has been no
change in the affairs of the Company subsequent to the date hereof.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
<S> <C>
Incorporation of Certain Documents By Reference..... 3
Prospectus Summary.................................. 4
Investment Considerations........................... 7
Price Range of Common Stock and Dividend Policy..... 10
Use of Proceeds..................................... 11
Capitalization...................................... 11
Selected Consolidated Financial Data................ 12
<CAPTION>
Page
<S> <C>
Management's Discussion and Analysis of Financial
Condition and Results
of Operations...................................... 14
Selling Stockholder................................. 20
Underwriting........................................ 22
Legal Matters....................................... 24
Experts............................................. 24
Available Information............................... 24
Index to Consolidated Financial Statements.......... F-1
</TABLE>
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents filed by the Company with the Securities and Exchange
Commission (the "Commission") are incorporated herein by reference:
1. Annual Report on Form 10-K for the year ended December 31, 1993 (the
"Form 10-K").
2. Quarterly Report on Form 10-Q for the quarter ended March 31, 1994.
3. The portions of the Proxy Statement for the Annual Meeting of
Stockholders which was held May 12, 1994 that have been incorporated by
reference in the Form 10-K.
4. Current Reports on Form 8-K dated April 25, 1994, May 16, 1994 and May
23, 1994.
5. The description of the Common Stock contained in the Registration
Statement on Form 8-A dated August 31, 1993, as amended.
All reports and other documents subsequently filed by the Company pursuant to
Section 13(a), 13(c), 14 or 15(d) of the Securities Exchange Act of 1934, as
amended, after the date of this Prospectus and prior to the termination of this
offering shall be deemed to be incorporated by reference herein and to be a part
hereof from the date of filing of such reports and documents. Any statement set
forth herein or in a document, all or a portion of which is incorporated or
deemed to be incorporated by reference herein, will be deemed to be modified or
superseded for purposes of this Prospectus to the extent that a statement set
forth herein or in a subsequently filed document deemed to be incorporated by
reference herein modifies or supersedes such statement. Any statement so
modified or superseded shall not be deemed, except as so modified and
superseded, to constitute a part of this Prospectus.
THE COMPANY WILL FURNISH, WITHOUT CHARGE, TO EACH PERSON, INCLUDING ANY
BENEFICIAL OWNER, TO WHOM A PROSPECTUS IS DELIVERED, UPON WRITTEN OR ORAL
REQUEST, A COPY OF ANY OR ALL OF THE FOREGOING DOCUMENTS INCORPORATED HEREIN BY
REFERENCE OTHER THAN EXHIBITS TO SUCH DOCUMENTS (UNLESS SUCH EXHIBITS ARE
SPECIFICALLY INCORPORATED BY REFERENCE THEREIN). REQUESTS FOR SUCH DOCUMENTS
SHOULD BE SUBMITTED IN WRITING TO JOAN O. KROGER, SECRETARY, COLUMBIA/HCA
HEALTHCARE CORPORATION, 201 WEST MAIN STREET, LOUISVILLE, KENTUCKY 40202 OR BY
TELEPHONE AT (502) 572-2259.
3
<PAGE>
PROSPECTUS SUMMARY
THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE MORE DETAILED
INFORMATION AND CONSOLIDATED FINANCIAL STATEMENTS AND NOTES THERETO APPEARING
ELSEWHERE OR INCORPORATED BY REFERENCE IN THIS PROSPECTUS. THE OFFERING OF
4,800,000 SHARES INITIALLY BEING OFFERED IN THE UNITED STATES AND CANADA (THE
"U.S. OFFERING") AND THE OFFERING OF 1,200,000 SHARES INITIALLY BEING OFFERED
OUTSIDE THE UNITED STATES AND CANADA (THE "INTERNATIONAL OFFERING") ARE
COLLECTIVELY REFERRED TO AS THE "OFFERING." UNLESS OTHERWISE INDICATED, THE
INFORMATION CONTAINED IN THIS PROSPECTUS ASSUMES THAT THE U.S. UNDERWRITERS'
OVERALLOTMENT OPTION IS NOT EXERCISED. AS USED IN THIS PROSPECTUS, UNLESS THE
CONTEXT INDICATES OTHERWISE, THE "COMPANY" MEANS COLUMBIA/HCA HEALTHCARE
CORPORATION, ITS SUBSIDIARIES AND ALL PREDECESSORS OF COLUMBIA/HCA HEALTHCARE
CORPORATION AND ITS SUBSIDIARIES, "COMMON STOCK" MEANS THE COMMON STOCK ($.01
PAR VALUE) OF THE COMPANY AND "NONVOTING COMMON STOCK" MEANS THE NONVOTING
COMMON STOCK ($.01 PAR VALUE) OF THE COMPANY.
THE COMPANY
The Company is one of the largest health care services companies in the United
States. As of March 31, 1994, the Company operated 168 general, acute care
hospitals and 28 psychiatric hospitals in 26 states and two foreign countries.
In addition, as part of its comprehensive health care networks, the Company
operates facilities that provide a range of outpatient and ancillary services.
For the year ended December 31, 1993, the Company generated operating revenues
of $10.3 billion and income from continuing operations of $575 million. The
Company's outpatient and ancillary facilities accounted for 27 percent of total
operating revenues in 1993.
The Company's primary objective is to provide to the markets it serves a
comprehensive array of quality health care services in the most cost effective
manner possible. The Company's general, acute care hospitals usually provide a
full range of services commonly available in hospitals to accommodate such
medical specialties as internal medicine, general surgery, cardiology, oncology,
neurosurgery, orthopedics and obstetrics, as well as diagnostic and emergency
services. Outpatient and ancillary health care services are provided by the
Company's general, acute care hospitals as well as at freestanding facilities
operated by the Company including rehabilitation facilities, outpatient surgery
and diagnostic centers, home health care agencies and other facilities. In
addition, the Company operates psychiatric hospitals which generally provide a
full range of mental health care services in inpatient, partial hospitalization
and outpatient settings. The Company believes that its widespread and
comprehensive network of health care facilities enables it to attract business
from managed care plans and major employers seeking efficient access to a wide
array of health care services.
On February 10, 1994, the Company acquired HCA-Hospital Corporation of America
("HCA") in a transaction accounted for as a pooling of interests (the "HCA
Merger"). Effective September 1, 1993, the Company acquired Galen Health Care,
Inc. ("Galen") also in a pooling of interests transaction (the "Galen Merger").
Galen began operations as an independent publicly held corporation upon the
distribution of all of its common stock (the "Spinoff") by its then 100% owner,
Humana Inc. ("Humana"), on March 1, 1993. As a result of these acquisitions, the
Company added 167 hospitals. These acquisitions have allowed the Company to
establish a strong position in new markets. In addition, the Company expects
these acquisitions to enhance its relationships with managed care providers and
other payers by expanding its geographic coverage and the range of outpatient
services it offers, and to permit it to capture significant operating
efficiencies through the consolidation of supply purchasing activities,
information systems, office facilities and various support functions.
The Company intends to continue to pursue a strategy of acquisition and
integration of hospitals and other health care facilities that are complementary
to its existing facilities and that enhance both the array of services offered
by its facilities and the geographic coverage of the markets it serves.
Consistent with this strategy, the Company has in the first quarter of 1994
announced the expansion of a number of its regional networks including Atlanta,
Chicago, Dallas/Fort Worth, Kansas City and Orlando. The Company believes that
significant opportunities exist to integrate facilities that have formerly been
operated on a tax-exempt basis into its networks. In integrating the facilities
it acquires, the Company seeks to decentralize the management of its facilities
and provide local management and physicians with the opportunity to purchase
equity interests in their local operations through partnership or other
corporate structures. In addition to the acquisition of general, acute care
hospitals, the Company is in the process of adding additional sub-acute, home
health, rehabilitation, psychiatric and comprehensive outpatient services.
Along with the Company's focus on the acquisition of facilities that broaden its
range of services and geographic coverage, the Company's strategy also includes
a number of programs designed to enhance the quality of its
4
<PAGE>
health care services and the management and operating efficiency of its
facilities. The principal components of the Company's operating strategy are to:
(i) BECOME A SIGNIFICANT PROVIDER OF HEALTH CARE SERVICES in the markets that it
serves by consolidating services and operations to reduce costs and by
establishing the wide geographic coverage required by managed care and employer
sponsored health care plans; (ii) PROVIDE A COMPREHENSIVE RANGE OF HEALTH CARE
SERVICES in each of its markets to provide managed care and employer health care
plans and individuals with efficient, single provider access to health care
services; (iii) DELIVER HIGH QUALITY SERVICES by using clinical information
systems to focus on patient outcomes and by implementing other quality assurance
programs to support and monitor quality of care standards and to meet
accreditation and regulatory standards; and (iv) INTEGRATE FRAGMENTED DELIVERY
SYSTEMS through the consolidation of acquisitions and existing facilities to
maximize the efficiencies generated by contracting with managed care plans and
employers and coordinating supply purchasing, information systems, government
and private reimbursement and other support functions.
The Company, through various predecessor entities, began operations on July 1,
1988. The Company was incorporated in Nevada in January 1990 and reincorporated
in Delaware in September 1993. The Company's principal executive offices are
located at 201 West Main Street, Louisville, Kentucky 40202 and its telephone
number at such address is (502) 572-2000.
THE OFFERING
<TABLE>
<S> <C>
Common Stock offered by the selling
stockholder:
U.S. Offering............................. 4,800,000 shares (1)
International Offering.................... 1,200,000 shares
Total Offering...................... 6,000,000 shares (1)
Common Stock outstanding after the 338,069,320 shares (2)(3)
Offering..................................
NYSE symbol............................... COL
Use of Proceeds........................... All of the Common Stock is being
sold by the selling stockholder.
The Company will not receive any
proceeds from the sale of the
shares being offered hereby.
<FN>
- ------------
(1) Assumes the U.S. Underwriters' overallotment option is not exercised. See
"Underwriting."
(2) Does not include 18,198,524 shares as of April 30, 1994 which have been
reserved for issuance under the Company's stock option plans, pursuant to
the exercise of warrants and upon conversion of convertible securities.
(3) Includes 15,089,999 shares of Nonvoting Common Stock.
</TABLE>
5
<PAGE>
SUMMARY CONSOLIDATED FINANCIAL INFORMATION
The summary consolidated financial information set forth below gives effect to
the Galen Merger and the HCA Merger which were accounted for as poolings of
interests. The following financial information has been derived from, and should
be read in conjunction with, the Company's consolidated financial statements,
and notes thereto, included elsewhere in this Prospectus and with "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
<TABLE>
<CAPTION>
-----------------------------------------------------
THREE MONTHS ENDED
MARCH 31 YEAR ENDED DECEMBER 31
DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS 1994 1993 1993 1992 1991
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues....................................... $ 2,778 $ 2,654 $ 10,252 $ 9,932 $ 9,598
Non-recurring charges.......................... 159 - 151 439 300
Income from continuing operations before income
taxes......................................... 233 332 969 533 542
Extraordinary loss on extinguishment of debt,
net of income tax benefit..................... (92) - (84) - -
Net income..................................... 45 221 507 165 369
Earnings per common and common equivalent
share......................................... $ .13 $ .65 $ 1.50 $ .50 $ 1.25
BALANCE SHEET DATA (AT END OF PERIOD):
Assets......................................... $ 10,352 $ 10,068 $ 10,216 $ 10,347 $ 10,843
Working capital................................ 758 442 573 606 635
Long-term debt (including amounts due within
one year)..................................... 3,614 3,891 3,698 3,656 5,158
Common stockholders' equity.................... 3,514 3,114 3,471 3,691 2,822
SELECTED OTHER FINANCIAL DATA:
EBDITA(1)...................................... $ 603 $ 557 $ 2,004 $ 1,924 $ 1,972
EBDITA as a percent of revenues................ 21.7% 21.0% 19.5% 19.4% 20.6%
Interest expense............................... $ 64 $ 85 $ 321 $ 401 $ 597
Ratio of debt to debt plus common stockholders'
equity........................................ 50.7% 55.5% 51.6% 49.8% 64.6%
SELECTED OPERATING DATA:
Number of hospitals at end of period........... 196 197 193 200 219
Weighted average licensed beds(2).............. 41,955 41,525 41,263 40,608 42,437
Admissions(3).................................. 309,800 306,200 1,158,400 1,161,100 1,189,700
Average length of stay (days).................. 5.9 6.1 5.9 6.1 6.5
Average daily census........................... 20,341 20,880 18,702 19,253 21,255
Occupancy(4)................................... 48.5% 50.3% 45.3% 47.4% 50.1%
Emergency room visits.......................... 788,300 791,900 3,139,700 3,042,900 3,028,600
<FN>
- ------------
(1) Income from continuing operations before non-recurring transactions,
depreciation, interest expense, minority interests, income taxes and
amortization.
(2) Defined as the number of licensed beds after giving effect to the length
of time the beds have been licensed during the period.
(3) The number of patients admitted for inpatient treatment.
(4) Calculated by dividing average daily census by weighted average licensed
beds.
</TABLE>
6
<PAGE>
INVESTMENT CONSIDERATIONS
Prospective investors should consider carefully, in addition to the other
information contained or incorporated by reference in this Prospectus, the
following factors before purchasing the Common Stock offered hereby.
HEALTH CARE REFORM
In recent years, an increasing number of legislative proposals have been
introduced or proposed in Congress and in some state legislatures that would
effect major changes in the health care system, either nationally or at the
state level. Among the proposals under consideration are cost controls on
hospitals, insurance market reforms to increase the availability of group health
insurance to small businesses, requirements that all businesses offer health
insurance coverage to their employees and the creation of a single government
health insurance plan that would cover all citizens. President Clinton has
stated that one of his primary objectives is to reform the nation's health care
system to ensure universal coverage and address the rising costs of care. In
early 1993, President Clinton appointed Hillary Rodham Clinton to lead a health
care reform task force with the objective of developing a health care reform
proposal which could be submitted by the President. On September 22, 1993,
before a Joint Session of Congress, President Clinton outlined the basic
principles of his upcoming health care reform proposal. President Clinton's
Health Security Act, introduced as legislation on November 22, 1993, includes
certain measures that could be viewed as advancing the scope of government
regulation of the health care industry. Key elements in the President's proposal
include various insurance market reforms, the requirement that businesses
provide health insurance coverage for their full-time and part-time employees,
significant reductions in future Medicare and Medicaid payments to providers,
and stringent government cost controls that would directly control insurance
premiums and indirectly affect the fees of hospitals, physicians and other
health care providers. In addition to the President's reform proposal, several
other health care reform bills have recently been introduced, including The
Managed Competition Act of 1993, Affordable Health Care Now Act of 1993 and
Health Equity & Access Reform Today. There can be no assurance that health care
proposals adverse to the Company's business will not be adopted.
COMPETITION; IMPACT OF MANAGED CARE ORGANIZATIONS
The health care business is highly competitive and competition among hospitals
and other health care providers for patients has intensified in recent years.
During this period, U.S. hospital occupancy rates have declined as a result of
cost containment pressures, changing technology, changes in government
regulation and reimbursement, and changes in physician practice patterns from
inpatient to outpatient treatment. In most geographic areas in which the Company
operates, there are other hospitals, outpatient surgery and diagnostic centers
and other facilities that provide most of the services offered by the Company's
hospitals. Certain of these competing facilities offer services, including
extensive medical research and medical education programs, which are not offered
by the Company's hospitals. In addition, hospitals owned by governmental
agencies or other tax-exempt entities benefit from endowments, charitable
contributions, tax-exempt financing and exemptions from sales, property and
income taxes, which advantages are not available to the Company's hospitals.
The competitive position of the Company's hospitals also has been, and will
continue to be, affected by the increasing number of initiatives undertaken
during the past several years by major purchasers of health care, including
federal and state governments, insurance companies and employers, to revise
payment methodologies and monitor health care expenditures in order to contain
health care costs. As a result of these initiatives, managed care organizations,
which offer prepaid and discounted medical services packages, represent an
increasing segment of health care payers, the effect of which has been to reduce
hospital revenue growth.
LIMITS ON REIMBURSEMENT
A significant portion of the Company's revenue is derived from the Medicare
program, which is highly regulated and subject to frequent and substantial
changes. In recent years, fundamental changes in the Medicare program (including
the implementation of a prospective payment system for inpatient services at
medical/surgical hospitals) have resulted in reduced levels of payment for a
substantial portion of hospital procedures and costs. Certain existing payment
programs are scheduled to be revised in the future which will likely result in
further reductions in payment levels. Medicare programs that currently are on a
cost reimbursement basis, such as outpatient and psychiatric hospital services,
may be changed to a prospective payment basis in the future. Additionally,
hospitals have experienced increasing pressures from private payers attempting
to control health
7
<PAGE>
care costs through direct contracting with hospitals to provide services on a
discounted basis, increasing utilization review, and encouraging greater
enrollment in managed care programs such as health maintenance organizations
("HMOs") and preferred provider organizations ("PPOs"). 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.
EXTENSIVE REGULATION
The health care industry, including hospitals, is subject to extensive federal,
state and local regulation relating to licensure, conduct of operations,
ownership of facilities, addition of facilities and services and prices for
services, and there can be no assurance that future regulatory changes will not
have an adverse impact on the Company. In particular, Medicare and Medicaid
antifraud and abuse amendments codified under Section 1128(b) of the Social
Security Act (the "Antifraud Amendments") prohibit certain business practices
and relationships that might affect the provision and cost of health care
services reimbursable under Medicare and Medicaid. Sanctions for violating the
Antifraud Amendments include criminal penalties and civil sanctions, including
fines and possible exclusion from the Medicare and Medicaid programs. Pursuant
to the Medicare and Medicaid Patient and Program Protection Act of 1987, the
Department of Health and Human Services has issued regulations which describe
some of the conduct and business relationships permissible under the Antifraud
Amendments (the "Safe Harbors"). Certain of the Company's current arrangements
with physicians, including joint ventures, do not qualify for the current Safe
Harbors. Although the Company exercises care in an effort to structure its
arrangements with physicians to comply in all material respects with these laws,
and although management believes that the Company is in compliance with the
Antifraud Amendments, there can be no assurance that (i) government officials
charged with responsibility for enforcing the prohibitions of the Antifraud
Amendments will not assert that the Company or certain transactions in which it
is involved are in violation of the Antifraud Amendments and (ii) such statute
will ultimately be interpreted by the courts in a manner consistent with the
practices of the Company.
PENDING HCA TAX LITIGATION
As a result of examinations by the Internal Revenue Service (the "IRS") of HCA's
federal income tax returns, HCA received statutory notices of deficiency for the
years 1981 through 1988. HCA has filed petitions in the U.S. Tax Court opposing
these claimed deficiencies. Additionally, the IRS completed its examination for
the years 1989 and 1990 and has issued proposed adjustments, which HCA has
protested. In the aggregate, the IRS is claiming additional taxes of $516
million and interest of approximately $802 million through March 31, 1994. In
addition to disputing the IRS's positions, HCA is claiming refunds of $51
million and interest through March 31, 1994 of $95 million. Management is of the
opinion that HCA has properly reported its income and paid its taxes in
accordance with applicable laws and in accordance with agreements established
with the IRS during previous examinations. In management's opinion, the final
outcome from the IRS's examinations of prior years' income taxes will not have a
material adverse effect on the results of operations or financial position of
the Company. If all or the majority of the positions of the IRS are upheld,
however, the financial position, results of operations and liquidity of the
Company would be materially adversely affected. See Note 7 of the Notes to
Consolidated Financial Statements and Note 9 of the Notes to Condensed
Consolidated Financial Statements.
DEPENDENCE ON KEY PERSONNEL
The Company is dependent upon the continued services and management experience
of Richard L. Scott and other executive officers. If Mr. Scott or any of such
other executive officers were to leave the Company, the Company's operating
results could be adversely affected. In addition, the Company's continued growth
depends on its ability to attract and retain skilled employees, on the ability
of its officers and key employees to manage growth successfully and on the
Company's ability to attract and retain physicians at its hospitals.
PROFESSIONAL LIABILITY RISKS
As is typical in the health care industry, the Company is subject to claims and
legal actions by patients and others in the ordinary course of business. The
Company, through two wholly-owned subsidiaries, insures substantially all of its
professional and general liability risks. Subject to various deductibles, the
Company's hospitals are insured by these insurance subsidiaries for losses of up
to $25 million per occurrence for the former
8
<PAGE>
HCA hospitals and up to $5 million per occurrence for the former Columbia
Hospital Corporation and Galen hospitals. The Company currently carries general
and professional liability insurance from unrelated commercial carriers for
losses in excess of amounts insured by its insurance subsidiaries, subject to
certain limitations. While the Company's professional and other liability
insurance has been adequate to provide for liability claims in the past, there
can be no assurance that such insurance will continue to be adequate. If actual
payments of claims with respect to liabilities insured by the Company through
its subsidiaries exceed anticipated payments of claims, the results of
operations and cash flows of the Company could be adversely affected.
CERTAIN ANTI-TAKEOVER PROVISIONS
Certain provisions of the Company's Restated Certificate of Incorporation and
Bylaws may make an unsolicited acquisition of control of the Company more
difficult or expensive. Furthermore, the Company has adopted a stockholder
rights plan which may also make an unsolicited acquisition of the Company more
difficult or expensive.
9
<PAGE>
PRICE RANGE OF COMMON STOCK AND DIVIDEND POLICY
The 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 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 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
1994:
First Quarter...................................................... 45.25 33.25
Second Quarter (through June 7, 1994).............................. 43.00 36.50
</TABLE>
The registrar and transfer agent for the Common Stock is First Union National
Bank of North Carolina. At the close of business on March 31, 1994, there were
15,600 holders of record of the Common Stock and one holder of record of the
Nonvoting Common Stock. See the cover page of this Prospectus for a recent
closing sale price of the 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 Board of Directors to
continue paying a quarterly dividend of $.03 per share, the declaration and
payment of future dividends by the Company will be at the discretion of the
Board of Directors and will depend upon many factors, including the Company's
earnings, financial condition, business needs, capital and surplus and
regulatory considerations.
10
<PAGE>
USE OF PROCEEDS
All of the Common Stock is being offered by the selling stockholder. The Company
will not receive any of the proceeds from the sale of the shares being offered.
CAPITALIZATION
The following table sets forth as of March 31, 1994 the capitalization of the
Company. The table should be read in conjunction with the Company's condensed
consolidated financial statements, and the notes thereto, appearing elsewhere in
this Prospectus.
<TABLE>
<CAPTION>
-----------
AS OF
MARCH 31
1994
-----------
(UNAUDITED)
<S> <C>
DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS
SHORT-TERM DEBT:
Current portion of long-term debt................................................................. $ 81
------------
LONG-TERM DEBT:
Bank debt......................................................................................... 318
Other floating rate debt.......................................................................... 1,779
Fixed rate notes and debentures................................................................... 1,338
Capitalized leases................................................................................ 98
------------
Total long-term debt............................................................................ 3,533
------------
COMMON STOCKHOLDERS' EQUITY:
Common Stock, par value $.01 per share; 800,000,000 voting shares and 25,000,000 nonvoting shares
authorized; 318,806,900 voting shares and 18,990,000 nonvoting shares issued and
outstanding(1)................................................................................... 3
Capital in excess of par value.................................................................... 2,226
Other............................................................................................. 4
Retained earnings................................................................................. 1,281
------------
Total common stockholders' equity............................................................... 3,514
------------
TOTAL CAPITALIZATION................................................................................ $ 7,128
------------
------------
<FN>
- ------------
(1) Does not include 18,428,489 shares which have been reserved for issuance
under the Company's stock option plans, pursuant to the exercise of
warrants and upon conversion of convertible securities.
</TABLE>
11
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
The selected consolidated financial data set forth below gives effect to the
Galen Merger and the HCA Merger which were accounted for as poolings of
interests. The following financial information has been derived from, and should
be read in conjunction with, the Company's consolidated financial statements,
and notes thereto, included elsewhere in this Prospectus and with "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------
THREE MONTHS ENDED
DOLLARS IN MILLIONS, EXCEPT PER MARCH 31 YEAR ENDED DECEMBER 31
SHARE AMOUNTS 1994 1993 1993 1992 1991 1990 1989
-------- -------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues........................... $ 2,778 $ 2,654 $ 10,252 $ 9,932 $ 9,598 $ 8,641 $ 7,724
-------- -------- ---------- ---------- ---------- ---------- ----------
Salaries, wages and benefits....... 1,113 1,072 4,215 4,112 3,976 3,510 3,066
Supplies........................... 434 433 1,664 1,613 1,467 1,314 1,135
Other operating expenses........... 492 478 1,893 1,849 1,739 1,586 1,483
Provision for doubtful accounts.... 150 126 542 515 508 444 407
Depreciation and amortization...... 144 136 554 541 524 499 468
Interest expense................... 64 85 321 401 597 694 667
Investment income.................. (14) (12) (66) (81) (64) (69) (103)
Non-recurring transactions......... 159 - 151 439 300 22 (10)
-------- -------- ---------- ---------- ---------- ---------- ----------
2,542 2,318 9,274 9,389 9,047 8,000 7,113
-------- -------- ---------- ---------- ---------- ---------- ----------
Income from continuing operations
before minority interests and
income taxes...................... 236 336 978 543 551 641 611
Minority interests in earnings of
consolidated entities............. 3 4 9 10 9 4 4
-------- -------- ---------- ---------- ---------- ---------- ----------
Income from continuing operations
before income taxes............... 233 332 969 533 542 637 607
Provision for income taxes......... 96 127 394 294 189 240 223
-------- -------- ---------- ---------- ---------- ---------- ----------
Income from continuing
operations........................ 137 205 575 239 353 397 384
Income (loss) from operations of
discontinued health plan segment,
net of income taxes (benefit)..... - 16 16 (125) 16 (6) (18)
Extraordinary loss on
extinguishment of debt, net of
income tax benefit................ (92) - (84) - - - (9)
Cumulative effect on prior years of
a change in accounting for income
taxes............................. - - - 51 - - -
-------- -------- ---------- ---------- ---------- ---------- ----------
Net income..................... $ 45 $ 221 $ 507 $ 165 $ 369 $ 391 $ 357
-------- -------- ---------- ---------- ---------- ---------- ----------
-------- -------- ---------- ---------- ---------- ---------- ----------
Earnings per common and common
equivalent share (1):
Income from continuing
operations...................... $ .40 $ .61 $ 1.70 $ .73 $ 1.20 $ 1.28
Income (loss) from operations of
discontinued health plan
segment......................... - .04 .04 (.39) .05 (.02)
Extraordinary loss on
extinguishment of debt.......... (.27) - (.24) - - -
Cumulative effect on prior years
of a change in accounting for
income taxes.................... - - - .16 - -
-------- -------- ---------- ---------- ---------- ----------
Net income..................... $ .13 $ .65 $ 1.50 $ .50 $ 1.25 $ 1.26
-------- -------- ---------- ---------- ---------- ----------
-------- -------- ---------- ---------- ---------- ----------
Shares used in earnings per common
and common equivalent share
computations (in thousands)....... 341,621 337,739 339,222 328,564 279,954 262,552
Net cash provided by continuing
operations........................ $ 367 $ 376 $ 1,298 $ 1,287 $ 1,257 $ 1,191 $ 919
Cash dividends declared and paid
per common share.................. .03 - .03 - - - -
</TABLE>
12
<PAGE>
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------
AS OF MARCH 31 AS OF DECEMBER 31
1994 1993 1993 1992 1991 1990 1989
-------- -------- ---------- ---------- ---------- ---------- ----------
BALANCE SHEET DATA:
<S> <C> <C> <C> <C> <C> <C> <C>
Assets............................. $ 10,352 $ 10,068 $ 10,216 $ 10,347 $ 10,843 $ 10,391 $ 10,461
Working capital.................... 758 442 573 606 635 482 379
Long-term debt, including amounts
due within one year............... 3,614 3,891 3,698 3,656 5,158 5,139 6,022
Common stockholders' equity........ 3,514 3,114 3,471 3,691 2,822 2,099 1,585
<CAPTION>
-----------------------------------------------------------------------------
THREE MONTHS ENDED
MARCH 31 YEAR ENDED DECEMBER 31
1994 1993 1993 1992 1991 1990 1989
-------- -------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
SELECTED OTHER FINANCIAL DATA:
EBDITA (2)......................... $ 603 $ 557 $ 2,004 $ 1,924 $ 1,972 $ 1,856 $ 1,736
Percent of revenues:
Salaries, wages and benefits..... 40.1% 40.4% 41.1% 41.4% 41.4% 40.6% 39.7%
Supplies......................... 15.6 16.3 16.2 16.2 15.3 15.2 14.7
Other operating expenses......... 17.7 18.1 18.5 18.6 18.1 18.4 19.2
Provision for doubtful
accounts........................ 5.4 4.7 5.3 5.2 5.3 5.1 5.3
EBDITA........................... 21.7 21.0 19.5 19.4 20.6 21.5 22.5
Ratio of debt to debt plus common
stockholders' equity.............. 50.7% 55.5% 51.6% 49.8% 64.6% 71.0% 79.2%
SELECTED OPERATING DATA:
Number of hospitals at end of
period............................ 196 197 193 200 219 221 218
Weighted average licensed beds..... 41,955 41,525 41,263 40,608 42,437 42,264 41,452
Admissions......................... 309,800 306,200 1,158,400 1,161,100 1,189,700 1,174,700 1,139,300
Average length of stay (days)...... 5.9 6.1 5.9 6.1 6.5 6.6 6.8
Average daily census............... 20,341 20,880 18,702 19,253 21,255 21,351 21,155
Occupancy.......................... 48.5% 50.3% 45.3% 47.4% 50.1% 50.5% 51.0%
Emergency room visits.............. 788,300 791,900 3,139,700 3,042,900 3,028,600 2,894,800 2,756,900
<FN>
- -------------
(1) 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
requirements totaling $18 million in 1991 and $63 million in 1990.
(2) Income from continuing operations before non-recurring transactions,
depreciation, interest expense, minority interests, income taxes and
amortization.
</TABLE>
13
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
BACKGROUND INFORMATION AND BUSINESS STRATEGY
HCA MERGER
As discussed in Notes 1 and 2 of the Notes to the Consolidated Financial
Statements of the Company, on October 2, 1993, Columbia Healthcare Corporation
("Columbia") entered into a definitive agreement to merge with HCA. This
transaction was completed on February 10, 1994 and was accounted for as a
pooling of interests. Accordingly, the accompanying financial statements and the
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. Accordingly, the accompanying financial statements
and the financial and operating data included in this discussion and analysis
give retroactive effect to the Galen Merger and include the combined operations
of Columbia Hospital Corporation ("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 the Company'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 the Company) 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
The Company 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 the Company serve as
the managing general partner. The Company'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.
In response to changes in the health care industry, the Company 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 -- The Company 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, the Company also operates
psychiatric and rehabilitation facilities, outpatient surgery and diagnostic
centers, home health agencies and other services. This strategy enables the
Company to attract business from managed care plans and major employers
seeking efficient access to a wide array of health care services.
14
<PAGE>
DELIVER HIGH QUALITY SERVICES -- Through the use of clinical
information systems and continuous quality enhancement programs, the Company
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, the
Company focuses on coordinating 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.
COMPARISON OF RESULTS OF OPERATIONS FOR THE
QUARTERS ENDED MARCH 31, 1994 AND 1993
Revenues increased 5% to $2.8 billion in the first quarter of 1994 compared to
the same period of 1993 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 the same period of 1993.
Despite a continued deterioration in payer mix, EBDITA increased 8% to $603
million in the first quarter of 1994 from $557 million in the first quarter of
1993. The increase in EBDITA margins to 21.7% in the first quarter of 1994 from
21.0% in the first quarter of 1993 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 of 1994, while discounted and
managed care admissions grew from 32% to 37%, respectively.
During the first quarter of 1994, the Company recorded $159 million ($102
million net of tax) 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. The Company may incur additional charges related to the HCA Merger
during the remainder of 1994 in connection with severance payments resulting
from continued consolidation activities. 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, may result in annual pretax savings of
approximately $130 million, of which as much as $75 million may be realized in
1994.
Excluding the effects of the non-recurring transactions, income from continuing
operations in the first quarter of 1994 totaled $239 million or $.70 per share,
an increase of 15% over the $205 million or $.61 per share in the first quarter
of 1993. 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 for a description of the Spinoff.
In the first quarter of 1994, the Company 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, the Company recorded charges in the third
quarter of 1993 totaling $151 million ($98 million net of tax) 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
15
<PAGE>
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, should result in annual pretax savings in 1994 of approximately
$30 million.
COMPARISON OF RESULTS OF OPERATIONS FOR THE
YEARS ENDED DECEMBER 31, 1993, 1992 AND 1991
At the time of the HCA Merger, the Company 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 CONSOLIDATED
---------------------------------
<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:
1993............................................... $ 907 $ 1,097 $ 2,004
1992............................................... 870 1,054 1,924
1991............................................... 928 1,044 1,972
Income from continuing operations (a):
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) Excludes the after-tax effect of non-recurring transactions. See Note 5 of
the Notes to the Consolidated Financial Statements for a description of
these transactions.
</TABLE>
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, the Company completed numerous acquisitions and
divestitures of hospitals, most of which are discussed in Notes 5 and 6 of the
Notes to the 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 for
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 CONSOLIDATED CHC GALEN HCA CONSOLIDATED
---------------------------------------------------------------------
<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>
16
<PAGE>
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
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 Galen'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 the Company 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.
During the third quarter of 1993, the Company 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 the common stock of
HealthTrust, Inc. -- The Hospital Company ("HealthTrust").
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 million 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 Consolidated Financial Statements and Note 7 of the
Notes to Condensed 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, the Company 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.
17
<PAGE>
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 $367 million for the three months
ended March 31, 1994 compared to $376 million for the comparable period of 1993.
Cash flows in the first quarter of 1994 were reduced by approximately $75
million in connection with a payment to the IRS related to disputed prior year
income taxes and interest. In the first quarter of both 1994 and 1993, cash
flows in excess of the Company's capital expenditure program were used primarily
to reduce long-term debt and in the first quarter of 1993, to finance a payment
of $135 million to Humana in connection with the Spinoff. 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 effect on cash flows
from continuing operations in 1994.
Cash provided by continuing operations totaled $1.3 billion in each of the last
three fiscal years. Cash flows in excess of the Company's capital expenditure
program were used primarily to reduce long-term debt.
Working capital totaled $758 million at March 31, 1994, $573 million at December
31, 1993 and $606 million at December 31, 1992. Management believes that cash
flows from operations and amounts available under the Company's revolving credit
facilities and related commercial paper programs are sufficient to meet expected
future liquidity needs.
Investments of the Company's professional liability insurance subsidiaries to
maintain statutory equity and pay claims totaled $778 million at both March 31,
1994 and December 31, 1993, and $709 million at December 31, 1992.
In September 1993 the Board of Directors initiated the payment of a regular
quarterly cash dividend of $.03 per common share. While it is the present
intention of the Board of Directors to continue paying a quarterly dividend of
$.03 per share, the declaration and payment of future dividends by the Company
will be at the discretion of the Board of Directors and will depend upon many
factors, including the Company's earnings, financial condition, business needs,
capital and surplus and regulatory considerations.
CAPITAL RESOURCES
Excluding acquisitions, capital expenditures totaled $214 million and $181
million for the three months ended March 31, 1994 and 1993, respectively, and
$836 million in all of 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.
In addition, the Company expended $114 million and $75 million for acquisitions
in the respective first quarters of 1994 and 1993, and $79 million, $36 million
and $96 million during all of 1993, 1992 and 1991, respectively. See Note 6 of
the Notes to Consolidated Financial Statements and Note 8 of the Notes to
Condensed Consolidated Financial Statements for a description of these
activities. As part of its business strategy, the Company intends to acquire
additional health care facilities in the future.
The Company 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
March 31, 1994, there were projects under construction which had an estimated
additional cost to complete of approximately $285 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. The ratio of debt to debt plus common stockholders' equity
improved from 58% at December 31, 1992 (after giving pro forma effect to the
Spinoff) to 52% at December 31, 1993 and 51% at March 31, 1994.
18
<PAGE>
On April 29, 1994, the Company filed a Registration Statement on Form S-3 with
the 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 the
Company's subsidiaries, capital expenditures and possible acquisitions.
The Company's credit facilities contain customary covenants which include (i)
limitations on additional debt, (ii) limitations on sales of assets, mergers and
changes of ownership and (iii) maintenance of certain interest coverage ratios.
The Company was in compliance with all such covenants at March 31, 1994.
EFFECTS OF INFLATION AND CHANGING PRICES
Various federal, state and local laws have been enacted that, in certain cases,
limit the Company's ability to increase prices. Revenues for 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. The Company 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, the Company'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 the Company'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
As discussed in Note 9 of the Notes to Condensed Consolidated Financial
Statements, the Company is contesting certain income taxes and related interest,
aggregating approximately $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 the Company. However, if all or a majority of the
positions of the IRS are upheld, the financial position, results of operations
and liquidity of the Company would be materially adversely affected.
On March 24, 1994, the Company 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 the Company 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 the Company adopted the provisions of Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes," which increased
1992 first quarter net income by $51 million or $.16 per share. See Note 7 of
the Notes to Consolidated Financial Statements.
19
<PAGE>
SELLING STOCKHOLDER
The following table sets forth as of April 30, 1994, and after the sale of the
Common Stock offered hereby (assuming no exercise of the U.S. Underwriters'
overallotment option) certain information regarding the beneficial ownership of
the Common Stock by J.P. Morgan Capital Corporation ("J.P. Morgan Capital"), the
selling stockholder in the Offering. Information with respect to the ownership
of shares of the Common Stock by J.P. Morgan Capital has been furnished by J.P.
Morgan Capital to the Company.
<TABLE>
<CAPTION>
---------------------------------------------------------
SHARES BENEFICIALLY SHARES BENEFICIALLY
OWNED PRIOR TO SHARES OWNED AFTER
OFFERING BEING OFFERING
NAME AND ADDRESS NUMBER PERCENT OFFERED NUMBER PERCENT
- ----------------------------------------------------- ---------------------------------------------------------
<S> <C> <C> <C> <C> <C>
J.P. Morgan Capital Corporation ...................................... 16,683,122(1) 5% 6,000,000 15,089,999(2) 4.5%
60 Wall Street
New York, New York 10260
<FN>
- ------------
(1) J.P. Morgan Capital owns 2,100,000 shares of Common Stock and 18,989,999
shares of Nonvoting Common Stock. The number of shares shown in the table
includes 2,100,000 shares of Common Stock and 14,583,122 shares of
Nonvoting Common Stock which are immediately convertible into shares of
Common Stock, and excludes 4,406,877 shares of Nonvoting Common Stock
which are not immediately convertible into shares of Common Stock. In
addition, on April 30, 1994, J.P. Morgan Investment Management Inc. and
Morgan Guaranty Trust Company of New York, which are affiliates of J.P.
Morgan Capital, held for investment by their clients 2,269,858 shares of
Common Stock, as to which beneficial ownership is disclaimed by J.P.
Morgan Capital.
(2) The number of shares shown in the table represents 15,089,999 shares of
Nonvoting Common Stock which will be immediately convertible into shares
of Common Stock after the Offering.
</TABLE>
CERTAIN RELATIONSHIPS OF J.P. MORGAN CAPITAL AND ITS AFFILIATES TO THE COMPANY
J.P. Morgan Capital is an indirect wholly-owned subsidiary of J.P. Morgan & Co.
Incorporated and an affiliate of J.P. Morgan Securities Inc. ("J.P. Morgan
Securities") and J.P. Morgan Securities Ltd., which are the lead managers of the
Offering, and of Morgan Guaranty Trust Company of New York ("Morgan Guaranty")
and J.P. Morgan Delaware (together with Morgan Guaranty, the "J.P. Morgan Bank
Entities"), which are lenders to the Company.
In the ordinary course of their respective businesses, affiliates of J.P. Morgan
Capital have engaged, and may in the future engage, in commercial banking and
investment banking transactions with the Company and its subsidiaries, including
HCA and Galen. J.P. Morgan Securities was a co-managing underwriter of the
Company's public offerings in April and March, 1994 of $150 million of 8.36%
Debentures Due 2024 and $150 million of 7.15% Notes Due 2004 and the Company's
public offering in December 1993 of $150 million of 7 1/2% Debentures Due 2023
and $150 million of 6 1/8% Notes Due 2000. In addition, during the first quarter
of 1994, J.P. Morgan Securities assisted the Company in connection with certain
swap transactions. In 1993, J.P. Morgan Securities arranged a $1.6 billion
credit facility for HCA, and in 1992, J.P. Morgan Securities was a co-managing
underwriter of HCA's initial public offering.
Upon consummation of the HCA Merger, the Company entered into revolving credit
agreements in an aggregate amount of $3 billion. The J.P. Morgan Bank Entities,
which are wholly-owned subsidiaries of J.P. Morgan & Co. Incorporated, are
lenders in this credit facility, and Morgan Guaranty is a co-agent bank for this
credit facility. The Company's total indebtedness under this credit facility at
March 31, 1994 was approximately $218 million. The J.P. Morgan Bank Entities
have received certain commitment and other fees from the Company in connection
with the credit facility. Prior to the HCA Merger, Morgan Guaranty was the agent
bank, and the J.P. Morgan Bank Entities were lenders, in certain of HCA's credit
facilities, including a $1.6 billion credit facility. In addition, Morgan
Guaranty has engaged in certain transactions with, and provided certain products
and services to, the Company and its predecessors relating to the management of
interest rate and foreign exchange exposures.
20
<PAGE>
During the period beginning January 1, 1993 and ended December 31, 1993, the
Company and its subsidiaries paid underwriting, arrangement and other fees to
J.P. Morgan Securities, and commitment, agency and other fees to the J.P. Morgan
Bank Entities, in the aggregate amount of approximately $2.6 million.
Pursuant to a Registration Rights Agreement dated as of March 16, 1989, as
amended (the "Registration Rights Agreement"), J.P. Morgan Capital and certain
other original investors in HCA had demand registration rights to require four
registrations (and after completion of the Offering will have demand
registration rights to require three more registrations), and have unlimited
"piggyback" registration rights with respect to registrations of shares of
Common Stock under the Securities Act of 1933, as amended (the "Securities
Act"). The Company has agreed to pay all of the expenses of such registrations,
including the fees and disbursements of counsel for such stockholders. Pursuant
to the Registration Rights Agreement and the Underwriting Agreement dated the
date hereof, the Company has agreed to indemnify J.P. Morgan Capital against
certain liabilities, including liabilities under the Securities Act.
21
<PAGE>
UNDERWRITING
Under the terms and subject to the conditions contained in an Underwriting
Agreement dated the date hereof, the Underwriters named below have severally
agreed to purchase, and the selling stockholder has agreed to sell to them,
severally, the respective number of shares of the Company's Common Stock set
forth opposite their names below:
<TABLE>
<CAPTION>
----------
NUMBER
OF
SHARES
----------
<S> <C>
U.S. UNDERWRITERS
J.P. Morgan Securities Inc............................................................... 1,600,000
Dean Witter Reynolds Inc................................................................. 1,600,000
Morgan Stanley & Co. Incorporated........................................................ 1,600,000
----------
Subtotal............................................................................... 4,800,000
----------
INTERNATIONAL UNDERWRITERS
J.P. Morgan Securities Ltd............................................................... 360,000
Dean Witter International Ltd............................................................ 360,000
Morgan Stanley & Co. International Limited............................................... 360,000
Deutsche Bank Aktiengesellschaft......................................................... 24,000
Nikko Securities......................................................................... 24,000
Paribas Capital Markets Group............................................................ 24,000
Robert Fleming & Co. Limited............................................................. 24,000
UBS Limited.............................................................................. 24,000
----------
Subtotal............................................................................... 1,200,000
----------
Total................................................................................ 6,000,000
----------
----------
</TABLE>
The Underwriting Agreement provides that the obligations of the several
Underwriters to pay for and accept delivery of the shares of Common Stock
offered hereby are subject to the approval of certain legal matters by their
counsel and to certain other conditions. The Underwriters are committed to take
and pay for all of the shares of Common Stock offered hereby (other than those
covered by the overallotment option described below) if any are taken. The
closing of the U.S. Offering is a condition to the closing of the International
Offering, and the closing of the International Offering is a condition to the
closing of the U.S. Offering.
Pursuant to the Agreement Between U.S. and International Underwriters, each U.S.
Underwriter has represented and agreed that, with certain exceptions set forth
below, (a) it is not purchasing any shares of Common Stock being sold by it (the
"U.S. Shares") for the account of anyone other than a United States or Canadian
Person and (b) it has not offered or sold, and will not offer or sell, directly
or indirectly, any U.S. Shares or distribute any prospectus relating to the U.S.
Shares outside the United States or Canada or to anyone other than a United
States or Canadian Person. Pursuant to the Agreement Between U.S. and
International Underwriters, each International Underwriter has represented and
agreed that, with certain exceptions set forth below, (a) it is not purchasing
any shares of Common Stock being sold by it (the "International Shares") for the
account of any United States or Canadian Person and (b) it has not offered or
sold, and will not offer or sell, directly or indirectly, any International
Shares or distribute any prospectus relating to the International Shares within
the United States or Canada or to any United States or Canadian Person. The
foregoing limitations do not apply to stabilization transactions or to certain
other transactions specified in the Agreement Between U.S. and International
Underwriters. As used herein, "United States or Canadian Person" means any
national or resident of the United States or Canada or any corporation, pension,
profit-sharing or other trust or other entity organized under the laws of the
United States or Canada or of any political subdivision thereof (other than a
branch located outside the United States and Canada of any United States or
Canadian Person) and includes any United States or Canadian branch of a person
who is otherwise not a United States or Canadian Person.
22
<PAGE>
Pursuant to the Agreement Between U.S. and International Underwriters, sales may
be made between the U.S. Underwriters and the International Underwriters of any
number of shares of Common Stock to be purchased pursuant to the Underwriting
Agreement as may be mutually agreed. The per share price and currency of
settlement of any shares so sold shall be the Price to Public set forth on the
cover page hereof, in United States dollars, less an amount not greater than the
per share amount of the concession to dealers set forth below.
Pursuant to the Agreement Between U.S. and International Underwriters, each U.S.
Underwriter has represented that it has not offered or sold, and agreed not to
offer or sell, any Common Stock, directly or indirectly, in Canada in
contravention of the securities laws of Canada or any province or territory
thereof and has represented that any offer of Common Stock in Canada will be
made only pursuant to an exemption from the requirement to file a prospectus in
the province or territory of Canada in which such offer is made. Each U.S.
Underwriter has further agreed to send to any dealer who purchases from it any
Common Stock a notice stating in substance that, by purchasing such Common
Stock, such dealer represents and agrees that it has not offered or sold, and
will not offer or sell, directly or indirectly, any of such Common Stock in
Canada or to, or for the benefit of, any resident of Canada in contravention of
the securities laws of Canada or any province or territory thereof and that any
offer of Common Stock in Canada will be made only pursuant to an exemption from
the requirement to file a prospectus in the province of Canada in which such
offer is made, and that such dealer will deliver to any other dealer to whom it
sells any such Common Stock a notice containing substantially the same statement
as is contained in this sentence.
Pursuant to the Agreement Between U.S. and International Underwriters, each
International Underwriter has represented and agreed that (i) it has not offered
or sold and will not offer or sell in the United Kingdom by means of any
document, any shares of Common Stock, other than to persons whose ordinary
business it is to buy or sell shares or debentures, whether as principal or
agent, or in circumstances which do not constitute an offer to the public within
the meaning of the Companies Act of 1985, (ii) it has complied and will comply
with all applicable provisions of the Financial Services Act 1986 with respect
to anything done by it in relation to the shares of Common Stock in, from or
otherwise involving the United Kingdom, and (iii) it has only issued or passed
on and will only issue or pass on to any person in the United Kingdom any
document received by it in connection with the sale of the shares of Common
Stock if that person is of a kind described in Article 9(3) of the Financial
Services Act 1986 (Investment Advertisements) (Exemptions) Order 1988 or is a
person to whom the document may otherwise lawfully be issued or passed on.
The Underwriters propose to offer part of the shares of Common Stock offered
hereby directly to the public at the public offering price set forth on the
cover page hereof and part to certain dealers at a price that represents a
concession not in excess of $.74 a share under the public offering price. Any
Underwriter may allow, and such dealers may reallow, a concession not in excess
of $.10 a share to certain other dealers.
Pursuant to the Underwriting Agreement, J.P. Morgan Capital has granted to the
U.S. Underwriters an option, exercisable for 30 days from the date of this
Prospectus, to purchase up to an additional 900,000 shares of Common Stock at
the public offering price set forth on the cover page hereof less the
underwriting discount. The U.S. Underwriters may exercise such option to
purchase solely for the purpose of covering overallotments, if any, made in
connection with the sale of the shares of Common Stock offered hereby. To the
extent such option is exercised, each U.S. Underwriter will become obligated,
subject to certain conditions, to purchase approximately the same percentage of
such additional shares as the number set forth next to such U.S. Underwriter's
name in the preceding table bears to the total number of shares of Common Stock
offered hereby.
From time to time in the ordinary course of their respective businesses, J.P.
Morgan Securities, Dean Witter Reynolds Inc. and Morgan Stanley & Co.
Incorporated have engaged and may in the future engage in investment banking
transactions with, and provide financial advisory services to, the Company. For
additional information with respect to certain relationships with the Company
and its subsidiaries, see "Selling Stockholder -- Certain Relationships of J.P.
Morgan Capital and its Affiliates to the Company."
J.P. Morgan Capital will be the selling stockholder in the Offering. The
provisions of Section (c)(8) of the Corporate Financing Rule under Section 44 of
Article III of the Rules of Fair Practice of the National Association of
Securities Dealers, Inc., apply to this Offering since all of the net proceeds
of the Offering will be paid to J.P. Morgan Capital. See "Selling Stockholder."
23
<PAGE>
The selling stockholder has agreed in the Underwriting Agreement not to offer,
sell, contract to sell or otherwise dispose of any shares of Common Stock or any
securities convertible into or exchangeable for Common Stock (except for the
shares offered hereby) for a period of 90 days after the date of this
Prospectus, without the prior written consent of J.P. Morgan Securities, as
representative of the several Underwriters. The Company has agreed in the
Underwriting Agreement not to effect any registration of any shares of Common
Stock or any securities convertible into or exchangeable for Common Stock
(except for the shares offered hereby and shares registered in connection with
acquisitions and employee benefit plans) for a period of 90 days after the date
of this Prospectus, without the prior written consent of J.P. Morgan Securities,
as representative of the several Underwriters.
In the Underwriting Agreement, the Company and J.P. Morgan Capital have agreed
to indemnify the Underwriters against certain liabilities, including liabilities
under the federal securities laws, or to contribute to payments which the
Underwriters may be required to make in respect thereof.
LEGAL MATTERS
The validity of the issuance of the Common Stock offered hereby will be passed
upon for the Company by Stephen T. Braun, Senior Vice President and General
Counsel of the Company. Davis Polk & Wardwell, New York, New York, is acting as
counsel for the Underwriters in connection with certain legal matters relating
to the shares of Common Stock offered hereby. As of May 12, 1994, Mr. Braun
owned approximately 1,072 shares and had options to purchase 94,500 shares of
Common Stock.
EXPERTS
The annual consolidated financial statements of the Company, the consolidated
financial statements and financial statement schedules of Columbia and the
supplemental consolidated financial statements and supplemental financial
statement schedules of the Company, included or incorporated by reference in
this Prospectus, have been audited by Coopers & Lybrand, independent
accountants, to the extent and for the periods indicated in their reports
thereon included or incorporated by reference herein, which include explanatory
paragraphs regarding (as to the Company and Columbia) a change in accounting for
income taxes and (as to the supplemental financial statements and supplemental
financial statement schedules of the Company) the merger of Columbia and HCA.
Such financial statements and financial statement schedules audited by Coopers &
Lybrand have been included or incorporated by reference in reliance upon such
reports given upon the authority of said firm as experts in accounting and
auditing.
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended, and in accordance therewith files reports,
proxy statements and other information with the Commission. Such reports, proxy
statements and other information can be inspected and copied at the public
reference facilities maintained by the Commission at Judiciary Plaza, 450 Fifth
Street, N.W., Washington, D.C. 20549, and at the Commission's regional offices
at 500 West Madison Street, Suite 1400, Chicago, Illinois 60661 and 7 World
Trade Center, New York, New York 10048. Copies of such material can be obtained
from the Public Reference Section of the Commission at the Washington, D.C.
address. Such reports, proxy statements and other information concerning the
Company also may be inspected at the offices of the New York Stock Exchange,
Inc., 20 Broad Street, New York, New York 10005, on which the shares of Common
Stock of the Company are listed.
The Company has filed with the Commission a Registration Statement under the
Securities Act with respect to the Common Stock offered by this Prospectus. This
Prospectus does not contain all the information set forth in the Registration
Statement and exhibits and schedules thereto, certain portions of which have
been omitted pursuant to the rules and regulations of the Commission. The
information so omitted, including exhibits, may be obtained from the Commission
at its principal office in Washington, D.C. upon the payment of the prescribed
fees, or may be examined without charge at the Public Reference Section of the
Commission, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549. For
further information, reference is made to the Registration Statement and
exhibits thereto.
24
<PAGE>
COLUMBIA/HCA HEALTHCARE CORPORATION
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
----
PAGE
----
<S> <C>
Report of Independent Accountants.......................................................................... F-2
Consolidated Financial Statements:
Consolidated Statement of Income for the years ended December 31, 1993,
1992 and 1991........................................................................................... F-3
Consolidated Balance Sheet, December 31, 1993 and 1992................................................... F-4
Consolidated Statement of Common Stockholders' Equity for the years ended December 31, 1993,
1992 and 1991........................................................................................... F-5
Consolidated Statement of Cash Flows for the years ended December 31, 1993, 1992 and 1991................ F-6
Notes to Consolidated Financial Statements............................................................... F-7
Quarterly Consolidated Financial Information (Unaudited)................................................. F-24
Condensed Consolidated Financial Statements:
Condensed Consolidated Statement of Income for the three months ended March 31, 1994 and March 31, 1993
(Unaudited)............................................................................................. F-25
Condensed Consolidated Balance Sheet, March 31, 1994 and December 31, 1993 (Unaudited)................... F-26
Consolidated Statement of Cash Flows for the three months ended March 31, 1994 and March 31, 1993
(Unaudited)............................................................................................. F-27
Notes to Condensed Consolidated Financial Statements (Unaudited)......................................... F-28
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders
Columbia/HCA Healthcare Corporation
We have audited the accompanying consolidated balance sheet of Columbia/HCA
Healthcare Corporation as of December 31, 1993 and 1992, and the related
consolidated statements of income, common stockholders' equity and cash flows
for each of the three years in the period ended December 31, 1993, which
statements give retroactive effect to the pooling of interests described in Note
2 to the consolidated financial statements. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Columbia/HCA
Healthcare Corporation 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."
[LOGO]
COOPERS & LYBRAND
Louisville, Kentucky
February 28, 1994,
except for Note 15,
as to which the date
is March 24, 1994
F-2
<PAGE>
COLUMBIA/HCA 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............................................................................ $ 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 consolidated financial statements.
F-3
<PAGE>
COLUMBIA/HCA 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................................................................. $ 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 consolidated financial statements.
F-4
<PAGE>
COLUMBIA/HCA HEALTHCARE CORPORATION
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 consolidated financial statements.
F-5
<PAGE>
COLUMBIA/HCA 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.......................................................................... $ 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 consolidated financial statements.
F-6
<PAGE>
COLUMBIA/HCA HEALTHCARE CORPORATION
NOTES TO 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 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 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/HCA's annual reporting period ending December 31.
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.
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.
F-7
<PAGE>
COLUMBIA/HCA HEALTHCARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 1 -- ACCOUNTING POLICIES (CONTINUED)
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 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.
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
F-8
<PAGE>
COLUMBIA/HCA HEALTHCARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 2 -- HCA MERGER (CONTINUED)
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).
The HCA Merger has been accounted for as a pooling of interests, and
accordingly, the 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).
F-9
<PAGE>
COLUMBIA/HCA HEALTHCARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 3 -- 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 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.
F-10
<PAGE>
COLUMBIA/HCA HEALTHCARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 4 -- SPINOFF TRANSACTION AND DISCONTINUED OPERATIONS (CONTINUED)
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
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
F-11
<PAGE>
COLUMBIA/HCA HEALTHCARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 6 -- OTHER BUSINESS COMBINATIONS (CONTINUED)
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 and joint ventures 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-12
<PAGE>
COLUMBIA/HCA 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........................... 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 risks.................................................... 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
F-13
<PAGE>
COLUMBIA/HCA HEALTHCARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 7 -- INCOME TAXES (CONTINUED)
these claimed deficiencies in the United States Tax Court. In addition, the
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 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
F-14
<PAGE>
COLUMBIA/HCA HEALTHCARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 7 -- INCOME TAXES (CONTINUED)
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.
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.
F-15
<PAGE>
COLUMBIA/HCA HEALTHCARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 7 -- INCOME TAXES (CONTINUED)
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-16
<PAGE>
COLUMBIA/HCA HEALTHCARE CORPORATION
NOTES TO 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-17
<PAGE>
COLUMBIA/HCA 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..................... 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>
F-18
<PAGE>
COLUMBIA/HCA HEALTHCARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 8 -- PROFESSIONAL LIABILITY RISKS (CONTINUED)
The fair value of the subsidiaries' investments is based generally on quoted
market prices.
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-19
<PAGE>
COLUMBIA/HCA HEALTHCARE CORPORATION
NOTES TO 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-20
<PAGE>
COLUMBIA/HCA HEALTHCARE CORPORATION
NOTES TO 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-21
<PAGE>
COLUMBIA/HCA HEALTHCARE CORPORATION
NOTES TO 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.
In September 1993 the Board of Directors initiated a regular quarterly cash
dividend on common stock of $.03 per share.
F-22
<PAGE>
COLUMBIA/HCA HEALTHCARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 12 -- CAPITAL STOCK (CONTINUED)
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-23
<PAGE>
COLUMBIA/HCA 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.................................... $ 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
</TABLE>
<TABLE>
<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 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 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
Consolidated Financial Statements.
</TABLE>
F-24
<PAGE>
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)
<TABLE>
<CAPTION>
---------------------
1994 1993
---------------------
<S> <C> <C>
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
</TABLE>
See accompanying notes.
F-25
<PAGE>
COLUMBIA/HCA HEALTHCARE CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEET
UNAUDITED
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
------------------------
ASSETS MARCH 31, DECEMBER 31,
1994 1993
------------------------
<S> <C> <C>
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
--------- ------------
--------- ------------
</TABLE>
See accompanying notes.
F-26
<PAGE>
COLUMBIA/HCA HEALTHCARE CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE QUARTERS ENDED MARCH 31, 1994 AND 1993
UNAUDITED
(DOLLARS IN MILLIONS)
<TABLE>
<CAPTION>
----------------
1994 1993
----------------
<S> <C> <C>
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 change 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
</TABLE>
See accompanying notes.
F-27
<PAGE>
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
consolidated financial statements of Columbia/HCA for the year ended December
31, 1993 contained in this Prospectus.
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 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-28
<PAGE>
COLUMBIA/HCA HEALTHCARE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
UNAUDITED
NOTE 4 -- HCA MERGER (CONTINUED)
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 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 CONSOLIDATED
--------------------------------
<S> <C> <C> <C>
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
----------- --------- ------
----------- --------- ------
</TABLE>
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 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):
<TABLE>
<CAPTION>
-----------------------------
CHC GALEN CONSOLIDATED
-----------------------------
<S> <C> <C> <C>
Revenues...................................................... $ 312 $ 1,017 $ 1,329
Net income:
Continuing operations....................................... $ 10 $ 80 $ 90
Discontinued operations..................................... - 16 16
--------- --------- ------
$ 10 $ 96 $ 106
--------- --------- ------
--------- --------- ------
</TABLE>
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.
F-29
<PAGE>
COLUMBIA/HCA HEALTHCARE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
UNAUDITED
NOTE 6 -- SPINOFF TRANSACTION AND DISCONTINUED OPERATIONS (CONTINUED)
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):
<TABLE>
<S> <C>
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
---------
---------
</TABLE>
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.
NOTE 8 -- ACQUISITIONS
The following is a summary of acquisitions and joint ventures consummated during
the respective three month periods (dollars in millions):
<TABLE>
<CAPTION>
-----------------
1994 1993
-----------------
<S> <C> <C>
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
--------- ---------
--------- ---------
</TABLE>
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
F-30
<PAGE>
COLUMBIA/HCA HEALTHCARE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
UNAUDITED
NOTE 9 -- INCOME TAXES (CONTINUED)
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.
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
F-31
<PAGE>
COLUMBIA/HCA HEALTHCARE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
UNAUDITED
NOTE 9 -- INCOME TAXES (CONTINUED)
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 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.
F-32
<PAGE>
COLUMBIA/HCA HEALTHCARE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
UNAUDITED
NOTE 9 -- INCOME TAXES (CONTINUED)
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.
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.
F-33
<PAGE>
(This page has been left blank intentionally.)
<PAGE>
COLUMBIA/HCA A New Commitment To Healthcare . . . Together
- --------------------------------------------------------------------------------
HEALTHCARE CORPORATION
<PAGE>
GRAPHIC AND IMAGE MATERIAL
On the inside front cover of the Prospectus is a map of the United States,
and an insert depicting England and Switzerland. The number of the Company's
facilities are listed in each state or country. The number of acute care
hospitals are contained within a square in each state or country, the number of
psychiatric hospitals are contained within a circle in each state and the number
of ancillary facilities are contained within a triangle. The Company logo is
at the top of the page.
