<PAGE> 1
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- --------------------------------------------------------------------------------
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------------
FORM 10-Q
---------------------
<TABLE>
<C> <S>
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
</TABLE>
FOR THE TRANSITION PERIOD FROM __________TO __________
COMMISSION FILE NUMBER 1-11239
---------------------
COLUMBIA/HCA HEALTHCARE CORPORATION
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
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)
</TABLE>
(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>
CLASS OF COMMON STOCK OUTSTANDING AT JULY 31, 1999
--------------------- ----------------------------
<S> <C>
Voting common stock, $.01 par value 543,237,962 shares
Nonvoting common stock, $.01 par value 21,000,000 shares
</TABLE>
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<PAGE> 2
COLUMBIA/HCA HEALTHCARE CORPORATION
FORM 10-Q
JUNE 30, 1999
<TABLE>
<CAPTION>
PAGE OF
FORM 10-Q
---------
<S> <C>
PART I: FINANCIAL INFORMATION
Item 1. Financial Statements:
Condensed Consolidated Statements of Income -- for
the quarters and six months ended June 30, 1999
and 1998........................................... 3
Condensed Consolidated Balance Sheets -- June 30,
1999 and December 31, 1998......................... 4
Condensed Consolidated Statements of Cash
Flows -- for the six months ended June 30, 1999
and 1998........................................... 5
Notes to Condensed Consolidated Financial
Statements......................................... 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations................. 13
PART II: OTHER INFORMATION
Items 1, 4 and 6............................................ 29
</TABLE>
2
<PAGE> 3
COLUMBIA/HCA HEALTHCARE CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
FOR THE QUARTERS AND SIX MONTHS ENDED JUNE 30, 1999 AND 1998
UNAUDITED
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
QUARTER SIX MONTHS
-------------------- --------------------
1999 1998 1999 1998
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Revenues.................................................. $ 4,161 $ 4,781 $ 8,816 $ 9,682
Salaries and benefits..................................... 1,676 1,998 3,536 4,011
Supplies.................................................. 654 719 1,376 1,465
Other operating expenses.................................. 826 961 1,718 1,901
Provision for doubtful accounts........................... 329 340 667 683
Depreciation and amortization............................. 278 311 574 620
Interest expense.......................................... 118 145 229 298
Equity in earnings of affiliates.......................... (30) (33) (65) (75)
Gains on sales of facilities.............................. (8) -- (257) --
Impairment of long-lived assets........................... 54 -- 160 --
Restructuring of operations and investigation related
costs................................................... 30 31 60 69
-------- -------- -------- --------
3,927 4,472 7,998 8,972
-------- -------- -------- --------
Income from continuing operations before minority
interests and income taxes.............................. 234 309 818 710
Minority interests in earnings of consolidated entities... 14 18 28 38
-------- -------- -------- --------
Income from continuing operations before income taxes..... 220 291 790 672
Provision for income taxes................................ 114 118 362 280
-------- -------- -------- --------
Income from continuing operations......................... 106 173 428 392
Discontinued operations:
Loss from operations of discontinued businesses, net of
income taxes (benefit) of $2 for the quarter ended
June 30, 1998 and ($14) for the six months ended June
30, 1998.............................................. -- (22) -- (44)
Loss on disposal of certain discontinued businesses..... -- (73) -- (73)
-------- -------- -------- --------
Net income....................................... $ 106 $ 78 $ 428 $ 275
======== ======== ======== ========
Basic earnings per share:
Income from continuing operations....................... $ .18 $ .27 $ .70 $ .61
Discontinued operations:
Loss from operations of discontinued businesses..... -- (.04) -- (.07)
Loss on disposal of certain discontinued
businesses....................................... -- (.11) -- (.11)
-------- -------- -------- --------
Net income....................................... $ .18 $ .12 $ .70 $ .43
======== ======== ======== ========
Diluted earnings per share:
Income from continuing operations....................... $ .18 $ .27 $ .70 $ .61
Discontinued operations:
Loss from operations of discontinued businesses..... -- (.04) -- (.07)
Loss on disposal of certain discontinued
businesses....................................... -- (.11) -- (.11)
-------- -------- -------- --------
Net income....................................... $ .18 $ .12 $ .70 $ .43
======== ======== ======== ========
Shares used in earnings per share calculations (in
thousands):
Basic................................................. 577,964 643,440 608,514 642,749
Diluted............................................... 583,826 647,993 614,249 646,467
Cash dividends per share.................................. $ .02 $ .02 $ .04 $ .04
</TABLE>
See accompanying notes.
3
<PAGE> 4
COLUMBIA/HCA HEALTHCARE CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
UNAUDITED
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1999 1998
-------- ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 83 $ 297
Accounts receivable, less allowances for doubtful accounts
of $1,493 in 1999 and $1,645 in 1998................... 1,821 2,096
Inventories............................................... 370 434
Income taxes receivable................................... 169 149
Other..................................................... 941 887
------- -------
3,384 3,863
Property and equipment, at cost............................. 13,764 15,644
Accumulated depreciation.................................... (5,536) (6,195)
------- -------
8,228 9,449
Investments of insurance subsidiary......................... 1,578 1,614
Investments in and advances to affiliates................... 793 1,275
Intangible assets, net...................................... 2,523 2,910
Other....................................................... 144 318
------- -------
$16,650 $19,429
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 629 $ 784
Accrued salaries.......................................... 386 425
Other accrued expenses.................................... 1,070 1,282
Long-term debt due within one year........................ 942 1,068
------- -------
3,027 3,559
Long-term debt.............................................. 5,718 5,685
Professional liability risks, deferred taxes and other
liabilities............................................... 1,703 1,839
Minority interests in equity of consolidated entities....... 768 765
Stockholders' equity:
Common stock $.01 par; authorized 1,600,000,000 voting
shares and 50,000,000 nonvoting shares; outstanding
543,038,500 voting shares and 21,000,000 nonvoting
shares -- June 30, 1999 and 621,578,300 voting shares
and 21,000,000 nonvoting shares -- December 31, 1998... 6 6
Capital in excess of par value............................ 959 3,498
Other..................................................... 8 11
Accumulated other comprehensive income.................... 70 80
Retained earnings......................................... 4,391 3,986
------- -------
5,434 7,581
------- -------
$16,650 $19,429
======= =======
</TABLE>
See accompanying notes.
4
<PAGE> 5
COLUMBIA/HCA HEALTHCARE CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 1999 AND 1998
UNAUDITED
(DOLLARS IN MILLIONS)
<TABLE>
<CAPTION>
1999 1998
------- -------
<S> <C> <C>
Cash flows from continuing operating activities:
Net income................................................ $ 428 $ 275
Adjustments to reconcile net income to net cash provided
by continuing operating activities:
Provision for doubtful accounts...................... 667 683
Depreciation and amortization........................ 574 620
Income taxes......................................... (41) 296
Gains on sales of facilities......................... (257) --
Impairment of long-lived assets...................... 160 --
Loss from discontinued operations.................... -- 117
Changes in operating assets and liabilities.......... (1,120) (974)
Other................................................ (10) (10)
------- -------
Net cash provided by continuing operating
activities.......................................... 401 1,007
------- -------
Cash flows from investing activities:
Purchase of property and equipment................... (690) (666)
Acquisition of hospitals and health care entities.... -- (116)
Disposition of property and equipment................ 624 66
Spin-off of facilities to stockholders............... 886 --
Change in investments................................ 548 (107)
Change in net assets of discontinued operations,
net................................................. -- 43
Sale of certain discontinued operations.............. -- 619
Other................................................ 14 72
------- -------
Net cash provided by (used in) investing
activities.......................................... 1,382 (89)
------- -------
Cash flows from financing activities:
Issuance of long-term debt........................... 1,017 --
Net change in bank borrowings........................ (871) (916)
Repayment of long-term debt.......................... (231) (140)
Payment of cash dividends............................ (24) (26)
Issuances (repurchases) of common stock, net......... (1,908) 78
Other................................................ 20 1
------- -------
Net cash used in financing activities................ (1,997) (1,003)
------- -------
Change in cash and cash equivalents......................... (214) (85)
Cash and cash equivalents at beginning of period............ 297 110
------- -------
Cash and cash equivalents at end of period.................. $ 83 $ 25
======= =======
Interest payments........................................... $ 237 $ 294
Income tax payments (refunds), net.......................... $ 452 $ (13)
</TABLE>
See accompanying notes.
5
<PAGE> 6
COLUMBIA/HCA HEALTHCARE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
UNAUDITED
NOTE 1 -- BASIS OF PRESENTATION
Columbia/HCA Healthcare Corporation is a holding company whose affiliates
own and operate hospitals and related health care entities. The term
"affiliates" includes direct and indirect subsidiaries of Columbia/ HCA
Healthcare Corporation and partnerships and joint ventures in which such
subsidiaries are partners. At June 30, 1999, these affiliates owned and operated
204 hospitals, 81 freestanding surgery centers and provided extensive outpatient
and ancillary services. Affiliates of Columbia/HCA Healthcare Corporation are
also partners in several 50/50 joint ventures that own and operate 16 hospitals
and 4 freestanding surgery centers which are accounted for using the equity
method. The affiliates' facilities are located in 24 states, England and
Switzerland. The terms "Columbia/HCA" or the "Company" as used in this Quarterly
Report on Form 10-Q refer to Columbia/HCA Healthcare Corporation and its
affiliates unless otherwise stated or indicated by context.
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 and six months ended June 30, 1999, are not necessarily indicative of
the results that may be expected for the year ending December 31, 1999. 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, 1998.
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 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 investigative and prosecutorial activity to occur in these
and other jurisdictions in the future. Columbia/HCA is a defendant in several
qui tam actions brought by private parties on behalf of the United States of
America, which have been unsealed and served on Columbia/HCA. The actions
allege, in general, that Columbia/HCA and certain subsidiaries and/or affiliated
partnerships violated the False Claims Act by submitting improper claims to the
government for reimbursement. The lawsuits generally seek damages of three times
the amount of all Medicare or Medicaid claims (involving false claims) presented
by the defendants to the Federal government, civil penalties of not less than
$5,000 nor more than $10,000 for each such Medicare or Medicaid claim,
attorney's fees and costs. The government has intervened in five unsealed qui
tam actions. Columbia/HCA is aware of additional qui tam actions that remain
under seal and believes that there are other sealed qui tam cases of which it is
unaware.
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, insider trading, periodic reporting and
internal accounting control provisions of the Federal securities laws.
Management believes it is too early to predict the outcome or effect of the
ongoing investigations or qui tam and other actions. If Columbia/HCA is found to
have violated 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. Similarly, the amounts claimed in the qui tam and other actions are
substantial, and Columbia/HCA could be subject to substantial costs resulting
from an adverse outcome of one or more such actions. Any such sanctions or
losses could have
6
<PAGE> 7
COLUMBIA/HCA HEALTHCARE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
UNAUDITED
NOTE 2 -- INVESTIGATIONS (CONTINUED)
a material adverse effect on the Company's financial position and results of
operations. (See Note 10 -- Contingencies and Part II, Item 1: Legal
Proceedings.)
NOTE 3 -- RESTRUCTURING OF OPERATIONS
The Company has substantially completed the restructuring of its operations
in an effort to create a smaller and more focused company. The restructuring
included the divestitures of certain hospitals, surgery centers and related
facilities, the spin-offs of LifePoint Hospitals, Inc. ("LifePoint") and Triad
Hospitals, Inc. ("Triad") and the divestitures of the Company's home health and
certain other businesses, as described in Note 5 -- Discontinued Operations.
Divestiture of Certain Hospitals and Surgery Centers
During the first six months of 1999, the Company recognized a pretax gain
of $257 million ($151 million after-tax) on the sale of three hospitals and
certain related health care facilities. Proceeds from the sales were used to
repay bank borrowings.
During the first six months of 1999, management identified and initiated,
or revised, plans to sell or close during 1999, 15 consolidating hospitals and 4
non-consolidating hospitals. The carrying value for the hospitals and other
assets expected to be sold was reduced to fair value of approximately $195
million, based upon estimates of sales values, for a total non-cash, pretax
charge of approximately $160 million. The hospitals and other assets for which
the impairment charge was recorded had net revenues of approximately $145
million and $180 million for the quarters ended June 30, 1999 and 1998,
respectively, and approximately $320 million and $363 million for the six months
ended June 30, 1999 and 1998, respectively. These facilities incurred losses
from continuing operations before the pretax charge and income tax benefits of
approximately $13 million and $16 million for the quarters ended June 30, 1999
and 1998, respectively, and approximately $20 million and $29 million for the
six months ended June 30, 1999 and 1998, respectively. During the second quarter
of 1999, the Company completed the sales of two of the 15 consolidating
hospitals and the 4 non-consolidating hospitals. During July 1999, the Company
completed the sales of 2 additional consolidating hospitals. The proceeds from
the completed divestitures approximated the carrying values and were used to
repay bank borrowings. Proceeds from the expected divestitures will be used to
repay bank borrowings.
Spin-Offs
On May 11, 1999, the Company completed the spin-offs of LifePoint and Triad
through a distribution of one share of LifePoint common stock and one share of
Triad common stock for every 19 shares of the Company's common stock outstanding
on April 30, 1999. Triad was comprised of 34 consolidating hospitals and
LifePoint was comprised of 23 consolidating hospitals.
7
<PAGE> 8
COLUMBIA/HCA HEALTHCARE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
UNAUDITED
NOTE 4 -- RESTRUCTURING OF OPERATIONS AND INVESTIGATION RELATED COSTS
During 1999 and 1998, the Company recorded the following pretax charges
related to the investigation and restructuring of operations as discussed in
Note 2 -- Investigations and Note 3 -- Restructuring of Operations (in
millions):
<TABLE>
<CAPTION>
QUARTER SIX MONTHS
------------ ------------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Professional fees related to investigations and
restructuring of operations............................. $23 $24 $42 $52
Severance costs........................................... -- -- 2 4
Other..................................................... 7 7 16 13
--- --- --- ---
$30 $31 $60 $69
=== === === ===
</TABLE>
NOTE 5 -- DISCONTINUED OPERATIONS
Discontinued operations included three of the four business units acquired
in the August 1997 merger with Value Health, Inc. ("Value Health") and the
Company's home health care businesses. The Company implemented plans to dispose
of these businesses during 1997. During the second and third quarters of 1998,
the Company completed the sales of the three Value Health units for proceeds
totaling $662 million. The proceeds from the sales were used to repay bank
borrowings. The Company recorded a $73 million loss upon completion of these
sales during the second quarter of 1998, representing an adjustment to the tax
benefit related to the estimated $443 million after-tax loss on disposal of
discontinued operations recorded in the fourth quarter of 1997.
During the third and fourth quarters of 1998, the Company completed five
separate sales transactions that included substantially all of the Company's
home health care operations and received approximately $90 million in proceeds.
The proceeds from the sales were used to repay bank borrowings.
Revenues of the discontinued businesses totaled $181 and $822 million for
the quarter and six months ended June 30, 1998, respectively.
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 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 1994 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 and the methods of accounting used by certain
subsidiaries for calculating taxable income related to vendor rebates and
governmental receivables. The IRS is claiming an additional $360 million in
income taxes and interest through June 30, 1999.
The Company expects to receive a Statutory Notice of Deficiency ("Statutory
Notice") in connection with the IRS' examination of its 1995 and 1996 Federal
income tax returns during the third quarter of 1999. The Company anticipates
filing a petition with the Tax Court contesting any claimed deficiencies and
proposed adjustments included in the Statutory Notice during the fourth quarter
of 1999. Because the 1995-96
8
<PAGE> 9
COLUMBIA/HCA HEALTHCARE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
UNAUDITED
NOTE 6 -- INCOME TAXES (CONTINUED)
IRS examination has not been completed, the Company is presently unable to
estimate the amount of any additional income tax and interest which the IRS may
claim.
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 1999.
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.
NOTE 7 -- EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted
earnings per share from continuing operations for the quarters and six months
ended June 30, 1999 and 1998 (dollars in millions, except per share amounts):
<TABLE>
<CAPTION>
QUARTER SIX MONTHS
-------------------- --------------------
1999 1998 1999 1998
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Numerator(a):
Income from continuing operations..... $ 106 $ 173 $ 428 $ 392
Denominator:
Share reconciliation (in thousands):
Shares used for basic earnings per
share.............................. 577,964 643,440 608,514 642,749
Effect of dilutive securities:
Stock options...................... 4,725 3,956 3,026 3,067
Warrants and other................. 1,137 597 2,709 651
-------- -------- -------- --------
Shares used for dilutive earnings per
share.............................. 583,826 647,993 614,249 646,467
======== ======== ======== ========
Earnings per share:
Basic earnings per share from
continuing operations.............. $ .18 $ .27 $ .70 $ .61
Diluted earnings per share from
continuing operations.............. $ .18 $ .27 $ .70 $ .61
</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 -- LONG-TERM DEBT
During March 1999, the Company entered into a $1.0 billion Senior Interim
Term Loan Agreement. Borrowings under this agreement were used during the second
quarter to fund the $1.0 billion share repurchase program approved in February
1999 (see Note 9 -- Stock Repurchase Program). The Company's revolving credit
facility and $1.0 billion term loan were amended during March 1999 to permit the
spin-offs of LifePoint and Triad.
9
<PAGE> 10
COLUMBIA/HCA HEALTHCARE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
UNAUDITED
NOTE 9 -- STOCK REPURCHASE PROGRAM
In February 1999, the Company's Board of Directors authorized the
repurchase of up to $1 billion of its common stock, which the Company completed
through open market purchases and through a series of accelerated purchase
contracts. During the first quarter of 1999, through open market purchases, the
Company repurchased 3.6 million shares of its common stock for approximately $68
million. During the second quarter of 1999, through open market purchases, the
Company repurchased 10 million shares of its common stock for approximately $232
million. Also during the second quarter of 1999, the Company, through
accelerated purchase agreements, repurchased 27 million shares of its common
stock for approximately $700 million.
In July 1998, the Company announced a stock repurchase program under which
up to $1 billion of the Company's common stock would be repurchased.
Approximately 44 million shares were purchased at an average cost of
approximately $22.65 per share. The majority of these shares were purchased by
certain financial organizations through a series of forward purchase contracts.
In accordance with the terms of the forward purchase contracts, which permit
settlement on a net shares basis, the shares purchased remain issued and
outstanding until the forward purchase contracts are settled. During the first
quarter of 1999, the Company settled forward purchase contracts representing
15.0 million shares at a cost of approximately $323 million. The Company settled
another 24.4 million shares at a cost of approximately $566 million during the
second quarter of 1999. The Company also repurchased 4 million shares for $97
million during the fourth quarter of 1998 and 0.6 million shares for $14 million
during the first quarter of 1999 through open market purchases. Capital in
excess of par value was reduced by approximately $1.9 billion for the share
repurchase transactions as well as approximately $650 million for the spin-offs
of LifePoint and Triad during the six months ended June 30, 1999.
During the first quarter of 1999, in connection with the Company's share
repurchase programs, the Company entered into a Letter of Credit Agreement with
the United States Department of Justice. As part of the agreement, the Company
provided the government with letters of credit totaling $1 billion. The
agreement also provided that the Company's share repurchase program announced in
February 1999 could be completed, at the Company's discretion, through open
market purchases, privately negotiated transactions or through a series of
accelerated or forward purchase contracts. The Company and the government
acknowledge that the amount in the agreement is not based upon the amount or
expected amount of any potential settlement, and the agreement does not
constitute an admission of liability by the Company.
NOTE 10 -- CONTINGENCIES
Significant Legal Proceedings
Various lawsuits, claims and legal proceedings (see Note
2 -- Investigations, for a description of the ongoing government investigations)
have been and are expected to 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, claims and overcharging, 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 violations of law. 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
10
<PAGE> 11
COLUMBIA/HCA HEALTHCARE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
UNAUDITED
NOTE 10 -- CONTINGENCIES (CONTINUED)
General Liability Claims (continued)
actions the claimants may seek 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.
NOTE 11 -- COMPREHENSIVE INCOME
The components of comprehensive income, net of related taxes, for the
quarters and six months ended June 30, 1999 and 1998 are as follows (in
millions):
<TABLE>
<CAPTION>
QUARTER SIX MONTHS
------------ ------------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net income............................................ $106 $ 78 $428 $275
Unrealized gains (losses) on securities............... 10 (24) 1 --
Foreign currency translation adjustments.............. (4) -- (11) (2)
---- ---- ---- ----
Comprehensive income.................................. $112 $ 54 $418 $273
==== ==== ==== ====
</TABLE>
The components of accumulated other comprehensive income, net of related
taxes, at June 30, 1999 and December 31, 1998 are as follows (in millions):
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Net unrealized gains on securities.......................... $78 $77
Foreign currency translation adjustments.................... (8) 3
--- ---
Accumulated other comprehensive income...................... $70 $80
=== ===
</TABLE>
NOTE 12 -- SEGMENT AND GEOGRAPHIC INFORMATION
Columbia/HCA operates in one line of business, which is operating hospitals
and related health care entities. During the quarters and six months ended June
30, 1999 and 1998 approximately 29% and 30%, and 30% and 32%, respectively, of
the Company's revenues related to patients participating in the Medicare
program.
During the second quarter of 1999, Columbia/HCA restructured its operations
into two geographically organized groups; the Eastern Group made up of 104
consolidating hospitals located in the Eastern United States and the Western
Group made up of 91 consolidating hospitals located in the Western United
States. These two groups make up the Company's core operations and are typically
located in urban areas that are characterized by highly integrated facility
networks. At June 30, 1999, the Eastern and Western Groups included 8 hospitals
which are currently held for sale, two of which were sold in July. An additional
group, the Omega Group, includes 7 hospitals which are not located in the
Company's core markets and are currently held for sale.
The Company completed the spin-offs of LifePoint and Triad (the Spin-offs)
during the second quarter of 1999. At April 30, 1999, LifePoint included 23
consolidating hospitals which are located in non-urban areas where, in almost
every case the hospital is the only hospital in the community. At April 30,
1999, Triad included 34 consolidating hospitals, approximately three-quarters of
which are located in small cities, generally in the Southern, Western and
Southwestern United States where the hospital is usually the only hospital or
one of two hospitals in the community, and the remainder of Triad's facilities
are located in larger urban areas typically characterized by a high rate of
population growth. See Note 3 -- Restructuring of Operations.
11
<PAGE> 12
COLUMBIA/HCA HEALTHCARE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
UNAUDITED
NOTE 12 -- SEGMENT AND GEOGRAPHIC INFORMATION (CONTINUED)
The geographic distributions of the Company's revenues and EBITDA, restated
for the restructuring of operations, for the quarters and six months ended June
30, 1999 and 1998, the quarters ended March 31, 1999 and 1998 and the years
ended December 31, 1998, 1997 and 1996, respectively, are summarized in the
following table (EBITDA is defined as income from continuing operations before
depreciation and amortization, interest expense, gains on sales of facilities,
impairment of long-lived assets, restructuring of operations and investigation
related costs, minority interest and income taxes). The geographic distributions
of the Company's assets as of June 30, 1999 and December 31, 1998, 1997 and 1996
are also summarized in the following table (dollars in millions):
<TABLE>
<CAPTION>
SIX MONTHS
QUARTER ENDED QUARTER ENDED ENDED YEAR ENDED
JUNE 30, MARCH 31, JUNE 30, DECEMBER 31,
--------------- --------------- --------------- ---------------------------
1999 1998 1999 1998 1999 1998 1998 1997 1996
------ ------ ------ ------ ------ ------ ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues:
Eastern Group................ $2,007 $1,952 $2,098 $2,019 $4,105 $3,971 $ 7,784 $ 7,705 $ 7,714
Western Group................ 1,853 1,721 1,865 1,723 3,718 3,444 6,853 6,616 6,427
Corporate and other.......... 76 75 76 73 152 148 252 196 365
Omega Group.................. 61 509 114 542 175 1,051 1,705 2,205 2,216
Spin-offs.................... 164 524 502 544 666 1,068 2,087 2,097 2,064
------ ------ ------ ------ ------ ------ ------- ------- -------
$4,161 $4,781 $4,655 $4,901 $8,816 $9,682 $18,681 $18,819 $18,786
====== ====== ====== ====== ====== ====== ======= ======= =======
EBITDA:
Eastern Group................ $ 436 $ 423 $ 512 $ 476 $ 948 $ 899 $ 1,590 $ 1,485 $ 1,939
Western Group................ 302 262 322 312 624 574 998 1,047 1,549
Corporate and other.......... (44) 22 (13) (11) (57) 11 3 (161) (15)
Omega Group.................. (8) 33 (6) 56 (14) 89 71 210 336
Spin-offs.................... 20 56 63 68 83 124 206 270 405
------ ------ ------ ------ ------ ------ ------- ------- -------
$ 706 $ 796 $ 878 $ 901 $1,584 $1,697 $ 2,868 $ 2,851 $ 4,214
====== ====== ====== ====== ====== ====== ======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
JUNE 30, -----------------------------
1999 1998 1997 1996
-------- ------- ------- -------
<S> <C> <C> <C> <C>
Assets:
Eastern Group............................................. $ 6,897 $ 7,030 $ 6,985 $ 7,257
Western Group............................................. 6,782 7,124 6,685 6,856
Corporate and other....................................... 2,815 2,895 4,598 3,665
Omega Group............................................... 156 654 1,925 1,536
Spin-offs................................................. -- 1,726 1,809 1,802
------- ------- ------- -------
$16,650 $19,429 $22,002 $21,116
======= ======= ======= =======
</TABLE>
NOTE 13 -- DERIVATIVES
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 133, ("SFAS 133") "Accounting
for Derivative Instruments and Hedging Activities". In July 1999, the FASB
issued Statement of Financial Accounting Standards No. 137, "Accounting for
Derivative Instruments and Hedging Activities -- Deferral of the Effective date
of FASB Statement No. 133", which requires the adoption of SFAS 133 in fiscal
years beginning after June 15, 2000. Because of the Company's minimal use of
derivatives, management does not anticipate that the adoption of the new
statement will have a significant effect on the results of operations or the
financial position of the Company.
12
<PAGE> 13
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FORWARD LOOKING STATEMENTS
This "Management's Discussion and Analysis of Financial Condition and
Results of Operations" contains disclosures which are "forward-looking
statements." Forward-looking statements include all statements that do not
relate solely to historical or current facts, and can be identified by the use
of words such as "may," "believe," "will," "expect," "project," "estimate,"
"anticipate," "plan," or "continue". These forward-looking statements are based
on the current plans and expectations of the Company and are subject to a number
of uncertainties and risks that could significantly affect current plans and
expectations and the Company's future financial condition and results. These
factors include, but are not limited to, (i) the outcome of the known and
unknown governmental investigations and litigation involving the Company's
business practices, (ii) the highly competitive nature of the health care
business, (iii) the efforts of insurers, health care providers and others to
contain health care costs, (iv) possible changes in the Medicare program that
may further limit reimbursements to health care providers and insurers, (v)
changes in Federal, state or local regulation affecting the health care
industry, (vi) the possible enactment of Federal or state health care reform,
(vii) the ability to attract and retain qualified management and other
personnel, including physicians, (viii) liabilities and other claims asserted
against the Company, (ix) fluctuations in the market value of the Company's
common stock, (x) changes in accounting practices, (xi) changes in general
economic conditions, (xii) future divestitures which may result in additional
charges, (xiii) the complexity of integrated computer systems and the success
and expense of the remediation efforts of the Company and relevant third parties
in achieving Year 2000 readiness, (xiv) the ability to enter into managed care
provider arrangements on acceptable terms, (xv) the availability and terms of
capital to fund the expansion of the Company's business, (xvi) changes in
business strategy or development plans, (xvii) slowness of reimbursement, and
(xviii) other risk factors. As a consequence, current plans, anticipated actions
and future financial condition and results of operations may differ from those
expressed in any forward-looking statements made by or on behalf of the Company.
You are cautioned not to unduly rely on such forward-looking statements when
evaluating the information presented in this "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
INVESTIGATIONS
The Company is currently the subject of several Federal investigations into
certain of its business practices, as well as 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 investigative and prosecutorial activity to occur in
these and other jurisdictions in the future. The Company is the subject of a
formal order of investigation by the Securities and Exchange Commission ("SEC").
The Company understands that the SEC investigation includes the anti-fraud,
insider trading, periodic reporting and internal accounting control provisions
of the Federal securities laws.
The Company cannot predict the outcome or quantify effects 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
10 -- Contingencies of the Notes to Condensed Consolidated Financial Statements.
BUSINESS STRATEGY
Columbia/HCA's primary objective is to provide the communities it serves
with a comprehensive array of quality health care services in the most cost
effective manner possible. The Company's general, acute care hospitals usually
provide a full range of services commonly available in hospitals, such as
internal medicine,
13
<PAGE> 14
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- (CONTINUED)
BUSINESS STRATEGY (CONTINUED)
general surgery, cardiology, oncology, neurosurgery, orthopedics and obstetrics,
as well as diagnostic and emergency services. Outpatient and ancillary health
care services are provided by the Company, including outpatient surgery centers,
diagnostic centers, rehabilitation facilities and other facilities. In addition,
Columbia/HCA operates psychiatric hospitals which generally provide a full range
of mental health care services in inpatient, partial hospitalization and
outpatient settings. The Company also operates preferred provider organizations
in 46 states.
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 believes it is better able to
attract and serve patients and physicians. The Company believes it 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.
In May 1999, Columbia/HCA established LifePoint Hospitals, Inc.
("LifePoint")and Triad Hospitals, Inc. ("Triad"), as independent,
publicly-traded companies through tax-free spin-offs of these companies to
Columbia/HCA stockholders. LifePoint's hospitals are located in non-urban areas
where, in almost every case, LifePoint's hospital is the only hospital in the
community. Approximately three-quarters of Triad's hospitals are located in
small cities, generally in the Southern, Western and Southwestern United States,
where Triad's hospital is usually either the only hospital or one of two
hospitals in the community, and the remainder of Triad's hospitals are located
in larger urban areas.
Management believes that separating LifePoint and Triad into two smaller,
strategically focused public companies will have positive effects on the
performance and profitability of the facilities in these companies by enabling
more focused management attention, more effective operating strategies based on
local market conditions, and compensation incentives for employees that are more
closely tied to group performance.
During the third quarter of 1997, management implemented plans to divest
the Company's home health businesses and three of the four Value Health business
units (Value Health was a provider of specialty managed care benefit programs).
The divestitures of the three Value Health business units and the home health
operations were completed during 1998. The results of operations of these
divested businesses are reflected in the 1998 condensed consolidated statement
of income as discontinued operations.
The divestiture of the home health operations and the Value Health business
units and the spin-offs of LifePoint and Triad will allow Columbia/HCA
management to focus their efforts on the Company's core markets, which are
typically located in urban areas that are characterized by highly integrated
health care facility networks.
As a part of the Company's business strategy, the Company previously
eliminated annual cash incentive compensation plans for corporate, group and
division employees, as well as for certain hospital executives. We have retained
or implemented certain limited cash incentive programs for non-executive
hospital employees that relate to areas that include receivables collections,
patient satisfaction goals, community involvement, certification of new skills,
expense management and quality improvement.
RESULTS OF OPERATIONS
Revenue/Volume Trends
During the second quarter of 1999, the Company continued to face industry
and company-specific challenges affecting revenues and volume growth rates.
Three primary factors have contributed to these challenges: an increasing
proportion of revenue being derived from fixed payment or discounted sources,
the
14
<PAGE> 15
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- (CONTINUED)
RESULTS OF OPERATIONS (CONTINUED)
Revenue/Volume Trends (continued)
continuing trend toward the conversion of more services to an outpatient basis
and the impact of the restructuring of operations.
The Company's revenues continue to be affected by an increasing proportion
of revenue being derived from fixed payment, higher discount sources, including
Medicare, Medicaid and managed care plans. In addition, 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. The Company
expects patient volumes from Medicare and Medicaid to continue to increase due
to the general aging of the population and expansion of state Medicaid programs.
However, under the Balanced Budget Act of 1997 ("BBA-97"), the Company's
reimbursement from the Medicare and Medicaid programs was reduced and will be
further reduced as additional reductions are phased in over the next two years.
The Company continues to experience a shift in its payer mix as patients move
from traditional indemnity insurance and Medicare coverage to medical coverage
that is provided under managed care plans. The Company generally receives lower
payments per patient under managed care plans than under Medicare or traditional
indemnity insurance plans. With an increasing proportion of services being
reimbursed based upon fixed payment amounts (where the payment is based upon the
diagnosis, regardless of the cost incurred or level of service provided),
revenues, earnings and cash flows are being reduced. Admissions related to
Medicare, Medicaid, and managed care plan and other discounted arrangements for
the quarters and six months ended June 30, 1999 and 1998 are set forth below.
<TABLE>
<CAPTION>
QUARTER SIX MONTHS
-------------- --------------
1999 1998 1999 1998
----- ----- ----- -----
<S> <C> <C> <C> <C>
Medicare.................................... 37.3% 39.4% 38.7% 40.7%
Medicaid.................................... 10.7 11.0 10.9 11.1
Managed care and other discounted........... 41.8 38.8 40.1 37.7
Other....................................... 10.2 10.8 10.3 10.5
----- ----- ----- -----
100.0% 100.0% 100.0% 100.0%
===== ===== ===== =====
</TABLE>
Revenues from capitation arrangements (prepaid health service agreements)
are less than 1% of consolidated revenues.
The Company's revenues also continue to be affected by the trend toward
certain services being performed more frequently on an outpatient basis. 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. Generally, the payments received for an
outpatient procedure are less than those received for a similar procedure
performed in an inpatient setting. Outpatient revenues grew to 40% and 39% of
net patient revenues for the quarters and six months ended June 30, 1999,
respectively, from 39% and 38% of net patient revenues during the same periods
last year.
Management believes that the restructuring of operations (including the
spin-offs, the divestiture of the home health operations and the announced
divestitures of several facilities) has created uncertainties with physicians,
patients and payers in certain communities, which changes have placed pressure
on revenues at facilities located in those certain communities.
Reductions in the rate of increase in Medicare and Medicaid reimbursement,
increasing percentages of 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 ongoing challenges to the
15
<PAGE> 16
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- (CONTINUED)
RESULTS OF OPERATIONS (CONTINUED)
Revenue/Volume Trends (continued)
Company. The challenges presented by these trends are enhanced by the fact that
the Company does not have the ability to control these trends and the associated
risks. To maintain and improve its operating margins in future periods, the
Company must increase patient volumes while controlling the cost of providing
services. If the Company is not able to achieve reductions in the cost of
providing services through operational efficiencies, and the trend of declining
reimbursements and payments continue, results of operations and cash flows will
deteriorate.
Management believes that the proper response to these challenges includes
the delivery of a broad range of quality health care services to physicians and
patients, with operating decisions being made by the local management teams and
local physicians.
Operating Results Summary
The following is a summary of results from continuing operations for the
quarters and six months ended June 30, 1999 and 1998 (dollars in millions,
except per share amounts):
<TABLE>
<CAPTION>
QUARTER
----------------------------------
1999 1998
--------------- ---------------
AMOUNT RATIO AMOUNT RATIO
------ ----- ------ -----
<S> <C> <C> <C> <C>
Revenues.................................................... $4,161 100.0 $4,781 100.0
Salaries and benefits....................................... 1,676 40.3 1,998 41.8
Supplies.................................................... 654 15.7 719 15.0
Other operating expenses.................................... 826 19.8 961 20.2
Provision for doubtful accounts............................. 329 7.9 340 7.1
Depreciation and amortization............................... 278 6.8 311 6.4
Interest expense............................................ 118 2.8 145 3.0
Equity in earnings of affiliates............................ (30) (0.7) (33) (0.7)
Gains on sales of facilities................................ (8) (0.2) -- --
Impairment of long-lived assets............................. 54 1.3 -- --
Restructuring of operations and investigation related
costs..................................................... 30 0.7 31 0.7
------ ----- ------ -----
3,927 94.4 4,472 93.5
------ ----- ------ -----
Income from continuing operations before minority interests
and income taxes.......................................... 234 5.6 309 6.5
Minority interests in earnings of consolidated entities..... 14 0.3 18 0.4
------ ----- ------ -----
Income from continuing operations before income taxes....... 220 5.3 291 6.1
Provision for income taxes.................................. 114 2.7 118 2.5
------ ----- ------ -----
Income from continuing operations........................... $ 106 2.6 $ 173 3.6
====== ===== ====== =====
Basic earnings per share from continuing operations......... $ .18 $ .27
Diluted earnings per share from continuing operations....... $ .18 $ .27
% changes from prior year:
Revenues................................................ (13.0)% (1.3)%
Income from continuing operations before income taxes... (24.5) (54.7)
Income from continuing operations....................... (38.4) (55.0)
Basic earnings per share from continuing operations..... (33.3) (53.4)
Diluted earnings per share from continuing operations... (33.3) (53.4)
Admissions (a).......................................... (16.8) (0.6)
Equivalent admissions (b)............................... (18.6) 0.3
Revenues per equivalent admission....................... 6.9 (1.6)
Same facility % changes from prior year (c):
Revenues................................................ 3.7 (3.0)
Admissions (a).......................................... 0.4 (0.5)
Equivalent admissions (b)............................... 0.3 0.6
Revenues per equivalent admission....................... 3.3 (3.7)
</TABLE>
16
<PAGE> 17
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- (CONTINUED)
RESULTS OF OPERATIONS (CONTINUED)
Operating Results Summary (continued)
<TABLE>
<CAPTION>
SIX MONTHS
-------------------------------
1999 1998
-------------- --------------
AMOUNT RATIO AMOUNT RATIO
------ ----- ------ -----
<S> <C> <C> <C> <C>
Revenues.................................................... $8,816 100.0 $9,682 100.0
Salaries and benefits....................................... 3,536 40.1 4,011 41.4
Supplies.................................................... 1,376 15.6 1,465 15.1
Other operating expenses.................................... 1,718 19.4 1,901 19.7
Provision for doubtful accounts............................. 667 7.6 683 7.1
Depreciation and amortization............................... 574 6.5 620 6.4
Interest expense............................................ 229 2.6 298 3.1
Equity in earnings of affiliates............................ (65) (0.7) (75) (0.8)
Gains on sales of facilities................................ (257) (2.9) -- --
Impairment of long-lived assets............................. 160 1.8 -- --
Restructuring of operations and investigation related
costs..................................................... 60 0.7 69 0.7
------ ----- ------ -----
7,998 90.7 8,972 92.7
------ ----- ------ -----
Income from continuing operations before minority interests
and income taxes.......................................... 818 9.3 710 7.3
Minority interests in earnings of consolidated entities..... 28 0.3 38 0.4
------ ----- ------ -----
Income from continuing operations before income taxes....... 790 9.0 672 6.9
Provision for income taxes.................................. 362 4.1 280 2.8
------ ----- ------ -----
Income from continuing operations........................... $ 428 4.9 $ 392 4.1
====== ===== ====== =====
Basic earnings per share from continuing operations......... $ .70 $ .61
Diluted earnings per share from continuing operations....... $ .70 $ .61
% changes from prior year:
Revenues................................................ (8.9)% (1.5)%
Income from continuing operations before income taxes... 17.5 (52.1)
Income from continuing operations....................... 9.1 (53.3)
Basic earnings per share from continuing operations..... 14.8 (51.2)
Diluted earnings per share from continuing operations... 14.8 (50.8)
Admissions (a).......................................... (11.2) 0.8
Equivalent admissions (b)............................... (12.7) 1.8
Revenues per equivalent admission....................... 4.4 (3.3)
Same facility % changes from prior year (c):
Revenues................................................ 3.4 (2.8)
Admissions (a).......................................... 1.8 0.3
Equivalent admissions (b)............................... 1.8 1.5
Revenues per equivalent admission....................... 1.6 (4.2)
</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 and is used by
management and certain investors as a general measure of inpatient volume.
(b) Equivalent admissions are 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 period.
17
<PAGE> 18
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- (CONTINUED)
RESULTS OF OPERATIONS (CONTINUED)
Quarters Ended June 30, 1999 and 1998
Income from continuing operations before income taxes decreased to $220
million in 1999 from $291 million in 1998 and pretax margins decreased to 5.3%
in 1999 from 6.1% in 1998. The decrease in pretax income was primarily
attributable to a decrease in the number of facilities as a result of the
spin-offs and other asset divestitures completed as part of the restructuring of
operations and impairments of long-lived assets of $54 million. See Note
3 -- Restructuring of Operations of the Notes to Condensed Consolidated
Financial Statements.
Revenues decreased 13.0% to $4.2 billion in 1999 compared to $4.8 billion
in 1998. Inpatient admissions decreased 16.8% from a year ago and equivalent
admissions (adjusted to reflect combined inpatient and outpatient volume)
decreased 18.6%. Revenues, admissions and equivalent admissions declined
primarily as a result of the spin-offs of LifePoint and Triad and sales of
facilities. At June 30, 1999 there were 105 fewer hospitals and 58 fewer surgery
centers than there were at June 30, 1998. On a same facility basis, revenues
increased 3.7%, admissions increased 0.4% and equivalent admissions increased
0.3% from a year ago. Revenues per equivalent admission increased 6.9% from 1998
to 1999 and on a same facility basis increased 3.3% from 1998 to 1999. The sales
of surgery centers (34 were sold during July 1998) contributed to the increase
in revenue per equivalent admission being greater on a consolidated basis than
the increase on a same facility basis.
The decline in revenues was due to several factors including decreases in
Medicare rates of reimbursement mandated by the BBA-97 which became effective
October 1, 1997 (lowered 1999 revenues by approximately $30 million), continued
increases in discounts from the growing number of managed care payers (managed
care as a percent of total admissions increased to 42% in 1999 compared to 39%
during 1998) and a net decrease in the number of consolidating hospitals and
surgery centers due to the sales and spin-offs of several facilities during
1999.
Salaries and benefits, as a percentage of revenues, decreased to 40.3% in
1999 from 41.8% in 1998. The increase in revenues per equivalent admission was a
primary factor for the decrease. In addition, the Company was more successful in
adjusting staffing levels to correspond with the equivalent admission growth
rates (man hours per equivalent admission decreased slightly compared to last
year).
Supply costs increased as a percentage of revenues to 15.7% in 1999 from
15.0% in 1998 due to an increase in the cost of supplies per equivalent
admission due to the increasing costs of new technology and pharmaceuticals.
Other operating expenses (primarily consisting of contract services,
professional fees, repairs and maintenance, rents and leases, utilities,
insurance and non-income taxes) decreased to 19.8% in 1999 from 20.2% in 1998
due to small decreases in several of these areas as a percentage of revenues.
Provision for doubtful accounts, as a percentage of revenues, increased to
7.9% in 1999 from 7.1% in 1998 due to payer mix shifts to managed care plans
(resulting in increased amounts of patient co-payments and deductibles).
Management is unable to quantify the effects of the shift in payer mix however,
the shift is expected to continue and the provision for doubtful accounts is
likely to remain at higher levels than in past years.
Equity in earnings of affiliates remained relatively unchanged as a
percentage of revenues at 0.7% in 1999 and in 1998.
Depreciation and amortization increased as a percentage of revenues to 6.8%
in 1999 from 6.4% in 1998, primarily due to the increased capital expenditures
related to ancillary services (such as outpatient services) and information
systems. Capital expenditure in these areas generally result in shorter
depreciation and amortization lives for the assets acquired than typical
hospital acquisitions.
18
<PAGE> 19
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- (CONTINUED)
RESULTS OF OPERATIONS (CONTINUED)
Quarters Ended June 30, 1999 and 1998 (continued)
Interest expense decreased to $118 million in 1999 compared to $145 million
in 1998 primarily as a result of a decrease in average outstanding debt during
1999 compared to last year. This was due to the restructuring of operations
discussed earlier which has resulted in the receipt of a significant amount of
cash proceeds in 1999 and the second half of 1998 which were used to pay down
borrowings.
During 1999 and 1998, respectively, the Company incurred $30 million and
$31 million of costs in connection with the restructuring of operations and
investigation related costs. These costs included $23 and $24 million in
professional fees related to the restructuring of operations and the
investigations in 1999 and 1998, respectively. The costs also included $7
million of various other costs in both 1999 and 1998.
Minority interests decreased slightly as a percentage of revenues to 0.3%
in 1999 from 0.4% in 1998.
The increase in the effective income tax rate from 1998 to 1999 is
primarily due to higher amounts of non-deductible intangible assets related to
gains on sales of facilities and impairments of long-lived assets during the
1999 periods.
As previously discussed, the Company has substantially completed the
restructuring of its operations. See Note 3 -- Restructuring of Operations in
the Notes to Condensed Consolidated Financial Statements. Assuming the
completion of the restructuring as of the beginning of the period, the Company's
remaining core assets had combined net income from continuing operations which
decreased 31.4% to $130 million in 1999 from $190 million in 1998. Excluding
gains on sales of facilities, impairment of long-lived assets and restructuring
of operations and investigation related costs, combined net income for the
Company's remaining core assets decreased 6.3% to $195 million in 1999 from $208
million in 1998.
Six Months Ended June 30, 1999 and 1998
Income from continuing operations before income taxes increased 17.5% to
$790 million in 1999 from $672 million in 1998 and pretax margins increased to
9.0% in 1999 from 6.9% in 1998. The increase in pretax income was primarily
attributable to $257 million in gains on sales of facilities (an excess of $97
million in net gains over the $160 million in impairment charges recorded during
the first six months of 1999) and an increase in the operating margin.
Revenues decreased 8.9% to $8.8 billion in 1999 compared to $9.7 billion in
1998. Inpatient admissions decreased 11.2% from a year ago and equivalent
admissions (adjusted to reflect combined inpatient and outpatient volume)
decreased 12.7%. Revenues, admissions and equivalent admissions declined
primarily as a result of the spin-offs of LifePoint and Triad and the sales of
facilities. At June 30, 1999 there were 105 fewer hospitals and 58 fewer surgery
centers than there were at June 30, 1998. On a same facility basis, revenues
increased 3.4%, admissions increased 1.8% and equivalent admissions increased
1.8% from a year ago. Revenues per equivalent admission increased 4.4% from 1998
to 1999 and on a same facility basis increased 1.6% from 1998 to 1999. The sales
of surgery centers (34 were sold during July 1998) contributed to the increase
in revenue per equivalent admission being greater on a consolidated basis than
the increase on a same facility basis.
The decline in revenues was due to several factors including decreases in
Medicare rates of reimbursement mandated by the BBA-97 which became effective
October 1, 1997 (lowered 1999 revenues by approximately $60 million), continued
increases in discounts from the growing number of managed care payers (managed
care as a percent of total admissions increased to 40% in 1999 compared to 38%
during 1998) and a net decrease in the number of consolidating hospitals and
surgery centers due to the spin-offs and sales of several facilities during 1999
and 1998.
19
<PAGE> 20
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- (CONTINUED)
RESULTS OF OPERATIONS (CONTINUED)
Six Months Ended June 30, 1999 and 1998 (continued)
Salaries and benefits, as a percentage of revenues, decreased to 40.1% in
1999 from 41.4% in 1998. The increase in revenues per equivalent admission was a
primary factor for the decrease. In addition, the Company was more successful in
adjusting staffing levels to correspond with the equivalent admission growth
rates (man hours per equivalent admission decreased slightly compared to last
year).
Supply costs increased as a percentage of revenues to 15.6% in 1999 from
15.1% in 1998 due to an increase in the cost of supplies per equivalent
admission due to the increasing costs of new technology and pharmaceuticals.
Other operating expenses (primarily consisting of contract services,
professional fees, repairs and maintenance, rents and leases, utilities,
insurance and non-income taxes) decreased to 19.4% in 1999 from 19.7% in 1998
due to small decreases in several of these areas as a percentage of revenues.
Provision for doubtful accounts, as a percentage of revenues, increased to
7.6% in 1999 from 7.1% in 1998 due to payer mix shifts to managed care plans
(resulting in increased amounts of patient co-payments and deductibles).
Management is unable to quantify the effects the shift in payer mix however, the
shift is expected to continue and the provision for doubtful accounts is likely
to remain at higher levels than in past years.
Equity in earnings of affiliates decreased as a percentage of revenues to
0.7% in 1999 from 0.8% in 1998.
Depreciation and amortization increased as a percentage of revenues to 6.5%
in 1999 from 6.4% in 1998, primarily due to the increased capital expenditures
related to ancillary services (such as outpatient services) and information
systems. Capital expenditure in these areas generally result in shorter
depreciation and amortization lives for the assets acquired than typical
hospital acquisitions.
Interest expense decreased to $229 million in 1999 compared to $298 million
in 1998 primarily as a result of a decrease in average outstanding debt during
1999 compared to last year. This was due to the restructuring of operations
discussed earlier which has resulted in the receipt of a significant amount of
cash proceeds in 1999 and the second half of 1998 which were used to pay down
borrowings.
During 1999 and 1998, respectively, the Company incurred $60 million and
$69 million of costs in connection with the restructuring of operations and
investigation related costs. These costs included $42 and $52 million in
professional fees related to the restructuring of operations and investigations,
$2 million and $4 million of severance costs and $16 million and $13 million in
various other costs in 1999 and 1998, respectively.
Minority interests decreased slightly as a percentage of revenues to 0.3%
in 1999 from 0.4% in 1998.
The increase in the effective income tax rate from 1998 to 1999 is
primarily due to higher amounts of non-deductible intangible assets related to
gains on sales of facilities and impairments of long-lived assets during the
1999 periods.
As previously discussed, the Company has substantially completed the
restructuring of its operations. See Note 3 -- Restructuring of Operations in
the Notes to Condensed Consolidated Financial Statements. Assuming the
completion of the restructuring as of the beginning of the period, the Company's
remaining core assets had combined net income from continuing operations which
decreased 11% to $361 million in 1999 from $406 million in 1998. Excluding gains
on sales of facilities, impairment of long-lived assets and restructuring of
operations and investigation related costs, combined net income for the
Company's remaining core assets increased 6.8% to $476 million in 1999 from $446
million in 1998.
20
<PAGE> 21
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- (CONTINUED)
RESULTS OF OPERATIONS (CONTINUED)
Liquidity
Cash provided by continuing operating activities totaled $401 million
during the first six months of 1999 compared to $1.0 billion in 1998. The
decrease was primarily due to a $350 million Federal income tax refund received
during 1998 related to excess estimated payment amounts made during 1997.
Cash provided by investing activities increased to $1.4 billion in 1999,
compared to cash used in investing activities of $89 million during the first
six months of 1998. The increase was due to proceeds from the disposition of
hospitals and other health care facilities of $624 million and the spin-offs of
LifePoint and Triad to stockholders of $886 million in the first six months of
1999 compared with $66 million in proceeds from asset sales in 1998. During 1999
cash flows from the changes in investments were $548 million (including
repayment by a nonconsolidated joint venture of Company advances of
approximately $330 million) compared with cash used of $107 million in 1998.
Cash flows used in financing activities totaled approximately $2.0 billion
in the first six months of 1999 compared to approximately $1.0 billion in 1998.
The excess of cash flows from operations and cash provided by investing
activities was primarily used to repurchase the Company's common stock
(approximately $2.0 billion) during the first six months of 1999.
Working capital totaled $357 million as of June 30, 1999 compared to $304
million at December 31, 1998. At December 31, 1998, included in current
liabilities was $741 million outstanding under the Company's former 364-day
revolving credit facility which was repaid during the first quarter of 1999. At
June 30, 1999, included in current liabilities was $500 million under the $1
billion Senior Interim Term Loan Agreement which is scheduled for payment at the
end of the third quarter of 1999. Management believes that cash flows from
operations, amounts available under the Company's bank revolving credit facility
and proceeds from expected asset sales will be sufficient to meet expected
liquidity needs during the remainder of 1999.
Investments of the Company's professional liability insurance subsidiary to
maintain statutory equity and pay claims totaled $1.7 billion at June 30, 1999
and $1.8 billion at December 31, 1998.
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 $500 million at June 30, 1999. The Company cannot predict if, or
when, their joint venture partners will exercise such options (no put options
have been exercised between December 31, 1998 and June 30, 1999).
During the first quarter of 1998, the Internal Revenue Service (the "IRS")
issued guidance regarding certain 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 continuing to
consult with its joint venture partners and tax advisers to develop appropriate
courses 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.
In February 1999, the Company's Board of Directors authorized the
repurchase of up to $1 billion of its common stock. The Company completed the
repurchase of its shares through open market purchases and through a series of
accelerated purchase contracts. During the first quarter of 1999, through open
market purchases, the Company repurchased 3.6 million shares of its common stock
for approximately $68 million. During the second quarter of 1999, through open
market purchases, the Company repurchased 10 million shares of its common stock
for approximately $232 million. Also during the second quarter of 1999, the
Company, through accelerated purchase agreements, repurchased approximately 27
million shares of its common stock for approximately $700 million.
21
<PAGE> 22
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- (CONTINUED)
RESULTS OF OPERATIONS (CONTINUED)
Liquidity (continued)
In July 1998, the Company announced a stock repurchase program under which
up to $1 billion of the Company's common stock would be repurchased.
Approximately 44 million shares were purchased at an average cost of
approximately $22.65 per share. The majority of these shares were purchased by
certain financial organizations through a series of forward purchase contracts.
In accordance with the terms of the forward purchase contracts, the shares
purchased remain issued and outstanding until the forward purchase contracts are
settled. During the first quarter of 1999, the Company settled forward purchase
contracts representing 15.0 million shares at a cost of approximately $323
million. The Company settled another 24.4 million shares at a cost of
approximately $565 million during the second quarter of 1999. The Company also
repurchased 4 million shares for $97 million during the fourth quarter of 1998
and 0.6 million shares for $14 million during the first quarter of 1999 through
open market purchases.
During the first quarter of 1999, in connection with the Company's share
repurchase programs, the Company entered into a Letter of Credit Agreement with
the United States Department of Justice. As part of the agreement, the Company
provided the government with Letters of Credit totaling $1 billion. The
agreement also provided that the Company's share repurchase program announced in
February 1999 may be completed, at the Company's discretion, through open market
purchases, privately negotiated transactions or through a series of accelerated
or forward purchase contracts. The Company and the government acknowledge that
the amount in the agreement is not based upon the amount or expected amount of
any potential settlement, and the agreement does not constitute an admission of
liability by the Company.
During May 1999, the spin-offs of LifePoint and Triad were accomplished
through a distribution of one share of LifePoint and one share of Triad common
stock for every 19 shares of the Company's common stock outstanding on April 30,
1999. The Company also received $886 million in cash related to debt which it
incurred prior to the spin-offs which was assumed by LifePoint and Triad in
connection with the spin-off transaction. The proceeds were used to pay down
debt.
The resolution 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 $690 million during the
first six months of 1999 compared to $666 million for the same period in 1998.
Planned capital expenditures in 1999 are expected to approximate $1.2 billion.
Management believes that its capital expenditure program is adequate to expand,
improve and equip its existing health care facilities.
Acquisitions 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 $116 million during the first six
months of 1998.
The Company expects to finance all capital expenditures with internally
generated and borrowed funds. Available sources of capital include public or
private debt, amounts available under the Company's revolving credit facility
(approximately $880 million as of July 31, 1999) and equity. At June 30, 1999,
there were projects under construction which had an estimated additional cost to
complete and equip over the next two years of approximately $880 million.
22
<PAGE> 23
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 revolving credit facility, the $1.0 billion term loan and the
$1.0 billion senior interim term loan contain customary covenants which include
(i) limitations on additional debt, (ii) limitations on sales of assets, mergers
and changes of ownership, and (iii) maintenance of certain interest coverage
ratios. The Senior Interim Term Loan Agreement also provides for the mandatory
prepayment of loans thereunder in the case of certain debt or equity issuances.
The Company is currently in compliance with all such covenants.
In February 1999, Standard & Poor's downgraded the Company's senior debt
rating to BB+ and its commercial paper rating to B.
The Company entered into a $1.0 billion Senior Interim Term Loan Agreement
during March 1999. The borrowings under this agreement were used to fund the
$1.0 billion share repurchase program approved in February 1999. The Company's
revolving credit facility and $1.0 billion term loan agreement were amended
during March 1999 to permit the spin-offs of the Company's America and Pacific
operating groups (LifePoint and Triad) and place a $1.25 billion letter of
credit sublimit in the revolving credit facility.
In July 1999, the Company filed a "shelf" registration statement and
prospectus with the Securities and Exchange Commission relating to $1.5 billion
of debt securities.
The Company's restructuring of operations has resulted in the receipt of a
significant amount of cash proceeds from sales of facilities during both 1998
and 1999. The Company continues to manage its capital structure during this
process through the application of such proceeds, as it considers appropriate,
to the repayment of debt and the repurchase of its common stock.
IMPACT OF YEAR 2000 COMPUTER ISSUES
The Company has dedicated substantial resources to address the impact of
the Year 2000 problem. The Company has engaged all relevant aspects of the
organization in a coordinated effort to address the Year 2000 problem and to
minimize the chance of an interruption to the Company's operations or impact to
patient safety and health. The Year 2000 problem is the result of two potential
malfunctions that could have an impact on the Company's systems and equipment.
The first problem arises due to computers being programmed to use two rather
than four digits to define the applicable year. The second problem arises in
embedded chips, where microchips and microcontrollers have been designed using
two rather than four digits to define the applicable year. Certain of the
Company's computer programs, building infrastructure components (e.g., alarm
systems and HVAC systems) and medical devices that are date sensitive, may
recognize a date using "00" as the year 1900 rather than the year 2000. If
uncorrected, the problem could result in computer system and program failures
that could result in a disruption of business operations or equipment and
medical device malfunctions that could affect patient diagnosis and treatment.
With respect to the information technology ("IT") systems portions of the
Company's Year 2000 project, which address the inventory, assessment,
remediation, testing and implementation of internally developed software, the
Company identified various software applications that were addressed on separate
time lines. The Company has completed testing and remediating of these software
applications. The Company has completed the assessment of mission critical third
party software (i.e., that software which is essential for day-to-day
operations) and has developed testing and implementation plans with separate
time lines. The Company has completed and placed into production 99% of software
applications for internally developed and mission critical third party software.
Testing, remediation and implementation of various software applications for
certain of the Company's related subsidiaries are scheduled to be completed in
the fourth quarter of 1999 and
23
<PAGE> 24
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- (CONTINUED)
IMPACT OF YEAR 2000 COMPUTER ISSUES (CONTINUED)
should not have a material effect on the Company's readiness. The IT systems
portion of the Company's Year 2000 project is currently on schedule.
With respect to the IT infrastructure portion of the Company's Year 2000
project, the Company has undertaken a program to inventory, assess and correct,
replace or otherwise address impacted, vendor-supplied products (hardware,
systems software, business software, and telecommunication equipment). The
Company has implemented a program to contact vendors, analyze information
provided, and to remediate, replace or otherwise address IT products that pose a
material Year 2000 impact. The Company anticipates completion, in all material
respects, of the IT infrastructure portion of its program by September 30, 1999.
The IT infrastructure portion of the Company's Year 2000 project is currently on
schedule in all material respects.
The Company presently believes that with modifications to existing software
or the installation of upgraded software under the IT infrastructure portion,
the Year 2000 will not pose material operational problems for the Company's
computer systems. However, if such modifications or upgrades are not
accomplished in a timely manner, Year 2000 related failures may present a
material adverse impact on the operations of the Company.
With respect to the non-IT infrastructure portion of the Company's Year
2000 project, the Company has undertaken a program to inventory, assess and
correct, replace or otherwise address impacted vendor products, medical
equipment and other related equipment with embedded chips. The Company has
implemented a program to contact vendors, analyze information provided, and to
remediate, replace or otherwise address devices or equipment that pose a
material Year 2000 impact. The Company anticipates completion, in all material
respects, of the non-IT infrastructure portion of its program by September 30,
1999. The non-IT infrastructure portion of the Company's Year 2000 project is
currently on schedule in all material respects.
The Company is prioritizing its non-IT infrastructure efforts by focusing
on equipment and medical devices that will have a direct impact on patient care.
The Company is directing substantial efforts to repair, replace, upgrade or
otherwise address this equipment and these medical devices in order to minimize
risk to patient safety and health. The Company is relying on information that is
being provided to it by equipment and medical device manufacturers regarding the
Year 2000 status of their products. While the Company is attempting to evaluate
information provided by its previous and current vendors, there can be no
assurance that in all instances accurate information is being provided. The
Company also cannot in all instances guarantee that the repair, replacement or
upgrade of all non-IT infrastructure systems will occur on a timely basis or
that such repairs, replacements or upgrades will avoid all Year 2000 problems.
The Company has initiated communications with its major third party payers,
including government payers and intermediaries. The Company relies on these
entities for accurate and timely reimbursement of claims, often through the use
of electronic data interfaces. The Company has not received assurances that
these interfaces will be timely converted. Because certain payers have refused
or are not ready to test with the Company's systems, testing with payers and
intermediaries will continue through the end of the year. Failure of these third
party systems could have a material adverse effect on the Company's cash flow
and results of operations.
The Company also has initiated communications with its mission critical
suppliers and vendors (i.e., those suppliers and vendors whose products and
services are essential for day-to-day operations) to verify their ability to
continue to deliver goods and services through the Year 2000. The Company has
not received assurances from all mission critical suppliers and vendors that
they will be able to continue to deliver goods and services through the Year
2000, but the Company is continuing its efforts to obtain such assurances.
Failure of these third parties could have a material impact on operations and/or
the ability to provide health care services.
24
<PAGE> 25
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- (CONTINUED)
IMPACT OF YEAR 2000 COMPUTER ISSUES (CONTINUED)
With the assistance of external resources, the Company has undertaken the
development of contingency plans in the event that its Year 2000 efforts, or the
efforts of third parties upon which the Company relies, are not accurately or
timely completed. The Company has developed a contingency planning methodology
and will implement contingency plans throughout 1999.
While the Company is developing contingency plans to address possible
failure scenarios, the Company recognizes that there are "worst case" scenarios
which may develop and are largely outside the Company's control. The Company
recognizes the risks associated with extended infrastructure (power, water,
telecommunications) failure, the interruption of insurance and other payments to
the Company and the failure of equipment or software that could impact patient
safety or health despite the assurances of third parties. The Company is
addressing these and other failure scenarios in its contingency planning effort
and is engaging third parties in discussions regarding how to manage common
failure scenarios, but the Company cannot currently estimate the likelihood or
the potential cost of such failures. Currently, the Company does not believe
that any reasonably likely worst case scenario will have a material impact on
the Company's revenues or operations. Those reasonably likely worst case
scenarios include continued expenditures for remediation, continued expenditures
for replacement or upgrade of equipment, continued efforts regarding contingency
planning, increased staffing for the periods immediately preceding and after
January 1, and possible payment delays from the Company's payers.
The Year 2000 project is currently estimated to have a minimum total cost
of $86 million, of which the Company has incurred $19 million in the first six
months of 1999. Cumulatively, the Company has incurred $76 million of costs
related to the Year 2000 project. The estimate does not include payroll costs
for certain internal employees because these costs are not separately tracked by
the Company. Prior to this time, the Company was not able to reasonably estimate
the cost to be incurred for the remediation, upgrade and replacement of its
impacted non-IT infrastructure systems and equipment. The Company currently
estimates the ultimate cost to be incurred for the remediation, upgrade and
replacement of its impacted non-IT infrastructure systems and equipment to be
approximately $80 million which is in addition to the above estimated minimum
total costs of $86 million. The Company recognizes that the total cost may
increase as it completes its assessment and remediation of non-IT infrastructure
systems and equipment and such increase could be material. The majority of the
costs related to the Year 2000 project (except the cost of new equipment) will
be expensed as incurred and are expected to be funded through operating cash
flows.
The costs of the project and estimated completion dates for the Year 2000
modifications are based on management's best estimates, which were derived
utilizing numerous assumptions of future events, including the continued
availability of certain resources, third party modification plans and other
factors. However, there can be no guarantees that these estimates will be
achieved and actual results could differ materially from those anticipated.
Specific factors that might cause such material differences include, but are not
limited to, the availability and cost of personnel trained in this area and the
cost and ability to locate and correct all relevant computer codes and all
medical equipment.
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.
25
<PAGE> 26
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- (CONTINUED)
PENDING IRS DISPUTES
The Company is contesting income taxes and related interest proposed by the
IRS for prior years aggregating approximately $360 million as of June 30, 1999.
Management believes that final resolution of these disputes will not have a
material adverse effect on the results of operations or liquidity of the
Company. (See Note 6 -- Income Taxes of the Notes to Condensed Consolidated
Financial Statements for a description of the pending IRS disputes).
26
<PAGE> 27
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- (CONTINUED)
OPERATING DATA
<TABLE>
<CAPTION>
1999 1998
------- ---------
<S> <C> <C>
CONSOLIDATING
Number of hospitals in operation at:
March 31.................................................. 273 310
June 30................................................... 204 309
September 30.............................................. 294
December 31............................................... 281
Number of freestanding outpatient surgical centers in
operation at:
March 31.................................................. 95 142
June 30................................................... 81 139
September 30.............................................. 103
December 31............................................... 102
Licensed hospital beds at (a):
March 31.................................................. 51,797 60,739
June 30................................................... 43,969 60,418
September 30.............................................. 57,521
December 31............................................... 53,693
Weighted average licensed beds (b):
Quarter:
First.................................................. 52,451 60,765
Second................................................. 46,490 60,712
Third.................................................. 59,396
Fourth................................................. 55,594
Year...................................................... 59,104
Average daily census (c):
Quarter:
First.................................................. 26,546 28,816
Second................................................. 21,467 25,780
Third.................................................. 24,414
Fourth................................................. 23,932
Year...................................................... 25,719
Admissions (d):
Quarter:
First.................................................. 477,400 508,200
Second................................................. 395,800 475,400
Third.................................................. 459,700
Fourth................................................. 448,500
Year...................................................... 1,891,800
Equivalent Admissions (e):
Quarter:
First.................................................. 703,300 756,600
Second................................................. 596,900 733,500
Third.................................................. 705,100
Fourth................................................. 680,400
Year...................................................... 2,875,600
Average length of stay (days) (f):
Quarter:
First.................................................. 5.0 5.1
Second................................................. 4.9 4.9
Third.................................................. 4.9
Fourth................................................. 4.9
Year...................................................... 5.0
</TABLE>
27
<PAGE> 28
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- (CONTINUED)
OPERATING DATA (CONTINUED)
<TABLE>
<CAPTION>
1999 1998
----- -----
<S> <C> <C>
NON-CONSOLIDATING (G)
Number of hospitals in operation at:
March 31.................................................. 24 26
June 30................................................... 16 26
September 30.............................................. 24
December 31............................................... 24
Number of freestanding outpatient surgical centers in
operation at:
March 31.................................................. 5 5
June 30................................................... 4 5
September 30.............................................. 5
December 31............................................... 5
Licensed hospital beds at:
March 31.................................................. 6,015 6,357
June 30................................................... 3,868 6,317
September 30.............................................. 6,029
December 31............................................... 6,015
</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 the Company's 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 and is used by
management and certain investors as a general measure of inpatient volume.
(e) Equivalent admissions are 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.
(f) Represents the average number of days admitted patients stay in the
Company's hospitals.
(g) The non-consolidating facilities include facilities operated through 50/50
joint ventures which are not controlled by the Company. 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.
28
<PAGE> 29
PART II: OTHER INFORMATION
ITEM 1: LEGAL PROCEEDINGS.
The Company is facing significant legal challenges. The Company is the
subject of various Federal and state investigations, qui tam actions,
shareholder derivative and class action suits filed in Federal court,
shareholder derivative actions filed in state courts, patient/payer actions and
general liability claims.
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, also in
El Paso, 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 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. In June 1999, Columbia Home Care Group
received a subpoena seeking records related to home health operations.
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 related to the alleged false
characterization of interest payments on certain debt resulting in Medicare and
CHAMPUS (TRICARE) overpayments since 1986 to 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. A
fourth employee of a subsidiary of the Company was indicted in July 1998 by a
superseding indictment. The trial on this matter commenced on May 3, 1999. On
July 2, 1999, the jury returned a mixed verdict, finding two such employees
guilty and acquitting one. The jury was unable to reach a verdict as to the
fourth employee. Sentencing has been scheduled for October 1999 for the two
convicted employees. The Government has not announced a decision on whether it
will retry the fourth employee.
Several hospital and other facilities affiliated with the Company in
various states have also received individual Federal and/or state government
inquiries, both informal and formal, requesting information related to
reimbursement from government programs.
In general, the Company believes that the United States Department of
Justice and other Federal and state governmental authorities are investigating
certain acts, practices or omissions alleged to have been engaged in by the
Company with respect to Medicare, Medicaid and CHAMPUS patients regarding (a)
allegedly improper DRG coding (commonly referred to as "upcoding") relating to
bills submitted for medical services, (b) allegedly improper outpatient
laboratory billing (e.g., unbundling of services and medically unnecessary
tests), (c) inclusion of allegedly improper items in cost reports submitted as a
basis for reimbursement under Medicare, Medicaid and similar government
programs, (d) arrangements with physicians and other parties that allegedly
violate certain Federal and state laws governing fraud and abuse, anti-kickback
and "Stark" laws and (e) allegedly improper acquisitions of home health care
agencies and allegedly excessive billing for home health care services.
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 scope 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.
In July 1999, Olsten Corporation and its subsidiary, Kimberly Home Health
(neither of which is affiliated with Columbia/HCA), announced that they will pay
$61 million to settle allegations that both companies defrauded the Medicare
program. Kimberly pled guilty to three separate felony charges filed by the
29
<PAGE> 30
U.S. Attorneys in the Middle and Southern District of Florida and the Northern
District of Georgia, the three separate charges being conspiracy, mail fraud and
violating the Medicare anti-kickback statute. While Columbia/HCA was not
specifically named in these guilty pleas, the guilty pleas refer to the
involvement of a "Company A" or a "company not named as a defendant." The
Company believes these references refer to Columbia/HCA or its subsidiaries.
The Company is also the subject of a formal order of investigation by the
Securities and Exchange Commission. The Company understands that the
investigation relates to the anti-fraud, insider trading, periodic reporting and
internal accounting control provisions of the federal securities laws.
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 2 -- Investigations and Note 10 -- Contingencies of the Notes to
Condensed Consolidated Financial Statements.)
LAWSUITS
Qui Tam Actions
Several qui tam actions have been brought by private parties ("relators")
on behalf of the United States of America and have been unsealed and served on
the Company. With the exception of five cases discussed below, the government
has declined to intervene in the qui tam actions unsealed to date. To the best
of the Company's knowledge, the actions allege, in general, that the Company and
certain subsidiaries and/or affiliated partnerships violated the False Claims
Act, 31 U.S.C. 3729 et seq., for improper claims submitted to the government for
reimbursement. The lawsuits generally seek damages of three times the amount of
all Medicare or Medicaid claims (involving false claims) presented by the
defendants to the Federal government, civil penalties of not less than $5,000
nor more than $10,000 for each such Medicare or Medicaid claim, attorneys' fees
and costs. The Company is aware of additional qui tam actions that remain under
seal and believes that there are other sealed qui tam cases of which it is
unaware.
On February 12, 1999, the United States filed a Motion before the Judicial
Panel on Multidistrict Litigation ("MDL Panel") seeking to transfer and
consolidate all qui tam actions against the Company, including those that are
sealed and unsealed, for purposes of discovery and pretrial matters, to the
District Court for the District of Columbia. The MDL Panel denied the Motion on
procedural grounds relating to notice but granted leave to refile.
On October 5, 1998, the matter of United States of America ex rel. James F.
Alderson v. Columbia/HCA Healthcare Corp., Healthtrust-The Hospital Company and
Quorum Health Group, et al., Case No. 97-2035-CIV-T-23E, in the Middle District
of Florida, Tampa Division, was unsealed. The government intervened in this
action on October 1, 1998. The Complaint was originally filed in Montana in 1993
but was later transferred to Florida. The Complaint alleges that defendants made
false statements in annual Medicare cost reports over a period of ten years. The
Complaint further alleges that defendants engaged in a scheme of filing improper
reimbursement claims while keeping a "secret" set of books which were known as
"reserve cost reports" and concealing these books from Medicare auditors. The
Government filed an Amended Complaint. The Government has not yet served an
Amended Complaint on the Columbia/HCA defendants.
The matter of United States of America ex rel. Sara Ortega v. Columbia/HCA
Healthcare Corp., et al., No. EP95-CA-259H, was unsealed on July 31, 1998 in the
Western District of Texas, El Paso Division. The Complaint alleges that
defendants submitted false statements to the Joint Commission on Accreditation
of Healthcare Organizations (JCAHO) in order to be eligible for Medicare
payments, thereby rendering false defendants' claims for Medicare reimbursement.
The Complaint, which has not been served on the Company, also alleges that
defendants engaged in fraudulent accounting practices, paid kickbacks for
patient referrals, upcoded claims for reimbursement from Federal healthcare
programs and shifted costs to its Medicare cost reports. Defendants have moved
to dismiss the Complaint, and that motion is pending. Defendants have also
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moved to stay discovery while the motion to dismiss is pending. The Government
announced that it intervened on all counts of this action except for the count
alleging false statements to JCAHO.
The matter of United States of America, ex rel. Scott Pogue v. Diabetes
Treatment Centers of America, Inc., et al., Civil Action No. 3-94-0515, was
filed under seal on June 23, 1994 in the United States District Court for the
Middle District of Tennessee. On February 6, 1995, the United States filed its
Notice of Non-Intervention and on that same date, the District Court ordered the
complaint unsealed. In general, the relator contends that sums paid to
physicians by the Diabetes Treatment Centers of America, who served as Medical
Directors at a hospital affiliated with the Company, were unlawful payments for
the referrals of their patients. Relator filed a motion for partial summary
judgment. The court ordered relator's motion for partial summary judgment
stricken. The relator did not file an amended motion for summary judgment and
the Court's deadline for filing such a motion has passed.
In December 1998, the matter of United States of America ex rel. John W.
Schilling v. Columbia/HCA Healthcare Corporation, et al., Civil Action No.
96-1264-CIV-T-23B, in the Middle District of Florida, was unsealed. The
Government has intervened in this action. The Complaint alleges that defendants
made false statements in annual Medicare cost reports. The Complaint further
alleges, as in Alderson, that the Company kept "reserve cost reports." The
Government has not yet served the Complaint on Defendants, and the case is
currently stayed.
In June of 1998, the case United States of America ex rel. Joseph "Mickey"
Parslow v. Columbia/HCA Healthcare Corporation and Curative Health Services,
Incorporated, No. 98-1260-CIV-T-23F, in the Middle District of Florida, Tampa
Division, was filed. This complaint was unsealed by the Court on April 9, 1999.
The Government has intervened in this lawsuit but has not yet served the
complaint on the Company. This qui tam action alleges that the Company submitted
false claims relating to contracts with Curative for the management of certain
wound care centers. The complaint further alleges that management fees paid to
Curative were excessive and not reasonable and that the claims for reimbursement
for these management fees violated the anti-kickback statutes.
A lawsuit captioned United States of America ex rel. James Thompson v.
Columbia/HCA Healthcare Corporation, et al. was filed on March 10, 1995 in the
United States District Court for the Southern District of Texas, Corpus Christi
Division (Civil Action No. C-95-110). In general, the relator claims that the
defendants (the Company and certain subsidiaries and affiliated partnerships)
engaged in a widespread strategy to pay physicians money for referrals and
engaged in other conduct to induce referrals, such as: (i) offering physicians
equity interests in hospitals; (ii) offering loans to physicians; (iii) paying
money under the guise of "consultation fees" to physicians to guarantee their
capital investment; (iv) paying consultation fees, rent or other monies to
physicians; (v) providing office space for free or reduced rent; (vi) providing
free or reduced rate vacations and trips; (vii) providing free or reduced rate
opportunities for additional medical training; (viii) providing income
guarantees; and (ix) granting physicians exclusive rights to perform procedures
in particular fields of practice. The defendants filed a Motion to Dismiss the
Second Amended Complaint in November 1995 which was granted by the Court in July
1996. In August 1996, the relator appealed to the United States Court of Appeals
for the Fifth Circuit, and in October 1997, the Fifth Circuit affirmed in part
and vacated and remanded in part the Trial Court's rulings. Defendants filed a
Second Amended Motion to Dismiss which was denied on August 18, 1998. On August
21, 1998, relator filed a Third Amended Complaint. Although some discovery has
occurred, currently, there is a stay of discovery.
The matter of United States of America ex rel. Sandra Russell; and Sandra
Russell, in her own right v. EPIC Healthcare Management Group, et al., No.
H-95-99151, was filed on January 18, 1995 in the United States District Court
for the Southern District of Texas, Houston Division. The complaint alleges that
the defendants submitted claims, records and/or statements for Medicare
reimbursement in connection with home health services which were false. The
defendants moved to dismiss in May 1997. The court granted defendant's motion
but allowed the relator the right to replead. Relator filed an amended
complaint. Defendants filed a second motion to dismiss which was granted on June
25, 1998. Relator filed an Appeal which is pending before the Fifth Circuit.
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The matter of Mary Ann Wisz, Individually, and ex rel. United States of
America v. C/HCA Development, Inc. d/b/a Columbia-Olympia Fields Osteopathic
Hospital and Medical Center, Inc., et al., Case No. 97-C-2646, was filed on
April 16, 1997, in the United States District Court for the Northern District of
Illinois, Eastern Division. An amended complaint was filed on February 17, 1998,
and on May 15, 1998, relator was permitted leave to file its Second Amended
Complaint. In addition to adding Midwestern University as a party defendant, the
Second Amended Complaint contained allegations that Olympia Fields Osteopathic
Hospital and Medical Center and/or the Chicago Osteopathic Hospital changed
dates on out-patient surgical procedures. That portion of the Second Amended
Complaint has been answered and discovery is ongoing. The Second Amended
Complaint also alleges that one or both hospitals directed surgical nurses to
misdesignate the severity of surgeries. That portion of the Second Amended
Complaint was subject to a partial motion to dismiss, which motion was granted.
The parties in this matter have reached a settlement in principle. Such
settlement must be documented and approved by the court before it becomes
effective.
The matter of United States ex rel. McLendon v. Columbia/HCA, et al., Civ.
No. 1 97 CV 0890, was filed under seal on April 4, 1997 in the U.S. District
Court for the Northern District of Georgia, Atlanta Division. On July 19, 1999,
the court unsealed this action. The Complaint alleges that the Company acted to
illegally obtain Medicare reimbursement for costs incurred in purchasing home
health agencies. The Complaint also alleges that the Company illegally billed
Medicare for certain sales and marketing activities and for certain home care
visits. The Government has intervened in this action but has not served the
Complaint.
The Company intends to pursue the defense of the qui tam actions
vigorously.
Shareholder Derivative and Class Action Complaints Filed in the U.S. District
Courts
Since April 1997, numerous securities class action and derivative lawsuits
have been filed in the United States District Court for the Middle District of
Tennessee against the Company and a number of its current and former directors,
officers and/or employees.
On October 10, 1997, the court entered an order consolidating all of the
above-mentioned securities class action claims into a single-captioned case,
Morse, Sidney, et al. v. R. Clayton McWhorter, et al., Case No. 3-97-0370. All
of the other individual securities class action lawsuits were administratively
closed by the Court. The consolidated Morse lawsuit is a purported class action
seeking the certification of a class of persons or entities who acquired the
Company's common stock from April 9, 1994 to September 9, 1997. The consolidated
lawsuit was brought against the Company, Richard Scott, David Vandewater, Thomas
Frist, Jr., R. Clayton McWhorter, Carl E. Reichardt, Magdalena Averhoff, M.D.,
T. Michael Long and Donald S. MacNaughton. The lawsuit alleges, among other
things, that the defendants committed violations of the Federal securities laws
by materially inflating the Company's revenues and earnings through a number of
practices, including upcoding, maintaining reserve cost reports, disseminating
false and misleading statements, cost shifting, illegal reimbursements, improper
billing, unbundling and violating various Medicare laws. The lawsuit seeks
damages, costs and expenses. Plaintiffs filed their Motion for Class
Certification in February 1998, and defendants filed responsive briefs. No
ruling has been made on class certification.
On October 10, 1997, the court entered an order consolidating the
above-mentioned derivative law claims into a single-captioned case, McCall, H.
Carl, as Comptroller of the State of New York and as Trustee of the New York
State Common Retirement Fund, derivatively on behalf of Columbia/HCA Healthcare
Corporation v. Richard L. Scott, et al., No. 3-97-0838. All of the other
derivative lawsuits were administratively closed by the Court. The consolidated
McCall lawsuit was brought against the Company, Thomas Frist, Jr., Richard L.
Scott, David T. Vandewater, R. Clayton McWhorter, Magdalena Averhoff, M.D.,
Frank S. Royal, M.D., T. Michael Long, William T. Young and Donald S.
MacNaughton. The lawsuit alleges, among other things, derivative claims against
the individual defendants that they intentionally or negligently breached their
fiduciary duties to the Company by authorizing, permitting or failing to prevent
the Company from engaging in various schemes to improperly increase revenue,
upcoding, improper cost reporting, improper referrals, improper acquisition
practices and overbilling. In addition, the lawsuit asserts a derivative claim
against some of the individual defendants for breaching their fiduciary duties
by allegedly engaging in improper insider trading. The lawsuit seeks
restitution, damages, recoupment of fines or penalties paid by the Company,
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restitution and pre-judgment interest against the alleged insider trading
defendants, and costs and expenses. In addition, the lawsuit seeks orders: (i)
prohibiting the Company from paying individual defendants employment benefits;
(ii) terminating all improper business relationships with individual defendants;
and (iii) requiring the Company to implement effective corporate governance and
internal control mechanisms designed to monitor compliance with Federal and
state laws and ensure reports to the Board of material violations.
The defendants filed motions to dismiss in both the Morse and McCall
lawsuits. These motions were referred to the Magistrate Judge for consideration.
In June 1998, the Magistrate Judge recommended that the court grant the motions
to dismiss in both cases. Plaintiffs in both cases have filed objections to the
Magistrate's recommendations with the District Court, and defendants have filed
responsive pleadings.
Shareholder Derivative Actions Filed in State Courts
Several derivative actions have been filed in state court by certain
purported stockholders of the Company against certain of the Company's current
and former officers and directors alleging breach of fiduciary duty, and failure
to take reasonable steps to ensure that the Company did not engage in illegal
practices thereby exposing the Company to significant damages.
Two purported derivative actions entitled Barron, Evelyn, et al. v.
Magdelena Averhoff, et al., (Civil Action No. 15822NC), filed on July 22, 1997,
and Kovalchick, John E. v. Magdelena Averhoff, et al., Civil Action No. 15829NC,
filed on July 29, 1997, have been filed in the Court of Chancery of the State of
Delaware in and for New Castle County. The actions were brought on behalf of the
Company by certain purported shareholders of the Company against certain of the
Company's current and former officers and directors. The suits seek damages,
attorneys' fees and costs. In the Barron lawsuit, plaintiffs also seek an Order
(i) requiring individual defendants to return to the Company all salaries or
remunerations paid them by the Company, together with proceeds of the sale of
Columbia/HCA stock made in breach of their fiduciary duties; (ii) prohibiting
the Company from paying any individual defendant any benefits pursuant to the
terms of employment, consulting or partnership agreements; and (iii) terminating
all improper business relationships between the Company and any individual
defendant. In the Kovalchick lawsuit, plaintiffs also seek an Order (i)
requiring individual defendants to return to the Company all salaries or
remunerations paid to them by the Company and all proceeds from the sale of
Columbia/HCA stock made in breach of their fiduciary duties; (ii) requiring that
an impartial Compliance Committee be appointed to meet regularly; and (iii)
requiring that the Company be prohibited from paying any director/defendant any
benefits pursuant to terms of employment, consulting or partnership agreements.
Plaintiffs in both Barron and Kovalchick have granted the defendants an
indefinite extension of time to respond to the Complaints. On August 14, 1997, a
similar purported derivative action entitled State Board of Administration of
Florida, the public pension fund of the State of Florida in behalf of itself and
in behalf of all other stockholders of Columbia/HCA Healthcare Corporation
derivatively in behalf of Columbia/HCA Healthcare Corporation vs. Magdalena
Averhoff, et al., (No. 97-2729), was filed in the Circuit Court in Davidson
County, Tennessee on behalf of the Company by certain purported shareholders of
the Company against certain of the Company's current and former directors and
officers. These lawsuits seek damages and costs as well as orders (i) enjoining
the Company from paying benefits to individual defendants; (ii) requiring
termination of all improper business relationships with individual defendants;
(iii) requiring the Company to provide for independent public directors and (iv)
requiring the Company to put in place proper mechanisms of corporate governance.
The court has entered an Order temporarily staying the lawsuit.
The matter of Louisiana State Employees Retirement System, a public pension
fund of the State of Louisiana, in behalf of itself and in behalf of all other
stockholders of Columbia/HCA Healthcare Corporation derivatively in behalf of
Columbia/HCA Healthcare Corporation v. Magdalena Averhoff, et al., another
derivative action, was filed on March 19, 1998 in the Circuit Court of the
Eleventh Judicial Circuit, Dade County, Florida, General Jurisdiction Division
(Case No. 98-6050 CA04) and the defendants removed it to the United States
District Court, Southern District of Florida (Case No. 98-814-CIV). The
Louisiana State Employees Retirement System is the public pension fund of the
State of Louisiana. The suit alleges, among other things, breach of fiduciary
duties resulting in damage to the Company. The lawsuit seeks
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damages from the individual defendants to be paid to the Company and attorneys'
fees, costs and expenses. In addition, the lawsuit seeks orders (i) requiring
the individual defendants to pay to the Company all benefits received by them
from the Company; (ii) enjoining the Company from paying any benefits to
individual defendants; (iii) requiring that defendants terminate all improper
business relationships with the Company and any individual defendants; (iv)
requiring that the Company provide for appointment of a majority of independent
public directors and (v) requiring that the Company put in place proper
mechanisms of corporate governance. On August 10, 1998, the Court transferred
this case to the Middle District of Tennessee. By agreement of the parties, the
case has been administratively closed pending the outcome of the court's ruling
on the defendants' motions to dismiss the McCall action referred to above.
The Company intends to pursue the defense of these Federal and state
Shareholder Derivative and Class Action Complaints vigorously.
Patient/Payer Actions and Other Class Actions
The Company is a party to several purported class action lawsuits which
have been filed by patients and/or payers against the Company and/or certain of
its current and/or former officers and/or directors alleging, in general,
improper and fraudulent billing, overcharging, coding and physician referrals,
as well as other violations of law. Certain of the lawsuits have been
conditionally certified as class actions.
The matter of In re: Columbia/HCA Healthcare Corporation Billing Practices
Litigation, Master File No. MDL 1227, was commenced by Order of the MDL Panel
entered on June 11, 1998 granting the Company's petition to consolidate the
Boyson and Operating Engineers cases for pretrial purposes in the Middle
District of Tennessee pursuant to 28 U.S.C. 1407. Three other cases that have
been consolidated with Boyson and Operating Engineers in the MDL proceeding are
(i) Board of Trustees of the Carpenters & Millwrights of Houston & Vicinity
Welfare Trust Fund, (ii) Board of Trustees of the Texas Ironworkers' Health
Benefit Plan, and (iii) Tennessee Laborers Health and Welfare Fund. On September
21, 1998, the plaintiffs in five consolidated cases filed a Coordinated Class
Action Complaint, which the Company answered on October 13, 1998. The plaintiffs
seek certification of two proposed classes including all private individuals and
all employee welfare benefit plans that have paid for health-related goods or
services provided by the Company. The plaintiffs allege, among other things,
that the Company has engaged in a pattern and practice of inflating charges,
concealing the true nature of patients' illnesses, providing unnecessary medical
care, and billing for services never rendered. The plaintiffs seek damages,
attorneys' fees and costs, as well as disgorgement and injunctive relief. A
scheduling order has been entered that provides for class certification motions
to be filed by February 22, 1999 and for discovery to be completed by June 30,
1999. In February 1999, plaintiffs filed a motion to extend the time periods in
the scheduling order, which has not been ruled on by the court. The parties are
currently engaged in discovery pending a ruling by the court on scheduling
order.
The matter of Boyson, Cordula, on behalf of herself and all others
similarly situated v. Columbia/HCA Healthcare Corporation was filed on September
8, 1997 in the United States District Court for the Middle District of
Tennessee, Nashville Division (Civil Action No. 3-97-0936). The original
complaint, which sought certification of a national class comprised of all
persons or entities who have paid for medical services provided by the Company,
alleges, among other things, that the Company has engaged in a pattern and
practice of (i) inflating diagnosis and medical treatments of its patients to
receive larger payments from the purported class members; (ii) providing
unnecessary medical care; and (iii) billing for services never rendered. This
lawsuit seeks injunctive relief requiring the Company to perform an accounting
to identify and disgorge medical bill overcharges. It also seeks damages,
attorneys' fees, interest and costs. In an Order entered on June 11, 1998 by the
MDL Panel, other lawsuits against the Company were consolidated with the Boyson
case in the Middle District of Tennessee. The amended complaint in Boyson was
withdrawn and superseded by the Coordinated Class Action Complaint filed in the
MDL proceeding on September 21, 1998. (See In re: Columbia/HCA Healthcare
Corporation Billing Practices Litigation, above.)
The matter of Operating Engineers Local No. 312 Health & Welfare Fund, on
behalf of itself and as representative of a class of those similarly situated v.
Columbia/HCA Healthcare Corporation was filed on August 6, 1997 in the United
States District Court for the Eastern District of Texas, Civil Action
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No. 597CV203. The original complaint alleged violations of the Racketeering
Influenced and Corrupt Organization Act ("RICO") based on allegations that the
defendant has employed one or more schemes or artifices to defraud the plaintiff
and purported class members through fraudulent billing for services not
performed, fraudulent overcharging in excess of correct rates and fraudulent
concealment and misrepresentation. In October 1997, the Company filed a motion
to transfer venue and to dismiss the lawsuit on jurisdiction and venue grounds
because the RICO claims are deficient. The motion to transfer was denied on
January 23, 1998. The motion to dismiss was also denied. In February 1998,
defendant filed a petition with the MDL Panel to consolidate this case with
Boyson for pretrial proceedings in the Middle District of Tennessee. During the
pendency of the motion to consolidate, plaintiff amended its Complaint to add
allegations under the Employee Retirement Income Security Act of 1974 ("ERISA")
as well as state law claims. The amended complaint seeks damages, attorneys'
fees and costs, as well as disgorgement and injunctive relief. The MDL Panel
granted defendant's motion to consolidate in June 1998, and this action was
transferred to the Middle District of Tennessee. The amended complaint in
Operating Engineers was withdrawn and superseded by the Coordinated Class Action
Complaint filed in the MDL proceeding on September 21, 1998.
On April 24, 1998, two matters, Board of Trustees of the Carpenters &
Millwrights of Houston & Vicinity Welfare Trust Fund v. Columbia/HCA Healthcare
Corporation, Case No. 598CV157, and Board of Trustees of the Texas Ironworkers'
Health Benefit Plan v. Columbia/HCA Healthcare Corporation, Case No. 598CV158,
were filed in the United States District Court for the Eastern District of
Texas. The original Complaint in these suits alleged violations of RICO only.
Plaintiffs in both cases principally alleged that in order to inflate its
revenues and profits, defendant engaged in fraudulent billing for services not
performed, fraudulent overcharging in excess of correct rates and fraudulent
concealment and misrepresentation. These suits seek damages, attorneys' fees and
costs, as well as disgorgement and injunctive relief. Plaintiffs subsequently
amended their complaint to add allegations under ERISA as well as state law
claims. These suits have been consolidated by the MDL Panel with Boyson and
transferred to the Middle District of Tennessee for pretrial proceedings. The
amended complaints in these suits were withdrawn and superseded by the
Coordinated Class Action Complaint filed in the MDL proceeding on September 21,
1998.
The matter of Tennessee Laborers Health and Welfare Fund, on behalf of
itself and all others similarly situated vs. Columbia/HCA Healthcare
Corporation, Case No. 3-98-0437, was filed in the United States District Court
of the Middle District of Tennessee, Nashville Division, on May 14, 1998. The
lawsuit seeks certification of a national class comprised of all employee
welfare benefit plans that have paid for medical services provided by the
Company. This case involves allegations under ERISA, as well as state law claims
which are similar to those alleged in Boyson. Plaintiff, an Employee Welfare
Benefit Plan, alleges that defendant violated the terms of the Plan documents by
overbilling the Plans, including but not limited to, exaggerating the severity
of illnesses, providing unnecessary treatment, billing for services not rendered
and other methods of overbilling and further violated the terms of the Plan
documents by taking Plan assets in payment of such improper bills. Plaintiff
further alleges that defendant intentionally concealed or suppressed the true
nature of its patients' illnesses, and the actual treatment provided to those
patients, and its improper billing. The suit seeks injunctive relief in the form
of an accounting, damages, attorneys' fees, interest and costs. This suit has
been consolidated by the Court with Boyson and the other cases transferred by
the MDL Panel to the Middle District of Tennessee. The complaint in Tennessee
Laborers was withdrawn and superseded with the filing of the Coordinated Class
Action Complaint in the MDL proceeding on September 21, 1998.
The matter of Brown, Nancy, individually and on behalf of all others
similarly situated v. Columbia/ HCA Healthcare Corporation was filed on November
16, 1995, in the Fifteenth Judicial Circuit Court in and for Palm Beach County,
Florida, Case No. 95-9102 AD. The suit alleges that Palms West Hospital charged
excessive amounts for goods and services associated with patient care and
treatment, including items such as pharmaceuticals, medical supplies, laboratory
tests, medical equipment and related medical services such as x-rays. The suit
seeks the certification of a nationwide class, and damages for patients who have
paid bills for the allegedly unreasonable portion of the charges as well as
interest, attorneys' fees and costs. In response to defendant's amended motion
to dismiss filed in January 1996, plaintiff amended the Complaint and defendant
subsequently filed an answer and defenses in June 1996. On October 15, 1997,
Harald Jackson moved to
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intervene in the lawsuit (see case below). The court denied Jackson's motion on
December 19, 1997. To date, discovery is proceeding and no class has been
certified.
Jane Doe and her husband, John Doe, on their own behalf, and on behalf of
all other persons similarly situated vs. HCA Health Services of Tennessee, Inc.,
d/b/a HCA Donelson Hospital n/k/a Summit Medical Center is a class action suit
filed on August 17, 1992 in the First Circuit Court for Davidson County,
Tennessee, Case No. 92C-2041. The suit principally alleges that Summit Medical
Center's charges for hospital services and supplies for medical services (a
hysterectomy in the plaintiff's case) exceeded the reasonable costs of its goods
and services, that the overcharges constitute a breach of contract and an unfair
or deceptive trade practice as well as a breach of the duty of good faith and
fair dealing. This suit seeks damages, costs and attorneys' fees. In addition,
the suit seeks a declaratory judgment recognizing plaintiffs' rights to be free
from predatory billing and collection practices and an Order (i) requiring
defendants to notify plaintiff class members of entry of declaratory judgment
and (ii) enjoining defendants from further efforts to collect charges from the
plaintiffs. In 1997, this case was certified as a class action consisting of all
past, present and future patients at Summit Medical Center. In July 1997, Summit
filed a Motion for Summary Judgment. In March 1998, the court denied the Motion
for Summary Judgment and ordered the parties into mediation. In June 1998, the
Court of Appeals denied defendant's application for permission to appeal the
trial court's denial of the summary judgment motion. Summit has filed an
application for permission to appeal to the Supreme Court of Tennessee, which
the Supreme Court granted on November 9, 1998, and remanded the case to the
Court of Appeals for review on the merits. The Court of Appeals held oral
argument on June 8, 1999 and took the case under advisement.
Ferguson, Charles, on behalf of himself and all other similarly situated v.
Columbia/HCA Healthcare Corporation, et al. was filed on September 16, 1997 in
the Circuit Court for Washington County, Tennessee, Civil Action No. 18679. This
lawsuit seeks certification of a national class comprised of all individuals and
entities who paid or were responsible for payment of any portion of a bill for
medical care or treatment provided by the Company and alleges, among other
things, that the Company engaged in billing fraud by excessively billing
patients for services rendered, billing patients for services not rendered or
not medically necessary, uniformly using improper codes to report patient
diagnosis, and improperly and illegally recruiting doctors to refer patients to
the Company's hospitals. The proposed class is broad enough to encompass all
private payers, including individuals, insurers and health and welfare plans.
The suit seeks damages, interest, attorneys' fees, costs and expenses. In
addition, the suit seeks an Order (i) requiring defendants to provide an
accounting of plaintiffs and class members who overpaid or were obligated to
overpay; and (ii) requiring defendants to disgorge all monies illegally
collected from plaintiffs and the class. Plaintiff filed a Motion for Class
Certification in September 1997 which has not been ruled on. In December 1997,
the Company filed a Motion for Summary Judgment which was denied. In January
1998, plaintiff filed a Motion for Leave to File a Second Amended Class Action
Complaint to Add an Additional Class Representative which was granted but the
court dismissed the claims asserted by the additional plaintiff. In June 1998,
plaintiff filed a Motion for Leave of Court to File a Third Amended Class Action
Complaint, and in October 1998 plaintiff filed a Motion for Leave of Court to
File a Fourth Amended Class Action Complaint. Both proposed Amended Complaints
seek to add new named plaintiffs to represent the proposed class. Both seek to
add additional allegations of billing fraud, including improper billing for
laboratory tests, inducing doctors to perform unnecessary medical procedures,
improperly admitting patients from emergency rooms and maximizing patients'
lengths of stay as inpatients in order to increase charges, and improperly
inducing doctors to refer patients to the Company's home healthcare units or
psychiatric hospitals. Both seek an additional order that the Company's
contracts with plaintiffs and all class members are rescinded and that the
Company must repay all monies received from plaintiffs and the class members.
The court has not ruled on either Motion for Leave to Amend. Discovery is
underway in the case. The Company in September 1998 filed another Motion for
Summary Judgment contesting the standing of the named plaintiffs to bring the
alleged claims. That motion has not been ruled on by the court.
The matter of The United Paper Workers International Union, et al. v.
Columbia/HCA Healthcare Corporation, et al., was filed on September 3, 1998 in
the Circuit Court for Washington County, Tennessee, Civil Action No. 19350. The
lawsuit contains billing fraud allegations similar to those in the Ferguson case
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and seeks certification of a national class comprised of all self-insured
employers who paid or were obligated to pay any portion of a bill for, among
other things, pharmaceuticals, medical supplies or medical services. The suit
seeks declaratory relief, damages, interest, attorneys' fees and other
litigation costs. In addition, the suit seeks an Order (i) requiring defendants
to provide an accounting to plaintiffs and class members who overpaid or were
obligated to overpay, (ii) requiring defendants to disgorge all monies illegally
collected from plaintiffs and the class, and (iii) rescinding all contracts of
defendants with plaintiffs and all class members. The complaint has not been
served formally on the Company.
The matter of Douglas, Cheryl, individually, and on behalf of all others
similarly situated v. Columbia/ HCA Healthcare Corporation, et al. is a
purported class action filed on March 5, 1998 in the Circuit Court of Cook
County, Illinois, County Department, Chancery Division, Case No. 98 CH 2942. The
suit generally alleges that defendants were involved in fraudulent and deceptive
acts including wrongful billing, unnecessary treatment and wrongful diagnosis of
patients with illnesses that necessitate higher medical fees for financial gain.
The suit seeks damages, costs and expenses. On September 18, 1998, the Company's
motion to dismiss was granted and plaintiff's complaint was dismissed without
prejudice. On November 6, 1998, the plaintiff filed an amended complaint
alleging violations of the Illinois Consumer Fraud and Deceptive Trade Practices
Act, fraudulent misrepresentation, breach of contract and civil conspiracy. On
April 16, 1999, the court granted the Company's motion to dismiss the amended
complaint. Such dismissal was with prejudice as to the civil conspiracy count
and without prejudice as to the remaining counts, and plaintiff was provided
time to replead those counts that had been dismissed without prejudice. The
Company subsequently entered into a settlement of this lawsuit with the
plaintiff in exchange for a full and complete release of the Company by the
plaintiff and final documentation is pending.
The matter of Hoop, Kemp, et al. v. Columbia/HCA Health Corporation, et al.
was filed on August 18, 1997 in the District Court of Johnson County, Texas,
Civil Action No. 249-171-97. This suit seeks certification of a Texas class
comprised of persons who paid for any portion of an improper or fraudulent bill
for medical services rendered by any Texas facility owned or operated by the
Company. The suit seeks damages, attorneys' fees, costs and expenses, as well as
restitution to plaintiffs and the class in the amount by which defendants have
been unjustly enriched and equitable and injunctive relief. The lawsuit
principally alleges that the Company perpetrated a fraudulent scheme that
consisted of systematic and routine overbilling through false and inaccurate
bills, including padding, billing for services never provided, and exaggerating
the seriousness of patients' illnesses. The lawsuit also alleges that the
Company systematically entered into illegal kickback schemes with doctors for
patient referrals. The Company filed its answer in November 1997 denying the
claims. Discovery has commenced.
The matter of Jackson, Harald F., individually and on behalf of all others
similarly situated v. Columbia/HCA Healthcare Corporation was initially filed as
a motion to intervene in the Brown matter in October 1997 in the Fifteenth
Judicial Circuit Court in and for Palm Beach County, Florida. The court denied
Jackson's motion on December 19, 1997, and Jackson subsequently filed a
Complaint in the same state court on December 23, 1997, Case No. 97-011419-AI.
This suit seeks certification of a national class of persons or entities who
were allegedly overcharged for medical services by the Company through an
alleged practice of systematically and unlawfully inflating prices, concealing
its practice of inflating prices, and engaging in, and concealing, a uniform
practice of overbilling. The proposed class is broad enough to encompass all
private payers, including individuals, insurers and health and welfare plans.
This suit seeks damages on behalf of the plaintiff and individual members of the
class as well as interest, attorneys' fees and costs. In January 1998, the case
was removed to the United States District Court, Southern District of Florida,
Case No. 98-CIV-8050. In February 1998, Jackson filed an amended complaint, and
the case was remanded to state court. The Company has filed motions in response
to the amended complaint which are pending. Jackson moved to transfer the case
to the judge handling the Brown case which is also pending, but the motion to
transfer was denied on April 8, 1999. Discovery has commenced.
The matter of Johnson, Bruce A., et al. v. Plantation General Hospital,
Limited Partnership was filed on March 9, 1992 in the Circuit Court for the
Seventeenth Judicial Circuit, State of Florida, Broward County, Case No.
92-06823 Division 2. In general, the suit alleged that the hospital charged
excessive amounts for pharmaceuticals, medical supplies and laboratory tests.
The suit sought certification of a class. Count I sought
37
<PAGE> 38
a price reduction on all outstanding bills in the amount of the allegedly
excessive portion of the charges. Counts II and III sought damages for patients
who have paid bills containing allegedly excessive amounts for the alleged
unreasonable portion of the charges. Plaintiff's Complaint claimed fees from any
recovery or benefit in the action. In September 1995, the trial court certified
a class and the Fourth District Court of Appeals affirmed. In October 1996, the
hospital filed a Motion for Summary Judgment on Counts II and III on the basis
of the voluntary payment defense. The Court granted the motion in November 1997.
In April 1998, following the hospital's statement that it would deem the six to
eleven year old outstanding debt of class members to be fully satisfied, the
court granted defendant's motion for summary judgment on Count I on the ground
of mootness. No monetary judgment was recovered. In September 1998, the court
entered an order denying plaintiff's motion for attorneys' fees and granting
their motion for costs. Both parties have appealed the September 1998 orders.
Those appeals are pending. There have been no appeals of the final judgments.
The Company intends to pursue the defense of these class actions
vigorously.
While it is premature to predict the outcome of the qui tam, shareholder
derivative and class action lawsuits, the amounts claimed are substantial. It is
possible that an adverse resolution, individually or in the aggregate, could
have a material adverse impact on the Company's liquidity, financial position
and results of operations. See Note 2 -- Investigations and Note
10 -- Contingencies of the Notes to Condensed Consolidated Financial Statements.
The Company is unable to measure the effect or predict the magnitude that
these matters and the related media coverage could have on the Company's future
results of operations and financial position.
General Liability and Other Claims
The matter of Landgraff, Anne M. and Gina Magarian, on behalf of the
Columbia/HCA Stock Bonus Plan v. Columbia/HCA Healthcare Corporation of America,
et al. was originally filed on November 7, 1997 in the United States District
Court for the Northern District of Georgia, Atlanta Division, Civil Action No.
97-CV-3381 and transferred by agreement of the parties to the United States
District Court for the Middle District of Tennessee, Civil Action No. 3-98-0090.
The plaintiffs filed a second amended complaint on April 24, 1998 against the
Company and certain members of the Company's Retirement Committee during 1997
alleging breach of fiduciary duty owed to the participants in the Stock Bonus
Plan by failing to sell the Plan holdings of Company stock based upon knowledge
of material public and non-public adverse information and by failing to act
solely in the interests and for the benefit of the participants. The suit
generally alleges that the defendants fraudulently concealed information from
the public and fraudulently inflated the Company's stock price through billing
fraud, overcharges, inaccurate Medicare cost reports and illegal kickbacks for
physician referrals. The suit seeks an order allowing the plaintiffs to proceed
on behalf of the Plan as in a derivative action, a judgment for compensatory and
restitutionary damages for the losses allegedly experienced by the Plan because
of breaches of fiduciary duty, an order transferring management of the Plan to a
competent, neutral third-party, and an award of pre-judgment interest,
reasonable attorneys fees and costs. A bench trial was held from June 8 through
July 1, 1999, and the Court is expected to hear closing arguments later this
year.
A class action styled Mary Forsyth, et al. v. Humana, Inc., et al., Case
No. CV-S-89-249-DWH, was filed on March 29, 1989, in the United States District
Court for the District of Nevada. Plaintiffs are two classes of individuals who
paid for, or received coverage under, group insurance policies sold in the State
of Nevada by Humana Insurance. They allege violations of antitrust laws, ERISA
and RICO which arise from the sale of the policies and from incentives provided
under the policies for insureds to use Humana Sunrise Hospital in Las Vegas, a
facility now owned by the Company. The suit seeks attorneys' fees and costs, as
well as injunctive relief and insurance benefits for plaintiffs. In 1993, the
United States District Court granted summary judgment dismissing most of
plaintiffs' claims but granted plaintiffs judgment on one claim. Plaintiffs
appealed to the United States Court of Appeals for the Ninth Circuit which, in
May 1997, affirmed the judgment on the ERISA claims; reversed as to the
antitrust claims; and reversed in part as to the RICO claims, but affirmed the
District Court's grant of summary judgment limiting RICO damages to three times
the ERISA damages. In their current complaint, plaintiffs claim approximately
$133 million in antitrust
38
<PAGE> 39
damages that is subject to statutory trebling. However, in their most recent
expert report, plaintiffs' expert claims antitrust damages of approximately
$13-$21 million. Humana Inc. ("Humana") petitioned the United States Supreme
Court for a Writ of Certiorari on the RICO claims which was granted. On January
20, 1999, the Supreme Court affirmed the Ninth Circuit's decision that the
plaintiffs could proceed with their RICO claims. The Supreme Court did not
address the amount of damages that plaintiffs could seek on their claim. The
entire case is now back in the Nevada district court, where Humana has filed
several motions seeking dismissal of the antitrust claims. A settlement has been
negotiated pending required approval.
On December 4, 1997, a lawsuit captioned Florida Software Systems, Inc., a
Florida corporation v. Columbia/HCA Healthcare Corporation, a Delaware
corporation was filed in the United States District Court for the Middle
District of Florida (Civil Action No. 97-2866-C.V.-T-17b). The lawsuit alleges
that the defendant breached an agreement under which Florida Software Systems,
Inc. was allegedly granted the exclusive right to provide medical claims
management for certain claims made by the Company for payment to any third party
payers in connection with the rendering of medical care or services. The lawsuit
alleges claims for fraud, breach of implied contract and breach of contract. The
lawsuit seeks damages, attorneys' fees and costs in excess of $2 billion, as
well as injunctive relief. The court denied the plaintiff's motion for a
preliminary injunction. On October 15, 1998, the Company filed a counterclaim
and third party complaint against Florida Software Systems, Inc., Receivable
Dynamics Inc., Nevada Communications Corporation, Norman R. Dobiesz, Maureen
Donovan Dobiesz, Stuart M. Lopata, and Samuel A. Greco (a former senior officer
at the Company). The counterclaim alleges racketeering, conspiracy, breach of
fiduciary duty, and breach of contract. Defendants in the counterclaim filed a
motion to dismiss the counterclaim, which motion to dismiss has been granted as
to one count and denied as to the seven remaining counts. Discovery has
commenced.
The Company intends to pursue the defense of these actions and prosecution
of its counterclaims and third party claims vigorously.
The Company is also subject to claims and suits arising in the ordinary
course of business, including claims for personal injuries or for 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. In the opinion of
management, 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.
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company's annual meeting of stockholders was held on May 27, 1999. The
following matters were voted upon at the meeting:
1. Election of directors:
<TABLE>
<CAPTION>
VOTES IN FAVOR VOTES WITHHELD
-------------- --------------
<S> <C> <C> <C>
Martin Feldstein....................... 512,456,010 2,491,748
Thomas F. Frist, Jr., M.D. ............ 512,341,441 2,606,316
John H. McArthur....................... 512,350,469 2,597,288
Thomas S. Murphy....................... 512,379,542 2,568,215
J. Michael Cook........................ 511,248,470 3,699,287
</TABLE>
<TABLE>
<CAPTION>
VOTES IN FAVOR VOTES AGAINST ABSTENTIONS
-------------- -------------- -----------
<S> <C> <C> <C>
2. Ratification of Ernst & Young LLP as
the Company's auditors................. 511,718,397 2,135,040 1,094,314
3. Stockholder proposal relating to phase
out of PVC purchases................... 11,767,666 415,694,660 24,176,690
</TABLE>
39
<PAGE> 40
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 June 30, 1999:
On April 22, 1999, the Company filed a report on Form 8-K which
included its first quarter 1999 earnings release and announced that its
Board of Directors authorized the spin-offs of LifePoint Hospitals, Inc.
and Triad Hospitals, Inc. to the stockholders of the Company and
established April 30, 1999 as the record date for the distribution.
On May 19, 1999, the Company filed a report on Form 8-K which
announced the completion of the spin-offs of LifePoint Hospitals, Inc. and
Triad Hospitals, Inc. on May 11, 1999.
40
<PAGE> 41
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/ R. MILTON JOHNSON
--------------------------------------
R. Milton Johnson
Senior Vice President and Controller
Date: August 10, 1999
41
<PAGE> 1
EXHIBIT 12
COLUMBIA/HCA HEALTHCARE CORPORATION
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
FOR THE QUARTERS AND SIX MONTHS ENDED JUNE 30, 1999 AND 1998
(DOLLARS IN MILLIONS)
<TABLE>
<CAPTION>
QUARTER SIX MONTHS
------------ ----------------
1999 1998 1999 1998
---- ---- ------ ------
<S> <C> <C> <C> <C>
EARNINGS:
Income from continuing operations before minority interests
and income taxes......................................... $234 $309 $ 818 $ 710
Fixed charges, excluding capitalized interest.............. 146 179 288 367
---- ---- ------ ------
$380 $488 $1,106 $1,077
==== ==== ====== ======
FIXED CHARGES:
Interest charged to expense................................ $118 $145 $ 229 $ 298
Interest portion of rental expense and amortization of
deferred loan costs...................................... 28 34 59 69
---- ---- ------ ------
Fixed charges, excluding capitalized interest.............. 146 179 288 367
Capitalized interest....................................... 5 6 11 10
---- ---- ------ ------
$151 $185 $ 299 $ 377
==== ==== ====== ======
Ratio of earnings to fixed charges......................... 2.51 2.64 3.70 2.86
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
STATEMENTS OF INCOME AND BALANCE SHEETS AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 83
<SECURITIES> 0
<RECEIVABLES> 3,314
<ALLOWANCES> 1,493
<INVENTORY> 370
<CURRENT-ASSETS> 3,384
<PP&E> 13,764
<DEPRECIATION> 5,536
<TOTAL-ASSETS> 16,650
<CURRENT-LIABILITIES> 3,027
<BONDS> 5,718
0
0
<COMMON> 6
<OTHER-SE> 5,428
<TOTAL-LIABILITY-AND-EQUITY> 16,650
<SALES> 0
<TOTAL-REVENUES> 8,816
<CGS> 0
<TOTAL-COSTS> 4,912
<OTHER-EXPENSES> 1,718
<LOSS-PROVISION> 667
<INTEREST-EXPENSE> 229
<INCOME-PRETAX> 790
<INCOME-TAX> 362
<INCOME-CONTINUING> 428
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 428
<EPS-BASIC> 0.70<F1>
<EPS-DILUTED> 0.70<F2>
<FN>
<F1>EPS-Basic per SPAS No. 128
<F2>EPS - Diluted per SFAS No. 128
</FN>
</TABLE>
