-----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, Qf/JXqE+i5afhvqCtZyR9qdqzhCOcwEtvm9DLcET4NClx77i2MotP7VdjmhVXcnF j745m13P8Q+3F5Z6zrd73A== 0000950144-99-013344.txt : 19991117 0000950144-99-013344.hdr.sgml : 19991117 ACCESSION NUMBER: 0000950144-99-013344 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 19990930 FILED AS OF DATE: 19991115 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: 99756875 BUSINESS ADDRESS: STREET 1: ONE PARK PLZ CITY: NASHVILLE STATE: TN ZIP: 37203 BUSINESS PHONE: 6153449551 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 SEPTEMBER 30, 1999 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 OCTOBER 31, 1999 --------------------- ------------------------------- Voting common stock, $.01 par value 542,276,800 shares Nonvoting common stock, $.01 par value 21,000,000 shares
- -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 2 COLUMBIA/HCA HEALTHCARE CORPORATION FORM 10-Q SEPTEMBER 30, 1999
PAGE OF FORM 10-Q --------- PART I: FINANCIAL INFORMATION Item 1. Financial Statements Condensed Consolidated Statements of Income -- for the quarters and nine months ended September 30, 1999 and 1998..................................... 3 Condensed Consolidated Balance Sheets -- September 30, 1999 and December 31, 1998.................... 4 Condensed Consolidated Statements of Cash Flows -- for the nine months ended September 30, 1999 and 1998..................................... 5 Notes to Condensed Consolidated Financial Statements........................................ 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations................. 13 PART II: OTHER INFORMATION Item 1. Legal Proceedings................................... 29 Item 6. Exhibits and Reports on Form 8-K.................... 40
2 3 COLUMBIA/HCA HEALTHCARE CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF INCOME FOR THE QUARTERS AND NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998 UNAUDITED (DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
QUARTER NINE MONTHS -------------------- -------------------- 1999 1998 1999 1998 -------- -------- -------- -------- Revenues.................................................. $ 3,899 $ 4,579 $ 12,715 $ 14,261 Salaries and benefits..................................... 1,583 1,900 5,119 5,911 Supplies.................................................. 618 730 1,994 2,195 Other operating expenses.................................. 733 914 2,451 2,815 Provision for doubtful accounts........................... 318 369 985 1,052 Depreciation and amortization............................. 262 312 836 932 Interest expense.......................................... 122 142 351 440 Equity in earnings of affiliates.......................... (8) (16) (73) (91) Gains on sales of facilities.............................. -- (537) (257) (537) Impairment of long-lived assets........................... -- 334 160 334 Restructuring of operations and investigation related costs................................................... 24 21 84 90 -------- -------- -------- -------- 3,652 4,169 11,650 13,141 -------- -------- -------- -------- Income from continuing operations before minority interests and income taxes.............................. 247 410 1,065 1,120 Minority interests in earnings of consolidated entities... 13 16 41 54 -------- -------- -------- -------- Income from continuing operations before income taxes..... 234 394 1,024 1,066 Provision for income taxes................................ 96 231 458 511 -------- -------- -------- -------- Income from continuing operations......................... 138 163 566 555 Discontinued operations: Loss from operations of discontinued businesses, net of income tax benefit of $20 for the quarter and $33 for the nine months ended September 30, 1998.............. -- (17) -- (61) Loss on disposal of certain discontinued businesses..... -- -- -- (73) -------- -------- -------- -------- Net income....................................... $ 138 $ 146 $ 566 $ 421 ======== ======== ======== ======== Basic earnings per share: Income from continuing operations....................... $ .25 $ .25 $ .95 $ .86 Discontinued operations: Loss from operations of discontinued businesses....... -- (.03) -- (.10) Loss on disposal of certain discontinued businesses... -- -- -- (.11) -------- -------- -------- -------- Net income....................................... $ .25 $ .22 $ .95 $ .65 ======== ======== ======== ======== Diluted earnings per share: Income from continuing operations....................... $ .24 $ .25 $ .95 $ .86 Discontinued operations: Loss from operations of discontinued businesses....... -- (.03) -- (.10) Loss on disposal of certain discontinued businesses... -- -- -- (.11) -------- -------- -------- -------- Net income....................................... $ .24 $ .22 $ .95 $ .65 ======== ======== ======== ======== Shares used in earnings per share calculations (in thousands): Basic................................................... 562,539 644,959 593,021 643,494 Diluted................................................. 567,789 647,243 598,594 646,734 Cash dividends per share.................................. $ .02 $ .02 $ .06 $ .06
See accompanying notes. 3 4 COLUMBIA/HCA HEALTHCARE CORPORATION CONDENSED CONSOLIDATED BALANCE SHEETS UNAUDITED (DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
SEPTEMBER 30, DECEMBER 31, 1999 1998 ------------- ------------ ASSETS Current assets: Cash and cash equivalents................................. $ 124 $ 297 Accounts receivable, less allowances for doubtful accounts of $1,571 in 1999 and $1,645 in 1998................... 1,834 2,096 Inventories............................................... 367 434 Income taxes receivable................................... 188 149 Other..................................................... 1,002 887 ------- ------- 3,515 3,863 Property and equipment, at cost............................. 13,955 15,644 Accumulated depreciation.................................... (5,650) (6,195) ------- ------- 8,305 9,449 Investments of insurance subsidiary......................... 1,545 1,614 Investments in and advances to affiliates................... 617 1,275 Intangible assets, net...................................... 2,481 2,910 Other....................................................... 164 318 ------- ------- $16,627 $19,429 ======= ======= LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable.......................................... $ 608 $ 784 Accrued salaries.......................................... 384 425 Other accrued expenses.................................... 1,147 1,282 Long-term debt due within one year........................ 1,010 1,068 ------- ------- 3,149 3,559 Long-term debt.............................................. 5,522 5,685 Professional liability risks, deferred taxes and other liabilities............................................... 1,679 1,839 Minority interests in equity of consolidated entities....... 768 765 Stockholders' equity: Common stock, $.01 par; authorized 1,600,000,000 voting shares and 50,000,000 nonvoting shares; outstanding 542,282,000 voting shares and 21,000,000 nonvoting shares -- September 30, 1999 and 621,578,300 voting shares and 21,000,000 nonvoting shares -- December 31, 1998................................................... 6 6 Capital in excess of par value............................ 934 3,498 Other..................................................... 8 11 Accumulated other comprehensive income.................... 43 80 Retained earnings......................................... 4,518 3,986 ------- ------- 5,509 7,581 ------- ------- $16,627 $19,429 ======= =======
See accompanying notes. 4 5 COLUMBIA/HCA HEALTHCARE CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998 UNAUDITED (DOLLARS IN MILLIONS)
1999 1998 ------- ------- Cash flows from continuing operating activities: Net income................................................ $ 566 $ 421 Adjustments to reconcile net income to net cash provided by continuing operating activities: Provision for doubtful accounts...................... 985 1,052 Depreciation and amortization........................ 836 932 Income taxes......................................... (117) 632 Gains on sales of facilities......................... (257) (537) Impairment of long-lived assets...................... 160 334 Loss from discontinued operations.................... -- 134 Changes in operating assets and liabilities.......... (1,387) (1,416) Other................................................ 20 15 ------- ------- Net cash provided by continuing operating activities.......................................... 806 1,567 ------- ------- Cash flows from investing activities: Purchase of property and equipment................... (936) (969) Acquisition of hospitals and health care entities.... -- (116) Disposition of hospitals and health care entities.... 660 1,570 Spin-off of facilities to stockholders............... 886 -- Change in investments................................ 557 (269) Change in net assets of discontinued operations, net................................................. -- 48 Sale of certain discontinued operations.............. -- 662 Other................................................ 17 102 ------- ------- Net cash provided by investing activities............ 1,184 1,028 ------- ------- Cash flows from financing activities: Issuance of long-term debt........................... 1,024 -- Net change in bank borrowings........................ (441) (2,433) Repayment of long-term debt.......................... (826) (141) Payment of cash dividends............................ (35) (39) Issuances (repurchases) of common stock, net......... (1,905) 81 Other................................................ 20 2 ------- ------- Net cash used in financing activities................ (2,163) (2,530) ------- ------- Change in cash and cash equivalents......................... (173) 65 Cash and cash equivalents at beginning of period............ 297 110 ------- ------- Cash and cash equivalents at end of period.................. $ 124 $ 175 ======= ======= Interest payments........................................... $ 320 $ 412 Income tax payments (refunds), net.......................... $ 565 $ (116)
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 September 30, 1999, these affiliates owned and operated 202 hospitals, 81 freestanding surgery centers and provided extensive outpatient and ancillary services. Affiliates of Columbia/HCA Healthcare Corporation are also partners in several 50/50 joint ventures that own and operate 12 hospitals and 3 freestanding surgery centers which are accounted for using the equity method. The affiliates' facilities are located in 24 states, England and Switzerland. The terms "Columbia/HCA" or the "Company," as used in this Quarterly Report on Form 10-Q, refer to Columbia/HCA Healthcare Corporation and its affiliates unless otherwise stated or indicated by context. The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments considered necessary for a fair presentation have been included. Operating results for the quarter and nine months ended September 30, 1999, are not necessarily indicative of the results that may be expected for the year ending December 31, 1999. For further information, refer to the consolidated financial statements and footnotes thereto included in the Company's Annual Report on Form 10-K for the year ended December 31, 1998. Certain prior year amounts have been reclassified to conform to the current year presentation. NOTE 2 -- INVESTIGATIONS The Company is currently the subject of several Federal investigations into its business practices, as well as governmental investigations by various states. The Company is cooperating in these investigations and understands, through written notice and other means, that it is a target in these investigations. Given the breadth of the ongoing investigations, the Company expects additional investigative and prosecutorial activity to occur in these and other jurisdictions in the future. Columbia/HCA is a defendant in several qui tam actions brought by private parties on behalf of the United States of America, which have been unsealed and served on Columbia/HCA. The actions allege, in general, that Columbia/HCA and certain subsidiaries and/or affiliated partnerships violated the False Claims Act by submitting improper claims to the government for reimbursement. The lawsuits generally seek damages of three times the amount of all Medicare or Medicaid claims (involving false claims) presented by the defendants to the Federal government, civil penalties of not less than $5,000 nor more than $10,000 for each such Medicare or Medicaid claim, attorney's fees and costs. The government has intervened in five unsealed qui tam actions. Columbia/HCA is aware of additional qui tam actions that remain under seal and believes that there are other sealed qui tam cases of which it is unaware. The Company is the subject of a formal order of investigation by the Securities and Exchange Commission. The Company understands that the investigation includes the anti-fraud, insider trading, periodic reporting and internal accounting control provisions of the Federal securities laws. Management believes it is too early to predict the outcome or effect of the ongoing investigations or qui tam and other actions. If Columbia/HCA is found to have violated Federal or state laws relating to Medicare, Medicaid or similar programs, the Company could be subject to substantial monetary fines, civil and criminal penalties and exclusion from participation in the Medicare and Medicaid programs. Similarly, the amounts claimed in the qui tam and other actions are substantial, and Columbia/HCA could be subject to substantial costs resulting from an adverse outcome of one or more such actions. Any such sanctions or losses could have 6 7 COLUMBIA/HCA HEALTHCARE CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) UNAUDITED NOTE 2 -- INVESTIGATIONS (CONTINUED) a material adverse effect on the Company's financial position and results of operations. (See Note 10--Contingencies and Part II, Item 1: Legal Proceedings.) NOTE 3 -- RESTRUCTURING OF OPERATIONS The Company has substantially completed the restructuring of its operations in an effort to create a smaller and more focused company. The restructuring included the divestitures of certain hospitals, surgery centers and related facilities, the spin-offs of LifePoint Hospitals, Inc. ("LifePoint") and Triad Hospitals, Inc. ("Triad") and the divestitures of the Company's home health and certain other businesses, as described in Note 5 -- Discontinued Operations. Divestiture of Certain Hospitals and Surgery Centers During 1999, the Company recognized a net pretax gain of $257 million ($151 million after-tax) on the sale of three hospitals and certain related health care facilities. Proceeds from the sales were used to repay bank borrowings. During the first nine months of 1999, management identified and initiated, or revised, plans to divest or close during 1999 and 2000, 19 consolidating hospitals and 4 non-consolidating hospitals. The carrying value for the hospitals and other assets expected to be sold was reduced to fair value of approximately $195 million, based upon estimates of sales values, for a total non-cash, pretax charge of approximately $160 million. The hospitals and other assets for which the impairment charge was recorded had net revenues of approximately $101 million and $167 million for the quarters ended September 30, 1999 and 1998, respectively, and approximately $421 million and $530 million for the nine months ended September 30, 1999 and 1998, respectively. These facilities incurred losses from continuing operations before the pretax charge and income tax benefits of approximately $20 million and $19 million for the quarters ended September 30, 1999 and 1998, respectively, and approximately $40 million and $48 million for the nine months ended September 30, 1999 and 1998, respectively. During the first nine months of 1999, the Company completed the sales of 5 of the 19 consolidating hospitals and the 4 non-consolidating hospitals, and 4 of the consolidating hospitals were included in the spin-off of Triad. The Company completed the sales of 3 consolidating hospitals in October 1999. The proceeds from the completed sales approximated the carrying values and were used to repay bank borrowings. Proceeds from the expected divestitures will be used to repay bank borrowings. Spin-Offs On May 11, 1999, the Company completed the spin-offs of LifePoint and Triad through a distribution of one share of LifePoint common stock and one share of Triad common stock for every 19 shares of the Company's common stock outstanding on April 30, 1999. Triad was comprised of 34 consolidating hospitals and LifePoint was comprised of 23 consolidating hospitals. Capital in excess of par value was reduced by approximately $683 million for the spin-offs of LifePoint and Triad. 7 8 COLUMBIA/HCA HEALTHCARE CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) UNAUDITED NOTE 4 -- RESTRUCTURING OF OPERATIONS AND INVESTIGATION RELATED COSTS During 1999 and 1998, the Company recorded the following pretax charges related to the investigation and restructuring of operations as discussed in Note 2 -- Investigations and Note 3 -- Restructuring of Operations (in millions):
QUARTER NINE MONTHS ------------ ------------ 1999 1998 1999 1998 ---- ---- ---- ---- Professional fees related to investigations and restructuring of operations............................ $20 $20 $62 $72 Other.................................................... 4 1 22 18 --- --- --- --- $24 $21 $84 $90 === === === ===
NOTE 5 -- DISCONTINUED OPERATIONS Discontinued operations included three of the four business units acquired in the Company's August 1997 merger with Value Health, Inc. ("Value Health") and the Company's home health care businesses. During 1997, the Company implemented plans to dispose of these businesses. During the second and third quarters of 1998, the Company completed the sales of the three Value Health units for proceeds totaling $662 million. The proceeds from the sales were used to repay bank borrowings. The Company recorded a $73 million loss upon completion of these sales during the second quarter of 1998, representing an adjustment to the tax benefit related to the estimated $443 million after-tax loss on disposal of discontinued operations recorded in the fourth quarter of 1997. During the third and fourth quarters of 1998, the Company completed five separate sales transactions that included substantially all of the Company's home health care operations and received approximately $90 million in proceeds. The proceeds from the sales were used to repay bank borrowings. Revenues of the discontinued businesses totaled $98 million and $920 million for the quarter and nine months ended September 30, 1998, respectively. NOTE 6 -- INCOME TAXES The Company is currently contesting before the United States Tax Court (the "Tax Court") and the United States Court of Federal Claims certain claimed deficiencies and adjustments proposed by the IRS in conjunction with its examination of the Company's 1994 Federal income tax return, Columbia Healthcare Corporation's ("CHC") 1993 and 1994 Federal income tax returns, HCA-Hospital Corporation of America's ("HCA") 1981 through 1988 and 1991 through 1993 Federal income tax returns and Healthtrust, Inc.-The Hospital Company's ("Healthtrust") 1990 through 1994 Federal income tax returns. The disputed items include: the disallowance of certain acquisition-related costs, executive compensation, system conversion costs and insurance premiums which were deducted in calculating taxable income and the methods of accounting used by certain subsidiaries for calculating taxable income related to vendor rebates and governmental receivables. The IRS is claiming an additional $374 million in income taxes and interest with respect to disputed issues through September 30, 1999. The Company expects to receive a Statutory Notice of Deficiency ("Statutory Notice") during the first quarter of 2000 in connection with the IRS examination of its 1995 and 1996 Federal income tax returns. The Company anticipates filing a petition with the Tax Court contesting any claimed deficiencies and proposed adjustments included in the Statutory Notice during the second quarter of 2000. Because the 1995 - 96 IRS examination has not been completed, the Company is presently unable to estimate the amount of any additional income tax and interest which the IRS may claim. 8 9 COLUMBIA/HCA HEALTHCARE CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) UNAUDITED NOTE 6 -- INCOME TAXES (CONTINUED) 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. Management believes that adequate provisions have been recorded to satisfy final resolution of the disputed issues. Management believes that the Company, CHC, HCA and Healthtrust properly reported taxable income and paid taxes in accordance with applicable laws and agreements established with the IRS during previous examinations and that final resolution of these disputes will not have a material adverse effect on the results of operations or financial position of the Company. NOTE 7 -- EARNINGS PER SHARE The following table sets forth the computation of basic and diluted earnings per share from continuing operations for the quarters and nine months ended September 30, 1999 and 1998 (dollars in millions, except per share amounts):
QUARTER NINE MONTHS --------------------- -------------------- 1999 1998 1999 1998 --------- -------- -------- -------- Numerator (a): Income from continuing operations.... $ 138 $ 163 $ 566 $ 555 Denominator: Share reconciliation (in thousands): Shares used for basic earnings per share............................. 562,539 644,959 593,021 643,494 Effect of dilutive securities: Stock options..................... 4,285 1,677 3,446 2,604 Warrants and other................ 965 607 2,127 636 --------- -------- -------- -------- Shares used for dilutive earnings per share............................. 567,789 647,243 598,594 646,734 ========= ======== ======== ======== Earnings per share: Basic earnings per share from continuing operations............. $ .25 $ .25 $ .95 $ .86 Diluted earnings per share from continuing operations............. $ .24 $ .25 $ .95 $ .86
- --------------- (a) Amount is used for both basic and diluted earnings per share computations since there is no earnings effect related to the dilutive securities. NOTE 8 -- LONG-TERM DEBT During March 1999, the Company entered into a $1.0 billion Senior Interim Term Loan Agreement. Borrowings under this agreement were used during the second quarter to fund the $1.0 billion share repurchase program approved in February 1999 (see Note 9 -- Stock Repurchase Program). The Company previously entered into a $1.0 billion senior term loan in June 1998. During the third quarter of 1999, the Company repaid $500 million on the senior interim term loan. During the third quarter of 1999, the Company repaid $100 million on the senior term loan. The Company used amounts available under the Company's revolving credit facility to fund the payments on the senior interim term loan and the senior term loan. 9 10 COLUMBIA/HCA HEALTHCARE CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) UNAUDITED NOTE 9 -- STOCK REPURCHASE PROGRAM In February 1999, the Company's Board of Directors authorized the repurchase of up to $1 billion of the Company's common stock, which the Company completed through open market purchases and accelerated purchase contracts. During the first quarter of 1999, through open market purchases, the Company repurchased 3.6 million shares of its common stock for approximately $68 million. During the second quarter of 1999, through open market purchases, the Company repurchased 10 million shares of its common stock for approximately $232 million. Also during 1999, the Company, through accelerated purchase agreements, repurchased 28 million shares of its common stock for approximately $700 million. In July 1998, the Company announced a stock repurchase program under which $1 billion of the Company's common stock was repurchased. The majority of these shares were purchased by certain financial organizations through a series of forward purchase contracts. During the first quarter of 1999, the Company settled forward purchase contracts representing 15.0 million shares at a cost of approximately $323 million. The Company settled another 24.4 million shares at a cost of approximately $566 million during the second quarter of 1999. The Company repurchased 4 million shares for $97 million during the fourth quarter of 1998 and 0.6 million shares for $14 million through open market purchases. During 1999, the share repurchase transactions reduced capital in excess of par value by approximately $1.9 billion. During the first quarter of 1999, in connection with the Company's share repurchase programs, the Company entered into a Letter of Credit Agreement with the United States Department of Justice. As part of the agreement, the Company provided the government with letters of credit totaling $1 billion. The agreement also provided that the Company's share repurchase program announced in February 1999 could be completed, at the Company's discretion, through open market purchases, privately negotiated transactions or through accelerated or forward purchase contracts. The Company and the government acknowledge that the amount in the agreement is not based upon the amount or expected amount of any potential settlement of the ongoing government investigation, and the agreement does not constitute an admission of liability by the Company. NOTE 10 -- CONTINGENCIES Significant Legal Proceedings Various lawsuits, claims and legal proceedings (see Note 2 -- Investigations, for a description of the ongoing government investigations) have been and are expected to be instituted or asserted against the Company, including those relating to shareholder derivative and class action complaints; purported class action lawsuits filed by patients and payers alleging, in general, improper and fraudulent billing, coding, claims and overcharging, as well as other violations of law; certain qui tam or "whistleblower" actions alleging, in general, unlawful claims for reimbursement or unlawful payments to physicians for the referral of patients and other violations of law. While the amounts claimed are substantial, the ultimate liability cannot be determined or reasonably estimated at this time due to the considerable uncertainties that exist. Therefore, it is possible that results of operations, financial position and liquidity in a particular period could be materially, adversely affected upon the resolution of certain of these contingencies. General Liability Claims The Company is subject to claims and suits arising in the ordinary course of business, including claims for personal injuries or wrongful restriction of, or interference with, physicians' staff privileges. In certain of these actions the claimants may seek punitive damages against the Company, which are usually not covered by insurance. It is management's opinion that the ultimate resolution of these pending claims and legal proceedings will not have a material adverse effect on the Company's results of operations or financial position. 10 11 COLUMBIA/HCA HEALTHCARE CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) UNAUDITED NOTE 11 -- COMPREHENSIVE INCOME The components of comprehensive income, net of related taxes, for the quarters and nine months ended September 30, 1999 and 1998 are as follows (in millions):
QUARTER NINE MONTHS ------------ ------------ 1999 1998 1999 1998 ---- ---- ---- ---- Net income............................................ $138 $146 $566 $421 Change in unrealized gains on securities.............. (32) (16) (31) (16) Foreign currency translation adjustments.............. 5 4 (6) 2 ---- ---- ---- ---- Comprehensive income.................................. $111 $134 $529 $407 ==== ==== ==== ====
The components of accumulated other comprehensive income, net of related taxes, at September 30, 1999 and December 31, 1998 are as follows (in millions):
1999 1998 ---- ---- Net unrealized gains on securities.......................... $46 $77 Foreign currency translation adjustments.................... (3) 3 --- --- Accumulated other comprehensive income...................... $43 $80 === ===
NOTE 12 -- SEGMENT AND GEOGRAPHIC INFORMATION Columbia/HCA operates in one line of business, which is operating hospitals and related health care entities. The Company's revenues related to patients participating in the Medicare program approximated 28% and 30% for the quarters ended September 30, 1999 and 1998, respectively, and 29% and 31% for the nine months ended September 30, 1999 and 1998, respectively. Columbia/HCA's operations are structured in two geographically organized groups: the Eastern Group made up of 104 consolidating hospitals located in the Eastern United States and the Western Group made up of 85 consolidating hospitals located in the Western United States. These two groups make up the Company's core operations and are typically located in urban areas that are characterized by highly integrated facility networks. An additional group, the National Group, includes 11 consolidating hospitals which are located in the United States but are not located in the Company's core markets and are currently held for sale. During the third quarter of 1999, the Company moved 8 consolidating hospitals which are currently held for sale, three of which were sold during the third quarter, from the Eastern and Western Groups to the National Group. One hospital which had been previously held for sale was moved to the Eastern Group since it will not be sold. The Company also operates 2 consolidating hospitals in Switzerland. The Company completed the spin-offs of LifePoint and Triad (the "Spin-offs") during the second quarter of 1999. At April 30, 1999, LifePoint included 23 consolidating hospitals which are located in non-urban areas where, in almost every case the hospital is the only hospital in the community. At April 30, 1999, Triad included 34 consolidating hospitals, approximately three-quarters of which are located in small cities, generally in the Southern, Western and Southwestern United States where the hospital is usually the only hospital or one of two hospitals in the community, and the remainder of Triad's facilities are located in larger urban areas typically characterized by a high rate of population growth. See Note 3 -- Restructuring of Operations. The geographic distribution of the Company's revenues and EBITDA, restated for the restructuring of operations, for the quarters and nine months ended September 30, 1999 and 1998, the quarters ended June 30, 1999 and 1998 and March 31, 1999 and 1998 and the years ended December 31, 1998, 1997 and 1996 are summarized in the following table (EBITDA is defined as income from continuing operations before depreciation and amortization, interest expense, gains on sales of facilities, impairment of long-lived assets, restructuring of operations and investigation related costs, minority interest and income taxes). The 11 12 COLUMBIA/HCA HEALTHCARE CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) UNAUDITED NOTE 12 -- SEGMENT AND GEOGRAPHIC INFORMATION (CONTINUED) geographic distribution of the Company's assets, restated for the restructuring of operations, as of September 30, 1999 and December 31, 1998, 1997 and 1996 are also summarized in the following table (dollars in millions):
NINE MONTHS QUARTER ENDED QUARTER ENDED QUARTER ENDED ENDED YEAR ENDED SEPTEMBER 30, JUNE 30, MARCH 31, SEPTEMBER 30, DECEMBER 31, --------------- --------------- --------------- ----------------- --------------------------- 1999 1998 1999 1998 1999 1998 1999 1998 1998 1997 1996 ------ ------ ------ ------ ------ ------ ------- ------- ------- ------- ------- Revenues: Eastern Group........... $1,965 $1,846 $1,989 $1,933 $2,080 $1,998 $ 6,034 $ 5,777 $ 7,677 $ 7,585 $ 7,595 Western Group........... 1,751 1,664 1,798 1,655 1,803 1,657 5,352 4,976 6,607 6,346 6,141 Corporate and other(a).............. 87 86 85 128 84 120 256 334 400 432 593 National Group.......... 96 469 125 541 186 582 407 1,592 1,910 2,359 2,393 Spin-offs............... -- 514 164 524 502 544 666 1,582 2,087 2,097 2,064 ------ ------ ------ ------ ------ ------ ------- ------- ------- ------- ------- $3,899 $4,579 $4,161 $4,781 $4,655 $4,901 $12,715 $14,261 $18,681 $18,819 $18,786 ====== ====== ====== ====== ====== ====== ======= ======= ======= ======= ======= EBITDA: Eastern Group........... $ 393 $ 349 $ 438 $ 422 $ 512 $ 474 $ 1,343 $ 1,245 $ 1,581 $ 1,458 $ 1,918 Western Group........... 276 265 296 255 311 302 883 822 979 997 1,479 Corporate and other(a).............. 3 2 (47) 44 (14) 5 (58) 51 47 (58) 56 National Group.......... (17) 9 (1) 19 6 52 (12) 80 55 184 356 Spin-offs............... -- 57 20 56 63 68 83 181 206 270 405 ------ ------ ------ ------ ------ ------ ------- ------- ------- ------- ------- $ 655 $ 682 $ 706 $ 796 $ 878 $ 901 $ 2,239 $ 2,379 $ 2,868 $ 2,851 $ 4,214 ====== ====== ====== ====== ====== ====== ======= ======= ======= ======= =======
DECEMBER 31, SEPTEMBER 30, --------------------------- 1999 1998 1997 1996 ------------- ------- ------- ------- Assets: Eastern Group............................................. $ 6,854 $ 6,950 $ 6,891 $ 7,166 Western Group............................................. 6,510 6,895 6,531 6,519 Corporate and other(a).................................... 2,848 3,016 4,866 3,535 National Group............................................ 415 842 1,905 2,094 Spin-offs................................................. -- 1,726 1,809 1,802 ------- ------- ------- ------- $16,627 $19,429 $22,002 $21,116 ======= ======= ======= =======
- --------------- (a) Includes the Company's 2 consolidating hospitals which are located in Switzerland. NOTE 13 -- DERIVATIVES In June 1998, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards No. 133, ("SFAS 133") "Accounting for Derivative Instruments and Hedging Activities". In July 1999, the FASB issued Statement of Financial Accounting Standards No. 137, "Accounting for Derivative Instruments and Hedging Activities -- Deferral of the Effective Date of FASB Statement No. 133", which requires the adoption of SFAS 133 in fiscal years beginning after June 15, 2000. Because of the Company's minimal use of derivatives, management does not anticipate that the adoption of the new statement will have a significant effect on earnings or the financial position of the Company. 12 13 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FORWARD LOOKING STATEMENTS This "Management's Discussion and Analysis of Financial Condition and Results of Operations" contains disclosures which are "forward-looking statements." Forward-looking statements include all statements that do not relate solely to historical or current facts, and can be identified by the use of words such as "may," "believe," "will," "expect," "project," "estimate," "anticipate," "plan," or "continue." These forward-looking statements are based on the current plans and expectations of the Company and are subject to a number of uncertainties and risks that could significantly affect current plans and expectations and the Company's future financial condition and results. These factors include, but are not limited to, (i) the outcome of the known and unknown governmental investigations and litigation involving the Company's business practices, (ii) the highly competitive nature of the health care business, (iii) the efforts of insurers, health care providers and others to contain health care costs, (iv) possible changes in the Medicare program that may further limit reimbursements to health care providers and insurers, (v) changes in Federal, state or local regulation affecting the health care industry, (vi) the possible enactment of Federal or state health care reform, (vii) the ability to attract and retain qualified management and personnel, including physicians, (viii) liabilities and other claims asserted against the Company, (ix) fluctuations in the market value of the Company's common stock, (x) changes in accounting practices, (xi) changes in general economic conditions, (xii) future divestitures which may result in additional charges, (xiii) the complexity of integrated computer systems, any failure of the Company or its material third party suppliers or payers to timely achieve Year 2000 readiness or institute effective contingency plans in the event such Year 2000 readiness is not achieved, and the expense of the remediation efforts of the Company in achieving Year 2000 readiness, and effecting any necessary contingency plans, (xiv) the ability to enter into managed care provider arrangements on acceptable terms, (xv) the availability and terms of capital to fund the expansion of the Company's business, (xvi) changes in business strategy or development plans, (xvii) slowness of reimbursement, and (xviii) other risk factors. As a consequence, current plans, anticipated actions and future financial condition and results may differ from those expressed in any forward-looking statements made by or on behalf of the Company. You are cautioned not to unduly rely on such forward-looking statements when evaluating the information presented in this "Management's Discussion and Analysis of Financial Condition and Results of Operations." INVESTIGATIONS The Company is currently the subject of several Federal investigations into certain of its business practices, as well as governmental investigations by various states. The Company is cooperating in these investigations and understands, through written notice and other means, that it is a target in these investigations. Given the breadth of the ongoing investigations, the Company expects additional investigative and prosecutorial activity to occur in these and other jurisdictions in the future. The Company is the subject of a formal order of investigation by the Securities and Exchange Commission ("SEC"). The Company understands that the SEC investigation includes the anti-fraud, insider trading, periodic reporting and internal accounting control provisions of the Federal securities laws. The Company cannot predict the outcome or quantify effects that the ongoing investigations, the initiation of additional investigations, if any, and the related media coverage will have on the Company's financial condition or results of operations in future periods. Were the Company to be found in violation of Federal or state laws relating to Medicare, Medicaid or similar programs, the Company could be subject to substantial monetary fines, civil and criminal penalties and exclusion from participation in the Medicare and Medicaid programs. Any such sanctions could have a material adverse effect on the Company's financial position and results of operations. See Note 10 -- Contingencies of the Notes to Condensed Consolidated Financial Statements. BUSINESS STRATEGY Columbia/HCA's primary objective is to provide the communities it serves with a comprehensive array of quality health care services in the most cost effective manner possible. The Company's general, acute care 13 14 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- (CONTINUED) BUSINESS STRATEGY (CONTINUED) hospitals usually provide a full range of services commonly available in hospitals, such as internal medicine, general surgery, cardiology, oncology, neurosurgery, orthopedics and obstetrics, as well as diagnostic and emergency services. Outpatient and ancillary health care services are provided by the Company, including outpatient surgery centers, diagnostic centers, rehabilitation facilities and other facilities. In addition, Columbia/HCA operates psychiatric hospitals which generally provide a full range of mental health care services in inpatient, partial hospitalization and outpatient settings. The Company also operates preferred provider organizations in 47 states and the District of Columbia. As a part of its ongoing strategy, the Company maintains and replaces equipment, renovates and constructs replacement facilities and adds new services to increase the attractiveness of its hospitals and other facilities to patients and physicians. By developing a comprehensive health care network with a broad range of health care services located throughout a market area, the Company believes it is better able to attract and serve patients and physicians. The Company believes it is also able to reduce operating costs by sharing certain services among several facilities in the same market and is better positioned to work with health maintenance organizations ("HMOs"), preferred provider organizations ("PPOs") and employers. In May 1999, Columbia/HCA established LifePoint Hospitals, Inc. ("LifePoint") and Triad Hospitals, Inc. ("Triad"), as independent, publicly-traded companies through tax-free spin-offs of these companies to Columbia/HCA stockholders. LifePoint's hospitals are located in non-urban areas where, in almost every case, LifePoint's hospital is the only hospital in the community. Approximately three-quarters of Triad's hospitals are located in small cities, generally in the Southern, Western and Southwestern United States, where Triad's hospital is usually either the only hospital or one of two hospitals in the community, and the remainder of Triad's hospitals are located in larger urban areas. During the third quarter of 1997, management implemented plans to divest the Company's home health businesses and three of the four Value Health business units (Value Health was a provider of specialty managed care benefit programs). The divestitures of the three Value Health business units and the home health operations were completed during 1998. The results of operations of these divested businesses are reflected in the 1998 condensed consolidated statement of income as discontinued operations. The Company has substantially completed the restructuring of its operations in an effort to create a smaller and more focused company. The divestiture of the home health operations and the Value Health business units and the spin-offs of LifePoint and Triad allow Columbia/HCA management to focus their efforts on the Company's core markets, which are typically located in urban areas that are characterized by highly integrated health care facility networks. 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 Medicare, Medicaid and managed care plans. In addition, insurance companies, government programs (other than Medicare) and employers purchasing health care services for their employees are negotiating discounted amounts that they will pay health care providers rather than paying standard prices. The Company expects patient volumes from Medicare and Medicaid to continue to increase due to the general aging of the population and expansion of state Medicaid programs. However, under the Balanced Budget Act of 1997 ("BBA-97"), the Company's reimbursement from the Medicare and Medicaid programs was reduced. The Company continues to experience a shift in its payer mix as patients move from traditional indemnity insurance and Medicare coverage to medical coverage that is provided under managed care plans. The Company generally receives lower payments per patient under managed care plans than under Medicare or traditional indemnity insurance plans. With an increasing proportion of services being reimbursed based upon fixed payment amounts (where the payment is based upon the diagnosis, regardless of the cost incurred or level of service provided), revenues, earnings and cash flows 14 15 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- (CONTINUED) RESULTS OF OPERATIONS (CONTINUED) Revenue/Volume Trends (continued) are being reduced. Admissions related to Medicare, Medicaid, managed care plans and other discounted arrangements for the quarters and nine months ended September 30, 1999 and 1998 are set forth below.
QUARTER NINE MONTHS -------------- -------------- 1999 1998 1999 1998 ----- ----- ----- ----- Medicare.................................... 35.8% 38.0% 37.8% 39.7% Medicaid.................................... 11.3 11.6 11.0 11.4 Managed care and other discounted........... 43.0 39.6 41.0 38.3 Other....................................... 9.9 10.8 10.2 10.6 ----- ----- ----- ----- 100.0% 100.0% 100.0% 100.0% ===== ===== ===== =====
Revenues from capitation arrangements (prepaid health service agreements) are less than 1% of consolidated revenues. Reductions in the rate of increase in Medicare and Medicaid reimbursement, and increasing percentages of patient volume attributed 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. 15 16 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- (CONTINUED) RESULTS OF OPERATIONS (CONTINUED) Operating Results Summary The following is a summary of results from continuing operations for the quarters and nine months ended September 30, 1999 and 1998 (dollars in millions, except per share amounts):
QUARTER ------------------------------------ 1999 1998 ---------------- ---------------- AMOUNT RATIO AMOUNT RATIO ------- ----- ------- ----- Revenues.................................................... $ 3,899 100.0 $ 4,579 100.0 Salaries and benefits....................................... 1,583 40.6 1,900 41.5 Supplies.................................................... 618 15.9 730 15.9 Other operating expenses.................................... 733 18.7 914 20.0 Provision for doubtful accounts............................. 318 8.2 369 8.1 Depreciation and amortization............................... 262 6.8 312 6.7 Interest expense............................................ 122 3.1 142 3.1 Equity in earnings of affiliates............................ (8) (0.2) (16) (0.4) Gains on sales of facilities................................ -- -- (537) (11.7) Impairment of long-lived assets............................. -- -- 334 7.3 Restructuring of operations and investigation related costs..................................................... 24 0.6 21 0.5 ------- ----- ------- ----- 3,652 93.7 4,169 91.0 ------- ----- ------- ----- Income from continuing operations before minority interests and income taxes.......................................... 247 6.3 410 9.0 Minority interests in earnings of consolidated entities..... 13 0.3 16 0.4 ------- ----- ------- ----- Income from continuing operations before income taxes....... 234 6.0 394 8.6 Provision for income taxes.................................. 96 2.5 231 5.0 ------- ----- ------- ----- Income from continuing operations........................... $ 138 3.5 $ 163 3.6 ======= ===== ======= ===== Basic earnings per share from continuing operations......... $ .25 $ .25 Diluted earnings per share from continuing operations....... $ .24 $ .25 % changes from prior year: Revenues................................................ (14.8)% (0.7)% Income from continuing operations before income taxes... (40.4) 161.0 Income from continuing operations....................... (15.2) 80.1 Basic earnings per share from continuing operations..... -- 66.7 Diluted earnings per share from continuing operations... (4.0) 66.7 Admissions (a).......................................... (19.4) (0.6) Equivalent admissions (b)............................... (20.9) (1.1) Revenues per equivalent admission....................... 7.6 0.3 Same facility % changes from prior year (c): Revenues................................................ 5.8 (0.4) Admissions (a).......................................... 2.0 0.7 Equivalent admissions (b)............................... 1.9 1.3 Revenues per equivalent admission....................... 3.8 (1.7)
16 17 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- (CONTINUED) RESULTS OF OPERATIONS (CONTINUED) Operating Results Summary (continued)
NINE MONTHS ------------------------------------ 1999 1998 ---------------- ---------------- AMOUNT RATIO AMOUNT RATIO ------- ----- ------- ----- Revenues.................................................... $12,715 100.0 $14,261 100.0 Salaries and benefits....................................... 5,119 40.3 5,911 41.4 Supplies.................................................... 1,994 15.7 2,195 15.4 Other operating expenses.................................... 2,451 19.2 2,815 19.7 Provision for doubtful accounts............................. 985 7.8 1,052 7.4 Depreciation and amortization............................... 836 6.4 932 6.6 Interest expense............................................ 351 2.8 440 3.1 Equity in earnings of affiliates............................ (73) (0.6) (91) (0.6) Gains on sales of facilities................................ (257) (2.0) (537) (3.8) Impairment of long-lived assets............................. 160 1.3 334 2.3 Restructuring of operations and investigation related costs..................................................... 84 0.7 90 0.6 ------- ----- ------- ----- 11,650 91.6 13,141 92.1 ------- ----- ------- ----- Income from continuing operations before minority interests and income taxes.......................................... 1,065 8.4 1,120 7.9 Minority interests in earnings of consolidated entities..... 41 0.3 54 0.4 ------- ----- ------- ----- Income from continuing operations before income taxes....... 1,024 8.1 1,066 7.5 Provision for income taxes.................................. 458 3.6 511 3.6 ------- ----- ------- ----- Income from continuing operations........................... $ 566 4.5 $ 555 3.9 ======= ===== ======= ===== Basic earnings per share from continuing operations......... $ .95 $ .86 Diluted earnings per share from continuing operations....... $ .95 $ .86 % changes from prior year: Revenues................................................ (10.8)% (1.3)% Income from continuing operations before income taxes... (3.9) (31.4) Income from continuing operations....................... (2.0) (40.3) Basic earnings per share from continuing operations..... 10.5 (38.6) Diluted earnings per share from continuing operations... 10.5 (38.1) Admissions (a).......................................... (13.8) 0.3 Equivalent admissions (b)............................... (15.4) 0.9 Revenues per equivalent admission....................... 5.3 (2.1) Same facility % changes from prior year (c): Revenues................................................ 4.3 (1.9) Admissions (a).......................................... 2.2 0.7 Equivalent admissions (b)............................... 2.1 1.7 Revenues per equivalent admission....................... 2.2 (3.5)
- --------------- (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 September 30, 1999 and 1998 Income from continuing operations before income taxes decreased to $234 million in 1999 from $394 million in 1998 and pretax margins decreased to 6.0% in 1999 from 8.6% in 1998. The decrease in pretax income was primarily attributable to a decrease in the number of facilities as a result of the spin-offs and other asset sales completed as part of the restructuring of operations and gains of $537 million in 1998 resulting from the completed sale of several facilities as part of the Company's restructuring of operations. See Note 3 -- Restructuring of Operations of the Notes to Condensed Consolidated Financial Statements. Revenues decreased 14.8% to $3.9 billion in 1999 compared to $4.6 billion in 1998. Inpatient admissions decreased 19.4% from a year ago and equivalent admissions (adjusted to reflect combined inpatient and outpatient volume) decreased 20.9%. Revenues, admissions and equivalent admissions declined primarily as a result of the spin-offs of LifePoint and Triad and sales of several facilities. At September 30, 1999 there were 92 fewer hospitals and 22 fewer surgery centers than there were at September 30, 1998. On a same facility basis, revenues increased 5.8%, admissions increased 2.0% and equivalent admissions increased 1.9% from a year ago. Revenue per equivalent admission increased 7.6% from 1998 to 1999 and on a same facility basis increased 3.8% from 1998 to 1999 due to success achieved during 1999 in improved managed care pricing. The decline in revenues was due to several factors, including, decreases in Medicare rates of reimbursement mandated by the BBA-97 which became effective October 1, 1997 (lowered 1999 revenues by approximately $25 million), 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 43% in 1999 compared to 40% during 1998) and a net decrease in the number of consolidating hospitals and surgery centers due to the sales and spin-offs of several facilities during 1999. Salaries and benefits, as a percentage of revenues, decreased to 40.6 % in 1999 from 41.5% in 1998. The increase in revenue per equivalent admission was a primary factor for the decrease. In addition, the Company was more successful in adjusting staffing levels to correspond with the equivalent admission growth rates (man hours per equivalent admission decreased slightly compared to last year). Supply costs remained relatively flat as a percentage of revenues at 15.9%. Other operating expenses (primarily consisting of contract services, professional fees, repairs and maintenance, rents and leases, utilities, insurance and non-income taxes) decreased, as a percentage of revenues, to 18.7% in 1999 from 20.0% in 1998 due to certain fixed costs such as rents and leases and utilities remaining relatively flat while revenue per equivalent admission was increasing. A decline in professional fees, due to the sales of certain teaching facilities which incurred costs for medical directorships, also contributed to the decrease. Provision for doubtful accounts, as a percentage of revenues, increased to 8.2% in 1999 from 8.1% in 1998 due to payer mix shifts to managed care plans (resulting in increased amounts of patient co-payments and deductibles). Management is unable to quantify the effects, but the shift in payer mix is expected to continue and the provision for doubtful accounts is likely to remain at higher levels than in past years. Equity in earnings of affiliates decreased as a percentage of revenues at 0.2% in 1999 compared to 0.4% in 1998. The decrease was due to an impairment charge recorded by one of our equity investment entities (resulting in an $8 million decrease) and the sales of certain non-consolidating hospitals during 1999. At September 30, 1999 there were 12 fewer non-consolidating hospitals than there were at September 30, 1998. Depreciation and amortization increased as a percentage of revenues to 6.8% in 1999 from 6.7% in 1998, primarily due to the increased capital expenditures related to ancillary services (such as outpatient services) and information systems. Capital expenditure in these areas generally result in shorter depreciation and amortization lives for the assets acquired than typical hospital acquisitions. 18 19 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- (CONTINUED) RESULTS OF OPERATIONS (CONTINUED) Quarters Ended September 30, 1999 and 1998 (continued) Interest expense decreased to $122 million in 1999 compared to $142 million in 1998 primarily as a result of a decrease in average outstanding debt during 1999 compared to last year. This was due to the restructuring of operations discussed earlier which resulted in the receipt of cash proceeds in 1999 and the third and fourth quarters of 1998 which were used to pay down borrowings. During 1999 and 1998, respectively, the Company incurred $24 million and $21 million of restructuring of operations and investigation related costs. These costs included $20 million in professional fees related to the restructuring of operations and the investigations in 1999 and 1998. Minority interests decreased slightly as a percentage of revenues to 0.3% in 1999 from 0.4% in 1998. The decrease in the effective income tax rate from 1998 to 1999 is primarily due to higher amounts of non-deductible intangible assets related to gains on sales of facilities and impairments of long-lived assets during the 1998 period. As previously discussed, the Company has substantially completed the restructuring of its operations. See Note 3 -- Restructuring of Operations of the Notes to Condensed Consolidated Financial Statements. Assuming the completion of the restructuring as of the beginning of the period, the Company's remaining core assets had combined net income from continuing operations which increased to $161 million in 1999 from a loss of $1 million in 1998. Excluding gains on sales of facilities, impairment of long-lived assets and restructuring of operations and investigation related costs, combined net income for the Company's remaining core assets increased 10% to $176 million in 1999 from $160 million in 1998. Nine Months Ended September 30, 1999 and 1998 Income from continuing operations before income taxes decreased 3.9% to $1,024 million in 1999 from $1,066 million in 1998. Pretax margins increased to 8.1% in 1999 from 7.5% in 1998. The decrease in pretax income was primarily attributable to $537 million in gains on sales of facilities in 1998 compared to only $257 million in gains on sales of facilities in 1999 (an excess of $203 million in net gains over the $334 in impairment charges recorded during the first nine months of 1998 compared to an excess of $97 million in net gains over the $160 million in impairment charges recorded during the first nine months of 1999) and an increase in the operating margin. Revenues decreased 10.8% to $12.7 billion in 1999 compared to $14.3 billion in 1998. Inpatient admissions decreased 13.8% from a year ago and equivalent admissions (adjusted to reflect combined inpatient and outpatient volume) decreased 15.4%. Revenues, admissions and equivalent admissions declined primarily as a result of the spin-offs of LifePoint and Triad and the sales of facilities. At September 30, 1999 there were 92 fewer hospitals and 22 fewer surgery centers than there were at September 30, 1998. On a same facility basis, revenues increased 4.3%, admissions increased 2.2% and equivalent admissions increased 2.1% from a year ago. Revenue per equivalent admission increased 5.3% from 1998 to 1999 and on a same facility basis increased 2.2% from 1998 to 1999. The decline in revenues was due to several factors including decreases in Medicare rates of reimbursement mandated by the BBA-97 which became effective October 1, 1997 (lowered 1999 revenues by approximately $85 million), 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% in 1999 compared to 38% during 1998) and a net decrease in the number of consolidating hospitals and surgery centers due to the spin-offs and sales of several facilities during 1999 and 1998. Salaries and benefits, as a percentage of revenues, decreased to 40.3% in 1999 from 41.4% in 1998. The increase in revenues per equivalent admission was a primary factor for the decrease. In addition, the Company 19 20 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- (CONTINUED) RESULTS OF OPERATIONS (CONTINUED) Nine Months Ended September 30, 1999 and 1998 (continued) was more successful in adjusting staffing levels to correspond with the equivalent admission growth rates (man hours per equivalent admission decreased slightly compared to last year). Supply costs increased as a percentage of revenues to 15.7% in 1999 from 15.4% in 1998 due to an increase in the cost of supplies per equivalent admission 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) decreased as a percentage of revenues to 19.2% in 1999 from 19.7% in 1998, due to certain fixed costs such as rent and leases, and utilities remaining relatively flat while revenue per equivalent admission was increasing. A decline in professional fees, due to the sales of certain teaching facilities which had costs for medical directorships, also contributed to the decrease. Provision for doubtful accounts, as a percentage of revenues, increased to 7.8% in 1999 from 7.4% in 1998 due to external factors such as payer mix shifts to managed care plans (resulting in increased amounts of patient co-payments and deductibles) and an increase in self pay net revenue as a percentage of total patient revenue. Management is unable to quantify the effects of each of these factors, but the shift in payer mix is expected to continue and the provision for doubtful accounts is likely to remain at higher levels than in past years. Equity in earnings of affiliates remained flat as a percentage of revenues at 0.6%. Depreciation and amortization remained relatively flat as a percentage of revenues in 1999 compared to 1998. Interest expense decreased to $351 million in 1999 compared to $440 million in 1998 primarily as a result of a decrease in average outstanding debt during 1999 compared to last year. This was due to the restructuring of operations discussed earlier which has resulted in the receipt of cash proceeds in 1999 and in the third and fourth quarters of 1998 which were used to pay down borrowings. During 1999 and 1998, respectively, the Company incurred $84 million and $90 million of restructuring of operations and investigation related costs. These costs included $62 and $72 million in professional fees related to the restructuring of operations and investigations, $2 million and $5 million of severance costs and $20 million and $13 million in various other costs in 1999 and 1998, respectively. Minority interests decreased slightly as a percentage of revenues to 0.3% in 1999 from 0.4% in 1998. The effective income tax rate is high in both 1999 and 1998 due to non-deductible intangible assets related to gains on sales of facilities and impairments of long-lived assets. As previously discussed, the Company has substantially completed the restructuring of its operations. See Note 3--Restructuring of Operations of the Notes to Condensed Consolidated Financial Statements. Assuming the completion of the restructuring as of the beginning of the period, the Company's remaining core assets had combined net income from continuing operations which increased 37.8% to $558 million in 1999 from $405 million in 1998. Excluding gains on sales of facilities, impairment of long-lived assets and restructuring of operations and investigation related costs, combined net income for the Company's remaining core assets increased 7.0% to $649 million in 1999 from $607 million in 1998. Liquidity Cash provided by continuing operating activities totaled $806 million during the first nine months of 1999 compared to $1.6 billion in 1998. The decrease was primarily due to changes in the timing of tax payments, as 20 21 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- (CONTINUED) RESULTS OF OPERATIONS (CONTINUED) Liquidity (continued) tax payments of $565 million have been made in 1999 compared to a net $116 million tax refund received during 1998. Cash provided by investing activities increased to $1.2 billion in 1999, compared to $1.0 billion during the first nine months of 1998. The increase was due to proceeds from changes in investments of $557 million (including repayment by a non-consolidating joint venture of Company advances of approximately $330 million) compared with $269 million used to invest in affiliates in 1998. This increase in cash flows from investments in affiliates was partially offset by a lower level of proceeds from sales and the spin-offs (approximately $1.5 billion in 1999 compared to approximately $2.2 billion in 1998). Cash flows used in financing activities totaled $2.2 billion in the first nine months of 1999 compared to $2.5 billion in 1998. The excess of cash flows from operations and cash provided by investing activities was primarily used to repurchase the Company's common stock (approximately $2.0 billion) during the first nine months of 1999. During the third quarter of 1999, the Company repaid $100 million on the Company's senior term loan and $500 million on the senior interim term loan. The Company used amounts available under the Company's revolving credit facility to fund these payments. Working capital totaled $366 million as of September 30, 1999 compared to $304 million at December 31, 1998. Management believes that cash flows from operations, amounts available under the Company's bank revolving credit facility and proceeds from expected asset sales will be sufficient to meet expected liquidity needs during the next twelve months. Investments of the Company's professional liability insurance subsidiary to maintain statutory equity and pay claims totaled $1.7 billion at September 30, 1999 and $1.8 billion at December 31, 1998. The Company has various agreements with joint venture partners whereby the partners have an option to sell or "put" their interests in the joint venture back to the Company within specific periods at fixed prices or prices based on certain formulas. The combined put price under all such agreements was approximately $500 million at September 30, 1999. The Company cannot predict if, or when, their 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-profits and not-for-profit hospitals. The Company has not determined the impact of the tax ruling on its existing joint ventures and is consulting with its joint venture partners and tax advisers to develop appropriate courses of action. The tax ruling could require the restructuring of certain joint ventures with not-for-profits or influence the exercise of the put agreements by certain joint venture partners. In February 1999, the Company's Board of Directors authorized the repurchase of up to $1 billion of the Company's common stock. The Company completed the repurchase of its shares through open market purchases and through a series of accelerated purchase contracts. During the first quarter of 1999, through open market purchases, the Company repurchased 3.6 million shares of its common stock for approximately $68 million. During the second quarter of 1999, through open market purchases, the Company repurchased 10 million shares of its common stock for approximately $232 million. Also during the second quarter of 1999, the Company, through accelerated purchase agreements, repurchased approximately 28 million shares of its common stock for approximately $700 million. In July 1998, the Company announced a stock repurchase program under which $1 billion of the Company's common stock was repurchased. The majority of these shares were purchased by certain financial organizations through a series of forward purchase contracts. During the first quarter of 1999, the Company settled forward purchase contracts representing 15.0 million shares at a cost of approximately $323 million. The Company settled another 24.4 million shares at a cost of approximately $565 million during the second 21 22 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- (CONTINUED) RESULTS OF OPERATIONS (CONTINUED) Liquidity (continued) quarter of 1999. The Company also repurchased 4 million shares for $97 million during the fourth quarter of 1998 and 0.6 million shares for $14 million through open market purchases. During the first quarter of 1999, in connection with the Company's share repurchase programs, the Company entered into a Letter of Credit Agreement with the United States Department of Justice. As part of the agreement, the Company provided the government with letters of credit totaling $1 billion. The Company and the government acknowledge that the amount in the 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. During May 1999, the spin-offs of LifePoint and Triad were accomplished through a distribution of one share of LifePoint and one share of Triad common stock for every 19 shares of the Company's common stock outstanding on April 30, 1999. The Company also received $886 million in cash related to debt which it incurred prior to the spin-offs which was assumed by LifePoint and Triad in connection with the spin-off transaction. The proceeds were used to pay down debt. The resolution of the government investigations and the various lawsuits and legal proceedings that have been asserted could result in substantial liabilities to the Company. The ultimate liabilities cannot be reasonably estimated, as to the timing or amounts, at this time; however, it is possible that results of operations, financial position and liquidity could be materially, adversely affected upon the resolution of certain of these contingencies. Capital Resources Excluding acquisitions, capital expenditures were approximately $1 billion during the first nine months of 1999 and for the same period in 1998. Planned capital expenditures in 1999 are expected to approximate $1.2 billion. Management believes that its capital expenditure program is adequate to expand, improve and equip its existing health care facilities. 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 $116 million during the first nine months of 1998. The Company expects to finance all capital expenditures with internally generated and borrowed funds. Available sources of capital include public or private debt, amounts available under the Company's revolving credit facility (approximately $580 million as of October 31, 1999) and equity. At September 30, 1999, there were projects under construction which had an estimated additional cost to complete and equip over the next three years of approximately $735 million. The Company's revolving credit facility, the $1.0 billion senior term loan and the $1.0 billion senior interim term loan contain customary covenants which include (i) limitations on additional debt, (ii) limitations on sales of assets, mergers and changes of ownership, and (iii) maintenance of certain interest coverage ratios. The Senior Interim Term Loan Agreement also provides for the mandatory prepayment of loans thereunder in the case of certain debt or equity issuances. The Company is currently in compliance with all such covenants. In February 1999, Standard & Poor's downgraded the Company's senior debt rating to BB+. The Company entered into a $1.0 billion Senior Interim Term Loan Agreement during March 1999. The borrowings under this agreement were used to fund the $1.0 billion share repurchase program approved in February 1999. The Company's revolving credit facility and $1.0 billion Senior Term Loan Agreement were amended during March 1999 to permit the spin-offs of LifePoint and Triad and place a $1.25 billion letter of credit sublimit in the revolving credit facility. 22 23 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- (CONTINUED) RESULTS OF OPERATIONS (CONTINUED) Capital Resources (continued) In July 1999, the Company filed a "shelf" registration statement and prospectus with the Securities and Exchange Commission relating to $1.5 billion in debt securities. The Company continues to manage its capital structure during this process through the application of such proceeds, as it considers appropriate, to the repayment of debt and the repurchase of its common stock. IMPACT OF YEAR 2000 ISSUES The Company has dedicated substantial resources to address the impact of the Year 2000 problem on the Company. The Company has engaged appropriate individuals and groups within its organization, as well as independent consultants, in an effort to address the Year 2000 problem as it may affect the Company and to help address the potential for a material interruption to the Company's operations or impact to its patients' safety and health. If uncorrected, Year 2000 problems could result in computer system and program failures that could result in material disruptions of the Company's business operations and equipment and medical device malfunctions that could materially adversely affect patient diagnosis and treatment. The Company has completed the material aspects of its information technology ("IT") systems portion of the Company's Year 2000 project, which addresses the inventory, assessment, remediation, testing and implementation of centrally supported and distributed (i) internally developed software and (ii) mission critical third party software (i.e., that software which is essential for day-to-day operations). The Company adopted a structured approach to inventory, assessment, remediation, testing and implementation with regard to its centrally supported and distributed software, with test cases based on future dates and aging of dates. Testing was conducted internally and at the Company's disaster recovery site. Testing, remediation and implementation of certain specialized software applications used at a non-healthcare provider subsidiary is scheduled to be completed in the fourth quarter of 1999 and is currently not expected to have a material effect on the Company's Year 2000 readiness based on the relative size of the subsidiary. The Company has developed contingency plans and an Information Technology and System Control Center which will be staffed to address Year 2000 problems which may arise. With respect to the IT infrastructure portion of the Company's Year 2000 project, the Company has undertaken a program to inventory, assess and correct, replace or otherwise address impacted vendor-supplied products (such as hardware, systems software, business software and telecommunication equipment). The Company has contacted vendors, analyzed the vendor information provided, and is completing its efforts to remediate, replace or otherwise address IT products that could pose a material Year 2000 impact on the Company. The Company developed a database of vendor compliance information for use by its facilities to determine the Year 2000 readiness of such facility assets. The Company had originally anticipated completion of the IT infrastructure portion of its program by September 30, 1999. Due to certain delays and other implementation issues at a number of the Company's facilities being remediated, as of the time of this Form 10-Q, the Company anticipates completion of the IT infrastructure portion of its program in the fourth quarter of 1999. The cause for the delays have been reviewed, and action plans have been implemented to provide a focused effort to cure the delays. Contingency plans have been developed for mission critical and high impact patient care and business operation areas. With respect to the non-IT infrastructure portion of the Company's Year 2000 project, the Company has undertaken a program to inventory, assess and correct, replace or otherwise address impacted vendor products, medical equipment, facility and physical plant equipment and other related equipment with embedded chips. The Company implemented a program to contact vendors, analyze information provided, and to remediate, replace or otherwise address devices or equipment that could pose a material Year 2000 impact. These vendor contacts included a survey and assessment process and on-site visits to certain high impact vendors, which 23 24 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- (CONTINUED) IMPACT OF YEAR 2000 ISSUES (CONTINUED) have now been substantially completed. The Company originally anticipated completion of the non-IT infrastructure portion of its program by September 30, 1999. Due to certain delays and other implementation issues at a number of the Company's facilities being remediated, as of the date of this Form 10-Q, the Company anticipates completion of the non-IT infrastructure portion of its program in the fourth quarter of 1999. The cause for the delays have been reviewed, and action plans have been implemented to provide a focused effort to cure the delays. Contingency plans have been developed for mission critical and high impact patient care and business operation areas. The Company has directed and is continuing to direct substantial efforts to repair, replace, upgrade or otherwise address equipment and medical devices that will have a direct impact on patient care in its effort to address the risk to patient safety and health. The Company is relying on information that is being provided to it by equipment and medical device manufacturers regarding the Year 2000 status of their products. While the Company is attempting to evaluate information provided by its previous and current vendors, there can be no assurance that in all instances accurate information is being provided. There also can be no assurances that the repair, replacement or upgrade of all non-IT infrastructure systems will occur on a timely basis or that such repairs, replacements or upgrades will avoid all Year 2000 problems. Contingency plans have been developed for mission critical and high impact patient care and business operation areas. The Company has communicated with its major accounts receivable ("A/R") vendors and third party payers, including government payers and fiscal intermediaries on Year 2000 readiness issues. As of September 30, 1999, the Company had contacted its major A/R vendors and third party payers to request end to end testing relating to billing and payment. The Company has completed or is in the process of testing with most of its vendors and many of its major payers. The Company relies on these entities for accurate and timely reimbursement of claims, often through the use of electronic data interfaces. The Company has not received assurances that all these interfaces will be Year 2000 compliant. Because certain payers have refused or are not ready to test with the Company's systems, testing and continued follow-up efforts with those payers and intermediaries that will test will continue through the end of the year. The Company anticipates that some third party payers will be unable or unwilling to participate in the Company's request for voluntary testing. Additionally, the Company recognizes that, even though it has successfully tested with a payer, such testing will not ensure that the payer will be able to process the Company's claims in a post Year 2000 day-to-day environment. Multiple failures of third party systems from which the Company derives significant revenues could have a material adverse effect on the Company's cash flow and results of operations. Contingency plans are being developed in the event payments are delayed for an extended period of time due to a Year 2000 problem. The Company has also communicated with its mission critical suppliers and vendors (i.e., those suppliers and vendors whose products and services are essential for day-to-day operations, such as medical-surgical suppliers) to verify their ability to continue to deliver goods and services after December 31, 1999. These efforts included a survey and assessment process, on-site visits to certain high impact suppliers and vendors, as well as a program of website review and telephone and mail contact. The Company has not received assurances from all mission critical suppliers and vendors that they will be able to continue to deliver goods and services after the arrival of the Year 2000, but the Company is continuing its efforts to obtain such assurances. Contingency plans for this area of the program include identification of alternate suppliers for "at risk" suppliers. With the assistance of external resources, the Company has developed contingency plans in the event that its Year 2000 efforts, or the efforts of third parties upon which the Company relies, are not accurately or timely completed. The Company will continue to implement contingency plans as needed. Contingency plans have been developed for mission-critical and high impact patient care and business operations. The contingency plans developed by the facilities include those in the following areas: medical equipment, 24 25 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- (CONTINUED) IMPACT OF YEAR 2000 ISSUES (CONTINUED) suppliers and service providers, utilities, information technology and services, facility and physical plant equipment and business office operations. While the Company is developing contingency plans to address possible failure scenarios, the Company recognizes that there are "worst case" scenarios which may develop and are largely outside the Company's control. The Company recognizes the risks associated with extended infrastructure (power, water, telecommunications) failure, the interruption of insurance and other payments to the Company and the failure of equipment or software that could impact patient safety or health despite the assurances of third parties. The Company is addressing these and other failure scenarios in its contingency planning efforts and is engaging third parties in discussions regarding how to manage common failure scenarios, but the Company cannot currently estimate the likelihood or the potential cost of such failures. In addition to the extended infrastructure risks discussed above, potential worst case scenarios include medical devices and systems failing to operate properly; material and unplanned expenditures to correct unanticipated Year 2000 failures, including remediation, replacement or upgrade of equipment, and extended operation of labor intensive contingency plans; material and extended payment delays from the Company's payers; unavailability of critical supplies from historic or alternate vendors which result in the inability to continue the operation of one or more facilities; litigation from any of the above; and the inability of the Company to bill or receive payment for its services over an extended period. As of September 30, 1999, the estimated minimum Year 2000 project costs (consultants, training, compliance systems development, etc.) which will be expensed have been increased from $86 million to approximately $90 million. The increase is related to certain retention bonuses and other items to be paid in connection with the Year 2000 project. This estimate does not include payroll costs for certain internal employees because these costs are not separately tracked by the Company. Cumulatively through September 30, 1999, the Company has incurred $79 million of expenses related to the Year 2000 project, including $22 million incurred during the first nine months of 1999. In addition to the above Year 2000 project costs, the Company currently estimates the minimum Year 2000 capitalized and expensed costs incurred for the remediation, upgrade and replacement of its impacted non-IT infrastructure systems and equipment to be increased from $80 million to approximately $86 million. The increase of $6 million is related to estimates for additional equipment purchased that must be expensed rather than capitalized under the Company's capitalization policy. As of September 30, 1999, the Company had incurred approximately $71 million of these capitalized and expensed costs. The Company believes that its total cost may increase as it completes its assessment and remediation of non-IT infrastructure systems and equipment and such costs will be expensed or capitalized as appropriate. The potential estimated costs of the Company's Year 2000 project and estimated completion dates for the Year 2000 modifications are based on management's best estimates, as of September 30, 1999. These estimates were derived utilizing numerous assumptions of future events, including the continued availability of certain resources, third party modification plans and other factors. These estimates do not include the costs of executing any contingency plans or potential litigation claims resulting from any Year 2000 failure. There can be no assurance that the Company's Year 2000 project will be timely completed in all respects within the estimated cost range. Actual results could differ materially from those anticipated. Specific factors that might cause such material differences include, but are not limited to, the availability and cost of personnel trained in this area and the cost and ability to locate and correct all relevant computer codes and all medical equipment. The Company believes that if (i) any material phase or aspect of its Year 2000 project is not completed successfully and timely, (ii) certain mission critical suppliers and venders (particularly medical surgical suppliers and utilities) are not able to deliver goods or services after December 31, 1999, or (iii) its contingency plans do not anticipate and effectively address actually experienced Year 2000 related problems or do not effectively address unanticipated Year 2000 related problems, then the Company's results of 25 26 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- (CONTINUED) IMPACT OF YEAR 2000 ISSUES (CONTINUED) operations and financial condition, as well as its day-to-day business operations and its ability to provide health care services (potentially including patient diagnosis and treatment), could be materially adversely affected. 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 $374 million as of September 30, 1999. Management believes that final resolution of these disputes will not have a material adverse effect on the results of operations or liquidity of the Company. (See Note 6 -- Income Taxes of the Notes to Condensed Consolidated Financial Statements for a description of the pending IRS disputes). 26 27 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- (CONTINUED) OPERATING DATA
1999 1998 ------- --------- CONSOLIDATING Number of hospitals in operation at: March 31.................................................. 273 310 June 30................................................... 204 309 September 30.............................................. 202 294 December 31............................................... 281 Number of freestanding outpatient surgical centers in operation at: March 31.................................................. 95 142 June 30................................................... 81 139 September 30.............................................. 81 103 December 31............................................... 102 Licensed hospital beds at (a): March 31.................................................. 51,797 60,739 June 30................................................... 43,969 60,418 September 30.............................................. 43,461 57,521 December 31............................................... 53,693 Weighted average licensed beds (b): Quarter: First................................................... 52,451 60,765 Second.................................................. 46,490 60,712 Third................................................... 43,511 59,396 Fourth.................................................. 55,594 Year...................................................... 59,104 Average daily census (c): Quarter: First................................................... 26,546 28,816 Second.................................................. 21,467 25,780 Third................................................... 19,704 24,414 Fourth.................................................. 23,932 Year...................................................... 25,719 Admissions (d): Quarter: First................................................... 477,400 508,200 Second.................................................. 395,800 475,400 Third................................................... 370,500 459,700 Fourth.................................................. 448,500 Year...................................................... 1,891,800 Equivalent Admissions (e): Quarter: First................................................... 703,300 756,600 Second.................................................. 596,900 733,500 Third................................................... 557,900 705,100 Fourth.................................................. 680,400 Year...................................................... 2,875,600 Average length of stay (days) (f): Quarter: First................................................... 5.0 5.1 Second.................................................. 4.9 4.9 Third................................................... 4.9 4.9 Fourth.................................................. 4.9 Year...................................................... 5.0
27 28 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- (CONTINUED) OPERATING DATA (CONTINUED)
1999 1998 ------- --------- NON-CONSOLIDATING (G) Number of hospitals in operation at: March 31.................................................. 24 26 June 30................................................... 16 26 September 30.............................................. 12 24 December 31............................................... 24 Number of freestanding outpatient surgical centers in operation at: March 31.................................................. 5 5 June 30................................................... 4 5 September 30.............................................. 3 5 December 31............................................... 5 Licensed hospital beds at: March 31.................................................. 6,015 6,357 June 30................................................... 3,868 6,317 September 30.............................................. 3,153 6,029 December 31............................................... 6,015
- --------------- (a) Licensed beds are those beds for which a facility has been granted approval to operate from the applicable state licensing agency. (b) Weighted average licensed beds represents the average number of licensed beds, weighted based on periods owned. (c) Represents the average number of patients in the Company's hospital beds each day. (d) Represents the total number of patients admitted (in the facility for a period in excess of 23 hours) to the Company's hospitals and is used by management and certain investors as a general measure of inpatient volume. (e) Equivalent admissions are used by management and certain investors as a general measure of combined inpatient and outpatient volume. Equivalent admissions are computed by multiplying admissions (inpatient volume) by the sum of gross inpatient revenue and gross outpatient revenue and then dividing the resulting amount by gross inpatient revenue. The equivalent admissions computation "equates" outpatient revenue to the volume measure (admissions) used to measure inpatient volume resulting in a general measure of combined inpatient and outpatient volume. (f) Represents the average number of days admitted patients stay in the Company's hospitals. (g) The non-consolidating facilities include facilities operated through 50/50 joint ventures which are not controlled by the Company. They are accounted for using the equity method of accounting and are, therefore, not included on a fully consolidating basis in the condensed consolidated financial statements. 28 29 PART II: OTHER INFORMATION ITEM 1: LEGAL PROCEEDINGS. The Company is facing significant legal challenges. The Company is the subject of various Federal and state investigations, qui tam actions, shareholder derivative and class action suits filed in Federal court, shareholder derivative actions filed in state courts, patient/payer actions and general liability claims. FEDERAL AND STATE INVESTIGATIONS In March 1997, various facilities of the Company's El Paso, Texas operations were searched by Federal authorities pursuant to search warrants, and the government removed various records and documents. In February 1998, also in El Paso, an additional warrant was executed and a single computer was seized. In July 1997, various Company affiliated facilities and offices were searched pursuant to search warrants issued by the United States District Court in several states. During July, September and November 1997, the Company was also served with subpoenas requesting records and documents related to laboratory billing and DRG coding in various states and home health operations in various jurisdictions, including, but not limited to, Florida. In January 1998, the Company received a subpoena which requested records and documents relating to physician relationships. In June 1999, Columbia Home Care Group received a subpoena seeking records related to home health operations. Also, in July 1997, the United States District Court for the Middle District of Florida, in Fort Myers, issued an indictment against three employees of a subsidiary of the Company. The indictment related to the alleged false characterization of interest payments on certain debt resulting in Medicare and CHAMPUS (TRICARE) overpayments since 1986 to Fawcett Memorial Hospital, a Port Charlotte, Florida hospital that was acquired by the Company in 1992. The Company has been served with subpoenas for various records and documents. A fourth employee of a subsidiary of the Company was indicted in July 1998 by a superseding indictment. The trial on this matter commenced on May 3, 1999. On July 2, 1999, the jury returned a mixed verdict, finding two such employees guilty and acquitting one. The jury was unable to reach a verdict as to the fourth employee. Sentencing has been scheduled for December 1999 for the two convicted employees. The Government and the fourth employee executed an agreement to defer prosecution for 18 months after which charges will be dismissed. Several hospital and other facilities affiliated with the Company in various states have also received individual Federal and/or state government inquiries, both informal and formal, requesting information related to reimbursement from government programs. In general, the Company believes that the United States Department of Justice and other Federal and state governmental authorities are investigating certain acts, practices or omissions alleged to have been engaged in by the Company with respect to Medicare, Medicaid and CHAMPUS (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 companies defrauded the Medicare program. Kimberly pled guilty to three separate felony charges filed by the U.S. Attorneys in the Middle and Southern District of Florida and the Northern District of Georgia, the three separate charges being conspiracy, mail fraud and violating the Medicare anti-kickback statute. While 29 30 Columbia/HCA was not specifically named in these guilty pleas, the guilty pleas refer to the involvement of a "Company A" or a "company not named as a defendant." The Company believes these references refer to Columbia/HCA or its subsidiaries. The Company is also the subject of a formal order of investigation by the Securities and Exchange Commission. The Company understands that the investigation relates to the anti-fraud, insider trading, periodic reporting and internal accounting control provisions of the federal securities laws. While it is too early to predict the outcome of any of the ongoing investigations or the initiation of any additional investigations, were the Company to be found in violation of Federal or state laws relating to Medicare, Medicaid or similar programs, the Company could be subject to substantial monetary fines, civil and criminal penalties and exclusion from participation in the Medicare and Medicaid programs. Any such sanctions could have a material adverse effect on the Company's financial position and results of operations. (See Note 2--Investigations and Note 10--Contingencies of the Notes to Condensed Consolidated Financial Statements.) LAWSUITS Qui Tam Actions Several qui tam actions have been brought by private parties ("relators") on behalf of the United States of America and have been unsealed and served on the Company. With the exception of five cases discussed below, the government has declined to intervene in the qui tam actions unsealed to date. To the best of the Company's knowledge, the actions allege, in general, that the Company and certain subsidiaries and/or affiliated partnerships violated the False Claims Act, 31 U.S.C. 3729 et seq., for improper claims submitted to the government for reimbursement. The lawsuits generally seek damages of three times the amount of all Medicare or Medicaid claims (involving false claims) presented by the defendants to the Federal government, civil penalties of not less than $5,000 nor more than $10,000 for each such Medicare or Medicaid claim, attorneys' fees and costs. The Company is aware of additional qui tam actions that remain under seal and believes that there are other sealed qui tam cases of which it is unaware. On February 12, 1999, the United States filed a Motion before the Judicial Panel on Multidistrict Litigation ("MDL" Panel) seeking to transfer and consolidate, 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 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 healthcare programs and shifted costs to its Medicare cost reports. Defendants have moved to dismiss the Complaint, and that motion is pending. 30 31 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 of America ex rel. Sandra Russell; and Sandra Russell, in her own right v. EPIC Healthcare Management Group, et al., No. H-95-99151, was filed on January 18, 1995 in the United States District Court for the Southern District of Texas, Houston Division. The complaint alleges that the defendants submitted claims, records and/or statements for Medicare reimbursement in connection with home health services which were false. The defendants moved to dismiss in May 1997. The court granted defendant's motion but allowed the relator the right to replead. Relator filed an amended complaint. Defendants filed a second motion to dismiss which was granted on June 25, 1998. Relator filed an Appeal. The Fifth Circuit affirmed the dismissal on October 14, 1999. 31 32 The matter of Mary Ann Wisz, Individually, and ex rel. United States of America v. C/HCA Development, Inc. d/b/a Columbia-Olympia Fields Osteopathic Hospital and Medical Center, Inc., et al., Case No. 97-C-2646, was filed on April 16, 1997, in the United States District Court for the Northern District of Illinois, Eastern Division. An amended complaint was filed on February 17, 1998, and on May 15, 1998, relator was permitted leave to file its Second Amended Complaint. In addition to adding Midwestern University as a party defendant, the Second Amended Complaint contained allegations that Olympia Fields Osteopathic Hospital and Medical Center and/or the Chicago Osteopathic Hospital changed dates on out-patient surgical procedures. That portion of the Second Amended Complaint has been answered and discovery is ongoing. The Second Amended Complaint also alleges that one or both hospitals directed surgical nurses to misdesignate the severity of surgeries. That portion of the Second Amended Complaint was subject to a partial motion to dismiss, which motion was granted. The parties in this matter have reached a settlement in principle. Such settlement must be documented and approved by the court before it becomes effective, and C/HCA Development, Inc. d/b/a Columbia-Olympia Fields Osteopathic Hospital and Medical Center, Inc. was dismissed from the matter on August 11, 1999. The matter of United States ex rel. McLendon v. Columbia/HCA, et al., Civ. No. 1 97 CV 0890, was filed under seal on April 4, 1997 in the U.S. District Court for the Northern District of Georgia, Atlanta Division. On July 19, 1999, the court unsealed this action. The Complaint alleges that the Company acted to illegally obtain Medicare reimbursement for costs incurred in purchasing home health agencies. The Complaint also alleges that the Company illegally billed Medicare for certain sales and marketing activities and for certain home care visits. The Government has intervened in this action but has not served the Complaint. 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 October 18, 1999, three subsidiaries of the Company received a qui tam complaint from the relator, entitled United States ex rel. Dan R. Williams v. West Regional Medical Center, West Florida Medical Center Clinic, West Florida Behavioral Health, filed on May 28, 1999, in the U.S. District Court of the Northern District of Florida, No. 3:99CV221LAC. The complaint alleges, in general, that the defendants billed the Federal Employees Health Benefit Program for a physician visit on days during relator's hospitalization when, according to the relator, a physician visit had not occurred. The complaint alleges this was a standard practice. The complaint also alleges that blood tests and laboratory services submitted during relator's hospitalization were inaccurate, and that the three defendants engaged in a system of self-referral designed to increase usage of each others' services. The United States has not intervened 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 32 33 or entities who acquired the Company's common stock from April 9, 1994 to September 9, 1997. The consolidated lawsuit was brought against the Company, Richard Scott, David Vandewater, Thomas Frist, Jr., R. Clayton McWhorter, Carl E. Reichardt, Magdalena Averhoff, M.D., T. Michael Long and Donald S. MacNaughton. The lawsuit alleges, among other things, that the defendants committed violations of the Federal securities laws by materially inflating the Company's revenues and earnings through a number of practices, including upcoding, maintaining reserve cost reports, disseminating false and misleading statements, cost shifting, illegal reimbursements, improper billing, unbundling and violating various Medicare laws. The lawsuit seeks damages, costs and expenses. Plaintiffs filed their Motion for Class Certification in February 1998, and defendants filed responsive briefs. No ruling has been made on class certification. On October 10, 1997, the court entered an order consolidating the above-mentioned derivative law claims into a single-captioned case, McCall, H. Carl, as Comptroller of the State of New York and as Trustee of the New York State Common Retirement Fund, derivatively on behalf of Columbia/HCA Healthcare Corporation v. Richard L. Scott, et al., No. 3-97-0838. All of the other derivative lawsuits were administratively closed by the Court. The consolidated McCall lawsuit was brought against the Company, Thomas Frist, Jr., Richard L. Scott, David T. Vandewater, R. Clayton McWhorter, Magdalena Averhoff, M.D., Frank S. Royal, M.D., T. Michael Long, William T. Young and Donald S. MacNaughton. The lawsuit alleges, among other things, derivative claims against the individual defendants that they intentionally or negligently breached their fiduciary duties to the Company by authorizing, permitting or failing to prevent the Company from engaging in various schemes to improperly increase revenue, upcoding, improper cost reporting, improper referrals, improper acquisition practices and overbilling. In addition, the lawsuit asserts a derivative claim against some of the individual defendants for breaching their fiduciary duties by allegedly engaging in improper insider trading. The lawsuit seeks restitution, damages, recoupment of fines or penalties paid by the Company, 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. Shareholder Derivative Actions Filed in State Courts Several derivative actions have been filed in state court by certain purported stockholders of the Company against certain of the Company's current and former officers and directors alleging breach of fiduciary duty, and failure to take reasonable steps to ensure that the Company did not engage in illegal practices thereby exposing the Company to significant damages. Two purported derivative actions entitled Barron, Evelyn, et al. v. Magdelena Averhoff, et al., (Civil Action No. 15822NC), filed on July 22, 1997, and Kovalchick, John E. v. Magdelena Averhoff, et al., (Civil Action No. 15829NC), filed on July 29, 1997, have been filed in the Court of Chancery of the State of Delaware in and for New Castle County. The actions were brought on behalf of the Company by certain purported shareholders of the Company against certain of the Company's current and former officers and directors. The suits seek damages, attorneys' fees and costs. In the Barron lawsuit, plaintiffs also seek an Order (i) requiring individual defendants to return to the Company all salaries or remunerations paid them by the Company, together with proceeds of the sale of Columbia/HCA stock made in breach of their fiduciary duties; (ii) prohibiting the Company from paying any individual defendant any benefits pursuant to the terms of employment, consulting or partnership agreements; and (iii) terminating all improper business relationships 33 34 between the Company and any individual defendant. In the Kovalchick lawsuit, plaintiffs also seek an Order (i) requiring individual defendants to return to the Company all salaries or remunerations paid to them by the Company and all proceeds from the sale of Columbia/HCA stock made in breach of their fiduciary duties; (ii) requiring that an impartial Compliance Committee be appointed to meet regularly; and (iii) requiring that the Company be prohibited from paying any director/defendant any benefits pursuant to terms of employment, consulting or partnership agreements. Plaintiffs in both Barron and Kovalchick have granted the defendants an indefinite extension of time to respond to the Complaints. On August 14, 1997, a similar purported derivative action entitled State Board of Administration of Florida, the public pension fund of the State of Florida in behalf of itself and in behalf of all other stockholders of Columbia/HCA Healthcare Corporation derivatively in behalf of Columbia/HCA Healthcare Corporation vs. Magdalena Averhoff, et al., (No. 97-2729), was filed in the Circuit Court in Davidson County, Tennessee on behalf of the Company by certain purported shareholders of the Company against certain of the Company's current and former directors and officers. These lawsuits seek damages and costs as well as orders (i) enjoining the Company from paying benefits to individual defendants; (ii) requiring termination of all improper business relationships with individual defendants; (iii) requiring the Company to provide for independent public directors and (iv) requiring the Company to put in place proper mechanisms of corporate governance. The court has entered an Order temporarily staying the lawsuit. The matter of Louisiana State Employees Retirement System, a public pension fund of the State of Louisiana, in behalf of itself and in behalf of all other stockholders of Columbia/HCA Healthcare Corporation derivatively in behalf of Columbia/HCA Healthcare Corporation v. Magdalena Averhoff, et al., another derivative action, was filed on March 19, 1998 in the Circuit Court of the Eleventh Judicial Circuit, Dade County, Florida, General Jurisdiction Division (Case No. 98-6050 CA04), and the defendants removed it to the United States District Court, Southern District of Florida (Case No. 98-814-CIV). The Louisiana State Employees Retirement System is the public pension fund of the State of Louisiana. The suit alleges, among other things, breach of fiduciary duties resulting in damage to the Company. The lawsuit seeks damages from the individual defendants to be paid to the Company and attorneys' fees, costs and expenses. In addition, the lawsuit seeks orders (i) requiring the individual defendants to pay to the Company all benefits received by them from the Company; (ii) enjoining the Company from paying any benefits to individual defendants; (iii) requiring that defendants terminate all improper business relationships with the Company and any individual defendants; (iv) requiring that the Company provide for appointment of a majority of independent public directors and (v) requiring that the Company put in place proper mechanisms of corporate governance. On August 10, 1998, the Court transferred this case to the Middle District of Tennessee. By agreement of the parties, the case has been administratively closed pending the outcome of the court's ruling on the defendants' motions to dismiss the McCall action referred to above. 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. 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 34 35 answered on October 13, 1998. The plaintiffs seek certification of two proposed classes including all private individuals and all employee welfare benefit plans that have paid for health-related goods or services provided by the Company. The plaintiffs allege, among other things, that the Company has engaged in a pattern and practice of inflating charges, concealing the true nature of patients' illnesses, providing unnecessary medical care, and billing for services never rendered. The plaintiffs seek damages, attorneys' fees and costs, as well as disgorgement and injunctive relief. A scheduling order 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. 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. On April 24, 1998, two matters, Board of Trustees of the Carpenters & Millwrights of Houston & Vicinity Welfare Trust Fund v. Columbia/HCA Healthcare Corporation, Case No. 598CV157, and Board of Trustees of the Texas Ironworkers' Health Benefit Plan v. Columbia/HCA Healthcare Corporation, Case No. 598CV158, were filed in the United States District Court for the Eastern District of Texas. The original Complaint in these suits alleged violations of RICO only. Plaintiffs in both cases principally alleged that in order to inflate its revenues and profits, defendant engaged in fraudulent billing for services not performed, fraudulent overcharging in excess of correct rates and fraudulent concealment and misrepresentation. These suits seek damages, attorneys' fees and costs, as well as disgorgement and injunctive relief. Plaintiffs subsequently amended their complaint to add allegations under ERISA as well as state law claims. These suits have been consolidated by the MDL Panel with Boyson and transferred to the Middle District of Tennessee for pretrial proceedings. The amended complaints in these suits were withdrawn and superseded by the Coordinated Class Action Complaint filed in the MDL proceeding on September 21, 1998. 35 36 The matter of Tennessee Laborers Health and Welfare Fund, on behalf of itself and all others similarly situated vs. Columbia/HCA Healthcare Corporation, Case No. 3-98-0437, was filed in the United States District Court of the Middle District of Tennessee, Nashville Division, on May 14, 1998. The lawsuit seeks certification of a national class comprised of all employee welfare benefit plans that have paid for medical services provided by the Company. This case involves allegations under ERISA, as well as state law claims which are similar to those alleged in Boyson. Plaintiff, an Employee Welfare Benefit Plan, alleges that defendant violated the terms of the Plan documents by overbilling the Plans, including but not limited to, exaggerating the severity of illnesses, providing unnecessary treatment, billing for services not rendered and other methods of overbilling and further violated the terms of the Plan documents by taking Plan assets in payment of such improper bills. Plaintiff further alleges that defendant intentionally concealed or suppressed the true nature of its patients' illnesses, and the actual treatment provided to those patients, and its improper billing. The suit seeks injunctive relief in the form of an accounting, damages, attorneys' fees, interest and costs. This suit has been consolidated by the Court with Boyson and the other cases transferred by the MDL Panel to the Middle District of Tennessee. The complaint in Tennessee Laborers was withdrawn and superseded with the filing of the Coordinated Class Action Complaint in the MDL proceeding on September 21, 1998. The matter of Brown, Nancy, individually and on behalf of all others similarly situated v. Columbia/HCA Healthcare Corporation was filed on November 16, 1995, in the Fifteenth Judicial Circuit Court in and for Palm Beach County, Florida, Case No. 95-9102 AD. The suit alleges that Palms West Hospital charged excessive amounts for goods and services associated with patient care and treatment, including items such as pharmaceuticals, medical supplies, laboratory tests, medical equipment and related medical services such as x-rays. The suit seeks the certification of a nationwide class, and damages for patients who have paid bills for the allegedly unreasonable portion of the charges as well as interest, attorneys' fees and costs. In response to defendant's amended motion to dismiss filed in January 1996, plaintiff amended the Complaint and defendant subsequently filed an answer and defenses in June 1996. On October 15, 1997, Harald Jackson moved to intervene in the lawsuit (see case below). The court denied Jackson's motion on December 19, 1997. To date, discovery is proceeding and no class has been certified. Jane Doe and her husband, John Doe, on their own behalf, and on behalf of all other persons similarly situated vs. HCA Health Services of Tennessee, Inc., d/b/a HCA Donelson Hospital n/k/a Summit Medical Center is a class action suit filed on August 17, 1992 in the First Circuit Court for Davidson County, Tennessee, Case No. 92C-2041. The suit principally alleges that Summit Medical Center's charges for hospital services and supplies for medical services (a hysterectomy in the plaintiff's case) exceeded the reasonable costs of its goods and services, that the overcharges constitute a breach of contract and an unfair or deceptive trade practice as well as a breach of the duty of good faith and fair dealing. This suit seeks damages, costs and attorneys' fees. In addition, the suit seeks a declaratory judgment recognizing plaintiffs' rights to be free from predatory billing and collection practices and an Order (i) requiring defendants to notify plaintiff class members of entry of declaratory judgment and (ii) enjoining defendants from further efforts to collect charges from the plaintiffs. In 1997, this case was certified as a class action consisting of all past, present and future patients at Summit Medical Center. In July 1997, Summit filed a Motion for Summary Judgment. In March 1998, the court denied the Motion for Summary Judgment and ordered the parties into mediation. In June 1998, the Court of Appeals denied defendant's application for permission to appeal the trial court's denial of the summary judgment motion. Summit 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. 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 36 37 excessively billing patients for services rendered, billing patients for services not rendered or not medically necessary, uniformly using improper codes to report patient diagnosis, and improperly and illegally recruiting doctors to refer patients to the Company's hospitals. The proposed class is broad enough to encompass all private payers, including individuals, insurers and health and welfare plans. The suit seeks damages, interest, attorneys' fees, costs and expenses. In addition, the suit seeks an Order (i) requiring defendants to provide an accounting of plaintiffs and class members who overpaid or were obligated to overpay; and (ii) requiring defendants to disgorge all monies illegally collected from plaintiffs and the class. Plaintiff filed a Motion for Class Certification in September 1997 which has not been ruled on. In December 1997, the Company filed a Motion for Summary Judgment which was denied. In January 1998, plaintiff filed a Motion for Leave to File a Second Amended Class Action Complaint to Add an Additional Class Representative which was granted but the court dismissed the claims asserted by the additional plaintiff. In June 1998, plaintiff filed a Motion for Leave of Court to File a Third Amended Class Action Complaint, and in October 1998 plaintiff filed a Motion for Leave of Court to File a Fourth Amended Class Action Complaint. Both proposed Amended Complaints seek to add new named plaintiffs to represent the proposed class. Both seek to add additional allegations of billing fraud, including improper billing for laboratory tests, inducing doctors to perform unnecessary medical procedures, improperly admitting patients from emergency rooms and maximizing patients' lengths of stay as inpatients in order to increase charges, and improperly inducing doctors to refer patients to the Company's home healthcare units or psychiatric hospitals. Both seek an additional order that the Company's contracts with plaintiffs and all class members are rescinded and that the Company must repay all monies received from plaintiffs and the class members. The court has not ruled on either Motion for Leave to Amend. Discovery is underway in the case. The Company in September 1998 filed another Motion for Summary Judgment contesting the standing of the named plaintiffs to bring the alleged claims. That motion has not been ruled on by the court. The matter of The United Paper Workers International Union, et al. v. Columbia/HCA Healthcare Corporation, et al., was filed on September 3, 1998 in the Circuit Court for Washington County, Tennessee, Civil Action No. 19350. The lawsuit contains billing fraud allegations similar to those in the Ferguson case 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. The matter of Douglas, Cheryl, individually, and on behalf of all others similarly situated v. Columbia/HCA Healthcare Corporation, et al. is a purported class action filed on March 5, 1998 in the Circuit Court of Cook County, Illinois, County Department, Chancery Division, Case No. 98 CH 2942. The suit generally alleges that defendants were involved in fraudulent and deceptive acts including wrongful billing, unnecessary treatment and wrongful diagnosis of patients with illnesses that necessitate higher medical fees for financial gain. The suit seeks damages, costs and expenses. On September 18, 1998, the Company's motion to dismiss was granted and plaintiff's complaint was dismissed without prejudice. On November 6, 1998, the plaintiff filed an amended complaint alleging violations of the Illinois Consumer Fraud and Deceptive Trade Practices Act, fraudulent misrepresentation, breach of contract and civil conspiracy. On April 16, 1999, the court granted the Company's motion to dismiss the amended complaint. Such dismissal was with prejudice as to the civil conspiracy count and without prejudice as to the remaining counts, and plaintiff was provided time to replead those counts that had been dismissed without prejudice. The Company subsequently entered into a settlement of this lawsuit with the plaintiff in exchange for a full and complete release of the Company by the plaintiff. The settlement has been consummated and this lawsuit has been dismissed. 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 37 38 certification of a Texas class comprised of persons who paid for any portion of an improper or fraudulent bill for medical services rendered by any Texas facility owned or operated by the Company. The suit seeks damages, attorneys' fees, costs and expenses, as well as restitution to plaintiffs and the class in the amount by which defendants have been unjustly enriched and equitable and injunctive relief. The lawsuit principally alleges that the Company perpetrated a fraudulent scheme that consisted of systematic and routine overbilling through false and inaccurate bills, including padding, billing for services never provided, and exaggerating the seriousness of patients' illnesses. The lawsuit also alleges that the Company systematically entered into illegal kickback schemes with doctors for patient referrals. The Company filed its answer in November 1997 denying the claims. Discovery has commenced. The matter of Jackson, Harald F., individually and on behalf of all others similarly situated v. Columbia/HCA Healthcare Corporation was initially filed as a motion to intervene in the Brown matter (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 have appealed the September 1998 orders. Those appeals are pending. There have been no appeals of the final judgments. The Company intends to pursue the defense of these class actions vigorously. While it is premature to predict the outcome of the qui tam, shareholder derivative and class action lawsuits, the amounts claimed are substantial. It is possible that an adverse resolution, individually or in the aggregate, could have a material adverse impact on the Company's liquidity, financial position and results of operations. See Note 2--Investigations and Note 10--Contingencies of the Notes to Condensed Consolidated Financial Statements. The Company is unable to measure the effect or predict the magnitude that these matters and the related media coverage could have on the Company's future results of operations and financial position. 38 39 General Liability and Other Claims The matter of Landgraff, Anne M. and Gina Magarian, on behalf of the Columbia/HCA Stock Bonus Plan v. Columbia/HCA Healthcare Corporation of America, et al. was originally filed on November 7, 1997 in the United States District Court for the Northern District of Georgia, Atlanta Division, Civil Action No. 97-CV-3381 and transferred by agreement of the parties to the United States District Court for the Middle District of Tennessee, Civil Action No. 3-98-0090. The plaintiffs filed a second amended complaint on April 24, 1998 against the Company and certain members of the Company's Retirement Committee during 1997 alleging breach of fiduciary duty owed to the participants in the 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, and the Court is expected to hear closing arguments later this year. A class action styled Mary Forsyth, et al. v. Humana, Inc., et al., Case No. CV-S-89-249-DWH, was filed on March 29, 1989, in the United States District Court for the District of Nevada. Plaintiffs are two classes of individuals who paid for, or received coverage under, group insurance policies sold in the State of Nevada by Humana Insurance. They allege violations of antitrust laws, ERISA and RICO which arise from the sale of the policies and from incentives provided under the policies for insureds to use Humana Sunrise Hospital in Las Vegas, a facility now owned by the Company. The suit seeks attorneys' fees and costs, as well as injunctive relief and insurance benefits for plaintiffs. In 1993, the United States District Court granted summary judgment dismissing most of plaintiffs' claims but granted plaintiffs judgment on one claim. Plaintiffs appealed to the United States Court of Appeals for the Ninth Circuit which, in May 1997, affirmed the judgment on the ERISA claims; reversed as to the antitrust claims; and reversed in part as to the RICO claims, but affirmed the District Court's grant of summary judgment limiting RICO damages to three times the ERISA damages. In their current complaint, plaintiffs claim approximately $133 million in antitrust damages that is subject to statutory trebling. However, in their most recent expert report, plaintiffs' expert claims antitrust damages of approximately $13-$21 million. Humana Inc. ("Humana") petitioned the United States Supreme Court for a Writ of Certiorari on the RICO claims which was granted. On January 20, 1999, the Supreme Court affirmed the Ninth Circuit's decision that the plaintiffs could proceed with their RICO claims. The Supreme Court did not address the amount of damages that plaintiffs could seek on their claim. The entire case is now back in the Nevada district court, where Humana has filed several motions seeking dismissal of the antitrust claims. A settlement has been negotiated and has received the preliminary approval of the Court. A hearing on the parties' joint motion for final approval is set for November 30, 1999. 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 39 40 counterclaim and third-party complaint. Discovery has been conducted and several dispositive motions are pending with the court. 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 6 to the Condensed Consolidated Financial Statements which is incorporated herein by reference. The Company is also subject to claims and suits arising in the ordinary course of business, including claims for personal injuries or for wrongful restriction of, or interference with, physicians' staff privileges. In certain of these actions the claimants have asked for punitive damages against the Company, which are usually not covered by insurance. In the opinion of management, the ultimate resolution of these pending claims and legal proceedings will not have a material adverse effect on the Company's results of operations or financial position. ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K. (a) List of Exhibits: Exhibit 3--Amended and Restated Bylaws of the Company.* Exhibit 10.1--Columbia/HCA Healthcare Corporation Outside Directors Stock and Incentive Compensation Plan, as amended and restated.* Exhibit 10.2--First Amendment to Amended and Restated Columbia/HCA Healthcare Corporation 1992 Stock and Incentive Plan.* Exhibit 12--Statement re Computation of Ratio of Earnings to Fixed Charges. Exhibit 27--Financial Data Schedule.* *Included only in filings under the Electronic Data, Gathering, Analysis and Retrieval system. (b) Reports on Form 8-K filed during the quarter ended September 30, 1999: On July 27, 1999, the Company filed a report on Form 8-K which included its second quarter 1999 earnings release. On September 13, 1999, the Company filed a report on Form 8-K which announced the substantial completion of the Company's restructuring, announced the filing of a "shelf" registration statement relating to $1.5 billion of debt securities, and updated certain additional information. 40 41 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. COLUMBIA/HCA HEALTHCARE CORPORATION /s/ R. MILTON JOHNSON -------------------------------------- R. Milton Johnson Senior Vice President and Controller Date: November 15, 1999 41 EX-3 2 AMENDED & RESTATED BYLAWS OF THE COMPANY 1 EXHIBIT 3 ADOPTED SEPTEMBER 23, 1999 AMENDED AND RESTATED BYLAWS OF COLUMBIA/HCA HEALTHCARE CORPORATION ARTICLE I OFFICES SECTION 1. Registered Office. The registered office of the Corporation shall be within the State of Delaware in the City of Wilmington, County of New Castle. SECTION 2. Other Offices. The Corporation may also have an office or offices other than said registered office at such place or places, either within or without the State of Delaware, as the Board of Directors shall from time to time determine or the business of the Corporation may require. ARTICLE II MEETINGS OF STOCKHOLDERS SECTION 1. Place of Meetings. All meetings of the stockholders for the election of directors or for any other purpose shall be held at any such place, either within or without the State of Delaware, as shall be designated from time to time by the Board of Directors and stated in the notice of meeting or in a duly executed waiver thereof. SECTION 2. Annual Meeting. The annual meeting of stockholders shall be held at such date and time as shall be designated from time to time by the Board of Directors and stated in the notice of meeting or in a duly executed waiver thereof. At such annual meeting, the stockholders shall elect, by a plurality vote, the Board of Directors in the manner provided in the Corporation's Certificate of Incorporation and transact such other business as may properly be brought before the meeting. SECTION 3. Special Meetings. Special meetings of stockholders, unless otherwise prescribed by statute, may be called at any time only by the Board of Directors, the Chairman of the Board or the Chief Executive Officer. SECTION 4. Notice of Meetings. Except as otherwise expressly required by statute, written notice of each annual and special meeting of stockholders stating the date, place and hour of the meeting, and, in the case of a special meeting, the purpose or purposes for which the meeting is called, shall be given to each stockholder of record entitled to vote thereat not less than ten nor more than sixty days before the date of the meeting. Business transacted at any special meeting of stockholders shall be limited to the purposes stated in the notice. Notice shall be given personally or by mail and, if by mail, shall be sent in a postage prepaid envelope, addressed to the stockholder at the address appearing on the records of the Corporation. Notice by mail shall be deemed given at the time when the same shall be deposited in the United States mail, postage prepaid. Notice of any meeting shall not be required to be given to any person who attends such meeting, except when such person attends the meeting in person or by proxy for the express purpose of objecting, at the beginning of the meeting, to the transaction of any business because the meeting is not lawfully called or convened, or who, either before or after the meeting, shall submit a signed written waiver of notice, in person 2 or by proxy. Neither the business to be transacted at, nor the purpose of, an annual or special meeting of stockholders need be specified in any written waiver of notice. SECTION 5. List of Stockholders. The officer who has charge of the stock ledger of the Corporation shall prepare and make, at least ten days before each meeting of stockholders, a complete list of the stockholders entitled to vote at the meeting, arranged in alphabetical order, showing the address of and the number of shares registered in the name of each stockholder. Such list shall be open to the examination of any stockholder, for any purpose germane to the meeting, during ordinary business hours, for a period of at least ten days prior to the meeting, either at a place within the city where the meeting is to be held, which place shall be specified in the notice of meeting, or, if not specified, at the place where the meeting is to be held. The list shall be produced and kept at the time and place of the meeting during the whole time thereof, and may be inspected by any stockholder who is present. SECTION 6. Quorum, Adjournments. The holders of a majority of the voting power of the issued and outstanding stock of the Corporation entitled to vote thereat, present in person or represented by proxy, shall constitute a quorum for the transaction of business at all meetings of stockholders, except as otherwise provided by statute or by the Certificate of Incorporation. If, however, such quorum shall not be present or represented by proxy at any meeting of stockholders, the stockholders entitled to vote thereat, present in person or represented by proxy, shall have the power to adjourn the meeting from time to time, without notice other than announcement at the meeting, until a quorum shall be present or represented by proxy. At such adjourned meeting at which a quorum shall be present or represented by proxy, any business may be transacted which might have been transacted at the meeting as originally called. If the adjournment is for more than thirty days, or, if after adjournment a new record date is set, a notice of the adjourned meeting shall be given to each stockholder of record entitled to vote at the meeting. SECTION 7. Organization. At each meeting of stockholders, the Chairman of the Board, if one shall have been elected, or, in his absence or if one shall not have been elected, the Chief Executive Officer, shall act as chairman of the meeting. The Secretary or, in his absence or inability to act, the person whom the chairman of the meeting shall appoint secretary of the meeting, shall act as secretary of the meeting and keep the minutes thereof. SECTION 8. Order of Business. The order of business at all meetings of the stockholders shall be as determined by the chairman of the meeting. SECTION 9. Voting. Except as otherwise provided by statute or the Certificate of Incorporation, each stockholder of the Corporation shall be entitled at each meeting of stockholders to one vote for each share of capital stock of the Corporation standing in his name on the record of stockholders of the Corporation: (a) on the date fixed pursuant to the provisions of Section 7 of Article V of these Bylaws as the record date for the determination of the stockholders who shall be entitled to notice of and to 2 3 vote at such meeting; or (b) if no such record date shall have been so fixed, then at the close of business on the day next preceding the day on which notice thereof shall be given, or, if notice is waived, at the close of business on the date next preceding the day on which the meeting is held. Each stockholder entitled to vote at any meeting of stockholders may authorize another person or persons to act for him by a proxy, but no proxy shall be voted after three years from its date, unless the proxy provides for a longer period. Any such proxy shall be delivered to the secretary of the meeting at or prior to the time designated in the order of business for so delivering such proxies. When a quorum is present at any meeting, the vote of the holders of a majority of the voting power of the issued and outstanding stock of the Corporation entitled to vote thereon, present in person or represented by proxy, shall decide any question brought before such meeting, unless the question is one upon which by express provision of statute, of applicable stock exchange rule or of the Certificate of Incorporation or of these Bylaws, a different vote is required, in which case such express provision shall govern and control the decision of such question. Unless required by statute, or determined by the chairman of the meeting to be advisable, the vote on any question need not be by written ballot. On a vote by written ballot, each ballot shall be signed by the stockholder voting, or by his proxy, and shall state the number of shares voted. SECTION 10. Inspectors. The Board of Directors shall, in advance of any meeting of stockholders, appoint one or more inspectors to act at such meeting or any adjournment thereof and make a written report thereof. If any of the inspectors so appointed shall fail to appear or shall be unable to act, the chairman of the meeting shall appoint one or more inspectors. Each inspector, before entering upon the discharge of his or her duties, shall take and sign an oath faithfully to execute the duties of inspector at such meeting with strict impartiality and according to the best of his or her ability. The inspectors shall ascertain the number of shares of capital stock of the Corporation outstanding and the voting power of each, determine the number of shares represented at the meeting and the validity of proxies and ballots, count all votes and ballots, determine and retain for a reasonable period a record of the disposition of any challenges made to any determination by the inspectors and certify their determination of the number of shares represented at the meeting and their count of all votes and ballots. The inspectors may appoint or retain other persons or entities to assist the inspectors in the performance of the duties of the inspectors. No director or candidate for the office of director shall act as an inspector of an election of directors. Inspectors need not be stockholders. 3 4 ARTICLE III BOARD OF DIRECTORS SECTION 1. Place of Meetings. Meetings of the Board of Directors shall be held at such place or places, within or without the State of Delaware, as the Board of Directors may from time to time determine or as shall be specified in the notice of any such meeting. SECTION 2. Annual Meeting. The Board of Directors shall meet for the purpose of organization, the election of officers and the transaction of other business, on the same day and at the same place where the annual meeting of stockholders shall be held. Notice of such meeting need not be given. In the event such annual meeting is not so held, the annual meeting of the Board of Directors may be held at such other time or place (within or without the State of Delaware) as shall be specified in a notice thereof given as hereinafter provided in Section 5 of this Article III. SECTION 3. Regular Meetings. Regular meetings of the Board of Directors shall be held at such time and place as the Board of Directors may fix. If any day fixed for a regular meeting shall be a legal holiday at the place where the meeting is to be held, then the meeting which would otherwise be held on that day shall be held at the same hour on the next succeeding business day (unless the Chairman of the Board determines otherwise). Notice of regular meetings of the Board of Directors need not be given except as otherwise required by statute or these Bylaws. SECTION 4. Special Meetings. Special meetings of the Board of Directors may be called by the Chairman of the Board, if one shall have been elected, by two or more directors of the Corporation or by the Chief Executive Officer or the President. SECTION 5. Notice of Meetings. Notice of each special meeting of the Board of Directors (and of each regular meeting for which notice shall be required) shall be given by the Secretary as hereinafter provided in this Section 5, in which notice shall be stated the time and place of the meeting. Except as otherwise required by these Bylaws, such notice need not state the purposes of such meeting. Notice of each such meeting shall be sent to each director, addressed to such director at his or her residence or usual place of business, by telegraph, cable, telex, telecopier or other similar means, or be delivered to him or her personally or be given to him or her by telephone or other lawful means (including by facsimile or by electronic mail), at least two hours before the time at which such meeting is to be held. Notice of any such meeting need not be given to any director who shall, either before or after the meeting, submit a signed waiver of notice or who shall attend such meeting, except when he or she shall attend for the express purpose of objecting, at the beginning of the meeting, to the transaction of any business because the meeting is not lawfully called or convened. SECTION 6. Quorum and Manner of Acting. A majority of the entire Board of Directors shall constitute a quorum for the transaction of business at any meeting of the Board of Directors, and, except as otherwise expressly required by statute, the Certificate of Incorporation or these Bylaws, the act of a majority of the directors present at any meeting at which a quorum is present shall be the act of the Board of Directors. In the absence of a quorum at any meeting of the Board of Directors, 4 5 a majority of the directors present thereat may adjourn such meeting to another time and place. Notice of the time and place of any such adjourned meeting shall be given to all of the directors unless such time and place were announced at the meeting at which the adjournment was taken, in which case such notice shall only be given to the directors who were not present thereat. At any adjourned meeting at which a quorum is present, any business may be transacted which might have been enacted at the meeting as originally called. The directors shall act only as a Board and the individual directors shall have no power as such. SECTION 7. Organization. At each meeting of the Board of Directors, the Chairman of the Board, if one shall have been elected, or, in the absence of the Chairman of the Board or if one shall not have been elected, another director chosen by a majority of the directors present, shall act as chairman of the meeting and preside thereat. The Secretary or, in his absence or if one shall not have been elected, any person appointed by the chairman of the meeting, shall act as secretary of the meeting and keep the minutes thereof. SECTION 8. Resignations. Any director of the Corporation may resign at any time by giving written notice of his resignation to the Corporation. Any such resignation shall take effect at the time specified therein or, if the time when it shall become effective shall not be specified therein, immediately upon its receipt by the Corporation. Unless otherwise specified therein, the acceptance of such resignation shall not be necessary to make it effective. SECTION 9. Compensation. The Board of Directors shall have authority to fix the compensation, including fees and reimbursement of expenses, of directors for services to the Corporation in any capacity. SECTION 10. Committees. The Board of Directors may designate one or more committees, including an executive committee and a nominating committee, each committee to consist of one or more of the directors of the Corporation. The Board of Directors may designate one or more directors as alternate members of any committee, who may replace any absent or disqualified member at any meeting of the committee. In addition, in the absence or disqualification of a member of a committee, the member or members thereof present at any meeting and not disqualified from voting, whether or not he or she or they constitute a quorum, may unanimously appoint another member of the Board of Directors to act at the meeting in the place of any such absent or disqualified member. Except to the extent restricted by statute or the Certificate of Incorporation, each such committee, to the extent provided in the resolution creating it, shall have and may exercise all the powers and authority of the Board of Directors. Each such committee shall serve at the pleasure of the Board of Directors and have such name as may be determined from time to time by resolution adopted by the Board of Directors. Each committee shall keep regular minutes of its meetings and report the same to the Board of Directors. 5 6 SECTION 11. Action by Consent. Unless restricted by the Certificate of Incorporation, any action required or permitted to be taken by the Board of Directors or any committee thereof may be taken without a meeting if all members of the Board of Directors or such committee, as the case may be, consent thereto in writing, and the writing or writings are filed with the minutes of the proceedings of the Board of Directors or such committee, as the case may be. SECTION 12. Telephonic Meeting. Unless restricted by the Certificate of Incorporation, any one or more members of the Board of Directors or any committee thereof may participate in a meeting of the Board of Directors or such committee by means of a conference telephone or similar communications equipment by means of which all persons participating in the meeting can hear each other. Participation by such means shall constitute presence in person at a meeting. SECTION 13. Mandatory Board Retirement Policy. Effective July 1, 1994, no person shall be nominated to a term of office on the Company's Board of Directors who has attained the age of 70 or more before the first day of the proposed term of office. SECTION 14. Exceptions to Mandatory Retirement Policy. The provisions of Section 13 of this Article III shall not apply in respect of Thomas S. Murphy who has agreed to serve as a member of the Board of Directors of the Company. ARTICLE IV OFFICERS SECTION 1. Number and Qualifications. The officers of the Corporation shall be elected by the Board of Directors and shall include the Chairman of the Board, the Chief Executive Officer, the President, one or more Group Officers (including Group Presidents and Group Financial Officers), one or more Vice Presidents (including Senior Vice Presidents, Executive Vice Presidents or other classifications of Vice Presidents), the Secretary and the Treasurer. If the Board of Directors wishes, it may also elect other officers (including one or more Assistant Treasurers and one or more Assistant Secretaries) as may be necessary or desirable for the business of the Corporation. Any two or more offices may be held by the same person, and no officer except the Chairman of the Board need be a director. Each officer shall hold office until his or her successor shall have been duly elected and shall have qualified, or until his death, or until he or she shall have resigned or have been removed or disqualified, as hereinafter provided in these Bylaws. SECTION 2. Resignations. Any officer of the Corporation may resign at any time by giving written notice of his or her resignation to the Corporation. Any such resignation shall take effect at the time specified therein or, if the time when it shall become effective shall not be specified therein, immediately upon receipt by the Corporation. Unless otherwise specified therein, the acceptance of any such resignation shall not be necessary to make it effective. 6 7 SECTION 3. Removal. Any officer of the Corporation may be removed, either with or without cause, at any time, by the Board of Directors at any meeting thereof. SECTION 4. Chairman of the Board. The Chairman of the Board shall be elected from among the members of the Board. If present, he or she shall preside at all meetings of the Board of Directors and stockholders. He or she shall advise and counsel with the Chief Executive Officer, and in his or her absence with other executives of the Corporation, and shall perform such other duties as may from time to time be assigned to him or her by the Board of Directors. SECTION 5. Chief Executive Officer. The Chief Executive Officer, subject to the Board of Directors, shall have general executive charge, management, and control of the properties and operations of the Corporation in the ordinary course of its business, with all such powers with respect to such properties and operations as may be reasonably incident to such responsibilities. If the Board of Directors has not elected a Chairman or in the absence or inability to act of the Chairman of the Board, the Chief Executive Officer shall exercise all of the powers and discharge all of the duties of the Chairman of the Board. SECTION 6. President. The President shall have the general powers and duties of supervision and management usually vested in the office of the President of a corporation and shall perform such other duties as the Board of Directors, the Chairman of the Board or the Chief Executive Officer may, from time to time, prescribe. At the request of the Chief Executive Officer or in his or her absence or in the event of his or her inability or refusal to act, the President shall perform the duties of the Chief Executive Officer. SECTION 7. Group Officer. Each Group Officer shall perform all such duties as from time to time may be assigned to him or her by the Board of Directors, the Chairman of the Board, the Chief Executive Officer or the President. SECTION 8. Vice President. Each Vice President shall perform all such duties as from time to time may be assigned to him or her by the Board of Directors, the Chairman of the Board, the Chief Executive Officer or the President. SECTION 9. Treasurer. The Treasurer shall (a) have charge and custody of, and be responsible for, all the funds and securities of the Corporation; (b) keep full and accurate accounts of receipts and disbursements in books belonging to the Corporation; (c) deposit all moneys and other valuables to the credit of the Corporation in such depositories as may be designated by the Board of Directors or pursuant to its direction; 7 8 (d) receive, and give receipts for, moneys due and payable to the Corporation from any source whatsoever; (e) disburse the funds of the Corporation and supervise the investment of its funds, taking proper vouchers therefor; (f) render to the Board of Directors, whenever the Board of Directors may require, an account of the financial condition of the Corporation; and (g) in general, perform all duties incident to the office of Treasurer and such other duties as from time to time may be assigned to him or her by the Board of Directors, the Chairman of the Board or the Chief Executive Officer. SECTION 10. Secretary. The Secretary shall (a) keep or cause to be kept in one or more books provided for the purpose, the minutes of all meetings of the Board of Directors, the committees of the Board of Directors and the stockholders; (b) see that all notices are duly given in accordance with the provisions of these Bylaws and as required by law; (c) be custodian of the records and the seal of the Corporation and affix and attest the seal to all certificates for shares of the Corporation (unless the seal of the Corporation on such certificates shall be a facsimile, as hereinafter provided) and affix and attest the seal to all other documents to be executed on behalf of the Corporation under its seal; (d) see that the books, reports, statements, certificates and other documents and records required by law to be kept and filed are properly kept and filed; and (e) in general, perform all duties incident to the office of Secretary and such other duties as from time to time may be assigned to him or her by the Board of Directors, the Chairman of the Board or the Chief Executive Officer. SECTION 11. The Assistant Treasurer. The Assistant Treasurer, or if there shall be more than one, the Assistant Treasurers in the order determined by the Board of Directors (or if there be no such determination, then in the order of their election), shall, in the absence of the Treasurer or in the event of his or her inability or refusal to act, perform the duties and exercise the powers of the Treasurer and shall perform such other duties as from time to time may be assigned by the Board of Directors. 8 9 SECTION 12. The Assistant Secretary. The Assistant Secretary, or if there shall be more than one, the Assistant Secretaries in the order determined by the Board of Directors (or if there be no such determination, then in the order of their election), shall, in the absence of the Secretary or in the event of his or her inability or refusal to act, perform the duties and exercise the powers of the Secretary and shall perform such other duties as from time, to time may be assigned by the Board of Directors, the Chairman of the Board or the Chief Executive Officer. SECTION 13. Officers' Bonds or Other Security. If required by the Board of Directors, any officer of the Corporation shall give a bond or other security for the faithful performance of his or her duties, in such amount and with such surety as the Board of Directors may require. SECTION 14. Compensation. The compensation of the officers of the Corporation for their services as such officers shall be fixed from time to time by the Board of Directors. An officer of the Corporation shall not be prevented from receiving compensation by reason of the fact that he or she is also a director of the Corporation. ARTICLE V STOCK CERTIFICATES AND THEIR TRANSFER SECTION 1. Stock Certificates. Every holder of stock in the Corporation shall be entitled to have a certificate signed by, or in the name of the Corporation by, the Chairman of the Board, the Chief Executive Officer, the President or a Vice President and by the Treasurer or an Assistant Treasurer or the Secretary or an Assistant Secretary of the Corporation, certifying the number of shares owned by him or her in the Corporation. If the Corporation shall be authorized to issue more than one class of stock or more than one series of any class, the designations, preferences and relative, participating, optional or other special rights of each class of stock or series thereof and the qualifications, limitations or restrictions of such preferences or rights shall be set forth in full or summarized on the face or back of the certificate which the Corporation shall issue to represent such class or series of stock, provided that, except as otherwise provided in Section 202 of the General Corporation Law of the State of Delaware, in lieu of the foregoing requirements, there may be set forth on the face or back of the certificate which the Corporation shall issue to represent such class or series of stock, a statement that the Corporation will furnish without charge to each stockholder who so requests the designations, preferences and relative, participating, optional or other special rights of each class of stock or series thereof and the qualifications, limitations or restrictions of such preferences or rights. SECTION 2. Facsimile Signatures. Any or all of the signatures on a certificate may be a facsimile. In case any officer, transfer agent or registrar who has signed or whose facsimile signature has been placed upon a certificate shall have ceased to be such officer, transfer agent or registrar before such certificate is issued, it may be issued by the Corporation with the same effect as if he or she were such officer, transfer agent or registrar at the date of issue. 9 10 SECTION 3. Lost Certificates. The Board of Directors may direct a new certificate or certificates to be issued in place of any certificate or certificates theretofore issued by the Corporation alleged to have been lost, stolen, or destroyed. When authorizing such issue of a new certificate or certificates, the Board of Directors may, in its discretion and as a condition precedent to the issuance thereof, require the owner of such lost, stolen, or destroyed certificate or certificates, or his legal representative, to give the Corporation a bond in such sum as it may direct sufficient to indemnify it against any claim that may be made against the Corporation on account of the alleged loss, theft or destruction of any such certificate or the issuance of such new certificate. SECTION 4. Transfers of Stock. Upon surrender to the Corporation or the transfer agent of the Corporation of a certificate for shares duly endorsed or accompanied by proper evidence of succession, assignment or authority to transfer, it shall be the duty of the Corporation to issue a new certificate to the person entitled thereto, cancel the old certificate and record the transaction upon its records; provided, however, that the Corporation shall be entitled to recognize and enforce any lawful restriction on transfer. Whenever any transfer of stock shall be made for collateral security, and not absolutely, it shall be so expressed in the entry of transfer if, when the certificates are presented to the Corporation for transfer, both the transferor and the transferee request the Corporation to do so. SECTION 5. Transfer Agents and Registrars. The Board of Directors may appoint, or authorize any officer or officers to appoint, one or more transfer agents and one or more registrars. SECTION 6. Regulations. The Board of Directors may make such additional rules and regulations, not inconsistent with these Bylaws, as it may deem expedient concerning the issue, transfer and registration of certificates for shares of stock of the Corporation. SECTION 7. Fixing the Record Date. In order that the Corporation may determine the stockholders entitled to notice of or to vote at any meeting of stockholders or any adjournment thereof or entitled to receive payment of any dividend or other distribution or allotment of any rights, or entitled to exercise any rights in respect of any change, conversion or exchange of stock or for the purpose of any other lawful action, the Board of Directors may fix, in advance, a record date, which shall not be more than sixty nor less than ten days before the date of such meeting, nor more than sixty days prior to any other action. A determination of stockholders of record entitled to notice of or to vote at a meeting of stockholders shall apply to any adjournment of the meeting; provided, however, that the Board of Directors may, in its discretion, fix a new record date for the adjourned meeting. SECTION 8. Registered Stockholders. The Corporation shall be entitled to recognize the exclusive right of a person registered on its records as the owner of shares of stock to receive dividends and to vote as such owner, shall be entitled to hold liable for calls and assessments a person registered on its records as the owner of shares of stock, and shall not be bound to recognize any equitable or other claim to or interest in such share or shares of stock on the part of any other person, whether or not it shall have express or other notice thereof, except as otherwise provided by the laws of Delaware. 10 11 SECTION 9. Legends. The Board of Directors shall have the power and authority to provide that certificates representing shares of stock bear such legends as the Board of Directors deems appropriate to assure that the Corporation does not become liable for violations of federal or state securities laws or other applicable law. ARTICLE VI GENERAL PROVISIONS SECTION 1. Dividends. Subject to the provisions of statute and the Certificate of Incorporation, dividends upon the shares of capital stock of the Corporation may be declared by the Board of Directors at any regular or special meeting. Dividends may be paid in cash, in property or in shares of stock of the Corporation, unless otherwise provided by statute or the Certificate of Incorporation. SECTION 2. Reserves. Before payment of any dividend, there may be set aside out of any funds of the Corporation available for dividends such sum or sums as the Board of Directors may, from time to time, in its absolute discretion, think proper as a reserve or reserves to meet contingencies, or for equalizing dividends, or for repairing or maintaining any property of the Corporation or for such other purpose as the Board of Directors may think conducive to the interests of the Corporation. The Board of Directors may modify or abolish any such reserve in the manner in which it was created. SECTION 3. Seal. The seal of the Corporation shall be in such form as shall be approved by the Board of Directors. SECTION 4. Fiscal Year. The fiscal year of the Corporation shall end on December 31 of each year and may thereafter be changed by resolution of the Board of Directors. SECTION 5. Checks, Notes, Drafts, Etc. All checks, notes, drafts or other orders for the payment of money of the Corporation shall be signed, endorsed or accepted in the name of the Corporation by such officer, officers, person or persons as from time to time may be designated by the Board of Directors or by an officer or officers authorized by the Board of Directors to make such designation. SECTION 6. Execution of Contracts, Deeds, Etc. The Board of Directors may authorize any officer or officers, agent or agents, in the name, and on behalf of the Corporation to enter into or execute and deliver any and all deeds, bonds, mortgages, contracts and other obligations or instruments, and such authority may be general or confined to specific instances. The attestation to such execution by the Secretary of the Corporation shall not be necessary to constitute such deed, bond, mortgage, contract or other instrument a valid and binding obligation against the Corporation unless the resolutions, if any, of the Board of Directors authorizing such execution expressly state that such attestation is necessary. 11 12 SECTION 7. Voting of Stock in Other Corporations. Unless otherwise provided by resolution of the Board of Directors, the Chairman of the Board, the Chief Executive Officer, the President or any Vice President, from time to time, may (or may appoint one or more attorneys or agents to) cast the votes which the Corporation may be entitled to cast as a shareholder or otherwise in any other corporation, any of whose shares or securities may be held by the Corporation, at meetings of the holders of the shares or other securities of such other corporation or execute written consents to action in lieu thereof. In the event one or more, attorneys or agents are appointed, the Chairman of the Board, the Chief Executive Officer or the President may instruct the person or persons so appointed as to the manner of casting such votes or giving such consent. The Chairman of the Board, the Chief Executive Officer or the President may, or may instruct the attorneys or agents appointed to, execute or cause to be executed in the name and on behalf of the Corporation and under its seal or otherwise, such written proxies, consents, waivers or other instruments as may be necessary or proper in the circumstances. ARTICLE VII AMENDMENTS These Bylaws may be amended or repealed or new bylaws adopted (a) by the affirmative vote of the holders of at least 75% of the voting power of all shares of the Corporation entitled to vote generally in the election of directors, voting together as a single class or (b) if the Certificate of Incorporation so provides, by action of the Board of Directors at a regular or special meeting thereof. Any bylaw made by the Board of Directors may be amended or repealed by action of the stockholders at any annual or special meeting of stockholders. /s/ John M. Franck II ------------------------------------- John M. Franck II Corporate Secretary 12 EX-10.1 3 OUTSIDE DIRECTORS STOCK & INCENTIVE COMPENSATION 1 EXHIBIT 10.1 COLUMBIA/HCA HEALTHCARE CORPORATION OUTSIDE DIRECTORS STOCK AND INCENTIVE COMPENSATION PLAN Amended and Restated September 23, 1999 1. PURPOSES; CONSTRUCTION. This Plan shall be known as the "Columbia/HCA Healthcare Corporation Outside Directors Stock and Incentive Compensation Plan" and is hereinafter referred to as the "Plan." The purposes of the Plan are to encourage ownership of stock in the Company by Outside Directors, through the granting of non-qualified stock options, restricted stock awards and restricted stock unit awards, to provide an incentive to the directors to continue to serve the Company and to aid the Company in attracting qualified director candidates in the future. Options granted under the Plan will not be incentive stock options within the meaning of section 422 of the Code. The provisions of the Plan are intended to satisfy any applicable requirements of Section 16(b) of the Exchange Act, and shall be interpreted in a manner consistent with any such requirements thereof, as now or hereafter construed, interpreted and applied by regulation, rulings and cases. The terms of the Plan shall be as set forth below, effective May 1, 1999. 2. ADMINISTRATION OF THE PLAN. 2.1 General Authority. The Plan shall be administered by the Board. The Board shall have plenary authority in its discretion, but subject to the express provisions of the Plan, to administer the Plan and to exercise all the powers and authorities either specifically granted to it under the Plan or necessary or advisable in the administration of the Plan, including, without limitation, to interpret the Plan, to prescribe, amend and rescind rules and regulations relating to the Plan, to determine the details and provisions of the Agreements and to make all other determinations deemed necessary or advisable for the administration of the Plan. The Board's determinations on the foregoing matters shall be final and conclusive. No member of the Board shall be liable for any action taken or determination made in good faith with respect to the Plan or any grant hereunder. 2 3. DEFINITIONS. As used in the Plan, the following words and phrases shall have the meanings indicated: (a) "Agreement" shall mean an agreement entered into between the Company and a Participant in connection with a grant under the Plan. (b) "Annual Meeting" shall mean an Annual Meeting of the Stockholders of the Company. (c) "Board " shall mean the Board of Directors of the Company. (d) "Code" shall mean the Internal Revenue Code of 1986, as amended from time to time. (e) "Common Stock" shall mean the voting shares of common stock of the Company, with a par value of $.01 per share. (f) "Company" shall mean Columbia/HCA Healthcare Corporation, a Delaware corporation, or any successor corporation. (g) "Disability" shall mean a Participant's total and permanent inability to perform his or her duties with the Company or any Subsidiary by reason of any medically determinable physical or mental impairment, within the meaning of Code section 22(e)(3). (h) "Exchange Act" shall mean the Securities Exchange Act of 1934, as amended from time to time and as now or hereafter construed, interpreted and applied by regulations, rulings and cases. (i) "Fair Market Value" per Share, Restricted Share or Restricted Share Unit shall mean the mean of the high and low prices of a Share on the relevant date as reported by the New York Stock Exchange, or such value as otherwise determined using procedures established by the Board. (j) "Option" shall mean a stock option granted under the Plan. (k) "Option Price" shall mean the price at which each Share subject to an Option may be purchased, determined in accordance with Section 5.2 hereof. (l) "Outside Director" shall mean any member of the Board who is not also an employee of the Company (or any Subsidiary thereof). (m) "Participant" shall mean any Outside Director who has received an Option or other award hereunder that has not yet terminated. 2 3 (n) "Restricted Period" shall have the meaning given in Section 6.2(a) hereof. (o) "Restricted Share" or "Restricted Shares" shall mean Shares purchased hereunder subject to restrictions. (p) "Restricted Share Unit" or "Restricted Share Units" shall have the meaning given in Section 7 hereof. (q) "Rule 16b-3" shall mean Rule 16b-3, as in effect from time to time, promulgated by the Securities and Exchange Commission under Section 16 of the Exchange Act, including any successor to such Rule. (r) "Shares" shall mean shares of Common Stock of the Company. (s) "Subsidiary" shall have the meaning set forth in Section 8.2. 4. STOCK SUBJECT TO PLAN. 4.1 Number of Shares. The maximum number of Shares which may be issued pursuant to Options and other awards under the Plan shall be 500,000 Shares, which number shall be subject to adjustment as provided in Section 9 hereof. Such Shares may be either authorized but unissued Shares, or Shares that shall have been or may be reacquired by the Company. 4.2 Reuse of Shares. If an Option or a Restricted Share or Restricted Share Unit award under the Plan is canceled, terminates, expires unexercised or is exchanged for a different award without the issuance of Shares, the covered Shares shall, to the extent of such termination or non-use, again be available for awards thereafter granted during the term of the Plan. 5. OPTIONS. 5.1 Grant of Options. Each person who is an Outside Director immediately following the 1998 Annual Meeting shall be granted an Option, as of the first business day subsequent to such 1998 Annual Meeting, to acquire Shares having an aggregate Option Price equal to twelve and one-half (12.5) times such Outside Director's annual retainer fee then in effect. Each such Option shall become exercisable in five cumulative installments, each of which shall relate to 20% of the Shares covered by the Option, on the date of grant and the four next succeeding anniversary dates thereof. 3 4 Each person who shall become an Outside Director thereafter, but prior to the close of the Board's term ending in 2003, shall be granted an Option, as of the first business day after the commencement of his service as an Outside Director, to acquire Shares having an aggregate Option Price equal to such Outside Director's annual retainer fee then in effect multiplied by two and one-half (2.5) times the number of one-year periods (including as a one-year period the partial year remaining before the next Annual Meeting, if he becomes an Outside Director between Annual Meetings) remaining in the period ending with the Annual Meeting in the year 2003. Each such Option shall become exercisable in cumulative installments, each of which shall relate to a pro-rata portion of the Shares covered by the Option, on the date of grant and respective succeeding dates of the Annual Meetings, ending with such Annual Meeting for the year 2003. Notwithstanding anything in the Plan to the contrary, the Board may, from time to time, in its sole discretion, designate Participants who are to be granted additional options ("Discretionary Options") and determine the number of shares subject to such Discretionary Options. The Board, in its sole discretion, shall prescribe the time or times at which, or the conditions upon which, a Discretionary Option or portion thereof shall become vested and exercisable, and may accelerate the exercisability of any Discretionary Option at any time. Notwithstanding the provisions of Section 5.3, the Option Price of each Share under a Discretionary Option shall be determined by the Board; provided, however, that the Option Price of each Share under such Discretionary Option shall not be less than 100 percent of the Fair Market Value of a Share on the date of grant. Notwithstanding the provisions of Section 5.4, the Board may, in the case of a Discretionary Option, provide for a shorter than ten-year exercise period in the Agreement. 5.2 Option Price. The Option Price of each Share subject to an Option shall be 100 percent of the Fair Market Value of a Share on the date of grant. 5.3 Term. The term of any Option issued pursuant to the Plan shall be ten years from the date of grant and may extend beyond the date of termination of the Plan. 5.4 Option Exercise. An Option may be exercised in whole or in part at any time, with respect to whole Shares only, within the period permitted thereunder for the exercise thereof, and shall be exercised by written notice of intent to exercise the Option with respect to a specified number of Shares, delivered to the Company at its principal office, and payment in full to the Company at said office of the amount of the Option Price for the number of Shares with respect to which the Option is then being exercised. Payment of the Option Price shall be made (i) in cash or cash equivalents, (ii) in 4 5 whole Shares valued at the Fair Market Value of such Shares on the date of exercise (or next succeeding trading date, if the date of exercise is not a trading date) or (iii) by a combination of such cash (or cash equivalents) and such Shares; provided, however, that the optionee shall not be entitled to tender Shares pursuant to successive, substantially simultaneous exercises of an Option or any other stock option of the Company. Subject to applicable securities laws, an Option may also be exercised by delivering a notice of exercise of the Option and simultaneously selling the Shares thereby acquired, pursuant to a brokerage or similar agreement approved in advance by proper officers of the Company, using the proceeds of such sale as payment of the exercise price. Subject to the provisions of Section 10 hereof, the Company shall issue a stock certificate for the Shares purchased by exercise of an Option, in the name of the optionee (or other person exercising the Option in accordance with the provisions of the Plan), as soon as practicable after due exercise and payment of the aggregate Option Price for such Shares. 5.5 Limited Transferability of Options. All Options shall be nontransferable except (i) upon the optionee's death, by the optionee's will or the laws of descent and distribution or (ii) on a case-by-case basis, as may be approved by the Board in its discretion, in accordance with the terms provided below. Each Agreement shall provide that the optionee may, during his or her lifetime and subject to the prior approval of the Board at the time of proposed transfer, transfer all or part of the Option to a Family Member (as defined below), provided that such transfer is made for estate planning, tax planning, donative purposes or pursuant to a domestic relations order, and no consideration (other than nominal consideration) is received by the optionee. The transfer of an Option shall be subject to such other terms and conditions as the Board may in its discretion impose from time to time, including (without limitation) a condition that the portion of the Option to be transferred be vested and exercisable by the optionee at the time of the transfer and a requirement that the terms of such transfer be documented in a written agreement (in such form as the Board may prescribe). Subsequent transfers of an Option transferred under this Section shall be prohibited, other than by will or the laws of descent and distribution upon the death of the transferee. For purposes hereof, a "family member" shall mean any child, stepchild, grandchild, parent, stepparent, grandparent, spouse, former spouse, sibling, niece, nephew, mother-in-law, father-in-law, son-in-law, daughter-in-law, brother-in-law, or sister-in-law, including adoptive relationships, any person sharing the employee's household (other than a tenant or employee), a trust in which these persons have more than fifty percent of the beneficial interest, a foundation in which these persons (or the employee) control the management of assets, and any other entity in which these persons (or the employee) own more than fifty percent of the voting interests. No transfer of an Option by the optionee by will or by laws of descent and distribution shall be effective to bind the Company unless the Company shall have 5 6 been furnished with written notice thereof and an authenticated copy of the will and/or such other evidence as the Board may deem necessary to establish the validity of the transfer. During the lifetime of an optionee, except as provided above, the Option shall be exercisable only by the optionee, except that, in the case of an optionee who is legally incapacitated, the Option shall be exercisable by the optionee's guardian or legal representative. In the event of any transfer of an Option to a Family Member in accordance with the provisions of this Section, such Family Member shall thereafter have all rights that would otherwise be held by such optionee (or by such optionee's guardian, legal representative or beneficiary), except as otherwise provided herein. 5.6 Death of Optionee. If a Participant holding an Option dies while he is an Outside Director, the executor or administrator of the estate of the decedent (or the person or persons to whom an Option shall have been validly transferred in accordance with Section 5.5) shall have the right, during the period ending six months after the date of the optionee's death (subject to the provisions of Section 5.3 hereof concerning the maximum term of an Option), to exercise the Option to the extent that it was exercisable at the date of such optionee's death and shall not have been previously exercised. 5.7 Disability. If an optionee's service as an Outside Director shall be terminated as a result of Disability, the optionee (or in the case of an optionee who is legally incapacitated, his guardian or legal representative) shall have the right, during a period ending six months after the date of such termination (subject to the provisions of Section 5.3 hereof concerning the maximum term of an Option), to exercise an Option to the extent that it was exercisable at the date of such optionee's termination and shall not have been previously exercised. 5.8 Other Termination of Service. If an optionee's service as an Outside Director shall be terminated for any reason other than death or Disability, the optionee shall have the right, during the period ending ninety days after such termination (subject to the provisions of Section 5.3 hereof concerning the maximum term of an Option), to exercise the Option to the extent that it was exercisable on the date of such termination of service and shall not have been previously exercised. 6. RESTRICTED SHARES. 6.1 Grant of Annual Restricted Share Retainer Awards. Commencing with the one-year period immediately following the 1998 Annual Meeting, each Outside Director shall be entitled to receive, as a retainer for each 6 7 one-year period for which he is to serve as an Outside Director, an award of a number of Restricted Shares having a Fair Market Value of $40,000 on the date of grant of such award, subject to the provisions of Section 7.1. Awards hereunder for any such one-year period shall be granted as of the first business day of the period (or the first business day after the person becomes an Outside Director, with an appropriate proration of the amount, in the case of a mid-year appointment). 6.2 Terms of Restricted Share Agreements. Each grant of Restricted Shares under the Plan shall be evidenced by a written Agreement between the Company and Participant, which shall be in such form as the Board shall from time to time approve and shall comply with the terms of the Plan, including (without limitation) the following terms and conditions (and with such other terms and conditions, not inconsistent with the terms of the Plan, as the Board, in its discretion, may establish): (a) RESTRICTED PERIOD. Except as otherwise provided in the Plan, the Restricted Period for Restricted Shares granted under this Section 6 shall end on the first business day after the next following Annual Meeting. (b) OWNERSHIP AND RESTRICTIONS. At the time of grant of Restricted Shares, a certificate representing the number of Restricted Shares granted shall be registered in the name of the Participant. Such certificate shall be held by the Company or any custodian appointed by the Company for the account of the Participant, subject to the terms and conditions of the Plan, and shall bear such legend setting forth the restrictions imposed thereon as the Board, in its discretion, may determine. The Participant shall have all rights of a stockholder with respect to such Restricted Shares, including the right to receive dividends and the right to vote such Restricted Shares, subject to the following restrictions: (i) the Participant shall not be entitled to delivery of the stock certificate until the expiration of the Restricted Period and the fulfillment of any other restrictive conditions set forth in this Plan or the Agreement with respect to such Restricted Shares; (ii) none of the Restricted Shares may be sold, assigned, transferred, pledged, hypothecated or otherwise encumbered or disposed of (except by will or the applicable laws of descent and distribution) during such Restricted Period or until after the fulfillment of any other restrictive conditions; and (iii) except as otherwise provided under the Plan, all of the Restricted Shares shall be forfeited and all rights of the Participant to such Restricted Shares shall terminate, without further obligation on the part of the Company, unless the Participant continues to serve as an Outside Director for the entire Restricted Period and unless any other restrictive conditions relating to the Restricted Shares are met. Any common stock, any other securities of the Company and any other property (except cash dividends) distributed with respect to the Restricted Shares shall be subject to the same restrictions, terms and conditions as such Restricted Shares. 7 8 (c) TERMINATION OF RESTRICTIONS. At the end of the Restricted Period and provided that any other restrictive conditions of the Restricted Shares are met, or at such earlier time as shall be applicable under the Plan, all restrictions set forth in the Agreement relating to the Restricted Shares or in the Plan shall lapse as to the Restricted Shares subject thereto, and a stock certificate for the appropriate number of Shares, free of the restrictions and restrictive stock legend (other than as required under the Securities Act of 1933 or otherwise), shall be delivered to the Participant or his or her beneficiary or estate, as the case may be. (d) TERMINATION OF BOARD SERVICE DURING RESTRICTED PERIOD. Except as provided herein, if during the Restricted Period for any Restricted Shares held by a Participant the Participant's service as an Outside Director is terminated for any reason other than death or Disability, the Participant shall forfeit all rights with respect to such Restricted Shares, which shall automatically be considered to be cancelled. (e) ACCELERATED LAPSE OF RESTRICTIONS. Upon a termination of service as an Outside Director which results from a Participant's death or Disability, all restrictions then outstanding with respect to Restricted Shares held by such Participant shall automatically expire and be of no further force and effect. 7. RESTRICTED SHARE UNITS. 7.1 Election of Restricted Share Unit Award. Any person who is elected as an Outside Director immediately following the Company's 1998 Annual Meeting may elect, by written notice to the Company on or before May 8, 1998 (in such form as the Board shall prescribe), to receive an award of Restricted Share Units having a Fair Market Value of $200,000 on the date of grant, which date shall be the first business day subsequent to such 1998 Annual Meeting. In the case of any person who is serving as an Outside Director for a term beginning after 1998 (and has not previously been permitted to make an election hereunder), such person may, if the Board shall permit in its discretion (by a resolution adopted within the 90-day period following (a) an Annual Meeting or (b) the date the person became an Outside Director, in the case of a mid-year appointment), elect to receive an award of Restricted Share Units having a Fair Market Value, on the date of grant, of $40,000 multiplied by the remaining number of one-year periods prior to the 2003 Annual Meeting (including the one-year period in which the person is permitted to make an election hereunder, with an appropriate proration to reflect a partial year of service). Any such election shall be made by written notice to the Company within fourteen days following the date of the Board resolution permitting such election, and the date of grant of any such award shall be the first business day subsequent to (a) the Annual 8 9 Meeting for the calendar year in which the award is elected or (b) the date the person became an Outside Director, in the case of a mid-year appointment. Any Restricted Share Unit award hereunder shall be in lieu of Restricted Share awards under Section 6 for the successive one-year periods beginning on the date of the Annual Meeting for the first year (or partial year) in respect of which the Restricted Share Unit award is granted hereunder and ending with the 2003 Annual Meeting, and any Outside Director electing a Restricted Share Unit award hereunder shall have no right to any Restricted Share award under Section 6 for any period prior to the 2003 Annual Meeting that is covered by a Restricted Share Unit award hereunder. 7.2 Terms of Restricted Share Unit Agreements. Each award of Restricted Share Units under the Plan shall be evidenced by a written Agreement between the Company and Participant, which shall be in such form as the Board shall from time to time approve and shall comply with the terms of the Plan, including (without limitation) the following terms and conditions (and with such other terms and conditions, not inconsistent with the terms of the Plan, as the Board, in its discretion, may establish): (a) VESTING. Except as otherwise provided in the Plan, an award of Restricted Share Units shall vest in cumulative annual installments, each of which shall relate to 20% of the units covered by the award, on the five anniversary dates next succeeding the date of grant. In the case of an election made pursuant to Section 7.1 hereof after 1998, an award of Restricted Share Units shall vest in cumulative annual installments, each relating to a pro-rata portion of the units covered by the award (based on the applicable number of vesting dates), on the respective first business days subsequent to the Annual Meetings following the date of grant through the first business day subsequent to the 2003 Annual Meeting. (b) TERMINATION OF BOARD SERVICE PRIOR TO FULL VESTING. If a Participant's service as an Outside Director is terminated for any reason other than death or Disability before a Restricted Share Unit award held by him has become fully vested, the Participant shall forfeit all rights with respect to any Units that are not yet vested on the date of termination. (c) ACCELERATED VESTING. Upon a Participant's termination of service as an Outside Director which results from the Participant's death or Disability, any Restricted Share Units standing to his credit immediately prior to such termination shall immediately vest, to the extent that such Units would have vested on the first business day following the next Annual Meeting. (d) DIVIDEND EQUIVALENTS. A Participant shall be credited with dividend equivalents on any vested Restricted Share Units credited to his account at 9 10 the time of any payment of dividends to stockholders on Shares. The amount of any such dividend equivalents shall equal the amount that would have been payable to the Participant as a stockholder in respect of a number of Shares equal to the number of vested Restricted Share Units then credited to him. Any such dividend equivalents shall be credited to his account as of the date on which such dividend would have been payable and shall be converted into additional Restricted Share Units (which shall be immediately vested) based upon the Fair Market Value of a Share on the date of such crediting. No dividend equivalents shall be paid in respect of Restricted Share Units that are not yet vested. (e) PAYMENT OF AWARDS. A Participant shall be entitled to payment, at the time of his termination of service as an Outside Director, in respect of all vested Restricted Share Units then credited to him. Subject to the provisions of Sections 9 and 10, such payment shall be made through the issuance to the Participant of a stock certificate for a number of Shares equal to the number of vested Restricted Share Units credited to him at the time of such termination. Notwithstanding the foregoing, a Participant may elect an alternative payment date for the distribution of Shares in respect of his vested Restricted Share Units. Any such election must be made by written notice to the Company by May 31, 1998, or, in the case of an election made pursuant to Section 7.1 hereof after 1998, within fourteen days following the date of the Board resolution permitting such election (in such form as the Company shall prescribe), and may specify as the alternative payment date either (i) June 1, 2003 or (ii) June 1, 2008. Any such election shall be irrevocable. 8. CHANGE IN CONTROL. 8.1 Effect of Change in Control. Upon a "change in control" of the Company (as defined below), the following shall occur: (a) Each outstanding Option, to the extent that it shall not otherwise have become exercisable, shall become fully and immediately exercisable (without regard to the otherwise applicable installment provisions of Section 5.1 hereof); (b) All restrictions relating to any Restricted Shares then held by Participants shall lapse and be of no further force and effect; and (c) Any Restricted Share Units credited to a Participant's account shall immediately vest, to the extent that such units would have been vested on the next following anniversary date of the date of grant. 10 11 8.2 Definition. For purposes of Section 8.1 hereof, "change in control" of the Company shall mean any of the following events: (i) An acquisition (other than directly from the Company) of any voting securities of the Company (the "Voting Securities") by any "Person" (as the term Person is used for purposes of Section 13(d) or 14(d) of the Securities Exchange Act of 1934, as amended (the "1934 Act")) immediately after which such Person has "Beneficial Ownership" (within the meaning of Rule 13d-3 promulgated under the 1934 Act) of twenty percent (20%) or more of the combined voting power of the then outstanding Voting Securities; provided, however, that in determining whether a change in control has occurred, Voting Securities which are acquired in a "Non-Control Acquisition" (as hereinafter defined) shall not constitute an acquisition which would cause a change in control. A "Non-Control Acquisition" shall mean an acquisition by (i) an employee benefit plan (or a trust forming a part thereof) maintained by (A) the Company or (B) any corporation or other Person of which a majority of its voting power or its equity securities or equity interest is owned directly or indirectly by the Company (a "Subsidiary") or (ii) the Company or any Subsidiary. (ii) The individuals who, as of the date hereof, are members of the Board (the "Incumbent Board"), cease for any reason to constitute at least two-thirds of the Board; provided, however, that if the election, or nomination for election, by the Company's stockholders of any new director was approved by a vote of at least two-thirds of the Incumbent Board, such new director shall, for purposes of this Agreement, be considered as a member of the Incumbent Board; provided, further, however, that no individual shall be considered a member of the Incumbent Board if (1) such individual initially assumed office as a result of either an actual or threatened "Election Contest" (as described in Rule 14a-11 promulgated under the 1934 Act) or other actual or threatened solicitation of proxies or consents by or on behalf of a Person other than the Board (a "Proxy Contest") including by reason of any agreement intended to avoid or settle any Election Contest or Proxy Contest or (2) such individual was designated by a Person who has entered into an agreement with the Company to effect a transaction described in clause (i) or (iii) of this Section 8.2; or (iii) Approval by stockholders of the Company and consummation of: (1) A merger, consolidation or reorganization involving the Company, unless, 11 12 (A) The stockholders of the Company, immediately before such merger, consolidation or reorganization, own, directly or indirectly immediately following such merger, consolidation or reorganization, at least seventy-five percent (75%) of the combined voting power of the outstanding Voting Securities of the corporation resulting from such merger or consolidation or reorganization or its parent corporation (the "Surviving Corporation") in substantially the same proportion as their ownership of the Voting Securities immediately before such merger, consolidation or reorganization; (B) The individuals who were members of the Incumbent Board immediately prior to the execution of the agreement providing for such merger, consolidation or reorganization constitute at least two-thirds of the members of the board of directors of the Surviving Corporation; and (C) No Person (other than the Company, any Subsidiary, any employee benefit plan (or any trust forming a part thereof) maintained by the Company, the Surviving Corporation or any Subsidiary, or any Person who, immediately prior to such merger, consolidation or reorganization, had Beneficial Ownership of twenty percent (20%) or more of the then outstanding Voting Securities) has Beneficial Ownership of twenty percent (20%) or more of the combined voting power of the Surviving Corporation's then outstanding Voting Securities. (2) A complete liquidation or dissolution of the Company; or (3) An agreement for the sale or other disposition of all or substantially all of the assets of the Company to any Person (other than a transfer to a Subsidiary). Notwithstanding the foregoing, a change in control shall not be deemed to occur solely because any Person (the "Subject Person") acquired Beneficial Ownership of more than the permitted amount of the outstanding Voting Securities as a result of the acquisition of Voting Securities by the Company which, by reducing the number of Voting Securities outstanding, increased the proportional number of shares Beneficially Owned by the Subject Person, provided that if a change in control would occur (but for the operation of this sentence) as a result of the acquisition of Voting Securities by the Company, and after such share acquisition by the Company, the Subject Person becomes the Beneficial 12 13 Owner of any additional Voting Securities which increases the percentage of the then outstanding Voting Securities Beneficially Owned by the Subject Person, then a change in control shall occur. 9. ANTIDILUTION ADJUSTMENTS. In the event of a reorganization, recapitalization, stock split, stock dividend, combination of shares, merger or consolidation, or the sale, conveyance, lease or other transfer by the Company of all or substantially all of its property, or any other change in the corporate structure or shares of the Company, pursuant to any of which events the then outstanding Shares are split up or combined, or are changed into, become exchangeable at the holder's election for, or entitle the holder thereof to, other shares of stock, or in the case of any other transaction described in section 424(a) of the Code, the Board may make such adjustment or substitution (including by substitution of shares of another corporation) as it may determine to be appropriate, in its sole discretion, in (i) the aggregate number and kind of shares that may be distributed in respect of Option exercises and/or awards under the Plan, (ii) the number and kind of shares subject to outstanding Options and/or the Option Price of such shares, (iii) the number and kind of Restricted Shares outstanding under the Plan and (iv) the number and kind of shares represented by Restricted Share Units outstanding under the Plan. 10. CONDITIONS OF ISSUANCE OF STOCK CERTIFICATES. 10.1 Applicable Conditions. The Company shall not be required to issue or deliver any certificate for Shares under the Plan prior to fulfillment of all of the following conditions: (a) the completion of any registration or other qualification of such Shares, under any federal or state law, or under the rulings or regulations of the Securities and Exchange Commission or any other governmental regulatory body, that the Board shall, in its sole discretion, deem necessary or advisable; (b) the obtaining of any approval or other clearance from any federal or state governmental agency that the Board shall, in its sole discretion, determine to be necessary or advisable; (c) the lapse of such reasonable period of time following the event triggering the obligation to distribute shares as the Board from time to time may establish for reasons of administrative convenience; (d) satisfaction by the Participant of any applicable withholding taxes or other withholding liabilities; and 13 14 (e) if required by the Board, in its sole discretion, the receipt by the Company from a Participant of (i) a representation in writing that the Shares received pursuant to the Plan are being acquired for investment and not with a view to distribution and (ii) such other representations and warranties as are deemed necessary by counsel to the Company. 10.2 Legends. The Company reserves the right to legend any certificate for Shares, conditioning sales of such shares upon compliance with applicable federal and state securities laws and regulations. 11. PAYMENT OF WITHHOLDING AND PAYROLL TAXES. Subject to the requirements of Section 16(b) of the Exchange Act, the Board shall have discretion to permit or require a Participant, on such terms and conditions as it determines, to pay all or a portion of any taxes arising in connection with an Option or other award under the Plan by having the Company withhold Shares or by the Participant's delivering other Shares having a then-current Fair Market Value equal to the amount of taxes to be withheld. In the absence of such withholding or delivery of Shares, the Company shall otherwise withhold from any payment under the Plan all amounts required by law to be withheld. 12. NO RIGHTS TO CONTINUED SERVICE. Nothing in the Plan or in any grant made or Agreement entered into pursuant hereto shall confer upon any Participant the right to continue service as a member of the Board or to be entitled to any remuneration or benefits not set forth in the Plan or such Agreement. 13. AMENDMENT AND TERMINATION OF THE PLAN. The Board, at any time and from time to time, may suspend, terminate, modify or amend the Plan; provided, however, that an amendment which requires stockholder approval for the Plan to continue to comply with any law, regulation or stock exchange requirement shall not be effective unless approved by the requisite vote of stockholders. No suspension, termination, modification or amendment of the Plan shall adversely affect any grants previously made, unless the written consent of the Participant is obtained. 14. TERM OF THE PLAN. The Plan, as amended effective May 1, 1999, shall terminate on May 17, 2008. No grants may be made after such termination, but termination of the Plan shall 14 15 not, without the consent of any Participant who then holds Options or Restricted Shares or to whom Restricted Share Units are then credited, alter or impair any rights or obligations in respect of such Options, Restricted Shares or Restricted Share Units. 15. GOVERNING LAW. The Plan and the rights of all persons claiming hereunder shall be construed and determined in accordance with the laws of the State of Delaware without giving effect to the choice of law principles thereof, except to the extent that such laws are preempted by Federal law. 15 16 APPENDIX A SPECIAL RULE APPLICABLE IN CONNECTION WITH TRIAD AND LIFEPOINT SPIN-OFFS. Notwithstanding anything elsewhere in the Plan to the contrary, a Columbia/HCA Outside Director who, in connection with the distribution of LifePoint Hospitals, Inc. Common Stock and Triad Hospitals, Inc. Common Stock (the "Spin-Off"), ceases to be an Outside Director of Columbia/HCA but continues as an Outside Director of LifePoint Hospitals, Inc. or Triad Hospitals, Inc. immediately following such Spin-Off shall be treated as an Outside Director of Columbia/HCA, solely for purposes of determining the period during which any Option that was vested and exercisable immediately prior to such Spin-Off shall continue to be exercisable thereafter, as long as he or she is an Outside Director of LifePoint Hospitals, Inc. or Triad Hospitals, Inc. At such time as such person ceases to be an Outside Director of LifePoint Hospitals, Inc. or Triad Hospitals, Inc., such cessation of service will be treated as though it were a cessation of service as an Outside Director of Columbia/HCA under comparable circumstances. 16 EX-10.2 4 FIRST AMENDMENT TO AMENDED AND RESTATED COLUMBIA 1 EXHIBIT 10.2 FIRST AMENDMENT TO AMENDED AND RESTATED COLUMBIA/HCA HEALTHCARE CORPORATION 1992 STOCK AND INCENTIVE PLAN Columbia/HCA Healthcare Corporation, a Delaware corporation, hereby amends its Amended and Restated Columbia/HCA Healthcare Corporation 1992 Stock and Incentive Plan as provided below. 1. Section 4(d)(iii) shall be amended in its entirety and replaced with the following paragraph: An optionee electing to exercise an option shall give written notice to the Company of such election and of the number of shares subject to such exercise. The full purchase price of such shares shall be tendered with such notice of exercise. Payment shall be made to the Company in cash (including bank check, certified check, personal check, or money order), or, at the discretion of the Committee and as specified by the Committee, (A) by delivering certificates for the Company's Common Stock already owned by the optionee having a fair market value as of the date of exercise equal to the full purchase price of the shares, together with any applicable withholding taxes, or (B) a combination of cash and such shares; provided, however, that an optionee shall not be entitled to tender shares of the Company's Common Stock pursuant to successive, substantially simultaneous exercises of options granted under this or any other stock option plan of the Company. The fair market value of such tendered shares shall be the sales price of such shares or, in the discretion of the Committee, such other value as it may determine consistent with the provisions of Section 4(b) herein. The Committee may also, in its sole discretion, permit option holders to deliver a notice of exercise of options and simultaneously to sell the shares of Common Stock thereby acquired pursuant to a brokerage or similar arrangement approved in advance by proper officers of the Company, using the proceeds of such sale as payment of the exercise price. Until such person has been issued the shares subject to such exercise, he or she shall possess no rights as a stockholder with respect to such shares. 2. This amendment shall be effective as of July 16, 1999. EX-12 5 STATEMENT RE COMPUTATION OF RATIO TO EARNINGS 1 EXHIBIT 12 COLUMBIA/HCA HEALTHCARE CORPORATION COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES FOR THE QUARTERS AND NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998 (DOLLARS IN MILLIONS)
QUARTER NINE MONTHS ------------ ---------------- 1999 1998 1999 1998 ---- ---- ------ ------ EARNINGS: Income from continuing operations before minority interests and income taxes......................................... $247 $410 $1,065 $1,120 Fixed charges, excluding capitalized interest.............. 147 175 435 542 ---- ---- ------ ------ $394 $585 $1,500 $1,662 ==== ==== ====== ====== FIXED CHARGES: Interest charged to expense................................ $122 $142 $ 351 $ 440 Interest portion of rental expense and amortization of deferred loan costs...................................... 26 33 84 102 ---- ---- ------ ------ Fixed charges, excluding capitalized interest.............. 148 175 435 542 Capitalized interest....................................... 4 6 16 16 ---- ---- ------ ------ $152 $181 $ 451 $ 558 ==== ==== ====== ====== Ratio of earnings to fixed charges......................... 2.59 3.23 3.33 2.98
EX-27 6 FINANCIAL DATA SCHEDULE 9/30/99
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE STATEMENTS OF INCOME AND BALANCE SHEETS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000,000 9-MOS DEC-31-1999 JAN-01-1999 SEP-30-1999 124 0 3,405 1,571 367 3,515 13,955 5,650 16,627 3,149 5,522 0 0 6 5,503 16,627 0 12,715 0 7,113 2,451 985 351 1,024 458 566 0 0 0 566 .95 .95
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