<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 MARCH 31, 1997
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THESECURITIES
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
(I.R.S. EMPLOYER IDENTIFICATION NO.)
(STATE OR OTHER JURISDICTION OF
INCORPORATION OR ORGANIZATION)
ONE PARK PLAZA
NASHVILLE, TENNESSEE 37203
(ZIP CODE)
(ADDRESS OF PRINCIPAL EXECUTIVE
OFFICES)
(615) 344-9551
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
NOT APPLICABLE
(FORMER NAME, FORMER ADDRESS AND FORMER FISCAL YEAR, IF CHANGED SINCE LAST
REPORT)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months, and (2) has been subject to such filing
requirements for the past 90 days.
YES X NO
Indicate the number of shares outstanding of each of the issuer's classes of
common stock of the latest practical date.
<TABLE>
<CAPTION>
OUTSTANDING AT
CLASS OF COMMON STOCK APRIL 30, 1997
--------------------- ------------------
<S> <C>
Voting common stock, $.01 par value 646,788,100 shares
Nonvoting common stock, $.01 par value 21,000,000 shares
</TABLE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
1 of 19
<PAGE>
COLUMBIA/HCA HEALTHCARE CORPORATION
FORM 10-Q
MARCH 31, 1997
<TABLE>
<CAPTION>
PAGE OF
PART I: FINANCIAL INFORMATION FORM 10-Q
- ----------------------------- ---------
<S> <C>
Item 1. Financial Statements
Condensed Consolidated Statements of Income--for the quarters ended
March 31, 1997 and 1996............................................. 3
Condensed Consolidated Balance Sheets--March 31, 1997 and December
31, 1996............................................................ 4
Condensed Consolidated Statements of Cash Flows--for the quarters
ended March 31, 1997 and 1996....................................... 5
Notes to Condensed Consolidated Financial Statements................. 6
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations............................................ 8
<CAPTION>
PART II: OTHER INFORMATION
- --------------------------
<S> <C>
Items 1 to 6............................................................. 16
</TABLE>
2
<PAGE>
COLUMBIA/HCA HEALTHCARE CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
FOR THE QUARTERS ENDED MARCH 31, 1997 AND 1996
UNAUDITED
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
1997 1996
------- -------
<S> <C> <C>
Revenues..................................................... $ 5,328 $ 4,951
Salaries and benefits........................................ 2,062 1,958
Supplies..................................................... 712 689
Other operating expenses..................................... 1,051 953
Provision for doubtful accounts.............................. 302 271
Depreciation and amortization................................ 300 268
Interest expense............................................. 116 130
Equity in earnings of affiliates............................. (62) (41)
------- -------
4,481 4,228
------- -------
Income before minority interests and income taxes............ 847 723
Minority interests in earnings of consolidated entities...... 47 28
------- -------
Income before income taxes................................... 800 695
Provision for income taxes................................... 321 279
------- -------
Net income............................................... $ 479 $ 416
======= =======
Earnings per share........................................... $ .70 $ .61
Cash dividends per share..................................... $ .02 $ .02
Shares used in computing earnings per share (in thousands)... 679,705 678,048
</TABLE>
See accompanying notes.
3
<PAGE>
COLUMBIA/HCA HEALTHCARE CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
UNAUDITED
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1997 1996
--------- ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents............................. $ 17 $ 113
Accounts receivable, less allowances for doubtful
accounts of $1,414
and $1,396........................................... 3,192 3,023
Inventories........................................... 443 441
Other................................................. 915 836
------- -------
4,567 4,413
Property and equipment, at cost......................... 15,723 15,721
Accumulated depreciation................................ (5,404) (5,322)
------- -------
10,319 10,399
Investments of insurance subsidiary..................... 1,128 1,119
Investments in and advances to affiliates............... 1,437 1,293
Intangible assets, net.................................. 3,658 3,709
Other................................................... 336 339
------- -------
$21,445 $21,272
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable...................................... $ 847 $ 845
Accrued salaries...................................... 420 453
Other accrued expenses................................ 1,088 1,320
Income taxes.......................................... 360 127
Long-term debt due within one year.................... 199 201
------- -------
2,914 2,946
Long-term debt.......................................... 6,441 6,781
Deferred taxes and other liabilities.................... 2,188 2,100
Minority interests in equity of consolidated entities... 852 836
Stockholders' equity:
Common stock, $.01 par; authorized 800,000,000 voting
shares and 25,000,000 nonvoting shares; issued and
outstanding 650,967,200
voting shares and 21,000,000 nonvoting shares--March
31, 1997 and 650,499,400 voting shares and 21,000,000
nonvoting shares--
December 31, 1996.................................... 7 7
Capital in excess of par value........................ 4,507 4,519
Other................................................. 53 66
Retained earnings..................................... 4,483 4,017
------- -------
9,050 8,609
------- -------
$21,445 $21,272
======= =======
</TABLE>
See accompanying notes.
4
<PAGE>
COLUMBIA/HCA HEALTHCARE CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE QUARTERS ENDED MARCH 31, 1997 AND 1996
UNAUDITED
(DOLLARS IN MILLIONS)
<TABLE>
<CAPTION>
1997 1996
----- -----
<S> <C> <C>
Cash flows from operating activities:
Net income..................................................... $ 479 $ 416
Adjustments to reconcile net income to net cash provided by op-
erating activities:
Depreciation and amortization................................ 300 268
Changes in operating assets and liabilities.................. (237) (93)
Other........................................................ 22 (9)
----- -----
Net cash provided by operating activities.................. 564 582
----- -----
Cash flows from investing activities:
Purchase of property and equipment............................. (347) (385)
Acquisition of hospitals and health care entities.............. (17) (378)
Investments in and advances to affiliates...................... (24) (17)
Disposition of property and equipment.......................... 175 37
Change in other investments.................................... (99) 8
Other.......................................................... 44 (49)
----- -----
Net cash used in investing activities...................... (268) (784)
----- -----
Cash flows from financing activities:
Issuance of long-term debt..................................... 8 30
Net changes in commercial paper borrowings and lines of cred-
it............................................................ (215) 127
Repayment of long-term debt.................................... (144) (107)
Payment of cash dividends...................................... (14) (13)
Other.......................................................... (27) 38
----- -----
Net cash provided by (used in) financing activities........ (392) 75
----- -----
Change in cash and cash equivalents.............................. (96) (127)
Cash and cash equivalents at beginning of period................. 113 232
----- -----
Cash and cash equivalents at end of period....................... $ 17 $ 105
===== =====
Interest payments................................................ $ 79 $ 141
Income tax payments, net of refunds.............................. 81 4
</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" or the "Company") is a
Delaware corporation that operates hospitals and related health care entities
through (i) wholly owned subsidiaries, (ii) joint ventures or (iii) ownership
of interests in various partnerships in which subsidiaries of the Company
serve as the managing general partner. At March 31, 1997, Columbia owned and
operated 314 hospitals, 143 freestanding surgery centers, more than 500 home
health locations and numerous other facilities providing a variety of health
care services. Columbia is also a partner in several 50/50 joint ventures that
own and operate 27 hospitals and 5 freestanding surgery centers which are
accounted for using the equity method. Columbia's facilities are located in 36
states, England and Switzerland.
The accompanying unaudited condensed consolidated financial statements have
been prepared in accordance with generally accepted accounting principles for
interim financial information and with the instructions to Form 10-Q and
Article 10 of Regulation S-X. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements. In the opinion of management, all
adjustments (consisting of normal recurring accruals) considered necessary for
a fair presentation have been included. Operating results for the quarter
ended March 31, 1997, are not necessarily indicative of the results that may
be expected for the year ending December 31, 1997. For further information,
refer to the consolidated financial statements and footnotes thereto included
in Columbia's annual report on Form 10-K for the year ended December 31, 1996.
Certain prior year amounts have been reclassified to conform to the current
year presentation.
NOTE 2--EARNINGS PER SHARE
Earnings per share is 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
share is not presented because such amounts approximate earnings per share.
In February 1997, the Financial Accounting Standards Board issued Statement
No. 128, "Earnings per Share", which is required to be adopted on December 31,
1997. At that time, the Company will be required to change the method
currently used to compute primary earnings per share and to restate all prior
periods. Under the new requirements, primary earnings per share will be
replaced with basic earnings per share, which excludes the dilutive effect of
common stock equivalents. The impact is expected to result in a small increase
in basic earnings per share as compared to primary earnings per share ($0.02
per share increase for the year ended December 31, 1996).
NOTE 3--INCOME TAXES
Pending IRS Disputes
Columbia is currently contesting before the United States Tax Court (the
"Tax Court"), the United States Court of Federal Claims and the Appeals
Division of the Internal Revenue Service (the "IRS"), certain claimed
deficiencies and adjustments proposed by the IRS in connection with its
examination of HCA--Hospital Corporation of America's ("HCA") federal income
tax returns for 1981 through 1992 and of Healthtrust, Inc.--The Hospital
Company's ("Healthtrust") federal income tax returns for 1990 through 1992.
The disputed items include the depreciable lives utilized by HCA for
constructed hospital facilities, the disallowance of certain executive
compensation which Healthtrust deducted in calculating taxable income for
1991, and the disallowance of certain stock option compensation which HCA
deducted in calculating taxable income for 1992. If the IRS prevails on these
issues, Columbia would owe additional income taxes and interest of
approximately $347 million through March 31, 1997. Management believes that
adequate provisions have been recorded to satisfy final resolution of these
issues.
6
<PAGE>
COLUMBIA/HCA HEALTHCARE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
UNAUDITED
NOTE 3--INCOME TAXES (CONTINUED)
Pending IRS Disputes (continued)
A Tax Court decision is expected in 1997 regarding HCA's claim that
insurance premiums paid to its wholly-owned insurance subsidiary are
deductible. Through March 31, 1997, Columbia is seeking a refund totaling
approximately $215 million.
Management believes that HCA and Healthtrust properly reported income and
paid taxes in accordance with applicable laws and agreements established with
the IRS during previous examinations, and that final resolution of these
disputes (excluding any possible refunds) will not have a material adverse
effect on the results of operations or financial position of Columbia.
NOTE 4--PROPOSED MERGER TRANSACTION AND STOCK REPURCHASE PROGRAM
Proposed Merger Transaction
On April 14, 1997, Columbia entered into an amended and restated merger
agreement with Value Health, Inc. ("Value Health") whereby Columbia will pay
$20.50 in cash for each Value Health common share. As of December 31, 1996,
Value Health had approximately 54.4 million shares outstanding (net of
treasury shares). The transaction will be recorded using the purchase method
of accounting and is expected to be completed during the second quarter of
1997.
Previously, on January 15, 1997, Columbia and Value Health had announced an
agreement to merge the companies in a stock-for-stock exchange in which the
Value Health stockholders would have received .58 of a share of Columbia
common stock in exchange for each Value Health common share held. This
original merger agreement was expected to be recorded as a pooling of
interests.
Stock Repurchase Program
Columbia announced on April 14, 1997, that the Company's board of directors
authorized the repurchase of up to $1 billion of Columbia common stock.
Repurchases will be made in the open market and the timing and amounts will
depend upon market conditions. Repurchased shares will be available for
reissuance for general corporate purposes.
7
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
BUSINESS STRATEGY
Columbia's business strategy centers on working with physicians and other
health care providers to develop comprehensive, integrated health care
delivery networks in targeted markets. 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 has developed
the following strategy to provide high quality health care services at the
lowest possible cost:
Deliver high quality services--Through the use of clinical information
systems, continuous quality enhancement programs and the identification and
sharing of "best demonstrated processes", Columbia focuses on patient outcomes
and satisfaction and strives to continuously improve the quality of care and
service provided to patients.
Become a significant provider of services--Columbia attempts to (i)
consolidate services to reduce costs and (ii) develop the geographic coverage
necessary for inclusion in managed care and employer-sponsored networks in
each market.
Provide a comprehensive range of services--In addition to the operation of
general, acute care hospitals, Columbia also operates psychiatric and
rehabilitation facilities, outpatient surgery and diagnostic centers, home
health agencies and facilities providing other health care related services.
This strategy enables Columbia to attract business from managed care plans and
major employers seeking efficient access to a wide array of health care
services.
8
<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 certain operating information for the quarters
ended March 31, 1997 and 1996 (dollars in millions, except per share amounts):
<TABLE>
<CAPTION>
1997 1996
------------- -------------
AMOUNT RATIO AMOUNT RATIO
------ ----- ------ -----
<S> <C> <C> <C> <C>
Revenues........................................ $5,328 100.0 $4,951 100.0
Salaries and benefits........................... 2,062 38.7 1,958 39.5
Supplies........................................ 712 13.4 689 13.9
Other operating expenses........................ 1,051 19.7 953 19.3
Provision for doubtful accounts................. 302 5.7 271 5.5
Depreciation and amortization................... 300 5.6 268 5.4
Interest expense................................ 116 2.2 130 2.6
Equity in earnings of affiliates................ (62) (1.2) (41) (0.8)
------ ----- ------ -----
4,481 84.1 4,228 85.4
------ ----- ------ -----
Income before minority interests and income
taxes.......................................... 847 15.9 723 14.6
Minority interests in earnings of consolidated
entities....................................... 47 0.9 28 0.6
------ ----- ------ -----
Income before income taxes...................... 800 15.0 695 14.0
Provision for income taxes...................... 321 6.0 279 5.6
------ ----- ------ -----
Net income.................................... $ 479 9.0 $ 416 8.4
====== ===== ====== =====
Earnings per share.............................. $ 0.70 $ 0.61
====== ======
% changes from prior year:
Revenues...................................... 7.6% 13.0%
Income before income taxes.................... 15.1 15.4
Net income.................................... 15.2 16.1
Earnings per share............................ 14.8 15.1
Admissions(a)................................. 1.3 8.0
Adjusted admissions(b)........................ 3.7 12.1
Revenues per adjusted admission............... 3.7 0.9
Same--hospital % changes from prior year(c):
Revenues...................................... 7.8% 8.4%
Admissions(a)................................. 2.2 2.6
Adjusted admissions(b)........................ 4.8 6.7
Revenues per adjusted admission............... 2.9 1.6
</TABLE>
- --------
(a) Represents the total number of patients admitted (in the facility for a
period in excess of 23 hours) to the Company's hospitals.
(b) Adjusted to reflect outpatient activity by multiplying actual admissions by
the sum of gross inpatient revenue and gross outpatient revenue and
dividing the result by gross inpatient revenue.
(c) Excludes the operations of hospitals and their related facilities which
were either acquired or divested during the current and prior year.
9
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS--(CONTINUED)
RESULTS OF OPERATIONS (CONTINUED)
General
The Company continues to experience revenue increases and results of
operations continue to be affected by the trend toward certain services being
performed more frequently on an outpatient basis and in patient's homes. The
Company has been able to achieve increases in revenues due to higher
utilization of home health services, outpatient services, and the increased
severity of illness of patients admitted. Although the Company's revenues have
grown during the period, the impact of volume increases and increase in patient
acuity have been partially offset by the increasing proportion of revenue
derived from fixed payment sources, including Medicare, Medicaid and managed
care plans (87% of admissions in the first quarter of 1997 and 85% in the first
quarter of 1996 relate to Medicare, Medicaid and managed care plan patients).
Insurance companies, government programs (other than Medicare) and employers
purchasing health care services for their employees are negotiating the amounts
they will pay the health care providers rather than paying standard prices.
This leads to these purchasers of health care services becoming discounted
payors, similar to HMO's and PPO's, in virtually all markets and making it
increasingly difficult for providers to maintain their historical revenue
growth trends. Revenues from capitation arrangements (prepaid health service
agreements) are less than 1% of consolidated revenues.
The growth in home health and outpatient services is expected to continue as
procedures currently performed on an inpatient basis are converted to
outpatient procedures through continuing advances in pharmaceutical and medical
technologies. The redirection of certain procedures to an outpatient basis is
also influenced by pressures from payors to direct certain procedures from
inpatient care to outpatient care. The Company expects the growth in home
health and outpatient services to continue.
The Company expects patient volumes (admissions, outpatient visits and home
health visits) from Medicare and Medicaid to continue to increase due to the
general aging of the population and the expansion of state Medicaid programs.
The Medicare program reimburses the Company's hospitals primarily based on
established rates that are dependent on each patient's diagnosis, regardless of
the provider's cost to treat the patient or the length of time the patient
stays in the hospital (Medicare currently reimburses home health services based
primarily upon the providers cost). The Medicare program's established rates
are indexed for inflation annually, but these increases have historically been
less than the actual inflation rate and the Company's increases to its standard
charges.
Quarters Ended March 31, 1997 and 1996
Revenues increased 7.6% to $5.3 billion in 1997 compared to $5.0 billion in
1996, primarily as a result of growth in inpatient and outpatient volumes. On a
same-hospital basis, revenues increased 7.8%, admissions increased 2.2% and
adjusted admissions (adjusted to reflect outpatient activity) increased 4.8%
from a year ago. The increase in outpatient activity is primarily a result of
increases in home health services (home health revenues increased approximately
30% to $316 million in 1997 compared to $240 million in 1996) and outpatient
services (average daily outpatient visits increased 7.7% in 1997). The
consolidated revenue growth rate was less than the same hospital revenue growth
rate because of a net decrease of six consolidated hospitals since March 31,
1996. The decrease was due to sales or termination of leases and contribution
of facilities to joint ventures accounted for using the equity method which
offset the increase in revenues from acquisitions.
Income before income taxes increased 15.1% to $800 million in 1997 from $695
million in 1996 and pretax margins increased to 15.0% in 1997 from 14.0% in
1996. The increase in pretax income was attributable to growth in revenues, as
described above, and improvements in the margin.
Salaries and benefits, as a percentage of revenues, declined to 38.7% in 1997
from 39.5% in 1996. This decline was due, in part, to improvements in labor
productivity (man hours per adjusted admission declined 0.7%) resulting from
the sharing of "best demonstrated processes" among certain Columbia facilities.
The outsourcing of certain services (services outsourced at various facilities
included, among others, laboratory,
10
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS--(CONTINUED)
RESULTS OF OPERATIONS (CONTINUED)
Quarters Ended March 31, 1997 and 1996 (continued)
rehabilitation, dietary and linen services) also contributed to the
improvement in this area, while shifting some salaries and benefits costs to
other operating expenses. The Company expects this trend to continue.
Supply costs declined as a percentage of revenues to 13.4% in 1997 from
13.9% in 1996 due to enhanced levels of participation in the Company's
standard purchasing contracts for medical supplies (which provide for
progressive discounts based upon the volume of purchases made by Columbia).
While the Company expects to continue to benefit from its volume purchasing
power, there can be no assurance that such benefits will continue to be
realized in the relative amounts realized to date.
The improvement in pretax margins attained from the decreases as a
percentage of revenues in salaries and benefits and supply costs was partially
offset by increases as a percentage of revenues in other operating expenses
and the provision for doubtful accounts.
Other operating expenses, as a percentage of revenues, increased to 19.7% in
1997 from 19.3% in 1996. This was primarily due to an increase, to 7.9% from
7.2% of revenues, in contract services which resulted from payments to third
parties on a fee basis for certain services previously performed by Company
employees . Also included in other operating expenses are professional fees,
repairs and maintenance, rents and leases, utilities, insurance and non-income
taxes. There were no significant changes in any of these expenses as a
percentage of revenues.
Provision for doubtful accounts, as a percentage of revenues, increased to
5.7% in 1997 from 5.5% in 1996 due, in part, to computer information system
conversions (including patient accounting systems) at various facilities. The
information system conversions hampered the business office billing functions
and collection efforts in those facilities as some resources were directed to
installing and converting systems and building new data files, rather than
devoting full effort to billing and collecting receivables.
Equity in earnings of affiliates increased as a percentage of revenues to
1.2% in 1997 from 0.8% in 1996 primarily due to more of the Company's
development activities being structured as non-consolidated joint ventures. As
of March 31, 1997, there were 27 hospitals and 5 free-standing surgery centers
compared to 17 hospitals and 3 surgery centers at March 31, 1996, which are
being accounted for using the equity method.
Depreciation and amortization increased as a percentage of revenues to 5.6%
in 1997 from 5.4% in 1996, primarily due to increased capital expenditures
related to ancillary services (such as home health and other outpatient
services) and information systems. Capital expenditures in these areas
generally result in shorter depreciation and amortization lives for the assets
acquired than typical hospital acquisitions.
Interest expense declined to $116 million or 2.2% of revenues in 1997
compared to $130 million or 2.6% of revenues last year primarily as a result
of a decrease in the average outstanding debt during the first quarter of 1997
compared to last year.
Minority interests increased to $47 million or 0.9% of revenues in 1997
compared to $28 million or 0.6% of revenues in 1996 primarily due to both
increased profitability and minority ownership in equity of additional
consolidated entities compared to last year.
Net income increased 15.2% to $479 million ($0.70 per share) during 1997
compared to $416 million ($0.61 per share) in 1996.
Liquidity
Cash provided by operating activities totaled $564 million for the quarter
ended March 31, 1997 compared to $582 million in the same period last year.
The decrease in 1997 from 1996 is primarily due to an increase in the
Company's accounts receivable balances.
11
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS--(CONTINUED)
RESULTS OF OPERATIONS (CONTINUED)
Liquidity (continued)
During 1997, cash flows from operating activities exceeded the funds utilized
for Columbia's capital expenditure program and acquisitions by $200 million.
The excess of funds generated from operations were used to pay down long-term
debt and commercial paper borrowings. Capital expenditures and acquisitions in
the first quarter of 1996 exceeded cash provided by operating activities by
$181 million and were funded by the issuance of long-term debt and commercial
paper borrowings.
Working capital totaled $1.7 billion at March 31, 1997 and $1.5 billion at
December 31, 1996. Management believes that cash flows from operations and
amounts available under Columbia's revolving credit facilities and related
commercial paper programs are sufficient to meet expected future liquidity
needs.
Investments of Columbia's professional liability insurance subsidiary to
maintain statutory equity and pay claims totaled $1.2 billion and $1.3 billion
at March 31, 1997 and December 31, 1996, respectively.
The Company has entered into various agreements with joint venture partners
whereby the partners have an option to sell or "put" their interest in the
joint venture back to the Company within specified periods at fixed prices or
prices based on certain formulas. The combined put price under all such
agreements was approximately $1.1 billion at March 31, 1997. While the Company
cannot predict if, or when, their joint venture partners will exercise such
options (no put options have been exercised through March 31, 1997), it is not
expected that the majority of the puts would be exercised in any one period.
Capital Resources
Excluding acquisitions, capital expenditures totaled $347 million for the
quarter ended March 31, 1997, compared to $385 million for the same period in
1996. Planned capital expenditures in 1997 are expected to approximate $1.7
billion. Management believes that its capital expenditure program is adequate
to expand, improve and equip its existing health care facilities.
Columbia also expended $17 million and $378 million for acquisitions during
the respective quarters ended March 31, 1997 and 1996. The decline in
acquisitions can be partially attributed to increased regulatory review
procedures in certain states that have extended the timing between the
initiation and consummation of certain transactions. Columbia also made
investments in and advances to affiliates (generally 50% interests in joint
ventures that are accounted for using the equity method) of $24 million in the
quarter ended March 31, 1997 compared to $17 million for the same period in
1996.
Columbia expects to finance all capital expenditures with internally
generated and borrowed funds. Available sources of capital include public or
private debt, commercial paper, unused bank revolving credit facilities and
equity. At March 31, 1997, there were projects under construction which had an
estimated additional cost to complete and equip of approximately $1.3 billion.
Columbia's revolving credit agreements (the "Credit Facilities") are
comprised of a $2.0 billion five-year revolving credit facility and a $2.0
billion 364-day revolving credit facility. Borrowings under the 364-day
revolving credit facility do not mature until one year subsequent to the end of
the 364-day period. The Credit Facilities support Columbia's commercial paper
programs. As of April 30, 1997, Columbia had approximately $1.7 billion of
credit available (net of outstanding commercial paper) under the Credit
Facilities.
Columbia's revolving credit agreements contain customary covenants which
include (i) limitations on additional debt, (ii) limitations on sales of
assets, mergers and changes of ownership, and (iii) maintenance of certain
interest coverage ratios. Columbia was in compliance with all such covenants at
March 31, 1997.
12
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS--(CONTINUED)
RESULTS OF OPERATIONS (CONTINUED)
Health Care Reform
In recent years, an increasing number of legislative proposals have been
introduced or proposed to Congress and in some state legislatures that would
significantly affect health care systems in Columbia's markets. The cost of
certain proposals would be funded in significant part by reductions in payments
by government programs, including Medicare and Medicaid, to health care
providers. While the Company is unable to predict which, if any, proposals for
health care reform will be adopted, there can be no assurance that proposals
adverse to the business of Columbia will not be adopted.
Proposed Merger Transaction
On April 14, 1997, Columbia entered into an amended and restated merger
agreement with Value Health, Inc. See Note 4 of the Notes to Condensed
Consolidated Financial Statements for a description of the proposed merger
transaction.
Stock Repurchase Program
Columbia announced on April 14, 1997, that the Company's board of directors
authorized the repurchase of up to $1 billion of Columbia common stock.
Repurchases will be made in the open market and the timing and amount will
depend upon market conditions. Repurchased shares will be available for
reissuance for general corporate purposes.
Other Information
Columbia is currently contesting income taxes and related interest
aggregating approximately $347 million 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. See Note 3 of the Notes to Condensed Consolidated
Financial Statements for a description of the pending IRS disputes.
Resolution of various other loss contingencies, including litigation pending
against Columbia in the ordinary course of business, is not expected to have a
material adverse effect on its financial position or results of operations.
13
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS--(CONTINUED)
OPERATING DATA
<TABLE>
<CAPTION>
1997 1996
------- ---------
<S> <C> <C>
CONSOLIDATED
Number of hospitals in operation at:
March 31.................................................. 314 320
June 30................................................... 326
September 30.............................................. 325
December 31............................................... 319
Number of freestanding outpatient surgical centers in
operation at:
March 31.................................................. 143 127
June 30................................................... 130
September 30.............................................. 130
December 31............................................... 132
Licensed hospital beds at:
March 31.................................................. 60,993 62,197
June 30................................................... 63,217
September 30.............................................. 63,063
December 31............................................... 61,931
Weighted average licensed beds(a):
Quarter:
First..................................................... 61,222 62,330
Second.................................................... 62,937
Third..................................................... 63,179
Fourth.................................................... 62,385
Year....................................................... 62,708
Average daily census(b):
Quarter:
First..................................................... 28,401 28,428
Second.................................................... 26,193
Third..................................................... 25,111
Fourth.................................................... 26,437
Year....................................................... 26,538
Admissions:
Quarter:
First..................................................... 497,200 490,800
Second.................................................... 463,100
Third..................................................... 462,400
Fourth.................................................... 479,100
Year....................................................... 1,895,400
Average length of stay (days)(c):
Quarter:
First..................................................... 5.1 5.3
Second.................................................... 5.1
Third..................................................... 5.0
Fourth.................................................... 5.1
Year....................................................... 5.1
</TABLE>
14
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS--(CONTINUED)
OPERATING DATA (CONTINUED)
<TABLE>
<CAPTION>
1997 1996
----- -----
<S> <C> <C>
NON-CONSOLIDATED (D)
Number of hospitals in
operation at:
March 31................ 27 17
June 30................. 17
September 30............ 18
December 31............. 22
Number of freestanding
outpatient surgical
centers in operation at:
March 31................ 5 3
June 30................. 3
September 30............ 3
December 31............. 4
Licensed hospital beds at:
March 31................ 6,537 4,393
June 30................. 4,393
September 30............ 4,768
December 31............. 5,451
</TABLE>
- --------
(a) Represents the average number of licensed beds weighted based on periods
owned. Licensed beds are those beds for which a facility has been granted
approval to operate from the applicable state licensing agency.
(b) Represents the average number of patients in hospital beds each day.
(c) Represents the average number of days admitted patients stay in Columbia's
hospitals.
(d) The non-consolidated facilities include facilities operated through 50/50
joint ventures which are not controlled by Columbia. They are accounted
for using the equity method of accounting and are, therefore, not included
on a fully consolidated basis in the condensed consolidated financial
statements.
15
<PAGE>
PART II: OTHER INFORMATION
ITEM 1: LEGAL PROCEEDINGS.
A putative joint derivative and class action entitled Sidney Morse v. R.
Clayton McWhorter et. al. was filed on April 8, 1997 in the United States
District Court for the Middle District of Tennessee (Civil Action No. 3-97-
0370). The derivative claims were brought by an alleged stockholder of the
Company, purportedly on behalf of the Company, against certain of its current
and former directors--R. Clayton McWhorter, Thomas F. Frist, Jr., Magdalena
Averhoff, Charles J. Kane, T. Michael Long, Donald S. MacNaughton, Richard L.
Scott, Robert D. Walter, William T. Young, John W. Landrum, Rodman W.
Moorhead, III, Carl E. Reichardt and Frank S. Royal. The class action claims
were brought by two alleged stockholders of the Company against the Company
and three of the above-named individuals - Messrs. McWhorter, Frist and Scott.
The complaint alleges, inter alia, that the defendants knowingly or recklessly
conducted and/or permitted the Company to conduct its business in an unlawful
manner, including through violations of various Medicare regulations; that
they failed to disclose this allegedly illegal conduct in the Company's proxy
statements and/or public filings; and that they thereby created the allegedly
misleading impression that the Company is in compliance with applicable laws,
rules and regulations. Count I of the complaint is premised on alleged
violations of Section 10(b) of the Securities and Exchange Act of 1934 (the
"1934 Act") and SEC Rule 10b-5, Count II on alleged violations of Section
20(a) of the 1934 Act, Count III on alleged breaches of fiduciary duty by the
individual defendants, and Count IV on alleged violations of Section 14(a) of
the 1934 Act and SEC Rule 14a-9. Counts I and II seek certification of a class
of plaintiff-stockholders, compensatory damages plus prejudgement interest
from each of the defendants in an unspecified amount, and costs and expenses
including attorney fees. Counts III and IV seek declaratory and injunctive
relief against the individual defendants, including removal of directors,
compensatory damages on behalf of the Company, and costs and expenses
including attorney fees. The Company believes that the allegations in the
complaint are without merit and intends to pursue the defense of this action
vigorously.
A putative class action entitled Bert Skolsky v. Columbia/HCA Healthcare
Corporation, et. al. was filed on April 8, 1997 in the United States District
Court for the Middle District of Tennessee (Civil Action No. 3-97-0374), by an
alleged stockholder of the Company against the Company and four if its current
and former directors and officers--Richard L. Scott, David T. Vandewater,
Kenneth C. Donahey and R. Clayton McWhorter. The complaint alleges, inter
alia, that the Company and the individual defendants artificially inflated the
Company's stock price by making false and misleading statements concerning the
Company's revenues, earnings, profitability and the nature of its business in
its public statements, press releases and public filings, which failed to
disclose allegedly illegal and/or impermissible business practices concerning
government health care payment programs, acquisition of hospitals by the
Company and claimed payments of money to doctors for referring patients to the
Company. Count I of the complaint is premised on alleged violations of Section
10(b) of the 1934 Act and SEC Rule 10b-5, and Count II on alleged violations
of Section 20(a) of the 1934 Act. The complaint seeks certification of a class
of plaintiff-stockholders, compensatory damages plus prejudgement interest
from all of the defendants jointly and severally in an amount to be proven at
trial, and costs and expenses including attorney fees. The Company believes
that the allegations in the complaint are without merit and intends to pursue
the defense of this action vigorously.
ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K.
(a)Exhibits:
Exhibit 11--Statement re Computation of Earnings Per 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:
On January 21, 1997, Columbia filed a report on Form 8-K related to the
originally proposed merger transaction with Value Health, Inc. A copy of
the press release issued by Columbia on January 15, 1997 was included in
the report.
16
<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
Date: May 15, 1997 /s/ Kenneth C. Donahey
-------------------------------------
KENNETH C. DONAHEY
SENIOR VICE PRESIDENT AND CONTROLLER
(PRINCIPAL FINANCIAL AND ACCOUNTING
OFFICER)
17
<PAGE>
EXHIBIT 11
COLUMBIA/HCA HEALTHCARE CORPORATION
COMPUTATION OF EARNINGS PER SHARE
FOR THE QUARTERS ENDED MARCH 31, 1997 AND 1996
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
1997 1996
-------- --------
<S> <C> <C>
PRIMARY EARNINGS PER SHARE:
Net income................................................... $ 479 $ 416
======== ========
Shares used in the computation (in thousands):
Weighted average shares outstanding........................ 672,690 670,392
Dilutive effect of common stock equivalents................ 7,015 7,656
-------- --------
Shares used in computing earnings per share.............. 679,705 678,048
======== ========
Primary earnings per share............................. $ .70 $ .61
======== ========
FULLY DILUTED EARNINGS PER SHARE:
Net income................................................... $ 479 $ 416
======== ========
Shares used in the computation (in thousands):
Weighted average common shares outstanding................. 672,690 670,392
Dilutive effect of common stock equivalents................ 7,031 8,066
-------- --------
Shares used in computing earnings per share.............. 679,721 678,458
======== ========
Fully diluted earnings per share....................... $ .70 $ .61
======== ========
</TABLE>
18
<PAGE>
EXHIBIT 12
COLUMBIA/HCA HEALTHCARE CORPORATION
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
FOR THE QUARTERS ENDED MARCH 31, 1997 AND 1996
(DOLLARS IN MILLIONS)
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
EARNINGS:
Income before minority interests and income taxes................... $847 $723
Fixed charges, exclusive of capitalized interest.................... 151 165
---- ----
$998 $888
==== ====
FIXED CHARGES:
Interest charged to expense......................................... $116 $130
Interest portion of rental expense and amortization of deferred loan
costs.............................................................. 35 35
---- ----
Fixed charges, exclusive of capitalized interest.................... 151 165
Capitalized interest................................................ 6 8
---- ----
$157 $173
==== ====
Ratio of earnings to fixed charges.................................. 6.36 5.14
==== ====
</TABLE>
19
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM 10Q AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> MAR-31-1997
<CASH> 17
<SECURITIES> 0
<RECEIVABLES> 4,606
<ALLOWANCES> 1,414
<INVENTORY> 443
<CURRENT-ASSETS> 4567
<PP&E> 15,723
<DEPRECIATION> 5,404
<TOTAL-ASSETS> 21,445
<CURRENT-LIABILITIES> 2,914
<BONDS> 6,441
0
0
<COMMON> 7
<OTHER-SE> 9,043
<TOTAL-LIABILITY-AND-EQUITY> 21,445
<SALES> 0
<TOTAL-REVENUES> 5,328
<CGS> 0
<TOTAL-COSTS> 2,774
<OTHER-EXPENSES> 1,051
<LOSS-PROVISION> 302
<INTEREST-EXPENSE> 116
<INCOME-PRETAX> 800
<INCOME-TAX> 321
<INCOME-CONTINUING> 479
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 479
<EPS-PRIMARY> 0.70
<EPS-DILUTED> 0.70
</TABLE>
