-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, F6YyM7W0ZfQKb9MpKjxuJLRSg60XTguKywDWA6pFY+0+auLTpv0eaGAZMy7vojXq d4uBoSZtQIBpSBKa4eXf1A== 0000950144-00-006323.txt : 20000512 0000950144-00-006323.hdr.sgml : 20000512 ACCESSION NUMBER: 0000950144-00-006323 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 20000331 FILED AS OF DATE: 20000511 FILER: COMPANY DATA: COMPANY CONFORMED NAME: COLUMBIA HCA HEALTHCARE CORP CENTRAL INDEX KEY: 0000860730 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-GENERAL MEDICAL & SURGICAL HOSPITALS, NEC [8062] IRS NUMBER: 752497104 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-11239 FILM NUMBER: 626583 BUSINESS ADDRESS: STREET 1: ONE PARK PLZ CITY: NASHVILLE STATE: TN ZIP: 37203 BUSINESS PHONE: 6153449551 MAIL ADDRESS: STREET 1: ONE PARK PLAZA CITY: NASHVILLE STATE: TN ZIP: 37203 FORMER COMPANY: FORMER CONFORMED NAME: COLUMBIA HCA HEALTHCARE CORP/ DATE OF NAME CHANGE: 19940314 FORMER COMPANY: FORMER CONFORMED NAME: COLUMBIA HEALTHCARE CORP DATE OF NAME CHANGE: 19930830 FORMER COMPANY: FORMER CONFORMED NAME: COLUMBIA HOSPITAL CORP DATE OF NAME CHANGE: 19930328 10-Q 1 COLUMBIA/HCA HEALTHCARE CORPORATION 1 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 --------------------- FORM 10-Q --------------------- [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2000 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM __________TO __________ COMMISSION FILE NUMBER 1-11239 --------------------- COLUMBIA/HCA HEALTHCARE CORPORATION (Exact name of registrant as specified in its charter) DELAWARE 75-2497104 (State or other jurisdiction (I.R.S. Employer of incorporation or organization) Identification No.) ONE PARK PLAZA 37203 NASHVILLE, TENNESSEE (Zip Code) (Address of principal executive offices)
(615) 344-9551 (Registrant's telephone number, including area code) NOT APPLICABLE (Former name, former address and former fiscal year, if changed since last report) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months, and (2) has been subject to such filing requirements for the past 90 days. YES [X] NO [ ] Indicate the number of shares outstanding of each of the issuer's classes of common stock of the latest practical date.
CLASS OF COMMON STOCK OUTSTANDING AT APRIL 30, 2000 --------------------- ----------------------------- Voting common stock, $.01 par value 536,639,900 shares Nonvoting common stock, $.01 par value 21,000,000 shares
- -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 2 COLUMBIA/HCA HEALTHCARE CORPORATION FORM 10-Q MARCH 31, 2000
PAGE OF FORM 10-Q --------- PART I: FINANCIAL INFORMATION Item 1. Financial Statements: Condensed Consolidated Statements of Income -- for the quarters ended March 31, 2000 and 1999........ 3 Condensed Consolidated Balance Sheets -- March 31, 2000 and December 31, 1999........................ 4 Condensed Consolidated Statements of Cash Flows -- for the quarters ended March 31, 2000 and 1999.............................................. 5 Notes to Condensed Consolidated Financial Statements........................................ 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations....................... 14 PART II: OTHER INFORMATION Item 1. Legal Proceedings................................... 26 Item 6. Exhibits and Reports on Form 8-K.................... 37
2 3 COLUMBIA/HCA HEALTHCARE CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF INCOME FOR THE QUARTERS ENDED MARCH 31, 2000 AND 1999 UNAUDITED (DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
2000 1999 -------- -------- Revenues.................................................... $ 4,271 $ 4,655 Salaries and benefits....................................... 1,661 1,848 Supplies.................................................... 670 722 Other operating expenses.................................... 764 904 Provision for doubtful accounts............................. 302 338 Depreciation and amortization............................... 256 296 Interest expense............................................ 119 111 Equity in earnings of affiliates............................ (32) (35) Gains on sales of facilities................................ -- (249) Impairment of long-lived assets............................. -- 106 Restructuring of operations and investigation related costs..................................................... 13 30 -------- -------- 3,753 4,071 -------- -------- Income before minority interests and income taxes........... 518 584 Minority interests in earnings of consolidated entities..... 26 14 -------- -------- Income before income taxes.................................. 492 570 Provision for income taxes.................................. 196 248 -------- -------- Net income........................................ $ 296 $ 322 ======== ======== Per share data: Basic earnings............................................ $ .53 $ .50 Diluted earnings.......................................... $ .52 $ .50 Cash dividends............................................ $ .02 $ .02 Shares used in earnings per share calculations (in thousands): Basic..................................................... 563,239 639,403 Diluted................................................... 573,054 645,011
See accompanying notes. 3 4 COLUMBIA/HCA HEALTHCARE CORPORATION CONDENSED CONSOLIDATED BALANCE SHEETS UNAUDITED (DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
MARCH 31, DECEMBER 31, 2000 1999 --------- ------------ ASSETS Current assets: Cash and cash equivalents................................. $ 133 $ 190 Accounts receivable, less allowances for doubtful accounts of $1,537 and $1,567................................... 1,976 1,873 Inventories............................................... 377 383 Income taxes receivable................................... -- 178 Other..................................................... 923 973 ------- ------- 3,409 3,597 Property and equipment, at cost............................. 14,273 14,084 Accumulated depreciation.................................... (5,724) (5,594) ------- ------- 8,549 8,490 Investments of insurance subsidiary......................... 1,461 1,457 Investments in and advances to affiliates................... 662 654 Intangible assets, net...................................... 2,257 2,319 Other....................................................... 392 368 ------- ------- $16,730 $16,885 ======= ======= LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable.......................................... $ 632 $ 657 Accrued salaries.......................................... 390 403 Other accrued expenses.................................... 1,054 1,112 Long-term debt due within one year........................ 719 1,160 ------- ------- 2,795 3,332 Long-term debt.............................................. 5,771 5,284 Professional liability risks, deferred taxes and other liabilities............................................... 1,715 1,889 Minority interests in equity of consolidated entities....... 759 763 Stockholders' equity: Common stock $.01 par; authorized 1,600,000,000 voting shares and 50,000,000 nonvoting shares; outstanding 536,370,200 voting shares and 21,000,000 nonvoting shares -- 2000 and 543,272,900 voting shares and 21,000,000 nonvoting shares -- 1999.................... 6 6 Capital in excess of par value............................ 732 951 Other..................................................... 8 8 Accumulated other comprehensive income.................... 61 53 Retained earnings......................................... 4,883 4,599 ------- ------- 5,690 5,617 ------- ------- $16,730 $16,885 ======= =======
See accompanying notes. 4 5 COLUMBIA/HCA HEALTHCARE CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE QUARTERS ENDED MARCH 31, 2000 AND 1999 UNAUDITED (DOLLARS IN MILLIONS)
2000 1999 ----- ------- Cash flows from operating activities: Net income................................................ $ 296 $ 322 Adjustments to reconcile net income to net cash provided by operating activities: Provision for doubtful accounts........................ 302 338 Depreciation and amortization.......................... 256 296 Income taxes........................................... 163 331 Gains on sales of facilities........................... -- (249) Impairment of long-lived assets........................ -- 106 Changes in operating assets and liabilities............ (601) (844) Other.................................................. 13 12 ----- ------- Net cash provided by operating activities............ 429 312 ----- ------- Cash flows from investing activities: Purchase of property and equipment..................... (272) (301) Acquisition of hospitals and health care entities...... (18) -- Disposition of property and equipment.................. 38 506 Change in investments.................................. (22) 541 Other.................................................. (26) 64 ----- ------- Net cash provided by (used in) investing activities.......................................... (300) 810 ----- ------- Cash flows from financing activities: Issuance of long-term debt............................. 1,200 1,004 Net change in revolving bank credit.................... (550) (1,241) Repayment of long-term debt............................ (607) (187) Payment of cash dividends.............................. (11) (13) Repurchases of common stock, net....................... (242) (408) Other.................................................. 24 12 ----- ------- Net cash used in financing activities................ (186) (833) ----- ------- Change in cash and cash equivalents......................... (57) 289 Cash and cash equivalents at beginning of period............ 190 297 ----- ------- Cash and cash equivalents at end of period.................. $ 133 $ 586 ===== ======= Interest payments........................................... $ 80 $ 83 Income tax payments (refunds), net.......................... $ 32 $ (82)
See accompanying notes. 5 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 March 31, 2000, these affiliates owned and operated 192 hospitals, 80 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 13 hospitals and 3 freestanding surgery centers which are accounted for using the equity method. The Company's 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 and such adjustments are of a normal recurring nature. Operating results for the quarter ended March 31, 2000, are not necessarily indicative of the results that may be expected for the year ending December 31, 2000. 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, 1999. Certain prior year amounts have been reclassified to conform to the current year presentation. NOTE 2 -- INVESTIGATIONS The Company continues to be 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. The Company 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 the Company. The actions allege, in general, that the Company and certain subsidiaries and/or affiliated partnerships violated the False Claims Act 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 government has intervened in six qui tam actions. 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. 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 remains unable to predict the outcome or effect of the ongoing investigations or qui tam and other actions. If the Company 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 the Company could be subject to substantial costs resulting from an adverse outcome of one or more such actions. Any such sanctions or losses could have a material adverse effect on the Company's financial position and results of operations. (See Note 9 -- Contingencies and Part II, Item 1: Legal Proceedings.) 6 7 COLUMBIA/HCA HEALTHCARE CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) UNAUDITED NOTE 3 -- RESTRUCTURING OF OPERATIONS The Company has substantially completed a 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. Divestiture of Certain Hospitals and Surgery Centers During the first quarter of 1999, the Company recognized a pretax gain of $249 million ($151 million after-tax) on the sale of two consolidating hospitals and certain related health care facilities. Proceeds from the sales were used to repay bank borrowings. During the first quarter of 1999, management identified and initiated, or revised, plans to sell or close during 1999 and 2000, 13 consolidating hospitals. The carrying value for the hospitals and other assets expected to be sold was reduced to fair value of approximately $210 million, based upon estimates of sales values, for a total non-cash, pretax charge of approximately $106 million. For the quarters ended March 31, 2000 and 1999, respectively, the hospitals and other assets for which the impairment charge was recorded had revenues (through the date of sale or closure) of approximately $29 million and $136 million and incurred net losses before the pretax charge and income tax benefits of approximately $8 million and $10 million. During 1999 and the first quarter of 2000, the Company completed the divestitures of 7 of the consolidating hospitals on which impairment charges had been recorded (an additional one of these hospitals was closed in April of 2000). The facilities spun-off to Triad included another 3 of the consolidating hospitals on which impairment charges had been recorded. Proceeds from the completed divestitures were used to repay bank borrowings. Management's estimates of sales values are generally based upon internal evaluations of each market that include quantitative analyses of revenues and cash flows, reviews of recent sales of similar facilities and market responses based upon discussions with and offers received from potential buyers. The market responses are usually considered to provide the most reliable estimates of fair value. The asset impairment charges did not have a significant impact on the Company's cash flows and are not expected to significantly impact cash flows for future periods. The impaired facilities are classified as "held for use" because economic and operational considerations justify operating the facilities and marketing them as operating enterprises, therefore depreciation has not been suspended. The impairment charges affected the Company's asset categories, as follows (in millions):
1999 ---- Property and equipment...................................... $ 72 Intangible assets........................................... 34 ---- $106 ====
The impairment charges affected the Company's operating segments, as follows (in millions):
1999 ---- Spin-offs................................................... $ 34 National Group.............................................. 72 ---- $106 ====
7 8 COLUMBIA/HCA HEALTHCARE CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) UNAUDITED NOTE 3 -- RESTRUCTURING OF OPERATIONS (CONTINUED) 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. The Company's capital in excess of par value was reduced by approximately $687 million related to the spin-offs of LifePoint and Triad. For the quarter ended March 31, 1999, the LifePoint and Triad facilities had $502 million in revenues and incurred a net loss of $26 million for the quarter ended March 31, 1999. NOTE 4 -- RESTRUCTURING OF OPERATIONS AND INVESTIGATION RELATED COSTS The Company recorded the following pretax charges in connection with the restructuring of operations and investigations as discussed in Note 2 -- Investigations and Note 3 -- Restructuring of Operations (in millions):
QUARTER ------------ 2000 1999 ---- ---- Professional fees related to investigations................. $ 8 $19 Severance costs............................................. -- 2 Other....................................................... 5 9 --- --- $13 $30 === ===
The professional fees related to investigations represent incremental legal and accounting expenses that are being recognized on the basis of when the costs are incurred. The severance amounts in 1999 related primarily to a small group of executives associated with operations or functions that were ceased or divested. The liability balance for accrued severance and lease commitments was approximately $12 million at March 31, 2000. NOTE 5 -- 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. During the second quarter of 2000, the Company filed a petition with the Tax Court contesting certain claimed deficiencies and adjustments proposed by the IRS in connection with its examination of the Company's 1995 through 1996 Federal income tax returns. The disputed items include the disallowance of certain financing costs, system conversion costs and insurance premiums which were deducted in calculating taxable income, and the allocation of costs to fixed assets and goodwill in connection with hospitals acquired by the Company in 1995 and 1996. The IRS is claiming an additional $186 million in income taxes and interest through March 31, 2000. During the first quarter of 2000, the Company and the IRS filed a Stipulated Settlement with the Tax Court regarding the IRS' proposed disallowance of certain acquisition-related costs, executive compensation and systems conversion costs 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 8 9 COLUMBIA/HCA HEALTHCARE CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) UNAUDITED NOTE 5 -- INCOME TAXES (CONTINUED) governmental receivables. As a result of the settlement, the Company paid additional tax and interest of approximately $156 million during the first quarter of 2000. The settlement had no impact on the Company's results of operations. Tax Court decisions received in 1996 and 1997, related to the IRS' examination of 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 2000. Because no final decisions have been made regarding appeals of the decisions, the Company is presently unable to estimate the amount of any additional income tax and interest which the IRS may claim. During the first quarter of 2000, the IRS began an examination of the Company's 1997 and 1998 Federal income tax returns. The Company is presently unable to estimate the amount of any additional income tax and interest which the IRS may claim upon completion of the examination. 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 the final resolution of these disputes will not have a material adverse effect on the results of operations or financial position of the Company. NOTE 6 -- EARNINGS PER SHARE Basic earnings per share is computed on the basis of the weighted average number of common shares outstanding. Diluted earnings per share is computed on the basis of the weighted average number of common shares outstanding plus the dilutive effect of outstanding stock options and warrants using the treasury stock method and the assumed net share settlement of structured repurchases of common stock. The following table sets forth the computation of basic and diluted earnings per share for the quarters ended March 31, 2000 and 1999 (dollars in millions, except per share amounts):
QUARTER -------------------- 2000 1999 -------- -------- Net income.................................................. $ 296 $ 322 Weighted average common shares outstanding.................. 563,239 639,403 Effect of dilutive securities: Stock options............................................. 5,338 1,326 Warrants and other........................................ 4,477 4,282 -------- -------- Shares used for diluted earnings per share.................. 573,054 645,011 ======== ======== Earnings per share: Basic earnings per share.................................. $ .53 $ .50 Diluted earnings per share................................ $ .52 $ .50
NOTE 7 -- LONG-TERM DEBT In March 2000, the Company entered into a $1.2 billion term loan agreement (the "2000 Term Loan") with several banks. Proceeds from the 2000 Term Loan were used in the first quarter of 2000 to retire the outstanding balance under the $1.0 billion interim term loan agreement entered into in March 1999 and to reduce outstanding loans under the Company's revolving credit facility. 9 10 COLUMBIA/HCA HEALTHCARE CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) UNAUDITED NOTE 8 -- STOCK REPURCHASE PROGRAM In March 2000, the Company announced that its Board of Directors authorized the repurchase of up to $1 billion of additional common stock. During the first quarter of 2000, certain financial organizations repurchased approximately 5.3 million shares of the Company's common stock for approximately $119 million under forward purchase contracts, and in accordance with the terms of the contracts, these shares remain outstanding until settled by the Company. The Company expects to repurchase the remaining stock associated with the March 2000 repurchase authorization through open market purchases, privately negotiated transactions or forward purchase contracts. In November 1999, the Company announced that its Board of Directors had authorized the repurchase of up to $1 billion of its common stock. During the first quarter of 2000, the Company settled forward purchase contracts associated with its November 1999 authorization of approximately 8.5 million shares at a cost of $250 million. In accordance with the terms of the forward purchase contracts, the shares purchased remain outstanding until the forward purchase contracts are settled by the Company. The remaining November 1999 forward purchase contracts totaling approximately 25.9 million shares at a cost of approximately $750 million are expected to be settled during 2000. The significant terms of the forward purchase contracts utilized in the repurchase transactions include: (1) in consideration for the purchases, the Company is obligated to pay the counterparties an amount equal to their average cost to acquire the stock plus a rate of return that varies by contract (from LIBOR plus 125 basis points to LIBOR plus 150 basis points), (2) the contracts generally have a stated term of one year, but the Company may settle the contracts at any time, subject to certain notification requirements and (3) the Company may settle the contracts, at its discretion, by one of three methods: (a) physical settlement -- where the Company would pay cash in exchange for the shares or (b) net share settlement -- where the Company would issue shares to the counterparties or the counterparties would return shares to the Company in amounts that provide value equal to the differential between the market value of the shares on the settlement date less transaction costs and the counterparties' cost to acquire the shares plus the specified rate of return or (c) net cash settlement -- where the Company would pay cash to the counterparties or the counterparties would pay cash to the Company in amounts that would provide value equal to the differential between the market value of the shares on the settlement date less transaction costs and the cost to acquire the shares plus the specified rate of return. 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 Company and the government acknowledge that the amount of the letters of credit is not based upon the amount or expected amount of any potential settlement of the ongoing government investigation, and the agreement does not constitute an admission of liability by the Company. NOTE 9 -- CONTINGENCIES Significant Legal Proceedings Various lawsuits, claims and legal proceedings (see Note 2 -- Investigations and Part II, Item 1: Legal Proceedings, for a description of the ongoing government investigations and other legal proceedings) 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 10 11 COLUMBIA/HCA HEALTHCARE CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) UNAUDITED NOTE 9 -- CONTINGENCIES (CONTINUED) Significant Legal Proceedings (continued) estimated at this time due to the considerable uncertainties that exist. Therefore, it is possible that results of operations, financial position and liquidity in a particular period could be materially, adversely affected upon the resolution of certain of these contingencies. General Liability Claims The Company is subject to claims and suits arising in the ordinary course of business, including claims for personal injuries or wrongful restriction of, or interference with, physicians' staff privileges. In certain of these actions the claimants may seek punitive damages against the Company, which may not be 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 10 -- COMPREHENSIVE INCOME The components of comprehensive income, net of related taxes, for the quarters ended March 31, 2000 and 1999 are as follows (in millions):
QUARTER ------------ 2000 1999 ---- ---- Net income.................................................. $296 $322 Unrealized gains (losses) on securities..................... 8 (9) Foreign currency translation adjustments.................... -- (7) ---- ---- Comprehensive income........................................ $304 $306 ==== ====
The components of accumulated other comprehensive income, net of related taxes, at March 31, 2000 and December 31, 1999 are as follows (in millions):
2000 1999 ---- ---- Net unrealized gains on securities.......................... $67 $59 Foreign currency translation adjustments.................... (6) (6) --- --- Accumulated other comprehensive income...................... $61 $53 === ===
NOTE 11 -- SEGMENT AND GEOGRAPHIC INFORMATION The Company operates in one line of business, which is operating hospitals and related health care entities. During the quarters ended March 31, 2000 and 1999 approximately 30% and 31%, respectively, of the Company's revenues related to patients participating in the Medicare program. The Company's operations are structured into two geographically organized groups: the Eastern Group is comprised of 102 consolidating hospitals located in the Eastern United States and the Western Group is comprised of 81 consolidating hospitals located in the Western United States. These two groups represent the Company's core operations and are typically located in urban areas that are characterized by highly integrated facility networks. An additional group, the National Group, includes 7 consolidating hospitals which the Company intends to sell or close and which are located in the United States, but not in the Company's core markets. The Company also operates 2 consolidating hospitals in Switzerland. 11 12 COLUMBIA/HCA HEALTHCARE CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) UNAUDITED NOTE 11 -- SEGMENT AND GEOGRAPHIC INFORMATION (CONTINUED) The Company completed the spin-offs of LifePoint and Triad (the "Spin-offs") during the second quarter of 1999. LifePoint included 23 consolidating hospitals and Triad included 34 consolidating hospitals. See Note 3 -- Restructuring of Operations. The chief operating decision maker reviews geographic distributions of the Company's revenues, EBITDA, depreciation and amortization, and assets. EBITDA is defined as income before depreciation and amortization, interest expense, gains on sales of facilities, impairment of long-lived assets, restructuring of operations and investigation related costs, minority interests and income taxes. The Company's Chief Operating Officer, who is the Company's chief operating decision maker, uses EBITDA as an analytical indicator for purposes of allocating resources to geographic areas and assessing their performance. EBITDA is commonly used as an analytical indicator within the health care industry, and also serves as a measure of leverage capacity and debt service ability. EBITDA should not be considered as a measure of financial performance under generally accepted accounting principles, and the items excluded from EBITDA are significant components in understanding and assessing financial performance. Because EBITDA is not a measurement determined in accordance with generally accepted accounting principles and is thus susceptible to varying calculations, EBITDA as presented may not be comparable to other similarly titled measures of other companies. The geographic distributions of the Company's revenues, EBITDA, depreciation and amortization, and assets, restated for the 1999 restructuring of operations transactions (the spin-offs and transfers of certain facilities to the National Group), are summarized in the following table (dollars in millions):
QUARTER ---------------- 2000 1999 ------ ------ Revenues: Eastern Group............................................. $2,229 $2,077 Western Group............................................. 1,894 1,779 Corporate and other(a).................................... 88 75 National Group............................................ 60 222 Spin-offs................................................. -- 502 ------ ------ $4,271 $4,655 ====== ====== EBITDA: Eastern Group............................................. $ 548 $ 512 Western Group............................................. 367 311 Corporate and other(a).................................... (2) (14) National Group............................................ (7) 6 Spin-offs................................................. -- 63 ------ ------ $ 906 $ 878 ====== ====== Depreciation and amortization: Eastern Group............................................. $ 118 $ 116 Western Group............................................. 110 108 Corporate and other(a).................................... 24 25 National Group............................................ 4 12 Spin-offs................................................. -- 35 ------ ------ $ 256 $ 296 ====== ======
12 13 COLUMBIA/HCA HEALTHCARE CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) UNAUDITED NOTE 11 -- SEGMENT AND GEOGRAPHIC INFORMATION (CONTINUED)
MARCH 31, DECEMBER 31, 2000 1999 --------- ------------ Assets: Eastern Group............................................. $ 7,125 $ 6,915 Western Group............................................. 6,627 6,586 Corporate and other(a).................................... 2,722 3,144 National Group............................................ 256 240 ------- ------- $16,730 $16,885 ======= =======
- --------------- (a) Includes the Company's 2 consolidating hospitals located in Switzerland. 13 14 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FORWARD LOOKING STATEMENTS This Quarterly Report on Form 10-Q contains disclosures which contain "forward-looking statements." Forward-looking statements include all statements that do not relate solely to historical or current facts, and may be identified by the use of words like "may," "believe," "will," "expect," "project," "estimate," "anticipate," "plan," "initiative" or "continue." These forward-looking statements are based on the current plans and expectations of the Company and are subject to a number of known and unknown uncertainties and risks, many of which are beyond the Company's control, 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 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) ability to complete the share repurchase program, (xi) changes in accounting practices, (xii) changes in general economic conditions, (xiii) future divestitures which may result in additional charges, (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, (xviii) the ability to implement its shared services strategy, and (xix) other risk factors. As a consequence, current plans, anticipated actions and future financial condition and results 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 report, including in "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 and the initiation of additional investigations, if any, 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 9-Contingencies in the Notes to Condensed Consolidated Financial Statements.) BUSINESS STRATEGY The Company's primary objective is to provide the communities it serves a comprehensive array of quality health care services in the most cost effective manner possible. The Company's general, acute care hospitals usually provide a full range of services commonly available in hospitals to accommodate such medical specialties as internal medicine, general surgery, cardiology, oncology, neurosurgery, orthopedics and 14 15 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- (CONTINUED) BUSINESS STRATEGY (CONTINUED) obstetrics, as well as diagnostic and emergency services. Outpatient and ancillary health care services are provided by the Company's general, acute care hospitals, and through the Company's freestanding outpatient surgery and diagnostic centers and rehabilitation facilities. The Company's psychiatric hospitals provide a full range of mental health care services through inpatient, partial hospitalization and outpatient settings. The Company also operates preferred provider organizations in 47 states and the District of Columbia. 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 local physicians. The Company believes that its ability to attract and serve patients and physicians is enhanced by developing a comprehensive health care network with a broad range of health care services located throughout a market area. The Company also believes it is able to reduce operating costs by sharing certain services among several facilities in the same area and is better positioned to work with health maintenance organizations ("HMOs"), preferred provider organizations ("PPOs") and employers. In May 1999, the Company established LifePoint Hospitals, Inc. ("LifePoint") and Triad Hospitals, Inc. ("Triad"), as independent, publicly-traded companies through tax-free spin-offs of these companies to the Company's stockholders. The Company has substantially completed a restructuring of its operations, in an effort to create a smaller and more focused company. The divestiture of the Company's home health operations and the Value Health business units, the spin-offs of LifePoint and Triad and the sales of various other hospitals and surgery centers, not located in the Company's strategic locations, allow the Company's 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. The Company and the health care industry are facing many challenges, including the growing number of uninsured, reimbursement pressures from government and non-government payers and the increasing costs of supplies, pharmaceuticals and new technologies. As a response to these challenges, the Company is implementing a shared services initiative. This initiative is a company-wide program designed to reduce operating costs and provide additional resources for patient care by consolidating hospitals' back-office functions such as billing and collections and standardizing and upgrading financial services. In addition, the Company is implementing company-wide supply improvement and distribution programs that will include consolidating purchasing and accounts payable functions regionally, combining warehouses and developing division-based procurement programs. RESULTS OF OPERATIONS Revenue/Volume Trends The Company's revenues continue to be affected by an increasing proportion of revenue being derived from fixed payment, higher discount sources, including government payers, managed care providers and others. 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 by significant changes that were phased in through October 1, 1998, and will continue to be reduced as certain changes continue to be phased in during 2000 and 2001. BBA-97 contains a requirement that the Health Care Financing Administration adopt a prospective payment system ("PPS") for outpatient hospital services. The outpatient PPS is currently anticipated to be implemented on July 1, 2000. As of this date, the Company is not able to predict the effect, if any, that the outpatient PPS will have on its financial results. 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. 15 16 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- (CONTINUED) RESULTS OF OPERATIONS (CONTINUED) Revenue/Volume Trends (continued) The Company generally receives lower payments per patient under managed care plans than under traditional indemnity insurance plans or traditional Medicare. 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. Revenues from capitation arrangements (prepaid health service agreements) are less than 1% of consolidated revenues. Admissions related to Medicare, Medicaid and managed care plans and other discounted arrangements for the quarters ended March 31, 2000 and 1999 are set forth below.
QUARTERS ENDED MARCH 31, ---------------- 2000 1999 ------ ------ Medicare.................................................... 38.4% 39.9% Medicaid.................................................... 10.8 11.2 Managed care and other discounted........................... 41.6 38.8 Other....................................................... 9.2 10.1 ----- ----- 100.0% 100.0% ===== =====
Reductions in the rate of increase in Medicare and Medicaid reimbursement and increasing percentages of patient volume being related to patients participating in managed care plans are expected to present ongoing challenges to the 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 along with the implementation of its shared services initiative. 16 17 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- (CONTINUED) RESULTS OF OPERATIONS (CONTINUED) Operating Results Summary The following are comparative summaries of results from operations for the quarters ended March 31, 2000 and 1999 (dollars in millions, except per share amounts):
2000 1999 --------------- --------------- AMOUNT RATIO AMOUNT RATIO ------ ----- ------ ----- Revenues.................................................... $4,271 100.0 $4,655 100.0 Salaries and benefits....................................... 1,661 38.9 1,848 39.7 Supplies.................................................... 670 15.7 722 15.5 Other operating expenses.................................... 764 17.8 904 19.3 Provision for doubtful accounts............................. 302 7.1 338 7.3 Depreciation and amortization............................... 256 6.0 296 6.4 Interest expense............................................ 119 2.8 111 2.4 Equity in earnings of affiliates............................ (32) (0.7) (35) (0.7) Gains on sales of facilities................................ -- -- (249) (5.3) Impairment of long-lived assets............................. -- -- 106 2.3 Restructuring of operations and investigation related costs..................................................... 13 0.3 30 0.6 ------ ----- ------ ----- 3,753 87.9 4,071 87.5 ------ ----- ------ ----- Income before minority interests and income taxes........... 518 12.1 584 12.5 Minority interests in earnings of consolidated entities..... 26 0.6 14 0.3 ------ ----- ------ ----- Income before income taxes.................................. 492 11.5 570 12.2 Provision for income taxes.................................. 196 4.6 248 5.3 ------ ----- ------ ----- Net income.................................................. $ 296 6.9 $ 322 6.9 ====== ===== ====== ===== Basic earnings per share.................................... $ .53 $ .50 Diluted earnings per share.................................. $ .52 $ .50 % changes from prior year: Revenue................................................... (8.2)% (5.0)% Income before income taxes................................ (13.7) 49.5 Net income................................................ (8.0) 46.7 Basic earnings per share.................................. 6.0 47.1 Diluted earnings per share................................ 4.0 47.1 Admissions(a)............................................. (14.5) (6.0) Equivalent admissions(b).................................. (15.3) (7.1) Revenues per equivalent admission......................... 8.3 2.2 Same facility % changes from prior year(c): Revenues.................................................. 6.4 2.7 Admissions(a)............................................. 2.2 3.5 Equivalent admissions(b).................................. 2.5 3.6 Revenues per equivalent admission......................... 3.8 (0.8)
- --------------- (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 18 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- (CONTINUED) RESULTS OF OPERATIONS (CONTINUED) Quarters Ended March 31, 2000 and 1999 Income before income taxes decreased 13.7% to $492 million in 2000 from $570 million in 1999 and pretax margins decreased to 11.5% in 2000 from 12.2% in 1999. The decrease in pretax income was primarily attributable to gains on sales of facilities (an excess of $143 million in net gains over the $106 million in impairment charges) recorded in the first quarter of 1999. Excluding gains on sales of facilities and impairments of long-lived assets, income before income taxes increased 15.1% to $492 million in 2000 from $427 million in 1999. Revenues decreased 8.2% to $4.3 billion in 2000 compared to $4.7 billion in 1999. Inpatient admissions decreased 14.5% from 1999 and equivalent admissions (adjusted to reflect combined inpatient and outpatient volume) decreased 15.3%. Revenues, admissions and equivalent admissions declined primarily as a result of the Company's restructuring of operations. During 1999, the Company completed the spin-offs of LifePoint and Triad and the sales of 24 hospital facilities. On a same facility basis, revenues increased 6.4%, admissions increased 2.2% and equivalent admissions increased 2.5% from 1999. Revenue per equivalent admissions increased 8.3% from 1999 to 2000 and on a same facility basis increased 3.8%. The increase in revenue per equivalent admission on a same facility basis was primarily the result of successes achieved during 1999 in renegotiating and renewing certain managed care contracts on more favorable terms to the Company. The increase in revenue per equivalent admission on a consolidated basis was the result of the combination of the same facility improvement and the benefit from the restructuring of operations transactions. While the Company achieved some successes in managed care pricing, attaining revenue increases continues to present a challenge due to decreases in Medicare rates of reimbursement mandated by BBA-97 which became effective October 1, 1997 (lowered first quarter 2000 revenues by approximately $10 million) and a continuing shift in revenues away from traditional Medicare and indemnity payers to managed care (managed care as a percent of total admissions increased to 41.6% in 2000 compared to 38.8% in 1999). Salaries and benefits, as a percentage of revenues, decreased to 38.9% in 2000 from 39.7% in 1999 due to the restructuring of operations discussed above and in Note 3 -- Restructuring of Operations in the Notes to Condensed Consolidated Financial Statements. The salaries and benefits as a percentage of revenues for the facilities included in the spin-offs of Triad and LifePoint were 42.6% for the first quarter of 1999, and the salaries and benefits as a percentage of revenues for the facilities included in the Company's National Group was 47.5% for the first quarter of 1999. During 1999, 15 hospitals were divested from the Company's National Group. Salaries and benefits for the Company's core facilities as a percentage of revenues was 38.9% in 1999 compared to 38.7% in 2000. Man hours per equivalent admission for the Company's core facilities remained relatively flat compared to last year. Supply costs increased as a percentage of revenues to 15.7% in 2000 from 15.5% in 1999 due to an increase in the cost of supplies per equivalent admission on a same facility basis of 3.7% related 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) as a percentage of revenues, decreased to 17.8% in the first quarter of 2000 from 19.3% in 1999 due to the restructuring of operations discussed above and in Note 3 -- Restructuring of Operations in the Notes to Condensed Consolidated Financial Statements. The other operating expenses as a percentage of revenues for the facilities included in the spin-offs of Triad and LifePoint were 22.3% for the first quarter of 1999, and the other operating expenses as a percentage of revenues for the facilities included in the Company's National Group were 26.3% for the first quarter of 1999 and 30.3% for 2000. Other operating expenses for the Company's core facilities as a percentage of revenues were 18.6% in 1999 compared to 17.7% in 2000. 18 19 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- (CONTINUED) RESULTS OF OPERATIONS (CONTINUED) Quarters Ended March 31, 2000 and 1999 (continued) Provision for doubtful accounts, as a percentage of revenues, decreased to 7.1% in 2000 from 7.3% in 1999, however, the Company continues to experience trends that make it difficult to maintain or reduce the provision for doubtful accounts as a percentage of revenues. These trends include payer mix shifts to managed care plans (resulting in increased amounts of patient co-payments and deductibles), delays in payments and the denial of claims by managed care payers and increases in the volume of health care services provided to uninsured patients in certain of the Company's facilities. Equity in earnings of affiliates remained flat as a percentage of revenues at 0.7% in 2000 and 1999. Depreciation and amortization decreased as a percentage of revenues to 6.0% in 2000 from 6.4% in 1999, primarily due to the restructuring of operations discussed above. Depreciation and amortization as a percentage of revenues for the facilities included in the spin-offs of Triad and LifePoint was 7.0% in 1999, while the depreciation and amortization as a percentage of revenues for the Company's core facilities was 6.2% in 1999 and was 6.0% in 2000. Interest expense increased to $119 million in 2000 compared to $111 million in 1999 primarily as a result of an increase in interest rates during 2000 compared to 1999. The average rates for the Company's bank borrowings increased from 6.1% during the quarter ended March 31, 1999 to 7.3% during the quarter ended March 31, 2000. During 2000 and 1999, respectively, the Company incurred $13 million and $30 million of restructuring of operations and investigation related costs. In 2000, these costs included $8 million of professional fees (legal and accounting) related to the governmental investigations and $5 million of other costs. In 1999, restructuring of operations and investigation related costs included $19 million of professional fees (legal and accounting) related to the governmental investigations, $2 million of severance costs and $9 million of other costs. See Note 4 -- Restructuring of Operations and Investigation Related Costs in the Notes to Condensed Consolidated Financial Statements. During 1999, the Company recognized a pretax gain of $249 million ($151 million after-tax) on the sale of two hospitals and certain related health care facilities. Proceeds from the sales were used to repay bank borrowings. During 1999, the Company also identified and initiated, or revised, plans to divest or close during 1999 and 2000, 13 consolidating hospitals. The carrying value for the hospitals and other assets expected to be sold was reduced to fair value based upon estimates of sales values, for a total non-cash, pretax charge of approximately $106 million. See Note 3 -- Restructuring of Operations in the Notes to Condensed Consolidated Financial Statements. Minority interests increased slightly as a percentage of revenues to 0.6% in 2000 from 0.3% in 1999. The effective income tax rate was 43.6% in 1999 due to non-deductible intangible assets related to gains on sales of facilities and impairments of long-lived assets. If the effect of the nondeductible intangible assets and the related amortization were excluded, the effective income tax rate would have been approximately 39% for both 2000 and 1999. As previously discussed, the Company has substantially completed a restructuring of its operations. See Note 3 -- Restructuring of Operations in the Notes to Condensed Consolidated Financial Statements. Assuming the restructuring was completed as of the beginning of the period, the Company's remaining core facilities had combined net income which increased 19.4% to $310 million in 2000 from $260 million in 1999. Excluding gains on sales of facilities, impairment of long-lived assets and restructuring of operations and 19 20 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- (CONTINUED) RESULTS OF OPERATIONS (CONTINUED) Quarters Ended March 31, 2000 and 1999 (continued) investigation related costs, combined net income for the Company's remaining core facilities increased 14.4% to $320 million in 2000 from $279 million in 1999. Liquidity Cash provided by operating activities improved to $429 million during the first quarter of 2000 compared to $312 million in 1999. Cash used in investing activities was $300 million in 2000, compared to cash provided of $810 million during the first quarter of 1999. The decrease was due to proceeds from the disposition of hospitals and other health care facilities of $506 million in the first quarter of 1999 compared with $38 million in 2000. During 1999 cash flows from changes in investments were $541 million (including repayment by a nonconsolidated joint venture of Company advances of approximately $330 million) compared with cash used of $22 million in 2000. Cash flows used in financing activities totaled $186 million in the first quarter of 2000 compared to $833 million in 1999. The financing cash flows were primarily used to pay down debt in 1999 (approximately $424 million) and repurchase the Company's common stock (approximately $242 million and $408 million during the first quarter of 2000 and 1999, respectively). Working capital totaled $614 million as of March 31, 2000 compared to $265 million at December 31, 1999. At December 31, 1999 current liabilities included $500 million outstanding under the Company's senior interim term loan (the "1999 Term Loan"). In March 2000, the Company repaid the $500 million using proceeds from a new $1.2 billion senior term loan (the "2000 Term Loan"). Management believes that cash flows from operations, amounts available under the Company's revolving credit facility (the "Credit Facility") and the Company's access to debt markets are sufficient to meet expected liquidity needs during the remainder of 2000. Investments of the Company's professional liability insurance subsidiary to maintain statutory equity and pay claims totaled $1.7 billion at both March 31, 2000 and at December 31, 1999. 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 March 31, 2000. During the first quarter of 2000, the partner in the Winter Park Healthcare Group, Ltd. joint venture exercised its put option whereby the Company purchased a portion of the partner's interest in the joint venture for approximately $18 million. The Company cannot predict if, or when, other joint venture partners will exercise such options. During the first quarter of 1998, the Internal Revenue Service (the "IRS") issued guidance regarding certain tax consequences of joint ventures between for-profit and not-for-profit hospitals. As a result of the tax ruling, the IRS may propose to revoke the tax-exempt or public charity status of certain not-for profit entities which participate in such joint ventures or to treat joint venture income as unrelated business taxable income. The Company is continuing to review the impact of the tax ruling on its existing joint ventures, or the development of future ventures, and is consulting with its joint venture partners and tax advisers to develop appropriate courses of action. The tax ruling or any adverse determination by the IRS regarding the tax-exempt or public charity status of a not-for-profit partner or the characterization of joint venture income as unrelated business taxable income could limit joint venture development with not-for-profit hospitals, require the restructuring of certain existing joint ventures with not-for-profits and influence the exercise of the put agreements by certain existing joint venture partners. 20 21 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- (CONTINUED) RESULTS OF OPERATIONS (CONTINUED) Liquidity (continued) In March 2000, the Company announced that its Board of Directors authorized the repurchase of up to $1 billion of additional common stock. During the first quarter of 2000, certain financial organizations repurchased approximately 5.3 million shares of the Company's common stock for approximately $119 million under forward purchase contracts, and in accordance with the terms of the contracts, these shares remain outstanding until settled by the Company. The Company expects to repurchase the remaining stock associated with the March 2000 repurchase authorization through open market purchases, privately negotiated transactions or forward purchase contracts. In November 1999, the Company announced that its Board of Directors had authorized the repurchase of up to $1 billion of its common stock. During the first quarter of 2000, the Company settled forward purchase contracts associated with its November 1999 authorization of approximately 8.5 million shares at a cost of $250 million. In accordance with the terms of the forward purchase contracts, the shares purchased remain outstanding until the forward purchase contracts are settled by the Company. The remaining November 1999 forward purchase contracts totaling approximately 25.9 million shares at a cost of approximately $750 million are expected to be settled during 2000. 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 Company and the government acknowledge that the amount of the letters of credit agreement is not based upon the amount, or expected amount, of any potential settlement of the ongoing government investigation, and the agreement does not constitute an admission of liability by the Company. 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 the resolution of certain of the contingencies could have a material adverse effect on the Company's results of operations, financial position and liquidity. Capital Resources Excluding acquisitions, capital expenditures were $272 million during the first quarter of 2000 compared to $301 million for the same period in 1999. Planned capital expenditures in 2000 are expected to approximate $1.3 billion. Management believes that its capital expenditure program is adequate to expand, improve and equip its existing health care facilities. Acquisition of hospitals and health care entities and investments in and advances to affiliates (generally 50% interests in joint ventures that are accounted for using the equity method) totaled $18 million during the first quarter of 2000 compared with none during the first quarter of 1999. The Company expects to finance all capital expenditures with internally generated and borrowed funds. Available sources of capital include public or private debt markets, amounts available under the Company's Credit Facility (approximately $961 million as of April 30, 2000) and equity. At March 31, 2000, there were projects under construction which had an estimated additional cost to complete and equip over the next two years of approximately $821 million. In March 2000, the Company entered into the 2000 Term Loan. Proceeds from the 2000 Term Loan were used in the first quarter of 2000 to retire the outstanding balance under the 1999 Term Loan and to reduce outstanding loans under the Credit Facility. 21 22 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- (CONTINUED) RESULTS OF OPERATIONS (CONTINUED) Capital Resources (continued) The Credit Facility, the 2000 Term Loan and the $1.0 billion term loan which the Company entered into in July 1998 (the "1998 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 Company is currently in compliance with all such covenants. Market Risk The Company is exposed to market risk related to changes in interest rates and market values of securities. The Company currently does not use derivative instruments to offset the market risk exposure of the investments in debt or equity securities of the Company's wholly-owned insurance subsidiary or to alter the interest rate characteristics of the Company's debt instruments. The Company's investments in debt and equity securities were $1.1 billion and $542 million, respectively, at March 31, 2000. These investments are carried at fair value with changes in unrealized gains and losses being recorded as adjustments to stockholders' equity. The fair value of investments is generally based on quoted market prices. Changes in interest rates and market values of securities are not expected to be material in relation to the financial position and operating results of the Company. With respect to the Company's interest-bearing liabilities, approximately $2.15 billion of long-term debt at March 31, 2000 is subject to variable rates of interest, while the remaining balance in long-term debt of $4.34 billion at March 31, 2000 is subject to fixed rates of interest. The Company's variable interest rate is affected by both the general level of U.S. interest rates and the Company's credit rating. The Company's variable rate debt is comprised of the Company's Credit Facility of which interest is payable generally at LIBOR plus 0.45% to 1.5% (depending on the Company's credit ratings), and bank term loans of which interest is payable generally at LIBOR plus 0.75% to 2.5%. Due to increases in LIBOR, the average rate for the Company's Credit Facility increased from 5.8% for the quarter ended March 31, 1999 to 6.8% for the quarter ended March 31, 2000, and the average rate for the Company's term loans increased from 6.3% for the quarter ended March 31, 1999 to 7.4% for the quarter ended March 31, 2000. The estimated fair value of the Company's total long-term debt was $6.16 billion at March 31, 2000. The estimates of fair value are based upon the quoted market prices for the same or similar issues of long-term debt with the same maturities. Based on a hypothetical 1% increase in interest rates, the potential annualized losses in future pretax earnings would be approximately $21.5 million. The impact of such a change in interest rates on the carrying value of long-term debt would not be significant. The estimated changes to interest expense and the fair value of long-term debt are determined considering the impact of hypothetical interest rates on the Company's borrowing cost and long-term debt balances. To mitigate the impact of fluctuations in interest rates, the Company generally targets a portion of its debt portfolio at a fixed rate, either by borrowing on a fixed or floating rate basis or entering into interest rate swap transactions. The Company has not, during 2000 or 1999, participated in any interest rate swap agreements. Foreign operations and the related market risks associated with foreign currency are currently insignificant to the Company's results of operations and financial position. 22 23 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- (CONTINUED) IMPACT OF YEAR 2000 COMPUTER ISSUES The Company experienced no material adverse effect on its results of operations, financial condition or ability to provide for its patients' safety and health as a result of the Year 2000 date conversion in its or third party computer systems and programs. HEALTH CARE REFORM In recent years, an increasing number of legislative proposals have been introduced or proposed to Congress and in some state legislatures that would significantly affect health care systems in the Company's markets. The cost of certain proposals would be funded in significant part by reduction in payments by government programs, including Medicare and Medicaid, to health care providers (similar to the reductions incurred as part of BBA-97 as previously discussed). While the Company is unable to predict which, if any, proposals for health care reform will be adopted, there can be no assurance that proposals adverse to the business of the Company will not be adopted. PENDING IRS DISPUTES The Company is contesting income taxes and related interest proposed by the IRS for prior years aggregating approximately $186 million as of March 31, 2000. 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 5 -- Income Taxes in the Notes to Condensed Consolidated Financial Statements for a description of the pending IRS disputes). During the first quarter of 2000, the Company and the IRS filed a Stipulated Settlement with the Tax Court regarding the IRS' proposed disallowance of certain acquisition-related costs, executive compensation and systems conversion costs 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. As a result of the settlement, the Company paid additional tax and interest of approximately $156 million during the first quarter of 2000. The settlement had no impact on the Company's results of operations. 23 24 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- (CONTINUED) OPERATING DATA
2000 1999 ------- --------- CONSOLIDATING Number of hospitals in operation at: March 31.................................................. 192 273 June 30................................................... 204 September 30.............................................. 202 December 31............................................... 195 Number of freestanding outpatient surgical centers in operation at: March 31.................................................. 80 95 June 30................................................... 81 September 30.............................................. 81 December 31............................................... 80 Licensed hospital beds at(a): March 31.................................................. 42,006 51,797 June 30................................................... 43,969 September 30.............................................. 43,461 December 31............................................... 42,484 Weighted average licensed beds(b): Quarter: First................................................... 42,184 52,451 Second.................................................. 46,490 Third................................................... 43,511 Fourth.................................................. 42,850 Year...................................................... 46,291 Average daily census(c): Quarter: First................................................... 22,697 26,546 Second.................................................. 21,467 Third................................................... 19,704 Fourth.................................................. 20,385 Year...................................................... 22,002 Admissions(d): Quarter: First................................................... 408,100 477,400 Second.................................................. 395,800 Third................................................... 370,500 Fourth.................................................. 381,700 Year...................................................... 1,625,400 Equivalent Admissions(e): Quarter: First................................................... 595,900 703,300 Second.................................................. 596,900 Third................................................... 557,900 Fourth.................................................. 567,000 Year...................................................... 2,425,100 Average length of stay (days)(f): Quarter: First................................................... 5.1 5.0 Second.................................................. 4.9 Third................................................... 4.9 Fourth.................................................. 4.9 Year...................................................... 4.9
24 25 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- (CONTINUED) OPERATING DATA (CONTINUED)
2000 1999 ------- --------- NON-CONSOLIDATING(G) Number of hospitals in operation at: March 31.................................................. 13 24 June 30................................................... 16 September 30.............................................. 12 December 31............................................... 12 Number of freestanding outpatient surgical centers in operation at: March 31.................................................. 3 5 June 30................................................... 4 September 30.............................................. 3 December 31............................................... 3 Licensed hospital beds at: March 31.................................................. 3,251 6,015 June 30................................................... 3,868 September 30.............................................. 3,153 December 31............................................... 3,179
- --------------- (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 and are accounted for using the equity method of accounting. 25 26 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. In March 2000, the Company received a subpoena that requested records relating to wound care centers. 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 Tricare (formerly CHAMPUS) 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. The government and the fourth employee executed an agreement to defer prosecution for 18 months after which charges will be dismissed. The two convicted employees were sentenced in December 1999 and both have appealed to the 11th Circuit. Several hospitals 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 Tricare 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 26 27 companies defrauded the Medicare program. Kimberly pled guilty to three separate felony charges (conspiracy, mail fraud and violating the Medicare anti-kickback statute) filed by the U.S. Attorneys in the Middle and Southern District of Florida and the Northern District of Georgia. 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 we remain unable 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 9 -- Contingencies in 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 six 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. sec.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, pursuant to 28 U.S.C. sec. 1407, all qui tam actions against the Company, including those sealed and unsealed, for purposes of discovery and pretrial matters, to the United States District Court for the District of Columbia. The MDL Panel denied the Motion on procedural grounds. On August 12, 1999, the United States Government filed an Application to Conduct 28 U.S.C. sec. 1407 Consolidated Proceedings under seal with the MDL Panel. The underlying motion to consolidate the proceedings relates to the qui tam cases against the Company, both sealed and unsealed. 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 and served an Amended Complaint against Quorum Health Group. 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 27 28 Healthcare Organizations (JCAHO) in order to be eligible for Medicare payments, thereby rendering false defendants' claims for Medicare reimbursement. An Amended 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 health care programs and shifted costs to its Medicare cost reports. Defendants have moved to dismiss the Complaint, and that motion is pending. Defendants have also moved to stay discovery while the motion to dismiss is pending. The government announced that it intervened on all counts of the Amended Complaint 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. This action is currently stayed. 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 (above), 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 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, there is currently a stay of discovery. 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 28 29 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. In August 1999, the Company was made aware that the case of United States ex rel. Tonya M. Atchison v. Col/HCA Healthcare, Inc., El Paso Healthcare System, Ltd., Columbia West Radiology Group, P.A., West Texas Radiology Group, Rio Grande Physicians' Services Inc., El Paso Nurses Unlimited Inc., El Paso Healthcare Systems Limited, and El Paso Healthcare Systems United Partnership, No. EP 97-CA234, was unsealed in the U.S. District Court for the Western District of Texas and the Company was served on or about September 16, 1999. In general, the complaint alleges that the defendants submitted false claims regarding the 72-hour rule, cost reports and central business office billings, wrote-off bad debt on international patients, inflated financial information on the sale of a hospital, improperly billed pharmacy charges and radiology charges, improperly billed skilled nursing facility charges, improperly accounted for discounts and rebates, improperly billed certified first assistants in surgery, home health visits, senior health centers, diabetic treatment and wound care centers. The government has not intervened in this action. The parties have agreed to extend the time within which to respond to the complaint. On November 10, 1999, the Company was served with the case of United States ex rel. Ronald L. Campbell and Daniel C. Rice v. Montgomery County Hospital District, Montgomery County Health Care Foundation, and Conroe Hospital Corp., Case No. H-97-3502, in the Southern District of Texas. The complaint alleges that the Company conspired with Montgomery County Hospital District ("MCHD") to conceal the fact that MCHD knowingly overstated capital losses, resulting in the avoidance of "recapture liability" on the cost reports. The court has stayed this case. The government has not intervened in this case. In February 2000, the matter of United States of America, ex rel. Michael R. Marine v. Columbia Aventura Medical Center, Columbia Cedars Medical Center, Columbia Hospital, Columbia/HCA Healthcare Corporation, Columbia JFK Medical Center, Columbia Kendall Regional Medical Center, Columbia Miami Heart Institute, Columbia Northwest Medical Center, Columbia University Hospital and Medical Center, and Columbia Westside Regional Medical Center Case No. 97-4368 (S.D. Fla.) was unsealed. The government intervened on or about February 15, 2000. The complaint alleges that the Company submitted false claims pertaining to the costs incurred by its nine south Florida hospitals for home health services furnished to homebound patients. The Company has not been served with the Complaint. In approximately March 2000, the matter of United States of America ex rel., Bruce S. Skinner, M.D. v. North Trident Regional Hospital, Inc., Columbia/HCA Healthcare Corp. of South Carolina, Inc., Columbia Physician Services, Inc., and Columbia/HCA Healthcare Corporation, Case No. 2-00-0076-23 (U.S. District Court, District of South Carolina, Charleston Division) was unsealed. The Complaint alleges that the defendants committed fraud and engaged in the upcoding of billing for physician/employees' professional services. The Government has declined to intervene in this case. 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 29 30 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, 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 filed objections to the Magistrate's recommendations with the District Court, and defendants filed responsive pleadings. In September 1999, the District Court entered an Order granting the defendants' motion to dismiss McCall, H. Carl, as Comptroller of the State of New York and as Trustee of the New York State Retirement Fund, derivatively on behalf of Columbia/HCA Healthcare Corporation v. Richard L. Scott, et al., No. 3-97-0838 with prejudice. The plaintiffs in the McCall lawsuit have filed an appeal from that order. Defendants filed their brief in opposition to the appeal in March 2000. The plaintiffs filed their reply brief in May 2000. 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 the Company's 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 the Company's stock made in breach of their fiduciary duties; 30 31 (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 suit alleges, among other things, breach of fiduciary duties resulting in damage to the Company. The lawsuit seeks 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 United States District Court, Middle District of Tennessee (Case No. 3:98-0846). 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. As a result of the court's September 1, 1999, order dismissing the McCall lawsuit, this lawsuit was also dismissed with prejudice. The plaintiffs in this lawsuit have filed an appeal from that order. Defendants filed their brief in opposition to the appeal in March 2000. Plaintiffs filed their reply brief in May 2000. 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 (see cases below) 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 31 32 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 was entered that provided 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. Effective November 2, 1999, a sixth case, The United Paperworkers International Union, et al. v. Columbia/HCA Healthcare Corporation, et al., was transferred by the MDL Panel for consolidated pretrial proceedings. On December 30, 1999, plaintiffs filed a motion seeking leave to file a first amended coordinated complaint, which has not been ruled on by the court. The parties are currently engaged in discovery pending a ruling by the court on plaintiffs' motion. 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 No. 597CV203. The original complaint alleged violations of the Racketeering Influenced and Corrupt Organization Act ("RICO") based on allegations that the defendant 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. (See In re: Columbia/HCA Healthcare Corporation Billing Practices Litigation, above.) 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 32 33 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. (See In re: Columbia/HCA Healthcare Corporation Billing Practices Litigation, above.) 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. (See In re: Columbia/HCA Healthcare Corporation Billing Practices Litigation, above.) 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 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. Following the service of this complaint on the Company on August 20, 1999, the Company subsequently removed this lawsuit to the United States District Court for the Eastern District of Tennessee and it has been conditionally transferred by the MDL Panel to the Middle District of Tennessee for consolidated pretrial proceedings with In re: Columbia/HCA Healthcare Corporation Billing Practices Litigation. (See In re: Columbia/HCA Healthcare Corporation Billing Practices Litigation, above.) 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, Harold Jackson moved to 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 33 34 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 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. On August 27, 1999, the Court of Appeals issued an opinion affirming the trial court's denial of Summit's Motion for Summary Judgment. Summit filed an application for permission to appeal to the Tennessee Supreme Court in October 1999. On December 10, 1999, the Tennessee Supreme Court granted permission for the Tennessee Hospital Association and Adventist Health System Sunbelt Healthcare Corporation to file an amicus brief in this case. 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 health care 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 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 34 35 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 (above) 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 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 also claimed the right to recover attorneys' fees and costs. 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 appealed the September 1998 orders. In November 1999, the Court of Appeals affirmed the lower court's order denying attorneys' fees but did not address the issue of costs, stating the issue was premature. An order was entered in the trial court establishing that plaintiffs were entitled to costs, but no dollar amount was fixed. We filed a motion asking that the trial court reconsider its award of costs to plaintiffs. The trial court vacated its September 1998 order regarding the award of costs, and another hearing was held in March 2000 on this issue. On March 10, 2000, the trial court entered an order denying the plaintiffs' motion for costs. The plaintiffs have not filed an appeal regarding this order, and the filing deadline has passed. Accordingly, there are no remaining issues in this litigation and the case will be closed. 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 in question 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 9 -- Contingencies in the Notes to Condensed Consolidated Financial Statements. 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 35 36 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 Company's 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. Additional oral arguments were held on March 23, 2000. 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 and third-party complaint have filed answers to the counterclaim and third-party complaint. Discovery has been conducted and several dispositive motions are pending with the court. Two law firms representing groups of health insurers have approached the Company and alleged that the Company's affiliates may have overcharged or otherwise improperly billed the health insurers for various types of medical care during the time frame from 1994 through 1997. The Company has engaged in discussions with these law firms, but no litigation has been filed. The Company is unable to determine if litigation will be filed, and if filed, what damages would be asserted. The Company intends to pursue the defense of these actions and prosecution of its counterclaims and third party claims vigorously. The Company from time to time is a party to certain proceedings in the United States Tax Court and the United States Court of Federal Claims. For a description of those proceedings, see Note 5 -- Income Taxes in the Notes to Condensed Consolidated Financial Statements. 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 may not be 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. 36 37 ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K. (a) List of Exhibits: Exhibit 10 -- Columbia/HCA Healthcare Corporation 2000 Performance Equity Incentive Plan (which plan is filed herewith).* Exhibit 12 -- Statement re Computation of Ratio of Earnings to Fixed Charges. Exhibit 27 -- Financial Data Schedule.* (For SEC use only). *Included only in filings under the Electronic Data, Gathering, Analysis and Retrieval system. (b) Reports on Form 8-K filed during the quarter ended March 31, 2000: On February 16, 2000, the Company filed a report on Form 8-K which included its operating results for the year and fourth quarter ended December 31, 1999. 37 38 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: May 11, 2000 38 EX-10 2 EQUITY INCENTIVE PLAN 1 EXHIBIT 10 COLUMBIA/HCA HEALTHCARE CORPORATION PERFORMANCE EQUITY INCENTIVE PLAN Purpose and Administration of the Plan The Performance Equity Incentive Plan ("Plan") has been established to encourage outstanding performance of employees who are in a position to make substantial contributions to the success of the Company. This plan is governed by the Columbia/HCA Healthcare Corporation 1992 Stock and Incentive Plan, or if approved by the Company's stockholders, The Columbia/HCA Healthcare Corporation 2000 Equity Incentive Plan and is administered by the Compensation Committee. Participation Eligibility to participate in the Plan shall be extended generally to all full time regular/corporate payroll Director and above with at least three months employment in the fiscal year ("Participants") subject to approval by the CEO of Columbia/HCA Healthcare Corporation. For a Participant added during the Fiscal Year, the consideration shall be determined pursuant to the Plan and prorated. Proration may also apply to employees who transfer to a position eligible for a different incentive target. Incentive Calculation and Payment Plan payments for Participants are based on a combination of financial/non financial measurements (see chart below). As soon as practical, after the Fiscal Year, when the financial results of the Company are known, the appropriate senior officer will review and recommend plan payments. The Committee may make adjustments to performance targets deemed necessary to avoid unwarranted penalties or windfalls. Such adjustments will recognize uncontrollable outside factors and will be kept to a minimum. Payments shall be made as soon as practicable, after the annual audit report has been issued, but in no event later than three months after the Fiscal Year. Payments will be in the form of restricted stock that will vest at 50% per year over the following two years. This Plan is not a "qualified" plan for tax purposes, and any payments are subject to tax withholding requirements. Plan Measurements
FINANCIAL NON FINANCIAL ---------------------------------------------- -------------------------------- SWB as % of Net, Cash Flow, Satisfaction EBITDA AR/Bad Debt ------------ (Actual to Department Or Supply Corp-Client Individual Budget)* Budget*** Expense as % Ops-Patient Specific Goals*** - -------------------------------------------------------------------------------------------------------------- Covered Officer 100% - -------------------------------------------------------------------------------------------------------------- Corporate 25% 25% ** 50% - -------------------------------------------------------------------------------------------------------------- Operations AND SVPS 50% 20% 15% 15% ==============================================================================================================
*NOTE: EBITDA will have an upside potential of up to 150% for exceeding budget by 10% (both operations and Corporate). **Each Corporate participant will have at least one Individual Specific Goal related to Client Satisfaction. ***Some Corporate departments may be measured on some other financial measure as approved by the SVP Human Resources and the Company COO. 1 2 Termination of Participant In the event a payment is due pursuant to the Plan and a Participant's employment with the Company is terminated prior to the payment by reason of retirement, total and permanent disability or death, such Participant (or estate in the event of death) shall receive a pro rata payment as soon as practical after the Fiscal Year, but in no event later than the three months after the Fiscal Year. The Committee or it's designee shall have authority to accelerate vesting on all unvested shares. A Participant who is otherwise voluntarily or involuntarily separated prior to the payment of any Incentive Compensation shall cease to be a Participant and shall not have earned any right to receive any payments pursuant to the Plan. 2 EX-12 3 COMPUTATION OF EARNINGS PER SHARE 1 EXHIBIT 12 COLUMBIA/HCA HEALTHCARE CORPORATION COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES FOR THE QUARTERS ENDED MARCH 31, 2000 AND 1999 (DOLLARS IN MILLIONS)
2000 1999 ---- ---- EARNINGS: Income before minority interests and income taxes........... $518 $584 Fixed charges, excluding capitalized interest............... 144 142 ---- ---- $662 $726 ==== ==== FIXED CHARGES: Interest charged to expense................................. $119 $111 Interest portion of rental expense and amortization of deferred loan costs....................................... 25 31 ---- ---- Fixed charges, excluding capitalized interest............... 144 142 Capitalized interest........................................ 5 6 ---- ---- $149 $148 ==== ==== Ratio of earnings to fixed charges.......................... 4.43 4.91
EX-27 4 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE STATEMENTS OF INCOME AND BALANCE SHEETS OF COLUMBIA/HCA HEALTHCARE CORPORATION FOR THE THREE MONTHS ENDED MARCH 31, 2000 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000,000 3-MOS DEC-31-2000 JAN-01-2000 MAR-31-2000 133 0 3,513 1,537 377 3,409 14,273 5,724 16,730 2,795 5,771 0 0 6 5,684 16,730 0 4,271 0 2,331 764 302 119 492 196 296 0 0 0 296 0.53 0.52
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