<PAGE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1995
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ________________ TO ________________
COMMISSION FILE NUMBER 1-11239
COLUMBIA / HCA HEALTHCARE CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 75-2497104
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
ONE PARK PLAZA 37203
NASHVILLE, TENNESSEE (ZIP CODE)
(ADDRESS OF PRINCIPAL EXECUTIVE
OFFICES)
(615) 327-9551
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
NOT APPLICABLE
(FORMER NAME, FORMER ADDRESS AND FORMER FISCAL YEAR,
IF CHANGED SINCE LAST REPORT)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months, and (2) has been subject to such filing
requirements for the past 90 days.
YES X NO
____ ____
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
<TABLE>
<CAPTION>
OUTSTANDING AT
CLASS OF COMMON STOCK OCTOBER 31, 1995
--------------------- ------------------
<S> <C>
Voting common stock, $.01 par value 431,038,200 shares
Nonvoting common stock, $.01 par value 14,119,000 shares
</TABLE>
1 of 21
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<PAGE>
COLUMBIA/HCA HEALTHCARE CORPORATION
FORM 10-Q
SEPTEMBER 30, 1995
<TABLE>
<CAPTION>
PAGE OF
PART I: FINANCIAL INFORMATION FORM 10-Q
----------------------------- ---------
<C> <S> <C>
Item 1. Financial Statements
Condensed Consolidated Statement of Income--for the quarters
and nine months ended September 30, 1995 and 1994.......... 3
Condensed Consolidated Balance Sheet--September 30, 1995 and
December 31, 1994.......................................... 4
Condensed Consolidated Statement of Cash Flows--for the nine
months ended September 30, 1995 and 1994................... 5
Notes to Condensed Consolidated Financial Statements........ 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations.................................. 11
<CAPTION>
PART II: OTHER INFORMATION
--------------------------
<C> <S> <C>
Items 1 to 6......................................................... 18
</TABLE>
2
<PAGE>
COLUMBIA/HCA HEALTHCARE CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF INCOME
FOR THE QUARTERS AND NINE MONTHS ENDED SEPTEMBER 30, 1995 AND 1994
UNAUDITED
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
QUARTER NINE MONTHS
---------------- ----------------
1995 1994 1995 1994
------- ------- ------- -------
<S> <C> <C> <C> <C>
Revenues................................... $ 4,371 $ 3,668 $13,112 $10,621
Salaries, wages and benefits............... 1,788 1,531 5,291 4,347
Supplies................................... 629 525 1,907 1,581
Other operating expenses................... 876 725 2,503 2,011
Provision for doubtful accounts............ 258 232 746 631
Depreciation and amortization.............. 251 207 730 579
Interest expense........................... 111 105 347 281
Investment income.......................... (29) (17) (68) (56)
Merger and facility consolidation costs.... - - 387 159
------- ------- ------- -------
3,884 3,308 11,843 9,533
------- ------- ------- -------
Income before minority interests and income
taxes..................................... 487 360 1,269 1,088
Minority interests in earnings of
consolidated entities..................... 30 8 80 21
------- ------- ------- -------
Income before income taxes................. 457 352 1,189 1,067
Provision for income taxes................. 183 139 479 424
------- ------- ------- -------
Income before extraordinary item........... 274 213 710 643
Extraordinary loss on extinguishment of
debt, net of income tax benefit........... (7) (23) (103) (115)
------- ------- ------- -------
Net income............................. $ 267 $ 190 $ 607 $ 528
======= ======= ======= =======
Earnings per common and common equivalent
share:
Income before extraordinary item......... $ .61 $ .49 $ 1.58 $ 1.52
Extraordinary loss on extinguishment of
debt.................................... (.02) (.05) (.23) (.27)
------- ------- ------- -------
Net income............................. $ .59 $ .44 $ 1.35 $ 1.25
======= ======= ======= =======
Cash dividends per common share............ $ .03 $ .03 $ .09 $ .09
Shares used in earnings per common and
common equivalent share computation (000). 449,440 432,526 448,185 423,402
</TABLE>
See accompanying notes.
3
<PAGE>
COLUMBIA/HCA HEALTHCARE CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEET
UNAUDITED
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1995 1994
------------- ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents......................... $ 75 $ 68
Accounts receivable less allowances for loss of
$886 and $784.................................... 2,503 2,346
Inventories....................................... 401 373
Other............................................. 749 560
------- -------
3,728 3,347
Property and equipment, at cost..................... 14,118 12,613
Accumulated depreciation............................ (4,518) (3,987)
------- -------
9,600 8,626
Investments of professional liability insurance
subsidiary......................................... 896 888
Intangible assets................................... 3,494 3,058
Other............................................... 488 359
------- -------
$18,206 $16,278
======= =======
LIABILITIES AND COMMON STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.................................. $ 716 $ 609
Salaries, wages and other compensation............ 456 391
Other accrued expenses............................ 986 1,131
Long-term debt due within one year................ 287 124
------- -------
2,445 2,255
Long-term debt...................................... 6,198 5,548
Deferred credits and other liabilities.............. 2,101 2,107
Minority interests in equity of consolidated
entities........................................... 696 278
Common stockholders' equity:
Common stock, $.01 par; authorized 800,000,000
voting shares and 25,000,000 nonvoting shares;
issued and outstanding 430,721,600 and
427,837,300 voting shares and 14,119,000
nonvoting shares................................. 4 4
Other............................................. 6,762 6,086
------- -------
6,766 6,090
------- -------
$18,206 $16,278
======= =======
</TABLE>
See accompanying notes.
4
<PAGE>
COLUMBIA/HCA HEALTHCARE CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1995 AND 1994
UNAUDITED
(DOLLARS IN MILLIONS)
<TABLE>
<CAPTION>
1995 1994
------- -------
<S> <C> <C>
Cash flows from operating activities:
Net income................................................. $ 607 $ 528
Adjustments to reconcile net income to net cash provided by
operating activities:
Merger and facility consolidation costs.................. 387 159
Depreciation and amortization............................ 730 579
Deferred income taxes.................................... (19) (40)
Changes in operating assets and liabilities.............. (348) (103)
Extraordinary loss on extinguishment of debt............. 170 187
Other.................................................... (11) 25
------- -------
Net cash provided by operating activities.............. 1,516 1,335
------- -------
Cash flows from investing activities:
Purchase of property and equipment......................... (1,064) (873)
Acquisition of EPIC Holdings, Inc. ........................ - (221)
Cash acquired in connection with Medical Care America, Inc.
merger transaction........................................ - 106
Acquisition of hospitals and health care facilities........ (1,150) (373)
Disposition of property and equipment...................... 241 80
Change in investments...................................... (88) (63)
Other...................................................... (74) (66)
------- -------
Net cash used in investing activities.................. (2,135) (1,410)
------- -------
Cash flows from financing activities:
Issuance of long-term debt................................. 1,764 1,235
Net changes in commercial paper borrowings and lines of
credit.................................................... 785 1,791
Repayment of long-term debt................................ (1,924) (3,400)
Payment of cash dividends.................................. (34) (25)
Issuance of common stock................................... 43 189
Other...................................................... (8) (2)
------- -------
Net cash provided by (used in) financing activities.... 626 (212)
------- -------
Change in cash and cash equivalents.......................... 7 (287)
Cash and cash equivalents at beginning of period............. 68 348
------- -------
Cash and cash equivalents at end of period................... $ 75 $ 61
======= =======
Interest payments............................................ $ 329 $ 291
Income tax payments, net of refunds.......................... 528 386
</TABLE>
See accompanying notes.
5
<PAGE>
COLUMBIA/HCA HEALTHCARE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
UNAUDITED
NOTE 1--BASIS OF PRESENTATION
Columbia/HCA Healthcare Corporation ("Columbia/HCA" or the "Company") is a
Delaware corporation that operates hospitals and ancillary health care
facilities through (i) corporate subsidiaries, (ii) joint ventures or (iii)
ownership of interests in various partnerships in which subsidiaries of
Columbia/HCA serve as the managing general partner.
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, 1994 filed with the Securities and Exchange Commission on Form 8-
K dated April 24, 1995.
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 presentation of interim results.
NOTE 2--EARNINGS PER 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. Fully
diluted earnings per common and common equivalent share are not presented
because such amounts approximate earnings per common and common equivalent
share.
NOTE 3--HEALTHTRUST MERGER
On April 24, 1995, Columbia/HCA consummated a merger with Healthtrust,
Inc.--The Hospital Company ("Healthtrust") (the "Healthtrust Merger"). The
Healthtrust Merger has been accounted for as a pooling of interests, and
accordingly, the condensed consolidated financial statements give retroactive
effect to the Healthtrust Merger and include the combined operations of
Columbia/HCA and Healthtrust for all periods presented. The following is a
summary of the results of operations of the separate entities for the periods
prior to the Healthtrust Merger (dollars in millions):
<TABLE>
<CAPTION>
COLUMBIA/HCA HEALTHTRUST COMBINED
------------ ----------- --------
<S> <C> <C> <C>
Three months ended March 31, 1995:
Revenues............................. $3,337 $1,043 $ 4,380
Net income........................... 292 66 358
Three months ended September 30, 1994:
Revenues............................. $2,728 $ 944 $ 3,668(a)
Net income........................... 153 38 190(b)
Nine months ended September 30, 1994:
Revenues............................. $8,195 $2,439 $10,621(a)
Net income........................... 403 126 528(b)
</TABLE>
- --------
(a) Includes pooling adjustments of $4 million and $13 million for the three
months and nine months ended September 30, 1994, respectively, to
eliminate data center fees charged by Columbia/HCA to Healthtrust.
(b) Includes pooling adjustment of $1 million for both the three months and
nine months ended September 30, 1994, to eliminate discounting of
Healthtrust professional general liability loss provisions to conform to
Columbia/HCA's accounting method.
6
<PAGE>
COLUMBIA/HCA HEALTHCARE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
UNAUDITED
NOTE 4--EXTINGUISHMENT OF DEBT
In the third quarter of 1995, Columbia/HCA refinanced $44 million of
subordinated notes and a $76 million note. The refinancings reduced net income
in the third quarter of 1995 by $7 million or $.02 per share.
In the third quarter of 1994, net income was reduced by $23 million or $.05
per share in connection with the refinancing of $136 million of long-term
debt.
NOTE 5--OTHER BUSINESS COMBINATIONS
The following is a summary of acquisitions and joint ventures (excluding the
mergers with EPIC Holdings, Inc. ("EPIC") (the "EPIC Merger") and Medical Care
America, Inc. ("MCA") (the "MCA Merger")), consummated during the respective
nine month periods (dollars in millions):
<TABLE>
<CAPTION>
1995 1994
------ ------
<S> <C> <C>
Number of hospitals............................................. 23 10
Number of licensed beds......................................... 4,639 2,933
Purchase price information:
Fair value of assets acquired................................. $1,592 $ 523
Liabilities assumed........................................... (108) (65)
------ ------
Net assets acquired......................................... 1,484 458
Contributions from minority partners.......................... (330) (79)
Net cash acquired............................................. (4) (6)
------ ------
Net cash paid for acquisitions............................ $1,150 $ 373
====== ======
</TABLE>
In 1995, the Company exchanged a 225 bed hospital in South Carolina for a
104 bed hospital in Texas and a 126 bed hospital in California.
In 1994, the Company exchanged a 135 bed hospital in Alabama and a 160 bed
hospital in Texas for two hospitals in Georgia with a total of 232 beds.
NOTE 6--INCOME TAXES
The Internal Revenue Service (the "IRS") has issued statutory notices of
deficiency in connection with its examinations of HCA--Hospital Corporation of
America's ("HCA") federal income tax returns for 1981 through 1988.
Columbia/HCA is currently contesting these claimed deficiencies in the United
States Tax Court (the "Tax Court"). The IRS has also proposed certain
adjustments in connection with its examinations of HCA's 1989 and 1990 federal
income tax returns. In addition, in August 1995, the IRS issued a statutory
notice of deficiency in connection with its examination of HCA's 1991 federal
income tax return. Columbia/HCA intends to contest the claimed deficiency. The
following is a discussion of the disputed items.
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
7
<PAGE>
COLUMBIA/HCA HEALTHCARE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
UNAUDITED
NOTE 6--INCOME TAXES (CONTINUED)
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
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 $68 million in income taxes and $529
million in interest as of September 30, 1995.
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 $122 million in income taxes and $203 million in interest as of
September 30, 1995.
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 September 30, 1995, Columbia/HCA is seeking a refund
totaling $63 million in income taxes and $119 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 IRS has disallowed the deduction and is
claiming an additional $4 million in income taxes and $21 million in interest
as of September 30, 1995. A final determination that the premiums are not
deductible either when paid to Parthenon or upon the sale of certain hospitals
to Healthtrust would increase the taxable basis in the hospitals sold, thereby
reducing HCA's gain realized on the sale.
Healthtrust Sale
In connection with its sale of certain Subsidiaries to Healthtrust in 1987
in exchange for cash, Healthtrust preferred stock and stock purchase warrants,
HCA calculated its gain based on the valuation of such stock and warrants by
an independent appraiser. The IRS claims a higher aggregate valuation, based
on the face amount of the preferred stock and a separate appraisal Healthtrust
obtained for the stock purchase warrants. Application of the higher valuation
would increase the gain recognized by HCA on the sale. However, if the IRS
succeeds in its assertion, HCA's tax basis in its Healthtrust preferred stock
and warrants will be increased accordingly, thereby substantially reducing the
tax from the sale of such preferred stock and warrants by a corresponding
amount. By December 31, 1992, HCA had sold its entire interest in the
Healthtrust preferred stock and warrants. Including the effect of the sales of
these securities, the IRS is claiming additional interest of $81 million
through September 30, 1995.
8
<PAGE>
COLUMBIA/HCA HEALTHCARE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
UNAUDITED
NOTE 6--INCOME TAXES (CONTINUED)
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 $95 million
through September 30, 1995.
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 $9 million of additional income taxes
and $25 million of interest through September 30, 1995. 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 proposed by the IRS 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 $137 million
and interest of $90 million through September 30, 1995.
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 $95
million and interest of $45 million through September 30, 1995.
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 $38 million in income taxes and
$25 million in interest through September 30, 1995.
9
<PAGE>
COLUMBIA/HCA HEALTHCARE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
UNAUDITED
NOTE 6--INCOME TAXES (CONTINUED)
In September 1994, Columbia/HCA presented its case in Tax Court for all
issues included in the statutory notices of deficiency for 1981 through 1988
other than the deductibility of insurance premiums paid to Parthenon, (which
was presented in November 1994). A Tax Court decision is expected in 1995.
Resolution of disputed income tax issues by the Tax Court will not be affected
by the merger with Healthtrust.
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.
10
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
BUSINESS STRATEGY
Columbia/HCA's business strategy centers on working with physicians and
other healthcare providers to develop comprehensive, integrated healthcare
delivery networks in targeted markets. The implementation of this strategy
typically involves significant health care facility acquisition and
consolidation activities.
During the past several years, hospital industry inpatient admission trends
have been adversely impacted by cost containment efforts initiated by federal
and state governments and various third-party payers, including health
maintenance organizations, preferred provider organizations, commercial
insurance companies and employer-sponsored networks. In addition, a
significant number of medical procedures have shifted from inpatient to less
expensive outpatient settings as a result of both cost containment pressures
and advances in medical technology.
In response to changes in the health care industry, Columbia/HCA has
developed the following strategy to provide the highest quality health care
services at the lowest possible cost:
Become a significant provider of services--Columbia/HCA attempts to (i)
consolidate services to reduce costs and (ii) develop the geographic coverage
necessary for inclusion in managed care and employer-sponsored networks in
each market.
Provide a comprehensive range of services--In addition to the operation of
general, acute care hospitals, Columbia/HCA also operates psychiatric and
rehabilitation facilities, outpatient surgery and diagnostic centers, home
health agencies and other services. This strategy enables Columbia/HCA to
attract business from managed care plans and major employers seeking efficient
access to a wide array of health care services.
Deliver high quality services--Through the use of clinical information
systems and continuous quality enhancement programs, Columbia/HCA focuses on
patient outcomes and strives to continuously improve the quality of care and
service provided to patients.
Integrate fragmented delivery systems--Through its networks, Columbia/HCA
focuses on coordinating pricing, contracting, information systems, economic
incentives and quality assurance activities among the providers in each
market.
11
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS--(CONTINUED)
RESULTS OF OPERATIONS
The following is a summary of operations before extraordinary item for the
quarters and nine months ended September 30, 1995 and 1994 (dollars in
millions, except per share amounts):
<TABLE>
<CAPTION>
QUARTER
----------------------------
1995 1994
------------- -------------
AMOUNT RATIO AMOUNT RATIO
------ ----- ------ -----
<S> <C> <C> <C> <C>
Revenues......................................... $4,371 100.0 $3,668 100.0
Salaries, wages and benefits..................... 1,788 40.9 1,531 41.8
Supplies......................................... 629 14.4 525 14.3
Other operating expenses......................... 876 20.1 725 19.8
Provision for doubtful accounts.................. 258 5.9 232 6.3
Investment income................................ (29) (0.7) (17) (0.5)
------ ----- ------ -----
3,522 80.6 2,996 81.7
------ ----- ------ -----
EBDITA (a)....................................... 849 19.4 672 18.3
Depreciation and amortization.................... 251 5.8 207 5.6
Interest expense................................. 111 2.5 105 2.9
------ ----- ------ -----
Income before minority interests and income
taxes........................................... 487 11.1 360 9.8
Minority interests............................... 30 0.6 8 0.2
------ ----- ------ -----
Income before income taxes....................... 457 10.5 352 9.6
Provision for income taxes....................... 183 4.2 139 3.8
------ ----- ------ -----
Income before extraordinary item................. $ 274 6.3 $ 213 5.8
====== ===== ====== =====
Earnings per common and common equivalent share:
Income before extraordinary item............... $ .61 $ .49
====== ======
% changes from prior year:
Revenues....................................... 19.2
EBDITA......................................... 26.4
Income before income taxes..................... 30.2
Income before extraordinary item............... 28.6
Earnings per common and common equivalent share
before extraordinary item..................... 24.5
</TABLE>
- --------
(a) Income before depreciation, interest, minority interests, income taxes and
amortization. Although EBDITA is not a measure of operating performance
calculated in accordance with generally accepted accounting principles, it
is commonly used as an analytical indicator within the health care
provider industry. In addition, EBDITA also serves as a measurement of
leverage capacity and debt service ability. EBDITA should not be
considered as a measure of profitability or liquidity or as an alternative
to net income, cash flows generated by operating, investing or financing
activities or other financial statement data presented in the consolidated
financial statements as an indicator of financial performance.
12
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS--(CONTINUED)
RESULTS OF OPERATIONS (CONTINUED)
<TABLE>
<CAPTION>
NINE MONTHS
------------------------------
1995 1994
-------------- --------------
AMOUNT RATIO AMOUNT RATIO
------- ----- ------- -----
<S> <C> <C> <C> <C>
Revenues...................................... $13,112 100.0 $10,621 100.0
Salaries, wages and benefits.................. 5,291 40.4 4,347 40.9
Supplies...................................... 1,907 14.5 1,581 14.9
Other operating expenses...................... 2,503 19.1 2,011 19.0
Provision for doubtful accounts............... 746 5.7 631 5.9
Investment income............................. (68) (0.5) (56) (0.5)
------- ----- ------- -----
10,379 79.2 8,514 80.2
------- ----- ------- -----
EBDITA (a).................................... 2,733 20.8 2,107 19.8
Depreciation and amortization................. 730 5.5 579 5.5
Interest expense.............................. 347 2.6 281 2.6
Merger and facility consolidation costs....... 387 3.0 159 1.5
------- ----- ------- -----
Income before minority interests and income
taxes........................................ 1,269 9.7 1,088 10.2
Minority interests............................ 80 0.6 21 0.2
------- ----- ------- -----
Income before income taxes.................... 1,189 9.1 1,067 10.0
Provision for income taxes.................... 479 3.7 424 4.0
------- ----- ------- -----
Income before extraordinary item.............. $ 710 5.4 $ 643 6.0
======= ===== ======= =====
Earnings per common and common equivalent
share:
Excluding merger and facility consolidation
costs...................................... $ 2.11 $ 1.76
Merger and facility consolidation costs..... (.53) (.24)
------- -------
Income before extraordinary item............ $ 1.58 $ 1.52
======= =======
% changes from prior year:
Revenues.................................... 23.4
EBDITA...................................... 29.7
Income before income taxes.................. 11.5
Income before extraordinary item............ 10.6
Earnings per common and common equivalent
share before extraordinary item............ 3.9
Other information excluding the effect of
merger and facility consolidation costs:
Income before income taxes.................. $ 1,576 12.1 $ 1,226 11.5
Income before extraordinary item............ 945 7.2 745 7.0
% changes from prior year:
Income before income taxes................ 28.6
Income before extraordinary item.......... 27.0
Earnings per common and common equivalent
share before extraordinary item.......... 19.9
</TABLE>
- --------
(a) Income before merger and facility consolidation costs, depreciation,
interest, minority interests, income taxes and amortization. Although
EBDITA is not a measure of operating performance calculated in accordance
with generally accepted accounting principles, it is commonly used as an
analytical indicator within the health care provider industry. In
addition, EBDITA also serves as a measurement of leverage capacity and
debt service ability. EBDITA should not be considered as a measure of
profitability or liquidity or as an alternative to net income, cash flows
generated by operating, investing or financing activities or other
financial statement data presented in the consolidated financial
statements as an indicator of financial performance.
13
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS--(CONTINUED)
RESULTS OF OPERATIONS (CONTINUED)
Third Quarters Ended September 30, 1995 and 1994
Revenues increased 19.2% to $4.4 billion in the third quarter of 1995
compared to the same period last year, primarily as a result of acquisitions
and growth in inpatient and outpatient volumes. The free-standing surgical
center business acquired in connection with the merger with MCA in September
1994 increased revenues in the third quarter by $123 million in 1995 and $39
million in 1994. On a same-hospital basis, third quarter 1995 admissions
increased 3.2% and adjusted admissions (adjusted to reflect outpatient
activity) increased 6.8% from a year ago. The increase in outpatient activity
is primarily a result of expanding home health and other outpatient ancillary
services.
Income before income taxes increased to $457 million in 1995 from $352
million in 1994 and pretax margins increased to 10.5% in 1995 from 9.6% in
1994. The improvement in pretax income was attributable to the combination of
growth in revenues and improvements in the margin. Pretax margins increased
primarily due to improvements in staffing levels. Salaries, wages and benefits
declined as a percentage of revenues to 40.9% in 1995 from 41.8% in 1994.
Income before extraordinary item increased 28.6% to $274 million ($.61 per
share) in the third quarter of 1995 compared to $213 million ($.49 per share)
in 1994.
Nine Months Ended September 30, 1995 and 1994
Revenues increased 23.4% to $13.1 billion for the nine months ended
September 30, 1995 compared to the same period last year, primarily as a
result of acquisitions and growth in inpatient and outpatient volumes. The
acute care facilities acquired in connection with the EPIC Merger in May 1994
increased revenues in the first nine months by $786 million in 1995 and $434
million in 1994, while the free-standing surgical center business acquired in
connection with the MCA Merger in September 1994 increased revenues by $368
million in 1995 and $39 million in 1994. On a same-hospital basis, admissions
increased 4.4% and adjusted admissions increased 8.2% from a year ago. The
increase in outpatient activity is primarily a result of expanding home health
and other outpatient ancillary services.
Income before income taxes increased to $1.2 billion in 1995 from $1.1
billion in 1994 and pretax margins decreased to 9.1% in 1995 from 10.0% in
1994. Excluding the effect of the merger and facility consolidation costs
charged in 1995 and 1994, income before taxes increased 28.6% to $1.6 billion
in 1995 from $1.2 billion in 1994 and pretax margins increased to 12.1% in
1995 from 11.5% in 1994. The improvement in pretax income was attributable to
the combination of growth in revenues and improvements in the margin. Pretax
margins increased due to improvements in staffing levels and increased
discounts on medical supplies. Salaries, wages and benefits declined as a
percentage of revenues to 40.4% in 1995 from 40.9% in 1994, while supply costs
declined as a percentage of revenues to 14.5% in 1995 compared to 14.9% in
1994.
Income before extraordinary item increased 10.6% to $710 million ($1.58 per
share) during the first nine months of 1995 compared to $643 million ($1.52
per share) in 1994. Excluding the effects of the merger and facility
consolidation costs charged in 1995 and 1994, income before extraordinary item
increased 27.0% to $945 million ($2.11 per share) in 1995 compared to $745
million ($1.76 per share) in 1994.
During the first nine months of 1995, Columbia/HCA recorded $105 million of
pretax costs incurred in connection with the Healthtrust Merger. These costs
included severance costs, investment advisory fees, and certain charges based
upon management's implementation of actions to reduce corporate overhead costs
and
14
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS--(CONTINUED)
RESULTS OF OPERATIONS (CONTINUED)
consolidate management information systems. Pretax charges of $282 million
were recorded to writedown assets to estimated net realizable value in
connection with management's plans to consolidate duplicative facilities and
replace facilities in certain markets.
During the first nine months of 1994, Columbia/HCA recorded $159 million
(before income taxes) of merger and facility consolidation costs in connection
with the merger with HCA.
In connection with the Healthtrust Merger, substantially all of
Healthtrust's debt was refinanced to reduce future interest expense and
eliminate certain restrictive covenants. During the first nine months of 1995,
Columbia/HCA refinanced $1 billion of Healthtrust's long-term debt, $706
million of the borrowings under the Healthtrust bank credit agreement and a
$76 million note resulting in an after-tax loss of $103 million ($.23 per
share).
In connection with the merger with HCA, substantial amounts of high-coupon
long-term debt were refinanced to reduce future interest expense and eliminate
certain restrictive covenants. During the first nine months of 1994,
Columbia/HCA refinanced approximately $2.2 billion of long-term debt resulting
in an after-tax loss of $115 million ($.27 per share).
LIQUIDITY
Cash provided by operating activities totaled $1.5 billion for the nine
months ended September 30, 1995 compared to $1.3 billion last year. In both
periods, cash flows in excess of Columbia/HCA's capital expenditure program
were used primarily to finance acquisitions. Working capital totaled $1.3
billion at September 30, 1995 compared to $1.1 billion at December 31, 1994.
Management believes that cash flows from operations and amounts available
under Columbia/HCA's revolving credit facilities and related commercial paper
programs are sufficient to meet expected future liquidity needs.
A substantial portion of the merger and facility consolidation costs in 1995
and 1994 comprises the writedown of recorded assets and, accordingly, these
transactions did not have a material adverse effect on cash flows from
operations.
Investments of Columbia/HCA's professional liability insurance subsidiaries
to maintain statutory equity and pay claims totaled $981 million at September
30, 1995 and $973 million at December 31, 1994.
The Company has entered into various joint venture agreements whereby the
partners have an option to sell or "put" their interest in the joint ventures
back to Columbia/HCA at prices based on fair value. The combined put price of
all negotiated joint ventures is material and would have a significant affect
on the Company's liquidity in the event all put options were exercised.
Columbia/HCA's ratio of earnings to fixed charges was 4.20 and 3.79 for the
quarters ended September 30, 1995 and 1994, respectively, and 3.71 and 3.99
for the nine months ended September 30, 1995 and 1994, respectively.
15
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS--(CONTINUED)
CAPITAL RESOURCES
Excluding acquisitions, capital expenditures totaled $1.1 billion for the
nine months ended September 30, 1995 compared to $873 million for the same
period in 1994. Planned capital expenditures in 1995 (excluding acquisitions)
are expected to approximate $1.5 billion. Management believes that its capital
expenditure program is adequate to expand, improve and equip existing health
care facilities.
Columbia/HCA also expended $1.2 billion and $373 million for acquisitions
and joint ventures (excluding the EPIC and MCA Mergers in 1994) during the
respective nine months ended September 30, 1995 and 1994. See Note 5 of the
Notes to Condensed Consolidated Financial Statements for a description of
these activities. As part of its business strategy, Columbia/HCA intends to
acquire (either through purchase or joint venture transactions) additional
health care facilities in the future.
Columbia/HCA intends to finance all capital expenditures with internally
generated and borrowed funds. Available sources of capital include public or
private debt, commercial paper, unused bank revolving credits and equity. At
September 30, 1995, there were projects under construction which had an
estimated additional cost to complete of approximately $935 million.
OTHER INFORMATION
As discussed in Note 6 of the Notes to Condensed Consolidated Financial
Statements, Columbia/HCA is contesting certain income taxes and related
interest aggregating $1.6 billion at September 30, 1995 proposed by the IRS
for prior years. Management believes that final resolution of these disputes
will not have a material adverse effect on the financial position, results of
operations or liquidity of Columbia/HCA. However, if all or a majority of the
positions of the IRS are upheld, the financial position, results of operations
and liquidity of Columbia/HCA would be materially adversely affected.
Resolution of various other loss contingencies, including litigation pending
against Columbia/HCA in the ordinary course of business, is not expected to
have a material adverse effect on its financial position or results of
operations.
Agreements relating to long-term debt require, among other things,
maintenance of certain levels of interest coverage and provide limitations on
long-term debt, sales of assets, mergers, changes in ownership and certain
other financing activities. Columbia/HCA was in compliance with all such
covenants at September 30, 1995.
Congress is currently working on proposals that would reform the current
Medicare and Medicaid programs. The Company is unable to predict what reforms
Congress will adopt and there can be no assurance that reform proposals
adverse to the business of the Company will not be adopted.
16
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS--(CONTINUED)
OPERATING DATA
<TABLE>
<CAPTION>
1995 1994
------- ---------
<S> <C> <C>
Number of hospitals in operation at:
March 31.................................................. 318 277
June 30................................................... 321 312
September 30.............................................. 319 311
December 31............................................... 311
Number of freestanding outpatient surgical centers in
operation at:
March 31.................................................. 111 6
June 30................................................... 115 6
September 30.............................................. 118 103
December 31............................................... 104
Licensed hospital beds at:
March 31.................................................. 61,261 54,179
June 30................................................... 61,885 58,888
September 30.............................................. 61,255 59,594
December 31............................................... 59,595
Weighted average licensed beds:
Quarter:
First .................................................... 60,960 53,909
Second.................................................... 61,801 57,263
Third..................................................... 62,211 59,260
Fourth.................................................... 59,576
Year....................................................... 57,517
Average daily census:
Quarter:
First .................................................... 27,713 24,905
Second.................................................... 25,384 23,540
Third .................................................... 24,176 23,066
Fourth.................................................... 23,874
Year....................................................... 23,841
Admissions:
Quarter:
First .................................................... 454,500 387,100
Second.................................................... 435,100 384,200
Third..................................................... 430,400 390,200
Fourth.................................................... 404,000
Year....................................................... 1,565,500
Length of stay:
Quarter:
First .................................................... 5.5 5.8
Second.................................................... 5.3 5.6
Third..................................................... 5.2 5.4
Fourth.................................................... 5.4
Year....................................................... 5.6
</TABLE>
17
<PAGE>
PART II: OTHER INFORMATION
ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits:
Exhibit 11--Statement re Computation of Earnings Per Common and Common
Equivalent Share.
Exhibit 12--Statement re Computation of Ratio of Earnings to Fixed
Charges.
Exhibit 27--Financial Data Schedule (included only in filings under the
Electronic Data, Gathering, Analysis, and Retrieval system)
(b) Reports on Form 8-K:
None
18
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THE
REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED ON ITS BEHALF BY THE
UNDERSIGNED THEREUNTO DULY AUTHORIZED.
Columbia/HCA Healthcare Corporation
/s/ Kenneth C. Donahey
Date: November 13, 1995 -------------------------------------
KENNETH C. DONAHEY
SENIOR VICE PRESIDENT AND CONTROLLER
(PRINCIPAL ACCOUNTING OFFICER)
19
<PAGE>
EXHIBIT 11
COLUMBIA/HCA HEALTHCARE CORPORATION
COMPUTATION OF EARNINGS PER COMMON AND COMMON EQUIVALENT SHARE
FOR THE QUARTERS AND NINE MONTHS ENDED SEPTEMBER 30, 1995 AND 1994
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
QUARTER NINE MONTHS
---------------- ----------------
1995 1994 1995 1994
------- ------- ------- -------
<S> <C> <C> <C> <C>
PRIMARY EARNINGS PER COMMON AND COMMON
EQUIVALENT SHARE:
Earnings:
Income before extraordinary item......... $ 274 $ 213 $ 710 $ 643
Extraordinary loss on extinguishment of
debt, net of income tax benefit......... (7) (23) (103) (115)
------- ------- ------- -------
Net income............................. $ 267 $ 190 $ 607 $ 528
======= ======= ======= =======
Shares used in the computation (000):
Weighted average common shares
outstanding............................. 443,941 427,306 443,066 417,030
Dilutive effect of common stock
equivalents............................. 5,499 5,220 5,119 6,372
------- ------- ------- -------
Shares used in earnings per common and
common equivalent share computation... 449,440 432,526 448,185 423,402
======= ======= ======= =======
Primary earnings per common and common
equivalent share:
Income before extraordinary item......... $ .61 $ .49 $ 1.58 $ 1.52
Extraordinary loss on extinguishment of
debt.................................... (.02) (.05) (.23) (.27)
------- ------- ------- -------
Net income............................. $ .59 $ .44 $ 1.35 $ 1.25
======= ======= ======= =======
FULLY DILUTED EARNINGS PER COMMON AND
COMMON EQUIVALENT SHARE:
Earnings:
Income before extraordinary item......... $ 274 $ 213 $ 710 $ 643
Interest add-back on convertible
securities, net of income taxes......... - 1 - 2
------- ------- ------- -------
Income applicable to common stock........ 274 214 710 645
Extraordinary loss on extinguishment of
debt, net of income tax benefit......... (7) (23) (103) (115)
------- ------- ------- -------
Net income............................. $ 267 $ 191 $ 607 $ 530
======= ======= ======= =======
Shares used in the computation (000):
Weighted average common shares
outstanding............................. 443,941 427,306 443,066 417,030
Dilutive effect of common stock
equivalents and other dilutive
securities.............................. 5,677 6,417 5,502 7,590
------- ------- ------- -------
Shares used in earnings per common and
common equivalent share computation... 449,618 433,723 448,568 424,620
======= ======= ======= =======
Fully diluted earnings per common and
common equivalent share:
Income before extraordinary item......... $ .61 $ .49 $ 1.58 $ 1.52
Extraordinary loss on extinguishment of
debt.................................... (.02) (.05) (.23) (.27)
------- ------- ------- -------
Net income............................. $ .59 $ .44 $ 1.35 $ 1.25
======= ======= ======= =======
</TABLE>
20
<PAGE>
EXHIBIT 12
COLUMBIA/HCA HEALTHCARE CORPORATION
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
FOR THE QUARTERS AND NINE MONTHS ENDED SEPTEMBER 30, 1995 AND 1994
(DOLLARS IN MILLIONS)
<TABLE>
<CAPTION>
QUARTER NINE MONTHS
--------- -------------
1995 1994 1995 1994
---- ---- ------ ------
<S> <C> <C> <C> <C>
Earnings:
Income before minority interests and income taxes...... $487 $360 $1,269 $1,088
Fixed charges, exclusive of capitalized interest....... 143 130 442 350
---- ---- ------ ------
$630 $490 $1,711 $1,438
==== ==== ====== ======
Fixed Charges:
Interest charged to expense............................ $111 $105 $ 347 $ 281
Interest portion of rental expense and amortization of
deferred loan costs and capitalized interest.......... 32 25 95 69
---- ---- ------ ------
Fixed charges, exclusive of capitalized interest....... 143 130 442 350
Capitalized interest................................... 7 - 20 10
---- ---- ------ ------
$150 $130 $ 462 $ 360
==== ==== ====== ======
Ratio of earnings to fixed charges..................... 4.20 3.79 3.71 3.99
==== ==== ====== ======
</TABLE>
21
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
statement of income and balance sheet and is qualified in its entirety by
reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> SEP-30-1995
<CASH> 75
<SECURITIES> 0
<RECEIVABLES> 2,503
<ALLOWANCES> 886
<INVENTORY> 401
<CURRENT-ASSETS> 3,728
<PP&E> 14,118
<DEPRECIATION> 4,518
<TOTAL-ASSETS> 18,206
<CURRENT-LIABILITIES> 2,445
<BONDS> 6,198
<COMMON> 4
0
0
<OTHER-SE> 6,762
<TOTAL-LIABILITY-AND-EQUITY> 18,206
<SALES> 0
<TOTAL-REVENUES> 13,112
<CGS> 0
<TOTAL-COSTS> 7,198
<OTHER-EXPENSES> 2,503
<LOSS-PROVISION> 746
<INTEREST-EXPENSE> 347
<INCOME-PRETAX> 1,189
<INCOME-TAX> 479
<INCOME-CONTINUING> 710
<DISCONTINUED> 0
<EXTRAORDINARY> 103
<CHANGES> 0
<NET-INCOME> 607
<EPS-PRIMARY> 1.35
<EPS-DILUTED> 1.35
</TABLE>
