<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, 1998
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 (I.R.S. EMPLOYER
OF INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
ONE PARK PLAZA 37203
NASHVILLE, TENNESSEE (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.
OUTSTANDING AT
CLASS OF COMMON STOCK APRIL 30, 1998
--------------------- ------------------
Voting common stock, $.01 par value 622,522,500 shares
Nonvoting common stock, $.01 par value 21,000,000 shares
- -------------------------------------------------------------------------------
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1 of 23
<PAGE>
COLUMBIA/HCA HEALTHCARE CORPORATION
FORM 10-Q
MARCH 31, 1998
<TABLE>
<CAPTION>
PAGE OF
PART I: FINANCIAL INFORMATION FORM 10-Q
- ----------------------------- ---------
<S> <C>
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Statements of Income--for the quarters ended
March 31, 1998 and 1997............................................. 3
Condensed Consolidated Balance Sheets--March 31, 1998 and December
31, 1997............................................................ 4
Condensed Consolidated Statements of Cash Flows--for the quarters
ended March 31, 1998 and 1997....................................... 5
Notes to Condensed Consolidated Financial Statements................. 6
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations................................................... 10
PART II: OTHER INFORMATION
- --------------------------
Items 1 to 6............................................................. 20
</TABLE>
2
<PAGE>
COLUMBIA/HCA HEALTHCARE CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
FOR THE QUARTERS ENDED MARCH 31, 1998 AND 1997
UNAUDITED
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
1998 1997
------ ------
<S> <C> <C>
Revenues....................................................... $4,901 $4,988
Salaries and benefits.......................................... 2,013 1,876
Supplies....................................................... 746 699
Other operating expenses....................................... 940 962
Provision for doubtful accounts................................ 343 297
Depreciation and amortization.................................. 309 296
Interest expense............................................... 153 113
Equity in earnings of affiliates............................... (42) (62)
Restructuring of operations and investigation related costs.... 38 -
------ ------
4,500 4,181
------ ------
Income from continuing operations before minority interests and
income taxes.................................................. 401 807
Minority interests in earnings of consolidated entities........ 20 47
------ ------
Income from continuing operations before income taxes.......... 381 760
Provision for income taxes..................................... 162 305
------ ------
Income from continuing operations.............................. 219 455
Income (loss) from operations of discontinued businesses, net
of income taxes (benefits) of ($16) in 1998 and $16 in 1997... (22) 24
Cumulative effect of accounting change, net of income tax bene-
fit of $36.................................................... - (56)
------ ------
Net income................................................. $ 197 $ 423
====== ======
Basic earnings per share:
Income from continuing operations............................ $ .34 $ .67
Income (loss) from operations of discontinued businesses..... (.03) .04
Cumulative effect of accounting change....................... - (.08)
------ ------
Net income................................................. $ .31 $ .63
====== ======
Diluted earnings per share:
Income from continuing operations............................ $ .34 $ .66
Income (loss) from operations of discontinued businesses..... (.03) .04
Cumulative effect of accounting change....................... - (.08)
------ ------
Net income................................................. $ .31 $ .62
====== ======
Cash dividends per share....................................... $ .02 $ .02
====== ======
</TABLE>
See accompanying notes.
3
<PAGE>
COLUMBIA/HCA HEALTHCARE CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1998 1997
----------- ------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents........................... $ 128 $ 110
Accounts receivable, less allowances for doubtful
accounts of $1,679 in 1998 and $1,661 in 1997...... 2,549 2,522
Inventories......................................... 463 452
Income taxes receivable............................. 26 532
Other............................................... 859 807
------- -------
4,025 4,423
Property and equipment, at cost....................... 16,441 16,254
Accumulated depreciation.............................. (6,189) (6,024)
------- -------
10,252 10,230
Investments of insurance subsidiary................... 1,490 1,422
Investments in and advances to affiliates............. 1,346 1,329
Intangible assets, net................................ 3,508 3,521
Net assets of discontinued operations................. 789 841
Other................................................. 220 236
------- -------
$21,630 $22,002
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.................................... $ 862 $ 929
Accrued salaries.................................... 430 475
Other accrued expenses.............................. 1,139 1,237
Long-term debt due within one year.................. 242 132
------- -------
2,673 2,773
Long-term debt........................................ 8,748 9,276
Professional liability risks, deferred taxes and other
liabilities.......................................... 1,893 1,867
Minority interests in equity of consolidated entities. 823 836
Stockholders' equity:
Common stock, $.01 par; authorized 1,600,000,000
voting shares and 50,000,000 nonvoting shares;
outstanding 622,334,100 voting shares and
21,000,000 nonvoting shares--March 31, 1998 and
620,452,200 voting shares and 21,000,000 nonvoting
shares--December 31, 1997.......................... 6 6
Capital in excess of par value...................... 3,518 3,480
Other............................................... 12 13
Accumulated other comprehensive income.............. 114 92
Retained earnings................................... 3,843 3,659
------- -------
7,493 7,250
------- -------
$21,630 $22,002
======= =======
</TABLE>
See accompanying notes.
4
<PAGE>
COLUMBIA/HCA HEALTHCARE CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE QUARTERS ENDED MARCH 31, 1998 AND 1997
UNAUDITED
(DOLLARS IN MILLIONS)
<TABLE>
<CAPTION>
1998 1997
----- ----
<S> <C> <C>
Cash flows from continuing operating activities:
Net income ..................................................... $ 197 $423
Adjustments to reconcile net income to net cash provided by
continuing operating activities:
Provision for doubtful accounts............................... 343 297
Depreciation and amortization................................. 309 296
Loss (income) from discontinued operations.................... 22 (24)
Cumulative effect of accounting change........................ - 56
Changes in operating assets and liabilities................... (172) (501)
Other......................................................... (11) 22
----- ----
Net cash provided by continuing operating activities........ 688 569
----- ----
Cash flows from investing activities:
Purchase of property and equipment.............................. (316) (344)
Acquisition of hospitals and health care entities............... (66) (17)
Investments in and advances to affiliates....................... - (24)
Disposition of hospitals and health care entities............... 43 175
Change in other investments..................................... (39) (94)
Investment in net assets of discontinued operations, net........ 30 (15)
Other........................................................... 71 46
----- ----
Net cash used in investing activities....................... (277) (273)
----- ----
Cash flows from financing activities:
Issuance of long-term debt...................................... - 8
Net changes in commercial paper and bank borrowings............. (345) (215)
Repayment of long-term debt..................................... (72) (144)
Payment of cash dividends....................................... (13) (14)
Other........................................................... 37 (27)
----- ----
Net cash used in financing activities....................... (393) (392)
----- ----
Change in cash and cash equivalents............................... 18 (96)
Cash and cash equivalents at beginning of period.................. 110 113
----- ----
Cash and cash equivalents at end of period........................ $ 128 $ 17
===== ====
Interest payments................................................. $ 117 $ 79
Income tax payments (refunds), net................................ $(334) $ 81
</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, together with its affiliated
subsidiaries, (the "Company") is a Delaware corporation that owns and operates
hospitals and related health care entities. At March 31, 1998, the Company
owned and operated 310 hospitals, 142 freestanding surgery centers (the
Company announced an agreement to sell 34 of these centers subsequent to March
31, 1998, see NOTE 10--SUBSEQUENT EVENTS) and provided extensive outpatient
and ancillary services, including home health (the Company plans to divest its
home health business, see NOTE 5--DISCONTINUED OPERATIONS). The Company is
also a partner in several 50/50 joint ventures that own and operate 26
hospitals and 5 freestanding surgery centers which are accounted for using the
equity method. The Company's facilities are located in 35 states, England,
Switzerland and Spain.
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 considered necessary for a fair presentation have been included.
Operating results for the quarter ended March 31, 1998, are not necessarily
indicative of the results that may be expected for the year ending December
31, 1998. For further information, refer to the consolidated financial
statements and footnotes thereto included in the Company's annual report on
Form 10-K for the year ended December 31, 1997.
Certain prior year amounts have been reclassified to conform to the current
year presentation.
NOTE 2--INVESTIGATIONS
The Company is currently the subject of several federal investigations into
its business practices, as well as state governmental investigations by
various states. The Company is cooperating in these investigations and
understands, through written notice and other means, that it is a target in
these investigations.
Given the breadth of the ongoing investigations, the Company expects
additional subpoenas and other investigative and prosecutorial activity to
occur in these and other jurisdictions in the future.
Management believes the ongoing investigations and related media coverage
are having a negative effect on the Company's results of operations. It is too
early to predict the outcome or effect that the ongoing investigations, the
initiation of additional investigations, if any, and the related media
coverage will have on the Company's financial condition or results of
operations in future periods. Were the Company to be found in violation of
federal or state laws relating to Medicare, Medicaid or similar programs, the
Company could be subject to substantial monetary fines, civil and criminal
penalties and exclusion from participation in the Medicare and Medicaid
programs. Any such sanctions could have a material adverse effect on the
Company's financial position and results of operations. See NOTE 8--
CONTINGENCIES.
The Company is the subject of a formal order of investigation by the
Securities and Exchange Commission. The Company understands that the
investigation includes the anti-fraud, periodic reporting and internal
accounting control provisions of the federal securities laws.
NOTE 3--RESTRUCTURING OF OPERATIONS
During 1997, the Company announced it was evaluating and pursuing various
restructuring alternatives which included divestitures of certain assets to
third parties and possible spin-offs of certain other assets to the Company's
stockholders. See NOTE 5--DISCONTINUED OPERATIONS and NOTE 10--SUBSEQUENT
EVENTS.
6
<PAGE>
COLUMBIA/HCA HEALTHCARE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
UNAUDITED
NOTE 4--RESTRUCTURING OF OPERATIONS AND INVESTIGATION RELATED COSTS
During the first quarter of 1998, the Company recorded the following pretax
charges in connection with the restructuring of operations and the
investigation related costs as discussed in NOTE 2 and 3 (in millions):
<TABLE>
<S> <C>
Severance costs.................................................... $ 4
Professional fees related to investigations........................ 28
Other.............................................................. 6
---
$38
===
</TABLE>
NOTE 5--DISCONTINUED OPERATIONS
In 1997, the Company implemented a plan to sell its home health care
business and three of the four business units acquired in the August 1997
merger with Value Health, Inc. ("Value Health").
Revenues of the home health care and Value Health businesses to be disposed
of totaled $641 million in the first quarter of 1998 and $340 million for the
same period of 1997. Results of operations for these businesses, including
interest expense associated with the debt incurred to complete the Value
Health merger, are included in "Income (loss) from operations of discontinued
businesses" in the condensed consolidated statements of income.
During the first quarter of 1998, the Company announced agreements to sell
Value Rx and Value Behavioral Health ("VBH") (two of the three Value Health
units to be divested) for $445 million and $230 million in cash, respectively.
The sale of Value Rx was completed April 1, 1998 (see NOTE 10--SUBSEQUENT
EVENTS). The sale of VBH is anticipated to be completed in the second quarter
of 1998, subject to various regulatory approvals, and is not expected to have
a material effect on results of operations. The proceeds from the sale of VBH
are expected to be used to repay bank borrowings.
NOTE 6--INCOME TAXES
The Company is currently contesting before the United States Tax Court (the
"Tax Court") and the United States Court of Federal Claims certain claimed
deficiencies and adjustments proposed by the Internal Revenue Service (the
"IRS") in conjunction with its examination of the Company's 1994 federal
income tax return, Columbia Healthcare Corporation's ("CHC") 1993 and 1994
federal income tax returns, HCA-Hospital Corporation of America, Inc.'s
("HCA") 1981 through 1988 and 1991 through 1993 federal income tax returns and
Healthtrust, Inc.--The Hospital Company's ("Healthtrust") 1990 through 1992
federal income tax returns. The disputed items include: the disallowance of
certain acquisition-related costs, executive compensation, system conversion
costs and insurance premiums which were deducted in calculating taxable income
in 1993 and 1994; and the methods of accounting used by certain subsidiaries
for calculating taxable income related to vendor rebates and governmental
receivables in 1993 and 1994. The IRS is claiming an additional $280 million
in income taxes and interest through March 31, 1998.
Tax Court decisions received in 1996 and 1997 related to HCA's 1981 through
1988 federal income tax returns may be appealed by the IRS or the Company to
the United States Court of Appeals, Sixth Circuit. The Company expects any
decisions regarding the appeal of these rulings will be made during 1998.
Management believes that adequate provisions have been recorded to satisfy
final resolution of the disputed issues. Management believes that the Company,
CHC, HCA and Healthtrust properly reported taxable 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 will not
have a material adverse effect on the results of operations or financial
position of the Company.
7
<PAGE>
COLUMBIA/HCA HEALTHCARE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
UNAUDITED
NOTE 7--EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted earnings
per share from continuing operations for the three months ended March 31, 1998
and 1997 (dollars in millions, except per share amounts):
<TABLE>
<CAPTION>
1998 1997
------- -------
<S> <C> <C>
Numerator (a):
Income from continuing operations....................... $ 219 $ 455
Denominator:
Share reconciliation (in thousands):
Shares used for basic earnings per share............... 642,050 672,525
Effect of dilutive securities:
Stock options......................................... 2,178 6,464
Warrants and other.................................... 705 716
------- -------
Shares used for dilutive earnings per share............. 644,933 679,705
======= =======
Earnings per share:
Basic earnings per share from continuing operations..... $ .34 $ .67
Diluted earnings per share from continuing operations... $ .34 $ .66
</TABLE>
(a) Amount is used for both basic and diluted earnings per share computations
since there is no earnings effect related to the dilutive securities.
NOTE 8--CONTINGENCIES
Significant Legal Proceedings
Various lawsuits, claims and legal proceedings (see NOTE 2 for a description
of the ongoing government investigations) have been or may be instituted or
asserted against the Company, including those relating to shareholder
derivative and class action complaints; purported class action lawsuits filed
by patients and payers alleging, in general, improper and fraudulent billing,
coding and physician referrals, as well as other violations of law; certain
qui tam or "whistleblower" actions alleging, in general, unlawful claims for
reimbursement or unlawful payments to physicians for the referral of patients
and other litigation matters. While the amounts claimed may be substantial,
the ultimate liability cannot be determined or reasonably estimated at this
time due to the considerable uncertainties that exist. Therefore, it is
possible that results of operations, financial position and liquidity in a
particular period could be materially, adversely affected upon the resolution
of certain of these contingencies.
General Liability Claims
The Company is subject to claims and suits arising in the ordinary course of
business, including claims for personal injuries or wrongful restriction of,
or interference with, physicians' staff privileges. In certain of these
actions the claimants have asked for punitive damages against the Company,
which are usually not covered by insurance. It is management's opinion that
the ultimate resolution of these pending claims and legal proceedings will not
have a material adverse effect on the Company's results of operations or
financial position.
8
<PAGE>
COLUMBIA/HCA HEALTHCARE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
UNAUDITED
NOTE 9--COMPREHENSIVE INCOME
The components of comprehensive income, net of related tax, for the three
months ended March 31, 1998 and 1997 are as follows (in millions):
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Net income..................................................... $197 $423
Unrealized gains on securities................................. 24 37
Foreign currency translation adjustments....................... (2) 2
---- ----
Comprehensive income........................................... $219 $462
==== ====
</TABLE>
The components of accumulated other comprehensive income, net of related
tax, at March 31, 1998 and December 31, 1997 are as follows:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Unrealized gains on securities.................................. $114 $90
Foreign currency translation adjustments........................ - 2
---- ---
Accumulated other comprehensive income.......................... $114 $92
==== ===
</TABLE>
NOTE 10--SUBSEQUENT EVENTS
On April 1, 1998, the Company completed the sale of Value Rx for $445
million in cash. The sale is part of the Company's previously announced
restructuring plan (see NOTE 5--DISCONTINUED OPERATIONS). The results of
operations and net assets of Value Rx are included as part of "discontinued
operations" in the condensed consolidated financial statements. The sale is
not expected to have a material effect on results of operations. Proceeds from
the sale were used to repay bank borrowings.
On April 16, 1998, the Company announced an agreement to sell 34 of its
ambulatory surgery centers located in "non-core" markets for $550 million in
cash. The surgery centers are included in continuing operations. The sale is
anticipated to be completed in the third quarter of 1998, subject to various
regulatory approvals, and is expected to result in a after-tax gain of
approximately $100 million. Proceeds from the sale are expected to be used to
repay bank borrowings.
On April 29, 1998 the Company announced that it now plans to file a ruling
request with the Internal Revenue Service for two, rather than three, as
previously announced, tax-free spin-off companies. The request is part of the
previously announced plan to restructure the Company's operations and is
expected to be filed late in the second quarter or early in the third quarter
of 1998.
NOTE 11--SEGMENT DISCLOSURES
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 131, Disclosures about Segments of an
Enterprise and Related Information ("SFAS 131"), which will be effective for
the Company's 1998 year-end consolidated financial statements. SFAS 131
establishes standards for the way that public business enterprises report
information about operating segments in annual financial statements and
requires that those enterprises report selected information about operating
segments in interim financial reports.
Management is currently evaluating the appropriate disclosures pursuant to
the provisions of SFAS 131 in consideration of the Company's ongoing
restructuring of operations (as discussed in NOTE 3--RESTRUCTURING OF
OPERATIONS),
NOTE 12--ACCOUNTING CHANGE
During the fourth quarter of 1997, the Company changed its method of
accounting for start-up costs, effective January 1, 1997. The first quarter of
1997 has been restated to reflect the cumulative effect of adopting the new
method of accounting.
9
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
INVESTIGATIONS
The Company is currently the subject of several federal investigations into
its business practices, as well as state governmental investigations by
various states. The Company is cooperating in these investigations and
understands, through written notice and other means, that it is a target in
these investigations.
Given the breadth of the ongoing investigations, the Company expects
additional subpoenas and other investigative and prosecutorial activity to
occur in these and other jurisdictions in the future.
Management believes the ongoing investigations and related media coverage
are having a negative effect on the Company's results of operations. It is too
early to predict the outcome or effect that the ongoing investigations, the
initiation of additional investigations, if any, and the related media
coverage will have on the Company's financial condition or results of
operations in future periods. Were the Company to be found in violation of
federal or state laws relating to Medicare, Medicaid or similar programs, the
Company could be subject to substantial monetary fines, civil and criminal
penalties and exclusion from participation in the Medicare and Medicaid
programs. Any such sanctions could have a material adverse effect on the
Company's financial position and results of operations. See NOTE 8 of the
notes to condensed consolidated financial statements.
The Company is the subject of a formal order of investigation by the
Securities and Exchange Commission. The Company understands that the
investigation includes the anti-fraud, periodic reporting and internal
accounting control provisions of the federal securities laws.
RESTRUCTURING OF OPERATIONS & DISCONTINUED OPERATIONS
During 1997, the Company announced it was evaluating and pursuing various
restructuring alternatives which included divestitures of certain assets to
third parties and possible spin-offs of certain other assets to the Company's
stockholders.
The Company implemented a plan during 1997 to sell its home health care
business and three of the four business units acquired through the 1997 merger
with Value Health, Inc. ("Value Health"). Results of operations for these
businesses are included in "Income (loss) from operations of discontinued
businesses" in the condensed consolidated statements of income. See NOTE 5 of
notes to condensed consolidated financial statements.
In the first quarter of 1998, the Company announced agreements to sell Value
Rx and Value Behavioral Health (two of the three Value Health units to be
divested) for $445 million and $230 million in cash, respectively. The sale of
Value Rx was completed in April 1, 1998, see Subsequent Events below. The
proceeds from the sale of Value Behavioral Health (expected to be completed in
the second quarter of 1998) are expected to be used to repay bank borrowings.
BUSINESS STRATEGY
The Company's strategy is to be a comprehensive provider of quality health
care services in select markets. The Company maintains and replaces equipment,
renovates and constructs replacement facilities and adds new services to
increase the attractiveness of its hospitals and other facilities to patients
and physicians. By developing a comprehensive health care network with a broad
range of health care services located throughout a market area, the Company
achieves greater visibility and is better able to attract and serve patients
and physicians. The Company is also able to reduce operating costs by sharing
certain services among several facilities in the same market and is better
positioned to work with health maintenance organizations ("HMOs"), preferred
provider organizations ("PPOs") and employers.
The Company generally seeks to operate each of its facilities as part of a
network with other health care facilities that it owns or operates within the
same region. In instances where acquisitions of additional facilities in the
area are not possible or practical, the Company may seek joint ventures or
partnership arrangements with other local facilities.
10
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS--(CONTINUED)
RESULTS OF OPERATIONS
Revenue/Volume Trends
In addition to the impact of the ongoing government investigations and
related media coverage, the Company's revenues continue to be affected by the
trend toward certain services being performed more frequently on an outpatient
basis and an increasing proportion of revenue being derived from fixed
payment, higher discount sources, including Medicare, Medicaid and managed
care plans. Admissions related to Medicare, Medicaid and managed care plan
patients during the three months ended March 31, 1998 and 1997 were 90% and
88%, respectively, of total admissions.
Insurance companies, government programs (other than Medicare) and employers
purchasing health care services for their employees are negotiating discounted
amounts that they will pay health care providers rather than paying standard
prices. These purchasers then become discounted payers, similar to HMOs and
PPOs, in virtually all markets and make 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 outpatient services is expected to continue in the health care
industry as procedures 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 payers to direct certain procedures
from inpatient care to outpatient care. Outpatient revenues grew to 36% of net
patient revenues in the first quarter of 1998 from 35% in the first quarter of
1997.
The Company expects patient volumes from Medicare and Medicaid to continue
to increase due to the general aging of the population and the expansion of
state Medicaid programs. However, under the Balanced Budget Act of 1997 (the
"BBA-97"), the Company's reimbursement from the Medicare and Medicaid programs
were reduced and will be further reduced as some reductions will be phased in
over the next few years.
Reductions in Medicare and Medicaid reimbursement, increasing percentages of
the patient volume being related to patients participating in managed care
plans and continuing trends toward more services being performed on an
outpatient basis are expected to present an ongoing challenge to the Company.
To achieve and maintain a reasonable operating margin in the future periods,
the Company must increase patient volumes while controlling the costs of
providing services.
Management believes that the proper response to this challenge includes the
delivery of a broad range of quality health care services to patients through
comprehensive health care networks with operating decisions being made by the
local management teams and local physicians.
11
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS--(CONTINUED)
RESULTS OF OPERATIONS (CONTINUED)
Operating Results Summary
The following is a summary of results from continuing operations for the
quarters ended March 31, 1998 and 1997 (dollars in millions, except per share
amounts):
<TABLE>
<CAPTION>
1998 1997
-------------- -------------
AMOUNT RATIO AMOUNT RATIO
------ ----- ------ -----
<S> <C> <C> <C> <C>
Revenues........................................ $4,901 100.0 $4,988 100.0
Salaries and benefits........................... 2,013 41.1 1,876 37.6
Supplies........................................ 746 15.2 699 14.0
Other operating expenses........................ 940 19.2 962 19.2
Provision for doubtful accounts................. 343 7.0 297 6.0
Depreciation and amortization................... 309 6.3 296 5.9
Interest expense................................ 153 3.1 113 2.3
Equity in earnings of affiliates................ (42) (0.9) (62) (1.2)
Restructuring of operations and investigation
related costs.................................. 38 0.8 - -
------ ----- ------ -----
4,500 91.8 4,181 83.8
------ ----- ------ -----
Income from continuing operations before
minority interests and income taxes............ 401 8.2 807 16.2
Minority interests in earnings of consolidated
entities....................................... 20 0.4 47 1.0
------ ----- ------ -----
Income from continuing operations before income
taxes.......................................... 381 7.8 760 15.2
Provision for income taxes...................... 162 3.4 305 6.1
------ ----- ------ -----
Income from continuing operations............... $ 219 4.4 $ 455 9.1
====== ===== ====== =====
Basic earnings per share from continuing opera-
tions.......................................... $ .34 $ .67
Diluted earnings per share from continuing oper-
ations......................................... $ .34 $ .66
% changes from prior year:
Revenues...................................... (1.7%) 6.3%
Income from continuing operations before in-
come taxes................................... (49.8) 12.9
Income from continuing operations............. (51.8) 13.0
Basic earnings per share from continuing oper-
ations....................................... (49.3) 11.7
Diluted earnings per share from continuing op-
erations..................................... (48.5) 11.9
Admissions (a)................................ 2.1 1.3
Equivalent admissions (b)..................... 3.3 3.1
Revenues per equivalent admission............. (4.8) 3.0
Same-facility % changes from prior year (c):
Revenues...................................... (2.6%) 6.6%
Admissions (a)................................ 0.7 2.2
Equivalent admissions (b)..................... 2.0 4.2
Revenues per equivalent admission............. (4.6) 2.3
</TABLE>
- --------
(a) Admissions represent the total number of patients admitted (in the
facility for a period in excess of 23 hours) to the Company's hospitals.
(b) Equivalent admissions is used by management and certain investors as a
general measure of combined inpatient and outpatient volume. Equivalent
admissions are computed by multiplying admissions (inpatient volume) by
the sum of gross inpatient revenue and gross outpatient revenue and then
dividing the resulting amount by gross inpatient revenue. The equivalent
admissions computation "equates" outpatient revenue to the volume measure
(admissions) used to measure inpatient volume resulting in a general
measure of combined inpatient and outpatient volume.
(c) "Same-facility" information excludes the operations of hospitals and
their related facilities which were either acquired or divested during
the current and prior year.
12
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS--(CONTINUED)
RESULTS OF OPERATIONS (CONTINUED)
Quarters Ended March 31, 1998 and 1997
Income from continuing operations before income taxes declined 49.8% to $381
million in 1998 from $760 million in 1997, and pretax margins decreased to
7.8% in 1998 from 15.2% in 1997. The decrease in pretax income was primarily
attributable to the decline in revenue growth rates, decreases in the
operating margin and costs associated with the restructuring of operations and
investigation related costs.
Revenues decreased 1.7% to $4.9 billion in 1998 compared to $5.0 billion in
1997. Inpatient admissions increased 2.1% from a year ago and equivalent
admissions (adjusted to reflect combined inpatient and outpatient volume)
increased 3.3%. On a same-facility basis, revenues decreased 2.6%, admissions
increased 0.7% and equivalent admissions increased 2.0% from a year ago. The
decline in both reported and same-facility revenues compared to increases in
volumes resulted from declines in revenue per equivalent admissions of 4.8% on
a reported basis and 4.6% on a same-facility basis. As previously discussed,
the increase in outpatient volume activity is primarily a result of the
continuing trend of certain services, previously provided in an inpatient
setting, being converted to an outpatient setting. In addition to the
continued increase in the percentage of the Company's patient revenues being
derived from outpatient sources, average daily outpatient visits increased
0.8% in 1998 compared to 1997.
The decline in revenues was due to several factors including decreases in
Medicare reimbursement rates mandated by the BBA-97 which became effective
October 1, 1997 (lowered 1998 revenues by approximately $50 million),
continued increases in discounts from the growing number of managed care
payers (managed care as a percent of total admissions increased to 36% in 1998
compared to 33% during 1997) and delays experienced in obtaining Medicare cost
report settlements (cost report settlements resulted in favorable revenue
adjustments of $21 million in 1998 compared to $29 million in 1997).
Operating expenses increased as a percentage of revenues in every expense
category except other operating expenses which remained unchanged and minority
interests which declined to 0.4% in 1998 from 1.0% in 1997 due to decreased
income from joint ventures that included minority partners. The primary reason
for the increases as a percentage of revenues in all other expense categories,
as described below, was the Company's inability to adjust expenses on a timely
basis in line with the decreases experienced in volume and reimbursement
trends. Management attention to the investigations, reactions by certain
physicians and patients to the negative media coverage and management changes
at several levels and locations throughout the Company continue to contribute
to the Company's inability to implement changes to reduce operating expenses
in response to the volume and revenue growth rate declines.
Salaries and benefits, as a percentage of revenues, increased to 41.1% in
1998 from 37.6% in 1997. The decline in revenues per equivalent admission was
a primary factor for the increase. In addition, the Company was unable to
adjust staffing levels corresponding with the declining equivalent admission
growth rate (man hours per equivalent admission increased slightly compared to
last year).
Supply costs increased as a percentage of revenues to 15.2% in 1998 from
14.0% in 1997 due to a decline in net revenue per equivalent admission while
the cost of supplies per equivalent admission increased.
As previously discussed, other operating expenses (primarily consisting of
contract services, professional fees, repairs and maintenance, rents and
leases, utilities, insurance and non-income taxes) remained unchanged as a
percentage of revenues.
13
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS--(CONTINUED)
RESULTS OF OPERATIONS (CONTINUED)
Quarters Ended March 31, 1998 and 1997 (Continued)
Provision for doubtful accounts, as a percentage of revenues, increased to
7.0% in 1998 from 6.0% in 1997 due to internal factors such as continued
computer information system conversions (including patient accounting systems)
at various facilities and external factors such as payer mix shifts to managed
care plans (resulting in increased amounts of patient co-payments and
deductibles) and payer remittance slowdowns. The information system
conversions hampered the business office billing functions and collection
efforts in those facilities as some resources are directed to installing and
converting systems and building new data files, rather that devoting full
effort to billing and collecting receivables. The Company experienced an
increased occurrence of charge audits from certain payers due to the negative
publicity surrounding the government investigations which have resulted in
delays in the collection of receivables. The delays in collections resulted in
an increase in receivables reserved under the Company's bad debt allowance
policy. Management is unable at this time to predict when or if, these delays
in collecting accounts receivable will improve or the effect these delays will
have on the ultimate amounts collected.
Depreciation and amortization increased as a percentage of revenues to 6.3%
in 1998 from 5.9% in 1997, primarily due to the slowdown in revenue growth and
increased capital expenditures related to ancillary services (such as
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 increased to $153 million in 1998 compared to $113 million
in 1997 primarily as a result of an increase in average outstanding debt
during 1998 compared to last year. This was due, in part, to the additional
debt incurred during the third and fourth quarters of 1997 related to the
Company's $1.0 billion common stock repurchase program which was completed in
the fourth quarter of 1997. Interest expense associated with the increase in
debt related to the funding of the 1997 merger with Value Health has been
allocated to "Discontinued operations" and is therefore not included in
interest expense from continuing operations.
Equity in earnings of affiliates decreased as a percentage of revenues to
0.9% in 1998 from 1.2% in 1997 primarily due to decreased profitability at
certain non-consolidated, joint venture facilities.
During 1998, the Company incurred $38 million ($22 million after-tax or $.03
per diluted share) of costs in connection with the restructuring of operations
and investigations. These costs included $28 million in professional fees
related to the investigations and $10 million in various other costs.
The Company incurred a $22 million net loss from operations of it's
discontinued businesses in 1998 compared to net income of $24 million during
the prior year. The majority of the loss, which is primarily related to the
Company's home health care business, is due to approximately $20 million in
revenue reductions related to clarification of the Medicare rates of
reimbursement for home health visits under the BBA-97. The Company also
experienced a decline in home health visits from 4.2 million last year to 2.6
million in 1998.
Liquidity
Cash provided by continuing operating activities totaled $688 million during
the first quarter of 1998 compared to $569 million in 1997. The increase was
primarily due to a $350 million federal income tax refund received during 1998
related to excess estimated payment amounts made during 1997. The refund was
partially offset by a decline in net income from 1997 to 1998.
Cash used in investing activities was approximately $277 million during the
first quarter of 1998 compared to $273 for the same period of 1997.
14
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS--(CONTINUED)
RESULTS OF OPERATIONS (CONTINUED)
Liquidity (Continued)
Cash flows used in financing activities totaled $393 million in the first
quarter of 1998 compared to $392 million in 1997. The excess of cash flows
from operations over cash used in investing activities was primarily used to
pay down debt during both the first quarters of 1998 and 1997. Cash was used
primarily for payments on bank borrowings during 1998 and payments on the
Company's commercial paper program and long-term debt during 1997.
Working capital totaled $1.4 billion as of March 31, 1998 compared to $1.7
billion at December 31, 1997. Management believes that cash flows from
operations, amounts available under the Company's bank revolving credit
facilities and proceeds from expected asset sales will be sufficient to meet
expected liquidity needs during the next twelve months.
Investments of the Company's professional liability insurance subsidiary to
maintain statutory equity and pay claims totaled $1.6 billion at March 31,
1998 and $1.5 billion at December 31, 1997.
The Company has various agreements with joint venture partners whereby the
partners have an option to sell or "put" their interests in the joint venture
back to the Company within specific periods at fixed prices or prices based on
certain formulas. The combined put price under all such agreements was
approximately $1.0 billion at March 31, 1998. In April of 1998, the partner in
the Memorial Healthcare Group, Inc. joint venture exercised their put option
whereby the Company purchased their remaining interest in the joint venture
for approximately $40 million. The Company cannot predict if, or when, other
joint venture partners will exercise such options.
During the first quarter of 1998, the Internal Revenue Service (the "IRS")
issued guidance regarding the tax consequences of joint ventures between for-
profits and not-for-profit hospitals. The Company has not determined the
impact of the tax ruling on its existing joint ventures and is consulting with
its joint venture partners and tax advisers to develop an appropriate course
of action. The tax ruling could require the restructuring of certain joint
ventures with not-for-profits or influence the exercise of the put agreements
by certain joint venture partners.
The settlement of the government investigations and the various lawsuits and
legal proceedings that have been asserted could result in substantial
liabilities to the Company. The ultimate liabilities cannot be reasonably
estimated, as to the timing or amounts, at this time; however, it is possible
that results of operations, financial position and liquidity could be
materially, adversely affected upon the resolution of certain of these
contingencies.
Capital Resources
Excluding acquisitions, capital expenditures were $316 million during the
first quarter of 1998 compared to $344 million for the same period in 1997.
Planned capital expenditures (including construction projects) in 1998 are
expected to approximate $1.4 billion. Management believes that its capital
expenditure program is adequate to expand, improve and equip its existing
health care facilities.
Acquisition of hospitals and health care entities and investments in and
advances to affiliates (generally 50% interests in joint ventures that are
accounted for using the equity method) totaled $66 million during the first
quarter of 1998 and $41 million in 1997.
The Company expects to finance all capital expenditures with internally
generated and borrowed funds. Available sources of capital include public or
private debt, unused bank revolving credit facilities and equity. At March 31,
1998, there were projects under construction which had an estimated additional
cost to complete and equip over the next few years of approximately $1.2
billion.
15
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS--(CONTINUED)
RESULTS OF OPERATIONS (CONTINUED)
Capital Resources (Continued)
The Company's bank revolving credit facilities (the "Credit Facilities") are
comprised of a $2.0 billion five-year revolving credit agreement expiring
February 2002 and a $3.0 billion 364-day revolving credit agreement expiring
June 1998. Borrowings under the 364-day revolving credit agreement do not
mature until one year subsequent to the end of the 364-day period. As of April
30, 1998, the Company had approximately $1.1 billion of credit available under
the Credit Facilities.
The Company's Credit Facilities contain customary covenants which include
(i) limitations on additional debt, (ii) limitations on sales of assets,
mergers and changes of ownership, (iii) limitations on repurchases of the
Company's common stock, (iv) maintenance of certain interest coverage ratios
and (v) attaining certain minimum levels of consolidated earnings before
interest, taxes, depreciation and amortization. The Credit Facilities also
provide for the mandatory prepayment of loans thereunder, and a corresponding
reduction of commitments in the case of certain asset sales and certain debt
or equity issuances. The Company is currently in compliance with all such
covenants.
During the third quarter of 1997, the Company began replacing amounts
outstanding under its commercial paper programs with borrowings under its
Credit Facilities. This was due to the limited access of commercial paper as a
funding source caused by downgrades of the Company's senior debt and
commercial paper credit ratings by Moody's Investor Service ("Moody's") and
Standard and Poor's. In February 1998, Moody's further downgraded the
Company's senior debt credit rating to Ba2 from Baa2 and the commercial paper
rating to NP (not prime) from P-3.
As part of the Company's restructuring of operations discussed earlier, the
Company announced it is evaluating and pursuing various restructuring
alternatives which include divestitures of certain assets to third parties and
possible spin-offs of certain assets to the Company's stockholders. These
restructuring alternatives could have the effect of materially changing the
capital structure of the Company. At this time, management has not determined
the future capital structure of the Company.
YEAR 2000 COMPUTER ISSUES
The Company is continuing to address the Year 2000 issues. Review and
modification of internally developed computer programs is progressing through
utilization of both internal and external resources. The review of medical and
physical plant equipment is being lead by a central internal infrastructure
team coordinating the efforts of Year 2000 coordinators that have been
identified at each facility. During the first quarter of 1998, the Company
incurred approximately $9 million of costs, which are being expensed as
incurred, related to its Year 2000 efforts.
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 the Company's markets. The cost of
certain proposals would be funded in significant part by reduction in payments
by government programs, including Medicare and Medicaid, to health care
providers (similar to the reductions incurred as part of BBA-97 as previously
discussed). 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 the Company will not be adopted.
PENDING IRS DISPUTES
The Company is contesting income taxes and related interest proposed by the
IRS for prior years aggregating approximately $280 million as of March 31,
1998. Management believes that final resolution of these
16
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS--(CONTINUED)
PENDING IRS DISPUTES (CONTINUED)
disputes will not have a material adverse effect on the results of operations
or financial position of the Company. (See NOTE 6 of the notes to condensed
consolidated financial statements for a description of the pending IRS
disputes).
SUBSEQUENT EVENTS
On April 1, 1998, the Company completed the sale of Value Rx for $445
million in cash. The sale is part of the Company's previously announced
restructuring plan (see NOTE 5 of the notes to condensed consolidated
financial statements). The sale is not expected to have a material effect on
results of operations. Proceeds from the sale were used to repay bank
borrowings.
On April 16, 1998, the Company announced an agreement to sell 34 of its
ambulatory surgery centers located in "non-core" markets for approximately
$550 million in cash. The sale is also part of the Company's restructuring
plan. The sale is anticipated to be completed in the third quarter of 1998,
subject to various regulatory approvals, and is expected to result in a after-
tax gain of approximately $100 million. The proceeds from the sale are
expected to be used to repay bank borrowings.
On April 29, 1998, the Company announced that it now plans to file a ruling
request with the Internal Revenue Service for two, rather than three as
previously announced, tax-free spin-off companies. The request is part of the
previously announced plan to restructure the Company's operations and is
expected to be filed late in the second quarter or early in the third quarter
of 1998.
FORWARD-LOOKING STATEMENTS
Certain statements contained in this Quarterly Report on Form 10-Q
including, without limitation, statements containing the words "believes",
"anticipates", "expects", and words of similar import, constitute "forward-
looking" statements within the meaning of the Private Securities Litigation
Reform Act of 1995. Such forward-looking statements involve known and unknown
risks, uncertainties and other factors that may cause the actual results,
performance or achievements of the Company or industry results to be
materially different from any future results, performance or achievements
expressed or implied by such forward-looking statements. Such factors include,
among others, the following: (i) the outcome of the known and unknown
governmental investigations and litigation involving the Company's business
practices; (ii) the recently enacted changes in the Medicare and Medicaid
programs affecting reimbursement to health care providers and insurers; (iii)
legislative proposals for health care reform; (iv) the ability to enter into
managed care provider arrangements on acceptable terms; (v) liability and
other claims asserted against the Company; (vi) changes in the Company's
business strategy or development plans; (vii) the departure of key executive
officers from the Company; and (viii) the availability and terms of capital to
fund the expansion of the Company's business, including the acquisition of
additional facilities. Given these uncertainties, prospective investors are
cautioned not to place undue reliance on such forward-looking statements. The
Company disclaims any obligation to update any such factors or to publicly
announce the results of any revision to any of the forward-looking statements
contained herein to reflect future events or developments.
17
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS--(CONTINUED)
OPERATING DATA
<TABLE>
<CAPTION>
1998 1997
------- ---------
CONSOLIDATED
<S> <C> <C>
Number of hospitals in operation at:
March 31.................................................. 310 314
June 30................................................... 315
September 30.............................................. 314
December 31............................................... 309
Number of freestanding outpatient surgical centers in opera-
tion at:
March 31.................................................. 142 143
June 30................................................... 145
September 30.............................................. 143
December 31............................................... 140
Licensed hospital beds at (a):
March 31.................................................. 60,739 60,993
June 30................................................... 61,275
September 30.............................................. 61,071
December 31............................................... 60,643
Weighted average licensed beds (b):
Quarter:
First..................................................... 60,765 61,222
Second.................................................... 61,203
Third..................................................... 60,981
Fourth.................................................... 60,983
Year....................................................... 61,096
Average daily census (c):
Quarter:
First..................................................... 28,758 28,401
Second.................................................... 25,921
Third..................................................... 24,343
Fourth.................................................... 25,411
Year....................................................... 26,006
Admissions (d):
Quarter:
First..................................................... 507,600 497,200
Second.................................................... 477,200
Third..................................................... 461,700
Fourth.................................................... 479,000
Year....................................................... 1,915,100
Equivalent Admissions (e):
Quarter:
First..................................................... 755,800 731,900
Second.................................................... 729,600
Third..................................................... 711,300
Fourth.................................................... 728,600
Year....................................................... 2,901,400
Average length of stay (days) (f):
Quarter:
First..................................................... 5.1 5.1
Second.................................................... 4.9
Third..................................................... 4.9
Fourth.................................................... 4.9
Year....................................................... 5.0
</TABLE>
18
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OPERATING DATA (CONTINUED)
<TABLE>
<CAPTION>
1998 1997
----- -----
NON-CONSOLIDATED (G)
<S> <C> <C>
Number of hospitals in op-
eration at:
March 31................ 26 27
June 30................. 27
September 30............ 27
December 31............. 27
Number of freestanding
outpatient surgical cen-
ters in operation at:
March 31................ 5 5
June 30................. 5
September 30............ 5
December 31............. 5
Licensed hospital beds at:
March 31................ 6,357 6,537
June 30................. 6,641
September 30............ 6,455
December 31............. 6,455
</TABLE>
- --------
(a) Licensed beds are those beds for which a facility has been granted
approval to operate from the applicable state licensing agency.
(b) Weighted average licensed beds represents the average number of licensed
beds weighted based on periods owned.
(c) Represents the average number of patients in hospital beds each day.
(d) Represents the total number of patients admitted (in the facility for a
period in excess of 23 hours) to the Company's hospitals.
(e) Equivalent admissions are computed by multiplying admissions (inpatient
volume) by the sum of gross inpatient revenue and gross outpatient revenue
and then dividing the resulting amount by gross inpatient revenue. The
equivalent admissions computation "equates" outpatient revenue to the
volume measure (admissions) used to measure inpatient volume resulting in
a general measure of combined inpatient and outpatient volume.
(f) Represents the average number of days admitted patients stay in Columbia's
hospitals.
(g) 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.
19
<PAGE>
PART II: OTHER INFORMATION
ITEM 1: LEGAL PROCEEDINGS.
FEDERAL AND STATE INVESTIGATIONS
In March 1997, various facilities of the Company's El Paso, Texas operations
were searched by federal authorities pursuant to search warrants, and the
government removed various records and documents. In February 1998, an
additional warrant was executed and a single computer was seized.
In July 1997, various Company affiliated facilities and offices were
searched pursuant to search warrants issued by the United States District
Court in several states. During July, September and November 1997, the Company
was also served with subpoenas requesting records and documents related to
laboratory billing and diagnosis related group ("DRG") coding in various
states and home health operations in various jurisdictions, including, but not
limited to, Florida. In January 1998, the Company received a subpoena which
requested records and documents relating to physician relationships.
Also, in July 1997, the United States District Court for the Middle District
of Florida, in Fort Myers, issued an indictment against three employees of a
subsidiary of the Company. The indictment relates to the alleged false
characterization of interest payments on certain debt resulting in Medicare
and CHAMPUS overpayments since 1986 to Columbia Fawcett Memorial Hospital, a
Port Charlotte, Florida hospital that was acquired by the Company in 1992. The
Company has been served with subpoenas for various records and documents.
In addition, several hospital facilities affiliated with the Company in
various states have received individual federal and/or state government
inquiries, both informal and formal, requesting information related to
reimbursement from government programs.
The Company is cooperating in these investigations and understands, through
written notice and other means, that it is a target in these investigations.
Given the breadth of the ongoing investigations, the Company expects
additional subpoenas and other investigative and prosecutorial activity to
occur in these and other jurisdictions in the future.
While it is too early to predict the outcome of any of the ongoing
investigations or the initiation of any additional investigations, were the
Company to be found in violation of federal or state laws relating to
Medicare, Medicaid or similar programs, the Company could be subject to
substantial monetary fines, civil and criminal penalties and exclusion from
participation in the Medicare and Medicaid programs. Any such sanctions could
have a material adverse effect on the Company's financial position and results
of operations. See NOTE 8 of the notes to condensed consolidated financial
statements.
The Company is the subject of a formal order of investigation by the
Securities and Exchange Commission. The Company understands that the
investigation includes the anti-fraud, periodic reporting and internal
accounting control provisions of the federal securities laws.
The above information supplements the Legal Proceedings section in the
Company's annual report on Form 10-K for the year ended December 31, 1997.
20
<PAGE>
ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K.
(a) List of Exhibits:
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 filed during the quarter ended March 31, 1998:
On February 6, 1998, the Company filed a report on Form 8-K related to
anticipated charges to be recorded in the fourth quarter ended December 31,
1997. The Company also announced it anticipated reporting weaker than expected
financial results for the same period.
On February 19, 1998, the Company filed a report on Form 8-K announcing
final results for the fourth quarter and year ended December 31, 1997.
On March 6, 1998, the Company filed a report on Form 8-K announcing its
earnings estimates for the first quarter ended March 31, 1998.
21
<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
-------------------------------------
KENNETH C. DONAHEY
Date: May 8, 1998 SENIOR VICE PRESIDENT AND
CONTROLLER
(PRINCIPAL ACCOUNTING
OFFICER)
22
<PAGE>
EXHIBIT 12
COLUMBIA/HCA HEALTHCARE CORPORATION
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
FOR THE QUARTERS ENDED MARCH 31, 1998 AND 1997
(DOLLARS IN MILLIONS)
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
EARNINGS:
Income from continuing operations before minority interests and
income taxes.................................................... $401 $807
Fixed charges, excluding capitalized interest.................... 188 146
---- ----
$589 $953
==== ====
FIXED CHARGES:
Interest charged to expense...................................... $153 $113
Interest portion of rental expense and amortization of deferred
loan costs...................................................... 35 33
---- ----
Fixed charges, excluding capitalized interest.................... 188 146
Capitalized interest............................................. 4 6
---- ----
$192 $152
==== ====
Ratio of earnings to fixed charges............................... 3.07 6.28
==== ====
</TABLE>
23
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
STATEMENTS OF INCOME AND BALANCE SHEETS AND IS QUAILIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<CASH> 128
<SECURITIES> 0
<RECEIVABLES> 4,228
<ALLOWANCES> 1,679
<INVENTORY> 463
<CURRENT-ASSETS> 4,025
<PP&E> 16,441
<DEPRECIATION> 6,189
<TOTAL-ASSETS> 21,630
<CURRENT-LIABILITIES> 2,673
<BONDS> 8,748
0
0
<COMMON> 6
<OTHER-SE> 7,487
<TOTAL-LIABILITY-AND-EQUITY> 21,630
<SALES> 0
<TOTAL-REVENUES> 4,901
<CGS> 0
<TOTAL-COSTS> 2,759
<OTHER-EXPENSES> 940
<LOSS-PROVISION> 343
<INTEREST-EXPENSE> 153
<INCOME-PRETAX> 381
<INCOME-TAX> 162
<INCOME-CONTINUING> 219
<DISCONTINUED> (22)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 197
<EPS-PRIMARY> 0.31<F1>
<EPS-DILUTED> 0.31<F2>
<FN>
<F1>EPS - Basic per SFAS No. 128
<F2>EPS - Diluted per SFAS No. 128
</FN>
</TABLE>
