<PAGE>
As filed with the Securities and Exchange Commission on April 17, 1999
File No. 0-29816
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- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------
FORM 10/A
(Amendment No. 3)
GENERAL FORM FOR REGISTRATION OF SECURITIES
Pursuant to Section 12(b) or 12(g) of the Securities Exchange Act of 1934
Triad Hospitals LLC
(Exact name of registrant as specified in its charter)
Delaware 67-1762164
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
13455 Noel Road, 20th Floor 75240
Dallas, Texas (Zip Code)
(Address of principal executive
offices)
Registrant's telephone number, including area code (972) 701-2200
Securities to be registered pursuant to Section 12(b) of the Act:
None
Securities to be registered pursuant to Section 12(g) of the Act:
Common Stock, $.01 par value
(Title of class)
Preferred Stock Purchase Rights
(Title of class)
Copies of all communications should be sent to:
Morton A. Pierce, Esq. Donald P. Fay, Esq.
Dewey Ballantine LLP
1301 Avenue of the Americas Executive Vice President and
New York, New York 10019-6092 General Counsel
(212) 259-8000 Triad Hospitals LLC
13455 Noel Road, 20th Floor
Dallas, Texas 75240
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<PAGE>
Triad Hospitals LLC
Information Included in Information Statement and Incorporated in Form 10 By
Reference
Cross-Reference Sheet Between Information Statement and Items of Form 10
Item 1. Business.
The information required by this item is contained under the sections
"Summary"; "Triad Management's Discussion and Analysis of Financial Condition
and Results of Operations"; "Triad Business"; and "Triad Hospitals, Inc. Index
to Combined Financial Statements" in the Information Statement dated ,
1999 annexed hereto as Exhibit 2.1 (the "Information Statement") and such
sections are incorporated herein by reference.
Item 2. Financial Information.
The information required by this item is contained under the sections
"Summary"; "Triad Unaudited Pro Forma Condensed Combined Financial
Statements"; "Triad Selected Historical Financial Data"; and "Triad
Management's Discussion and Analysis of Financial Condition and Results of
Operations" in the Information Statement and such sections are incorporated
herein by reference.
Item 3. Properties.
The information required by this item is contained under the section "Triad
Business--Properties" in the Information Statement and such section is
incorporated herein by reference.
Item 4. Security Ownership of Certain Beneficial Owners and Management.
The information required by this item is contained under the section "Triad
Security Ownership by Certain Beneficial Owners and Management" in the
Information Statement and such section is incorporated herein by reference.
Item 5. Directors and Executive Officers.
The information required by this item is contained under the sections "Triad
Management" and "Triad Description of Capital Stock--Limited Liability and
Indemnification Provisions" in the Information Statement and such sections are
incorporated herein by reference.
Item 6. Executive Compensation.
The information required by this item is contained under the section "Triad
Management--Executive Compensation" in the Information Statement and such
section is incorporated herein by reference.
Item 7. Certain Relationships and Related Transactions.
The information required by this item is contained under the sections
"Summary"; "The Distribution"; "Arrangements Among Columbia/HCA, LifePoint and
Triad Relating to the Distribution"; and "Triad Management--The 1999 Long-Term
Incentive Plan" in the Information Statement and such sections are
incorporated herein by reference.
Item 8. Legal Proceedings.
The information required by this item is contained under the section "Triad
Business--Legal Proceedings" in the Information Statement and such section is
incorporated herein by reference.
2
<PAGE>
Item 9. Market Price of and Dividends on the Registrant's Common Equity and
Related Stockholder Matters.
The information required by this item is contained under the sections
"Summary"; "Risk Factors--Market Uncertainties With Respect to LifePoint
Common Stock and Triad Common Stock"; "The Distribution--Market for LifePoint
Common Stock and Triad Common Stock"; and "Dividend Policy--Triad"; in the
Information Statement and such sections are incorporated herein by reference.
Item 10. Recent Sales of Unregistered Securities.
This item is not applicable.
Item 11. Description of Registrant's Securities to be Registered.
The information required by this item is contained under the sections "Risk
Factors--Anti-Takeover Provisions"; "Triad Description of Capital Stock"; and
"The Distribution--Market for LifePoint Common Stock and Triad Common Stock"
in the Information Statement and such sections are incorporated herein by
reference.
Item 12. Indemnification of Directors and Officers.
The information required by this item is contained under the section "Triad
Description of Capital Stock--Limited Liability and Indemnification
Provisions" in the Information Statement and such section is incorporated
herein by reference.
Item 13. Financial Statements and Supplementary Data.
The information required by this item is contained under the sections
"Summary"; "Triad Unaudited Pro Forma Condensed Combined Financial
Statements"; "Triad Selected Historical Financial Data"; "Triad Management's
Discussion and Analysis of Financial Condition and Results of Operations"; and
"Triad Hospitals, Inc. Index to Combined Financial Statements" in the
Information Statement and such sections are incorporated herein by reference.
Item 14. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
This item is not applicable.
Item 15. Financial Statements and Exhibits.
(a) The information required by this item is contained under the section
"Triad Hospitals, Inc. Index to Combined Financial Statements" in the
Information Statement and such section is incorporated herein by reference.
(b) The following documents are filed as exhibits hereto:
<TABLE>
<CAPTION>
Exhibit
Number Description
------- -----------
<C> <S>
2.1 Information Statement dated as of , 1999.
2.2+ Form of Distribution Agreement to be entered into by and among
Columbia/HCA Healthcare Corporation, LifePoint Hospitals, Inc. and
Triad Hospitals, Inc.
3.1+ Form of Certificate of Incorporation of Triad Hospitals, Inc. to be in
effect on the distribution date.
3.2+ Form of By-Laws of Triad Hospitals, Inc. to be in effect on the
distribution date.
4.1 Form of Specimen Certificate for Triad Hospitals, Inc. Common Stock.
4.2+ Form of Rights Agreement, dated as of , 1999, between Triad
Hospitals, Inc. and , as rights agent.
</TABLE>
3
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Description
------- -----------
<C> <S>
10.1** Form of Tax Sharing and Indemnification Agreement to be entered into
by and among Columbia/HCA Healthcare Corporation, LifePoint Hospitals,
Inc. and Triad Hospitals, Inc.
10.2+ Form of Benefits and Employment Matters Agreement to be entered into
by and among Columbia/HCA Healthcare Corporation, LifePoint Hospitals,
Inc. and Triad Hospitals, Inc.
10.3+ Form of Insurance Allocation and Administration Agreement to be
entered into by and among Columbia/HCA Healthcare Corporation,
LifePoint Hospitals, Inc. and Triad Hospitals, Inc.
10.4+ Form of Transitional Services Agreement to be entered into by and
between Columbia/HCA Healthcare Corporation and Triad Hospitals, Inc.
10.5+ Form of Computer and Data Processing Services Agreement to be entered
into by and between Columbia Information Systems, Inc. and Triad
Hospitals, Inc.
10.6+ Form of Agreement to Share Telecommunications Services to be entered
into by and between Columbia Information Systems, Inc. and Triad
Hospitals, Inc.
10.7 Form of Sub-Lease Agreement to be entered into by and between Triad
Hospitals, Inc. and Medical Care International, Inc.
10.8 Form of Sub-Lease Agreement to be entered into by and between Triad
Hospitals, Inc. and Medical Care America, Inc.
10.9* Triad Hospitals, Inc. 1999 Long-Term Incentive Plan.
10.10* Triad Hospitals, Inc. Executive Stock Purchase Plan.
10.11* Triad Hospitals, Inc. Outside Director's Stock and Incentive
Compensation Plan.
10.12* Triad Hospitals, Inc. Management Stock Purchase Plan.
21** Subsidiaries of Triad Hospitals, Inc. as of the distribution date.
</TABLE>
- --------
* Compensatory plan or arrangement.
** To be filed by amendment.
+Previously filed.
4
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 12 of the Securities Exchange Act of
1934, the registrant has duly caused this Amendment No. 3 to this Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized.
Triad Hospitals LLC
/s/ Donald P. Fay
Date: April 16, 1999 By: _________________________________
Donald P. Fay
Executive Vice President and
General Counsel
5
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit
Number Description
------- -----------
<C> <S>
2.1 Information Statement dated as of , 1999.
2.2+ Form of Distribution Agreement to be entered into by and among
Columbia/HCA Healthcare Corporation, LifePoint Hospitals, Inc. and
Triad Hospitals, Inc.
3.1+ Form of Certificate of Incorporation of Triad Hospitals, Inc. to be in
effect on the distribution date.
3.2+ Form of By-Laws of Triad Hospitals, Inc. to be in effect on the
distribution date.
4.1 Form of Specimen Certificate for Triad Hospitals, Inc. Common Stock.
4.2+ Form of Rights Agreement, dated as of , 1999, between Triad
Hospitals, Inc. and , as rights agent.
10.1** Form of Tax Sharing and Indemnification Agreement to be entered into
by and among Columbia/HCA Healthcare Corporation, LifePoint Hospitals,
Inc. and Triad Hospitals, Inc.
10.2+ Form of Benefits and Employment Matters Agreement to be entered into
by and among Columbia/HCA Healthcare Corporation, LifePoint Hospitals,
Inc. and Triad Hospitals, Inc.
10.3+ Form of Insurance Allocation and Administration Agreement to be
entered into by and among Columbia/HCA Healthcare Corporation,
LifePoint Hospitals, Inc. and Triad Hospitals, Inc.
10.4+ Form of Transitional Services Agreement to be entered into by and
between Columbia/HCA Healthcare Corporation and Triad Hospitals, Inc.
10.5+ Form of Computer and Data Processing Services Agreement to be entered
into by and between Columbia Information Systems, Inc. and Triad
Hospitals, Inc.
10.6+ Form of Agreement to Share Telecommunications Services to be entered
into by and between Columbia Information Systems, Inc. and Triad
Hospitals, Inc.
10.7 Form of Sub-Lease Agreement to be entered into by and between Triad
Hospitals, Inc. and Medical Care International, Inc.
10.8 Form of Sub-Lease Agreement to be entered into by and between Triad
Hospitals, Inc. and Medical Care America, Inc.
10.9* Triad Hospitals, Inc. 1998 Long-Term Incentive Plan.
10.10* Triad Hospitals, Inc. Executive Stock Purchase Plan.
10.11* Triad Hospitals, Inc. Outside Directors' Stock and Incentive
Compensation Plan.
10.12* Triad Hospitals, Inc. Management Stock Purchase Plan.
21** Subsidiaries of Triad Hospitals, Inc. as of the distribution date.
</TABLE>
- --------
* Compensatory plan or arrangement.
** To be filed by amendment.
+ Previously filed.
6
<PAGE>
Exhibit 2.1
Columbia/HCA Healthcare Corporation
-----------------------------
Spin-Offs of LifePoint Hospitals, Inc. and Triad Hospitals, Inc.
Through a Common Stock Distribution
-----------------------------
To the Stockholders of Columbia/HCA Healthcare Corporation:
In November 1997, Columbia/HCA Healthcare Corporation reorganized its
operations into five divisions. Columbia/HCA has now determined to establish
two of those divisions, America Group and Pacific Group, as independent,
publicly-traded companies. America's hospitals are located in non-urban areas
where, in 21 of its 23 markets, America's hospital is the only hospital in the
community. Approximately three-quarters of Pacific's hospitals are located in
small cities, generally in the Southern, Western and Southwestern United
States, where Pacific's hospital is usually either the only hospital or one of
two or three hospitals in the community, and the remainder of Pacific's
hospitals are located in larger urban areas typically characterized by a high
rate of population growth.
We believe that separating the America and Pacific Groups into two smaller,
strategically focused public companies will have positive effects on the
performance and profitability of the facilities in these groups by enabling
more focused management attention, more effective operating strategies based on
local market conditions, and compensation incentives for employees that are
more closely tied to group performance. After the separation of the America and
Pacific Groups, Columbia/HCA will focus its efforts on its core markets, which
are typically located in urban areas that are characterized by highly
integrated facility networks.
The health care services businesses conducted by the America and Pacific
Groups will be transferred to LifePoint Hospitals, Inc. and Triad Hospitals,
Inc., respectively, each of which will be a newly formed Delaware holding
company. Thereafter, the shares of common stock of LifePoint Hospitals, Inc.
and of Triad Hospitals, Inc. will be distributed to the stockholders of
Columbia/HCA on a pro rata basis. Subject to certain financing arrangements,
the distribution of the shares of common stock of LifePoint Hospitals, Inc. and
Triad Hospitals, Inc. will be effective on , 1999.
If you own Columbia/HCA common stock as of the close of business on ,
1999, you will receive shares of LifePoint common stock and shares of
Triad common stock for every shares of Columbia/HCA common stock that you
own. You should receive these LifePoint and Triad shares in 1999.
Columbia/HCA has received a ruling from the Internal Revenue Service that,
among other things, the distribution of shares of LifePoint common stock and
Triad common stock generally will be tax-free to Columbia/HCA and to
Columbia/HCA's stockholders, except for any cash received instead of fractional
shares.
No Columbia/HCA stockholder action is required, and you do not need to
surrender your shares of Columbia/HCA common stock to receive the shares of
LifePoint common stock and Triad common stock. You will continue to hold the
same number of shares of Columbia/HCA common stock after the distribution. We
have applied for a quotation of the LifePoint common stock and the Triad common
stock on the Nasdaq National Market System and we expect that they will trade
under the symbols "LPNT" and "TRIH," respectively.
This information statement contains detailed information about LifePoint,
Triad and the distribution. We encourage you to read it carefully.
Sincerely,
Thomas F. Frist, Jr., M.D. Jack O. Bovender, Jr.
Chairman of the Board and President and
Chief Executive Officer Chief Operating Officer
, 1999
<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+Information contained herein is subject to completion or amendment. +
+Registration statements relating to these securities have been filed with the +
+Securities and Exchange Commission. These securities will not be issued prior +
+to the time the registration statements become effective. This information +
+statement shall not constitute an offer to sell or the solicitation of any +
+offer to buy any securities of Columbia/HCA Healthcare Corporation, LifePoint +
+Hospitals, Inc. or Triad Hospitals, Inc. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION OR AMENDMENT, DATED APRIL 17, 1999
Information Statement
------------
LifePoint Hospitals, Inc. Triad Hospitals, Inc.
Common Stock Common Stock
Consider We have prepared this information statement to
carefully the provide you with information regarding the pro rata
risk factors distribution to Columbia/HCA Healthcare Corporation
beginning on common and non-voting common stockholders of all of the
page 29 of this shares of common stock of LifePoint Hospitals, Inc.,
information which will be a newly-formed holding company for the
statement. America Group of Columbia/HCA, and Triad Hospitals,
Inc., which will be a newly-formed holding company for
Stockholder the Pacific Group of Columbia/HCA.
approval of the
distribution of Subject to certain financing arrangements, the shares
LifePoint and of LifePoint common stock and Triad common stock will
Triad is not be distributed on the effective date of the
required. We are distribution, which is , 1999, to holders of
not asking you Columbia/HCA common stock at the close of business on
for a proxy and the record date for the distribution, which is ,
we request that 1999.
you do not send
us a proxy. If you are a Columbia/HCA common stockholder at the
Also, you are close of business on the record date, you will receive
not required to shares of LifePoint common stock and shares of
make any payment Triad common stock for every shares of Columbia/HCA
for the shares common stock you hold. Certificates for the shares will
of LifePoint be mailed on or about , 1999. You will receive a
common stock or check for the cash equivalent of any fractional shares
Triad common you otherwise would have received in the distribution.
stock.
If you have questions regarding the distribution, you
This information may call National City Bank, Shareholder Services
statement is not Group, telephone number (800) 622-6757, the
an offer to distribution agent, or W. Mark Kimbrough, telephone
sell, or a number (615) 344-1199, Columbia/HCA's investor contact.
solicitation of
an offer to buy,
any securities
of Columbia/HCA,
LifePoint or
Triad.
No public market currently exists for either the LifePoint common stock or
the Triad common stock. However, we have applied for a quotation of the
LifePoint common stock and the Triad common stock on the Nasdaq National Market
System. If the shares are accepted for quotation on Nasdaq, we expect that a
"when-issued" market will develop shortly before the distribution date and
regular trading will begin on the first business day after the effective date
of the distribution.
Proposed Nasdaq Trading Symbols
LifePoint common stock -- LPNT
Triad common stock -- TRIH
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved the LifePoint common stock or the Triad
common stock, or determined if this information statement is truthful or
complete. Any representation to the contrary is a criminal offense.
We first mailed this information statement to Columbia/HCA stockholders on
, 1999.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<S> <C>
Summary................................................................... 1
Introduction............................................................. 1
Questions and Answers About LifePoint, Triad and the Distribution........ 2
Key Terms of the Distribution............................................ 7
Information Regarding the Distribution, LifePoint and Triad.............. 9
Columbia/HCA Healthcare Corporation...................................... 10
LifePoint Hospitals, Inc. ............................................... 11
Triad Hospitals, Inc. ................................................... 13
Comparative Financial Highlights......................................... 16
LifePoint Summary Financial Data.......................................... 17
LifePoint Unaudited Pro Forma Condensed Combined Financial Statements..... 19
LifePoint Unaudited Pro Forma Condensed Combined Statement of Operations
for the Year Ended December 31, 1998..................................... 20
LifePoint Unaudited Pro Forma Condensed Combined Balance Sheet............ 21
LifePoint Notes to Unaudited Pro Forma Condensed Combined Financial
Statements............................................................... 22
Triad Summary Financial Data.............................................. 23
Triad Unaudited Pro Forma Condensed Combined Financial Statements......... 25
Triad Unaudited Pro Forma Condensed Combined Statement of Operations for
the Year Ended December 31, 1998......................................... 26
Triad Unaudited Pro Forma Condensed Combined Balance Sheet................ 27
Triad Notes to Unaudited Pro Forma Condensed Combined Financial
Statements............................................................... 28
Risk Factors.............................................................. 29
Loss of Physicians or Other Key Personnel Could Adversely Affect
LifePoint and Triad..................................................... 29
No Operating Histories as Independent Companies; Net Losses.............. 29
Limits on Reimbursement and Health Care Reform Legislation May Reduce
Profitability........................................................... 29
Reimbursement by Managed Care Organizations May Reduce Hospital
Profitability........................................................... 30
Competition.............................................................. 30
Risks Associated With Potential Acquisitions............................. 31
Geographic Concentration of Operations Could Adversely Affect LifePoint
and Triad............................................................... 31
Extensive Regulation Could Adversely Affect LifePoint and Triad ......... 32
</TABLE>
<TABLE>
<S> <C>
Potential Adverse Impact of Columbia/HCA Investigations and Litigation;
Indemnification of LifePoint and Triad................................... 33
Professional Liability Risks Could Adversely Affect Results of Operations
and Cash Flow............................................................ 35
High Degree of Leverage and Debt Service Obligations May Adversely Affect
LifePoint and Triad...................................................... 35
Absence of Dividends...................................................... 36
Tax Treatment of the Distribution ........................................ 36
Holding Company Structure Risks........................................... 36
Risks Associated with Fraudulent Conveyance and Legal Dividend
Requirements............................................................. 37
Market Uncertainties With Respect to LifePoint Common Stock and Triad
Common Stock............................................................. 38
Anti-Takeover Provisions.................................................. 38
Possible Lack of Year 2000 Compliance May Adversely Affect LifePoint and
Triad.................................................................... 39
Reasons for Furnishing this Information Statement.......................... 40
Forward-Looking Information................................................ 40
The Distribution........................................................... 41
Background and Purposes of the Distribution............................... 41
Manner of Effecting the Distribution...................................... 42
Results of the Distribution............................................... 42
Material Federal Income Tax Consequences.................................. 43
Regulatory Approvals...................................................... 44
Market for LifePoint Common Stock and Triad Common Stock.................. 44
Conditions Precedent to the Distribution.................................. 45
Arrangements Among Columbia/HCA, LifePoint and Triad Relating to the
Distribution.............................................................. 45
Distribution Agreement.................................................... 45
Tax Sharing and Indemnification Agreement................................. 47
Benefits and Employment Matters Agreement................................. 47
Insurance Allocation and Administration Agreement......................... 49
Computer and Data Processing Services Agreement........................... 50
Lease Agreements.......................................................... 50
Transitional Services Agreement........................................... 50
Other Agreements.......................................................... 50
Dividend Policy............................................................ 51
LifePoint................................................................. 51
Triad..................................................................... 51
LifePoint Selected Historical Financial Data............................... 52
</TABLE>
-ii-
<PAGE>
<TABLE>
<S> <C>
LifePoint Management's Discussion and Analysis of Financial Condition and
Results of Operations.................................................... 54
Overview.................................................................. 54
Forward-Looking Statements............................................... 54
Investigations........................................................... 54
Results of Operations.................................................... 55
Liquidity and Capital Resources.......................................... 61
Impact of Year 2000 Computer Issues...................................... 62
Effects of Inflation and Changing Prices................................. 65
Health Care Reform....................................................... 65
Description of Certain New LifePoint Indebtedness......................... 66
General.................................................................. 66
Senior Subordinated Notes Due 2009....................................... 66
New Credit Agreement..................................................... 66
Triad Selected Historical Financial Data.................................. 68
Triad Management's Discussion and Analysis of Financial Condition and
Results of Operations.................................................... 70
Overview.................................................................. 70
Forward-Looking Statements............................................... 70
Investigations........................................................... 70
Results of Operations.................................................... 71
Liquidity and Capital Resources.......................................... 78
Impact of Year 2000 Computer Issues...................................... 78
Effects of Inflation and Changing Prices................................. 81
Health Care Reform....................................................... 81
Description of Certain New Triad Indebtedness............................. 82
General.................................................................. 82
Senior Subordinated Notes Due 2009....................................... 82
New Credit Agreement..................................................... 82
LifePoint Business........................................................ 84
General.................................................................. 84
Principal Executive Offices.............................................. 84
The Non-Urban Health Care Market......................................... 84
Business Strategy........................................................ 85
Operations............................................................... 86
Services and Utilization................................................. 86
Sources of Revenue....................................................... 87
Competition.............................................................. 88
Properties............................................................... 90
Employees and Medical Staff.............................................. 90
LifePoint's Regulatory Compliance Program................................ 91
Legal Proceedings........................................................ 91
Triad Business............................................................ 92
General.................................................................. 92
Principal Executive Offices.............................................. 92
Triad's Markets.......................................................... 92
Business Strategy........................................................ 93
Operations............................................................... 94
Services and Utilization................................................. 95
</TABLE>
<TABLE>
<S> <C>
Sources of Revenue....................................................... 96
Competition.............................................................. 96
Properties............................................................... 99
Employees and Medical Staff.............................................. 100
Triad's Regulatory Compliance Program.................................... 100
Legal Proceedings........................................................ 101
Government and Other Sources of Reimbursement for LifePoint and Triad..... 102
Medicare................................................................. 102
Medicaid................................................................. 103
Annual Cost Reports...................................................... 104
Managed Care............................................................. 104
Commercial Insurance..................................................... 104
Government Regulation and Other Factors Affecting LifePoint and Triad..... 105
Licensure, Certification and Accreditation............................... 105
Certificates of Need..................................................... 105
State Rate Review........................................................ 105
Utilization Review....................................................... 105
Medicare Regulations and Fraud and Abuse................................. 105
Corporate Practice of Medicine........................................... 108
Health Care Reform....................................................... 108
Conversion Legislation................................................... 108
Revenue Ruling 98-15..................................................... 109
Environmental Matters.................................................... 109
Insurance................................................................ 109
Governmental Investigation of Columbia/HCA and Related Litigation........ 109
LifePoint Management...................................................... 112
Directors................................................................ 112
Compensation of Directors................................................ 113
Executive Officers....................................................... 114
Executive Compensation................................................... 115
LifePoint Compensation Arrangements...................................... 116
Benefits and Employment Matters Agreement................................ 116
The LifePoint 1998 Long-Term Incentive Plan.............................. 116
LifePoint Executive Stock Purchase Plan.................................. 119
LifePoint Annual Cash Bonus Plan......................................... 120
The LifePoint Management Stock Purchase Plan.............................. 121
LifePoint Employee Stock Ownership Plan................................... 122
Employment Contracts, Termination of Employment Arrangements and Change in
Control Arrangements..................................................... 123
LifePoint Security Ownership by Certain Beneficial Owners and Management.. 125
Triad Management.......................................................... 127
Directors................................................................ 127
Compensation of Directors................................................ 128
Executive Officers....................................................... 129
Executive Compensation................................................... 131
</TABLE>
-iii-
<PAGE>
<TABLE>
<S> <C>
Columbia/HCA Option Grants in 1998....................................... 132
Triad Compensation Arrangements.......................................... 133
Benefits and Employment Matters Agreement................................ 133
The Triad 1999 Long-Term Incentive Plan.................................. 133
Triad Executive Stock Purchase Plan...................................... 135
Triad Annual Cash Bonus Plan............................................. 137
The Triad Management Stock Purchase Plan.................................. 137
Triad Employee Stock Ownership Plan....................................... 139
Employment Contracts, Termination of Employment Arrangements and Change in
Control Arrangements..................................................... 139
Triad Security Ownership by Certain Beneficial Owners and Management...... 140
LifePoint Description of Capital Stock.................................... 142
Introduction............................................................. 142
Authorized And Outstanding Capital Stock................................. 142
LifePoint Common Stock; Delaware Anti-Takeover Provisions................ 142
LifePoint Preferred Stock................................................ 143
</TABLE>
<TABLE>
<S> <C>
LifePoint Preferred Stock Purchase Rights................................. 143
Certain Anti-Takeover Provisions--LifePoint Certificate and By-Laws....... 145
Limited Liability and Indemnification Provisions.......................... 150
Triad Description of Capital Stock......................................... 151
Introduction.............................................................. 151
Authorized And Outstanding Capital Stock.................................. 151
Triad Common Stock; Delaware Anti-Takeover Provisions..................... 151
Triad Preferred Stock..................................................... 152
Triad Preferred Stock Purchase Rights..................................... 152
Certain Anti-Takeover Provisions--Triad Certificate and By-Laws........... 154
Limited Liability and Indemnification Provisions.......................... 159
Additional Information..................................................... 160
LifePoint Hospitals, Inc. and Subsidiaries Index to Financial Statements... F-1
Triad Hospitals, Inc. and Subsidiaries Index to Financial Statements....... F-1
</TABLE>
-iv-
<PAGE>
Summary
This summary highlights selected information from this information statement,
but does not contain all details concerning the distribution of the common
stock of LifePoint and Triad to Columbia/HCA stockholders, including
information that may be important to you. To better understand the
distribution, and the businesses and financial position of LifePoint and Triad,
you should carefully review this entire document. References in this document
to "LifePoint" mean LifePoint Hospitals, Inc. and its subsidiaries and
affiliates. References in this document to "Triad" mean Triad Hospitals, Inc.
and its subsidiaries and affiliates. References in this document to
"Columbia/HCA" mean Columbia/HCA Healthcare Corporation and its subsidiaries
and affiliates.
Introduction
Columbia/HCA is the largest provider of health care services in the United
States today, operating approximately 300 hospitals, as well as outpatient
surgery centers, diagnostic centers, cardiac rehabilitation centers, physical
therapy centers, radiation oncology centers, comprehensive outpatient
rehabilitation centers, medical office buildings, physician practices and other
health care programs. In November 1997, Columbia/HCA restructured its
operations into five divisions, including the America Group and the Pacific
Group. America's hospitals are located in non-urban areas where, in almost
every case, America's hospital is the only hospital in the community.
Approximately three-quarters of Pacific's hospitals are located in small
cities, generally in the Southern, Western and Southwestern United States,
where Pacific's hospital is usually either the only hospital or one of two or
three hospitals in the community, and the remainder of Pacific's facilities are
located in larger urban areas typically characterized by a high rate of
population growth. Columbia/HCA has now determined to establish the America
Group and the Pacific Group as two independent, publicly-traded companies.
As of the distribution date, the health care services businesses conducted by
the America and Pacific Groups of Columbia/HCA will have been transferred to
LifePoint Hospitals, Inc. and Triad Hospitals, Inc., respectively, each of
which will be a newly formed Delaware holding company. The shares of common
stock of LifePoint Hospitals, Inc. and of Triad Hospitals, Inc. will be
distributed to the stockholders of Columbia/HCA on a pro rata basis.
Subject to certain financing arrangements, the distribution of the shares of
common stock of LifePoint Hospitals, Inc. and Triad Hospitals, Inc. will be
effective on the distribution date, , 1999. Following the distribution,
Columbia/HCA will focus its efforts on its core markets, which are typically
located in urban areas that are characterized by highly integrated facility
networks.
Columbia/HCA management believes that separating LifePoint and Triad into two
smaller, strategically focused public companies will provide the following
benefits:
. Implement Tailored Business Strategies. Columbia/HCA's management
believes that, because of the different community characteristics and
levels of network integration that exist in the LifePoint and Triad
markets, the LifePoint and Triad business strategies need to be
distinguished from each other and from those pursued in Columbia/HCA's
core markets. As smaller companies, LifePoint and Triad will have more
flexibility in responding to the needs of the communities in which they
operate.
. Increase Management Focus and Attention. The managements of LifePoint and
Triad will be able to focus on making capital improvements to existing
facilities in order to expand specialized services, invest in physician
and executive recruitment and retention, and improve outreach programs
and general health education initiatives.
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. Tie Compensation to Performance. Following the distribution, LifePoint
and Triad will be able to more closely tie compensation incentives for
their employees to the performance of their companies. Each of LifePoint
and Triad intends to establish for the benefit of its employees an
Employee Stock Ownership Plan (an "ESOP"), which shortly after the
distribution, in the case of the LifePoint ESOP, will purchase a number
of shares equal to 8.3% of the outstanding common stock of LifePoint and,
in the case of the Triad ESOP, will purchase a number of shares equal to
9.0% of the outstanding common stock of Triad. These equity interests are
expected to help LifePoint and Triad to attract and retain talented and
effective management and to motivate employees throughout the
organization.
. Improve Access to Capital. The distribution will give each of LifePoint
and Triad direct access to capital markets. As divisions of Columbia/HCA,
LifePoint and Triad have competed with each other and with the other
Columbia/HCA divisions for management attention, support resources, and
capital to finance expansion and growth opportunities. As separate
entities, with their own management structures, LifePoint and Triad will
be better able to implement business strategies appropriate for their
markets and to direct capital funding and expansion initiatives.
. Increase Visibility to the Capital Markets. Following the distribution,
the financial markets will be able to focus on the individual strengths
of Columbia/HCA, LifePoint and Triad, and more accurately evaluate the
performance of each distinct business compared to companies in the same
or similar businesses.
After the distribution, Columbia/HCA will retain responsibility for
liabilities arising out of the pending governmental investigations of some of
Columbia/HCA's business practices and for liabilities arising out of related
stockholder and other legal proceedings currently pending against Columbia/HCA.
See "Arrangements Among Columbia/HCA, LifePoint and Triad Relating to the
Distribution--Distribution Agreement" beginning on page 45, "Risk Factors--
Potential Adverse Impact of Columbia/HCA Investigations and Litigation;
Indemnification of LifePoint and Triad" beginning on page 33, and "Government
Regulation and Other Factors Affecting LifePoint and Triad--Governmental
Investigation of Columbia/HCA and Related Litigation" beginning on page 109. In
general, Columbia/HCA also will be responsible for taxes relating to pre-
distribution periods.
This summary includes cross-references to other portions of this information
statement to help you find more detailed information about the distribution,
LifePoint and Triad. We encourage you to read the entire document.
Questions and Answers About LifePoint, Triad and the Distribution
What are the businesses
of LifePoint and Triad? After the distribution, LifePoint and Triad will
continue to provide health care services, through
hospitals and, in the case of Triad, ambulatory
surgery centers. LifePoint's hospitals are located in
growing, non-urban areas with an average population
of approximately 31,000 (based on 1997 data). In 21
of LifePoint's 23 markets, LifePoint's hospital is
the only hospital in the community. LifePoint's
hospitals are located in the States of Alabama,
Florida, Georgia, Kansas, Kentucky, Louisiana,
Tennessee, Utah and Wyoming. Approximately three-
quarters of Triad's hospitals are located in small
cities (generally with populations of less than
150,000 residents and located more than 60 miles from
a major urban center) where Triad's hospital is
usually either the only hospital or one of two or
three 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. Triad's hospitals are located in
the States of Alabama, Arizona, Arkansas, California,
Kansas, Louisiana, Missouri, New Mexico, Oklahoma,
Oregon and Texas.
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Why is Columbia/HCA Columbia/HCA believes that separating the America and
establishing the Pacific Groups into two smaller, strategically
businesses of its focused public companies will allow them to implement
America and Pacific business strategies that are more tailored to their
Groups as separate, particular markets and to more closely tie
publicly-traded compensation incentives for their employees to the
companies? performance of each company. As separate companies,
LifePoint and Triad are also expected to benefit from
more focused management attention and improved access
to the capital markets. After the distribution,
Columbia/HCA will focus its efforts on its core
markets, which are typically located in urban areas
that are characterized by highly integrated facility
networks.
Who will be the
executive officers and Scott L. Mercy will be the Chairman and Chief
directors of LifePoint Executive Officer of LifePoint. Mr. Mercy has
and Triad? extensive experience in the health care services
business, most recently serving as President and
Chief Executive Officer of America Service Group
Inc., a publicly-traded provider of managed health
care services to correctional facilities throughout
the United States. Prior to joining America Service
Group Inc. in April 1996, Mr. Mercy held senior
financial positions with Columbia/HCA and with
Hospital Corporation of America (which became a part
of Columbia/HCA in February 1994). Mr. Mercy will be
supported by a management team that will include
James M. Fleetwood, Jr., who currently is the
President of the America Group of Columbia/HCA and
will serve as President and Chief Operating Officer
of LifePoint, and other senior executives, some of
whom are currently responsible for the operations of
the America Group. See "LifePoint Management --
Executive Officers" beginning on page 114.
The LifePoint Board of Directors initially will
consist of five persons, including Mr. Mercy, who
will serve as Chairman. See "LifePoint Management--
Directors" beginning on page 112.
James D. Shelton, currently President of the Pacific
Group of Columbia/HCA, will serve as Chairman of the
Board, President and Chief Executive Officer of
Triad. Mr. Shelton has extensive experience in the
health care services business and has been associated
with Columbia/HCA since June 1994. Prior to joining
Columbia/HCA, Mr. Shelton held senior executive
positions with National Medical Enterprises, Inc.
(now known as Tenet Healthcare Corporation). Mr.
Shelton will be supported by a management team that
will include many of the senior executives currently
responsible for the operations of the Pacific Group.
See "Triad Management--Executive Officers" beginning
on page 129.
The Triad Board of Directors initially will consist
of seven persons, including Mr. Shelton, who will
serve as Chairman. See "Triad Management--Directors"
beginning on page 127.
After the distribution, After the distribution, Columbia/HCA will no longer
will LifePoint and own any LifePoint common stock or Triad common stock.
Triad be related to However, Columbia/HCA, LifePoint and Triad will enter
Columbia/HCA in any into certain agreements to define the ongoing
way? relationships between Columbia/HCA and each of
LifePoint and Triad after the distribution. These
agreements also allocate responsibility
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for obligations arising prior to the distribution and
for certain obligations that might arise in the
future. See "Arrangements Among Columbia/HCA,
LifePoint and Triad Relating to the Distribution"
beginning on page 45 for a more complete discussion
of these agreements.
How much debt will
LifePoint and Triad Columbia/HCA intends to arrange for approximately
have after the $260.6 million in debt financing, which will be
distribution? assumed by LifePoint prior to the distribution and is
expected to consist of $135 million of term loans
under a new credit agreement, $125 million of Senior
Subordinated Notes due 2009 and approximately $0.6
million in other debt obligations to be assumed from
Columbia/HCA. LifePoint expects that the new credit
agreement will also include an additional term loan
commitment of $35 million available for limited
purposes and a revolving credit commitment of up to
$65 million, which are expected to be undrawn at
closing. The term loan indebtedness is expected to be
secured by certain of LifePoint's assets.
Columbia/HCA also intends to arrange for
approximately $675 million in debt financing, which
will be assumed by Triad prior to the distribution
and is expected to consist of $365 million of term
loans under a new credit agreement, including a $75
million, 1 year asset sale bridge loan facility, $300
million of Senior Subordinated Notes due 2009 and
approximately $10 million in other debt obligations
to be assumed from Columbia/HCA. The term loan
indebtedness is expected to be secured by certain of
Triad's assets. Triad also expects to enter into a
revolving credit loan agreement providing for a
commitment for revolving credit loans in an aggregate
principal amount of up to $125 million, which is
expected to be undrawn at closing. The LifePoint and
Triad debt agreements are expected to contain
customary financial and other restrictive covenants
(including restrictions on the payment of dividends,
incurrences of indebtedness and sale of assets). See
"Risk Factors--High Degree of Leverage and Debt
Service Obligations May Adversely Affect LifePoint
and Triad" beginning on page 35, "LifePoint Unaudited
Pro Forma Condensed Combined Balance Sheet" beginning
on page 19, and "Triad Unaudited Pro Forma Condensed
Combined Balance Sheet" beginning on page 25.
What are the risks The businesses of LifePoint and Triad are subject to
involved in owning risks, among others, related to competition and to
LifePoint common stock possible changes in regulation and legislation
and Triad common stock? relating to the health care services industry, as
well as risks relating to possible changes in the
Medicare program which could further limit
reimbursement for health care services. The
separation of LifePoint and Triad from Columbia/HCA
presents certain additional risks because neither
LifePoint nor Triad has ever operated independently
of Columbia/HCA; there is no existing market for
either LifePoint common stock or Triad common stock
(although we intend to apply for quotation of the
LifePoint common stock and the Triad common stock on
the Nasdaq National Market System); and a large
number of the shares distributed could be sold into
the market at any given time. Each of LifePoint and
Triad also have anti-takeover provisions in place
that could discourage or make more expensive a
takeover attempt that is opposed by its Board of
Directors.
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Columbia/HCA is the subject of several government
investigations of certain of its business practices
and is also defendant in a number of lawsuits in
respect of which liabilities could be asserted
against LifePoint and Triad. Columbia/HCA has agreed
to indemnify LifePoint and Triad in respect of
liabilities arising from such matters. Any failure by
Columbia/HCA to satisfy its indemnification
obligation in respect of such liabilities could have
a material adverse effect on LifePoint and Triad.
See "Risk Factors" beginning on page 29 for a more
complete discussion of certain matters which you
should consider in respect of your ownership of
LifePoint common stock and Triad common stock.
What do I have to do to Nothing. No proxy or vote is necessary for the
participate in the distribution. If you own Columbia/HCA common stock
distribution? ("Columbia/HCA Common Stock") or Columbia/HCA Non-
voting Common Stock ("Columbia/HCA Non-voting Stock,"
and together with Columbia/HCA Common Stock,
"Columbia/HCA Stock") as of the close of business on
the record date, , 1999, shares of LifePoint
common stock and Triad common stock will be mailed to
you or credited to your brokerage account in
1999. You do not need to mail in Columbia/HCA Stock
certificates to receive LifePoint common stock and
Triad common stock certificates. You will not receive
new Columbia/HCA Stock certificates.
Explain the shares of LifePoint common stock and shares
distribution ratio. of Triad common stock will be distributed for every
shares of Columbia/HCA Stock you own on the
record date. For example, if you own 100 shares of
Columbia/HCA Stock as of the close of business on the
record date, you will receive shares of LifePoint
common stock and shares of Triad common stock in
the distribution. You will receive a check for the
cash equivalent of any fractional shares you
otherwise would have received in the distribution.
Is the distribution Columbia/HCA has received a ruling from the Internal
taxable for United Revenue Service that, among other things, the
States Federal income distribution generally will be tax-free to
tax purposes? Columbia/HCA and to Columbia/HCA stockholders.
However, you may have to pay tax on a limited amount
of gain arising from any cash you are paid in lieu of
fractional shares of LifePoint common stock or Triad
common stock.
The tax ruling provides that you should apportion
your tax basis in Columbia/HCA Stock held immediately
before the distribution among your Columbia/HCA Stock
and the LifePoint common stock and Triad common stock
you receive in the distribution. See "Risk Factors--
Tax Treatment of the Distribution" beginning on page
36, and "The Distribution--Material Federal Income
Tax Consequences" beginning on page 43, for more
complete discussions of the United States Federal
income tax consequences of the distribution to
holders of Columbia/HCA Stock.
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Will my dividends Columbia/HCA currently expects to continue paying its
change? regular quarterly dividend of $.02 per share. The
actual timing and amount of dividends declared by
Columbia/HCA will depend on various factors and are
subject to change at the discretion of the
Columbia/HCA Board of Directors. Neither LifePoint
nor Triad anticipates paying any cash dividends on
its common stock in the foreseeable future. In
addition, the terms of LifePoint's and Triad's debt
agreements are expected to restrict the payment of
cash dividends. See "Dividend Policy" beginning on
page 51.
Where will my shares of
LifePoint common stock At present, there is no public market for either
and Triad common stock LifePoint common stock or Triad common stock.
trade? LifePoint and Triad have applied for quotation of
their common stock on the Nasdaq National Market
System. If the shares are accepted for quotation, we
expect that a "when-issued" trading market for
LifePoint common stock and Triad common stock will
develop shortly before the distribution date, and
that "regular-way" trading will begin on , 1999.
Also, see "The Distribution--Market for LifePoint
Common Stock and Triad Common Stock" beginning on
page 44.
Will the distribution After the distribution, Columbia/HCA Common Stock
affect the trading will continue to be listed for trading on the New
price of my York Stock Exchange. As a result of the distribution,
Columbia/HCA Common the trading price of Columbia/HCA Common Stock likely
Stock? will be lower than the trading price immediately
prior to the distribution. Moreover, until the market
has evaluated the operations of Columbia/HCA without
LifePoint and Triad, the trading price of
Columbia/HCA Common Stock may fluctuate. The combined
trading prices of Columbia/HCA Common Stock,
LifePoint common stock and Triad common stock may not
equal the trading price of Columbia/HCA Common Stock
prior to the distribution. See "The Distribution--
Market for LifePoint Common Stock and Triad Common
Stock" beginning on page 44.
Are any regulatory Prior to the distribution date, Columbia/HCA will
approvals required for have provided appropriate notifications regarding the
the distribution? distribution to, and expects that it will have
received all material approvals from, the Federal and
state regulatory authorities having jurisdiction in
respect of the distribution and related
reorganization transactions. See "The Distribution--
Regulatory Approvals" beginning on page 44.
What will happen to They will be treated the same as all other shares of
shares owned through Columbia/HCA Stock. You will continue to own the
the Columbia/HCA Columbia/HCA Common Stock that you owned through the
Healthcare Corporation Columbia/HCA Healthcare Corporation Stock Bonus Plan,
Stock Bonus Plan, the the Columbia/HCA Healthcare Corporation Salary
Columbia/HCA Healthcare Deferral Plan and the San Leandro Retirement and
Corporation Salary Savings Plan prior to the distribution. In the case
Deferral Plan and the of employees of LifePoint and Triad, such shares will
San Leandro Retirement be owned through successor defined contribution plans
and Savings Plan? established by LifePoint and Triad. In the
distribution, shares of LifePoint common stock and
shares of Triad common stock for every shares
of Columbia/HCA Stock you own through the plans on
the record
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date will be credited to your account under the
relevant plan. The various tax-qualified plans of
Columbia/HCA, LifePoint and Triad may thereafter
engage in sales and/or exchange of non-employer
securities.
What will happen to Generally, vested Columbia/HCA employee stock options
existing employee stock (other than options that are "incentive stock
options to purchase options" under the Internal Revenue Code) will be
Columbia/HCA Common retained by employees of Columbia/HCA, LifePoint and
Stock? Triad and their exercise prices will be adjusted to
reflect the distribution. In addition, each holder of
such vested options will receive vested options to
purchase the number of shares of LifePoint common
stock and Triad common stock that he or she would
have received in the distribution, as if his or her
Columbia/HCA option had been exercised on the record
date. Similar adjustments will be made with respect
to vested Columbia/HCA stock options held by non-
employee directors. In the case of vested employee
stock options to acquire a small number of shares,
however, such options will be adjusted in a manner
that preserves the pre-distribution value of such
options.
Unvested employee stock options held by employees of
LifePoint and Triad will be cancelled and LifePoint
and Triad may, in their discretion, grant unvested
employee stock options to their respective employees.
In the case of unvested employee stock options held
by Columbia/HCA employees, the exercise price will be
adjusted to reflect the distribution. Unvested
options to acquire LifePoint and Triad stock will
also be issued to certain employees of Columbia/HCA.
Incentive stock options held by employees of
LifePoint and Triad will be cancelled and replaced
with options to purchase the common stock of the
employer of the holder. The number of shares covered
by, and the exercise price of, each replacement
option will be fixed so as to preserve the aggregate
exercise price of the cancelled option and the
aggregate spread between exercise price and the fair
market value of the cancelled option.
Key Terms of the Distribution
No Stockholder Action No action is required by Columbia/HCA stockholders to
Required receive LifePoint common stock and Triad common stock
in the distribution.
You do not need to surrender Columbia/HCA Stock to
receive LifePoint common stock and Triad common stock
in the distribution.
The number of shares of Columbia/HCA Stock you own
will not change as a result of the distribution.
Record Date If you are a holder of record of Columbia/HCA Stock
as of the close of business on the record date
( , 1999), you will be entitled to receive
LifePoint common stock and Triad common stock in the
distribution.
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Distribution Ratio
Subject to certain financing arrangements, you will
receive shares of LifePoint common stock and
shares of Triad common stock for every shares of
Columbia/HCA Stock you own as of the close of
business on , 1999.
No Fractional Shares Fractional shares will not be distributed. Instead,
Will Be Issued they will be aggregated and sold in the public market
by the distribution agent and the aggregate
cash proceeds will be distributed equally to
shareholders otherwise
entitled to fractional interests. See "The
Distribution--Manner of Effecting the Distribution"
beginning on page 42.
Shares to be All of the outstanding LifePoint common stock and
Distributed Triad common stock will be distributed in the
distribution. Based on the shares of
Columbia/HCA Common Stock and 21,000,000 shares of
Columbia/HCA Non-Voting Common Stock outstanding as
of , 1999, shares of LifePoint common
stock and shares of Triad common stock will be
distributed.
Mailing Date The distribution agent will mail LifePoint common
stock and Triad common stock certificates to
Columbia/HCA stockholders on or about , 1999,
which you should receive shortly thereafter.
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Information Regarding the Distribution, LifePoint and Triad
Before the distribution, you should direct inquiries relating to the
distribution to:
National City Bank Columbia/HCA Healthcare Corporation
Shareholder Services Group W. Mark Kimbrough
P. O. Box 92301 Assistant Vice President and Investor
Cleveland, Ohio 44193-0900 Contact
(216) 476-8663 One Park Plaza
(800) 622-6757 Nashville, Tennessee 37203
(615) 344-1199
(615) 344-2266 (facsimile)
After the distribution, you should direct inquiries relating to an investment
in LifePoint common stock to:
LifePoint Hospitals, Inc.
Investor Relations Department
4525 Harding Road
Nashville, Tennessee 37205
(615) 344-6261
After the distribution, you should direct inquiries relating to an investment
in Triad common stock to:
Triad Hospitals, Inc.
Investor Relations Department
13455 Noel Road, 20th Floor
Dallas, Texas 75240
(972) 701-2202
After the distribution, the transfer agent and registrar for the LifePoint
common stock and the Triad common stock will be:
National City Bank
Shareholder Services Group
P.O. Box 92301
Cleveland, Ohio 44193-0900
(216) 476-8663
(800) 622-6757
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Columbia/HCA Healthcare Corporation
After the distribution, Columbia/HCA will continue to be one of the leading
providers of health care services in the United States. As of February 28,
1999, after giving effect to the transfers of certain hospitals and other
health care facilities to LifePoint and Triad immediately prior to the
distribution, Columbia/HCA would have operated 198 general, acute care
hospitals, 10 psychiatric hospitals, and 77 outpatient surgery centers
(including 23 hospitals and 5 outpatient surgery centers which are operated
through 50/50 joint ventures that are managed by Columbia/HCA but are not
consolidated for financial reporting purposes).
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. Columbia/HCA's general, acute care 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 Columbia/HCA's
general, acute care hospitals, as well as at free-standing facilities operated
by Columbia/HCA, including outpatient surgery and 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.
By establishing the America and Pacific Groups as separate, independent
companies, Columbia/HCA will be better able to focus its efforts on its core
markets, which are typically located in urban areas that are characterized by
highly integrated facility networks.
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LifePoint Hospitals, Inc.
LifePoint's Facilities
LifePoint will continue to provide health care services through its hospitals
after the distribution. As of December 31, 1998, the America Group (the assets
of which will be transferred to LifePoint prior to the distribution) comprised
23 general, acute care hospitals, located in non-urban areas with an average
population of approximately 27,000 (based on 1998 data). According to industry
sources, population in LifePoint's markets is projected to grow on average in
excess of 5% annually between 1998 and 2003, compared to the expected national
growth rate of 2.4% over the same period. In 21 of LifePoint's 23 markets,
LifePoint's hospital is the only hospital in the community. LifePoint's
hospitals are located in nine states: Alabama, Florida, Georgia, Kansas,
Kentucky, Louisiana, Tennessee, Utah and Wyoming. Approximately half of
LifePoint's facilities are located in the States of Kentucky and Tennessee. All
but five of LifePoint's hospitals are located in states that have certificate
of need laws, which laws may have the effect of limiting the development of
competing facilities.
LifePoint's general, acute care hospitals usually provide the range of
medical and surgical services commonly available in hospitals in non-urban
markets. These hospitals also provide diagnostic and emergency services, as
well as outpatient and ancillary services such as outpatient surgery,
laboratory, radiology, respiratory therapy, cardiology and physical therapy.
Recent Operating Performance
LifePoint has experienced an increase in revenues and volume growth during
1998. On a same facility basis in 1998, LifePoint's revenues declined 1.8% and
hospital admissions decreased by 0.8%, although equivalent admissions (a
measure of combined inpatient and outpatient volume) increased by 0.2%. During
the same period, revenues per equivalent admission (on a same facility basis)
decreased by 2.0%. Management believes that the declines are primarily
attributable to the shift to providing services on an outpatient basis, the
increasing proportion of LifePoint's revenue being derived from fixed payment
and higher discount sources, including Medicare, Medicaid and managed care
plans, and the impact of the government investigations of certain of
Columbia/HCA's business practices and the related media coverage. Under the
Federal Balanced Budget Act of 1997, levels of Medicare and Medicaid
reimbursement have recently been reduced and will be further reduced as
additional reductions are phased in over the next few years. For additional
information regarding LifePoint's financial performance in recent periods, see
the LifePoint consolidated financial statements included elsewhere herein and
"LifePoint Management's Discussion and Analysis of Financial Condition and
Results of Operations" beginning on page 54. See also "LifePoint Unaudited Pro
Forma Condensed Combined Financial Statements" beginning on page 19.
Business Strategy
LifePoint's strategic goals are centered around the unique patient and health
care provider needs and opportunities in its non-urban markets. LifePoint
intends to manage its facilities to ensure that they operate in accordance with
the strategic objectives described below:
. Develop Facility-Specific Strategies for Non-Urban Markets. LifePoint
has developed facility specific strategies tailored for the unique
characteristics of each of its non-urban markets. These strategies are
intended to improve the quality and breadth of health care services, to
provide an outstanding workplace for LifePoint's employees, to recognize
and expand the hospitals' roles as community assets and to improve
financial performance. By contrast, Columbia/HCA's strategy has been
developed on a system-wide basis and has focused on building well-
integrated facility networks with large urban facilities as the
principal providers of specialty services.
. Expand Breadth of Service and Reduce Patient Outmigration. LifePoint
intends to increase revenues by broadening the scope of health care
services available at its facilities, particularly in markets where
significant outmigration is occurring, and to recruit physicians with a
broader range of specialties. As an entity separate from Columbia/HCA,
LifePoint will not have to compete with the
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<PAGE>
Columbia/HCA facilities located in larger, urban markets for management
attention, support resources, and capital to finance expansion of the
range of services offered at its hospitals. LifePoint has recently
undertaken projects in a number of its hospitals targeted at expanding
or renovating specialty service facilities including emergency room
facilities, obstetric care, surgical capacity and outpatient services.
Management believes that this expansion of available treatments and
LifePoint's community focus should help to encourage local residents in
LifePoint's non-urban markets to seek care at facilities within their
communities and limit outmigration.
. Strengthen Physician Recruiting and Retention. LifePoint seeks to
enhance the quality of care available locally (and the revenue derived
therefrom), and believes that recruiting physicians in local communities
is critical to increasing the quality of health care and the breadth of
available services. LifePoint recruited 88 physicians in 1998, the
majority of whom were added during the second half of the year.
LifePoint believes that its recent recruiting success is largely
attributable to the announcement of its spin-off as an independent
company and the community-based focus of its new management team. As
part of LifePoint's physician recruitment program in 1999, LifePoint
plans to focus primarily on recruiting additional specialty care
physicians. LifePoint also intends to take advantage of its management
focus to work more effectively with individual physicians and physician
practices. Management believes that expansion of the range of available
treatments at its hospitals should also assist in physician recruiting.
. Retain and Develop Stable Management. LifePoint's management believes
that achieving long-term retention of executive teams at the hospitals
will enhance medical staff relations and maintain continuity of
relationships within the community. LifePoint intends to focus its
recruitment of managers and health care professionals on those who wish
to live and practice in the communities in which LifePoint's hospitals
are located. In the past, managers and health care professionals
employed at LifePoint hospitals sometimes relocated to advance their
careers elsewhere within the Columbia/HCA system. LifePoint expects that
its ability to provide equity-based compensation linked to its
performance should assist in management retention.
. Improve Managed Care Position. As part of Columbia/HCA, LifePoint's
facilities typically have been included in managed care contracts
negotiated by Columbia/HCA on a market-wide basis emphasizing large
urban facilities. LifePoint believes that independence from Columbia/HCA
and the lower managed care penetration in its markets will enable it
over time to negotiate contract terms that are generally more favorable
for its facilities and to decrease the level of discount arrangements in
which it participates. LifePoint's hospitals do not participate in
capitation arrangements and LifePoint does not intend to do so in the
future.
. Improve Expense Management. LifePoint has begun to implement cost
control initiatives designed to reduce labor costs and improve labor
productivity, control supplies expense and reduce uncollectible
revenues. These initiatives include adjusting staffing levels according
to patient volumes, modifying supply purchases according to patient
needs, providing training to hospital staff in more efficient billing
and collection processes.
. Acquire Other Hospitals. Management intends to pursue a disciplined
acquisition strategy that will seek to identify and acquire attractive
hospitals in non-urban markets. In the past, Columbia/HCA has been
reluctant to pursue acquisitions of such facilities as non-urban
hospitals were not consistent with Columbia/HCA's urban market focus.
LifePoint will seek to acquire hospitals that are located in non-urban
markets with above average population growth, a strong economic base and
a favorable payor mix.
Recent Developments
On March 23, 1999, LifePoint entered into a letter of intent to sell three of
its general, acute care hospitals, Barrow Medical Center, Halstead Hospital and
Trinity Hospital for an aggregate purchase price of $25 million, plus a net
working capital adjustment which is currently expected by management to result
in an additional payment to LifePoint of approximately $4.8 million.
Consummation of this transaction is subject to execution of definitive
documentation, and there can be no assurance that this transaction will be
consummated.
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Triad Hospitals, Inc.
Triad's Facilities
Triad will continue to provide health care services through its hospitals and
ambulatory surgery centers located in small cities and selected high growth
urban markets in the Southern, Western and Southwestern United States. As of
December 31, 1998, the Pacific Group (the assets of which will be transferred
to Triad prior to the distribution) comprised 38 general, acute care hospitals,
1 psychiatric hospital, and 17 ambulatory surgery centers (excluding 2 surgery
centers that are not consolidated for accounting purposes), located in the
States of Alabama, Arizona, Arkansas, California, Kansas, Louisiana, Missouri,
New Mexico, Oklahoma, Oregon and Texas. The Pacific Group operates one of its
hospitals through a 50/50 joint venture that is not consolidated for financial
reporting purposes and is building an additional hospital through a 50/50 joint
venture that is currently scheduled to open in May 1999. Triad's management has
focused on streamlining Triad's portfolio of facilities to eliminate those with
poor financial performance, weak competitive market positions or locations in
certain urban markets. As a result of this initiative, Triad has decided to
divest certain of its facilities and, since December 31, 1998, Triad has sold
one of its hospitals, has transferred under long- term lease two of its
hospitals and three of its ambulatory surgery centers to an unaffiliated third
party and has ceased operations of another hospital. Triad currently intends to
sell an additional four of its general, acute care hospitals, its one
psychiatric hospital and certain of the ambulatory surgery centers that it
operated as of December 31, 1998. In addition, Triad has entered into an
agreement to swap one hospital, Doctors Hospital of Laredo, for a hospital
located in Victoria, Texas. Following these divestitures and the cessation of
operations of one hospital, Triad expects to own or operate 32 hospitals
(including the hospital operated through a joint venture and two hospitals
leased to and operated by an unaffiliated third party) as well as 14 ambulatory
surgery centers.
Triad's general, acute care hospitals typically 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. These hospitals also generally
provide outpatient and ancillary health care services such as outpatient
surgery, laboratory, radiology, respiratory therapy, cardiology and physical
therapy. Outpatient surgical services also are provided by surgery centers
operated by Triad. In addition, certain of Triad's general, acute care
hospitals have a limited number of licensed psychiatric beds.
Recent Operating Performance
In recent periods, Triad has experienced declines in revenue and volume
growth rates. For example, during the year ended December 31, 1998, revenues
(on a same facility basis) declined by 1.3%, and hospital admissions (on a same
facility basis) decreased by 1.9%, although equivalent admissions (a measure of
combined inpatient and outpatient volume) increased by 0.6%. During the same
period, revenues per equivalent admission (on a same facility) decreased by
1.9%. Management believes that the declines are primarily attributable to the
shift to providing services on an outpatient basis, the increasing proportion
of Triad's revenue being derived from fixed payment and higher discount
sources, including Medicare, Medicaid and managed care plans and the impact of
the government investigations of certain of Columbia/HCA's business practices
and the related media coverage. Under the Federal Balanced Budget Act of 1997,
levels of Medicare and Medicaid reimbursement have recently been reduced and
will be further reduced as additional reductions are phased in over the next
few years. For additional information regarding Triad's financial performance
in recent periods, see the Triad consolidated financial statements included
elsewhere herein and "Triad Management's Discussion and Analysis of Financial
Condition and Results of Operations" beginning on page 70. See also "Triad
Unaudited Pro Forma Condensed Combined Financial Statements" beginning on page
25.
Business Strategy
Triad's primary objectives are to provide quality health care services and to
enhance the financial performance of the company by increasing hospital
utilization and improving operating efficiencies, using the following
strategies:
13
<PAGE>
. Build on Position in Small Cities and High Population Growth Urban
Markets. Triad believes that, as a result of its efforts to streamline
its base of assets, it is well positioned to build upon its portfolio of
facilities in the Southern, Western and Southwestern United States.
Triad also believes that, unlike rural markets which have small
populations, Triad's small-city markets can support increased specialty
services which produce relatively higher revenues than other health care
services. In addition, in Triad's small-city markets, managed care
penetration (i.e., the relative proportion of the market enrolled in
managed care programs (HMOs and PPOs)) is generally lower than in urban
areas and, therefore, Triad believes that it will be in a better
position to negotiate more favorable managed care contracts in these
markets. Triad also intends to strengthen its competitive position in
the fast growing larger urban areas of the Southwest where it currently
operates.
. Recruit Physicians. Triad plans to actively recruit additional primary
care physicians. Triad believes that primary care physicians are
frequently the first contact point for a patient and that each hospital
must establish strong physician relationships in its community in order
to enhance patient care and fulfill the needs of the growing population
in its markets.
. Enhance Specialty Services, Outpatient Services and Emergency Rooms.
Triad believes that many of its markets are large enough to support
additional specialty services, such as women's centers, orthopedic
facilities, oncology centers and neurology care, and intends to
selectively increase these services in order to reduce patient
outmigration to urban hospitals. To support this expansion of specialty
services, Triad plans to actively recruit additional specialists to its
facilities. Recognizing that the shift from inpatient to outpatient care
recently experienced by the health care industry is likely to continue,
Triad intends to enhance the access to and the convenience of its
outpatient service capabilities by improving its free-standing
ambulatory surgery centers, restructuring its hospital facilities and
surgery capacity to better accommodate outpatient treatment, and
improving its emergency room facilities.
. Improve Operating Efficiencies Through Enhanced Cost Management and
Resource Control. Triad has initiated several measures to improve the
financial performance of its facilities through greater control of
operating expenses. Triad has focused on reducing salaries, wages and
benefits, the largest component of operating expense, at the facility
level. Triad also has instituted a financial training program for its
hospital managers to teach effective management of hospital revenues and
expenses. Triad plans to improve resource management through cooperative
initiatives with physicians to eliminate unnecessary tests and
procedures.
. Develop Strong Relationships with Physicians. Triad believes recruiting
and retaining motivated physicians is vitally important to its long term
success. Triad believes a model for effective health care service
delivery can be developed cooperatively with physicians and the
hospitals, which will result in improved quality of care. In each of its
markets, Triad has established Physician Leadership Groups made up of
leading area physicians who will work with corporate and hospital
management to establish local priorities. Corporate objectives will be
addressed by a national Physician Leadership Group comprised of
representatives of local Physician Leadership Groups and members of
Triad management. In an effort to further improve communication with its
physicians, Triad has appointed a senior manager who is an experienced
physician to oversee physician relations.
. Grow Through Existing Hospital Expansion, New Hospital and Ambulatory
Surgery Center Construction, and Selective Acquisitions. Triad intends
to identify expansion opportunities in areas where management perceives
that demand is not being adequately met due to rapid population growth
14
<PAGE>
or insufficient existing health care services. Triad plans to
selectively expand its existing hospitals by adding additional clinical
facilities or medical office buildings. Triad plans to construct new
hospitals and also may seek to make acquisitions in select markets.
Triad is currently in the process of building a new facility in South
Tulsa, Oklahoma through a joint venture with Hillcrest Healthcare
Systems. The facility is scheduled to open in May 1999 and will be 50%
owned by Triad. Triad believes that potential acquisition opportunities
may arise when other health care providers choose to divest facilities
or when independent hospitals believe that they can benefit from
becoming part of a larger hospital company. Currently, Triad does not
have specific plans for additional new facilities or acquisitions.
15
<PAGE>
Comparative Financial Highlights
The following table sets forth, for each of the years ended December 31,
1998, 1997 and 1996, revenues, income (loss) from continuing operations, total
assets and other operating data for each of LifePoint, Triad and, after giving
effect to the distribution, Columbia/HCA. This data is presented for
informational purposes only and is not necessarily indicative of the results of
operations or financial position that any of such companies would have reported
if they had operated independently during the periods presented (dollars in
millions).
<TABLE>
<CAPTION>
As of and for the Year
Ended December 31,
---------------------------------------
1998 1997 1996
------------ ------------ -----------
Amount % Amount % Amount %
------- --- ------- --- ------- ---
<S> <C> <C> <C> <C> <C> <C>
Columbia/HCA revenues................ $16,594 88% $16,722 88% $16,721 89%
LifePoint revenues................... 498 3 488 3 464 2
Triad revenues....................... 1,589 9 1,609 9 1,601 9
------- --- ------- --- ------- ---
$18,681 100% $18,819 100% $18,786 100%
======= === ======= === ======= ===
Columbia/HCA income (loss) from
continuing operations (a)........... $ 636 119% $ 184 100% $ 1,354 92%
LifePoint income (loss) from
continuing
operations (a)...................... (18) (3) 17 10 39 3
Triad income (loss) from continuing
operations (a)...................... (86) (16) (19) (10) 68 5
------- --- ------- --- ------- ---
$ 532 100% $ 182 100% $ 1,461 100%
======= === ======= === ======= ===
Columbia/HCA total assets............ $17,703 91% $20,193 92% $19,314 91%
LifePoint total assets............... 355 2 398 2 376 2
Triad total assets................... 1,371 7 1,411 6 1,426 7
------- --- ------- --- ------- ---
$19,429 100% $22,002 100% $21,116 100%
======= === ======= === ======= ===
Other operating data:
Columbia/HCA EBITDA(b)............... $ 2,662 93% $ 2,581 90% $ 3,808 90%
LifePoint EBITDA(b).................. 57 2 82 3 111 3
Triad EBITDA(b)...................... 149 5 188 7 295 7
------- --- ------- --- ------- ---
$ 2,868 100% $ 2,851 100% $ 4,214 100%
======= === ======= === ======= ===
</TABLE>
- --------
(a) Includes charges (net of tax benefits) related to impairments of long-lived
assets of $300, $16 and $33 million during 1998 for Columbia/HCA, LifePoint
and Triad, respectively, and $282 and $8 million during 1997 for
Columbia/HCA and Triad, respectively.
(b) EBITDA is defined as income from continuing operations before depreciation
and amortization, interest expense, management fees, impairment of long-
lived assets, gains on sales of facilities, restructuring of operations and
investigation related costs, minority interests and income taxes. EBITDA is
commonly used as an analytical indicator within the health care industry,
and also serves as a measure of leverage capacity and debt service ability.
EBITDA should not be considered as a measure of financial performance under
generally accepted accounting principles, and the items excluded from
EBITDA are significant components in understanding and assessing financial
performance. EBITDA should not be considered in isolation or as an
alternative to net income, cash flows generated by operating, investing or
financing activities or other financial statement data presented in the
combined financial statements as an indicator of financial performance or
liquidity. Because EBITDA is not a measurement determined in accordance
with generally accepted accounting principles and is thus susceptible to
varying calculations, EBITDA as presented may not be comparable to other
similarly titled measures of other companies.
16
<PAGE>
LifePoint
Summary Financial Data
The following table sets forth summary historical financial data of LifePoint
for each of the years in the five year period ended December 31, 1998 and
certain unaudited pro forma financial data of LifePoint for the year ended
December 31, 1998. The summary financial data at December 31, 1996, 1995 and
1994 and for the years ended December 31, 1995 and 1994 has been derived from
unaudited financial statements. The table should be read in conjunction with
the LifePoint Hospitals, Inc. Combined Financial Statements, the LifePoint
Unaudited Pro Forma Condensed Combined Financial Statements and the related
notes included elsewhere in this information statement.
<TABLE>
<CAPTION>
Years Ended December 31,
----------------------------------------
1998 1997 1996 1995 1994
------- ------- ------ ------ ------
(Dollars in millions, except per
share amounts)
<S> <C> <C> <C> <C> <C>
Summary of Operations:
Revenues............................ $ 498.4 $ 487.6 $464.0 $395.8 $350.1
Income (loss) from continuing
operations (a)..................... (17.7) 17.1 39.3 25.6 14.4
Net income (loss) (a)............... (21.8) 12.5 41.2 27.4 15.9
Basic earnings (loss) per share:
Income (loss) from continuing
operations (a)................... $ (0.59) $ 0.57 $ 1.31 $ 0.85 $ 0.48
Net Income (loss) (a)............. $ (0.73) $ 0.41 $ 1.37 $ 0.91 $ 0.53
Shares used in computing basic
earnings (loss)
per share (in millions).......... 30.0 30.0 30.0 30.0 30.0
Diluted earnings (loss) per share:
Income (loss) from continuing
operations (a)................... $ (0.59) $ 0.57 $ 1.30 $ 0.84 $ 0.47
Net income (loss) (a)............. $ (0.73) $ 0.41 $ 1.36 $ 0.90 $ 0.52
Shares used in computing diluted
earnings (loss)
per share (in millions).......... 30.0 30.2 30.3 30.4 30.4
Financial Position:
Assets.............................. $ 355.0 $ 397.9 $376.0 $324.5 $312.3
Long-term debt, including amounts
due within one year................ 0.6 1.6 1.6 2.1 1.7
Intercompany balances payable to
Columbia/HCA....................... 167.6 182.5 176.3 181.3 218.2
Working capital..................... 26.9 41.1 39.0 24.4 19.7
Capital expenditures................ 29.3 51.8 53.4 28.6 34.1
Other Operating Data:
EBITDA (b).......................... $ 56.8 $ 82.0 $110.6 $ 82.4 $ 66.3
Pro forma EBITDA (c)................ $ 50.0
Number of hospitals at end of
period............................. 23 22 22 20 20
Number of licensed beds at end of
period (d)......................... 2,108 2,080 2,074 1,881 1,843
Weighted average licensed beds (e).. 2,122 2,078 2,060 1,862 1,783
Admissions (f)...................... 62,264 60,487 59,381 54,549 52,681
Equivalent admissions (g)........... 109,336 105,126 98,869 88,915 81,708
Average length of stay (days) (h)... 4.4 4.4 4.7 4.8 4.9
Average daily census (i)............ 742 733 755 713 713
Occupancy rate (j).................. 35% 35% 37% 38% 40%
</TABLE>
- --------
(a) Includes charge related to impairment of long-lived assets of $26.1 million
($15.9 million after-tax) for the year ended December 31, 1998.
(b) EBITDA is defined as income from continuing operations before depreciation
and amortization, interest expense, management fees, impairment of long-
lived assets, minority interests and income taxes. EBITDA
17
<PAGE>
is commonly used as an analytical indicator within the health care
industry, and also serves as a measure of leverage capacity and debt
service ability. EBITDA should not be considered as a measure of financial
performance under generally accepted accounting principles, and the items
excluded from EBITDA are significant components in understanding and
assessing financial performance. EBITDA should not be considered in
isolation or as an alternative to net income, cash flows generated by
operating, investing or financing activities or other financial statement
data presented in the combined financial statements as an indicator of
financial performance or liquidity. Because EBITDA is not a measurement
determined in accordance with generally accepted accounting principles and
is thus susceptible to varying calculations, EBITDA as presented may not be
comparable to other similarly titled measures of other companies.
(c) Pro forma EBITDA is EBITDA, as defined in (b) above, adjusted as (i) if
the distribution and the divestitures of certain facilities that LifePoint
intends to divest during 1999 had occurred at the beginning of 1998, (ii)
to exclude noncash ESOP expense and (iii) to include LifePoint
management's estimated corporate overhead costs of $12 million, that are
recorded in the Pro Forma Condensed Combined Statement of Operations to
replace the management fees allocated by Columbia/HCA (see "Unaudited Pro
Forma Condensed Combined Financial Statements"). In addition to the
exclusion of certain items from pro forma EBITDA as presented and as
commonly accepted within the health care industry, LifePoint believes that
the impact on future operations of certain other unusual costs included in
pro forma EBITDA as presented should also be considered in assessing
LifePoint's leverage capacity and debt service ability. LifePoint believes
that certain costs incurred in 1998 and included in 1998 pro forma EBITDA
were unusual in nature or magnitude, and costs similar in nature or
magnitude are not expected to occur in future periods. Such costs
included, among other items, incremental salary costs associated with
computer information system conversions, severance, and certain uninsured
legal settlements. Pro forma EBITDA is commonly used as an analytical
indicator of leverage capacity and debt service ability. Pro forma EBITDA
should not be considered as a measure of financial performance under
generally accepted accounting principles, and the items excluded from pro
forma EBITDA are significant components in understanding and assessing
financial performance. Pro forma EBITDA should not be considered in
isolation or as an alternative to net income, cash flows generated by
operating, investing or financing activities or other financial statement
data presented in the combined financial statements as an indicator of
financial performance or liquidity. Because pro forma EBITDA is not a
measurement determined in accordance with generally accepted accounting
principles and is thus susceptible to varying calculations, pro forma
EBITDA as presented may not be comparable to other similarly titled
measures of other companies.
(d) Licensed beds are those beds for which a facility has been granted
approval to operate from the applicable state licensing agency.
(e) Represents the average number of licensed beds weighted based on periods
owned.
(f) Represents the total number of patients admitted (in the facility for a
period in excess of 23 hours) to LifePoint's hospitals and is used by
management and certain investors as a general measure of inpatient volume.
(g) Equivalent admissions is used by management and certain investors as a
general measure of combined inpatient and outpatient volume. Equivalent
admissions is 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.
(h) Represents the average number of days admitted patients stay in
LifePoint's hospitals. Average length of stay has declined due to the
continuing pressures from managed care and other payers to restrict
admissions and reduce the number of days that are covered by the payers
for certain procedures, and by technological and pharmaceutical
improvements.
(i) Represents the average number of patients in LifePoint's hospital beds
each day.
(j) Represents the percentage of hospital licensed beds occupied by patients.
Both average daily census and occupancy rate provide measures of the
utilization of inpatient rooms. The declining occupancy rate is primarily
attributed to the trend toward more services, that were previously
performed in an inpatient setting, being performed on an outpatient basis
and the decline in average length of stay per admission.
18
<PAGE>
LifePoint
Unaudited Pro Forma Condensed Combined Financial Statements
The following Unaudited Pro Forma Condensed Combined Financial Statements of
LifePoint are based on the historical combined financial statements, which
reflect periods during which the businesses that will comprise LifePoint did
not operate as a separate, independent company and certain estimates,
assumptions and allocations were made in preparing such financial statements.
Therefore, such historical combined financial statements do not necessarily
reflect the combined results of operations or financial position that would
have existed had LifePoint been a separate, independent company.
The Unaudited Pro Forma Condensed Combined Statement of Operations for the
year ended December 31, 1998 reflects the results of LifePoint's operations as
if the distribution and the divestitures of facilities that LifePoint intends
to divest during 1999 had occurred at the beginning of 1998. The Unaudited Pro
Forma Condensed Combined Balance Sheet assumes that the distribution and such
divestitures had occurred on December 31, 1998.
The Unaudited Pro Forma Condensed Combined Financial Statements should be
read in conjunction with the historical financial statements of LifePoint
included elsewhere herein and the notes thereto. The pro forma condensed
combined financial information is presented for informational purposes only and
does not purport to reflect the results of operations or financial position of
LifePoint or the results of operations or financial position that would have
occurred had LifePoint been operated as a separate, independent company.
19
<PAGE>
LifePoint
Unaudited Pro Forma Condensed Combined Statement of Operations
Year Ended December 31, 1998
(Dollars in millions, except per share amounts)
<TABLE>
<CAPTION>
Pro Forma Pro
Historical Adjustments Forma
---------- ----------- ------
<S> <C> <C> <C>
Revenues................................................................ $498.4 $(48.0)(a) $450.4
Salaries and benefits................................................... 220.8 (23.5)(a) 200.4
(5.3)(b)
8.4 (c)
Supplies................................................................ 62.0 (6.6)(a) 55.9
0.5 (c)
Other operating expenses................................................ 117.2 (12.3)(a) 108.0
3.1 (c)
Provision for doubtful accounts......................................... 41.6 (5.5)(a) 36.1
Depreciation and amortization........................................... 28.3 (3.2)(a) 25.1
ESOP expense............................................................ -- 2.4 (b) 2.4
Interest expense allocated from Columbia/HCA............................ 19.1 (5.6)(a) 25.9
12.4 (d)
Management fees allocated from Columbia/HCA............................. 8.9 (0.9)(a) --
(8.0)(c)
Impairment of long-lived assets......................................... 26.1 (24.8)(a) 1.3
------ ------ ------
524.0 (68.9) 455.1
------ ------ ------
Loss from continuing operations before minority interests and income tax
benefit................................................................ (25.6) 20.9 (4.7)
Minority interests in earnings of consolidated entities................. 1.9 -- 1.9
------ ------ ------
Loss from continuing operations before income taxes..................... (27.5) 20.9 (6.6)
Income tax benefit...................................................... (9.8) 7.1 (e) (2.7)
------ ------ ------
Loss from continuing operations......................................... $(17.7) $ 13.8 $ (3.9)
====== ====== ======
Basic and diluted loss per share (g).................................... $ (.59) $ (.13)
Shares used in computing basic and diluted loss per
share (in millions) (g)................................................ 30.0 30.0
</TABLE>
The accompanying notes are an integral part of the unaudited pro forma
condensed
combined financial statements.
20
<PAGE>
LifePoint
Unaudited Pro Forma Condensed Combined Balance Sheet
December 31, 1998
(Dollars in millions, except per share amounts)
<TABLE>
<CAPTION>
Pro Forma Pro
Historical Adjustments Forma
---------- ----------- ------
<S> <C> <C> <C>
ASSETS
------
Current assets:
Accounts receivable, net................... $ 36.4 $ (5.8)(a) $ 42.6
12.0 (h)
Inventories................................ 14.0 (2.1)(a) 11.9
Deferred taxes and other current assets.... 18.6 (.7)(a) 13.4
(4.5)(h)
------- ------ ------
69.0 (1.1) 67.9
Property and equipment, at cost.............. 442.6 (29.7)(a) 412.9
Accumulated depreciation..................... (176.2) 12.0 (a) (164.2)
------- ------ ------
266.4 (17.7) 248.7
Intangible assets, net....................... 15.2 (.5)(a) 14.7
Other........................................ 4.4 (4.0)(a) 10.4
10.0 (f)
------- ------ ------
$ 355.0 $(13.3) $341.7
======= ====== ======
LIABILITIES AND EQUITY
----------------------
Current liabilities:
Accounts payable........................... $ 15.5 $ (1.6)(a) $ 13.9
Accrued salaries........................... 11.7 (1.0)(a) 10.7
Other current liabilities.................. 14.9 (1.2)(a) 13.7
------- ------ ------
42.1 (3.8) 38.3
Intercompany balances payable to 167.6 (39.0)(a) --
Columbia/HCA................................
(136.1)(f)
7.5 (h)
Long-term debt............................... .3 260.0 (f) 260.3
Deferred taxes and other liabilities......... 21.4 -- 21.4
Minority interests in equity of consolidated
entities.................................... 4.9 -- 4.9
Equity, investments by Columbia/HCA.......... 118.7 12.0 (a) --
(130.7)(f)
Preferred stock, par value $0.01 per share;
authorized shares, no shares issued..... -- -- --
Common stock, par value $0.01 per share;
authorized shares,
30.0 million shares issued and outstanding.. -- 0.3 (f) 0.3
Capital in excess of par value............... -- 16.5 (f) 16.5
------- ------ ------
$ 355.0 $(13.3) $341.7
======= ====== ======
</TABLE>
The accompanying notes are an integral part of the unaudited pro forma
condensed combined financial statements.
21
<PAGE>
LifePoint
Notes to Unaudited Pro Forma Condensed Combined Financial Statements
Note 1--Basis of Presentation
The pro forma condensed combined financial statements reflect the combination
of historical financial information of the facilities to be part of LifePoint
and the pro forma adjustments described in Note 2.
Note 2--Pro Forma Adjustments
(a) To eliminate the assets, liabilities and 1998 results of operations of the
three facilities for which LifePoint management believes divestiture during
1999 is probable.
(b) To adjust historical retirement plan expense recorded as a component of
salaries and wages and record the estimated annual LifePoint Hospitals,
Inc. Retirement Plan (the "ESOP") expense. The ESOP will be established in
connection with the distribution and the ESOP will purchase newly issued
shares of LifePoint common stock equal to 8.3% of the outstanding shares
of LifePoint. The ESOP shares will be released from a suspense account and
allocated to LifePoint participating employees over an expected 10 year
period. The non-cash ESOP expense will be recognized as the shares are
released and allocated to the participants and will be based upon the fair
value of the shares released.
(c) To adjust for the estimated incremental general and administrative costs of
$12.0 million (in addition to $2.4 million in cost already included in the
historical combined statement of operations) that would have been incurred
if LifePoint had managed comparable general and administrative functions
and eliminate the management fee allocated from Columbia/HCA.
(d) To adjust interest expense to $25.9 million for the year ended December 31,
1998. The interest expense adjustment is based on the elimination of all
intercompany amounts payable by LifePoint to Columbia/HCA ($167.6 million
at December 31, 1998) and the assumption of certain indebtedness from
Columbia/HCA in the aggregate amount of $260.6 million (including $0.3
million in other current liabilities), at an assumed average interest rate
of 9 3/8% and amortization of the deferred loan cost.
(e) To adjust income tax benefit for the estimated impact of the pro forma
adjustments.
(f) To adjust for estimated initial debt of $260.6 million (including $0.3
million in other current liabilities) which will be assumed from
Columbia/HCA, record deferred loan costs of $10.0 million, and record the
issuance of 30.0 million shares of LifePoint common stock.
(g) Pro forma basic and diluted loss per share was computed based upon 30.0
million shares of LifePoint common stock, which are expected to be issued
at the distribution date.
(h) To adjust for Columbia/HCA's assumption of responsibility for, and
entitlement to, Medicare, Medicaid, and cost-based Blue Cross receivables
and payables relating to cost reporting periods ending on or prior to the
distribution date pursuant to the Distribution Agreement.
22
<PAGE>
Triad
Summary Financial Data
The following table sets forth summary historical financial data of Triad for
each of the years in the five year period ended December 31, 1998, and certain
unaudited pro forma financial data of Triad for the year ended December 31,
1998. The summary financial data at December 31, 1996, 1995 and 1994 and for
the years ended December 31, 1995 and 1994 has been derived from unaudited
financial statements. The table should be read in conjunction with the Triad
Hospitals, Inc. Combined Financial Statements, the Triad Unaudited Pro Forma
Condensed Combined Financial Statements and the related notes included
elsewhere in this information statement.
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------------------------------
1998 1997 1996 1995 1994
-------- -------- -------- -------- --------
(Dollars in millions, except per share
amounts)
<S> <C> <C> <C> <C> <C>
Summary of Operations:
Revenues................... $1,588.7 $1,609.3 $1,600.5 $1,558.9 $1,290.5
Income (loss) from
continuing operations
(a)....................... (85.5) (19.0) 68.3 84.9 54.0
Net income (loss) (a)...... (87.1) (19.8) 74.7 87.2 55.5
Basic earnings (loss) per
share:
Income (loss) from
continuing operations
(a)..................... $ (2.85) $ (0.63) $ 2.28 $ 2.83 $ 1.80
Net income (loss) (a).... $ (2.90) $ (0.66) $ 2.49 $ 2.91 $ 1.85
Shares used in computing
basic earnings (loss)
per share (in
millions)............... 30.0 30.0 30.0 30.0 30.0
Diluted earnings (loss) per
share:
Income (loss) from
continuing operations
(a)..................... $ (2.85) $ (0.63) $ 2.26 $ 2.79 $ 1.78
Net income (loss) (a).... $ (2.90) $ (0.66) $ 2.47 $ 2.87 $ 1.83
Shares used in computing
diluted earnings (loss)
per share (in
millions)............... 30.0 30.0 30.3 30.4 30.4
Financial Position:
Assets..................... $1,371.3 $1,410.5 $1,426.3 $1,351.8 $1,169.4
Long-term debt, including
amounts due within
one year.................. 14.4 15.4 17.1 27.5 32.3
Intercompany balances
payable to Columbia/HCA... 613.7 525.0 521.7 392.6 331.3
Working capital............ 184.9 150.3 156.5 156.3 127.9
Capital expenditures....... 114.9 120.1 94.4 115.0 203.4(k)
Operating Data:
EBITDA (b)................. $ 149.0 $ 187.8 $ 294.5 $ 285.2 $ 206.2
Pro forma EBITDA (c)....... $ 140.8
Number of hospitals at end
of period................. 38 38 38 39 38
Number of licensed beds at
end of period (d)......... 5,909 5,859 5,872 5,926 5,660
Weighted average licensed
beds (e).................. 5,877 5,860 5,882 5,900 5,325
Admissions (f)............. 169,590 172,926 171,265 170,392 147,923
Equivalent admissions (g).. 276,771 275,125 266,660 257,292 211,382
Average length of stay
(days) (h)................ 4.9 4.9 5.0 5.2 5.2
Average daily census (i)... 2,260 2,326 2,338 2,405 2,111
Occupancy rate (j)......... 39% 40% 40% 41% 40%
</TABLE>
- --------
(a) Includes charges related to impairment of long-lived assets of $55.1
million ($32.9 million after-tax) and $13.7 million ($8.2 million after-
tax) for the years ended December 31, 1998 and 1997, respectively.
(b) EBITDA is defined as income from continuing operations before depreciation
and amortization, interest expense, management fees, impairment of long-
lived assets, minority interests and income taxes. EBITDA is commonly used
as an analytical indicator within the health care industry, and also serves
as a measure of leverage capacity and debt service ability. EBITDA should
not be considered as a measure of financial performance under generally
accepted accounting principles, and the items excluded from EBITDA are
23
<PAGE>
significant components in understanding and assessing financial performance.
EBITDA should not be considered in isolation or as an alternative to net
income, cash flows generated by operating, investing or financing activities
or other financial statement data presented in the combined financial
statements as an indicator of financial performance or liquidity. Because
EBITDA is not a measurement determined in accordance with generally accepted
accounting principles and is thus susceptible to varying calculations,
EBITDA as presented may not be comparable to other similarly titled measures
of other companies.
(c) Pro forma EBITDA is EBITDA, as defined in (b) above, adjusted (i) as if the
distribution and the divestitures of certain facilities that Triad intends
to divest or cease to operate during 1999 had occurred at the beginning of
1998, (ii) to exclude noncash ESOP expense and (iii) to include Triad
management's estimated corporate overhead costs of $22.4 million, that are
recorded in the Pro Forma Condensed Combined Statement of Operations to
replace the management fees allocated by Columbia/HCA (see "Unaudited Pro
Forma Condensed Combined Financial Statements"). In addition to the
exclusion of certain items from pro forma EBITDA as presented and as
commonly accepted within the health care industry, Triad believes that the
impact on future operations of certain other unusual costs included in pro
forma EBITDA as presented should also be considered in assessing Triad's
leverage capacity and debt service ability. Triad believes that certain
costs incurred in 1998 and included in 1998 pro forma EBITDA were unusual
in nature or magnitude, and costs similar in nature or magnitude are not
expected to occur in future periods. Such costs included, among other
items, incremental salary costs associated with computer information system
conversions and certain uninsured legal settlements. Pro forma EBITDA is
commonly used as an analytical indicator of leverage capacity and debt
service ability. Pro forma EBITDA should not be considered as a measure of
financial performance under generally accepted accounting principles, and
the items excluded from pro forma EBITDA are significant components in
understanding and assessing financial performance. Pro forma EBITDA should
not be considered in isolation or as an alternative to net income, cash
flows generated by operating, investing or financing activities or other
financial statement data presented in the combined financial statements as
an indicator of financial performance or liquidity. Because pro forma
EBITDA is not a measurement determined in accordance with generally
accepted accounting principles and is thus susceptible to varying
calculations, pro forma EBITDA as presented may not be comparable to other
similarly titled measures of other companies.
(d) Licensed beds are those beds for which a facility has been granted approval
to operate from the applicable state licensing agency.
(e) Represents the average number of licensed beds, weighted based on periods
owned.
(f) Represents the total number of patients admitted (in the facility for a
period in excess of 23 hours) to Triad's hospitals and is used by
management and certain investors as a general measure of inpatient volume.
(g) Equivalent admissions is used by management and certain investors as a
general measure of combined inpatient and outpatient volume. Equivalent
admissions are computed by multiplying admissions (inpatient volume) by the
sum of gross inpatient revenue and gross outpatient revenue and then
dividing the resulting amount by gross inpatient revenue. The equivalent
admissions computation "equates" outpatient revenue to the volume measure
(admissions) used to measure inpatient volume resulting in a general
measure of combined inpatient and outpatient volume.
(h) Represents the average number of days admitted patients stay in Triad's
hospitals. Average length of stay has declined due to the continuing
pressures from managed care and other payers to restrict admissions and
reduce the number of days that are covered by the payers for certain
procedures, and by technological and pharmaceutical improvements.
(i) Represents the average number of patients in Triad's hospital beds each
day.
(j) Represents the percentage of hospital licensed beds occupied by patients.
Both average daily census and occupancy rate provide measures of the
utilization of inpatient rooms. The declining occupancy rate is primarily
attributed to the trend toward more services, that were previously
performed in an inpatient setting, being performed on an outpatient basis
and the decline in average length of stay per admission.
(k) Includes the acquisition of 7 hospitals from EPIC Healthcare Group, Inc. in
May 1994.
24
<PAGE>
Triad
Unaudited Pro Forma Condensed Combined Financial Statements
The following Unaudited Pro Forma Condensed Combined Financial Statements of
Triad are based on the historical combined financial statements, which reflect
periods during which the businesses that will comprise Triad did not operate as
a separate, independent company and certain estimates, assumptions and
allocations were made in preparing such financial statements. Therefore such
historical combined financial statements do not necessarily reflect the
combined results of operations or financial position that would have existed
had Triad been a separate, independent company.
The Unaudited Pro Forma Condensed Combined Statement of Operations for the
year ended December 31, 1998 reflects the results of Triad's operations as if
the distribution and the divestitures of facilities that Triad intends to
divest during 1999 had occurred at the beginning of 1998. The Unaudited Pro
Forma Condensed Combined Balance Sheet assumes that the distribution and such
divestitures had occurred on December 31, 1998.
The Unaudited Pro Forma Condensed Combined Financial Statements should be
read in conjunction with the historical financial statements of Triad included
elsewhere herein and the notes thereto. The pro forma condensed combined
financial information is presented for informational purposes only and does not
purport to reflect the results of operations or financial position of Triad or
the results of operations or financial position that would have occurred had
Triad been operated as a separate, independent company.
25
<PAGE>
Triad
Unaudited Pro Forma Condensed Combined Statement of Operations
Year Ended December 31, 1998
(Dollars in millions, except per share amounts)
<TABLE>
<CAPTION>
Pro Forma Pro
Historical Adjustments Forma
---------- ----------- --------
<S> <C> <C> <C>
Revenues................................... $1,588.7 $(196.8)(a) $1,391.9
Salaries and benefits...................... 700.5 (104.6)(a) 597.0
5.4 (f)
(4.3)(g)
Supplies................................... 241.6 (23.2)(a) 218.9
0.5 (f)
Other operating expenses................... 359.2 (52.8)(a) 316.5
10.1 (f)
Provision for doubtful accounts............ 138.4 (19.7)(a) 118.7
Depreciation and amortization.............. 109.6 (16.4)(a) 93.2
ESOP expense............................... -- 4.3 (g) 4.3
Interest expense allocated from
Columbia/HCA.............................. 68.9 (14.9)(a) 65.8
11.8 (b)
Management fees allocated from
Columbia/HCA.............................. 29.3 (3.6)(a) --
(25.7)(f)
Impairment of long-lived assets............ 55.1 (31.1)(a) 24.0
-------- ------- --------
1,702.6 (264.2) 1,438.4
-------- ------- --------
Loss from continuing operations before
minority interests and income tax
benefit................................... (113.9) 67.4 (46.5)
Minority interests in earnings of
consolidated entities..................... 11.0 (0.6)(a) 10.4
-------- ------- --------
Loss from continuing operations before
income taxes.............................. (124.9) 68.0 (56.9)
Income tax benefit......................... (39.4) 19.1 (c) (20.3)
-------- ------- --------
Loss from continuing operations............ $ (85.5) $ 48.9 $ (36.6)
======== ======= ========
Basic and diluted loss per share (e)....... $ (2.85) $ (1.22)
Shares (in millions) used in computing
basic and diluted loss per share (e)...... 30.0 30.0
</TABLE>
The accompanying notes are an integral part of the unaudited pro forma
condensed combined financial statements.
26
<PAGE>
Triad
Unaudited Pro Forma Condensed Combined Balance Sheet
December 31, 1998
(Dollars in millions, except per share amounts)
<TABLE>
<CAPTION>
Pro Forma Pro
Historical Adjustments Forma
---------- ----------- --------
<S> <C> <C> <C>
ASSETS
------
Current assets:
Accounts receivable, net.................. $ 199.3 $ (13.9)(a) $ 223.7
38.3 (h)
Inventories............................... 44.8 (4.0)(a) 40.8
Income taxes.............................. 37.9 (2.7)(a) 25.7
(9.5)(h)
Other..................................... 23.9 (9.1)(a) 14.8
-------- ------- --------
305.9 (0.9) 305.0
Property and equipment, at cost............. 1,462.6 (202.4)(a) 1,260.2
Accumulated depreciation.................... (703.1) 119.3 (a) (583.8)
-------- ------- --------
759.5 (83.1) 676.4
Intangible assets, net...................... 272.9 (13.0)(a) 259.9
Other....................................... 33.0 (5.1)(a) 42.9
15.0 (d)
-------- ------- --------
$1,371.3 $ (87.1) $1,284.2
======== ======= ========
LIABILITIES AND EQUITY
----------------------
Current liabilities:
Accounts payable.......................... $ 47.5 $ (5.5)(a) $ 42.0
Accrued salaries.......................... 34.8 (5.7)(a) 29.1
Other current liabilities................. 38.7 (4.7)(a) 34.0
-------- ------- --------
121.0 (15.9) 105.1
Long-term debt.............................. 13.4 661.6 (d) 675.0
Deferred taxes and other liabilities........ 62.5 (3.6)(a) 58.9
Minority interests in equity of consolidated
entities................................... 60.0 (4.4)(a) 55.6
Intercompany balances payable to
Columbia/HCA............................... 613.7 (642.5)(d) --
28.8 (h)
Equity, investments by Columbia/HCA......... 500.7 (107.0)(a) --
(393.7)(d)
Preferred stock, par value $0.01 per share;
authorized shares; no shares issued.. -- -- --
Common stock, par value $0.01 per share;
authorized million shares, 30.0 million
shares issued and outstanding.............. -- 0.3 (d) 0.3
Capital in excess of par value.............. -- 389.3 (d) 389.3
-------- ------- --------
$1,371.3 $ (87.1) $1,284.2
======== ======= ========
</TABLE>
The accompanying notes are an integral part of the unaudited pro forma
condensed combined financial statements.
27
<PAGE>
Triad
Notes to Unaudited Pro Forma Condensed Combined Financial Statements
Note 1--Basis of Presentation
The pro forma condensed combined financial statements reflect the combination
of historical financial information of the facilities to be part of Triad and
the pro forma adjustments described in Note 2.
Note 2--Pro Forma Adjustments
(a) To reflect the following completed divestiture and cessation of operations
and planned divestitures in 1999:
(1) elimination of the assets, liabilities and 1998 results of operations
of one acute care hospital which was sold effective as of March 1, 1999
(the proceeds of such sale were received by Columbia/HCA);
(2) elimination of the assets, liabilities and 1998 results of operations
of four acute care hospitals and one psychiatric hospital for which
Triad management believes dispositions in 1999 are probable; and
(3) elimination of the assets, liabilities and 1998 results of operations
of one acute care hospital which Triad has ceased to operate.
(b) To adjust interest expense to $65.8 million for the year ended December 31,
1998. The interest expense adjustment is based on the elimination of all
intercompany amounts payable by Triad to Columbia/HCA ($613.7 million at
December 31, 1998) and the assumption of certain indebtedness from
Columbia/HCA in the aggregate amount of $675.0 million at an assumed
average interest rate of 9.60% and amortization of the estimated loan
issuance costs.
(c) To adjust income tax expense for the estimated impact of the pro forma
adjustments.
(d) To adjust for estimated initial long-term debt of $675.0 million which will
be assumed from Columbia/HCA, record deferred loan costs associated with
the long-term debt of approximately $15.0 million and record the issuance
of 30.0 million shares of Triad common stock.
(e) Pro forma loss per share was computed based upon 30.0 million shares of
Triad common stock, which are expected to be issued at the distribution
date.
(f) To adjust for the estimated, incremental general and administrative costs
of $16.0 million (in addition to $6.4 million in cost already included in
the historical combined statement of operations) that would have been
incurred if Triad had managed comparable general and administrative
functions and eliminate the management fee allocated from Columbia/HCA.
(g) To adjust historical retirement plan expense recorded as a component of
salaries and wages and record the estimated annual Triad Hospitals, Inc.
Retirement Savings Plan (the "ESOP") expense. The Triad ESOP will be
established in connection with the distribution and the ESOP will purchase
newly issued shares of Triad common stock equal to 9.0% of the outstanding
shares of Triad. The ESOP shares will be released from a suspense account
and allocated to Triad participating employees over an expected 10-year
period. The non-cash ESOP expense will be recognized as the shares are
released and allocated to the participants and will be based upon the fair
value of the shares released.
(h) To adjust for Columbia/HCA's assumption of responsibility for, and
entitlement to, Medicare, Medicaid and cost-based Blue Cross receivables
and payables relating to cost reporting periods ending on or prior to the
distribution date pursuant to the Distribution Agreement.
28
<PAGE>
Risk Factors
Holders of shares of LifePoint common stock and Triad common stock should
carefully consider all information contained in this information statement,
especially the matters described or referred to in the following paragraphs.
Loss of Physicians or Other Key Personnel Could Adversely Affect LifePoint and
Triad
Since physicians generally direct the majority of hospital admissions, the
success of LifePoint and Triad, in part, is dependent upon the number and
quality of physicians on their hospitals' medical staffs, the admissions
practices of such physicians and the maintenance of good relations with such
physicians. Hospital physicians are generally not employees and, in many of the
markets served by Triad, most physicians have admitting privileges at other
hospitals.
With regard to LifePoint, only a limited number of physicians practice in the
non-urban communities in which LifePoint's hospitals are located. Consequently,
the loss of physicians in these communities, the inability of LifePoint to
recruit and to retain physicians in these communities or the inability of
LifePoint to maintain good relations with the physicians on its hospitals'
staffs could have a material adverse effect on its business, financial
condition, results of operations or prospects. The operations of LifePoint's
hospitals could also be materially adversely affected by the shortage of nurses
and certain other health care professionals in these communities.
LifePoint is also dependent upon the continued services and management
experience of Scott L. Mercy, James M. Fleetwood, Jr., and other of its
executive officers, and Triad also is dependent upon the continued services and
management experience of James D. Shelton and other of its executive officers.
If Messrs. Mercy, Fleetwood or Shelton, or any of such other executive
officers, were to resign their positions or otherwise be unable to serve, the
operating results of LifePoint or Triad, as the case may be, could be adversely
affected. In addition, the success of each of LifePoint and Triad depends on
its ability to attract and retain managers at its hospitals and other
facilities, on the ability of its officers and key employees to manage growth
successfully and on its ability to attract and retain skilled employees.
No Operating Histories as Independent Companies; Net Losses
Prior to the distribution, LifePoint operated as the America Group division
and Triad operated as the Pacific Group division of Columbia/HCA. Accordingly,
LifePoint and Triad do not have operating histories as independent, publicly-
traded companies and have historically relied on Columbia/HCA for various
financial, administrative and managerial expertise relevant to the conduct of
their businesses. After the distribution, LifePoint and Triad will maintain
their own lines of credit and banking relationships, employ their own senior
executives, perform their own administrative functions, (except that
Columbia/HCA will continue to provide certain support services to LifePoint and
Triad on a contractual basis.) The operations of the America Group did not
generate a profit for 1998, and the operations of the Pacific Group did not
generate a profit for 1998 or 1997. There can be no assurance that either
LifePoint or Triad will not continue to have net losses as independent,
publicly traded companies. See "LifePoint Unaudited Pro Forma Condensed
Combined Financial Statements," "Triad Unaudited Pro Forma Condensed Combined
Financial Statements," and "Arrangements Among Columbia/HCA, LifePoint and
Triad Relating to the Distribution" for more information regarding Triad and
LifePoint's financial results and future arrangements with Columbia/HCA and see
"LifePoint Management's Discussion and Analysis of Financial Condition and
Results of Operations" and "Triad Management's Discussion and Analysis of
Financial Condition and Results of Operations" for certain factors that could
affect either Lifepoint or Triad's ability to generate profits.
Limits on Reimbursement and Health Care Reform Legislation May Reduce
Profitability
A significant portion of the revenues of LifePoint and Triad are derived from
the Medicare and Medicaid programs, which are highly regulated and subject to
frequent and substantial changes. In recent years,
29
<PAGE>
fundamental changes in the Medicare and Medicaid programs (including the
implementation of a prospective payment system ("PPS") for inpatient services
at medical/surgical hospitals) have resulted in limitations on, and reduced
levels of payment and reimbursement for, a substantial portion of hospital
procedures and costs. The Federal Balanced Budget Act of 1997 (the "Balanced
Budget Act"), which establishes a plan to balance the Federal budget by fiscal
year 2002, includes significant additional reductions in spending levels for
the Medicare and Medicaid programs. These include, among others, payment
reductions for inpatient and outpatient hospital services, establishment of a
PPS for hospital outpatient services, skilled nursing facilities and home
health agencies under Medicare, and repeal of the Federal payment standard (the
so-called "Boren Amendment") for hospitals and nursing facilities under
Medicaid. A number of states also are considering legislation designed to
reduce their Medicaid expenditures and to provide universal coverage and
additional care, including enrolling Medicaid recipients in managed care
programs and imposing additional taxes on hospitals to help finance or expand
the states' Medicaid systems. In addition, private payers increasingly are
attempting to control health care costs through direct contracting with
hospitals to provide services on a discounted basis, increased utilization
review and greater enrollment in managed care programs such as health
maintenance organizations ("HMOs") and preferred provider organizations
("PPOs"). LifePoint and Triad believe that hospital operating margins have
been, and may continue to be, under significant pressure because of
deterioration in pricing flexibility and payer mix, and growth in operating
expenses in excess of the increase in prospective payments under the Medicare
program.
In recent years, an increasing number of legislative proposals have been
introduced or proposed in Congress and in some state legislatures that would
effect major changes in the health care system, either nationally or at the
state level. Among the proposals under consideration or already enacted are
price controls on hospitals, insurance market reforms to increase the
availability of group health insurance to small businesses, Medicare and
Medicaid managed care programs and requirements that all businesses offer
health insurance coverage to their employees. While LifePoint and Triad
anticipate that the rate of increase in payments to hospitals will be reduced
as a result of future Federal and state legislation, it is uncertain at this
time what legislation on health care reform may ultimately be enacted or
whether other changes in the administration or interpretation of governmental
health care programs will occur. There can be no assurance that future health
care legislation or other changes in the administration or interpretation of
governmental health care programs will not have a material adverse effect on
the business, financial condition, results of operations or prospects of
LifePoint or Triad.
In connection with the distribution, LifePoint and Triad are required to re-
enroll certain of their facilities as Medicaid providers. There can be no
assurances that the states will enroll the LifePoint and Triad hospitals in
their Medicaid programs on a timely basis following the distribution. Any
significant delay in the enrollment could negatively affect LifePoint or
Triad's operating cash flow.
Reimbursement by Managed Care Organizations May Reduce Hospital Profitability
The competitive position of the hospitals of LifePoint and Triad also is
affected by the increasing number of initiatives undertaken during the past
several years by major purchasers of health care, including Federal and state
governments, insurance companies and employers, to revise payment methodologies
and monitor health care expenditures in order to contain health care costs. As
a result of these initiatives, managed care organizations, offering prepaid and
discounted medical services packages represent an increasing portion of
LifePoint's and Triad's admissions, resulting in reduced hospital revenue
growth. If LifePoint and/or Triad is unable to lower costs through increased
operational efficiencies and the trend toward declining reimbursements and
payments continues, LifePoint's and/or Triad's results of operations and cash
flows will be adversely affected.
Competition
The health care business is highly competitive and competition among
hospitals and other health care providers for patients has intensified in
recent years. More than half of Triad's hospitals operate in geographic
30
<PAGE>
areas where they compete with at least one other hospital that provides most of
the services offered by Triad's hospitals. Certain of these competing
facilities offer services, including extensive medical research and medical
education programs, which are not offered by Triad's facilities. Some of the
hospitals that compete with Triad are owned by tax-supported governmental
agencies or not-for-profit entities supported by endowments and charitable
contributions which can finance capital expenditures on a tax-exempt basis and
are exempt from sales, property and income taxes. In these markets, Triad also
faces competition from other providers such as outpatient surgery and
diagnostic centers.
Almost all of LifePoint's hospitals and less than half of Triad's hospitals
operate in geographic areas where they are currently the sole provider of
hospital services in their communities. While these hospitals face less direct
competition in their immediate service areas than would be expected in larger
communities, they do face competition from other hospitals, including larger
tertiary care centers. Although these competing hospitals may be in excess of
30 to 50 miles away, patients in these LifePoint and Triad markets may migrate
to, may be referred by local physicians to, or may be lured by incentives from
managed care plans to travel to, such distant hospitals.
Risks Associated with Potential Acquisitions
One element of LifePoint's business strategy is expansion through the
acquisition of acute care hospitals in growing non-urban markets, and one
element of Triad's business strategy is expansion through the selective
acquisition of acute care hospitals in selected markets. The competition to
acquire hospitals in the markets targeted by LifePoint and Triad is
significant, and there can be no assurance that suitable acquisitions, for
which other health care companies (including those with greater financial
resources than LifePoint and Triad) may be competing, can be accomplished on
terms favorable to LifePoint or Triad, that financing, if necessary, can be
obtained for such acquisitions or that acquired facilities can be effectively
integrated with LifePoint's or Triad's operations, as the case may be. The
consummation of acquisitions may result in the incurrence or assumption by
LifePoint or Triad of additional indebtedness. In addition, in order to ensure
the tax free treatment of the distribution, each of LifePoint and Triad is
limited in the amount of stock it may issue as consideration for acquisitions.
Acquired businesses may have unknown or contingent liabilities, including
liabilities for failure to comply with health care laws and regulations.
Although LifePoint and Triad have policies to conform the practices of acquired
facilities to its standards, and generally will seek indemnification from
prospective sellers covering these matters, there can be no assurance that
LifePoint or Triad, as the case may be, will not become liable for past
activities of acquired businesses or that any such liabilities will not be
material.
In recent years, the legislatures and attorneys general of several states
have increased their level of interest in transactions involving the sale of
hospitals by not-for-profit entities. Such heightened scrutiny may increase the
cost and difficulty or prevent the completion of transactions with not-for-
profit organizations in certain states in the future.
Geographic Concentration of Operations Could Adversely Affect LifePoint and
Triad
After the distribution and LifePoint's intended divestitures (See Note 5--
Impairment of Long-Lived Assets of the Notes to Combined Financial Statements
of LifePoint included elsewhere herein), 6 of LifePoint's remaining 20 general,
acute care hospitals will be located in the Commonwealth of Kentucky, and 6 of
LifePoint's remaining 20 general, acute care hospitals will be located in the
State of Tennessee. Giving effect to such intended divestitures, for the year
ended December 31, 1998, 38.5% and 21.3% of LifePoint's revenue, was generated
by LifePoint's Kentucky and Tennessee hospitals, respectively. Accordingly, any
change in the current demographic, economic, competitive and regulatory
conditions in Kentucky or Tennessee could have a material adverse effect on the
business, financial condition, results of operations or prospects of LifePoint.
After the distribution and Triad's divestitures and the cessation of
operations of 1 hospital (see "Triad Business"), 14 of Triad's remaining 32
hospitals will be located in the State of Texas, and 4 of Triad's remaining 32
hospitals will be located in the State of Arizona. Giving effect to such
intended divestitures and
31
<PAGE>
hospital closure, for the year ended December 31, 1998, 33.4% and 19.2% of
Triad's revenue was generated by Triad's Texas and Arizona hospitals,
respectively. Accordingly, any change in the current demographic, economic,
competitive and regulatory conditions in Texas or Arizona could have a material
adverse effect on the business, financial condition, results of operations or
prospects of Triad.
Extensive Regulation Could Adversely Affect LifePoint and Triad
The health care industry is subject to extensive Federal, state and local
laws and regulations relating to licensure, conduct of operations, ownership of
facilities, addition of facilities and services, and prices for services that
are extremely complex and for which, in many instances, the industry does not
have the benefit of significant regulatory or judicial interpretation. In
particular, Medicare and Medicaid antifraud and abuse amendments, codified
under Section 1128B(b) of the Social Security Act (the "Anti-Kickback
Statute"), prohibit certain business practices and relationships related to
items or services reimbursable under Medicare, Medicaid and other Federal
health care programs, including the payment or receipt of remuneration to
induce or arrange for the referral of patients covered by a federal or state
health care program. Sanctions for violating the Anti-Kickback Statute include
criminal penalties and civil sanctions, including civil money penalties and
possible exclusion from such government programs. Pursuant to the Medicare and
Medicaid Patient and Program Protection Act of 1987, the United States
Department of Health and Human Services has issued regulations which describe
some of the conduct and business relationships immune from prosecution under
the Anti-Kickback Statute (the "Safe Harbors"). The fact that a given business
arrangement does not fall within a Safe Harbor does not render the arrangement
illegal. However, business arrangements of health care service providers that
fail to satisfy the applicable Safe Harbor criteria risk scrutiny by
enforcement authorities. Certain of the current business arrangements of
LifePoint and Triad do not qualify for a Safe Harbor.
The Health Insurance Portability and Accountability Act of 1996, which became
effective January 1, 1997, amends, among other things, Title XI (42 U.S.C. (S)
1301 et seq.) to broaden the scope of certain fraud and abuse laws to include
all health care services, whether or not they are reimbursed under a Federal
program, and creates new enforcement mechanisms to combat fraud and abuse,
including an incentive program under which individuals can receive up to $1,000
for providing information on Medicare fraud and abuse that leads to the
recovery of at least $100 of Medicare funds.
Each of LifePoint and Triad provide financial incentives to recruit
physicians into the communities served by its hospitals, including loans and
minimum revenue guarantees. Although HHS has proposed a Safe Harbor for certain
physician recruitment, no Safe Harbor for physician recruitment is currently in
force. Each of LifePoint and Triad also enter into certain employment
agreements, leases and other agreements with physicians. There can be no
assurance that regulatory authorities who enforce the Anti-Kickback Statute
will not determine that such physician recruiting activities or any other
arrangements of any of the hospitals owned and operated by LifePoint or Triad
violate the Anti-Kickback Statute or other Federal laws. Such a determination
could subject LifePoint or Triad to liabilities under the Social Security Act,
including criminal penalties, civil monetary penalties and/or exclusion from
participation in Medicare, Medicaid or other Federal health care programs, any
of which could have a material adverse effect on the business, financial
condition, results of operations or prospects of LifePoint or Triad.
In addition, Section 1877 of the Social Security Act (commonly known as the
"Stark Law") was amended, effective January 1, 1995, to significantly broaden
the scope of prohibited referrals by physicians under the Medicare and Medicaid
programs to providers of designated health services with which such physicians
have ownership or certain other financial arrangements. Certain exceptions are
available for employment agreements, leases, physician recruitment and certain
other physician arrangements. Final implementing regulations have not yet been
adopted, and there can be no assurance that the physician arrangements of
LifePoint or Triad will be found to be in compliance with the Stark Law, as
such law ultimately may be interpreted. Many states have adopted or are
considering similar anti-kickback and physician self-referral legislation, some
of which extends beyond the scope of the Federal law to prohibit the payment or
32
<PAGE>
receipt of remuneration for the referral of patients and physician self-
referrals regardless of the source of the payment for the care. Both Federal
and state government agencies have announced heightened and coordinated civil
and criminal enforcement efforts. In addition, the Office of the Inspector
General of the United States Department of Health and Human Services and the
Department of Justice have from time to time established enforcement
initiatives that focus on specific billing practices or other suspected areas
of abuse. Current initiatives include a focus on hospital billing for
outpatient charges associated with inpatient services, as well as hospital
laboratory billing practices. Each of LifePoint and Triad is cooperating with
the government agencies which are responsible for such initiatives where such
initiatives involve their respective hospitals.
Each of LifePoint and Triad exercises care in structuring its arrangements
with physicians and other referral sources to comply in all material respects
with applicable laws. It is possible, however, that government officials
charged with responsibility for enforcing such laws could assert that
LifePoint, Triad or certain transactions in which either of them is involved,
are in violation of such laws. It is also possible that such laws ultimately
could be interpreted by the courts in a manner inconsistent with the
interpretations of LifePoint or Triad.
Many states have enacted or are considering enacting laws affecting the
conversion or sale of not-for-profit hospitals. These laws, in general, include
provisions relating to state attorney general approval, advance notification
and community involvement. In addition, state attorneys general in states
without specific conversion legislation may exercise authority over these
transactions based upon existing law. In many states there has been an
increased interest in the oversight of not-for-profit conversions. The adoption
of conversion legislation and the increased review of not-for-profit hospital
conversions may limit the ability of LifePoint or Triad to acquire not-for-
profit hospitals.
Some states require prior approval for the purchase, construction and
expansion of health care facilities, based upon a state's determination of need
for additional or expanded health care facilities or services. Such
determinations, embodied in certificates of need ("CONs") issued by
governmental agencies with jurisdiction over health care facilities, may be
required for capital expenditures exceeding a prescribed amount, changes in bed
capacity or services and certain other matters. Five states in which LifePoint
currently owns hospitals, Alabama, Florida, Georgia, Kentucky and Tennessee,
and one state in which Triad currently owns hospitals, Alabama, have enacted
CON legislation. There can be no assurance that either LifePoint or Triad will
be able to obtain required CONs in the future or that the failure to obtain any
required CONs will not have a material adverse effect on the business,
financial condition, or results of operations or prospects of LifePoint or
Triad.
The laws, rules and regulations described above are complex and subject to
interpretation. In the event of a determination that either of LifePoint or
Triad is in violation of such laws, rules or regulations, or if further changes
in the regulatory framework occur, any such determination or changes could have
a material adverse effect on business, financial condition or results of
operations of LifePoint or Triad. See "Regulation and Other Factors Affecting
LifePoint and Triad."
Potential Adverse Impact of Columbia/HCA Investigations and Litigation;
Indemnification of LifePoint and Triad
Columbia/HCA is currently the subject of several Federal investigations into
certain of its business practices, as well as governmental investigations by
various states. Columbia/HCA 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,
Columbia/HCA expects additional subpoenas and other investigative and
prosecutorial activity to occur in these and other jurisdictions in the future.
Columbia/HCA is the subject of a formal order of investigation by the
Securities and Exchange Commission. Columbia/HCA understands that the SEC
investigation includes the anti-fraud, periodic reporting and internal
accounting control provisions of the Federal securities laws.
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
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Columbia/HCA and certain subsidiaries and/or affiliated partnerships violated
the False Claims Act, 31 U.S.C. (S) 3729 et seq., for improper claims submitted
to the government for reimbursement. The lawsuits generally seek three times
the amount of damages caused to the United States by the submission of any
Medicare or Medicaid 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. To the
knowledge of Columbia/HCA, the government has intervened in three qui tam
actions. Columbia/HCA is aware of additional qui tam actions that remain under
seal and believes that there may be other sealed qui tam cases of which it is
unaware.
Columbia/HCA is a defendant in a number of other suits, which allege, in
general, improper and fraudulent billing, overcharging, coding and physician
referrals, as well as other violations of law. Certain of the suits have been
conditionally certified as class actions. See "Government Regulation and Other
Factors Affecting LifePoint and Triad--Governmental Investigation of
Columbia/HCA and Related Litigation."
It is too early to predict the effect or outcome of any of the ongoing
investigations or qui tam and other actions, or whether any additional
investigations or litigation will be commenced. If Columbia/HCA is found to
have violated Federal or state laws relating to Medicare, Medicaid or similar
programs, then Columbia/HCA 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 may be substantial, and Columbia/HCA could be subject to substantial
costs resulting from an adverse outcome of one or more of such actions. Any
such sanctions or losses could have a material adverse effect on Columbia/HCA's
financial position and results of operations.
Pursuant to the Distribution Agreement to be entered into by and among
Columbia/HCA, LifePoint and Triad in connection with the distribution,
Columbia/HCA has agreed to indemnify LifePoint and Triad in respect of any
losses which they may incur as a result of the proceedings described above.
Columbia/HCA has also agreed to indemnify LifePoint and Triad in respect of any
losses which they may incur as a result of proceedings which may be commenced
by government authorities or by private parties in the future that arise from
acts, practices or omissions engaged in prior to the distribution date and
relate to the proceedings described above. Columbia/HCA has also agreed that,
in the event that any hospital owned by LifePoint or Triad is permanently
excluded from participation in the Medicare and Medicaid programs as a result
of the proceedings described above, then Columbia/HCA will make a cash payment
to LifePoint or Triad, as the case may be, in an amount (if positive) equal to
five times the excluded hospital's 1998 income from continuing operations
before depreciation and amortization, interest expense, management fees,
impairment of long-lived assets, minority interests and income taxes (as set
forth on a schedule to the Distribution Agreement) less the proceeds of the
sale or other disposition of the excluded hospital. Each of LifePoint and Triad
has agreed that, in connection with the government investigations described
above, it will participate with Columbia/HCA in negotiating one or more
compliance agreements setting forth each of their agreements to comply with
applicable laws and regulations. See "Arrangements Among Columbia/HCA,
LifePoint and Triad Relating to the Distribution--Distribution Agreement." If
any of such indemnified matters were successfully asserted against either
LifePoint or Triad, or any of their facilities, and Columbia/HCA failed to meet
its indemnification obligations, then such losses could have a material adverse
effect on the business, financial position, results of operations and prospects
of LifePoint and/or Triad, as the case may be. Columbia/HCA will not indemnify
LifePoint or Triad for losses relating to any acts, practices and omissions
engaged in by LifePoint or Triad after the distribution date, whether or not
LifePoint or Triad is indemnified for similar acts, practices and omissions
occurring prior to the distribution date.
Columbia/HCA believes that the ongoing governmental investigations and
related media coverage may have had a negative effect on Columbia/HCA's results
of operations (which includes LifePoint and Triad for the periods prior to the
distribution date which are presented herein). The extent to which LifePoint
and Triad may or may not continue to be affected after the distribution by the
ongoing investigations of Columbia/HCA, the initiation of additional
investigations, if any, and the related media coverage cannot be predicted. It
is
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possible that these matters could have a material adverse effect on the
business, financial condition, results of operations or prospects of LifePoint
or Triad in future periods.
Professional Liability Risks Could Adversely Affect Results of Operations and
Cash Flow
As is typical in the health care industry, LifePoint and Triad are subject to
claims and legal actions by patients and others in the ordinary course of
business. Columbia/HCA, LifePoint and Triad intend to cooperate in the purchase
of insurance coverage for professional and general liability risks for periods
ending on or after the distribution date. Substantially all losses in periods
prior to the distribution are insured through a wholly-owned insurance
subsidiary of Columbia/HCA and excess loss policies maintained by Columbia/HCA.
See "Arrangements Among Columbia/HCA, LifePoint and Triad Relating to the
Distribution--Insurance Allocation and Administration Agreement."
Because substantially all liability for professional and general liability
claims incurred is insured through a wholly-owned insurance subsidiary of
Columbia/HCA and excess loss policies maintained by Columbia/HCA, and
Columbia/HCA maintains the related reserve, no reserve for professional and
general liability risks is recorded on the balance sheets of LifePoint and
Triad. While the professional and general liability insurance coverage
maintained for the LifePoint and Triad businesses has been adequate to provide
for liability claims in the past, and the insurance coverage to be obtained for
future periods is expected to be adequate for future claims, there can be no
assurance that such insurance will be adequate. If actual payments of claims
after the distribution with respect to professional and general liabilities
exceed anticipated payments of claims, the results of operations and cash flow
of LifePoint or Triad, as the case may be, could be adversely affected.
High Degree of Leverage and Debt Service Obligations May Adversely Affect
LifePoint and Triad
After the distribution, LifePoint and Triad will be highly leveraged. As of
December 31, 1998, after giving pro forma effect to the distribution and the
related assumption by LifePoint of $135 million of term loans under a new
credit agreement, $125 million Senior Subordinated Notes due 2009 and
approximately $0.6 million in other Columbia/HCA debt obligations, and the
elimination of facilities to be divested by LifePoint, LifePoint's consolidated
long-term debt would have been approximately $260.6 million (including $0.3
million included in other current liabilities). LifePoint expects that its new
credit agreement will also include an additional term loan commitment of $35
million available for limited purposes and a revolving credit commitment of up
to $65 million. As of December 31, 1998, after giving pro forma effect to the
distribution and the related assumption by Triad of $365 million of term loans
under a new credit agreement, $300 million Senior Subordinated Notes due 2009,
and approximately $10 million in other Columbia/HCA debt obligations and the
elimination of facilities divested by Triad or which Triad has ceased to
operate, Triad's consolidated long-term debt would have been approximately $675
million. See "LifePoint Unaudited Pro Forma Condensed Combined Financial
Statements" and "Triad Unaudited Pro Forma Condensed Combined Financial
Statements." Triad also expects to receive a commitment for revolving credit
loans in an aggregate principal amount of up to $125 million. LifePoint and
Triad also have the ability to incur additional debt, subject to limitations
imposed by the new credit agreement and the indentures governing their notes.
While each of LifePoint and Triad believe that future operating cash flow,
together with available financing arrangements, will be sufficient to fund
their respective operating requirements, leverage and debt service requirements
could have important consequences to holders of the LifePoint common stock and
the Triad common stock, including the following: (i) such requirements may make
LifePoint and Triad more vulnerable to economic downturns and to adverse
changes in business conditions (e.g., further limitations on reimbursement
under Medicare and Medicaid programs); (ii) either of LifePoint's or Triad's
ability to obtain additional financing in the future for working capital,
capital expenditures, acquisitions, general corporate purposes or other
purposes may be impaired; (iii) a substantial portion of each of LifePoint's
and Triad's cash flow from operations may have to be dedicated to the payment
of principal and interest on its indebtedness, thereby reducing the funds
available for operations; (iv) certain of the borrowings may be at variable
rates of interest, which would make LifePoint and Triad vulnerable to increases
in interest rates; and (v) the indebtedness of LifePoint and Triad is expected
to contain numerous financial and other restrictive covenants (including
restrictions on payments of dividends, incurrences of indebtedness and sale of
assets), the failure to comply with which may result in an event of default
which, if
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not cured or waived, could cause such indebtedness to be declared immediately
due and payable. Any substantial increase in LifePoint's or Triad's debt levels
or the inability of either to borrow funds at favorable interest rates or to
comply with the financial or other restrictive covenants could have a material
adverse effect on the business, financial condition, results of operations or
prospects of LifePoint and/or Triad.
Absence of Dividends
Neither LifePoint nor Triad anticipates paying cash dividends in the
foreseeable future. In addition, the terms of LifePoint's and Triad's debt
agreements immediately prior to the distribution are expected to restrict the
payment of cash dividends, and any future indebtedness incurred by LifePoint or
Triad to refinance such debt, or to fund future growth, also may prohibit or
limit their ability to pay dividends. See "Dividend Policy."
Tax Treatment of the Distribution
On March 30, 1999, Columbia/HCA received a ruling from the IRS concerning
the United States Federal income tax consequences of the distribution. The tax
ruling provides that, because the distribution will qualify under Section 355
of the Internal Revenue Code of 1986, as amended (the "Code"), the distribution
generally will be tax-free to Columbia/HCA and to Columbia/HCA's stockholders,
except for any cash received instead of fractional shares. The tax ruling is
based upon the accuracy of representations made by Columbia/HCA as to numerous
factual matters and as to the intention to take (or to refrain from taking)
certain future actions. The inaccuracy of any of those factual representations
or the failure to take the intended actions (or the taking of actions which
were represented would not be taken) could cause the IRS to revoke all or part
of the tax ruling retroactively.
If the distribution were not to qualify for tax-free treatment under Section
355 of the Code, then, in general, additional corporate tax (which would be
substantial) would be payable by the consolidated group of which Columbia/HCA
is the common parent. Under the consolidated return rules, each member of the
consolidated group (including LifePoint and Triad) would be jointly and
severally liable for such tax liability. If the distribution did not qualify
for tax-free treatment under Section 355 of the Code, the resulting tax
liability would have a material adverse effect on the business, financial
position, results of operations and prospects of Columbia/HCA and, possibly,
also of LifePoint and Triad. In addition, if the distribution did not qualify
for tax-free treatment under Section 355 of the Code, then, depending on the
circumstances, Columbia/HCA stockholders could be taxable on their receipt of
shares of LifePoint and Triad common stock. See "The Distribution--Material
Federal Income Tax Consequences."
Columbia/HCA, LifePoint and Triad will enter into a Tax Sharing and
Indemnification Agreement, which will allocate tax liabilities among
Columbia/HCA, LifePoint and Triad and address certain other tax matters such as
responsibility for filing tax returns, control of and cooperation in tax
litigation, and the tax treatment of the distribution. Generally, Columbia/HCA
will be responsible for taxes that are allocable to periods prior to the
distribution date, and each of Columbia/HCA, LifePoint and Triad will be
responsible for its own tax liabilities (including its allocable share of taxes
shown on any consolidated, combined or other tax return filed by Columbia/HCA)
for periods after the distribution date. The Tax Sharing and Indemnification
Agreement will prohibit LifePoint and Triad from taking actions that could
jeopardize the tax treatment of the distribution or the restructuring that will
precede the distribution, and will require LifePoint and Triad to indemnify
each other and Columbia/HCA for any taxes or other losses that result from any
such actions.
Holding Company Structure Risks
LifePoint and Triad will be holding companies and each will hold most of its
assets at, and conduct most of its operations through, direct and indirect
subsidiaries. As holding companies, the results of operations of LifePoint and
Triad will depend on the results of operations of their subsidiaries. Moreover,
LifePoint and Triad will be dependent on dividends or other intercompany
transfers of funds from their subsidiaries to meet their debt service and other
obligations. The ability of LifePoint's and Triad's subsidiaries to pay
dividends or make other payments or advances to LifePoint or Triad, as the case
may be, will depend on their operating
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results and will be subject to applicable laws and restrictions contained in
agreements governing indebtedness of such subsidiaries. Claims of creditors of
the subsidiaries of LifePoint and Triad, including trade creditors, will
generally have priority as to the assets of such subsidiaries over the claims
of LifePoint or Triad. As of December 31, 1998, on a pro forma basis after
giving effect to the distribution and the elimination of the facilities to be
divested or, in the case of Triad, which Triad has ceased to operate, the
aggregate amount of indebtedness and other obligations of LifePoint's
subsidiaries, including trade payables, would have been approximately $274.5
million, and the aggregate amount of indebtedness and other obligations of
Triad's subsidiaries, including trade payables, would have been approximately
$717 million. See "LifePoint Management's Discussion and Analysis of Financial
Condition and Results of Operations--Liquidity and Capital Resources," and
"Triad Management's Discussion and Analysis of Financial Condition and Results
of Operations--Liquidity and Capital Resources."
Risks Associated with Fraudulent Conveyance and Legal Dividend Requirements
If a court in a lawsuit by an unpaid creditor of Columbia/HCA, or
Healthtrust, Inc.--The Hospital Company ("Healthtrust"), a wholly owned
subsidiary of Columbia/HCA that will issue the Senior Subordinated Notes and
incur the term loan indebtedness under the new credit agreements that will be
assumed by LifePoint and Triad, or representative of creditors of Columbia/HCA
or Healthtrust, such as a trustee in bankruptcy, were to find that at the time
Columbia/HCA effected the distribution, Columbia/HCA, or Healthtrust as the
case may be, (a) did not receive reasonably equivalent value on account of such
distribution and (1) was insolvent; (2) was rendered insolvent by reason of the
distribution; (3) was engaged in a business or transaction for which its
remaining assets constituted unreasonably small capital; or (4) intended to
incur, or believed it would incur, debts beyond its ability to pay as such
debts matured or (b) intended to hinder, delay or defraud creditors by means of
such distribution, such court could void the distribution (in whole or in part)
as a fraudulent conveyance and require stockholders to return some or all of
the shares of LifePoint common stock or Triad common stock issued in the
distribution to Columbia/HCA or the value thereof.
If a court in a lawsuit by an unpaid creditor of Healthtrust, LifePoint or
Triad, or the subsidiary of LifePoint or Triad, as the case may be, that
ultimately will assume such indebtedness under the Senior Subordinated Notes
due 2009 and term loans ("LifePoint Holdings" and "Triad Holdings,"
respectively), or representative of creditors of any such entities, such as a
trustee in bankruptcy, were to find that at the time the Senior Subordinated
Notes due 2009 were issued or assumed and the term loan indebtedness under the
new credit agreements was incurred or assumed, LifePoint, LifePoint Holdings,
Triad, Triad Holdings, or Healthtrust as the case may be, (a) did not receive
reasonably equivalent value on account of such incurrence or assumption of
indebtedness and (1) was insolvent; (2) was rendered insolvent by reason of
such incurrence or assumption of indebtedness; (3) was engaged in a business or
transaction for which its remaining assets constituted unreasonably small
capital; or (4) intended to incur, or believed it would incur, debts beyond its
ability to pay as such debts matured or (b) intended to hinder, delay or
defraud creditors by means of such incurrence or assumption of indebtedness,
such court could, in whole or in part, void the indebtedness or subordinate the
indebtedness to existing and future debt of LifePoint Holdings or Triad
Holdings, as the case may be. In addition, the payment of interest and
principal on the LifePoint or Triad indebtedness could be voided and required
to be returned to the obligor, or to a fund for the benefit of creditors.
The measure of insolvency for purposes of the foregoing will vary depending
upon the jurisdiction whose law is being applied. Generally, however, a company
would be considered insolvent if the fair value of its assets was less than the
amount of its liabilities or if it incurred debt beyond its ability to repay
such debt when due in the usual course of business. In addition, under the
Delaware General Corporation Law (which is applicable to the distribution), a
corporation generally may make distributions to its stockholders only out of
its surplus (net assets minus capital) and not out of capital.
The Columbia/HCA Board of Directors and management believe that (i)
LifePoint, Lifepoint Holdings Triad, Triad Holdings, Healthtrust and
Columbia/HCA each will be solvent before and after the issuance by Healthtrust
and assumption by LifePoint and Triad of the notes and the term loan
indebtedness and the distribution (in accordance with the above definitions),
will be able to repay their respective debts when due in
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the usual course of business following the issuance and assumption of the notes
and the term loan indebtedness and the distribution and will have sufficient
capital to carry on their respective businesses, (ii) the notes are not being
issued or assumed, the term loan indebtedness is not being incurred or assumed,
and the distribution is not being effected to hinder, delay or defraud
creditors and (iii) the distribution will be made entirely out of surplus, as
provided under the Delaware General Corporation Law. There can be no assurance,
however, that a court passing on such questions would agree with this view.
Market Uncertainties With Respect to LifePoint Common Stock and Triad Common
Stock
There is no existing market for either the LifePoint common stock or the
Triad common stock. Although LifePoint and Triad have applied for a quotation
of their common stock on Nasdaq, there can be no assurance as to the trading
prices for either security before or after the distribution date. Until the
LifePoint common stock and the Triad common stock are fully distributed and
orderly markets develop, the trading prices for such securities may fluctuate.
Prices for the LifePoint common stock and Triad common stock will be determined
in the trading markets and may be influenced by many factors, including the
depth and liquidity of the market for such securities, investor perceptions of
LifePoint, Triad and their respective businesses, the results of LifePoint and
Triad, the dividend policies of LifePoint and Triad and general economic and
market conditions. The LifePoint common stock and Triad common stock
distributed to Columbia/HCA stockholders in the distribution generally will be
freely transferable under the Securities Act of 1933, as amended (the
"Securities Act"), and the sale of a substantial number of shares of LifePoint
common stock or Triad common stock after the distribution could adversely
affect the market price of the LifePoint common stock or Triad common stock,
respectively. See "The Distribution--Market for LifePoint Common Stock and
Triad Common Stock."
Anti-Takeover Provisions
Certain provisions of the Certificate of Incorporation and By-Laws of each of
LifePoint and Triad may have the effect of discouraging an acquisition of
control not approved by its Board of Directors. These provisions include, for
example, terms providing for:
. the issuance of "blank check" preferred stock by the Board of Directors
without stockholder approval;
. higher stockholder voting requirements for certain transactions such as
business combinations with certain related parties (i.e., a "fair price
provision");
. a prohibition on taking actions by the written consent of stockholders;
. restrictions on the persons eligible to call a special meeting of
stockholders;
. classification of the Board of Directors into three classes; and
. the removal of directors only for cause and by a vote of 80% of the
outstanding voting power.
These provisions may also have the effect of discouraging third parties from
making proposals involving an acquisition or change of control of LifePoint or
Triad, although such proposals, if made, might be considered desirable by a
majority of the stockholders of LifePoint or Triad, as the case may be. These
provisions could further have the effect of making it more difficult for third
parties to cause the replacement of the Board of Directors of LifePoint or
Triad. These provisions have been designed to enable each of LifePoint and
Triad to develop its businesses and foster its long-term growth without
disruptions caused by the threat of a takeover not deemed by its Board of
Directors to be in the best interests of the applicable company and its
stockholders. Each of LifePoint and Triad also has adopted a stockholder rights
plan. These stockholder rights plans are designed to protect stockholders in
the event of an unsolicited offer and other takeover tactics which, in the
opinion of the relevant Board of Directors, could impair its ability to
represent stockholder interests. The provisions of these stockholder rights
plans may render an unsolicited takeover of LifePoint or Triad, as applicable,
more difficult or less likely to occur or might prevent such a takeover. Each
of LifePoint and Triad will be subject to provisions of Delaware corporate law
which may restrict certain business combination transactions. See "LifePoint
Description of Capital Stock--LifePoint Common Stock; Delaware Anti-Takeover
Provisions," "--LifePoint Preferred Stock Purchase Rights," and "--Certain
Anti-Takeover Provisions--LifePoint Certificate and By-Laws"; and "Triad
Description of Capital Stock--Triad Common Stock; Delaware Anti-Takeover
Provisions," "--Triad Preferred Stock Purchase Rights," and "--Certain Anti-
Takeover Provisions--Triad Certificate and By-Laws."
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Certain provisions in the Tax Sharing and Indemnification Agreement entered
into among Columbia/HCA, LifePoint and Triad, which are intended to preserve
the tax-free status of the distribution for Federal income tax purposes, could
discourage certain takeover proposals or make them more expensive. See
"Arrangements Among Columbia/HCA, LifePoint and Triad Relating to the
Distribution--Tax Sharing and Indemnification Agreement."
Possible Lack of Year 2000 Compliance May Adversely Affect LifePoint and Triad
Until 2006, LifePoint and Triad will continue to obtain most of their
computer applications and support from Columbia Information Systems, Inc.
("CIS"), a wholly owned subsidiary of Columbia/HCA, pursuant to the Computer
and Data Processing Services Agreement. CIS does not warrant that the software
and hardware used by CIS in providing services to LifePoint and Triad will be
Year 2000 ready, but CIS is currently making efforts in a professional, timely,
and workmanlike manner that it deems reasonable to address Year 2000 issues
with respect to the software licensed to LifePoint and Triad under the Computer
and Data Processing Services Agreement. CIS also has undertaken to examine and
remediate the software systems and applications of LifePoint and Triad not
obtained from Columbia/HCA and the non-information technology systems (e.g.,
vendor products, medical equipment and other related equipment with embedded
chips) of LifePoint and Triad to ensure that they are Year 2000 ready. See
"Arrangements Among Columbia/HCA, LifePoint and Triad Relating to the
Distribution--Computer and Data Processing Services Agreement" and "--
Transitional Services Agreement."
Any malfunctions in such systems, applications or equipment could have a
material adverse effect on the business, financial condition or results of
operations of LifePoint or Triad. Neither LifePoint nor Triad is currently able
to reasonably estimate the ultimate cost to be incurred by it for the
assessment, remediation, upgrade, replacement and testing of its impacted
information and non-information technology systems. LifePoint and Triad are
dependent upon Columbia/HCA in substantially all respects for the Year 2000
readiness of their respective information technology and non-information
technology systems and for contingency planning in respect of Year 2000-related
risks. Any failure by Columbia/HCA to adequately address such matters could
have a material adverse effect on the businesses, financial conditions, results
of operations and prospects of LifePoint and Triad.
In addition, each of LifePoint and Triad has significant ongoing
relationships with government agencies, third party payers, vendors, suppliers
and others that may have computer systems with Year 2000 problems. The Health
Care Financing Administration recently announced that, due to potential Year
2000 concerns, Medicare reimbursement updates for hospitals scheduled to take
effect October 1, 1999 will be delayed until April 1, 2000, although
reimbursement rates will be adjusted to replace revenues lost due to such
delay. If the fiscal intermediaries and governmental agencies with which
LifePoint and Triad transact business, and which are responsible for payment to
LifePoint and Triad under the Medicare and Medicaid programs, other payers, or
suppliers and vendors experience problems in Year 2000 readiness, that could
have a material adverse effect on the business, financial condition, results of
operations and prospects of LifePoint or Triad. See "LifePoint Management's
Discussion and Analysis of Financial Condition and Results of Operations--
Impact of Year 2000 Computer Issues" and "Triad Management's Discussion and
Analysis of Financial Condition and Results of Operations--Impact of Year 2000
Computer Issues."
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Reasons For Furnishing This Information Statement
This information statement is being furnished by Columbia/HCA solely to
provide information to Columbia/HCA stockholders who will receive LifePoint
common stock and Triad common stock in the distribution. It is not, and is not
to be construed as, an inducement or encouragement to buy or sell any
securities of Columbia/HCA, LifePoint, or Triad. Columbia/HCA, LifePoint and
Triad believe that the information presented herein is accurate as of the date
hereof. Changes will occur after the date hereof, and none of Columbia/HCA,
LifePoint or Triad will update the information except to the extent required in
the normal course of their respective public disclosure practices.
Forward-looking Information
This information statement and other materials filed or to be filed by
LifePoint or Triad with the SEC (as well as information included in oral
statements or other written statements made, or to be made, by LifePoint or
Triad) contain, or will contain, 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 address,
among other things, strategic objectives and the anticipated effects of the
distribution. See "Summary--Introduction," "Summary--Questions and Answers
About LifePoint, Triad and the Distribution," "Risk Factors," "The
Distribution--Background and Purposes of the Distribution," "LifePoint
Business--Business Strategy," "Triad Business--Business Strategy," "LifePoint
Management's Discussion and Analysis of Financial Condition and Results of
Operations" and "Triad Management's Discussion and Analysis of Financial
Condition and Results of Operations." These forward-looking statements are
based on the current plans and expectations of LifePoint and Triad and are
subject to a number of uncertainties and risks that could significantly affect
current plans and expectations and the future financial condition and results
of LifePoint and Triad. These factors include, but are not limited to, (i) the
highly competitive nature of the health care business, (ii) the efforts of
insurers, health care providers and others to contain health care costs, (iii)
possible changes in the Medicare program that may further limit reimbursements
to health care providers and insurers, (iv) changes in Federal, state or local
regulation affecting the health care industry, (v) the possible enactment of
Federal or state health care reform, (vi) the departure of key executive
officers from LifePoint or Triad, (vii) claims and legal actions relating to
professional liability, (viii) fluctuations in the market value of LifePoint
common stock or Triad common stock, (ix) changes in accounting practices, (x)
changes in general economic conditions, (xi) the complexity of integrated
computer systems and the success and expense of the remediation efforts of
Columbia/HCA, LifePoint, Triad and relevant third parties in achieving Year
2000 readiness, and (xii) other risk factors described above. As a consequence,
current plans, anticipated actions and future financial conditions and results
may differ from those expressed in any forward-looking statements made by or on
behalf of LifePoint or Triad. You are cautioned not to unduly rely on such
forward-looking statements when evaluating the information presented herein.
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The Distribution
Background and Purposes of the Distribution
Columbia/HCA is the largest provider of health care services in the United
States today, operating approximately 300 hospitals, as well as outpatient
surgery centers, diagnostic centers, cardiac rehabilitation centers, physical
therapy centers, radiation oncology centers, comprehensive outpatient
rehabilitation centers, medical office buildings, physician practices and other
health care programs. In November 1997, Columbia/HCA restructured its
operations into five divisions, including the America Group and the Pacific
Group. America's hospitals are located in non-urban areas where, in 21 of its
23 markets, America's hospital is the only hospital in the community.
Approximately three-quarters of Pacific's hospitals are located in small
cities, generally in the Southern, Western and Southwestern United States,
where Pacific's hospital is usually either the only hospital or one of two or
three hospitals in the community, and the remainder of Pacific's hospitals are
located in larger urban areas typically characterized by a high rate of
population growth. Following that restructuring, Columbia/HCA determined to
concentrate its efforts on its core markets, which are typically located in
urban areas that are characterized by highly integrated facility networks, and
to reorganize the America Group and the Pacific Group as two independent,
publicly-traded companies, LifePoint and Triad, respectively.
Columbia/HCA management believes that separating the America and Pacific
Groups into two smaller, strategically focused public companies will provide
the following benefits:
. Implement Tailored Business Strategies. Columbia/HCA's management
believes that, because of the different community characteristics and
levels of network integration that exist in the LifePoint and Triad
markets, the LifePoint and Triad business strategies need to be
distinguished from each other and from those pursued in Columbia/HCA's
core markets. As smaller companies, LifePoint and Triad will have more
flexibility in responding to the needs of the communities in which they
operate.
. Increase Management Focus and Attention. The managements of LifePoint and
Triad will be able to focus on making capital improvements to existing
facilities in order to expand specialized services, invest in physician
and executive recruitment and retention, and improve outreach programs
and general health education initiatives.
. Tie Compensation to Performance. Following the distribution, LifePoint
and Triad will be able to more closely tie compensation incentives for
their employees to the performance of their companies. Each of LifePoint
and Triad expects to establish for the benefit of its employees an
Employee Stock Ownership Plan (an "ESOP"). Shortly after the
distribution, the LifePoint ESOP will purchase a number of shares equal
to 8.3% of the outstanding common stock of LifePoint and the Triad ESOP
will purchase a number of shares equal to 9.0% of the outstanding common
stock of Triad. These equity interests are expected to help LifePoint and
Triad to attract and retain talented and effective management and to
motivate employees throughout the organization.
. Improve Access to Capital. The distribution will give each of LifePoint
and Triad direct access to capital markets. As divisions of Columbia/HCA,
the America and Pacific Groups competed with each other and with the
other Columbia/HCA divisions for management attention, support resources,
and capital to finance expansion and growth opportunities. As separate
entities, with their own management structures, LifePoint and Triad will
be better able to implement business strategies appropriate for their
markets and to direct capital funding and expansion initiatives.
. Increase Visibility to the Capital Markets. Following the distribution,
the financial markets will be able to focus on the individual strengths
of Columbia/HCA, LifePoint and Triad, and more accurately evaluate the
performance of each distinct business compared to companies in the same
or similar businesses.
Columbia/HCA expects that, in addition to allowing it to focus on its core
markets, the distribution of LifePoint and Triad will assist Columbia/HCA in
fulfilling its business plan of becoming a smaller company, focused on local,
community-based delivery of care, streamlining its organizational structure,
and reducing its
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overhead and administrative costs. After the distribution, however,
Columbia/HCA's revenue base will be diminished by approximately 11% and its
asset base will be diminished by approximately 9% (based on revenues and assets
reported for the year ended December 31, 1998). The separation of the LifePoint
and Triad hospitals may adversely affect Columbia/HCA's ability to negotiate
favorable managed care contracts in certain markets. Also, to the extent that
LifePoint and Triad succeed in stemming outmigration, some patients who
previously might have been treated at Columbia/HCA hospitals will instead be
treated at LifePoint and Triad hospitals.
Manner of Effecting the Distribution
The general terms and conditions relating to the distribution are set forth
in a Distribution Agreement among Columbia/HCA, LifePoint and Triad. See
"Arrangements Among Columbia/HCA, LifePoint and Triad Relating to the
Distribution--Distribution Agreement."
On the distribution date, Columbia/HCA will effect the distribution by
delivering all of the outstanding shares of LifePoint common stock and Triad
common stock to National City Bank, as distribution agent, for distribution to
the holders of record of Columbia/HCA Stock at the close of business on the
record date. The distribution will be made on the basis of shares of
LifePoint common stock and shares of Triad common stock for every
shares of Columbia/HCA Stock. The actual number of shares of LifePoint common
stock and Triad common stock that will be distributed will depend on the number
of shares of Columbia/HCA Stock outstanding on the record date. The shares of
LifePoint common stock and Triad common stock will be fully paid and
nonassessable, and the holders of such shares will not be entitled to
preemptive rights. See "LifePoint Description of Capital Stock" and "Triad
Description of Capital Stock." It is expected that certificates representing
shares of LifePoint common stock and of Triad common stock will be mailed to
Columbia/HCA stockholders on or about , 1999.
Certificates or scrip representing fractional shares of LifePoint common
stock or Triad common stock will not be issued to Columbia/HCA stockholders as
part of the distribution. Instead, each holder of Columbia/HCA Stock who would
otherwise be entitled to receive a fractional share will receive cash for such
fractional interests. The distribution agent will, as soon as practicable after
the distribution date, aggregate and sell all such fractional interests in the
open market at then prevailing market prices and distribute the aggregate
proceeds ratably to Columbia/HCA stockholders otherwise entitled to such
fractional interests. Columbia/HCA will pay all brokers' fees and commissions
in respect of such sale. See "The Distribution--Material Federal Income Tax
Consequences" for a discussion of the Federal income tax treatment of
fractional share interests.
Results of the Distribution
After the distribution, LifePoint and Triad will be separate, independent
publicly-traded companies. The number and identity of stockholders of LifePoint
and Triad immediately after the distribution will be the same as the number and
identity of stockholders of Columbia/HCA on the record date. Based on the
number of record stockholders and the number of issued and outstanding shares
of Columbia/HCA Stock as of the close of business on , 1999 and the
distribution ratios of shares of LifePoint common stock and shares of
Triad common stock for every shares of Columbia/HCA Stock, immediately
after the distribution, LifePoint expects to have approximately 16,500 record
holders, and approximately outstanding shares, of LifePoint common stock,
and Triad expects to have approximately 16,500 record holders, and
approximately outstanding shares, of Triad common stock. The actual number
of shares of LifePoint common stock and Triad common stock that will be
distributed will be determined as of the record date. The distribution will not
affect the number of outstanding shares of Columbia/HCA Stock or the rights of
Columbia/HCA stockholders.
Each of LifePoint and Triad expects to establish for the benefit of its
employees an Employee Stock Ownership Plan (an "ESOP"). Shortly after the
distribution, the LifePoint ESOP is expected to purchase, at fair market value,
a number of newly issued shares of LifePoint common stock equal to 8.3% of the
outstanding shares of LifePoint common stock (approximately shares), and
the Triad ESOP is
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expected to purchase, at fair market value, a number of newly issues shares of
Triad common stock equal to 9.0% of the outstanding shares of Triad common
stock (approximately shares). Each purchase will be financed by (i)
issuing a promissory note to LifePoint in the case of the LifePoint ESOP or
issuing a promissory note to Triad in the case of the Triad ESOP or (ii)
borrowing from a third party lender (which loan will be guaranteed by
LifePoint, in the case of the LifePoint ESOP or Triad, in the case of the Triad
ESOP). Each loan will be amortized over a period of not more than 10 years.
Material Federal Income Tax Consequences
Columbia/HCA has received a tax ruling from the IRS to the effect, among
other things, that, as the distribution will qualify as a tax-free distribution
under Section 355 of the Code, for Federal income tax purposes:
. Columbia/HCA will not recognize gain or loss upon the distribution of
the LifePoint common stock and the Triad common stock to Columbia/HCA's
stockholders.
. Columbia/HCA stockholders will not recognize any gain or loss (and will
not be required to include any amount as taxable income) as a result of
their receipt of LifePoint common stock and Triad common stock in the
distribution, except as described below in connection with cash received
in lieu of fractional shares of LifePoint common stock or Triad common
stock.
. Columbia/HCA stockholders will have an aggregate basis in their
Columbia/HCA Stock, LifePoint common stock and Triad common stock
immediately after the distribution equal to their aggregate basis in
their Columbia/HCA Stock immediately before the Distribution.
Columbia/HCA stockholders will apportion their tax basis in their
Columbia/HCA Stock among their Columbia/HCA Stock and the LifePoint
common stock and the Triad common stock they receive (including any
fractional share interest in LifePoint common stock and Triad common
stock to which the Columbia/HCA stockholders are entitled) in accordance
with the relative fair market values of these securities at the time of
the distribution.
. Columbia/HCA stockholders' holding period in the LifePoint common stock
and Triad common stock received in the distribution will include the
holding period of the Columbia/HCA Stock with respect to which the
LifePoint common stock and Triad common stock is distributed, provided
that the Columbia/HCA Stock is held as a capital asset on the
distribution date.
. Columbia/HCA stockholders who receive cash in lieu of fractional shares
of LifePoint common stock or Triad common stock will recognize gain or
loss equal to the difference between the cash received and the tax basis
allocated to such fractional shares. Any gain or loss will be capital
gain or loss if the fractional shares would have been held as a capital
asset on the distribution date.
The tax ruling will be based upon representations made by Columbia/HCA as to
numerous factual matters and as to the intention to take (or to refrain from
taking) certain future actions. The inaccuracy of any of those factual
representations or the failure to take the intended actions (or the taking of
actions which were represented would not be taken) could cause the IRS to
revoke all or part of the tax ruling retroactively. In that event, the IRS
might assert that the distribution was taxable. See "Risk Factors--Tax
Treatment of the Distribution" and "Arrangements Among Columbia/HCA, LifePoint
and Triad Relating to the Distribution--Tax Sharing and Indemnification
Agreement."
The foregoing is only a summary of the material United States Federal income
tax consequences of the distribution under current law. It does not purport to
cover all tax consequences and may not apply to stockholders who acquired their
Columbia/HCA stock in connection with a grant of shares as compensation, who
are not citizens or residents of the United States, or who are otherwise
subject to special treatment under the Code. Each stockholder is urged to
consult his or her tax advisor as to the particular consequences of the
distribution to such stockholder, including the application of state, local and
foreign tax laws, and as to possible changes in tax laws that may affect the
tax consequences described above.
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Regulatory Approvals
The distribution is subject to review and approvals by certain Federal
agencies, state departments of insurance, state health planning and licensure
agencies. Prior to the distribution date, Columbia/HCA will have provided
appropriate notifications regarding the distribution to, and expects that all
material approvals from or reviews of the regulatory authorities having
jurisdiction in respect of the distribution and related reorganization
transactions will have been received or completed, respectively.
Market for LifePoint Common Stock and Triad Common Stock
There is no existing market for LifePoint common stock or Triad common stock.
LifePoint and Triad have applied for quotation of their common stock on Nasdaq.
If the shares are accepted for quotation, a when-issued trading market for both
LifePoint common stock and Triad common stock is expected to develop shortly
before the distribution date. The term "when-issued" means that shares can be
traded prior to the time certificates are actually available or issued. There
can be no assurance about the trading prices for LifePoint common stock and
Triad common stock before or after the distribution date, and until the
LifePoint common stock and Triad common stock are fully distributed and an
orderly market develops, the trading prices for such securities may fluctuate.
Prices for LifePoint common stock and Triad common stock will be determined in
the trading markets and may be influenced by many factors, including the depth
and liquidity of the market for such securities, developments affecting the
businesses of LifePoint and Triad generally, the impact of the factors referred
to in "Risk Factors," investor perceptions of LifePoint, Triad and their
businesses, the results of LifePoint and Triad, the dividend policies of
LifePoint and Triad, and general economic and market conditions. It is
anticipated that LifePoint common stock will be traded on Nasdaq under the
symbol "LPNT," and that Triad common stock will be traded on Nasdaq under the
symbol "TRIH."
Columbia/HCA Common Stock will continue to trade on the New York Stock
Exchange. After the distribution, the trading price of Columbia/HCA Common
Stock likely will be lower than the trading price immediately prior to the
distribution. Moreover, until the market has evaluated the operations of
Columbia/HCA without LifePoint and Triad, the trading price of Columbia/HCA
Common Stock may fluctuate.
The Transfer Agent and Registrar for the LifePoint common stock and Triad
common stock will be National City Bank, Shareholder Services Group, P.O. Box
92301, Cleveland, Ohio, 44193-0900.
For certain information regarding options to purchase LifePoint common stock
and Triad common stock that will be granted in connection with the
distribution, see "Arrangements Among Columbia/HCA, LifePoint and Triad
Relating to the Distribution--Benefits and Employment Matters Agreement--
Treatment of Columbia/HCA Common Stock Options"; "LifePoint Management--
LifePoint Compensation Arrangements--The LifePoint 1998 Long-Term Incentive
Plan"; and "Triad Management--Triad Compensation Arrangements--The Triad 1998
Long-Term Incentive Plan." For certain information regarding the LifePoint ESOP
and the Triad ESOP, see "Arrangements Among Columbia/HCA, LifePoint and Triad
Relating to the Distribution--Benefits and Employment Matters Agreement--The
LifePoint ESOP and the Triad ESOP."
Shares of LifePoint common stock and Triad common stock distributed to
Columbia/HCA stockholders in the distribution will be freely transferable under
the Securities Act, except for shares of LifePoint common stock received by
persons who may be deemed to be affiliates of LifePoint and shares of Triad
common stock received by persons who may be deemed to be affiliates of Triad.
Persons who may be deemed to be affiliates of LifePoint or Triad after the
distribution generally include individuals or entities that control, are
controlled by, or are under common control with, LifePoint or Triad,
respectively, and may include certain officers and directors, or principal
stockholders, of LifePoint or Triad, as applicable. After LifePoint and Triad
become publicly-traded companies, securities held by persons who are their
affiliates will be subject to resale restrictions under the Securities Act.
Affiliates of LifePoint and Triad will be permitted to sell shares of the
entity of which such persons are affiliates only pursuant to an effective
registration statement or an exemption from the registration requirements of
the Securities Act, such as the exemption afforded by Rule 144 under the
Securities Act.
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Conditions Precedent to the Distribution
It is expected that the distribution will be effective on the distribution
date, , 1999, provided that, among other things:
1. the Registration Statements on Form 10 under the Securities Exchange Act
of 1934, as amended (the "Exchange Act"), filed by each of LifePoint
(the "LifePoint Form 10 Registration Statement") and Triad (the "Triad
Form 10 Registration Statement") shall have been declared effective and
no stop order relating to either Registration Statement shall be in
effect;
2. all necessary permits, registrations and consents required under the
securities or blue sky laws of states or other political subdivisions of
the United States in connection with the distribution shall have been
received or become effective;
3. the IRS tax ruling shall not have been revoked or modified in any
material respect;
4. each of the LifePoint common stock and the Triad common stock shall have
been approved for quotation on Nasdaq, subject to official notice of
issuance;
5. the transfers of assets and liabilities to LifePoint and Triad required
to constitute LifePoint and Triad as described herein shall have been
completed;
6. satisfactory arrangements having been made for the incurrence by
Columbia/HCA or one of its subsidiaries of approximately $935 million
principal amount of indebtedness and the assumption of approximately
$260 million principal amount of such indebtedness by LifePoint and of
approximately $675 million principal amount of such indebtedness by
Triad; and
7. no order, injunction or decree issued by any court of competent
jurisdiction or other legal restraint or prohibition preventing
consummation of the distribution or any of the transactions related
thereto (including the transfers of assets and liabilities contemplated
by the Distribution Agreement) shall be in effect.
The fulfillment or waiver of the foregoing conditions shall not create any
obligation on the part of Columbia/HCA to effect the distribution, and the
Columbia/HCA Board has reserved the right to amend, modify or abandon the
distribution and the related transactions at any time prior to the distribution
date.
Arrangements Among Columbia/HCA, LifePoint And Triad
Relating To The Distribution
Immediately prior to the distribution, LifePoint and Triad will be wholly
owned by Columbia/HCA and, until the distribution, the results of operations of
the assets and entities that will constitute LifePoint and Triad will be
included in Columbia/HCA's consolidated financial statements. After the
distribution, Columbia/HCA will not have any ownership interest in either
LifePoint or Triad, which will be independent, publicly-traded companies,
although certain Columbia/HCA benefit plans will receive shares of LifePoint
and Triad in the distribution. See "LifePoint Security Ownership by Certain
Beneficial Owners and Management" and "Triad Security Ownership by Certain
Beneficial Owners and Management." After the distribution, neither LifePoint
nor Triad will have any ownership interest in the other.
Immediately prior to the distribution, Columbia/HCA, LifePoint and Triad will
enter into certain agreements to define their ongoing relationships after the
distribution and to allocate tax, employee benefits and certain other
liabilities and obligations arising from periods prior to the distribution
date. These agreements are summarized below and have been filed as exhibits to
the LifePoint Form 10 Registration Statement and/or the Triad Form 10
Registration Statement. The following descriptions include a summary of the
material terms of these agreements but do not purport to be complete and are
qualified in their entirety by reference to the filed agreements.
Distribution Agreement
Columbia/HCA, LifePoint and Triad will enter into the Distribution Agreement
which will provide for, among other things, certain corporate transactions
required to effect the distribution and other arrangements among Columbia/HCA,
LifePoint and Triad subsequent to the distribution. The Distribution Agreement
also sets forth the conditions to the distribution. See "The Distribution--
Conditions Precedent to the Distribution."
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Transfers of Assets to LifePoint and Triad
The Distribution Agreement provides that Columbia/HCA will transfer all of
its right, title and interest in the assets constituting the America Group
business to LifePoint and all of its right, title and interest in the assets
constituting the Pacific Group business to Triad. The Distribution Agreement
further provides that each of LifePoint and Triad will take such action, if
any, as may be necessary to transfer assets owned by it so that, upon
completion of all asset transfers by Columbia/HCA, LifePoint and Triad, the
assets constituting the America Group business are owned by LifePoint and the
assets constituting the Pacific Group business are owned by Triad.
Each party to the Distribution Agreement agrees to exercise its reasonable
efforts to obtain promptly any necessary consents and approvals and to take
such actions as may be reasonably necessary or desirable to carry out the
purposes of the Distribution Agreement and the other agreements summarized
below. In the event that any transfers contemplated by the Distribution
Agreement are not effected on or prior to the distribution date, the parties
agree to cooperate to effect such transfers as promptly as practicable
following the distribution date, and pending any such transfers, to hold any
asset not so transferred in trust for the use and benefit of the party entitled
thereto (at the expense of the party entitled thereto), and to retain any
liability not so transferred for the account of the party by whom such
liability is to be assumed. All assets are being transferred without any
representation or warranty, on an "as is-where is" basis and the relevant
transferee bears the risk that any necessary consent to transfer is not
obtained.
Allocation of Financial Responsibility
The Distribution Agreement provides for, among other things, assumptions of
liabilities and cross-indemnities designed to allocate, effective as of the
distribution date, financial responsibility for the liabilities arising out of
or in connection with:
. the assets and entities that will constitute LifePoint and its
subsidiaries (including liabilities arising in respect of the transfer
of such assets and entities to LifePoint) to LifePoint; and
. the assets and entities that will constitute Triad and its subsidiaries
(including liabilities arising in respect of the transfer of such assets
and entities to Triad) to Triad.
Pursuant to the Distribution Agreement, after the distribution, Columbia/HCA
will indemnify LifePoint and Triad for any losses which they may incur arising
from the pending governmental investigations of certain of Columbia/HCA's
business practices. Columbia/HCA will also indemnify LifePoint and Triad for
any losses which they may incur arising from stockholder actions and other
legal proceedings related to the governmental investigations which are
currently pending against Columbia/HCA, and from proceedings which may be
commenced by government authorities or by private parties in the future that
arise from acts, practices or omissions engaged in prior to the Distribution
Date and relate to the pending proceedings. Columbia/HCA has also agreed that,
in the event that any hospital owned by LifePoint or Triad is permanently
excluded from participation in the Medicare and Medicaid programs as a result
of the proceedings described above, then Columbia/HCA will make a cash payment
to LifePoint or Triad, as the case may be, in an amount (if positive) equal to
five times the excluded hospital's 1998 income from continuing operations
before depreciation and amortization, interest expense, management fees,
impairment of long-lived assets, minority interests and income taxes (as set
forth on a schedule to the Distribution Agreement) less the proceeds of the
sale or other disposition of the excluded hospital. Each of LifePoint and Triad
has agreed that, in connection with the pending governmental investigations, it
will participate with Columbia/HCA in negotiating one or more compliance
agreements setting forth each of their agreements to comply with applicable
laws and regulations. Columbia/HCA will not indemnify LifePoint or Triad for
losses relating to any acts, practices and omissions engaged in by LifePoint or
Triad after the distribution date, whether or not LifePoint or Triad is
indemnified for similar acts, practices and omissions occurring prior to the
distribution date. See "Risk Factors--Potential Adverse Impact of Columbia/HCA
Investigations and Litigation; Indemnification of LifePoint and Triad" and
"Government Regulation and Other Factors Affecting LifePoint and Triad--
Governmental Investigation of Columbia/HCA and Related Litigation."
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Prior to the distribution, Columbia/HCA, through its wholly owned insurance
subsidiary and through third party carriers, maintained insurance for the
businesses of LifePoint and Triad. The Distribution Agreement provides that
Columbia/HCA also will be solely responsible for:
. claims against LifePoint or Triad covered by an insurance policy
maintained by Columbia/HCA (without regard to deductible amounts,
coinsurance amounts and policy limits), which are based upon facts and
circumstances occurring prior to the distribution date; and
. workers' compensation claims against LifePoint or Triad if the
underlying injury or condition was incurred before the distribution.
Government Programs
LifePoint and Triad will be responsible for the Medicare, Medicaid and Blue
Cross cost reports, and associated receivables and payables, for their
facilities for all periods ending after the distribution date. Columbia/HCA
will be responsible for the Medicare, Medicaid and Blue Cross cost reports for
the LifePoint and Triad facilities relating to periods ending on or prior to
the distribution date. LifePoint and Triad will be responsible for their own
cost report functions after the distribution date, as well as for any
terminating cost reports required to be filed in respect of the distribution.
Other Matters
Each of Columbia/HCA, LifePoint and Triad generally agrees to provide to the
other parties reasonable access to certain corporate records and information
reasonably requested by another party. Each of Columbia/HCA, LifePoint and
Triad is generally required to maintain the confidentiality of confidential
information it possesses regarding another party. The parties will endeavor to
resolve any disputes which may arise through discussion among senior management
of the affected parties. If such discussions do not succeed in resolving a
disputed matter, the parties retain the right to commence a legal action.
The Distribution Agreement also provides that, generally, the costs and
expenses incurred through the distribution date in connection with the
distribution are properly allocable to, and will be paid by, Columbia/HCA.
Except as set forth in the Distribution Agreement or any related agreement,
each party shall bear its own costs and expenses after the distribution.
Tax Sharing and Indemnification Agreement
Columbia/HCA, LifePoint and Triad will enter into a Tax Sharing and
Indemnification Agreement, which will allocate tax liabilities among
Columbia/HCA, LifePoint and Triad and address certain other tax matters such as
responsibility for filing tax returns, control of and cooperation in tax
litigation and qualification of the distribution as a tax-free transaction.
Generally, Columbia/HCA will be responsible for taxes that are allocable to
periods prior to the distribution date, and each of Columbia/HCA, LifePoint and
Triad will be responsible for its own tax liabilities (including its allocable
share of taxes shown on any consolidated, combined or other tax return filed by
Columbia/HCA) for periods after the distribution date. The Tax Sharing and
Indemnification Agreement will prohibit LifePoint and Triad from taking actions
that could jeopardize the treatment of the distribution or the internal
restructuring that will precede the distribution, and will require LifePoint
and Triad to indemnify each other and Columbia/HCA for any taxes or other
losses that result from any such actions.
Benefits and Employment Matters Agreement
Columbia/HCA, LifePoint and Triad will enter into a Benefits and Employment
Matters Agreement, which allocates responsibilities for employee compensation,
benefits, labor, benefit plan administration and certain other employment
matters on and after the distribution date.
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General Allocation
Each of LifePoint and Triad will assume responsibility as employer in respect
of its employees from and after the distribution date. Subject to specific
exceptions, Columbia/HCA will retain the liabilities in respect of former
employees associated with the facilities and operations of LifePoint and Triad
who terminated employment on or prior to the distribution date. Benefit plans
established by LifePoint or Triad generally will recognize past service with
Columbia/HCA.
Defined Contribution and Welfare Benefit Plans
The Benefits and Employment Matters Agreement provides that each of LifePoint
and Triad will adopt a new defined contribution plan for their respective
employees, as well as for the respective former employees associated with the
facilities and operations of LifePoint and Triad. Generally, assets of the
current Columbia/HCA money purchase pension, stock bonus and salary deferral
plans that are attributable to current and former employees of LifePoint and
Triad will be transferred, effective immediately prior to the distribution
date, to the new plans, and LifePoint and Triad thereafter will provide
benefits under such plans to their current and former employees. Except for
such transferred assets, Columbia/HCA will retain sole responsibility for all
liabilities and obligations under the existing Columbia/HCA defined
contribution plans.
LifePoint and Triad will adopt welfare benefit plans for their employees
that, as of the distribution date, will be substantially identical to the
benefit plans of Columbia/HCA. Generally, Columbia/HCA will be responsible for
all liabilities and obligations relating to claims incurred or premiums owed in
respect of welfare plans for periods prior to the distribution date and
LifePoint or Triad, as appropriate, will assume such responsibility for periods
thereafter with respect to their current or former employees.
Columbia/HCA will provide certain administrative and investment services in
respect of the LifePoint and Triad welfare plans. Services will be provided
through the end of 1999 in respect of Triad welfare plans and through May 31,
1999 in respect of LifePoint welfare plans. LifePoint and Triad have agreed to
indemnify Columbia/HCA and its agents in respect of the services performed for
such plans, so long as Columbia/HCA and its agents shall have acted in good
faith in performing such services.
The LifePoint ESOP and the Triad ESOP
Each of LifePoint and Triad expects to establish an ESOP. Shortly after the
distribution, the LifePoint ESOP is expected to purchase, at fair market value,
a number of newly issued shares of LifePoint common stock equal to 8.3% of the
outstanding LifePoint common stock (approximately shares), and the Triad
ESOP is expected to purchase, at fair market value, a number of newly issued
shares of Triad common stock equal to 9.0% of the outstanding Triad common
stock (approximately shares). Each purchase will be financed by (i)
issuing a promissory note to LifePoint in the case of the LifePoint ESOP or
issuing a promissory note to Triad in the case of the Triad ESOP or (ii)
borrowings from a third party lender (which loan will be guaranteed by
LifePoint, in the case of the LifePoint ESOP or Triad, in the case of the Triad
ESOP). Each loan will be amortized over a period of not more than 10 years.
Treatment of Columbia/HCA Common Stock Options
The Benefits and Employment Matters Agreement provides that each of LifePoint
and Triad will establish new stock option plans, and that outstanding
Columbia/HCA Common Stock options will be adjusted to reflect the distribution.
The nature of the adjustment will depend on the type of option, as follows:
. Incentive Stock Options: The option spread (whether positive or
negative) at the distribution date with respect to each of the existing
Columbia/HCA options intended to qualify as Incentive Stock Options
under Section 422 of the Code ("ISOs") will be preserved by having each
such ISO replaced entirely by an ISO issued by the appropriate post-
distribution date employer.
. Vested Nonqualified Stock Options: Except in the case of vested
Columbia/HCA Nonqualified Stock Options to acquire a small number of
shares, the option spread (whether positive or negative) at the
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distribution date with respect to each of the existing vested
Columbia/HCA Nonqualified Stock Options will be preserved by (i)
adjusting the exercise price of such Columbia/HCA options and (ii)
having LifePoint and Triad issue additional vested Nonqualified Stock
Options. This rule will apply regardless of which post-distribution date
employer employs the optionee. Similar adjustments will be made with
respect to vested Columbia/HCA Nonqualified Stock Options held by non-
employee directors. In the case of vested Columbia/HCA Nonqualified
Stock Options to acquire a small number of shares, such Columbia/HCA
Options will be adjusted in a manner that preserves the pre-distribution
value of such Columbia/HCA Options.
. Non-Vested Nonqualified Stock Options: Non-vested Columbia/HCA
Nonqualified Stock Options held by employees of LifePoint and Triad will
be cancelled and LifePoint and Triad may, in their discretion, grant
non-vested nonqualified stock options to their respective employees. In
the case of non-vested Columbia/HCA Nonqualified Stock Options held by
Columbia/HCA employees, the exercise price will be adjusted to reflect
the distribution. Non-vested non-qualified options to acquire LifePoint
and Triad stock will also be issued to certain employees of
Columbia/HCA.
See "LifePoint Management--LifePoint Compensation Arrangements--The LifePoint
1998 Long-Term Incentive Plan" and "Triad Management--Triad Compensation
Arrangements--The Triad 1998 Long-Term Incentive Plan."
Insurance Allocation and Administration Agreement
Columbia/HCA has maintained various insurance policies for the benefit and
protection of its America Group and Pacific Group divisions. Substantially all
losses in periods prior to the distribution are insured through a wholly-owned
insurance subsidiary of Columbia/HCA and excess loss policies maintained by
Columbia/HCA. In connection with the distribution, Columbia/HCA, LifePoint and
Triad will enter into the Insurance Allocation and Administration Agreement to
provide for their continuing rights and obligations in respect of such
insurance after the distribution date and to define their relationship
regarding the insurance on their respective properties.
The Insurance Allocation and Administration Agreement provides that any
claims against insurers outstanding on the distribution date will be for the
benefit of the party who will own the asset which is the basis for the claim,
or, in the case of a liability claim, which is the owner of the facility at
which the activity which is the subject of the claim occurred. In addition,
Columbia/HCA will pay to LifePoint or Triad, as the case may be, any portion of
such a claim that is unpaid by an insurer to satisfy deductible, co-insurance
or self-insurance amounts (unless such amounts were paid to or accounted for by
the affected entity prior to the distribution date). Columbia/HCA, LifePoint
and Triad will do all things necessary to ensure that all of the insurance
policies which provide coverage to LifePoint and Triad remain available after
the distribution date to the same extent they were available prior to the
distribution date. Any retroactive rate adjustments for periods ending on or
before the distribution date in respect of any such insurance policies will be
paid or received by Columbia/HCA.
Columbia/HCA, LifePoint and Triad will cooperate with each other in the
purchase of insurance coverage for periods after the distribution date,
although each retains the right to obtain separate insurance under certain
circumstances. It is anticipated that LifePoint and Triad will purchase
continuous coverage under extensions or renewals of existing, or new, policies
issued by Health Care Indemnity, Inc., a subsidiary of Columbia/HCA. They also
will endeavor to obtain coverage for claims incurred but not reported prior to
the distribution date which would have been covered by the insurance policies
existing at that time, if the policies obtained to cover periods after the
distribution do not cover such claims. Columbia/HCA will bear the cost of any
such additional coverage.
Columbia/HCA will defend any claim made against two or more of the parties,
if indemnification for the claim is available to LifePoint or Triad, as the
case may be, under the Distribution Agreement. If indemnification under the
Distribution Agreement is not available and there is no other agreement or
49
<PAGE>
indemnification in respect of such claim, the parties to the claim will jointly
defend the claim and will attempt to agree upon an appropriate allocation of
liability, subject to arbitration in the event the parties disagree.
Columbia/HCA, or an affiliate of Columbia/HCA, will continue to administer
all claims under the insurance policies in effect prior to the distribution
date. In addition, Columbia/HCA, or an affiliate of Columbia/HCA, will
administer claims under the new policies that will cover periods after the
distribution date, for an interim period.
Computer and Data Processing Services Agreement
Columbia/HCA's wholly owned subsidiary Columbia Information Services, Inc.
("CIS"), will enter into separate Computer and Data Processing Services
Agreements with each of LifePoint and Triad. Pursuant to this agreement, CIS
will provide computer installation, support, training, maintenance, data
processing and other related services to LifePoint and Triad. The initial term
of each agreement will be seven years, which will be followed by a wind-down
period of up to one year. CIS will charge fees to LifePoint and Triad for
services provided under this agreement that are market competitive based on
CIS's costs incurred in providing such services. In the event the agreement is
terminated by either LifePoint or Triad, it will be required to pay a
termination fee equal to the first month's billed fees, multiplied by the
remaining number of months in the agreement. CIS does not warrant that the
software and hardware used by CIS in providing services to LifePoint and Triad
will be Year 2000 ready. CIS is currently making efforts in a professional,
timely and workmanlike manner that it deems reasonable to address Year 2000
issues with respect to the software licensed to LifePoint and Triad under the
Computer and Data Processing Services Agreement.
Lease Agreements
Columbia/HCA will enter into an agreement with LifePoint pursuant to which
LifePoint will sub-lease from Columbia/HCA its principal executive offices (at
the same price per square foot as is payable under the existing Columbia/HCA
lease). The LifePoint sub-lease will terminate on February 28, 2002, but either
party may terminate the sub-lease upon six months prior written notice.
Columbia/HCA also will enter into an agreement with Triad, pursuant to which
Triad will sub-lease from Columbia/HCA its principal executive offices (at the
same price per square foot as is payable under the existing Columbia/HCA
lease). The Triad sub-lease will terminate on January 31, 2003.
Transitional Services Agreement
Columbia/HCA will enter into separate Transitional Services Agreements with
each of LifePoint and Triad. Pursuant to this agreement, Columbia/HCA will
continue to furnish various administrative services to LifePoint and Triad.
These services will include support in various aspects of payroll processing
and tax reporting for employees of LifePoint and Triad, real estate design and
construction management, and legal, human resources, insurance and accounting
matters. Columbia/HCA also will continue its ongoing program of inspecting
medical equipment at each of LifePoint's and Triad's hospitals to assure Year
2000 compliance. Each agreement will terminate on December 31, 2000, but may be
terminated by LifePoint or Triad as to specific services before December 31,
2000. LifePoint and Triad will pay fees to Columbia/HCA for services provided
in amounts equal to Columbia/HCA's costs incurred in providing such services.
Other Agreements
Columbia/HCA will enter into agreements with each of LifePoint and Triad
whereby Columbia/HCA will share telecommunications services with LifePoint and
Triad under Columbia/HCA's agreements with its telecommunications services
provider and whereby Columbia/HCA will make certain account collection services
available to LifePoint and Triad. Each of LifePoint and Triad will also
participate, along with Columbia/HCA, in a group purchasing organization which
will make certain national supply and equipment contracts available to their
respective facilities. In addition, Columbia/HCA and LifePoint will enter into
an agreement pursuant to which they will jointly own a corporate aircraft.
LifePoint will reimburse Columbia/HCA for a portion of the cost of operating
the aircraft proportionate to LifePoint's ownership interest.
50
<PAGE>
Dividend Policy
LifePoint
LifePoint currently intends to retain its earnings for use in the operation
and expansion of its business and therefore does not anticipate declaring or
paying any cash dividends in the foreseeable future. In addition, the terms of
LifePoint's debt agreements are expected to restrict the payment of cash
dividends by LifePoint. Any future determination to declare or pay cash
dividends will be made by the LifePoint Board of Directors. The actual amount
and timing of dividends, if any, will depend on LifePoint's financial
condition, results of operations, business prospects, capital requirements,
credit agreements and such other matters as the LifePoint Board of Directors
may deem relevant. See "LifePoint Management's Discussion and Analysis of
Financial Condition and Results of Operations--Liquidity and Capital
Resources."
Triad
Triad currently intends to retain its earnings for use in the operation and
expansion of its business and therefore does not anticipate declaring or paying
any cash dividends in the foreseeable future. In addition, the terms of Triad's
debt agreements are expected to restrict the payment of cash dividends by
Triad. Any future determination to declare or pay cash dividends will be made
by the Triad Board of Directors. The actual amount and timing of dividends, if
any, will depend on Triad's financial condition, results of operations,
business prospects, capital requirements, credit agreements and such other
matters as the Triad Board of Directors may deem relevant. See "Triad
Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources."
51
<PAGE>
LifePoint
Selected Historical Financial Data
The following table sets forth selected historical financial data of
LifePoint for each of the years in the five year period ended December 31,
1998. The selected financial data at December 31, 1996, 1995 and 1994 and for
the years ended December 31, 1995 and 1994 has been derived from unaudited
financial statements. The table should be read in conjunction with the
LifePoint Combined Financial Statements and related notes included elsewhere in
this information statement and "LifePoint's Management's Discussion and
Analysis of Financial Condition and Results of Operations."
<TABLE>
<CAPTION>
Years Ended December 31,
----------------------------------------
1998 1997 1996 1995 1994
------- ------- ------ ------ ------
(Dollars in millions, except per
share amounts)
<S> <C> <C> <C> <C> <C>
Summary of Operations:
Revenues............................. $ 498.4 $ 487.6 $464.0 $395.8 $350.1
Salaries and benefits................ 220.8 196.6 175.2 158.1 141.1
Supplies............................. 62.0 55.0 50.9 48.8 44.4
Other operating expenses............. 117.2 119.5 99.3 83.3 75.7
Provision for doubtful accounts...... 41.6 34.5 28.0 23.2 24.6
Depreciation and amortization........ 28.3 27.4 23.5 20.3 17.6
Interest expense allocated from
Columbia/HCA........................ 19.1 15.4 14.1 11.3 13.5
Management fees allocated from
Columbia/HCA........................ 8.9 8.2 6.2 8.1 9.2
Impairment of long-lived assets...... 26.1 -- -- -- --
------- ------- ------ ------ ------
524.0 456.6 397.2 353.1 326.1
Income (loss) from continuing
operations before minority interests
and income taxes (benefit).......... (25.6) 31.0 66.8 42.7 24.0
Minority interests in earnings of
consolidated entities............... 1.9 2.2 1.2 -- --
Income (loss) from continuing
operations before income taxes
(benefit)........................... (27.5) 28.8 65.6 42.7 24.0
Provision for income taxes
(benefit)........................... (9.8) 11.7 26.3 17.1 9.6
Income (loss) from continuing
operations(a)....................... $ (17.7) $ 17.1 $ 39.3 $ 25.6 $ 14.4
======= ======= ====== ====== ======
Net income (loss)(a)................. $ (21.8) $ 12.5 $ 41.2 $ 27.4 $ 15.9
======= ======= ====== ====== ======
Basic earnings (loss) per share:
Income (loss) from continuing
operations (a)..................... $ (0.59) $ 0.57 $ 1.31 $ 0.85 $ 0.48
Net Income (loss) (a)............... $ (0.73) $ 0.41 $ 1.37 $ 0.91 $ 0.53
Shares used in computing basic
earnings (loss)
per share (in millions)............ 30.0 30.0 30.0 30.0 30.0
Diluted earnings (loss) per share:
Income (loss) from continuing
operations (a)..................... $ (0.59) $ 0.57 $ 1.30 $ 0.84 $ 0.47
Net income (loss) (a)............... $ (0.73) $ 0.41 $ 1.36 $ 0.90 $ 0.52
Shares used in computing diluted
earnings (loss)
per share (in millions)............ 30.0 30.2 30.3 30.4 30.4
Financial Position:
Assets............................... $ 355.0 $ 397.9 $376.0 $324.5 $312.3
Long-term debt, including amounts due
within one year..................... 0.6 1.6 1.6 2.1 1.7
Intercompany balances payable to
Columbia/HCA........................ 167.6 182.5 176.3 181.3 218.2
Working capital...................... 26.9 41.1 39.0 24.4 19.7
Capital expenditures................. 29.3 51.8 53.4 28.6 34.1
Other Operating Data:
EBITDA(b)............................ $ 56.8 $ 82.0 $110.6 $ 82.4 $ 66.3
Number of hospitals at end of
period.............................. 23 22 22 20 20
Number of licensed beds at end of
period(c)........................... 2,108 2,080 2,074 1,881 1,843
Weighted average licensed beds(d).... 2,122 2,078 2,060 1,862 1,783
Admissions(e)........................ 62,264 60,487 59,381 54,549 52,681
Equivalent admissions(f)............. 109,336 105,126 98,869 88,915 81,708
Average length of stay (days)(g)..... 4.4 4.4 4.7 4.8 4.9
Average daily census(h).............. 742 733 755 713 713
Occupancy rate(i).................... 35% 35% 37% 38% 40%
</TABLE>
52
<PAGE>
- --------
(a) Includes charge related to impairment of long-lived assets of $26.1 million
($15.9 million after-tax) for the year ended December 31, 1998.
(b) EBITDA is defined as income from continuing operations before depreciation
and amortization, interest expense, management fees, impairment of long-
lived assets, minority interests and income taxes. EBITDA is commonly used
as an analytical indicator within the health care industry, and also serves
as a measure of leverage capacity and debt service ability. EBITDA should
not be considered as a measure of financial performance under generally
accepted accounting principles, and the items excluded from EBITDA are
significant components in understanding and assessing financial
performance. EBITDA should not be considered in isolation or as an
alternative to net income, cash flows generated by operating, investing or
financing activities or other financial statement data presented in the
combined financial statements as an indicator of financial performance or
liquidity. Because EBITDA is not a measurement determined in accordance
with generally accepted accounting principles and is thus susceptible to
varying calculations, EBITDA as presented may not be comparable to other
similarly titled measures of other companies.
(c) Licensed beds are those beds for which a facility has been granted approval
to operate from the applicable state licensing agency.
(d) Represents the average number of licensed beds weighted based on periods
owned.
(e) Represents the total number of patients admitted (in the facility for a
period in excess of 23 hours) to LifePoint's hospitals and is used by
management and certain investors as a general measure of inpatient volume.
(f) Equivalent admissions is used by management and certain investors as a
general measure of combined inpatient and outpatient volume. Equivalent
admissions is 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.
(g) Represents the average number of days admitted patients stay in LifePoint's
hospitals. Average length of stay has declined due to the continuing
pressures from managed care and other payers to restrict admissions and
reduce the number of days that are covered by the payers for certain
procedures, and by technological and pharmaceutical improvements.
(h) Represents the average number of patients in LifePoint's hospital beds each
day.
(i) Represents the percentage of hospital licensed beds occupied by patients.
Both average daily census and occupancy rate provide measures of the
utilization of inpatient rooms. The declining occupancy rate is primarily
attributed to the trend toward more services, that were previously
performed in an inpatient setting, being performed on an outpatient basis
and the decline in average length of stay per admission.
53
<PAGE>
LifePoint Management's Discussion and Analysis of
Financial Condition and Results of Operations
This discussion should be read together with the historical financial
statements of LifePoint Hospitals, Inc. included elsewhere herein and the notes
thereto and the information set forth under "LifePoint Selected Historical
Financial Data" and "LifePoint Unaudited Pro Forma Condensed Combined Financial
Statements" and the notes thereto.
Overview
LifePoint will own and operate the health care service business which has
comprised the America Group of Columbia/HCA until the distribution by
Columbia/HCA to its shareholders of all of the shares of outstanding common
stock of LifePoint. The distribution marks the beginning of LifePoint's
operations as an independent, publicly-traded company. As such, the historical
financial statements of LifePoint Hospitals, Inc. may not be indicative of
LifePoint's future performance, nor do they necessarily reflect what the
financial position and results of operations of LifePoint would have been if it
had operated as a separate, stand-alone entity during the periods covered. See
"Risk Factors--No Operating Histories as Independent Companies."
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 LifePoint and are subject to a number of uncertainties and
risks that could significantly affect current plans and expectations and the
future financial condition and results of LifePoint. These factors include, but
are not limited to, (i) the highly competitive nature of the health care
business, (ii) the efforts of insurers, health care providers and others to
contain health care costs, (iii) possible changes in the Medicare program that
may further limit reimbursements to health care providers and insurers, (iv)
changes in Federal, state or local regulation affecting the health care
industry, (v) the possible enactment of Federal or state health care reform,
(vi) the departure of key executive officers from LifePoint, (vii) claims and
legal actions relating to professional liability, (viii) fluctuations in the
market value of LifePoint common stock, (ix) changes in accounting practices,
(x) changes in general economic conditions, (xi) the complexity of integrated
computer systems and the success and expense of the remediation efforts of
Columbia/HCA, LifePoint and relevant third parties in achieving Year 2000
readiness, and (xii) other risk factors described above. 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 LifePoint. 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
Columbia/HCA is currently the subject of several Federal investigations into
certain of its business practices, as well as governmental investigations by
various states. Columbia/HCA 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,
Columbia/HCA expects additional subpoenas and other investigative and
prosecutorial activity to occur in these and other jurisdictions in the future.
Columbia/HCA is the subject of a formal order of investigation by the
Securities and Exchange Commission. Columbia/HCA understands that the SEC
investigation includes the anti-fraud, periodic reporting and internal
accounting control provisions of the Federal securities laws.
Management believes that the ongoing governmental investigations and related
media coverage may have had a negative effect on Columbia/HCA's results of
operations (which includes LifePoint for the periods prior to the distribution
date which are presented herein). The extent to which LifePoint may or may not
continue to be affected after the distribution by the ongoing investigations of
Columbia/HCA, the initiation of
54
<PAGE>
additional investigations, if any, and the related media coverage cannot be
predicted. It is possible that these matters could have a material adverse
effect on the financial condition or results of operations of LifePoint in
future periods.
Pursuant to the Distribution Agreement to be entered into by and among
Columbia/HCA, LifePoint and Triad in connection with the distribution,
Columbia/HCA has agreed to indemnify LifePoint in respect of any losses which
it may incur arising from the governmental investigations described above and
from stockholder actions and other legal proceedings related to the
governmental investigations which are currently pending against Columbia/HCA.
Columbia/HCA has also agreed to indemnify LifePoint in respect of any losses
which it may incur as a result of proceedings which may be commenced by
government authorities or by private parties in the future that arise from
acts, practices or omissions engaged in prior to the distribution date and
relate to the proceedings described above. Columbia/HCA has also agreed that,
in the event that any hospital owned by LifePoint is permanently excluded from
participation in the Medicare and Medicaid programs as a result of the
proceedings described above, then Columbia/HCA will make a cash payment to
LifePoint in an amount (if positive) equal to five times the excluded
hospital's 1998 income from continuing operations before depreciation and
amortization, interest expense, management fees, impairment of long-lived
assets, minority interests and income taxes (as set forth on a schedule to the
Distribution Agreement) less the proceeds of the sale or other disposition of
the excluded hospital. LifePoint has agreed that, in connection with the
pending governmental investigations, it will participate with Columbia/HCA in
negotiating one or more compliance agreements setting forth each of their
agreements to comply with applicable laws and regulations. See "Arrangements
Among Columbia/HCA, LifePoint and Triad Relating to the Distribution--
Distribution Agreement." If any of such indemnified matters were successfully
asserted against LifePoint, or any of its facilities, and Columbia/HCA failed
to meet its indemnification obligations, then such losses could have a material
adverse effect on the business, financial position, results of operations and
prospects of LifePoint. Columbia/HCA will not indemnify LifePoint for losses
relating to any acts, practices and omissions engaged in by LifePoint after the
distribution date, whether or not LifePoint is indemnified for similar acts,
practices and omissions occurring prior to the distribution date. (See Note 3--
Columbia/HCA Investigations, Litigation and Indemnification Rights and Note
11--Contingencies of the Notes to Combined Financial Statements of LifePoint
included elsewhere herein).
Results of Operations
Revenue/Volume Trends
LifePoint has experienced an increase in revenues and volume growth during
1998. However, on a same facility basis, LifePoint has experienced declines in
revenues and volume growth rates as well as operational deficiencies.
Management believes three primary factors have contributed to these declines in
revenue and volume growth rate (on a same facility basis): the impact of
reductions in Medicare payments mandated by the Balanced Budget Act of 1997
(the "Balanced Budget Act"), the continuing trend toward the conversion of more
services to an outpatient basis and the impact of the government
investigations.
LifePoint'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 also negotiating discounted amounts that they
will pay health care providers rather than paying standard prices. LifePoint
expects patient volumes from Medicare and Medicaid to continue to increase due
to the general aging of the population and the expansion of state Medicaid
programs. However, under the Balanced Budget Act, LifePoint's reimbursement
from the Medicare and Medicaid programs was reduced in 1998 and will be further
reduced as some reductions in reimbursement levels are phased in over the next
two years. The Balanced Budget Act has accelerated a shift, by certain Medicare
beneficiaries, from traditional Medicare coverage to medical coverage that is
provided under managed care plans. LifePoint generally receives lower payments
per patient under managed care plans than under 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 the level of service
55
<PAGE>
provided) revenues, earnings and cash flows are being significantly reduced.
Admissions related to Medicare, Medicaid and managed care plan patients were
87.7% and 86.1% of total admissions for the years ended December 31, 1998 and
1997, respectively. LifePoint's hospitals do not receive any revenues from
capitation arrangements (prepaid health service agreements). See "Government
and Other Sources of Reimbursement for LifePoint and Triad."
LifePoint's revenues also continue to be affected by the trend toward certain
services being performed more frequently on an outpatient basis. Growth in
outpatient services is expected to continue in the health care industry as
procedures performed on an inpatient basis are converted to outpatient
procedures through continuing advances in pharmaceutical and medical
technologies. The redirection of certain procedures to an outpatient basis is
also influenced by pressures from payers to perform certain procedures as
outpatient care rather than inpatient care. Generally, the payments received
for an outpatient procedure are less than for a similar procedure performed in
an inpatient setting. Outpatient revenues grew to 47.9% of net patient revenues
for the year ended December 31, 1998 from 47.1% during the prior year.
Management believes that the impact of the ongoing governmental
investigations of certain of Columbia/HCA's business practices and the related
media coverage, combined with Columbia/HCA's restructuring of operations
(including the distribution of Triad and LifePoint and the announced
divestitures of several facilities), have created uncertainties with
physicians, patients and payers in certain markets. See "Government Regulation
and Other Factors Affecting LifePoint and Triad--Governmental Investigation of
Columbia/HCA and Related Litigation."
Reductions in the rate of increase in Medicare and Medicaid reimbursement,
increasing percentages of the patient volume being related to patients
participating in managed care plans and continuing trends toward more services
being performed on an outpatient basis are expected to present ongoing
challenges. The challenges presented by these trends are magnified by
LifePoint's inability to control these trends and the associated risks. To
maintain and improve its operating margins in future periods, LifePoint must
increase patient volumes while controlling the costs of providing services. If
LifePoint is not able to achieve reductions in the cost of providing services
through increased operational efficiencies, and the trend toward declining
reimbursements and payments continues, results of operations and cash flow will
deteriorate.
Management believes that the proper response to these challenges includes the
delivery of a broad range of quality health care services to patients by
assuring that physicians with appropriate specializations practice in the
hospitals, that the appropriate equipment and range of specialized services are
available within the hospitals, and that the hospitals are positioned as
community assets.
56
<PAGE>
Operating Results Summary
The following are comparative summaries of results from continuing operations
for the years ended December 31, 1998, 1997 and 1996:
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------------------
1998 1997
------------------ -----------------
Amount Percentage Amount Percentage
------ ---------- ------ ----------
(Dollars in millions)
<S> <C> <C> <C> <C>
Revenues.................................. $498.4 100.0 $487.6 100.0
Salaries and benefits..................... 220.8 44.3 196.6 40.3
Supplies.................................. 62.0 12.4 55.0 11.3
Other operating expenses.................. 117.2 23.5 119.5 24.5
Provision for doubtful accounts........... 41.6 8.4 34.5 7.1
Depreciation and amortization............. 28.3 5.7 27.4 5.6
Interest expense allocated from
Columbia/HCA............................. 19.1 3.8 15.4 3.2
Management fees allocated from
Columbia/HCA............................. 8.9 1.8 8.2 1.7
Impairment of long-lived assets........... 26.1 5.2 - -
------ ----- ------ -----
524.0 105.1 456.6 93.7
------ ----- ------ -----
Income (loss) from continuing operations
before minority interests and income
taxes (benefit).......................... (25.6) (5.1) 31.0 6.3
Minority interests in earnings of
consolidated entities.................... 1.9 0.4 2.2 0.4
------ ----- ------ -----
Income (loss) from continuing operations
before income taxes (benefit)............ (27.5) (5.5) 28.8 5.9
Provision (benefit) for income taxes...... (9.8) (2.0) 11.7 2.4
------ ----- ------ -----
Income (loss) from continuing operations.. $(17.7) (3.5) $ 17.1 3.5
====== ===== ====== =====
% changes from prior year:
Revenues................................. 2.2%
Income (loss) from continuing operations
before income taxes (benefit)........... (195.4)
Income (loss) from continuing
operations.............................. (204.0)
Admissions (a)........................... 2.9
Equivalent admissions (b)................ 4.0
Revenues per equivalent admission........ (1.7)
Same facility % changes from prior year
(c):
Revenues................................. (1.8)
Admissions (a)........................... (.8)
Equivalent admissions (b)................ .2
Revenues per equivalent admission........ (2.0)
</TABLE>
57
<PAGE>
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------------------
1997 1996
------------------ -----------------
Amount Percentage Amount Percentage
------ ---------- ------ ----------
(Dollars in millions)
<S> <C> <C> <C> <C>
Revenues.................................. $487.6 100.0 $464.0 100.0
Salaries and benefits..................... 196.6 40.3 175.2 37.8
Supplies.................................. 55.0 11.3 50.9 11.0
Other operating expenses.................. 119.5 24.5 99.3 21.4
Provision for doubtful accounts........... 34.5 7.1 28.0 6.0
Depreciation and amortization............. 27.4 5.6 23.5 5.1
Interest expense allocated from
Columbia/HCA............................. 15.4 3.2 14.1 3.0
Management fees allocated from
Columbia/HCA............................. 8.2 1.7 6.2 1.3
------ ----- ------ -----
456.6 93.7 397.2 85.6
------ ----- ------ -----
Income from continuing operations before
minority interests and income taxes...... 31.0 6.3 66.8 14.4
Minority interests in earnings of
consolidated entities.................... 2.2 0.4 1.2 0.3
------ ----- ------ -----
Income from continuing operations before
income taxes............................. 28.8 5.9 65.6 14.1
Provision for income taxes................ 11.7 2.4 26.3 5.7
------ ----- ------ -----
Income from continuing operations......... $ 17.1 3.5 $ 39.3 8.4
====== ===== ====== =====
% changes from prior year:
Revenues................................. 5.1%
Income from continuing operations before
income taxes............................ (56.1)
Income from continuing operations........ (56.5)
Admissions (a)........................... 1.9
Equivalent admissions (b)................ 6.3
Revenues per equivalent admission........ (1.2)
Same facility % changes from prior year
(c):
Revenues................................. 2.5
Admissions (a)........................... 0.7
Equivalent admissions (b)................ 5.8
Revenues per equivalent admission........ (3.1)
</TABLE>
- --------
(a) Represents the total number of patients admitted (in the facility for a
period in excess of 23 hours) to LifePoint'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, consolidated or divested
during the current and prior year. The facilities that LifePoint intends to
divest will continue to be included in "same facility" until the date they
are divested.
Years Ended December 31, 1998 and 1997
Revenues increased 2.2% to $498.4 million in 1998 compared to $487.6 million
in 1997. Inpatient admissions increased 2.9%, equivalent admissions (adjusted
to reflect combined inpatient and outpatient volume) increased 4.0% and
revenues per equivalent admission decreased 1.7% from 1997. On a same facility
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basis, revenues decreased 1.8%, inpatient admissions decreased 0.8%, equivalent
admissions increased 0.2% and revenues per equivalent admission decreased 2.0%.
The decline in revenues (on a same facility basis) and revenues per equivalent
admission was due to several factors, including decreases in Medicare
reimbursement rates mandated by the Balanced Budget Act which became effective
October 1, 1997 (such rates lowered 1998 revenues by approximately $7 million),
continued increases in discounts from the growing number of managed care payers
(managed care as a percentage of total admissions increased to 18.6% in 1998
compared to 16.7% in 1997) and delays experienced in obtaining Medicare cost
report settlements (cost report filings and settlements resulted in favorable
revenue adjustments of $1.2 million in 1998 compared to favorable adjustments
of $3.3 million in 1997).
Operating expenses increased as a percentage of revenues in every expense
category except for other operating expenses, which decreased 1.0%. The primary
reason for the increases, as a percentage of revenues, was LifePoint's
inability to adjust expenses in line with the decreases experienced in same
facility volume and reimbursement trends. The level of management's attention
being devoted to the governmental investigations, reactions by certain
physicians and patients to the related negative media coverage and management
changes at several levels and locations throughout LifePoint contributed to
LifePoint's inability to implement changes to reduce operating expenses in
response to the revenue and volume growth rate declines on a same facility
basis.
Salaries and benefits, as a percentage of revenues, increased to 44.3% in
1998 from 40.3% in 1997. The increase was due to cost pressures on labor
(salaries and benefits per equivalent admission increased 8.0% over last year)
and a decline in productivity (man-hours per equivalent admission increased
2.9% over last year).
Supply costs increased to 12.4% as a percentage of revenues in 1998 from
11.3% in 1997 primarily due to the 1.7% decline in revenues per equivalent
admission, while the cost of supplies per equivalent admission increased 8.4%.
The higher cost of supplies per equivalent admission resulted from significant
increases in pharmaceutical costs and other increases in new product
development costs and general inflation.
Other operating expenses decreased as a percentage of revenues to 23.5% in
1998 from 24.5% in 1997. Other operating expenses consists primarily of
contract services, professional fees, repairs and maintenance, rents and
leases, utilities, insurance, marketing and non-income taxes. The decrease was
due to small decreases in several of these expense categories as a percentage
of revenues, including lower marketing costs being incurred due to the
cancellation of a national branding campaign.
Provision for doubtful accounts, as a percentage of revenues, increased to
8.4% in 1998 from 7.1% in 1997 due to internal factors such as computer
information system conversions (including patient accounting systems) at
various facilities and external factors such as payer mix shifts to managed
care plans (resulting in increased amounts of patient co-payments and
deductibles) and payer remittance slowdowns. The information system conversions
hampered the business office billing functions and collection efforts in those
facilities as some resources were directed to installing and converting systems
and building new data files, rather than devoting full effort to billing and
collecting receivables. The information systems conversion was substantially
completed in 1998. LifePoint has experienced an increased occurrence of charge
audits from certain payers due to the negative publicity surrounding the
government investigations which have resulted in delays in the collection of
receivables. The delays in collection resulted in an increase in receivables
reserved under LifePoint's bad debt allowance policy. Management is not able 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 (1996 and prior).
Interest expense, which is primarily represented by interest incurred on the
net intercompany balance with Columbia/HCA, increased to $19.1 million in 1998
from $15.4 million in 1997 primarily as a result of an increase in the average
balance of the advances from Columbia/HCA during 1998 compared to the same
period in 1997.
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During 1998, LifePoint, as part of its strategic business plan, decided to
divest three of its facilities. The divestitures are expected to be completed
through sales. The carrying value for these facilities expected to be sold was
reduced to fair value, based upon estimated selling values, resulting in a pre-
tax impairment charge of $24.8 million. An additional pre-tax impairment loss
of approximately $1.3 million was recorded during 1998 related to the write-off
of intangibles and other long-lived assets of certain physician practices where
the recorded asset values were not deemed to be fully recoverable based upon
the operating results trends and projected future cash flows. These assets are
now recorded at estimated fair value. (See Note 5--Impairment of Long-Lived
Assets in the Notes to Combined Financial Statements of LifePoint included
elsewhere herein.)
Income (loss) from continuing operations before income taxes (benefit)
declined to a loss of $27.5 million in 1998 from income of $28.8 million in
1997 primarily due to the $15.9 million after-tax charge related to impairment
of long-lived assets. Also, the three facilities that management has determined
to divest as part of their plan to establish the structure for the future
operations of LifePoint contributed significantly to the decline in results of
operations. These facilities to be divested incurred losses from continuing
operations before income tax benefit of approximately $9.6 million and $3.8
million for the years ended December 31, 1998 and 1997, respectively.
Management fees allocated by Columbia/HCA were $8.9 million in 1998 and $8.2
million in 1997. These amounts represent allocations, using revenues as the
allocation basis, of the corporate, general and administrative expenses of
Columbia/HCA. LifePoint management estimates that if they had managed
comparable general and administrative functions for LifePoint (as a separate,
independent entity) the costs incurred would be approximately $14.4 million,
based upon their 1999 projections.
Net income declined to a loss of $21.8 million in 1998 compared to income of
$12.5 million in 1997. In addition to the decline in income from continuing
operations, LifePoint incurred a $4.1 million after-tax loss from its
discontinued home health operations in 1998 compared to a $0.6 million after-
tax loss in 1997, primarily due to declines in Medicare rates of reimbursement
under the Balanced Budget Act and declines in home health visits.
Years Ended December 31, 1997 and 1996
Revenues increased 5.1% to $487.6 million in 1997 compared to $464.0 million
in 1996. Inpatient admissions increased 1.9%, equivalent admissions (adjusted
to reflect combined inpatient and outpatient volume) increased 6.3% and
revenues per equivalent admission decreased 1.2% from 1996. The increase in
revenues and equivalent admissions was primarily due to the acquisition of two
hospitals during March and May of 1996. On a same facility basis, revenues
increased 2.5%, admissions increased 0.7%, equivalent admissions increased 5.8%
and revenues per equivalent admission decreased 3.1%. The increase in
outpatient volume (reflected by the increases in equivalent admissions) is
primarily a result of the continuing trend of certain services, previously
provided in an inpatient setting, being converted to an outpatient setting. The
decline in revenues per equivalent admission was due in part to delays
experienced in obtaining cost report settlements (cost reports resulted in
favorable revenue adjustments of $3.3 million in 1997 compared to $10.6 million
in 1996), decreases in Medicare rates of reimbursement mandated by the Balanced
Budget Act which became effective October 1, 1997 (such rates lowered fourth
quarter 1997 revenues by approximately $1.5 million) and increased discounts
from the growing number of managed care payers (managed care as a percentage of
total admissions increased to 16.7% in 1997 compared to 13.8% in 1996).
Operating expenses increased as a percentage of revenues in every expense
category primarily due to LifePoint's inability to control expenses in line
with the reimbursement rate declines. The level of management's attention being
devoted to the governmental investigations during the fourth quarter of 1997,
reactions by certain physicians and patients to the related negative media
coverage and management changes at several levels and locations throughout
LifePoint contributed to LifePoint's inability to control operating expenses.
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Salaries and benefits, as a percentage of revenues, increased to 40.3% in
1997 from 37.8% in 1996. The increase was primarily due to cost pressures on
labor (salaries and benefits per equivalent admission increased 5.5% over last
year).
Other operating expenses increased to 24.5% of revenues in 1997 compared to
21.4% in 1996. Included in 1997 are costs associated with start-up activities
whereby in prior years similar costs were previously capitalized and
subsequently amortized. LifePoint changed its policy on accounting for start-up
costs effective January 1, 1997, which resulted in approximately $4.6 million
being recorded as other operating expenses for 1997, compared to similar costs
being capitalized and the related expense recorded as amortization expense
during 1996. (See Note 7--Accounting Change of the Notes to Combined Financial
Statements of LifePoint included elsewhere herein). The increase was also due,
in part, to small increases in various operating expense categories including
contract services as a percentage of revenues.
Provision for doubtful accounts, as a percentage of revenues, increased to
7.1% in 1997 from 6.0% in 1996 due to internal factors such as computer
information system conversions (including patient accounting systems) at
various facilities and external factors such as payer mix shifts to managed
care plans (resulting in increased amounts of patient co-payments and
deductibles) and payer remittance slowdowns.
Depreciation and amortization increased as a percentage of revenues to 5.6%
in 1997 from 5.1% in 1996. The increase was primarily due to increased capital
expenditures related to ancillary services (such as outpatient services) and
information systems.
Interest expense, which is primarily represented by interest incurred on the
net intercompany balance with Columbia/HCA, increased to $15.4 million in 1997
compared to $14.1 million in 1996, primarily as a result of an increase in the
average balance of the advances from Columbia/HCA during 1997 compared to 1996.
This was due, in part, to a $18.4 million decline in net cash flows provided
from operations during 1997 compared to 1996.
Income from continuing operations before income taxes declined to $28.8
million in 1997 from $65.6 million in 1996 due to the increases in expenses as
discussed above. Also, the three facilities that LifePoint plans to divest
contributed to the decline in results of operations. These facilities to be
divested incurred losses from continuing operations before income tax benefit
of approximately $3.8 million for the year ended December 31, 1997 compared to
income from continuing operations before income taxes of $1.8 million for the
year ended December 31, 1996.
Net income declined to $12.5 million in 1997 compared to $41.2 million in
1996. In addition to the decline in income from continuing operations,
LifePoint incurred a $4.0 million after-tax loss from its discontinued home
health operations in 1997 compared to $1.9 million in after-tax income in 1996.
The 1997 loss includes a $3.4 million after-tax estimated loss on disposal of
its home health operations. The majority of the decline in income from
operations of the discontinued home health businesses was due to reductions in
Medicare rates of reimbursement under the Balanced Budget Act.
Liquidity and Capital Resources
LifePoint has previously relied upon Columbia/HCA for liquidity and sources
of capital to supplement any needs not met by operations. Following the
distribution, as an independent, publicly-traded company, LifePoint will have
direct access to the capital markets and the ability to enter into its own bank
borrowing arrangements. At December 31, 1998, LifePoint had working capital of
$26.9 million.
Cash provided by operating activities decreased slightly to $45.3 million for
the year ended December 31, 1998 from $45.4 million last year. The decrease was
due to reduced income before non-cash charges and partially offset by higher
growth in accounts receivable balances in the prior period.
For the year ended December 31, 1997, cash provided by operating activities
decreased to $45.4 million from $63.8 million for the year ended December 31,
1996. The decrease was primarily due to reduced income from continuing
operations and partially offset by a decline in working capital outflows during
1997 compared to the prior year. The decline in working capital outflows was
primarily due to a higher growth in accounts receivable balances in the prior
year partially offset by a growth in accounts payable in the same year.
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Cash used in investing activities decreased to $29.3 million for the year
ended December 31, 1998 from $51.9 million during the same period last year.
The decrease was primarily due to decreased purchases of property and equipment
during the year ended 1998 and approximately $7.2 million in equity investments
in joint ventures during the same period last year. Cash used in investing
activities was $51.9 million for the year ended December 31, 1997 compared to
$58.6 million in 1996.
Routine capital expenditures approximated $29.3 million for the year ended
December 31, 1998. Management believes that its capital expenditure program is
adequate to expand, improve and equip LifePoint's existing health care
facilities. At December 31, 1998, there were projects under construction which
had an estimated cost to complete and equip over the next eighteen months of
approximately $61.8 million (including the construction of a replacement
hospital located in Florida that is estimated to cost approximately $32.0
million).
In connection with the distribution, all intercompany accounts payable by
LifePoint to Columbia/HCA will be eliminated, and LifePoint will assume
approximately $260.6 million of debt obligations from Columbia/HCA. Such debt
financing is expected to consist of $135 million of term loans under the new
credit agreement, $125 million Senior Subordinated Notes due 2009 and
approximately $0.6 million of debt assumed from Columbia/HCA. LifePoint expects
that the new credit agreement will also include an additional term loan
commitment of $35 million available for limited purposes and a revolving credit
commitment of up to $65 million, which are expected to be undrawn at closing.
Borrowings under the revolving credit facility will be available to fund
working capital needs and for other general corporate purposes.
Management does not consider the sale of any assets to be necessary to repay
LifePoint's indebtedness or to provide working capital. However, for other
reasons, certain of LifePoint's hospitals may be sold in the future from time
to time. LifePoint has entered into a letter of intent to sell three of its
general, acute care hospitals, Barrow Medical Center, Halstead Hospital and
Trinity Hospital for an aggregate purchase price of $25 million, plus a net
working capital adjustment which is currently expected by management to result
in an additional payment to LifePoint of approximately $4.8 million. See
"LifePoint Business--General." Although LifePoint's indebtedness will be more
substantial than was historically the case for its predecessor entities,
management expects that operations and working capital facilities will provide
sufficient liquidity for fiscal 1999.
LifePoint does not expect to pay dividends on its common stock in the
foreseeable future.
Impact of Year 2000 Computer Issues
Background and General Information
The Year 2000 problem is the result of two potential malfunctions that could
have an impact on Columbia/HCA's systems and equipment, including systems and
equipment on which LifePoint relies. The first problem arises due to computers
being programmed to use two rather than four digits to define the applicable
year. The second problem arises in embedded chips, where microchips and
microcontrollers have been designed using two rather than four digits to define
the applicable year. Certain of Columbia/HCA's computer programs, building
infrastructure components (e.g., alarm systems and HVAC systems) and medical
devices that are date sensitive, may recognize a date using "00" as the year
1900 rather than the year 2000. If uncorrected, the problem could result in
computer system and program failures or equipment and medical device
malfunctions that could result in a disruption of business operations or that
could affect patient diagnosis and treatment.
LifePoint obtains most of its information technology and information
technology infrastructure systems from CIS pursuant to the Computer and Data
Processing Services Agreement. CIS does not warrant that the software and
hardware used by CIS in providing services to LifePoint will be Year 2000, but
CIS is currently making efforts in a professional, timely, and workmanlike
manner that it deems reasonable to address Year 2000 issues with respect to the
software licensed to LifePoint under the Computer and Data Processing Services
Agreement. In connection with its participation in Columbia/HCA's Year 2000
project, LifePoint has
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made and will continue to make certain expenditures in respect of software
systems and applications not obtained from CIS and non-information technology
systems (e.g., vendor products, medical equipment and other related equipment
with embedded chips) to ensure that they are Year 2000 ready. See "Arrangements
Among Columbia/HCA, LifePoint and Triad Relating to the Distribution--Computer
and Data Processing Services Agreement" and "--Transitional Services
Agreement."
Pursuant to the Computer and Data Processing Services Agreement, after the
distribution, LifePoint will rely on CIS to provide virtually all of its
computer support and information technology services. Pursuant to the
Transitional Services Agreement, Columbia/HCA will continue its ongoing program
to inspect medical equipment at LifePoint facilities for Year 2000 readiness.
LifePoint is dependent upon Columbia/HCA in substantially all respects for the
Year 2000 readiness of its information technology and non-information
technology systems and for contingency planning in respect of Year 2000-related
risks. Any failure by Columbia/HCA to adequately address such matters could
have a material adverse effect on the business, financial condition, results of
operations or prospects of LifePoint.
Columbia/HCA is utilizing both internal and external resources to manage and
implement its Year 2000 program. With the assistance of external resources,
Columbia/HCA has undertaken development of contingency plans in the event that
its Year 2000 efforts, or the Year 2000 efforts of third-parties upon which
Columbia/HCA and LifePoint rely, are not accurately or timely completed.
LifePoint management consults regularly with the Columbia/HCA personnel
responsible for development of such contingency plans. Columbia/HCA has
developed a contingency planning methodology and will implement contingency
plans throughout 1999.
Information Technology Systems
With respect to the information technology portions of Columbia/HCA's Year
2000 project, which address the inventory, assessment, remediation, testing and
implementation of internally developed software, Columbia/HCA has identified
various software applications that are being addressed on separate time lines.
Columbia/HCA has begun remediating all these software applications and is
testing the software applications where remediation has been completed.
Columbia/HCA has also completed the assessment of mission critical third party
software (i.e., that software which is essential for day-to-day operations) and
has developed testing and implementation plans with separate time lines.
Columbia/HCA has completed and placed into production 60% of software
applications and is 75% complete on most of the remaining software
applications, and anticipates completing, in all material respects,
remediation, testing and implementation for internally developed and mission
critical third party software by June 1999. Columbia/HCA's efforts are
currently on schedule in all material respects.
With respect to the information technology infrastructure portion of
Columbia/HCA's Year 2000 project, Columbia/HCA has undertaken a program to
inventory, assess and correct, replace or otherwise address impacted vendor-
supplied products (hardware, systems software, business software, and
telecommunication equipment). Columbia/HCA has implemented a program to contact
vendors, analyze information provided, and remediate, replace or otherwise
address information technology products that pose a material Year 2000 impact.
Columbia/HCA anticipates completion, in all material respects, of the
information technology infrastructure portion of its program by June 1999. The
information technology infrastructure portion of Columbia/HCA's Year 2000
project is currently on schedule in all material respects.
Columbia/HCA presently believes that with modifications to existing software
or the installation of upgraded software under the information technology
infrastructure portion, the Year 2000 will not pose material operational
problems for its computer systems. However, if such modifications or upgrades
are not accomplished in a timely manner, Year 2000 related failures may present
a material adverse impact on the operations of LifePoint.
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Non-Information Technology Systems and Equipment
With respect to the non-information technology infrastructure portion of
Columbia/HCA's Year 2000 project, Columbia/HCA has undertaken a program to
inventory, assess and correct, replace or otherwise address impacted vendor
products, medical equipment and other related equipment with embedded chips.
Columbia/HCA has implemented a program to contact vendors, analyze information
provided, and remediate, replace or otherwise address devices or equipment that
pose a material Year 2000 impact. Columbia/HCA anticipates completion, in all
material respects, of the non-information technology infrastructure portion of
its program by a revised date of September 30, 1999, from the previously
anticipated date of June 30, 1999. With respect to such revised date, the non-
information technology infrastructure portion of Columbia/HCA's Year 2000
project is currently on schedule in all material respects.
Columbia/HCA is prioritizing its non-information technology infrastructure
efforts by focusing on equipment and medical devices that will have a direct
impact on patient safety and health. Columbia/HCA is directing substantial
efforts to repair, replace, upgrade or otherwise address this equipment and
these medical devices in order to minimize risk to patient safety and health.
Columbia/HCA is relying on information that is being provided to it by
equipment and medical device manufacturers regarding the Year 2000 readiness of
their products. While Columbia/HCA is attempting to evaluate information
provided by its past and present vendors, there can be no assurance that in all
instances accurate information is being provided. Columbia/HCA also cannot in
all instances guarantee that the repair, replacement or upgrade of all non-
information technology infrastructure systems will occur on a timely basis or
that such repairs, replacement or upgrades will avoid any Year 2000 problems.
Third-Party Payers and Intermediaries, and Suppliers
Columbia/HCA has initiated communications with LifePoint's major third party
payers and intermediaries, including government payers and intermediaries.
LifePoint relies on these entities for accurate and timely reimbursement of
claims, often through the use of electronic data interfaces. Columbia/HCA has
not received assurances that these interfaces will be timely converted. Testing
with payers and intermediaries will not be completed by June 30, 1999 because
the payers and intermediaries are not ready to test with Columbia/HCA's
systems. Failure of these third party systems could have a material adverse
effect on LifePoint's cash flow, or results of operations.
Columbia/HCA also has initiated communications with LifePoint's mission
critical suppliers and vendors (i.e. those suppliers and vendors whose products
and services are essential for day-to-day operations) to verify their ability
to continue to deliver goods and services through the Year 2000. Columbia/HCA
has not received assurances from all mission critical suppliers and vendors
that they will be able to continue to deliver goods and services through the
Year 2000, but Columbia/HCA is continuing its efforts to obtain such
assurances. The failure of these third parties could have a material adverse
effect on the business, financial condition, results of operations or prospects
of LifePoint, and/or the ability of LifePoint to provide health care services.
With the assistance of external resources, Columbia/HCA has undertaken the
development of contingency plans in the event that its Year 2000 efforts, or
the Year 2000 efforts of third parties upon which Columbia/HCA and LifePoint
rely, are not accurately or timely completed. Columbia/HCA has developed a
contingency planning methodology and will implement contingency plans
throughout 1999.
Year 2000 Risks
While Columbia/HCA is developing contingency plans to address possible
failure scenarios, LifePoint recognizes that there are "worst-case" scenarios
which may develop and are largely outside its or Columbia/HCA's control.
LifePoint recognizes the risks associated with extended infrastructure (e.g.,
power, water and telecommunications) failure, the interruption of insurance and
government program payments to the organization and the failure of equipment or
software that could impact patient safety or health despite the
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assurances of third parties. Columbia/HCA is addressing these and other failure
scenarios in its contingency planning effort and is engaging third parties in
discussions regarding how to manage common failure scenarios, but neither
Columbia/HCA nor Lifepoint can currently estimate the likelihood or the
potential cost of such failures. Currently, LifePoint does not believe that any
reasonably likely worst case scenario will have a material impact on its
revenues or operations. Those reasonably likely worst case scenarios include
continued expenditures for remediation, continued expenditures for replacement
or upgrade of equipment, continued efforts regarding contingency planning,
increased staffing for the periods immediately preceding and after January 1,
and possible implementation of alternative payment schemes with LifePoint's
payers.
Costs and Expenses
The Year 2000 project costs incurred by Columbia/HCA will have an impact on
the Computer and Data Processing Services Agreement with LifePoint. LifePoint
is not currently able to reasonably estimate the ultimate cost to be incurred
by it for the assessment, remediation, upgrade, replacement and testing of its
impacted non-information technology systems. The majority of the costs (except
the cost of new equipment) related to the Year 2000 project will be expensed as
incurred and are expected to be funded through operating cash flows.
The successful completion of the project and completion dates for the Year
2000 modifications are based on management's best estimates, which were derived
utilizing numerous assumptions of future events, including the continued
availability of certain resources, third party modification plans and other
factors. However, there can be no guarantees that these estimates will be
achieved and actual results could differ materially from those anticipated.
Specific factors that might cause such material differences include, but are
not limited to, the availability and cost of personnel trained in this area and
the ability to locate and correct all relevant computer codes and all medical
equipment.
Effects of Inflation and Changing Prices
Various federal, state and local laws have been enacted that, in certain
cases, limit LifePoint's ability to increase prices. Revenues for acute care
hospital services rendered to Medicare patients are established under the
Federal government's prospective payment system. Total Medicare revenues
approximated 37.8%, 39.4% and 40.9% for the years ended December 31, 1998, 1997
and 1996, respectively.
Management believes that hospital industry operating margins have been, and
may continue to be, under significant pressure because of deterioration in
inpatient volumes, changes in payer mix, and growth in operating expenses in
excess of the increase in prospective payments under the Medicare program.
Management expects that the average rate of increase in Medicare prospective
payments will continue to decline slightly in 1999. In addition, as a result of
increasing regulatory and competitive pressures, LifePoint's ability to
maintain operating margins through price increases to non-Medicare patients is
limited.
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 the services provided by and reimbursement to health care
providers in LifePoint'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 or taxes levied on hospitals or
other providers. While LifePoint 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 LifePoint will not be adopted.
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Description of Certain New LifePoint Indebtedness
General
Upon consummation of the distribution, LifePoint Hospitals Holdings, Inc., a
wholly owned subsidiary of LifePoint ("LifePoint Holdings"), expects to have
outstanding $125 million aggregate principal amount of notes due 2009 and $135
million aggregate principal amount of indebtedness under its bank facilities.
The notes will initially be issued, and indebtedness incurred, by Healthtrust,
a wholly owned subsidiary of Columbia/HCA. Following the issuance and sale of
the notes and the incurrence of the indebtedness, the America Group assets will
be transferred to LifePoint, and LifePoint will assume all obligations under
the notes and bank facilities. LifePoint will then transfer substantially all
of its assets to LifePoint's wholly owned subsidiary, LifePoint Holdings, and
LifePoint Holdings will assume all obligations under the notes and bank
facilities. The initial issuer of the notes and obligor under the bank
facilities will receive the net proceeds and will use such proceeds to repay
debt owed to Columbia/HCA and an affiliate of Columbia/HCA.
Senior Subordinated Notes due 2009
Certain of LifePoint Holdings' subsidiaries will fully and unconditionally
guarantee the notes on a senior subordinated basis. Future subsidiaries also
may be required to guarantee the notes on a senior subordinated basis. The
notes will be general unsecured obligations of LifePoint Holdings and will be
subordinated in right of payment to all of LifePoint Holdings' existing and
future senior indebtedness. The notes will rank equally with LifePoint
Holdings' existing and future senior subordinated obligations and will rank
senior to all of LifePoint Holdings' subordinated indebtedness. The guarantees
will be subordinated to all existing and future senior indebtedness of the
guarantors.
LifePoint Holdings may redeem the notes at any time on or after the fifth
anniversary of the issue date at the redemption prices set forth in the notes.
In addition, on or before the third anniversary of the issue date LifePoint
Holdings may redeem up to 35% of the notes with the net proceeds of certain
equity offerings at the redemption price set forth in the notes. Upon certain
change of control events, each holder of notes may require LifePoint Holdings
to repurchase all or a portion of its notes at a purchase price equal to 101%
of the principal amount thereof, plus accrued interest.
The indenture governing the notes will contain covenants that, among other
things, will limit LifePoint Holdings' and certain of its subsidiaries' ability
to incur additional indebtedness, pay dividends on, redeem or purchase its
capital stock, make investments, engage in transactions with affiliates, create
certain liens, in the case of certain of its subsidiaries, guarantee
indebtedness, sell assets, sell capital stock of restricted subsidiaries and
consolidate, merge or transfer all or substantially all its assets. See "Risk
Factors--High Degree of Leverage and Debt Service Obligations May Adversely
Affect LifePoint and LifePoint."
A registration rights agreement will be executed in connection with the
offering of the notes whereby LifePoint Holdings will agree to exchange the
unregistered notes for registered notes with substantially identical terms. If
the consummation of the exchange offer and certain other events in connection
with such exchange offer do not occur prior to certain specified dates,
LifePoint Holdings will be obligated to pay additional interest on the notes
during the existence of such default.
New Credit Agreement
The $235 million new credit agreement, to be assumed ultimately by LifePoint
Holdings, will consist of:
. a $85 million Tranche A term loan facility ($35 million of which may be
available for limited purposes subsequent to the distribution),
. a $85 million Tranche B term loan facility, and
. a $65 million revolving credit facility.
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Repayments under the term loan facilities are expected to be due in quarterly
installments. The final payment under the Tranche A term loan facility will be
due and payable 5 1/2 years after the distribution date and the final payment
under the Tranche B term loan facility will be due and payable 6 1/2 years
after the distribution date. In addition to the scheduled amortization,
LifePoint Holdings will be required to repay borrowings under the term loan and
revolving facilities with proceeds from asset sales, subject to certain
exceptions, with proceeds from issuance of equity securities or the incurrence
of certain debt obligations (other than the notes to be assumed at the time
that the bank facilities are assumed), and a portion of excess cash flow, which
amounts may not be re-borrowed. The Tranche B term loan facility will have a
prepayment fee due during the first two years for any voluntary prepayment. The
revolving credit facility, which will be undrawn at the time of the
distribution, is expected to be available for working capital and other general
corporate purposes, and any outstanding amounts thereunder will be due and
payable 5 1/2 years after the distribution date.
It is expected that, at LifePoint Holdings' option, the new credit agreement
will bear interest at a rate per annum equal to:
. LIBOR (as defined in the new credit agreement) plus an applicable margin;
or
. the higher of the administrative agent's prime rate or 0.5% above the
federal funds rate, in each case plus an applicable margin.
The applicable margin will be determined based on LifePoint Holdings'
consolidated funded indebtedness to its consolidated adjusted EBITDA ratio.
After the debt has been assumed by LifePoint Holdings, LifePoint will
guarantee the borrowings and other obligations under the bank facilities, which
guarantees will be secured by a pledge of the capital stock of LifePoint
Holdings. LifePoint Holdings will also pledge its assets to secure the bank
facilities. LifePoint Holdings' subsidiaries will guarantee the borrowings
under the bank facilities, which guarantees will be secured by a pledge of the
assets of the subsidiaries.
The bank facility will contain covenants that, among other things, will limit
LifePoint Holdings' and certain of its subsidiaries' ability to incur
additional indebtedness, pay dividends on, redeem or purchase its capital
stock, make investments and capital expenditures, engage in transactions with
affiliates, create certain liens, sell assets and consolidate, merge or
transfer assets. In addition, LifePoint Holdings expects that it will be
required to comply with various financial ratios and tests, including a minimum
net worth test, a consolidated funded debt to adjusted EBITDA ratio and a
minimum fixed charge coverage ratio.
The definitive new credit agreement has not yet been fully negotiated and may
contain more or less restrictive provisions than those set forth above. The
above summary highlights the material provisions of the new credit agreement as
of the date hereof, but is qualified in its entirety by reference to the
complete text of the documents entered into or to be entered into in connection
therewith.
67
<PAGE>
Triad
Selected Historical Financial Data
The following table sets forth selected historical financial data of Triad
for each of the years in the five year period ended December 31, 1998. The
selected financial data at December 31, 1996, 1995 and 1994 and for the years
ended December 31, 1995 and 1994 has been derived from unaudited financial
statements. The table should be read in conjunction with the Triad Combined
Financial Statements and related notes included elsewhere in this information
statement and "Triad Management's Discussion and Analysis of Financial
Condition and Results of Operations."
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------------------------------
1998 1997 1996 1995 1994
-------- -------- -------- -------- --------
(Dollars in millions, except per share
amounts)
<S> <C> <C> <C> <C> <C>
Summary of Operations:
Revenues.................. $1,588.7 $1,609.3 $1,600.5 $1,558.9 $1,290.5
Salaries and benefits..... 700.5 666.8 628.1 636.8 541.4
Supplies.................. 241.6 232.8 221.9 217.7 180.2
Other operating expenses.. 359.2 383.4 349.5 321.0 273.5
Provision for doubtful
accounts................. 138.4 138.5 106.5 98.2 89.2
Depreciation and
amortization............. 109.6 102.9 94.5 84.3 68.0
Interest expense allocated
from Columbia/HCA........ 68.9 60.5 52.0 36.6 30.7
Management fees allocated
from Columbia/HCA........ 29.3 25.4 20.7 21.0 17.4
Impairment of long-lived
assets................... 55.1 13.7 -- -- --
-------- -------- -------- -------- --------
1,702.6 1,624.0 1,473.2 1,415.6 1,200.4
-------- -------- -------- -------- --------
Income (loss) from
continuing operations
before minority interests
and income taxes......... (113.9) (14.7) 127.3 143.3 90.1
Minority interests in
earnings of consolidated
entities................. 11.0 11.5 10.8 1.4 0.6
-------- -------- -------- -------- --------
Income (loss) from
continuing operations
before income taxes
(benefit) ............... (124.9) (26.2) 116.5 141.9 89.5
Provision for income taxes
(benefit)................ (39.4) (7.2) 48.2 57.0 35.5
-------- -------- -------- -------- --------
Income (loss) from
continuing operations
(a)...................... $ (85.5) $ (19.0) $ 68.3 $ 84.9 $ 54.0
======== ======== ======== ======== ========
Net income (loss) (a)..... $ (87.1) $ (19.8) $ 74.7 $ 87.2 $ 55.5
======== ======== ======== ======== ========
Basic earnings (loss) per
share:
Income (loss) from
continuing operations
(a).................... $ (2.85) $ (0.63) $ 2.28 $ 2.83 $ 1.80
Net income (loss) (a)... $ (2.90) $ (0.66) $ 2.49 $ 2.91 $ 1.85
Shares used in computing
basic earnings (loss)
per share (in
millions).............. 30.0 30.0 30.0 30.0 30.0
Diluted earnings (loss)
per share:
Income (loss) from
continuing operations
(a).................... $ (2.85) $ (0.63) $ 2.26 $ 2.79 $ 1.78
Net income (loss) (a)... $ (2.90) $ (0.66) $ 2.47 $ 2.87 $ 1.83
Shares used in computing
diluted earnings (loss)
per share (in
millions).............. 30.0 30.0 30.3 30.4 30.4
Financial Position:
Assets.................... $1,371.3 $1,410.5 $1,426.3 $1,351.8 $1,169.4
Long-term debt, including
amounts due within one
year..................... 14.4 15.4 17.1 27.5 32.3
Intercompany balances
payable to Columbia/HCA.. 613.7 525.0 521.7 392.6 331.3
Working capital........... 184.9 150.3 156.5 156.3 127.9
Capital expenditures...... 114.9 120.1 94.4 115.0 203.4(j)
Other Operating Data:
EBITDA(b)................. $ 149.0 $ 187.8 $ 294.5 $ 285.2 $ 206.2
Number of hospitals at end
of period................ 38 38 38 39 38
Number of licensed beds at
end of period (c)........ 5,909 5,859 5,872 5,926 5,660
Weighted average licensed
beds (d)................. 5,877 5,860 5,882 5,900 5,325
Admissions (e)............ 169,590 172,926 171,265 170,392 147,923
Equivalent admissions
(f)...................... 276,771 275,125 266,660 257,292 211,382
Average length of stay
(days) (g)............... 4.9 4.9 5.0 5.2 5.2
Average daily census (h).. 2,260 2,326 2,338 2,405 2,111
Occupancy rate (i)........ 39% 40% 40% 41% 40%
</TABLE>
68
<PAGE>
- --------
(a) Includes charges related to impairment of long-lived assets of $55.1
million ($32.9 million after-tax) and $13.7 million ($8.2 million after-
tax) for the years ended December 31, 1998 and 1997, respectively.
(b) EBITDA is defined as income from continuing operations before depreciation
and amortization, interest expense, management fees, impairment of long-
lived assets, minority interests and income taxes. EBITDA is commonly used
as an analytical indicator within the health care industry, and also serves
as a measure of leverage capacity and debt service ability. EBITDA should
not be considered as a measure of financial performance under generally
accepted accounting principles, and the items excluded from EBITDA are
significant components in understanding and assessing financial
performance. EBITDA should not be considered in isolation or as an
alternative to net income, cash flows generated by operating, investing or
financing activities or other financial statement data presented in the
combined financial statements as an indicator of financial performance or
liquidity. Because EBITDA is not a measurement determined in accordance
with generally accepted accounting principles and is thus susceptible to
varying calculations, EBITDA as presented may not be comparable to other
similarly titled measures of other companies.
(c) Licensed beds are those beds for which a facility has been granted approval
to operate from the applicable state licensing agency.
(d) Represents the average number of licensed beds, weighted based on periods
owned.
(e) Represents the total number of patients admitted (in the facility for a
period in excess of 23 hours) to Triad's hospitals and is used by
management and certain investors as a general measure of inpatient volume.
(f) Equivalent admissions is used by management and certain investors as a
general measure of combined inpatient and outpatient volume. Equivalent
admissions are computed by multiplying admissions (inpatient volume) by the
sum of gross inpatient revenue and gross outpatient revenue and then
dividing the resulting amount by gross inpatient revenue. The equivalent
admissions computation "equates" outpatient revenue to the volume measure
(admissions) used to measure inpatient volume resulting in a general
measure of combined inpatient and outpatient volume.
(g) Represents the average number of days admitted patients stay in Triad's
hospitals. Average length of stay has declined due to the continuing
pressures from managed care and other payers to restrict admissions and
reduce the number of days that are covered by the payers for certain
procedures, and by technological and pharmaceutical improvements.
(h) Represents the average number of patients in Triad's hospital beds each
day.
(i) Represents the percentage of hospital licensed beds occupied by patients.
Both average daily census and occupancy rate provide measures of the
utilization of inpatient rooms. The declining occupancy rate is primarily
attributed to the trend toward more services, that were previously
performed in an inpatient setting, being performed on an outpatient basis
and the decline in average length of stay per admission.
(j) Includes the acquisition of 7 hospitals from EPIC Healthcare Group, Inc. in
May 1994.
69
<PAGE>
Triad Management's Discussion and Analysis of
Financial Condition and Results of Operations
This discussion should be read together with the historical financial
statements of Triad Hospitals, Inc. included elsewhere herein and the notes
thereto and the information set forth under "Triad Selected Historical
Financial Data" and "Triad Unaudited Pro Forma Condensed Combined Financial
Statements" and the notes thereto.
Overview
Triad will own and operate the health care service business which has
comprised the Pacific Group of Columbia/HCA until the distribution by
Columbia/HCA to its shareholders of all of the shares of outstanding common
stock of Triad. The distribution marks the beginning of Triad's operations as
an independent, publicly-traded company. As such, the historical financial
statements of Triad Hospitals, Inc. may not be indicative of Triad's future
performance, nor do they necessarily reflect what the financial position and
results of operations of Triad would have been if it had operated as a
separate, stand-alone entity during the periods covered. See "Risk Factors--No
Operating Histories as Independent Companies."
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 Triad and are subject to a number of uncertainties and
risks that could significantly affect current plans and expectations and the
future financial condition and results of Triad. These factors include, but are
not limited to, (i) the highly competitive nature of the health care business,
(ii) the efforts of insurers, health care providers and others to contain
health care costs, (iii) possible changes in the Medicare program that may
further limit reimbursements to health care providers and insurers, (iv)
changes in Federal, state or local regulation affecting the health care
industry, (v) the possible enactment of Federal or state health care reform,
(vi) the departure of key executive officers from Triad, (vii) claims and legal
actions relating to professional liability, (viii) fluctuations in the market
value of Triad common stock, (ix) changes in accounting practices, (x) changes
in general economic conditions, (xi) the complexity of integrated computer
systems and the success and expense of the remediation efforts of Columbia/HCA,
Triad and relevant third parties in achieving Year 2000 readiness, and (xii)
other risk factors described above. 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
Triad. 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
Columbia/HCA is currently the subject of several Federal investigations into
certain of its business practices, as well as governmental investigations by
various states. Columbia/HCA 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,
Columbia/HCA expects additional subpoenas and other investigative and
prosecutorial activity to occur in these and other jurisdictions in the future.
Columbia/HCA is the subject of a formal order of investigation by the
Securities and Exchange Commission. Columbia/HCA understands that the SEC
investigation includes the anti-fraud, periodic reporting and internal
accounting control provisions of the Federal securities laws.
Management believes that the ongoing governmental investigations and related
media coverage may have had a negative effect on Columbia/HCA's results of
operations (which includes Triad for the periods prior to
70
<PAGE>
the distribution date which are presented herein). The extent to which Triad
may or may not continue to be affected after the distribution by the ongoing
investigations of Columbia/HCA, the initiation of additional investigations, if
any, and the related media coverage cannot be predicted. It is possible that
these matters could have a material adverse effect on the financial condition
or results of operations of Triad in future periods.
Pursuant to the Distribution Agreement to be entered into by and among
Columbia/HCA, LifePoint and Triad in connection with the distribution,
Columbia/HCA has agreed to indemnify Triad in respect of any losses which it
may incur arising from the governmental investigations described above and from
stockholder actions and other legal proceedings related to the governmental
investigations which are currently pending against Columbia/HCA. Columbia/HCA
has also agreed to indemnify Triad in respect of any losses which it may incur
as a result of proceedings which may be commenced by government authorities or
by private parties in the future that arise from acts, practices or omissions
engaged in prior to the Distribution Date and related to the proceedings
described above. Columbia/HCA has also agreed that, in the event that any
hospital owned by Triad is permanently excluded from participation in the
Medicare and Medicaid programs as a result of the proceedings described above,
then Columbia/HCA will make a cash payment to Triad in an amount (if positive)
equal to five times the excluded hospital's 1998 income from continuing
operations before depreciation and amortization, interest expense, management
fees, impairment of long-lived assets, minority interests and income taxes (as
set forth on a schedule to the Distribution Agreement) less the proceeds of the
sale or other disposition of the excluded hospital. Triad has agreed that, in
connection with the pending governmental investigations, it will participate
with Columbia/HCA in negotiating one or more compliance agreements setting
forth each of their agreements to comply with applicable laws and regulations.
See "Arrangements Among Columbia/HCA, LifePoint and Triad Relating to the
Distribution--Distribution Agreement." If any such indemnified matters were
successfully asserted against Triad, or any of its facilities, and Columbia/HCA
failed to meet its indemnification obligations, then such losses could have a
material adverse effect on the business, financial position, results of
operations and prospects of Triad. Columbia/HCA will not indemnify Triad for
losses relating to any acts, practices and omissions engaged in by Triad after
the distribution date, whether or not Triad is indemnified for similar acts,
practices and omissions occurring prior to the distribution date. (See Note 3--
Columbia/HCA Investigations, Litigation and Indemnification Rights and Note
11--Contingencies of the Notes to Combined Financial Statements of Triad
included elsewhere herein).
Results of Operations
Revenue/Volume Trends
During the year ended December 31, 1998, Triad experienced declines in
revenue and volume growth rates as well as operational deficiencies. Management
believes four primary factors have contributed to the declines in revenue and
volume growth rate: the impact of reductions in Medicare payments mandated by
the Balanced Budget Act, the continuing trend toward the conversion of more
services to an outpatient basis, the impact of the government investigations,
and the impact of factors relating to the distribution.
Triad'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 also negotiating discounted amounts that they
will pay health care providers rather than paying standard prices. Triad
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, Triad's reimbursement from
the Medicare and Medicaid programs was reduced in 1998 and will be further
reduced as some reductions in reimbursement levels are phased in over the next
two years. The Balanced Budget Act has accelerated a shift, by certain Medicare
beneficiaries, from traditional Medicare coverage to medical coverage that is
provided under managed care plans. Triad generally receives lower payments per
patient under managed care plans than under 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
71
<PAGE>
cash flows are being significantly reduced. Admissions related to Medicare,
Medicaid and managed care plan patients were 88.4% and 87.3% of total
admissions for the years ended December 31, 1998 and 1997, respectively.
Revenues from capitation arrangements (prepaid health service agreements) are
less than 1% of revenues. See "Government and Other Sources of Reimbursement
for LifePoint and Triad."
Triad's revenues also continue to be affected by the trend toward certain
services being performed more frequently on an outpatient basis. Growth in
outpatient services is expected to continue in the health care industry as
procedures performed on an inpatient basis are converted to outpatient
procedures through continuing advances in pharmaceutical and medical
technologies. The redirection of certain procedures to an outpatient basis is
also influenced by pressures from payers to perform certain procedures as
outpatient care rather than inpatient care. Outpatient revenues grew to 43.3%
of net patient revenues for the year ended December 31, 1998 from 40.4% during
the prior year.
Management believes that the impact of the ongoing governmental
investigations of certain Columbia/HCA business practices and the related media
coverage, may have created uncertainties with physicians, patients and payers
in certain markets. See "Government Regulation and Other Factors Affecting
LifePoint and Triad--Governmental Investigation of Columbia/HCA and Related
Litigation."
Reductions in the rate of increase in Medicare and Medicaid reimbursement,
increasing percentages of the patient volume being related to patients
participating in managed care plans and continuing trends toward more services
being performed on an outpatient basis are expected to present ongoing
challenges. The challenges presented by these trends are magnified by Triad's
inability to control these trends and the associated risks. To maintain and
improve its operating margins in future periods, Triad must increase patient
volumes while controlling the costs of providing services. If Triad is not able
to achieve reductions in the cost of providing services through increased
operational efficiencies, and the trend toward declining reimbursements and
payments continues, 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.
72
<PAGE>
Operating Results Summary
Following are comparative summaries of results from continuing operations for
the years ended December 31, 1998, 1997 and 1996:
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------------------------
1998 1997
--------------------- --------------------
Amount Percentage Amount Percentage
-------- ---------- -------- ----------
(Dollars in millions)
<S> <C> <C> <C> <C>
Revenues........................... $1,588.7 100.0 $1,609.3 100.0
Salaries and benefits.............. 700.5 44.1 666.8 41.4
Supplies........................... 241.6 15.2 232.8 14.5
Other operating expenses........... 359.2 22.6 383.4 23.8
Provision for doubtful accounts.... 138.4 8.7 138.5 8.6
Depreciation and amortization...... 109.6 7.0 102.9 6.3
Interest expense allocated from
Columbia/HCA...................... 68.9 4.3 60.5 3.8
Management fees allocated from
Columbia/HCA...................... 29.3 1.8 25.4 1.6
Impairment of long-lived assets.... 55.1 3.5 13.7 0.9
-------- ----- -------- -----
1,702.6 107.2 1,624.0 100.9
-------- ----- -------- -----
Loss from continuing operations
before minority interests and
income taxes...................... (113.9) (7.2) (14.7) (0.9)
Minority interests in earnings of
consolidated entities............. 11.0 0.7 11.5 0.7
-------- ----- -------- -----
Loss from continuing operations
before income tax benefit......... (124.9) (7.9) (26.2) (1.6)
Income tax benefit................. (39.4) (2.5) (7.2) (0.4)
-------- ----- -------- -----
Loss from continuing operations.... $ (85.5) (5.4) $ (19.0) (1.2)
======== ===== ======== =====
% changes from prior year:
Revenues......................... (1.3%)
Loss from continuing operations.. 350.8
Admissions (a)................... (1.9)
Equivalent admissions (b)........ 0.6
Revenues per equivalent
admission....................... (1.9)
Same facility % changes from prior
year (c):
Revenues......................... (1.3)
Admissions (a)................... (1.9)
Equivalent admissions (b)........ 0.6
Revenues per equivalent
admission....................... (1.9)
</TABLE>
73
<PAGE>
<TABLE>
<CAPTION>
Years Ended December 31,
----------------------------------------
1997 1996
-------------------- -------------------
Amount Percentage Amount Percentage
-------- ---------- -------- ----------
(Dollars in millions)
<S> <C> <C> <C> <C>
Revenues.............................. $1,609.3 100.0 $1,600.5 100.0
Salaries and benefits................. 666.8 41.4 628.1 39.2
Supplies.............................. 232.8 14.5 221.9 13.9
Other operating expenses.............. 383.4 23.8 349.5 21.8
Provision for doubtful accounts....... 138.5 8.6 106.5 6.7
Depreciation and amortization......... 102.9 6.3 94.5 5.9
Interest expense allocated from
Columbia/HCA......................... 60.5 3.8 52.0 3.2
Management fees allocated from
Columbia/HCA......................... 25.4 1.6 20.7 1.3
Impairment of long-lived assets....... 13.7 0.9 - -
-------- ----- -------- -----
1,624.0 100.9 1,473.2 92.0
-------- ----- -------- -----
Income (loss) from continuing
operations before minority interests
and income taxes (benefit)........... (14.7) (0.9) 127.3 8.0
Minority interests in earnings of
consolidated entities................ 11.5 0.7 10.8 0.7
-------- ----- -------- -----
Income (loss) from continuing
operations before income taxes
(benefit)............................ (26.2) (1.6) 116.5 7.3
Provision for income taxes (benefit).. (7.2) (0.4) 48.2 3.0
-------- ----- -------- -----
Income (loss) from continuing
operations........................... $ (19.0) (1.2) $ 68.3 4.3
======== ===== ======== =====
% changes from prior year:
Revenues............................ 0.6%
Income (loss) from continuing
operations......................... (127.8)
Admissions (a)...................... 1.0
Equivalent admissions (b)........... 3.2
Revenues per equivalent admission... (2.5)
Same facility % changes from prior
year (c):
Revenues............................ 0.6
Admissions (a)...................... 1.7
Equivalent admissions (b)........... 3.9
Revenues per equivalent admission... (3.1)
</TABLE>
- --------
(a) Represents the total number of patients admitted (in the facility for a
period in excess of 23 hours) to Triad'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 year. The facilities that Triad intends to divest will
continue to be included in "same facility" until the date they are
divested.
Years Ended December 31, 1998 and 1997
The loss from continuing operations before income tax benefit increased
377.2% to a loss of $124.9 million in 1998 from a loss from continuing
operations before income tax benefit of $26.2 million in 1997. The facilities
(6 general, acute care hospitals and one psychiatric hospital) that management
has determined to
74
<PAGE>
divest in 1999 as part of their plan to establish the structure for the future
operations of Triad contributed significantly to the decline in results of
operations. These facilities already divested or to be divested incurred losses
from continuing operations before income taxes (benefit) of approximately $70.1
million and $29.7 million for the years ended December 31, 1998 and 1997,
respectively. Management established these divestiture plans based upon
analysis of the market potential for each of its facilities considering current
competitive conditions, anticipated changes in competitive conditions, expected
demographic trends, lease opportunities, joint venture opportunities and
capital allocation requirements.
Revenues decreased by 1.3% to $1,588.7 million in 1998 compared to $1,609.3
million in 1997. Inpatient admissions decreased 1.9% from a year ago and
equivalent admissions (adjusted to reflect combined inpatient and outpatient
volume) increased 0.6%. The decrease in revenues and the small 0.6% increase in
equivalent admissions resulted in a 1.9% decline in revenue per equivalent
admission. On a same facility basis, revenues decreased 1.3%, admissions
decreased 1.9% and equivalent admissions increased 0.6% from a year ago. The
decline in revenues combined with the small increase in equivalent admissions
resulted in a decline in same facility revenue per equivalent admission of
1.9%.
The decline in revenue per equivalent admission was due to several factors,
including decreases in Medicare reimbursement rates mandated by the Balanced
Budget Act which became effective October 1, 1997 (which reimbursement rates
lowered 1998 revenues by approximately $17.0 million), continued increases in
discounts from the growing number of managed care payers (managed care as a
percentage of total admissions increased to 32% in 1998 compared to 29% during
1997), and the announced divestitures of hospitals in certain markets.
Operating expenses increased as a percentage of revenues in each expense
category, except other operating expenses (which decreased 1.2% from 1997). The
primary reason for the increases, as a percentage of revenues, in all the
expense categories was the inability to adjust expenses in line with the
decreases experienced in volume and reimbursement trends. The level of
management's attention being devoted to the governmental investigations,
reactions by certain physicians and patients to the related negative media
coverage and management changes at several levels and locations throughout
Triad have contributed to Triad's inability to implement changes to reduce
operating expenses in response to the volume and revenue growth rate declines.
Salaries and benefits, as a percentage of revenues, increased to 44.1% in
1998 from 41.4% in 1997. The increase was due to a 4.4% increase in salaries
and benefits per equivalent admission and Triad's inability to adjust staffing
levels to mitigate the declining revenue per equivalent admission (man-hours
per equivalent admission increased 1.1% compared to last year).
Supply costs increased as a percentage of revenues to 15.2% in 1998 from
14.5% in 1997 due to the 1.9% decline in net revenue per equivalent admission,
while the cost of supplies per equivalent admission increased 3.2%.
Other operating expenses (which includes contract services, professional
fees, repairs and maintenance, rents and leases, utilities, insurance,
marketing and non-income taxes) decreased as a percentage of revenues to 22.6%
in 1998 from 23.8% in 1997. The decrease was due to small decreases in several
of these expense categories as a percentage of revenues, including lower
marketing costs being incurred due to the cancellation of a national branding
campaign.
Provision for doubtful accounts, as a percentage of revenues, increased to
8.7% in 1998 from 8.6% in 1997. The increase was due to internal factors such
as information system conversions (including patient accounting systems) at
certain facilities and external factors such as payer mix shifts to managed
care plans (resulting in increased amounts of patient co-payments and
deductibles) and increases in claim audits and remittance denials from certain
payers. Management is not able to quantify the effects of each of these
factors,
75
<PAGE>
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 (1996
and prior).
Depreciation and amortization increased as a percentage of revenues to 7.0%
in 1998 from 6.3% in 1997. The increase was primarily due to the 1.3% decline
in revenues on a same facility basis and increased capital expenditures related
to ancillary services (such as outpatient services) and information systems.
Interest expense, which is primarily represented by interest incurred on the
net intercompany balance with Columbia/HCA, increased to $68.9 million in 1998
compared to $60.5 million in 1997, primarily as a result of an increase in the
average balance of the advances from Columbia/HCA during 1998 compared to the
same period in 1997. This was due, in part, to a $76.4 million decline in cash
flows from operations.
During 1998, Triad, as part of its strategic business plan, decided to divest
certain of its facilities. The divestitures are expected to be completed in
1999 through sales, leases, joint ventures or closures. The carrying value for
these facilities expected to be sold was reduced to fair value, based upon
estimated selling values, resulting in a pre-tax impairment charge of $55.1
million. (See Note 5--Impairment of Long-lived Assets in the Notes to Combined
Financial Statements of Triad included elsewhere herein.)
Management fees allocated by Columbia/HCA were $29.3 million in 1998 and
$25.4 million in 1997. These amounts represent allocations, using revenues as
the allocation basis, of the corporate general and administrative expenses of
Columbia/HCA. Management estimates that if they managed comparable general and
administrative functions for Triad (as a separate, independent entity), the
costs incurred would be approximately $22.4 million, based upon their 1999
projections.
Minority interests were 0.7% as a percentage of revenues in both 1998 and
1997.
Triad incurred a $1.6 million net loss from operations of its discontinued
home health businesses in 1998 compared to net income of $4.9 million during
the prior year period. The loss is primarily due to revenue reductions related
to Medicare rates of reimbursement for home health visits under the Balanced
Budget Act and a decline in home health visits.
Years Ended December 31, 1997 and 1996
Income (loss) from continuing operations before income taxes (benefit)
declined 122.5% to a loss of $(26.2) million in 1997 from income of $116.5
million in 1996. The facilities that Triad divested or plans to divest
contributed to the decline in profitability by incurring losses from continuing
operations before income tax benefit of approximately $(29.7) million and
approximately $(4.6) million for the years ended December 31, 1997 and 1996,
respectively.
Revenues increased 0.6% to $1,609.3 million in 1997 compared to $1,600.5
million in 1996. Inpatient admissions increased 1.0% and equivalent admissions
(adjusted to reflect combined inpatient and outpatient volume) increased 3.2%.
On a same facility basis, revenues increased 0.6%, admissions increased 1.7%
and equivalent admissions increased 3.9% from 1996. The lower growth rate in
both reported and same facility revenues, compared to the increases in
equivalent admissions, resulted in declines in revenue per equivalent admission
of 2.5% on a reported basis and 3.1% on a same facility basis. As previously
discussed, the increase in outpatient volume (reflected by the increases in
equivalent admissions) is primarily a result of the continuing trend of certain
services, previously provided in an inpatient setting, being converted to an
outpatient setting.
The decline in revenue per equivalent admission was due to several factors
including decreases in Medicare reimbursement rates mandated by the Balanced
Budget Act which became effective October 1, 1997 (which reimbursement rates
lowered fourth quarter 1997 revenues by approximately $5.0 million), continued
increases in discounts from the growing number of managed care payers (managed
care as a percentage of total admissions increased to 29% in 1997 compared to
25% during 1996), delays experienced in obtaining Medicare
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cost report settlements (cost report filings and settlements netted to zero in
1997 compared to favorable revenue adjustments of $32.4 million in 1996).
Operating expenses increased, as a percentage of revenues, in each expense
category. The primary reason for the increases as a percentage of revenues in
all expense categories was Triad's inability to adjust expenses in line with
the decreases experienced in revenue and reimbursement trends. Management's
attention to the governmental investigations, reactions by certain physicians
and patients to the related negative media coverage and management changes at
several levels and locations throughout Triad contributed to Triad's inability
to implement changes to reduce operating expenses in response to the revenue
and reimbursement rate declines.
Salaries and benefits, as a percentage of revenues, increased to 41.4% in
1997 from 39.2% in 1996. The decline in revenues per equivalent admission was a
primary factor in the increase. A 2.9% increase in salaries and benefits per
equivalent admission resulted from the combined effect of decreasing man-hours
per equivalent admission of 1.8, while labor cost per man-hour increased 4.3%
and revenue per equivalent admission declined 2.5%.
Supply costs increased as a percentage of revenues to 14.5% in 1997 from
13.9% in 1996 due to a decline in net revenue per equivalent admission while
the cost of supplies per equivalent admission increased 1.7%.
Other operating expenses (which includes professional fees, contract
services, repairs and maintenance, rent, utilities, insurance, marketing and
non-income taxes) increased as a percentage of revenues to 23.8% in 1997 from
21.8% in 1996. The increase was due to small increases in several of these
expense categories as a percentage of revenues.
Provision for doubtful accounts, as a percentage of revenues, increased to
8.6% in 1997 from 6.7% in 1996 due to internal factors such as continued
computer information system conversions (including patient accounting systems)
at various facilities and external factors such as payer mix shifts to managed
care plans (resulting in increased amounts of patient co-payments and
deductibles) and payer remittance slowdowns. The information system conversions
hampered the business office billing functions and collection efforts in those
facilities as some resources are directed to installing and converting systems
and building new data files, rather than devoting full effort to billing and
collecting receivables.
Depreciation and amortization increased as a percentage of revenues to 6.3%
in 1997 from 5.9% in 1996, primarily due to the slowdown in revenue growth.
Interest expense increased to $60.5 million in 1997 compared to $52.0 million
in 1996, primarily as a result of an increase in the average balance of the
advances from Columbia/HCA during 1997 compared to 1996. Net cash provided by
operating activities declined by $65.0 million in 1997 compared to 1996.
During the fourth quarter of 1997 Triad determined that the recorded values
of certain long-lived assets related to certain surgery centers and physician
practices were not deemed fully recoverable based upon the operating results
trends and projected future cash flows. The recorded value for these surgery
centers and physician practices was reduced to estimated fair value resulting
in a pre-tax impairment charge of $13.7 million.
Minority interests were 0.7% as a percentage of revenues both in 1997 and
1996.
Triad earned $4.9 million net income from operations of its discontinued home
health business in 1997 compared to net income of $6.4 million during 1996. The
majority of the decline in income from operations of the discontinued home
health businesses was due to revenue reductions related to Medicare rates of
reimbursement for home health visits under the Balanced Budget Act. During
1997, Triad recorded a $2.9 million charge, net of tax benefits, on the
expected divestiture of the home health businesses.
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Liquidity and Capital Resources
Triad has previously relied upon Columbia/HCA for liquidity and sources of
capital to supplement any needs not met by operations. Following the
distribution, as an independent, publicly-traded company, Triad will have
direct access to the capital markets and the ability to enter into its own
borrowing arrangements. At December 31, 1998, Triad had working capital of
$184.9 million.
Cash provided by continuing operating activities declined to $23.9 million
for the year ended December 31, 1998 from $100.3 million during the previous
year. The decrease was primarily due to a larger net loss incurred for 1998 (a
loss of $87.1 million in 1998 compared to a loss of $19.8 million in 1997) and
an increase in accounts receivable balances during 1998.
For the year ended December 31, 1997, cash provided by operating activities
declined to $100.3 million from $165.3 million for the year ended December 31,
1996. The decrease was due to reduced income before non-cash charges in
addition to decreases in cash related to working capital items. The increase in
working capital outflows was primarily the result of reductions in accounts
payable and accrued expenses compared to the prior year.
Cash used in investing activities for the year ended December 31, 1998 was
consistent with the levels used during 1997 and 1996. At December 31, 1998,
there were projects under construction which had an estimated cost to complete
of approximately $107.8 million. These construction projects are expected to be
completed over the next eighteen months.
In connection with the distribution, all intercompany accounts payable by
Triad to Columbia/HCA will be eliminated, and Triad will assume approximately
$675 million of debt obligations from Columbia/HCA. Such debt financing is
expected to consist of $365 million of term loans under the new credit
agreement, $300 million Senior Subordinated Notes due 2009, and approximately
$10 million of debt assumed from Columbia/HCA. Triad also expects to receive a
commitment for revolving credit loans in an aggregate principal amount of up to
$125 million. Borrowings under the revolving credit facility will be available
to fund working capital needs and for other general corporate purposes.
Management does not consider the sale of any assets to be necessary to repay
Triad's indebtedness or to provide working capital. However, for other reasons,
certain of Triad's hospitals may be sold in the future from time to time.
Although Triad's indebtedness will be more substantial than was historically
the case for its predecessor entities, management expects that operations and
working capital facilities will provide sufficient liquidity for fiscal 1999.
Triad does not expect to pay dividends on its common stock in the foreseeable
future.
Impact of Year 2000 Computer Issues
Background and General Information
The Year 2000 problem is the result of two potential malfunctions that could
have an impact on Columbia/HCA's systems and equipment, including systems and
equipment on which Triad relies. The first problem arises due to computers
being programmed to use two rather than four digits to define the applicable
year. The second problem arises in embedded chips, where microchips and
microcontrollers have been designed using two rather than four digits to define
the applicable year. Certain of Columbia/HCA's computer programs, building
infrastructure components (e.g. alarm systems and HVAC systems) and medical
devices that are date sensitive, may recognize a date using "00" as the year
1900 rather than the year 2000. If uncorrected, the problem could result in
computer system and program failures or equipment and medical device
malfunctions that could result in a disruption of business operations or that
could affect patient diagnosis and treatment.
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Triad obtains most of its information technology and information technology
infrastructure systems from CIS pursuant to the Computer and Data Processing
Services Agreement. CIS does not warrant that the software and hardware used by
CIS in providing services to Triad will be Year 2000 ready but CIS is currently
making efforts in a professional, timely, and workmanlike manner that it deems
reasonable to address Year 2000 issues with respect to the software licensed to
Triad under the Computer and Data Processing Services Agreement. In connection
with its participation in Columbia/HCA's Year 2000 project, Triad has made and
will continue to make certain expenditures related to software systems and
applications not obtained from CIS and non-information technology systems
(e.g., vendor products, medical equipment and other related equipment with
embedded chips) to ensure that they are Year 2000 ready. See "Arrangements
Among Columbia/HCA, LifePoint and Triad Relating to the Distribution--Computer
and Data Processing Services Agreement" and "--Transitional Services
Agreement."
Pursuant to the Computer and Data Processing Services Agreement, after the
distribution, Triad will rely on CIS to provide virtually all of its computer
support and information technology services. Pursuant to the Transitional
Services Agreement, Columbia/HCA will continue its ongoing program to inspect
medical equipment at Triad facilities for Year 2000 readiness. Triad is
dependent upon Columbia/HCA in substantially all respects for the Year 2000
readiness of its information technology and non-information technology systems
and for contingency planning in respect of Year 2000-related risks. Any failure
by Columbia/HCA to adequately address such matters could have a material
adverse effect on the business, financial condition, results of operations or
prospects of Triad.
Columbia/HCA is utilizing both internal and external resources to manage and
implement its Year 2000 program. With the assistance of external resources,
Columbia/HCA has undertaken development of contingency plans in the event that
its Year 2000 efforts, or the Year 2000 efforts of third-parties upon which
Columbia/HCA and Triad rely, are not accurately or timely completed. Triad
management consults regularly with Columbia/HCA personnel for development of
such contingency plans. Columbia/HCA has developed a contingency planning
methodology and will implement contingency plans throughout 1999.
Information Technology Systems
With respect to the information technology portions of Columbia/HCA's Year
2000 project, which address the inventory, assessment, remediation, testing and
implementation of internally developed software, Columbia/HCA has identified
various software applications that are being addressed on separate time lines.
Columbia/HCA has begun remediating all these software applications and is
testing the software applications where remediation has been completed.
Columbia/HCA has also completed the assessment of mission critical third party
software (i.e., that software which is essential for day to day operations) and
has developed testing and implementation plans with separate time lines.
Columbia/HCA has completed and placed into production 60% of software
applications and is 75% complete on most of the remaining software
applications, and anticipates completing, in all material respects,
remediation, testing and implementation for internally developed and mission
critical third party software by June 1999. Columbia/HCA's efforts are
currently on schedule in all material respects.
With respect to the information technology infrastructure portion of
Columbia/HCA's Year 2000 project, Columbia/HCA has undertaken a program to
inventory, assess and correct, replace or otherwise address impacted vendor-
supplied products (hardware, systems software, business software, and
telecommunication equipment). Columbia/HCA has implemented a program to contact
vendors, analyze information provided, and remediate, replace or otherwise
address information technology products that pose a material Year 2000 impact.
Columbia/HCA anticipates completion, in all material respects, of the
information technology infrastructure portion of its program by June 1999. The
information technology infrastructure portion of Columbia/HCA's Year 2000
project is currently on schedule in all material respects.
Columbia/HCA presently believes that with modifications to existing software
or the installation of upgraded software under the information technology
infrastructure portion, the Year 2000 will not pose
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material operational problems for its computer systems. However, if such
modifications or upgrades are not accomplished in a timely manner, Year 2000-
related failures may present a material adverse impact on the operations of
Triad.
Non-Information Technology Systems and Equipment
With respect to the non-information technology infrastructure portion of
Columbia/HCA's Year 2000 project, Columbia/HCA has undertaken a program to
inventory, assess and correct, replace or otherwise address impacted vendor
products, medical equipment and other related equipment with embedded chips.
Columbia/HCA has implemented a program to contact vendors, analyze information
provided, and remediate, replace or otherwise address devices or equipment that
could have a material Year 2000 impact. Columbia/HCA anticipates completion, in
all material respects, of the non-information technology infrastructure portion
of its program by a revised date of September 30, 1999, from the previously
anticipated date of June 30, 1999. With respect to such revised date, the non-
information technology infrastructure portion of Columbia/HCA's Year 2000
project is currently on schedule in all material respects.
Columbia/HCA is prioritizing its non-information technology infrastructure
efforts by focusing on equipment and medical devices that will have a direct
impact on patient safety and health. Columbia/HCA is directing substantial
efforts to repair, replace, upgrade or otherwise address this equipment and
these medical devices in order to minimize risk to patient safety and health.
Columbia/HCA is relying on information that is being provided to it by
equipment and medical device manufacturers regarding the Year 2000 readiness of
their products. While Columbia/HCA is attempting to evaluate information
provided by its past and present vendors, there can be no assurance that in all
instances accurate information is being provided. Columbia/HCA also cannot in
all instances guarantee that the repair, replacement or upgrade of all non-
information technology infrastructure systems will occur on a timely basis or
that such repairs, replacements or upgrades will avoid any Year 2000 problems.
Third-Party Payers and Intermediaries, and Suppliers
Columbia/HCA has initiated communications with Triad's major third party
payers and intermediaries, including government payers and intermediaries.
Triad relies on these entities for accurate and timely reimbursement of claims,
often through the use of electronic data interfaces. Columbia/HCA has not
received assurances that these interfaces will be converted in a timely manner.
Testing with payers and intermediaries will not be completed by June 30, 1999
because the payers and intermediaries are not ready to test with Columbia/HCA's
systems. Failure of these third party systems could have a material adverse
effect on Triad's cash flow or results of operations.
Columbia/HCA also has initiated communications with its mission critical
suppliers and vendors (i.e., those suppliers and vendors whose products and
services are essential for day-to-day operations) to verify their ability to
continue to deliver goods and services through the Year 2000. Columbia/HCA has
not received assurances from all mission critical suppliers and vendors that
they will be able to continue to deliver goods and services through the Year
2000, but Columbia/HCA is continuing its efforts to obtain such assurances. The
failure of these third parties could have a material impact on the business,
financial condition, results of operations or prospects of Triad and/or the
ability of Triad to provide health care services.
With the assistance of external resources, Columbia/HCA has undertaken the
development of contingency plans in the event that its Year 2000 efforts, or
the Year 2000 efforts of third parties upon which Columbia/HCA and Triad rely,
are not accurately or timely completed. Columbia/HCA has developed a
contingency planning methodology and will implement contingency plans
throughout 1999.
Year 2000 Risks
While Columbia/HCA is developing contingency plans to address possible
failure scenarios, Triad recognizes that there are "worst-case" scenarios which
may develop and are largely outside its or Columbia/HCA's control. Triad
recognizes the risks associated with extended infrastructure (e.g., power,
water and telecommunications) failure, the interruption of insurance and
government program payments to the
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organization and the failure of equipment or software that could impact patient
safety or health despite the assurances of third parties. Columbia/HCA is
addressing these and other failure scenarios in its contingency planning effort
and is engaging third parties in discussions regarding how to manage common
failure scenarios, but neither Columbia/HCA nor Triad can currently estimate
the likelihood or the potential cost of such failures. Currently, Triad does
not believe that any reasonably likely worst case scenario will have a material
impact on its revenues or operations. Those reasonably likely worst case
scenarios include continued expenditures for remediation, continued
expenditures for replacement or upgrade of equipment, continued efforts
regarding contingency planning, increased staffing for the periods immediately
preceding and after January 1, and possible implementation of alternative
payment schemes with Triad's payers.
Costs and Expenses
The Year 2000 project costs incurred by Columbia/HCA will have an impact on
the Computer and Data Processing Services Agreement with Triad. Triad is not
currently able to reasonably estimate the ultimate cost to be incurred by it
for the assessment, remediation, upgrade, replacement and testing of its
impacted non-information technology systems. The majority of the costs (except
the cost of new equipment) related to the Year 2000 project will be expensed as
incurred and are expected to be funded through operating cash flows.
The successful completion of the project and completion dates for the Year
2000 modifications are based on management's best estimates, which were derived
utilizing numerous assumptions of future events, including the continued
availability of certain resources, third party modification plans and other
factors. However, there can be no guarantees that these estimates will be
achieved and actual results could differ materially from those anticipated.
Specific factors that might cause such material differences include, but are
not limited to, the availability and cost of personnel trained in this area and
the ability to locate and correct all relevant computer codes and all medical
equipment.
Effects of Inflation and Changing Prices
Various federal, state and local laws have been enacted that, in certain
cases, limit Triad's ability to increase prices. Revenues for acute care
hospital services rendered to Medicare patients are established under the
federal government's prospective payment system. Total Medicare revenues
approximated 34.6% in 1998, 35.4% in 1997 and 36.5% in 1996.
Management believes that hospital industry operating margins have been, and
may continue to be, under significant pressure because of deterioration in
inpatient volumes, changes in payer mix and growth in operating expenses in
excess of the increase in prospective payments under the Medicare program.
Management expects that the average rate of increase in Medicare prospective
payments will continue to decline slightly in 1999. In addition, as a result of
increasing regulatory and competitive pressures, Triad's ability to maintain
operating margins through price increases to non-Medicare patients is limited.
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 the services provided by and reimbursement to health care
providers in Triad'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 or taxes levied on hospitals or
other providers. While Triad 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 Triad will not be adopted.
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Description of Certain New Triad Indebtedness
General
Upon consummation of the distribution, Triad Hospitals Holdings, Inc., a
wholly owned subsidiary of Triad ("Triad Holdings"), expects to have
outstanding $300 million aggregate principal amount of notes due 2009 and $365
million aggregate principal amount of indebtedness under its bank facilities.
The notes will initially be issued, and indebtedness incurred, by Healthtrust,
a wholly owned subsidiary of Columbia/HCA. Following the issuance and sale of
the notes and the incurrence of the indebtedness, the Pacific Group assets will
be transferred to Triad, and Triad will assume all obligations under the notes
and bank facilities. Triad will then transfer substantially all of its assets
to Triad's wholly-owned subsidiary, Triad Holdings, and Triad Holdings will
assume all obligations under the notes and bank facilities. The initial issuer
of the notes and obligor under the bank facilities will receive the net
proceeds and will use such proceeds to repay debt owed to Columbia/HCA and an
affiliate of Columbia/HCA.
Senior Subordinated Notes due 2009
Certain of Triad Holdings' subsidiaries will fully and unconditionally
guarantee the notes on a senior subordinated basis. Future subsidiaries also
may be required to guarantee the notes on a senior subordinated basis. The
notes will be general unsecured obligations of Triad Holdings and will be
subordinated in right of payment to all of Triad Holdings' existing and future
senior indebtedness. The notes will rank equally with Triad Holdings' existing
and future senior subordinated obligations and will rank senior to all of Triad
Holdings' subordinated indebtedness. The guarantees will be subordinated to all
existing and future senior indebtedness of the guarantors.
Triad Holdings may redeem the notes at any time on or after the fifth
anniversary of the issue date at the redemption prices set forth in the notes.
In addition, on or before the third anniversary of the issue date Triad
Holdings may redeem up to 35% of the notes with the net proceeds of certain
equity offerings at the redemption price set forth in the notes. Upon certain
change of control events, each holder of notes may require Triad Holdings to
repurchase all or a portion of its notes at a purchase price equal to 101% of
the principal amount thereof, plus accrued interest.
The indenture governing the notes will contain covenants that, among other
things, will limit Triad Holdings' and certain of its subsidiaries' ability to
incur additional indebtedness, pay dividends on, redeem or purchase its capital
stock, make investments, engage in transactions with affiliates, create certain
liens, in the case of certain of its subsidiaries, guarantee indebtedness, sell
assets, sell capital stock of restricted subsidiaries and consolidate, merge or
transfer all or substantially all its assets. See "Risk Factors--High Degree of
Leverage and Debt Service Obligation May Adversely Affect LifePoint and Triad."
A registration rights agreement will be executed in connection with the
offering of the notes whereby Triad Holdings will agree to exchange the
unregistered notes for registered notes with substantially identical terms. If
the consummation of the exchange offer and certain other events in connection
with such exchange offer do not occur prior to certain specified dates, Triad
Holdings will be obligated to pay additional interest on the notes during the
existence of such default.
New Credit Agreement
The $490 million new credit agreement, to be assumed ultimately by Triad
Holdings, will consist of:
. a $90 million Tranche A term loan facility,
. a $200 million Tranche B term loan facility,
. a $75 million asset sale bridge loan facility, and
. a $125 million revolving credit facility.
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Repayments under the term loan facilities are expected to be due in quarterly
installments. The final payment under the Tranche A term loan facility will be
due and payable 6 years after the distribution date and the final payment under
the Tranche B term loan facility will be due and payable 6 1/2 years after the
distribution date. The asset sale bridge loan facility will be due and payable
one year after the distribution date. In addition to the scheduled
amortization, Triad Holdings will be required to repay borrowings under the
bridge loan facility and the term loan facilities with proceeds from asset
sales, subject to certain exceptions, and with proceeds from issuance of equity
or debt securities (other than the notes to be assumed at the time that the
bank facilities are to be assumed). The Tranche B term loan facility will have
a prepayment fee due during the first two years for any voluntary prepayment.
The proceeds from sales of certain identified assets, including the hospitals
Triad currently is holding for sale, first will be used to repay the bridge
loan facility, until that facility is paid in full. The revolving credit
facility, which will be undrawn at the time of the distribution, is expected to
be available for working capital and other general corporate purposes, and any
outstanding amounts thereunder will be due and payable 6 years after the
distribution date.
It is expected that, at Triad Holdings' option, the new credit agreement will
bear interest at a rate per annum equal to:
. LIBOR (as defined in the new credit agreement) plus an applicable
margin; or
. the higher of the administrative agent's prime rate or 0.5% above the
federal funds rate, in each case plus an applicable margin.
The applicable margin initially will be a fixed margin and after six months
will be based on the ratio of Triad Holdings' consolidated total funded debt to
EBITDA ratio.
After the debt has been assumed by Triad Holdings, Triad will guarantee the
borrowings and other obligations under the bank facilities, which guarantees
will be secured by a pledge of the capital stock of Triad Holdings. Triad
Holdings will also pledge its assets to secure the bank facilities. Triad
Holdings' subsidiaries will also guarantee the borrowings under the bank
facilities, which guarantees will be secured by a pledge of assets of the
subsidiaries.
The bank facility will contain covenants that, among other things, will limit
Triad Holdings' and certain of its subsidiaries' ability to incur additional
indebtedness, pay dividends on, redeem or purchase its capital stock, make
investments and capital expenditures, engage in transactions with affiliates,
create certain liens, sell assets and consolidate, merge or transfer assets. In
addition, Triad Holdings will be required to comply with various financial
ratios and tests, including a minimum net worth test, a total funded debt to
EBITDA ratio, a senior funded debt to EBITDA ratio and a minimum fixed charge
coverage ratio.
The definitive new credit agreement has not yet been fully negotiated and may
contain more or less restrictive provisions than those set forth above. The
above summary highlights the material provisions of the new credit agreement as
of the date hereof, but is qualified in its entirety by reference to the
complete text of the documents entered into or to be entered into in connection
therewith.
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LifePoint Business
General
LifePoint operates 23 general, acute care hospitals located in non-urban
areas with an average population of approximately 27,000 (based on 1998 data).
According to industry sources, population in LifePoint's markets is projected
to grow on average in excess of 5% annually between 1998 and 2003, compared to
the expected national growth rate of 2.4% over the same period. LifePoint will
be a successor to the America Group, which was created by Columbia/HCA in
November 1997 to operate these hospitals. In 21 of its 23 markets, LifePoint's
hospital is the only hospital in the community. LifePoint's hospitals are
located in the States of Alabama, Florida, Georgia, Kansas, Kentucky,
Louisiana, Tennessee, Utah and Wyoming. All but five of LifePoint's hospitals
are located in states that have certificate of need laws, which laws may have
the effect of limiting the development of competing facilities. On March 23,
1999, LifePoint entered into a letter of intent to sell three of its general,
acute care hospitals, Barrow Medical Center, Halstead Hospital and Trinity
Hospital, for an aggregate purchase price of $25 million, plus a net working
capital adjustment which is currently expected by management to result in an
additional payment to Life Point of approximately $4.8 million. Consummation of
this transaction is subject to execution of definitive documentation and there
can be no assurance that this transaction will be consummated.
Principal Executive Offices
LifePoint's principal executive offices are located at 4525 Harding Road,
Suite 300, Nashville, Tennessee 37205 (telephone number (615) 344-6261).
LifePoint's corporate website, which is expected to be in operation as of the
distribution date, is http://www.lifepointhospitals.com. Information contained
on LifePoint's website is not part of this information statement.
The Non-Urban Health Care Market
LifePoint believes that growing, non-urban health care markets are attractive
to health care service providers as a result of favorable demographic and
economic trends and competitive conditions. All of LifePoint's facilities are
located in non-urban markets.
Because non-urban service areas have smaller populations, there are generally
fewer hospitals and other health care service providers in each community,
resulting in less direct competition for hospital-based services. Management
believes that the smaller populations and relative dominance of the one or two
acute care hospitals in these markets also limit the entry of alternate non-
hospital providers, such as outpatient surgery centers or rehabilitation or
diagnostic imaging centers, as well as managed care plans. In addition,
LifePoint also believes that non-urban communities generally view the local
hospital as a key part of the local community. Additionally, there is generally
a lower level of managed care payer penetration (i.e., the relative proportion
of the market population enrolled in managed care programs (HMOs and PPOs)) in
LifePoint's markets than there is in urban markets.
Management believes that the characteristics of the non-urban health care
market provide LifePoint with attractive acquisition opportunities. Currently,
the majority of non-urban hospitals are owned by not-for-profit and
governmental entities that typically have limited access to capital to keep
pace with advances in medical technology. In addition, such entities frequently
lack the management resources necessary to control hospital expenses, recruit
and retain physicians, expand healthcare services and comply with increasingly
complex reimbursement and managed care requirements. As a result, patients may
migrate to, may be referred by local physicians to, or may be lured by
incentives from managed care plans to travel to, hospitals in larger, urban
markets. Management believes that as a result of these pressures, not-for-
profit and governmental owners of non-urban hospitals who wish to preserve the
local availability of quality health care services have sought to sell or lease
these hospitals to companies, like LifePoint, that have the access to capital
and management resources which can better serve the community and are committed
to the local delivery of health care.
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Business Strategy
LifePoint's strategy goals centered around the unique patient and health care
provider needs and opportunities in its non-urban markets. LifePoint intends to
manage its facilities to ensure that they operate in accordance with the
strategic objectives described below:
. Develop Facility-Specific Strategies for Non-Urban Markets. LifePoint
has developed facility-specific strategies tailored for the unique
characteristics of each of its non-urban markets. These strategies are
intended to improve the quality and breadth of health care services, to
provide an outstanding workplace for LifePoint's employees, to recognize
and expand the hospitals' roles as community assets and to improve
financial performance. By contrast, Columbia/HCA's strategy has been
developed on a system-wide basis and has focused on building well-
integrated facility networks with large urban facilities as the
principal providers of specialty services.
. Expand Breadth of Service and Reduce Patient Outmigration. LifePoint
intends to increase revenues by broadening the scope of health care
services available at its facilities, particularly in markets where
significant outmigration is occurring, and to recruit physicians with a
broader range of specialties. As an entity separate from Columbia/HCA,
LifePoint will not have to compete with the Columbia/HCA facilities
located in larger, urban markets for management attention, support
resources and capital to finance expansion of the range of services
offered at its hospitals. LifePoint has recently undertaken projects in
a number of its hospitals targeted at expanding or renovating specialty
service facilities including emergency room facilities, obstetric care,
surgical capacity and outpatient services. Management believes that this
expansion of available treatments and LifePoint's community focus should
help to encourage local residents in LifePoint's non-urban markets to
seek care at facilities within their communities and limit outmigration.
. Strengthen Physician Recruiting and Retention. LifePoint seeks to
enhance the quality of care available locally (and the revenue derived
therefrom), and believes that recruiting physicians in local communities
is critical to increasing the quality of health care and the breadth of
available services. LifePoint recruited 88 physicians in 1998, the
majority of whom were added during the second half of the year.
LifePoint believes that its recent recruiting success is largely
attributable to the announcement of its spin-off as an independent
company and the community-based focus of its new management team. As
part of LifePoint's physician recruitment program in 1999, LifePoint
plans to focus primarily on recruiting additional specialty care
physicians. LifePoint also intends to take advantage of its management
focus to work more effectively with individual physicians and physician
practices. Management believes that expansion of the range of available
treatments at its hospitals should also assist in physician recruiting.
. Retain and Develop Stable Management. Management believes that achieving
long-term retention of executive teams at the hospitals will enhance
medical staff relations and maintain continuity of relationships within
the community. LifePoint intends to focus its recruitment of managers
and health care professionals on those who wish to live and practice in
the communities in which LifePoint's hospitals are located. In the past,
managers and health care professionals employed at LifePoint hospitals
sometimes relocated to advance their careers elsewhere within the
Columbia/HCA system. LifePoint expects that its ability to provide
equity-based compensation linked to its performance should assist in
management retention.
. Improve Managed Care Position. As part of Columbia/HCA, LifePoint's
facilities typically have been included in managed care contracts
negotiated by Columbia/HCA on a market-wide basis emphasizing large
urban facilities. LifePoint believes that independence from Columbia/HCA
and the lower managed care penetration in its markets will enable it
over time to negotiate contract terms that are generally more favorable
for its facilities and to decrease the level of discount arrangements in
which it participates. LifePoint's hospitals do not participate in
capitation arrangements and LifePoint does not intend to do so in the
future.
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. Improve Expense Management. LifePoint has begun to implement cost
control initiatives designed to reduce labor costs and improve labor
productivity, control supplies expense and reduce uncollectible
revenues. These initiatives include adjusting staffing levels according
to patient volumes, modifying supply purchases according to patient need
and providing training to hospital staff in more efficient billing and
collection processes.
. Acquire Other Hospitals. Management intends to pursue a disciplined
acquisition strategy that will seek to identify and acquire attractive
hospitals in non-urban markets. In the past, Columbia/HCA has been
reluctant to pursue acquisitions of such facilities because non-urban
hospitals were not consistent with Columbia's urban market focus.
LifePoint will seek to acquire hospitals that are located in non-urban
markets with above average population growth, a strong economic base and
a favorable payor mix.
Operations
LifePoint's general, acute care hospitals usually provide the range of
medical and surgical services commonly available in hospitals in non-urban
markets. These hospitals also provide diagnostic and emergency services, as
well as outpatient and ancillary services such as outpatient surgery,
laboratory, radiology, respiratory therapy and physical therapy.
Each of LifePoint's hospitals is governed by a board of trustees, which
includes members of the hospital's medical staff as well as community leaders.
The board of trustees establishes policies concerning medical, professional and
ethical practices, monitors such practices, and is responsible for ensuring
that these practices conform to established standards. LifePoint maintains
quality assurance programs to support and monitor quality of care standards and
to meet accreditation and regulatory requirements. Patient care evaluations and
other quality of care assessment activities are monitored on a continuing
basis.
Like most hospitals located in non-urban areas, LifePoint's hospitals do not
engage in extensive medical research and medical education programs. However, a
number of LifePoint's hospitals have an affiliation with medical schools,
including the clinical rotation of medical students.
In addition to providing capital resources, LifePoint will make available a
variety of management services to its health care facilities. These services
will include information systems; ethics and compliance programs; leasing
contracts; accounting, financial and clinical systems; legal support; personnel
management; internal auditing; and resource management. Some of these services
initially will be provided through transitional arrangements made with
Columbia/HCA. LifePoint also will participate and have an equity interest,
along with Columbia/HCA and Triad, in a group purchasing organization which
will make certain national supply and equipment contracts available to
LifePoint's facilities. See "Arrangements Among Columbia/HCA, LifePoint and
Triad Relating to the Distribution" and "--Other Agreements."
Services and Utilization
LifePoint believes that two important factors relating to the overall
utilization of a hospital are the quality and market position of the hospital
and the number, quality and specialties of physicians providing patient care
within the facility. Generally, LifePoint believes that the ability of a
hospital to meet the health care needs of its community is determined by its
breadth of services, level of technology, emphasis on quality of care and
convenience for patients and physicians. Other factors which impact utilization
include the size of and growth in local population, local economic conditions,
the availability of reimbursement programs such as Medicare and Medicaid and
market penetration of managed care programs. Utilization across the industry
also is being affected by improved treatment protocols as a result of advances
in medical technology and pharmacology.
The following table sets forth certain operating statistics for consolidated
hospitals owned by LifePoint for each of the past five years ended December 31.
Medical/surgical hospital operations are subject to certain seasonal
fluctuations, including decreases in patient utilization during holiday periods
and increases in patient utilization during the cold weather months.
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<TABLE>
<CAPTION>
Years Ended December 31,
----------------------------------------
1998 1997 1996 1995 1994
------- ------- ------ ------ ------
<S> <C> <C> <C> <C> <C>
Number of hospitals at end of
period............................. 23 22 22 20 20
Number of licensed beds at end of
period (a)......................... 2,108 2,080 2,074 1,881 1,843
Weighted average licensed beds (b).. 2,122 2,078 2,060 1,862 1,783
Admissions (c)...................... 62,264 60,487 59,381 54,549 52,681
Equivalent admissions (d)........... 109,336 105,126 98,869 88,915 81,708
Average length of stay (days) (e)... 4.4 4.4 4.7 4.8 4.9
Average daily census (f)............ 742 733 755 713 713
Occupancy rate (g).................. 35% 35% 37% 38% 40%
</TABLE>
- --------
(a) Licensed beds are those beds for which a facility has been granted approval
to operate from the applicable state licensing agency.
(b) Represents the average number of licensed beds weighted based on periods
owned.
(c) Represents the total number of patients admitted (in the facility for a
period in excess of 23 hours) to LifePoint's hospitals and is used by
management and certain investors as a general measure of inpatient volume.
(d) Equivalent admissions is used by management and certain investors as a
general measure of combined inpatient and outpatient volume. Equivalent
admissions are computed by multiplying admissions (inpatient volume) by the
sum of gross inpatient revenue and gross outpatient revenue and then
dividing the resulting amount by gross inpatient revenue. The equivalent
admissions computation "equates" outpatient revenue to the volume measure
(admissions) used to measure inpatient volume resulting in a general
measure of combined inpatient and outpatient volume.
(e) Represents the average number of days admitted patients stay in LifePoint's
hospitals. Average length of stay has declined due to the continuing
pressures from managed care and other payers to restrict admissions and
reduce the number of days that are covered by the payers for certain
procedures, and by technological and pharmaceutical improvements.
(f) Represents the average number of patients in LifePoint's hospital beds each
day.
(g) Represents the percentage of hospital licensed beds occupied by patients.
Both average daily census and occupancy rate provide measures of the
utilization of inpatient rooms. The declining occupancy rate is primarily
attributed to the trend toward more services, that were previously
performed in an inpatient setting, being performed on an outpatient basis
and the decline in average length of stay per admission.
LifePoint's hospitals have experienced significant shifts from inpatient to
outpatient care as well as decreases in average lengths of inpatient stay,
primarily as a result of improvements in technology and clinical practices and
hospital payment changes by Medicare, insurance carriers and self-insured
employers. These hospital payment changes generally encourage the utilization
of outpatient, rather than inpatient, services whenever possible, and shortened
lengths of stay for inpatient care. In response to this shift toward outpatient
care, LifePoint is reconfiguring certain hospitals to more effectively
accommodate outpatient services and restructuring existing surgical capacity to
permit additional outpatient volume and a greater variety of outpatient
services.
Sources of Revenue
LifePoint receives payment for patient services from the Federal government
primarily under the Medicare program, state governments under their respective
Medicaid programs, HMOs, PPOs and other private insurers, as well as directly
from patients. The approximate percentages of net patient revenues from
continuing operations of LifePoint's facilities from such sources during the
periods specified below were as follows:
<TABLE>
<CAPTION>
Years Ended
December 31,
-------------------
1998 1997 1996
----- ----- -----
<S> <C> <C> <C>
Medicare.............................................. 37.8% 39.4% 40.9%
Medicaid.............................................. 11.1 11.1 11.5
Other sources......................................... 51.1 49.5 47.6
----- ----- -----
Total............................................... 100.0% 100.0% 100.0%
===== ===== =====
</TABLE>
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Medicare is a Federal program that provides certain hospital and medical
insurance benefits to persons age 65 and over, some disabled persons and
persons with end-stage renal disease. Medicaid is a Federal-state program
administered by the states which provides hospital benefits to qualifying
individuals who are unable to afford care. All of LifePoint's hospitals are
certified as providers of Medicare and Medicaid services. Amounts received
under the Medicare and Medicaid programs are generally significantly less than
the hospital's customary charges for the services provided.
To attract additional volume, most of LifePoint's hospitals offer discounts
from established charges to certain large group purchasers of health care
services, including private insurance companies, employers, HMOs, PPOs and
other managed care plans. These discount programs limit LifePoint's ability to
increase charges in response to increasing costs. See "LifePoint Business--
Competition." In addition to government programs, LifePoint is reimbursed by
private payers including HMOs, PPOs, private insurance companies, employers and
individual private payers. Patients are generally not responsible for any
difference between customary hospital charges and amounts reimbursed for such
services under Medicare, Medicaid, some private insurance plans, HMOs or PPOs,
but are responsible for services not covered by such plans, exclusions,
deductibles or co-insurance features of their coverage. The amount of such
exclusions, deductibles and co-insurance has generally been increasing each
year. Collection of amounts due from individuals is typically more difficult
than from governmental or business payers. For more information on the
reimbursement programs on which LifePoint's revenues are dependent, see
"Government and Other Sources of Reimbursement for LifePoint and Triad."
Competition
The primary bases of competition among hospitals in non-urban markets are the
quality and scope of medical services, availability of physicians, location,
community reputation and, to a lesser extent, price. Generally, LifePoint
serves markets in which its hospital is the only hospital in the community.
Therefore, most of LifePoint's hospitals face less competition in their
immediate patient service areas than would be expected in larger communities.
While LifePoint's hospitals are generally the primary provider of institutional
health care services in their respective communities, its hospitals face
competition from hospitals in surrounding communities, including larger
tertiary care centers and, in some cases, other non-urban hospitals. Some of
the hospitals that compete with LifePoint are owned by tax-supported
governmental agencies or by not-for-profit entities supported by endowments and
charitable contributions which can finance capital expenditures on a tax-exempt
basis.
One of the most significant factors in the competitive position of a hospital
is the number and quality of physicians affiliated with the hospital. Although
physicians may at any time terminate their affiliation with a hospital operated
by LifePoint, LifePoint's hospitals seek to retain physicians of varied
specialties on the hospitals' medical staffs and to attract other qualified
physicians. LifePoint believes that physicians refer patients to a hospital
primarily on the basis of the quality of services it renders to patients and
physicians, the quality of other physicians on the medical staff, the location
of the hospital and the quality of the hospital's facilities, equipment and
employees. Accordingly, LifePoint strives to maintain high ethical and
professional standards and quality facilities, equipment, employees and
services for physicians and their patients.
Another factor in the competitive position of a hospital is management's
ability to negotiate service contracts with purchasers of group health care
services. HMOs and PPOs attempt to direct and control the use of hospital
services through managed care programs and to obtain discounts from hospitals'
established charges. In addition, employers and traditional health insurers are
increasingly interested in containing costs through negotiations with hospitals
for managed care programs and discounts from established charges. Generally,
hospitals compete for service contracts with group health care service
purchasers on the basis of market reputation, geographic location, quality and
range of services, quality of the medical staff, convenience and price. The
importance of obtaining contracts with managed care organizations varies from
market to market, depending on the market strength of such organizations.
Managed care contracts generally are less
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important in the non-urban markets served by LifePoint than they are in urban
and suburban markets where there is typically a higher level of managed care
penetration.
State certificate of need ("CON") laws, which place limitations on a
hospital's ability to expand hospital services and add new equipment, also may
have the effect of restricting competition. Every state in which LifePoint
operates has CON laws except Kansas, Louisiana, Utah and Wyoming. The
application process for approval of covered services, facilities, changes in
operations and capital expenditures is, therefore, highly competitive. In those
states which have no CON laws or which set relatively high thresholds before
expenditures become reviewable by state authorities, competition in the form of
new services, facilities and capital spending may be more prevalent. LifePoint
has not experienced, and does not expect to experience, any material adverse
effects from state CON requirements or from the imposition, elimination or
relaxation of such requirements. See "Government Regulation and Other Factors
Affecting LifePoint and Triad."
LifePoint, and the health care industry as a whole, face the challenge of
continuing to provide quality patient care while dealing with rising costs,
strong competition for patients and a general reduction of reimbursement rates
by both private and government payers. As both private and government payers
reduce the scope of what may be reimbursed and reduce reimbursement levels for
what is covered, Federal and state efforts to reform the health care system may
further impact reimbursement rates. Changes in medical technology, existing and
future legislation, regulations and interpretations and competitive contracting
for provider services by private and government payers may require changes in
LifePoint's facilities, equipment, personnel, rates and/or services in the
future.
The hospital industry and LifePoint's hospitals continue to have significant
unused capacity. Inpatient utilization, average lengths of stay and average
inpatient occupancy rates continue to be negatively affected by payer-required
pre-admission authorization, utilization review, and payment mechanisms to
maximize outpatient and alternative health care delivery services for less
acutely ill patients. Admissions constraints, payer pressures and increased
competition are expected to continue. LifePoint will endeavor to meet these
challenges by expanding its facilities' outpatient services, offering
appropriate discounts to private payer groups, upgrading facilities and
equipment, and offering new programs and services.
One element of LifePoint's business strategy is expansion through the
acquisition of acute care hospitals in growing non-urban markets. The
competition to acquire non-urban hospitals is significant, and there can be no
assurance that suitable acquisitions, for which other health care companies
(including those with greater financial resources than LifePoint) may be
competing, can be accomplished on terms favorable to LifePoint or that
financing, if necessary, can be obtained for such acquisitions. LifePoint
believes that often the acquiror will be selected for a variety of reasons and
not exclusively on the basis of price. LifePoint believes that its strategic
goals align its interests with those of the local communities served by its
hospitals. LifePoint believes that its commitment to maintaining the local
availability of health care services, together with the reputation of
LifePoint's hospitals for providing market-specific, high quality health care,
its focus on physician recruiting and retention, its management's operating
experience, and its direct access to capital will enable LifePoint to compete
successfully for acquisitions.
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Properties
The following table lists the hospitals owned (except as otherwise indicated)
by the America Group of Columbia/HCA (the assets of which will be transferred
to LifePoint prior to the distribution) as of December 31, 1998:
<TABLE>
<CAPTION>
Licensed
Facility Name City State Beds
- ------------- ---- ----- --------
<S> <C> <C> <C>
Andalusia Hospital Andalusia AL 101
Bartow Memorial Hospital (1) Bartow FL 56
Barrow Medical Center(2) Winder GA 56
Western Plains Regional Hospital (3) Dodge City KS 110
Halstead Hospital(2) Halstead KS 177
Georgetown Community Hospital Georgetown KY 75
PineLake Regional Hospital Mayfield KY 106
Meadowview Regional Medical Center Maysville KY 111
Bourbon Community Hospital Paris KY 58
Logan Memorial Hospital Russellville KY 100
Lake Cumberland Regional Hospital Somerset KY 227
Riverview Medical Center Gonzales LA 104
Springhill Medical Center Springhill LA 63
Smith County Memorial Hospital Carthage TN 63
Trinity Hospital(2) Erin TN 40
Crockett Hospital Lawrenceburg TN 107
Livingston Regional Hospital Livingston TN 116
Hillside Hospital Pulaski TN 95
Emerald-Hodgson Hospital Sewanee TN 24
Southern Tennessee Medical Center Winchester TN 126
Castleview Hospital Price UT 84
Ashley Valley Medical Center Vernal UT 39
Riverton Memorial Hospital Riverton WY 70
</TABLE>
- --------
(1) The America Group operates and is general partner of a partnership that
leases and operates Bartow Memorial Hospital.
(2) On March 23, 1999 LifePoint entered into a letter of intent to sell these
hospitals.
(3) The America Group operates and holds a majority equity interest in a
consolidated joint venture which owns and operates Western Plains Regional
Hospital.
Medical office buildings also are operated in conjunction with its hospitals.
These office buildings are primarily occupied by physicians who practice at
LifePoint's hospitals.
LifePoint's headquarters are located in approximately 17,280 square feet of
space in one office building in Nashville, Tennessee. After the distribution
date, LifePoint will sub-lease this space from Columbia/HCA. See "Arrangements
Among Columbia/HCA, LifePoint and Triad Relating to the Distribution--Lease
Agreements."
LifePoint's headquarters, hospitals and other facilities are suitable for
their respective uses and are, in general, adequate for LifePoint's present
needs.
Employees and Medical Staff
At December 31, 1998, LifePoint had approximately 6,800 employees, including
approximately 1,780 part-time employees. No LifePoint employees are subject to
collective bargaining agreements. LifePoint considers its employee relations to
be good. While some of LifePoint's hospitals experience union organizing
activity from time to time, LifePoint does not expect such efforts to
materially affect its future operations. LifePoint's hospitals, like most
hospitals, have experienced labor costs rising faster than the general
inflation rate. There can be no assurance as to future availability and cost of
qualified medical personnel.
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LifePoint's hospitals are staffed by licensed physicians who have been
admitted to the medical staff of individual hospitals. Any licensed physician
may apply to be admitted to the medical staff of any of LifePoint's hospitals,
but admission to the staff must be approved by the hospital's medical staff and
the appropriate governing board of the hospital in accordance with established
credentialling criteria. With certain exceptions, physicians generally are not
employees of LifePoint's hospitals. However, LifePoint has conducted a
physician practice management program pursuant to which some physicians provide
services in LifePoint's hospitals by contract. After the distribution,
LifePoint intends to limit the scope of its physician practice management
program.
LifePoint's Regulatory Compliance Program
It is LifePoint's policy that its business be conducted with integrity and in
compliance with the law. LifePoint has in place and continues to develop a
corporate-wide compliance program, which focuses on all areas of regulatory
compliance, including physician recruitment, reimbursement and cost reporting
practices, and laboratory operations.
This regulatory compliance program is intended to ensure that high standards
of conduct are maintained in the operation of LifePoint's business and to help
ensure that policies and procedures are implemented so that employees act in
full compliance with all applicable laws, regulations and company policies.
Under the regulatory compliance program, LifePoint will provide initial and
periodic legal compliance and ethics training to every employee, review various
areas of LifePoint's operations, and develop and implement policies and
procedures designed to foster compliance with the law. LifePoint will regularly
monitor its ongoing compliance efforts. The program also will include a
mechanism for employees to report, without fear of retaliation, any suspected
legal or ethical violations to their supervisors or designated compliance
officers in the LifePoint's hospitals.
Legal Proceedings
LifePoint is, from time to time, subject to claims and suits arising in the
ordinary course of business, including claims for damages for personal
injuries, breach of management contracts or for wrongful restriction of or
interference with physician's staff privileges. In certain of these actions,
plaintiffs request punitive or other damages that may not be covered by
insurance. LifePoint is currently not a party to any such proceeding which, in
management's opinion, would have a material adverse effect on LifePoint's
business, financial condition or results of operations.
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Triad Business
General
Triad will be organized as a Delaware corporation to own and operate the
health care services business that has constituted the Pacific Group of
Columbia/HCA. The Pacific Group (the assets of which will be transferred to
Triad prior to the distribution) was formed by Columbia/HCA in November 1997.
After the distribution, Triad will continue to provide health care services
through its hospitals and ambulatory surgery centers located in small cities
and selected high growth urban markets in the Southern, Western and
Southwestern United States.
As of December 31, 1998, the Pacific Group comprised 38 general, acute care
hospitals, 1 psychiatric hospital, and 17 ambulatory surgery centers (excluding
2 surgery centers that are not consolidated for accounting purposes), located
in the States of Alabama, Arizona, Arkansas, California, Kansas, Louisiana,
Missouri, New Mexico, Oklahoma, Oregon and Texas. One hospital included among
these facilities is operated through a 50/50 joint venture that is not
consolidated for financial reporting purposes. Triad's management has focused
on streamlining Triad's portfolio of facilities to eliminate those with poor
financial performance, weak competitive market positions or locations in
certain urban markets. As a result of this initiative, Triad has decided to
divest certain of its facilities and, since December 31, 1998, has sold one of
its general, acute care hospitals, has transferred under long-term lease two of
its hospitals and three of its ambulatory surgery centers to an unaffiliated
third party and has ceased operations of another hospital. Triad currently
intends to sell an additional four of its general, acute care hospitals, its
one psychiatric hospital, and certain of the ambulatory surgery centers that it
operated as of December 31, 1998. In addition, Triad has entered into an
agreement to swap one hospital, Doctors Hospital of Laredo, for another
hospital located in Victoria, Texas. Following these divestitures and the
cessation of operations of one hospital, Triad expects its facilities to
include 32 hospitals (including the hospital operated through a joint venture
and two hospitals leased to and operated by an unaffiliated third party), as
well as 14 ambulatory service centers. In addition, Triad intends to open a new
hospital in May 1999 through a 50/50 joint venture.
In addition to providing capital resources, Triad will make available a
variety of management services to its health care facilities. These services
will include ethics and compliance programs; leasing contracts; accounting,
financial and clinical systems; governmental reimbursement assistance;
information systems; legal support; personnel management and internal audit;
access to regional managed care networks; and resource management. Some of
these services initially will be provided through transitional arrangements
made with Columbia/HCA. Triad also will participate and have an equity
interest, along with Columbia/HCA and LifePoint, in a group purchasing
organization which will make certain national supply and equipment contracts
available to Triad's facilities. See "Arrangements Among Columbia/HCA,
LifePoint and Triad Relating to Distribution" and "--Other Agreements."
Principal Executive Offices
Triad's principal executive offices are located at 13455 Noel Road, 20th
Floor, Dallas, Texas 75240 (telephone number (972) 701-2200). Triad's corporate
Website address is http://www.triadhospitals.com. Information contained on
Triad's Website is not part of this information statement.
Triad's Markets
Most of Triad's facilities are located in two distinct types of markets in
the Southern, Western and Southwestern United States. After completion of the
planned divestitures and cessation of operations, three-quarters of Triad's 32
hospitals will be located in small cities (generally with populations of less
than 150,000 residents and located more than 60 miles from a major urban
center), where Triad's hospital is usually either the only hospital or one of
two or three hospitals. The remainder of Triad's 32 hospitals will be located
in five larger urban areas. The urban areas where Triad operates are typically
characterized by a high rate of population growth (e.g., Phoenix and Tucson,
Arizona). Approximately half of Triad's facilities are located in the States of
Arizona and Texas.
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Small Cities
Triad believes that the small cities of the Southern, Western and
Southwestern United States are attractive to health care service providers as a
result of favorable demographic and economic trends. Twenty-eight of the
thirty-eight general, acute care hospitals that Triad operated as of December
31, 1998 (including the hospital operated through a joint venture) were located
in these markets. Of these hospitals, fifteen hospitals were located in
communities where they currently are the sole hospital and nine hospitals were
located in communities where they currently are one of only two hospitals.
After completion of the planned divestitures and the cessation of operations
described above, twenty-four of Triad's thirty-two remaining general, acute
care hospitals will be located in small cities. Of these, twelve will be
located in communities where they currently are the sole hospital and nine
hospitals will be located in communities where they currently are one of only
two hospitals.
While Triad's hospitals located in these small cities are more likely to face
direct competition than facilities located in smaller non-urban markets, that
competition usually is limited to a single competitor in the relevant market.
Triad believes that the smaller populations and relative dominance of the one
or two acute care hospitals in these markets also limit the entry of alternate
non-hospital providers, such as outpatient surgery centers or rehabilitation or
diagnostic imaging centers, as well as managed care plans.
Larger Urban Markets
Ten of the thirty-eight general, acute care hospitals that Triad operated as
of December 31, 1998 were located in larger urban markets of the Southern,
Western and Southwestern United States, and after completion of the planned
divestitures and closure described above, eight of Triad's thirty-two remaining
general, acute care hospitals will be located in such urban markets. The new
facility that Triad is currently building is also located in an urban market.
In addition to the direct competition Triad faces from other health care
providers in its markets, there are higher levels of managed care penetration
in the larger urban markets (i.e., the relative proportion of the market
population enrolled in managed care programs (HMOs and PPOs)).
Business Strategy
Triad's primary objectives are to provide quality health care services and to
enhance the financial performance of the company by increasing utilization of
its facilities and improving operating efficiencies, using the following
strategies:
. Build on Position in Small Cities and High Population Growth Urban
Markets. Triad believes that, as a result of its efforts to streamline
its base of assets, it is well positioned to build upon its portfolio of
facilities in the Southern, Western and Southwestern United States.
Triad also believes that, unlike rural markets which have small
populations, Triad's small-city markets can support increased specialty
services which produce relatively higher revenues than other health care
services. In addition, in Triad's small-city markets, managed care
penetration (i.e., the relative proportion of the market enrolled in
managed care programs (HMOs and PPOs)) is generally lower than in urban
areas and, therefore, Triad believes that it will be in a better
position to negotiate more favorable managed care contracts in these
markets. Triad also intends to strengthen its competitive position in
the fast growing larger urban areas of the Southwest where it currently
operates.
. Recruit Physicians. Triad plans to actively recruit additional primary
care physicians. Triad believes that primary care physicians are
frequently the first contact point for a patient and that each hospital
must establish strong physician relationships in its community in order
to enhance patient care and fulfill the needs of the growing population
in its markets.
. Enhance Specialty Services, Outpatient Services and Emergency
Rooms. Triad believes that many of its markets are large enough to
support additional specialty services, such as women's centers,
orthopedic facilities, oncology centers and neurology care, and intends
to selectively increase these
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services in order to reduce patient outmigration to urban hospitals. To
support this expansion of specialty services, Triad plans to actively
recruit additional specialists to its facilities. Recognizing that the
shift from inpatient to outpatient care recently experienced by the
health care industry is likely to continue, Triad intends to enhance
access to and the convenience of its outpatient service capabilities by
improving its free-standing ambulatory surgery centers, restructuring
its hospital facilities and surgery capacity to better accommodate
outpatient treatment, and improving its emergency room facilities.
. Improve Operating Efficiences Through Enhanced Cost Management and
Resource Control. Triad has initiated several measures to improve the
financial performance of its facilities through greater control of
operating expenses. Triad has focused on reducing salaries, wages and
benefits, the largest component of operating expense, at the facility
level. Triad also has instituted a financial training program for its
hospital managers to teach effective management of hospital revenues and
expenses. Triad plans to improve resource management through cooperative
initiatives with physicians to eliminate unnecessary tests and
procedures.
. Develop Strong Relationships with Physicians. Triad believes recruiting
and retaining motivated physicians is vitally important to its long term
success. Triad believes a model for effective health care service
delivery can be developed cooperatively with physicians and the
hospitals which will result in improved quality of care. In each of its
markets, Triad has established a Physician Leadership Group made up of
leading area physicians who will work with corporate and hospital
management to establish local priorities. Corporate objectives will be
addressed by a national Physician Leadership Group comprised of
representatives of local Physician Leadership Groups and members of
Triad management. In an effort to further improve communication with its
physicians, Triad has appointed a senior manager who is an experienced
physician to oversee physician relations.
. Grow Through Existing Hospital Expansion, New Hospital and Ambulatory
Surgery Center Construction and Selective Acquisitions. Triad intends to
identify expansion opportunities in areas where management perceives
that demand is not being adequately met due to rapid population growth
or insufficient existing health care services. Triad plans to
selectively expand its existing hospitals by adding additional clinical
facilities or medical office buildings. Triad plans to construct new
hospitals and also may seek to make acquisitions in select markets.
Triad is currently in the process of building a new facility in South
Tulsa, Oklahoma through a joint venture with Hillcrest Healthcare
Systems. The facility is scheduled to open in May 1999 and will be 50%
owned by Triad. Triad believes that potential acquisition opportunities
may arise when other health care providers choose to divest facilities
or when independent hospitals believe that they can benefit from
becoming part of a larger hospital company. Currently, Triad does not
have specific plans for additional new facilities or acquisitions.
Operations
Triad's general, acute care hospitals typically 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. These hospitals also generally
provide outpatient and ancillary health care services such as outpatient
surgery, laboratory, radiology, respiratory therapy, cardiology and physical
therapy. Outpatient services also are provided by ambulatory surgery centers
operated by Triad. In addition, certain of Triad's general, acute care
hospitals have a limited number of licensed psychiatric beds.
Each of Triad's hospitals is governed by a board of trustees, which includes
members of the hospital's medical staff. The board of trustees establishes
policies concerning the medical, professional and ethical practices, monitors
such practices, and is responsible for ensuring that these practices conform to
established standards. Triad maintains quality assurance programs to support
and monitor quality of care standards and to meet accreditation and regulatory
requirements. Patient care evaluations and other quality of care assessment
activities are monitored on a continuing basis.
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Services and Utilization
Hospital revenues depend upon inpatient occupancy levels, the volume of
outpatient procedures and the charges or negotiated payment rates for such
services. Charges and reimbursement rates for inpatient routine services vary
significantly depending on the type of service (e.g., medical/surgical,
intensive care or psychiatric) and the geographic location of the hospital.
Triad believes that important factors relating to the overall utilization of
a hospital include the quality and market position of the hospital and the
number, quality and specialities of physicians providing patient care within
the facility. Generally, Triad believes that the ability of a hospital to meet
the health care needs of its community is determined by its breadth of
services, level of technology, emphasis on quality of care and
convenience for patients and physicians. Other factors which impact utilization
include the growth in local population, local economic conditions, market
penetration of managed care programs and the availability of reimbursement
programs such as Medicare and Medicaid. Utilization across the industry also is
being affected by improved treatment protocols as a result of advances in
medical technology and pharmacology.
The following table sets forth certain operating statistics for hospitals
owned by Triad for each of the past five years ended December 31.
Medical/surgical hospital operations are subject to certain seasonal
fluctuations, including decreases in patient utilization during holiday periods
and increases in patient utilization during the cold weather months.
<TABLE>
<CAPTION>
Years Ended December 31,
-------------------------------------------
1998 1997 1996 1995 1994
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Number of hospitals at end of
period.......................... 38 38 38 39 38
Number of licensed beds at end of
period (a)...................... 5,909 5,859 5,872 5,926 5,660
Weighted average licensed beds
(b)............................. 5,877 5,860 5,882 5,900 5,325
Admissions (c)................... 169,590 172,926 171,265 170,392 147,923
Equivalent admissions (d)........ 276,771 275,125 266,660 257,292 211,382
Average length of stay (days)
(e)............................. 4.9 4.9 5.0 5.2 5.2
Average daily census (f)......... 2,260 2,326 2,338 2,405 2,111
Occupancy rate (g)............... 39% 40% 40% 41% 40%
</TABLE>
- --------
(a) Licensed beds are those beds for which a facility has been granted approval
to operate from the applicable state licensing agency.
(b) Represents the average number of licensed beds weighted based on periods
owned.
(c) Represents the total number of patients admitted (in the facility for a
period in excess of 23 hours) to Triad's hospitals and is used by
management and certain investors as a general measure of inpatient volume.
(d) Equivalent admissions is used by management and certain investors as a
general measure of combined inpatient and outpatient volume. Equivalent
admissions are computed by multiplying admissions (inpatient volume) by the
sum of gross inpatient revenue and gross outpatient revenue and then
dividing the resulting amount by gross inpatient revenue. The equivalent
admissions computation "equates" outpatient revenue to the volume measure
(admissions) used to measure inpatient volume resulting in a general
measure of combined inpatient and outpatient volume.
(e) Represents the average number of days admitted patients stay in Triad's
hospitals. Average length of stay has declined due to the continuing
pressures from managed care and other payers to restrict admissions and
reduce the number of days that are covered by the payers for certain
procedures, and by technological and pharmaceutical improvements.
(f) Represents the average number of patients in Triad's hospital beds each
day.
(g) Represents the percentage of hospital licensed beds occupied by patients.
Both average daily census and occupancy rate provide measures of the
utilization of inpatient rooms. The declining occupancy rate is primarily
attributed to the trend toward more services, that were previously
performed in an inpatient setting, being performed on an outpatient basis
and the decline in average length of stay per admission.
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Triad's hospitals have experienced significant shifts from inpatient to
outpatient care as well as decreases in average lengths of inpatient stay,
primarily as a result of improvements in technology and clinical practices and
hospital payment changes by Medicare, insurance carriers and self-insured
employers. These hospital payment changes generally encourage the utilization
of outpatient, rather than inpatient, services whenever possible, and shortened
lengths of stay for inpatient care. Triad has responded to the outpatient trend
by enhancing its hospitals' outpatient service capabilities, including (i)
dedicating resources to its freestanding ambulatory surgery centers at or near
certain of its hospital facilities, (ii) reconfiguring certain hospitals to
more effectively accommodate outpatient treatment by, among other things,
providing more convenient registration procedures and separate entrances, and
(iii) restructuring existing surgical capacity to allow a greater number and
range of procedures to be performed on an outpatient basis. Triad's facilities
will continue to emphasize those outpatient services that can be provided on a
quality, cost-effective basis and that the company believes will experience
increased demand.
Sources of Revenue
Triad receives payment for patient services from the Federal government
primarily under the Medicare program, state governments under their respective
Medicaid programs, HMOs, PPOs and other private insurers as well as directly
from patients. The approximate percentages of net patient revenues from
continuing operations of Triad's facilities from such sources during the
periods specified below were as follows:
<TABLE>
<CAPTION>
Years Ended
December 31,
-------------------
1998 1997 1996
----- ----- -----
<S> <C> <C> <C>
Medicare.............................................. 34.6% 35.4% 36.5%
Medicaid.............................................. 6.5 6.0 6.9
Other sources......................................... 58.9 58.6 56.6
----- ----- -----
Total............................................... 100.0% 100.0% 100.0%
===== ===== =====
</TABLE>
Medicare is a Federal program that provides certain hospital and medical
insurance benefits to persons age 65 and over, some disabled persons and
persons with end-stage renal disease. Medicaid is a Federal-state program
administered by the states which provides hospital benefits to qualifying
individuals who are unable to afford care. All of Triad's hospitals are
certified as providers of Medicare and Medicaid services. Amounts received
under the Medicare and Medicaid programs are generally significantly less than
the hospital's customary charges for the services provided.
To attract additional volume, most of Triad's hospitals offer discounts from
established charges to certain large group purchasers of health care services,
including private insurance companies, employers, HMOs, PPOs and other managed
care plans. These discount programs limit Triad's ability to increase charges
in response to increasing costs. See "--Competition." In addition to government
programs, Triad is reimbursed by private payers including HMOs, PPOs, private
insurance companies, employers and individual private payers. Patients are
generally not responsible for any difference between customary hospital charges
and amounts reimbursed for such services under Medicare, Medicaid, some private
insurance plans, HMOs or PPOs, but are responsible for services not covered by
such plans, exclusions, deductibles or co-insurance features of their coverage.
The amount of such exclusions, deductibles and co-insurance has generally been
increasing each year. Collection of amounts due from individuals is typically
more difficult than from governmental or business payers. For more information
on the reimbursement programs on which Triad's revenues are dependent, see
"Government and Other Sources of Reimbursement for LifePoint and Triad."
Competition
The competition among hospitals and other health care providers has
intensified in recent years as hospital occupancy rates have declined. Triad's
strategies are designed, and management believes that its hospitals are
positioned, to be competitive under these changing circumstances.
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Fifteen of the general, acute care hospitals operated by Triad as of December
31, 1998 (including the hospital operated through a joint venture) were located
in geographic areas where they were the only hospital in the community. These
hospitals generally face less competition in their immediate patient service
areas than would be expected in larger communities, and there is usually a
lower level of managed care penetration in these areas than there would be in
larger urban markets. While these Triad hospitals are generally the primary
provider of hospital services in their respective communities, they face
competition from larger tertiary care centers. Although these competitive
hospitals may be as far as 30 to 50 miles away, patients may migrate to, may be
referred by local physicians to, or may be lured by incentives from managed
care plans to travel to, such distant hospitals.
Eleven of the general, acute care hospitals operated by Triad as of December
31, 1998 were located in geographic areas where they competed with only one
other hospital. The remaining 12 general, acute care hospitals were located in
geographic areas where they competed with more than one other hospital.
Additionally, in the past several years, the number of freestanding outpatient
surgery and diagnostic centers in the geographic areas in which Triad operates
has increased significantly. As a result, Triad's hospitals operate in an
increasingly competitive environment. The rates charged by Triad's hospitals
are intended to be competitive with those charged by other local hospitals for
similar services. In some cases, competing hospitals are more established than
Triad's hospitals. Certain of these competing facilities, particularly in
Triad's urban markets, offer services, including extensive medical research and
medical education programs, which are not offered by Triad's facilities. In
addition, in certain of the urban markets where Triad operates, there are large
teaching hospitals which provide highly specialized facilities, equipment and
services which may not be available at Triad's hospitals. Also, some of the
hospitals that compete with Triad's facilities are owned by tax-supported
governmental agencies or by not-for-profit entities supported by endowments and
charitable contributions which can finance capital expenditures on a tax-exempt
basis.
One of the most significant factors in the competitive position of a hospital
is the number and quality of physicians affiliated with the hospital. Although
physicians may at any time terminate their affiliation with a hospital operated
by Triad, Triad's hospitals seek to retain physicians of varied specialties on
the hospitals' medical staffs and to attract other qualified physicians. Triad
believes that physicians refer patients to a hospital primarily on the basis of
the quality of services it renders to patients and physicians, the quality of
other physicians on the medical staff, the location of the hospital and the
quality of the hospital's facilities, equipment and employees. Accordingly,
Triad strives to maintain high ethical and professional standards and quality
facilities, equipment, employees and services for physicians and their
patients.
Another major factor in the competitive position of a hospital is
management's ability to negotiate service contracts with purchasers of group
health care services. HMOs and PPOs attempt to direct and control the use of
hospital services through managed care programs and to obtain discounts from
hospitals' established charges. In addition, employers and traditional health
insurers are increasingly interested in containing costs through negotiations
with hospitals for managed care programs and discounts from established
charges. Generally, hospitals compete for service contracts with group health
care service purchasers on the basis of price, market reputation, geographic
location, quality and range of services, quality of the medical staff and
convenience. The importance of obtaining contracts with managed care
organizations varies from market to market depending on the market strength of
such organizations.
State CON laws, which place limitations on a hospital's ability to expand
hospital services and add new equipment, may also have the effect of
restricting competition. Alabama is the only state where Triad operates that
has CON laws affecting acute care services. The application process for
approval of covered services, facilities, changes in operations and capital
expenditures in Alabama is, therefore, highly competitive. In those states
which have no CON laws or which set relatively high thresholds before
expenditures become reviewable by state authorities, competition in the form of
new services, facilities and capital spending is more prevalent. Triad has not
experienced, and does not expect to experience, any material adverse effects
from state CON requirements or from the imposition, elimination or relaxation
of such requirements. See "Government Regulation and Other Factors Affecting
LifePoint and Triad."
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<PAGE>
Triad, and the health care industry as a whole, face the challenge of
continuing to provide quality patient care while dealing with rising costs,
strong competition for patients and a general reduction of reimbursement rates
by both private and government payers. As both private and government payers
reduce the scope of what may be reimbursed and reduce reimbursement levels for
what is covered, Federal and state efforts to reform the health care system may
further impact reimbursement rates. Changes in medical technology, existing and
future legislation, regulations and interpretations and competitive contracting
for provider services by private and government payers may require changes in
Triad's facilities, equipment, personnel, rates and/or services in the future.
The hospital industry and Triad's hospitals continue to have significant
unused capacity. Inpatient utilization, average lengths of stay and average
occupancy rates continue to be negatively affected by payer-required pre-
admission authorization, utilization review and payer pressure to maximize
outpatient and alternative health care delivery services for less acutely ill
patients. Admissions constraints, payer pressures and increased competition are
expected to continue. Triad endeavors to meet these challenges by expanding
many of its facilities to include outpatient centers, offering discounts to
private payer groups, upgrading facilities and equipment and offering new
programs and services.
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Properties
The following table lists the hospitals owned (except as otherwise indicated)
by the Pacific Group of Columbia/HCA (the assets of which will be transferred
to Triad prior to the distribution) as of December 31, 1998. As described in
the table, the Pacific Group has sold or currently intends to sell certain of
the general, acute care hospitals and its psychiatric hospital.
<TABLE>
<CAPTION>
Licensed
Facility Name City State Beds
- ------------- ---- ----- --------
<S> <C> <C> <C>
Crestwood Medical Center Huntsville AL 120
DeQueen Regional Medical Center DeQueen AR 122
Medical Center of South Arkansas (1) El Dorado AR 360
Medical Park Hospital Hope AR 91
Phoenix Regional Medical Center Phoenix AZ 290
Paradise Valley Hospital Phoenix AZ 162
El Dorado Hospital Tucson AZ 166
Northwest Hospital Tucson AZ 174
San Leandro Hospital San Leandro CA 136
Mission Bay Memorial Hospital San Diego CA 128
Overland Park Regional Medical Center
(2) Overland Park KS 360
Women & Children's Hospital Lake Charles LA 80
Independence Regional Health Center
(2) Independence MO 366
Medical Center of Carlsbad Carlsbad NM 135
Lea Regional Hospital Hobbs NM 250
Claremore Regional Hospital Claremore OK 89
Willamette Valley Medical Center McMinnville OR 80
Douglas Medical Center Roseburg OR 118
Panhandle Surgical Hospital Amarillo TX 21
Alice Regional Hospital Alice TX 131
Brownwood Regional Medical Center (3) Brownwood TX 218
College Station Medical Center College Station TX 119
Navarro Regional Hospital Corsicana TX 168
Doctors Hospital of Laredo (4) Laredo TX 117
Longview Regional Hospital Longview TX 164
Woodland Heights Medical Center Lufkin TX 127
Medical Center of Pampa Pampa TX 107
San Angelo Community Medical Center San Angelo TX 165
Community Medical Center of Sherman Sherman TX 160
Medical Center at Terrell (3) Terrell TX 130
DeTar Hospital Victoria TX 217
Gulf Coast Medical Center Wharton TX 161
Divested:
Palm Drive Hospital Sebastopol CA 49
Wagoner Community Hospital (5) Wagoner OK 100
Held For Sale:
Beaumont Medical and Surgical Hospital Beaumont TX 366
Silsbee Doctors Hospital Silsbee TX 69
West Anaheim Medical Center Anaheim CA 219
Huntington Beach Hospital Huntington Beach CA 134
Research Psychiatric Center (6) Kansas City MO 100
</TABLE>
- --------
(1) The Pacific Group holds a fifty percent equity interest in a non-
consolidated joint venture which owns and operates the Medical Center of
South Arkansas.
(2) The Pacific Group continues to own the assets related to these hospitals,
but has transferred the exclusive rights to use and control the hospitals'
operations to a separate, independent entity pursuant to a long-term lease
agreement effective as of January 1, 1999.
(3) The Pacific Group currently leases each of these hospitals pursuant to
long-term leases which provide that it has the exclusive right to use and
control the hospital operations.
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<PAGE>
(4) The Pacific Group has entered into an agreement to swap the assets and
operations of this hospital for the assets and operations of Victoria
Regional Medical Center located in Victoria, Texas.
(5) The Pacific Group ceased to operate this facility effective April 1, 1999.
(6) The Pacific Group holds a sixty percent equity interest in a consolidated
joint venture which owns and operates the Research Psychiatric Center.
The Pacific Group holds an equity interest in a joint venture that is
building a new hospital in South Tulsa, Oklahoma, which will be operated by
Triad. Upon completion of this project, which is scheduled for May 1999,
Triad's equity interest will be fifty percent.
In addition to the hospitals listed in the table above and the hospital under
construction in South Tulsa, Oklahoma, as of December 31, 1998, the Pacific
Group operated 19 ambulatory surgery centers (including 3 surgery centers that
are operated by an unaffiliated third party pursuant to a long-term lease and 2
ambulatory surgery centers that are not consolidated for financial reporting
purposes), certain of which Triad currently intends to sell. Medical office
buildings also are operated in conjunction with its hospitals. These office
buildings are primarily occupied by physicians who practice at Triad's
hospitals.
Triad's headquarters are located in approximately 45,000 square feet of space
in one office building in Dallas, Texas. After the distribution date, Triad
will sub-lease this space from Columbia/HCA. See "Arrangements Among
Columbia/HCA, LifePoint and Triad relating to the Distribution--Lease
Agreements."
Triad's headquarters, hospitals and other facilities are suitable for their
respective uses and are, in general, adequate for Triad's present needs.
Employees and Medical Staff
At December 31, 1998, Triad had approximately 28,300 employees, including
approximately 9,100 part-time employees. Employees at one hospital are
currently represented by a labor union. Triad considers its employee relations
to be good. While Triad's non-union hospitals experience union organizational
activity from time to time, Triad does not expect such efforts to materially
affect its future operations. Triad's hospitals, like most hospitals, have
experienced labor costs rising faster than the general inflation rate. There
can be no assurance as to future availability and cost of qualified medical
personnel.
Triad's hospitals are staffed by licensed physicians who have been admitted
to the medical staff of individual hospitals. With certain exceptions,
physicians generally are not employees of Triad's hospitals. However, some
physicians provide services in Triad's hospitals under contracts, which
generally describe a term of service, provide and establish the duties and
obligations of such physicians, require the maintenance of certain performance
criteria and fix compensation for such services. Any licensed physician may
apply to be admitted to the medical staff of any of Triad's hospitals, but
admission to the staff must be approved by the hospital's medical staff and the
appropriate governing board of the hospital in accordance with established
credentialling criteria. Members of the medical staffs of Triad's hospitals
located in areas where there are other hospitals often also serve on the
medical staffs of other hospitals and may terminate their affiliation with a
hospital at any time.
Triad's Regulatory Compliance Program
It is Triad's policy that its business be conducted with integrity and in
compliance with the law. Triad is developing a corporate-wide compliance
program, which will focus on all areas of regulatory compliance, including
physician recruitment, reimbursement and cost reporting practices and
laboratory operations.
This regulatory compliance program is intended to assure that high standards
of conduct are maintained in the operation of Triad's business and to help
assure that policies and procedures are implemented so that employees act in
full compliance with all applicable laws, regulations and company policies.
Under the regulatory compliance program, Triad will provide initial and
periodic legal compliance and ethics training to
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<PAGE>
every employee, review various areas of Triad's operations, and develop and
implement policies and procedures designed to foster compliance with the law.
Triad will regularly monitor its ongoing compliance efforts. The program also
will include a mechanism for employees to report, without fear of retaliation,
any suspected legal or ethical violations to their supervisors or designated
compliance officers in Triad's hospitals.
Legal Proceedings
Triad is, from time to time, subject to claims and suits arising in the
ordinary course of business, including claims for damages for personal
injuries, breach of management contracts or for wrongful restriction of or
interference with physician's staff privileges. In certain of these actions,
plaintiffs request punitive or other damages that may not be covered by
insurance. Triad is currently not a party to any such proceeding which, in
management's opinion, would have a material adverse effect on Triad's business,
financial condition or results of operations.
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Government and Other Sources of Reimbursement for LifePoint and Triad
Medicare. Under the Medicare program, LifePoint and Triad hospitals receive
reimbursement under a prospective payment system ("PPS") for inpatient hospital
services. Psychiatric, long-term care, rehabilitation, specially designated
children's hospitals and certain designated cancer research hospitals, as well
as psychiatric or rehabilitation units that are distinct parts of a hospital
and meet Health Care Financing Administration criteria for exemption, are
currently exempt from PPS and are reimbursed on a cost-based system, subject to
certain cost limits (known as TEFRA limits).
Under the PPS, fixed payment amounts per inpatient discharge are established
based on the patient's assigned diagnosis related group ("DRG"). DRGs classify
treatments for illnesses according to the estimated intensity of hospital
resources necessary to furnish care for each principal diagnosis. DRG rates
have been established for each hospital participating in the Medicare program
and are based upon a statistically normal distribution of severity. When
treatments for certain patients fall well outside the normal distribution,
providers receive additional payments. DRG payments do not consider a specific
hospital's costs, but are adjusted for area wage differentials. The majority of
capital costs for acute care facilities are reimbursed on a prospective payment
system based on DRG weights times a federal rate adjusted for a geographic
rate.
DRG rates are updated and re-calibrated annually and have been affected by
several recent Federal enactments. The index used to adjust the DRG rates gives
consideration to the inflation experienced by hospitals (and entities outside
of the health care industry) in purchasing goods and services ("market
basket"). However, for several years the percentage increases to the DRG rates
have been lower than the percentage increases in the costs of goods and
services purchased by hospitals. The DRG rates are adjusted each Federal fiscal
year, which begins on October 1. The historical DRG rate increases were 1.1%,
1.5% and 2.0% for Federal fiscal years 1995, 1996 and 1997, respectively. For
Federal fiscal year 1998, there was no increase. The budgeted updates for
Federal fiscal years 1999 through 2002 are market basket minus 1.9%, 1.8%, 1.1%
and 1.1%, respectively. LifePoint and Triad anticipate that future legislation
may decrease the future rate of increase for DRG payments, but neither is able
to predict the amount of the reduction.
Outpatient services provided at general, acute care hospitals typically are
reimbursed by Medicare at the lower of customary charges or approximately 82%
of actual cost, subject to additional limits on the reimbursement of certain
outpatient services. The Balanced Budget Act, enacted August 5, 1997, contains
provisions that affect outpatient hospital services, including a requirement
that HCFA adopt a prospective payment system for outpatient hospital services
to begin January 1, 1999. However, implementation of the PPS will be delayed
because of Year 2000 systems concerns. The outpatient PPS will be implemented
as soon as possible after January 1, 2000. At such time as the PPS is
implemented, the rates will be based on the rates that would have been in
effect January 1, 1999, updated by the rate of increase in the hospital market
basket minus one percentage point. Neither LifePoint nor Triad is able to
predict the effect, if any, that the new payment system will have on its
financial results. After the fee schedule is established for this new system,
the fee schedule is to be updated by the market basket minus 1.0% for each of
Federal fiscal years 2000 through 2002. Similarly, effective January 1, 1999,
therapy services rendered by hospitals to outpatients and inpatients not
reimbursed under Medicare, part A, are reimbursed according to the Medicare
physician fee schedule.
The Balanced Budget Act mandates a prospective payment system for skilled
nursing facility services for Medicare cost reporting periods commencing after
June 30, 1998, hospital outpatient services beginning January 1, 1999, home
health services for Medicare cost reporting periods beginning after September
30, 1999, and inpatient rehabilitation hospital services for Medicare cost
reporting periods beginning after September 30, 2000. Prior to the commencement
of the prospective payment systems, payment constraints will be applied to PPS-
exempt hospitals and units for Medicare cost reporting periods beginning on or
after October 1, 1997. For the year ended December 31, 1998, LifePoint had 49
units that were reimbursed under this methodology, and Triad had 126 units that
were reimbursed under this methodology.
Payments to PPS-exempt hospitals and units, (i.e., inpatient psychiatric,
rehabilitation and long-term hospital services), are based upon reasonable
cost, subject to a cost per discharge target. These limits are updated annually
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<PAGE>
by a market basket index. For Federal fiscal year 1995, 1996 and 1997, the
market basket rate of increase was 3.7%, 3.4%, and 2.5% respectively. For
Federal fiscal year 1998, there was no increase. For Federal fiscal year 1999,
the market basket index is projected to be 2.4%. The update for cost reporting
periods from October 1, 1998 to September 30, 1999 is the market basket less a
percentage point between 0% and 2.4% depending on the hospital or units costs
in relation to the ceiling. Furthermore, limits have been established for the
cost per discharge target at the 75th percentile for each category of PPS-
exempt hospitals and hospital units, i.e., psychiatric, rehabilitation and
long-term hospitals. For Federal fiscal year 1998, these limits were $10,534,
$19,104, and $37,688 per discharge, respectively. For Federal fiscal year
1999, these limits are $10,787, $19,562 and $38,593 per discharge,
respectively. In addition, the cost per discharge for new hospitals/hospital
units cannot exceed 110% of the national median target rate for hospitals in
the same category. For Federal fiscal year 1998, these amounts were $8,517,
$16,738, and $18,947 per discharge for psychiatric, rehabilitation and long-
term hospital services, respectively. For Federal fiscal year 1999, these
amounts are $8,686, $17,077 and $22,010 per discharge, respectively.
Skilled nursing facilities have historically been reimbursed by Medicare on
the basis of actual costs, subject to certain limits. The Balanced Budget Act
requires the establishment of a prospective payment system for Medicare
skilled nursing facilities under which facilities will be paid a Federal per
diem rate for virtually all covered services. The new payment system will be
phased in over three cost reporting periods, starting with cost reporting
periods beginning on or after July 1, 1998. The law also institutes
consolidated billing for skilled nursing facility services, under which
payments for most non-physician Part B services for beneficiaries no longer
eligible for Part A skilled nursing facility care will be made to the
facility, regardless of whether the item or service was furnished by the
facility, by others under arrangement, or under any other contracting or
consulting arrangement. Consolidated billing is being implemented on a
transition basis. The Balanced Budget Act also requires United States
Department of Health and Human Services ("HHS") to establish a PPS for home
health services, to be implemented beginning October 1, 1999. Prior to
implementation, the Balanced Budget Act establishes certain interim payment
reforms for cost reporting periods beginning on or after October 1, 1997,
including reduced home health limits, reduced per visit costs limits, and
agency-specific per beneficiary annual limits on an agency's costs. As of
December 31, 1998, ten of LifePoint's hospitals and twenty-seven of Triad's
hospitals operated skilled nursing facilities.
Currently, physicians are paid by Medicare according to the physician fees
schedule. However, physicians working in rural health clinics, such as those
maintained by LifePoint and Triad, are reimbursed for their professional and
administrative services through the rural health clinic subject to per visit
limits unless the rural health clinic is based at a rural hospital with less
than 50 beds.
Medicare has special payment provisions for "sole community hospitals." A
sole community hospital is generally the only hospital in at least a 35-mile
radius. Five of LifePoint's facilities and six of Triad's facilities qualify
as sole community hospitals under Medicare regulations. Special payment
provisions related to sole community hospitals include a higher reimbursement
rate, which is based on a blend of hospital-specific costs and the national
reimbursement rate, and a 90% payment "floor" for capital costs which
guarantees the sole community hospital capital reimbursement equal to 90% of
capital cost. In addition, the CHAMPUS program has special payment provisions
for hospitals recognized as sole community hospitals for Medicare purposes.
Medicaid. Most state Medicaid payments are made under a prospective payment
system or under programs which negotiate payment levels with individual
hospitals. Medicaid reimbursement is often less than a hospital's cost of
services. Medicaid is currently funded jointly by the state Federal
governments. The Federal government and many states are currently considering
significant reductions in the level of Medicaid funding while at the same time
expanding Medicaid benefits, which could adversely affect future levels of
Medicaid reimbursement received by the hospitals of LifePoint and Triad.
On November 27, 1991, Congress enacted the Medicaid Voluntary Contribution
and Provider-Specific Tax Amendments of 1991, which limit the amount of
voluntary contributions and provider-specific taxes that can be used by states
to fund Medicaid and require the use of broad-based taxes for such funding. As
a result of enactment of these amendments, certain states in which LifePoint
and Triad operate have adopted broad-based provider taxes to fund their
Medicaid programs. The impact of these new taxes upon LifePoint and Triad has
not been materially adverse. However, neither LifePoint nor Triad can predict
whether any additional broad-
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based provider taxes will be adopted by the states in which it operates and,
accordingly, neither is able to assess the effect of such additional taxes on
its results of operations or financial position.
Annual Cost Reports. All hospitals participating in the Medicare program,
whether paid on a reasonable cost basis or under PPS, are required to meet
certain financial reporting requirements. Federal regulations require
submission of annual cost reports covering medical costs and expenses
associated with the services provided by each hospital to Medicare
beneficiaries. Review of previously submitted annual cost reports and the cost
report preparation process are areas included in the ongoing government
investigations of Columbia/HCA. It is too early to predict the outcome of these
investigations, but if LifePoint or Triad, or any of their facilities, were
found to be in violation of Federal or state laws relating to Medicare,
Medicaid or similar programs, they 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 financial position and results of operations of LifePoint
or Triad, as the case may be. Columbia/HCA has agreed to indemnify LifePoint
and Triad in respect of losses arising from such government investigations. See
"Arrangements Among Columbia/HCA, LifePoint and Triad Relating to the
Distribution--Distribution Agreement," "Risk Factors--Potential Adverse Impact
of Columbia/HCA Investigations and Litigation; Indemnification of LifePoint and
Triad," and "Government Regulation and Other Factors Affecting LifePoint and
Triad--Governmental Investigation of Columbia/HCA and Related Litigation."
Annual cost reports required under the Medicare and Medicaid programs are
subject to routine audits, which may result in adjustments to the amounts
ultimately determined to be due to LifePoint and Triad under these
reimbursement programs. These audits often require several years to reach the
final determination of amounts earned under the programs. Providers also have
rights of appeal, and it is common to contest issues raised in audits of prior
years' reports. Pursuant to the terms of the Distribution Agreement, LifePoint
and Triad will be responsible for the Medicare, Medicaid and Blue Cross cost
reports, and associated receivables and payables, for their facilities for all
periods ending after the distribution date. Columbia/HCA will be responsible
for the Medicare, Medicaid and Blue Cross cost reports for the LifePoint and
Triad facilities relating to periods ending on or prior to the distribution
date. See "Arrangements Among Columbia/HCA, LifePoint and Triad Relating to the
Distribution--Distribution Agreement."
Managed Care. Pressures to control the cost of health care have resulted in
increases to the percentage of admissions and net revenues attributable to
managed care payers. The percentage of LifePoint's admissions attributable to
managed care payers increased from 16.7% for the year ended December 31, 1997
to 18.6% for the year ended December 31, 1998. The percentage of LifePoint's
net revenue from continuing operations attributable to managed care payers
increased from 15.9% for the year ended December 31, 1997 to 20.1% for the year
ended December 31, 1998. The percentage of Triad's admissions attributable to
managed care payers increased from 28.7% for the year ended December 31, 1997
to 32.2% for the year ended December 31, 1998 and the percentage of Triad's net
revenue from continuing operations attributable to managed care payers
increased from 24.2% for the year ended December 31, 1997 to 29.5% for the year
ended December 31, 1998. LifePoint and Triad expect that the trend toward
increasing percentages related to managed care payers will continue in the
future. LifePoint and Triad generally receive lower payments from managed care
payers than from traditional commercial/indemnity insurers; however, as part of
their business strategy, LifePoint and Triad intend to take steps to improve
their managed care positions, see "LifePoint Business--Business Strategy" and
"Triad Business--Business Strategy."
Commercial Insurance. The hospitals of LifePoint and of Triad provide
services to individuals covered by private health care insurance. Private
insurance carriers make direct payments to such hospitals or, in some cases,
reimburse their policy holders, based upon the particular hospital's
established charges and the particular coverage provided in the insurance
policy.
Commercial insurers are continuing efforts to limit the costs of hospital
services by adopting discounted payment mechanisms, including prospective
payment or DRG based payment systems, for more inpatient and outpatient
services. To the extent that such efforts are successful and reduce the
insurers' reimbursement to hospitals for the costs of providing services to
their beneficiaries, such reduced levels of reimbursement may have a negative
impact on the operating results of the hospitals of LifePoint and of Triad.
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Government Regulation and Other Factors Affecting LifePoint and Triad
Licensure, Certification and Accreditation. Health care facility construction
and operation is subject to Federal, state and local regulations relating to
the adequacy of medical care, equipment, personnel, operating policies and
procedures, fire prevention, rate-setting and compliance with building codes
and environmental protection laws. Facilities are subject to periodic
inspection by governmental and other authorities to assure continued compliance
with the various standards necessary for licensing and accreditation. All of
the health care facilities of LifePoint and Triad are properly licensed under
appropriate state laws. All of the hospitals affiliated with LifePoint and
Triad are certified under the Medicare program and, except for one of Triad's
hospitals, all of such hospitals are accredited by the Joint Commission on
Accreditation of Healthcare Organizations, the effect of which is to permit the
facilities to participate in the Medicare and Medicaid programs. Certain of
Triad's psychiatric facilities do not participate in these programs. Should any
facility lose its accreditation by this Joint Commission, or otherwise lose its
certification under the Medicare program, the facility would be unable to
receive reimbursement from the Medicare and Medicaid programs. The facilities
of LifePoint and Triad are in substantial compliance with current applicable
Federal, state, local and independent review body regulations and standards.
The requirements for licensure, certification and accreditation are subject to
change and, in order to remain qualified, it may be necessary for LifePoint and
Triad to effect changes in their facilities, equipment, personnel and services.
Certificates of Need. The construction of new facilities, the acquisition of
existing facilities, and the addition of new beds or services may be subject to
review by state regulatory agencies under a CON program. Lifepoint will operate
some hospitals and Triad will operate one hospital in states that require
approval under a CON program to expand acute care hospital services. Such laws
generally require appropriate state agency determination of public need and
approval prior to the addition of beds or services or certain other capital
expenditures. Failure to obtain necessary state approval can result in the
inability to expand facilities, add services or complete an acquisition or
change ownership. Further, violation may result in the imposition of civil
sanctions or the revocation of a facility's license.
State Rate Review. Some states in which Triad will own hospitals have adopted
legislation mandating rate or budget review for hospitals. In the aggregate,
state rate or budget review and indigent tax provisions have not materially
adversely affected the results of operations of Triad. Neither LifePoint nor
Triad is able to predict whether any additional state rate or budget review or
indigent tax provisions will be adopted and, accordingly, neither is able to
assess the effect thereof on its results of operations or financial condition.
Utilization Review. Federal law contains numerous provisions designed to
ensure that services rendered by hospitals to Medicare and Medicaid patients
meet professionally recognized standards, are medically necessary and that
claims for reimbursement are properly filed. These provisions include a
requirement that a sampling of admissions of Medicare and Medicaid patients
must be reviewed by peer review organizations, which review the appropriateness
of Medicare and Medicaid patient admissions and discharges, the quality of care
provided, the validity of DRG classifications and the appropriateness of cases
of extraordinary length of stay or cost. Peer review organizations may deny
payment for services provided, may assess fines and also have the authority to
recommend to the HHS that a provider which is in substantial noncompliance with
the standards of the peer review organization be excluded from participation in
the Medicare program. Utilization review is also a requirement of most non-
governmental managed care organizations.
Medicare Regulations and Fraud and Abuse. Participation in the Medicare
program is heavily regulated by Federal statute and regulation. If a hospital
provider fails substantially to comply with the numerous conditions of
participation in the Medicare program or performs certain prohibited acts, such
hospital's participation in the Medicare program may be terminated or civil or
criminal penalties may be imposed upon it under certain provisions of the
Social Security Act. Prohibited acts include:
. making false claims to Medicare, including claims for services not
rendered, misrepresenting actual services rendered in order to obtain
higher reimbursement or cost report fraud;
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. paying remuneration to induce the referral of patients where services
provided are reimbursable under a federal health program;
. failing to stabilize any individual who comes to a hospital's emergency
room with an "emergency medical condition," within the scope of the
services available from the facility;
. transferring any stabilized patient to another health care facility
before the other facility has agreed to the transfer of the patient, if
the other facility does not have sufficient room and staff to treat the
patient, without the patient's emergency department medical records, or
without appropriate life support equipment; and
. transferring any unstabilized patient (except those transferred at the
patient's request or with physician certification that the medical risks
from the transfer are less harmful than continued treatment at the
transferring facility).
The Anti-Kickback Statute prohibits providers and others from soliciting,
receiving, offering or paying, directly or indirectly, any remuneration in
return for either making a referral for a service or item covered by a federal
healthcare program or ordering any covered service or item. Violations of this
statue may be punished by a fine of up to $50,000 or imprisonment for each
violation and damages up to three times the total amount of remuneration. In
addition, the Medicare Patient and Program Protection Act of 1987, as amended
by the Health Insurance Portability and Accountability Act of 1996 ("HIPAA")
and the Balanced Budget Act (as so amended, the "Protection Act"), imposes
civil penalties for a violation of these prohibitions, including exclusion from
federal healthcare programs.
The Protection Act authorized the Office of the Inspector General ("OIG") to
publish regulations outlining certain categories of activities that would be
deemed not to violate the Anti-Kickback Statute (the "Safe Harbors"). In 1991,
the OIG published final Safe Harbor regulations implementing the Congressional
intent expressed in the Protection Act. Currently there are Safe Harbors for
certain physician investments, rental of space or equipment, personal services
and management contracts, warranties, discounts, payments to employees, group
repurchasing organizations and waivers of deductibles. The preamble to the Safe
Harbor regulations states that the failure of a particular business arrangement
to comply with the regulations does not determine whether the arrangement
violates the Anti-Kickback Statute because the regulations do not make conduct
illegal. Any conduct that could be construed to be illegal after the
promulgation of this rule would have been illegal prior to the publication of
the regulations. Additionally, Safe Harbors have been proposed for physician
investments in entities located in rural areas as well as freestanding
ambulatory surgery centers. Neither LifePoint nor Triad is able to determine if
or when such proposed Safe Harbors will be enacted, and if enacted whether it
will be able to meet the requirements for protection.
HIPAA amends, among other things, Title XI (42 U.S.C. (S) 1301 et seq.) to
broaden the scope of certain fraud and abuse laws to include all health care
services, whether or not they are reimbursed under a Federal program, and
creates new enforcement mechanisms to combat fraud and abuse, including an
incentive program under which individuals can receive up to $1,000 for
providing information on Medicare fraud and abuse that leads to the recovery of
at least $100 of Medicare funds. Under HIPAA, health care fraud, now defined as
knowingly and willfully executing or attempting to execute a "scheme or device"
to defraud any health care benefit program, is made a Federal criminal offense.
In addition, for the first time, Federal enforcement officials will have the
ability to exclude from Medicare and Medicaid any investors, officers and
managing employees associated with business entities that have committed health
care fraud, even if the investor, officer or employee had no knowledge of the
fraud. HIPAA also establishes a new violation for the payment of inducements to
Medicare or Medicaid beneficiaries in order to influence those beneficiaries to
order or receive services from a particular provider or practitioner. The
Balanced Budget Act also allows civil monetary penalties to be imposed on a
provider contracting with individuals or entities that the provider knows or
should know is excluded from a federal healthcare program.
The OIG at HHS is responsible for identifying and eliminating fraud, abuse
and waste in HHS programs and for promoting efficiency and economy in HHS
departmental operations. The OIG carries out this mission
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through a nationwide program of audits, investigations and inspections. In
order to provide guidance to health care providers, the OIG has from time to
time issued "fraud alerts" which, although they do not have the force of law,
identify features of transactions, which may indicate that the transaction
could violate the Anti-Kickback Statute. The OIG has identified the following
incentive arrangements as potential violations:
. payment of any sort of incentive by the hospital each time a physician
refers a patient to the hospital;
. the use of free or significantly discounted office space or equipment
(in facilities usually located close to the hospital);
. provision of free or significantly discounted billing, nursing or other
staff services;
. free training for a physician's office staff in areas such as management
techniques and laboratory techniques;
. guarantees which provide that, if the physician's income fails to reach
a predetermined level, the hospital will supplement the remainder up to
a certain amount;
. low-interest or interest-free loans, or loans which may be forgiven if a
physician refers patients (or some number of patients) to the hospital;
. payment of the costs of a physician's travel and expenses for
conferences;
. coverage on the hospital's group health insurance plans at an
inappropriately low cost to the physician; or
. payment for services (which may include consultations at the hospital)
which require few, if any, substantive duties by the physician, or
payment for services in excess of the fair market value of services
rendered.
The OIG has encouraged persons having information about hospitals who offer
the above types of incentives to physicians to report such information to the
OIG.
Section 1877 of the Social Security Act (commonly known as the "Stark Law")
prohibits referrals of Medicare and Medicaid patients by physicians to entities
with which the physician has a financial relationship and which provide certain
"designated health services" which are reimbursable by Medicare or Medicaid.
"Designated health services" include, among other things, clinical laboratory
services, physical and occupational therapy services, radiology services,
durable medical equipment, home health, and inpatient and outpatient hospital
services. Sanctions for violating the Stark Law include civil money penalties
up to $15,000 per prohibited service provided, assessments equal to twice the
dollar value of each such service provided and exclusion from the Medicare and
Medicaid programs. There are a number of exceptions to the self-referral
prohibition, including an exception if the physician has an ownership interest
in the entire hospital. Proposed regulations implementing the Stark Law, as
amended, have not been implemented. In addition, a physician may have an
ownership interest in and refer patients to an entity providing designated
health services if the entity is located in a rural area. The requirements of
the "rural provider" exception are that (i) the provider is located in an area
that is not considered a metropolitan statistical area, and (ii) at least 75
percent of the patients served by the facility reside in a rural area. Proposed
regulations implementing the Stark Law, as amended, have not been implemented.
Neither LifePoint nor Triad can predict the final form that such regulations
will take or the effect that the Stark Law or the regulations promulgated
thereunder will have on LifePoint and Triad.
Each of LifePoint and Triad provide financial incentives to recruit
physicians into the communities served by its hospitals, including loans and
minimum revenue guarantees. Although HHS has proposed a Safe Harbor for certain
physician recruitment, no Safe Harbor for physician recruitment is currently in
force. Each of LifePoint and Triad also enter into certain employment
agreements, leases and other agreements with physicians. Although each of
LifePoint and Triad believes that its arrangements with physicians comply with
current law, there can be no assurance that regulatory authorities who enforce
such laws will not determine that such physician recruiting activities or other
physician arrangements violate the Anti-Kickback Statute or other applicable
laws. Such a determination could subject LifePoint or Triad to liabilities
under the Social Security Act, including criminal penalties, civil monetary
penalties and/or exclusion from participation in Medicare,
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Medicaid or other Federal health care programs, any of which could have a
material adverse effect on the business, financial condition or results of
operations of LifePoint or Triad.
Evolving interpretations of current, or the adoption of new, federal or state
laws or regulations could affect many of the arrangements entered into by each
of LifePoint's and Triad's hospitals. There is increasing scrutiny by law
enforcement authorities, the HHS, OIG, the courts and Congress of arrangements
between health care providers and potential referral sources to ensure that the
arrangements are not designed as a mechanism to exchange remuneration for
patient care referrals and opportunities. Investigators have also demonstrated
a willingness to look behind the formalities of a business transaction to
determine the underlying purpose of payments between health care providers and
potential referral sources.
The Social Security Act also imposes criminal and civil penalties for
submitting false claims to Medicare and Medicaid. False claims include, but are
not limited to, billing for services not rendered, misrepresenting actual
services rendered in order to obtain higher reimbursement and cost report
fraud. Like the Anti-Kickback Statute, this statute is very broad. Careful and
accurate coding of claims for reimbursement, including cost reports, must be
performed to avoid liability under the false claims statutes.
Many states in which LifePoint or Triad will operate also have adopted, or
are considering adopting, laws that prohibit payments to physicians in exchange
for referrals similar to the Anti-Kickback Statute, some of which apply
regardless of the source of payment for care. These statutes typically provide
criminal and civil penalties as well as loss of licensure. Many states also
have passed self-referral legislation similar to the Stark Law, prohibiting the
referrals of patients to entities with which the physician has a financial
relationship regardless of the source of payment for care. Little precedent
exists for the interpretation or enforcement of these state laws.
Corporate Practice of Medicine. Some of the states in which LifePoint and
Triad will operate have laws that prohibit corporations and other entities from
employing physicians or that prohibit certain direct and indirect payments or
fee-splitting arrangements between health care providers. In addition, some
states restrict certain business relationships between physicians and
pharmacies. Possible sanctions for violation of these restrictions include loss
of a physicians's license and civil and criminal penalties. These statutes vary
from state to state, are often vague and have seldom been interpreted by the
courts or regulatory agencies. Although each of LifePoint and Triad exercises
care to structure its arrangements with health care providers to comply with
the relevant state law, and each believes such arrangements comply with
applicable laws in all material respects, there can be no assurance that
governmental officials charged with responsibility for enforcing these laws
will not assert that LifePoint or Triad, or certain transactions in which
either of them is involved, are in violation of such laws, or that such laws
ultimately will be interpreted by the courts in a manner consistent with the
interpretations of LifePoint or Triad.
Health Care Reform. Health care, as one of the largest industries in the
United States, continues to attract much legislative interest and public
attention. In recent years, an increasing number of legislative proposals have
been introduced or proposed in Congress and in some state legislatures that
would effect major changes in the health care system, either nationally or at
the state level. Proposals that have been considered include cost controls on
hospitals, insurance market reforms to increase the availability of group
health insurance to small businesses, and requirements that all businesses
offer health insurance coverage to their employees. The costs of certain
proposals would be funded in significant part by reductions in payments by
governmental programs, including Medicare and Medicaid, to health care
providers such as hospitals. There can be no assurance that future health care
legislation or other changes in the administration or interpretation of
governmental health care programs will not have a material adverse effect on
the business, financial condition or results of operations of LifePoint or
Triad.
Conversion Legislation. Many states have enacted or are considering enacting
laws affecting the conversion or sale of not-for-profit hospitals. These laws,
in general, include provisions relating to attorney general approval, advance
notification and community involvement. In addition, state attorneys general in
states
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without specific conversion legislation may exercise authority over these
transactions based upon existing law. In many states there has been an
increased interest in the oversight of not-for-profit conversions. The adoption
of conversion legislation and the increased review of not-for-profit hospital
conversions may increase the cost and difficulty or prevent the completion of
transactions with not-for-profit organizations in certain states in the future.
Revenue Ruling 98-15. During March 1998, the IRS issued guidance regarding
the tax consequences of joint ventures between for-profit and not-for-profit
hospitals. Neither LifePoint nor Triad has determined the impact of the tax
ruling on its existing joint ventures, or the development of future ventures,
and is consulting with its joint venture partners and tax advisers to develop
an appropriate course of action. The tax ruling could limit joint venture
development with not-for-profit hospitals, require the restructuring of certain
existing joint ventures with not-for-profits and influence the exercise of "put
agreements" (that require the purchase of the partner's interest in the joint
venture) by certain existing joint venture partners.
Environmental Matters. LifePoint and Triad are subject to various Federal,
state and local statutes and ordinances regulating the discharge of materials
into the environment. Neither LifePoint nor Triad expects that it will be
required to expend any material amounts in order to comply with these laws and
regulations or that compliance will materially affect its capital expenditures,
earnings or competitive position.
Insurance. As is typical in the health care industry, LifePoint and Triad are
subject to claims and legal actions by patients in the ordinary course of
business. To cover these claims, LifePoint and Triad maintain professional
malpractice liability insurance and general liability insurance in amounts
which each believes to be sufficient for its operations, although some claims
may exceed the scope of the coverage in effect. Each of LifePoint and Triad
also maintains umbrella coverage. At various times in the past, the cost of
malpractice and other liability insurance has risen significantly. Therefore,
there can be no assurance that such insurance will continue to be available at
reasonable prices which will allow LifePoint and Triad to maintain adequate
levels of coverage. Substantially all losses in periods prior to the
distribution are insured through a wholly-owned insurance subsidiary of
Columbia/HCA and excess loss policies maintained by Columbia/HCA. Columbia/HCA
has agreed to indemnify LifePoint and Triad in respect of claims covered by
such insurance policies and workers compensation claims arising prior to the
distribution. See "Arrangements Among Columbia/HCA, LifePoint and Triad
Relating to the Distribution--Distribution Agreement" and "--Insurance
Allocation and Administration Agreement."
Because substantially all liability for general and professional liability
claims incurred is insured through a wholly-owned insurance subsidiary of
Columbia/HCA and excess loss policies maintained by Columbia/HCA, and
Columbia/HCA maintains the related reserve, no reserve for general and
professional liability risks is recorded on the balance sheets of LifePoint and
Triad. Any losses incurred in excess of amounts maintained under such insurance
will be funded from working capital. There can be no assurance that the cash
flow of LifePoint and Triad will be adequate to provide for professional and
general liability claims in the future. If payments for general and
professional liabilities exceed anticipated losses, the results of operations
and financial condition of LifePoint or Triad, as the case may be, could be
adversely affected.
Governmental Investigation of Columbia/HCA and Related Litigation. In March
1997, various facilities of Columbia/HCA's El Paso, Texas operations were
searched by Federal authorities pursuant to search warrants, and government
agents removed various records and documents. In February 1998, an additional
warrant was executed and a single computer was seized.
In July 1997, various Columbia/HCA affiliated facilities and offices were
searched pursuant to search warrants. During July, September and November 1997,
Columbia/HCA also was 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, Columbia/HCA received a subpoena which requested records and
documents relating to physician relationships.
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The United States District Court for the Middle District of Florida, in Fort
Myers, issued an indictment against three employees of a subsidiary of
Columbia/HCA in July 1997. The indictment relates to the alleged false
characterization of interest payments on certain debt resulting in Medicare and
CHAMPUS overpayments since 1986 to Columbia Fawcett Memorial Hospital, a Port
Charlotte, Florida hospital that was acquired by Columbia/HCA in 1992.
Columbia/HCA has been served with subpoenas for various records and documents.
In July 1998, a fourth employee of a subsidiary of Columbia/HCA was indicted by
a superseding indictment.
Several hospital facilities affiliated with Columbia/HCA in various states
have received individual Federal and/or state government inquiries, both
informal and formal, requesting information related to reimbursement from
government programs.
Columbia/HCA 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, Columbia/HCA expects additional
subpoenas and other investigative and prosecutorial activity to occur in these
and other jurisdictions in the future.
Columbia/HCA also is the subject of a formal order of investigation by the
SEC. Columbia/HCA understands that the investigation includes the anti-fraud,
periodic reporting and internal accounting control provisions of the Federal
securities laws.
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, 31 U.S.C. (S) 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. To the knowledge of Columbia/HCA, the
government has intervened in three qui tam actions. Columbia/HCA is aware of
additional qui tam actions that remain under seal and believes that there may
be other sealed qui tam cases of which it is unaware.
Since April 8, 1997, numerous Federal securities class action and derivative
lawsuits have been brought against Columbia/HCA and a number of its current and
former directors, officers and employees. On October 10, 1997, all of the
securities class action claims were consolidated into a single-captioned case
which seeks the certification of a class of persons or entities who acquired
Columbia/HCA's common stock from April 9, 1994 to September 9, 1997. The
lawsuit alleges, among other things, that the defendants committed violations
of the Federal securities laws by materially inflating Columbia/HCA'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 compensatory damages, costs and
expenses. On October 10, 1997, all of the derivative law claims were
consolidated into a single-captioned case. The lawsuit alleges, among other
things, derivative claims against the individual defendants that they
intentionally or negligently breached their fiduciary duties to Columbia/HCA by
authorizing, permitting or failing to prevent Columbia/HCA 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 engaging in
insider trading. The lawsuit seeks restitution, damages, recoupment of fines or
penalties paid by Columbia/HCA, restitution and pre-judgment interest against
the alleged insider trading defendants, and costs and disbursements. In
addition, the lawsuit seeks orders prohibiting Columbia/HCA from paying
individual defendants employment benefits, terminating all improper business
relationships with individual defendants, and requiring Columbia/HCA 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 of law.
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Several derivative actions have been filed in state court by certain
purported stockholders of Columbia/HCA against certain of Columbia/HCA's
current and former officers and directors alleging breach of fiduciary duty and
failure to take reasonable steps to ensure that Columbia/HCA did not engage in
illegal practices which exposed Columbia/HCA to significant damages.
A suit filed on November 7, 1997 against Columbia/HCA and certain members of
the retirement committee, alleges violations of the Employee Retirement Income
Security Act of 1974. The suit alleges Columbia/HCA breached its fiduciary duty
to participants in Columbia/HCA's Stock Bonus Plan, fraudulently concealed
information from the public and fraudulently inflated Columbia/HCA's stock
price through billing fraud, over charges, inaccurate medical cost reports and
illegal kickbacks for physician referrals.
Columbia/HCA also is a defendant in a number of Federal and state courts
actions filed by patients and/or payers, 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 and others are purported class actions.
It is too early to predict the effect or outcome of any of the ongoing
investigations or qui tam, stockholder derivative and class action lawsuits, or
whether any additional investigations or litigation will be commenced. If
Columbia/HCA is found to have violated Federal or state laws relating to
Medicare, Medicaid or similar programs, then Columbia/HCA 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, stockholder derivative and class action lawsuits may be
substantial and Columbia/HCA could be subject to substantial costs resulting
from an adverse outcome of one or more of such lawsuits. Any such sanctions or
losses could have a material adverse effect on Columbia/HCA's financial
position and results of operations.
Pursuant to the Distribution Agreement to be entered into by and among
Columbia/HCA, LifePoint and Triad in connection with the distribution,
Columbia/HCA has agreed to indemnify LifePoint and Triad in respect of any
losses which they may incur as a result of the proceedings described above.
Columbia/HCA has also agreed to indemnify LifePoint and Triad in respect of any
losses which they may incur as a result of proceedings which may be commenced
by government authorities or by private parties in the future that arise from
acts, practices or omissions engaged in prior to the distribution date and
relate to the proceedings described above. Columbia/HCA has also agreed that,
in the event that any hospital owned by LifePoint or Triad is permanently
excluded from participation in the Medicare and Medicaid programs as a result
of the proceedings described above, then Columbia/HCA will make a cash payment
to LifePoint or Triad, as the case may be, in an amount (if positive) equal to
five times the excluded hospital's 1998 income from continuing operations
before depreciation and amortization, interest expense, management fees,
impairment of long-lived assets, minority interests and income taxes (as set
forth on a schedule to the Distribution Agreement) less the proceeds of the
sale or other disposition of the excluded hospital. Each of LifePoint and Triad
has agreed that, in connection with the government investigations described
above, it will participate with Columbia/HCA in negotiating one or more
compliance agreements setting forth each of their agreements to comply with
applicable laws and regulations. See "Arrangements Among Columbia/HCA,
LifePoint and Triad Relating to the Distribution--Distribution Agreement." If
any of such indemnified matters were successfully asserted against either
LifePoint or Triad, or any of their facilities, and Columbia/HCA failed to meet
its indemnification obligations, then such losses could have a material adverse
effect on the business, financial position, results of operations or prospects
of LifePoint and/or Triad, as the case may be. Columbia/HCA will not indemnify
LifePoint or Triad for losses relating to any acts, practices and omissions
engaged in by LifePoint or Triad after the distribution date, whether or not
LifePoint or Triad is indemnified for similar acts, practices and omissions
occurring prior to the distribution date.
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<PAGE>
LifePoint Management
Directors
On the distribution date, the directors of LifePoint will be the persons
named below.
<TABLE>
<CAPTION>
Principal Occupation or Employment
Name Age for Past Five Years
---- --- ----------------------------------
<C> <C> <S>
Scott L. Mercy................ 37 Chairman and Chief Executive Officer, LifePoint,
as of the distribution date and, since September
1, 1998, Chief Executive Officer, America Group
of Columbia/HCA; President and Chief Executive
Officer of America Service Group, Inc. (health
care services for correctional facilities) from
1996 through September 1, 1998; Senior Vice
President--Financial Operations of Columbia/HCA
from 1994 through 1995; Vice President--
Financial Operations and Director--Financial
Operations Support of Hospital Corporation of
America (health care services), prior thereto.
Mr. Mercy is a director of America Service
Group, Inc.
Ricki Tigert Helfer........... 54 Non-resident Senior Fellow, The Brookings
Institution, since February 1998; since June
1997, Consultant, International Banking;
Chairman of the Board of Directors and Chief
Executive Officer, Federal Deposit Insurance
Corporation (banking regulation), October 1994
to May 1997; Partner, Gibson, Dunn & Crutcher
(law firm), prior thereto. Ms. Helfer is a
Governor of the Philadelphia Stock Exchange.
John E. Maupin, Jr., D.D.S. .. 51 President, Meharry Medical College, since July
1994; Executive Vice President, Morehouse School
of Medicine, prior thereto. Dr. Maupin is a
member of the Nashville Advisory Board, First
American National Bank and a director, Monarch
Dental Corporation.
DeWitt Ezell, Jr.............. 60 State President, BellSouth Corporation
(telecommunications), until April 30, 1999. Mr.
Ezell is a member of the Girl Scout Advisory
Board, TSU Advisory Board, Vanderbilt
University--College Cabinet and the Baptist
Hospital Advisor Board.
William V. Lapham............. 60 Partner, Ernst & Young LLP (accounting firm),
until December 31, 1997. Member, Ernst & Young
LLP International Council, until December 31,
1997.
</TABLE>
The LifePoint Certificate provides that the LifePoint Board of Directors will
be divided into three classes, with the classes to be as nearly equal in number
as possible. Of the initial LifePoint directors following the distribution,
one-third will continue to serve until the 2000 Annual Meeting of Stockholders,
one-third will continue to serve until the 2001 Annual Meeting of Stockholders,
and one-third will continue to serve until the 2002 Annual Meeting of
Stockholders. Of the initial directors, , and will serve until the
2000 Annual Meeting of Stockholders; , and will serve until the 2001
Annual Meeting of Stockholders; and , and will serve until the 2002
Annual Meeting of Stockholders. Starting with the 2000 Annual Meeting of
Stockholders, one class of directors will be elected each year for a three-year
term. See "LifePoint Description of Capital Stock--Certain Anti-Takeover
Provisions--LifePoint Certificate and By-Laws--Classified Board of Directors."
The LifePoint Board of Directors will have a number of standing committees,
including an Executive Committee, an Audit and Compliance Committee and a
Compensation Committee.
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<PAGE>
The Executive Committee may exercise certain powers of the Board of Directors
regarding the management and direction of the business and affairs of LifePoint
when the Board of Directors is not in session. All action taken by the
Executive Committee is reported to and reviewed by the LifePoint Board of
Directors. The Executive Committee also will screen candidates to be nominated
for election to the LifePoint Board of Directors by the stockholders or chosen
to fill newly created directorships or vacancies on the LifePoint Board of
Directors. The members of the Executive Committee will be , , and ,
with serving as Chair.
The Audit and Compliance Committee of the LifePoint Board of Directors will
review and make reports and recommendations to the Board of Directors with
respect to the selection of the independent auditors of LifePoint and its
subsidiaries, the arrangements for and the scope of the audits to be performed
by them and the internal audit activities, accounting procedures and controls
of LifePoint, and will review the annual consolidated financial statements of
LifePoint. The committee will also monitor adherence to LifePoint's regulatory
compliance program. The members of the Audit and Compliance Committee will be
, and , with serving as Chair.
The Compensation Committee of the LifePoint Board of Directors will be
responsible for approving compensation arrangements for executive management of
LifePoint, reviewing compensation plans relating to officers, grants of options
and other benefits under LifePoint's employee benefit plans and reviewing
generally LifePoint's employee compensation policy. The members of the
Compensation Committee will be , and , with serving as Chair.
Compensation of Directors
The annual retainer for outside directors who are neither officers nor
employees of LifePoint ("Non-Employee Directors") will be $18,000 and the Board
meeting fee will be $1,500 per meeting. Committee members will receive a fee of
$1,000 per meeting payable only for attendance at committee meetings not held
in conjunction with a meeting of the LifePoint Board of Directors. Directors
also are reimbursed for expenses incurred relating to attendance at meetings.
Under the LifePoint Outside Directors Stock and Incentive Compensation Plan,
each Non-Employee Director may elect to receive, in lieu of all or any portion
(in multiples of 25%) of his annual retainer, deferred stock units, the payout
of which, at the election of the director, may be deferred for two years or
until the end of such director's term of office. The payment of deferred stock
units will be made through the issuance of a stock certificate for a number of
shares equal to the number of deferred stock units.
The plan further provides that each Non-Employee Director will receive a one-
time grant of an option, as of a date to be selected by the LifePoint Board of
Directors, to acquire shares of LifePoint common stock (exercisable at the fair
market value of LifePoint common stock on the date of grant) for a number of
shares to be determined by the LifePoint Board. Each person who is a Non-
Employee Director on the day of the annual meeting of LifePoint's stockholders
will be granted on a date to be selected by the LifePoint Board of Directors an
option to acquire shares of LifePoint common stock (exercisable at the fair
market value of LifePoint common stock on the date of grant) for a number of
shares to be determined by the LifePoint Board. The one-time options described
above will become exercisable as to all of the shares covered by the option on
the third anniversary of the date of grant. The annual options will become
exercisable as to one-third of the shares covered by the option on the date of
grant and each of the two next succeeding anniversaries of the date of grant.
Upon the occurrence of a change in control of LifePoint (as defined), each
outstanding option shall become fully and immediately exerciseable.
The plan further provides that Non-Employee Directors may receive
discretionary option grants.
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<PAGE>
Executive Officers
On the distribution date, the executive officers of LifePoint will be as
follows:
<TABLE>
<CAPTION>
Name Age Position And Professional Experience
---- --- ------------------------------------
<C> <C> <S>
Scott L. Mercy............ 37 Chairman and Chief Executive Officer, LifePoint, as
of the distribution date and, since September 1,
1998, Chief Executive Officer, America Group of
Columbia/HCA; President and Chief Executive Officer
of America Service Group, Inc. (health care services
for correctional facilities) from 1996 through
September 1, 1998; Senior Vice President--Financial
Operations of Columbia/HCA from 1994 through 1995;
Vice President--Financial Operations and Director--
Financial Operations Support of Hospital Corporation
of America (health care services), prior thereto.
James M. Fleetwood, Jr. .. 51 President and Chief Operating Officer of LifePoint,
as of the distribution date, and since January 1,
1998, President, the America Group of Columbia/HCA;
President--Florida Group of Columbia/HCA from May
1996 to January 1, 1998; President of the North
Florida Division of Columbia/HCA from April 1995 to
May 1996; Regional Vice President of Healthtrust,
Inc.--The Hospital Company (health care services),
prior thereto.
William F. Carpenter III.. 44 Senior Vice President and General Counsel, LifePoint,
as of the distribution date, and since November 16,
1998, General Counsel, the America Group of
Columbia/HCA; Member, Waller Lansden Dortch & Davis,
PLLC (law firm), prior to December 31, 1998.
Kenneth C. Donahey........ 48 Senior Vice President and Chief Financial Officer,
LifePoint, as of the distribution date, and since
November 5, 1998, Chief Financial Officer, the
America Group of Columbia/HCA; Senior Vice President
and Controller, Columbia/HCA from April 1995 through
November 4, 1998; Senior Vice President and
Controller, Healthtrust, Inc.--The Hospital Company,
prior thereto.
Neil D. Hemphill.......... 45 Senior Vice President of Administration and Human
Resources, LifePoint, as of the distribution date
and, since September 1, 1998, Senior Vice President
of Administration and Human Resources, the America
Group of Columbia/HCA; Senior Vice President of Human
Resources, Columbia/HCA from February 1994 to
September 1, 1998; Vice President of Human Resources,
Columbia Healthcare Corporation, prior thereto.
William Gracey............ 45 Division President, LifePoint, as of the distribution
date and, since July 1998, Division President, the
America Group of Columbia/HCA; President of
Operations Support for the Atlantic Group of
Columbia/HCA from January 1998 through June 1998;
Division President, Columbia/HCA from September 1995
to December 1997; Chief Operating Officer of the
Pacific Division of Columbia/HCA from February 1995
to September 1995; Chief Executive Officer of other
facilities of Hospital Corporation of America (health
care services), prior thereto.
Dan Slipkovich............ 41 Division President, LifePoint, as of the distribution
date; and since October 1998, Division President of
the America Group of Columbia/HCA; Chief Financial
Officer of the America Group of Columbia/HCA, January
1998 to October 1998; Chief Financial Officer and
Vice President of the Florida Group of Columbia/HCA
from July 1996 to January 1998; Chief Financial
Officer and Vice President of the North Florida
Division of Columbia/HCA from April 1995 to July
1996; Regional Assistant Vice President of
Healthtrust, Inc.--The Hospital Company, prior
thereto.
</TABLE>
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<PAGE>
Executive Compensation
The information under this heading relates to the compensation paid by
Columbia/HCA to the Chief Executive Officer of LifePoint and the four
individuals who will be executive officers of LifePoint as of the distribution
date and who were, based on such compensation, the most highly compensated
LifePoint executive officers for the year ended December 31, 1998. All cash
compensation was paid by Columbia/HCA and all stock compensation was in the
form of Columbia/HCA Common Stock or options to purchase shares of Columbia/HCA
Common Stock. The principal positions listed in the table are those that will
be held by such persons as of the distribution date. For information regarding
certain future compensation arrangements which have been established for
LifePoint as an independent, publicly-traded company, see "--LifePoint
Compensation Arrangements."
LifePoint Summary Compensation Table
<TABLE>
<CAPTION>
Annual Compensation Long-Term Compensation
---------------------------------- --------------------------
Securities
Other Annual Restricted Underlying All Other
Name and Principal Salary Bonus Compensation Stock Options/SARS Compensation
Position Year ($)(2) ($)(3) ($)(4) Awards ($)(5) (#)(6) ($)(7)
------------------ ---- -------- -------- ------------ ------------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Scott L. Mercy.......... 1998 $133,333 $ 66,667 $ -- $ -- -- $ --
Chairman and Chief 1997 $ -- $ -- $ -- $ -- -- $ --
Executive Officer (1)
James M. Fleetwood,
Jr. ................... 1998 $481,250 $ -- $ 31,978 $ 56,866 -- $10,864
President and Chief 1997 $350,000 $175,000 $ 76,799 $ -- 340,000 $ 8,439
Operating Officer
Kenneth C. Donahey...... 1998 $412,500 $ -- $ -- $ -- -- $15,738
Senior Vice President 1997 $275,000 $ -- $ -- $183,369 290,000 $15,903
and Chief Financial
Officer
William Gracey.......... 1998 $299,250 $ 80,000 (8) $ -- $ 20,463 -- $14,480
Division President 1997 $210,000 $ 52,500 $ -- $ 70,011 72,000 $12,084
Dan Slipkovich.......... 1998 $263,359 $ -- $ 63,408 $ 31,108 -- $13,380
Division President 1997 $191,500 $ 95,750 $ -- $ -- 125,000 $13,530
</TABLE>
- --------
(1) Mr. Mercy became employed by Columbia/HCA in September 1998 and therefore
received no compensation in 1997.
(2) 1998 salary amounts do not include the value of restricted stock awards
granted in lieu of a portion of annual salary.
(3) Reflects bonus earned during 1997. In some instances, all or a portion of
the bonus was paid during 1998. Each of the executive officers identified
in the table had the option to take all or part of their bonus in shares of
Columbia/HCA restricted stock at a 25% discount from the fair market value
at the time of grant, which is reflected in the Restricted Stock Awards
column. Columbia/HCA's cash bonus program was discontinued in August 1997.
(4) Perquisites and other personal benefits did not exceed the lesser of either
$50,000 or 10% of the total of annual salary and bonus for any executive
officer identified in the table. Other compensation consists principally of
relocation expenses.
(5) 1998 amounts represent the average of the closing prices on trading days
during the deferral period of Columbia/HCA shares issued in lieu of a
portion of annual salary. 1997 amounts represent the average of the closing
price on the five trading days prior to the grant date of shares of
Columbia/HCA restricted stock granted in lieu of all or a portion of a cash
bonus. As of January 1, 1999, Messrs. Fleetwood, Donahey, Gracey and
Slipkovich held an aggregate of 5,659, 13,733, 3,192 and 2,117 shares of
restricted stock, respectively. Pursuant to Securities and Exchange
Commission rules, after deducting the consideration paid therefor, the
shares held by Messrs. Gracey and Slipkovich had a net pre-tax value of
$10,770 and $3,215, respectively, and the shares held by Messrs. Fleetwood
and Donahey were without value. Dividends will be payable on shares of
restricted stock if and to the extent paid on Columbia/HCA's Common Stock
generally, regardless of whether or not the shares are vested.
(6) Options to acquire shares of Columbia/HCA Common Stock. Columbia/HCA
granted options at two separate times in 1997. The 1997 regular grant was
issued in February 1997. A special grant was issued in
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<PAGE>
November 1997 to help ensure the retention and motivation of key executives,
including each of the executive officers identified in the table, at the
time Columbia/HCA was reorganizing. On average, the size of the November
1997 grant is two times a competitive median long-term grant for a two year
period (1998-99).
(7) Consists of Columbia/HCA contributions to Columbia/HCA's Savings and
Investment Plan, Money Purchase Plan and Stock Bonus Plan.
(8) In 1998, Columbia/HCA paid Mr. Gracey $80,000 in connection with his
services regarding the divestiture of the Atlantic Group division.
Aggregated Option/SAR Exercises In Last Fiscal Year and FY-End Option/SAR
Values
<TABLE>
<CAPTION>
Number of
Securities Underlying Value of Unexercised In-the-
Unexercised Options/SARs at Money Options/SARs at Fiscal
Fiscal Year-End (#) Year-End($) (1)
------------------------------ -----------------------------------
Name Exercisable Unexercisable Exercisable Unexercisable
- ---- ------------- -------------- ------------------- ---------------
<S> <C> <C> <C> <C>
Scott L. Mercy.......... 7,500 -- $ 184,542.75 $ 0
James M. Fleetwood,
Jr..................... 131,745 396,250 1,241,673.28 0
Kenneth C. Donahey...... 161,984 346,250 1,459,010.81 0
William Gracey.......... 17,624 94,876 0 0
Dan Slipkovich.......... 33,026 141,125 294,813.30 0
</TABLE>
- --------
(1) The closing price for the Columbia/HCA Common Stock, as reported by the
NYSE, on December 31, 1998 was $24.75. Value is calculated on the basis of
the difference between the option exercise price and $24.75, multiplied by
the number of shares of Columbia/HCA Common Stock underlying the option.
LifePoint Compensation Arrangements
Benefits and Employment Matters Agreement
In connection with the distribution, Columbia/HCA, LifePoint and Triad will
enter into the Benefits and Employment Matters Agreement, which allocates
responsibilities for employee compensation, benefits, labor, benefit plan
administration and certain other employment matters on and after the
distribution date. Among other things, the Benefits and Employment Matters
Agreement generally provides for grants to LifePoint employees of options to
purchase shares of LifePoint common stock and Triad common stock in respect of
vested options to purchase Columbia/HCA Common Stock (other than incentive
stock options), and grants to purchase LifePoint stock in replacement of
incentive stock options covering Columbia/HCA Common Stock. In addition, the
Benefits and Employment Matters Agreement provides for the cancellation of non-
vested options to purchase Columbia/HCA Common Stock and the discretionary
grant of options to purchase LifePoint common stock. The Benefits and
Employment Matters Agreement also provides for the establishment of certain of
the benefit plans described in this section. See "Arrangements Among
Columbia/HCA, LifePoint and Triad Relating to the Distribution--Benefits and
Employment Matters Agreement."
The LifePoint 1998 Long-Term Incentive Plan
The LifePoint 1998 Long-Term Incentive Plan has been adopted by the Board of
Directors of Columbia/HCA in contemplation of the distribution.
Reservation of Shares. Under the LifePoint Long-Term Incentive Plan,
5,425,000 shares of LifePoint common stock will be reserved for issuance. The
shares of LifePoint common stock to be issued will be made available from
authorized but unissued shares of LifePoint common stock or issued shares that
have been reacquired by LifePoint. If any shares of LifePoint common stock that
are the subject of an award are not
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<PAGE>
issued and cease to be issuable for any reason, such shares will no longer be
charged against the maximum share limitations and may again be made subject to
awards. In the event of certain corporate reorganizations, recapitalizations,
or other specified corporate transactions affecting LifePoint or the LifePoint
common stock, proportionate adjustments may be made to the number of shares
available for grant, as well as the other maximum share limitations, under the
LifePoint Long-Term Incentive Plan, and the number of shares and prices under
outstanding awards.
Duration. The LifePoint Long-Term Incentive Plan has a term of 10 years,
subject to earlier termination or amendment by the LifePoint Board of
Directors.
Administration. Beginning with the first meeting of the LifePoint Board of
Directors, the LifePoint Long-Term Incentive Plan will be administered by the
Compensation Committee of the LifePoint Board of Directors. Subject to the
limitations set forth in the LifePoint Long-Term Incentive Plan, the LifePoint
Compensation Committee has the authority to determine the persons to whom
awards are granted, the types of awards to be granted, the time at which awards
will be granted, the number of shares, units or other rights subject to each
award, the exercise, base or purchase price of an award (if any), the time or
times at which the award will become vested, exercisable or payable, and the
duration of the award.
Eligibility. All employees of LifePoint and its subsidiaries and, in the case
of awards other than incentive stock options, any consultant or independent
contractor providing services to LifePoint or a subsidiary, will be eligible to
be granted awards under the LifePoint Long-Term Incentive Plan, as selected
from time to time by the LifePoint Compensation Committee in its sole
discretion.
Types of Awards. The LifePoint Long-Term Incentive Plan authorizes the grant
of the following types of awards:
. Stock Options (nonqualified and incentive stock options). The maximum
number of shares that may be covered under options granted to any
individual in any calendar year is 700,000 shares. The exercise price of
an option may be determined by the LifePoint Compensation Committee,
provided that the exercise price per share of an option may not be less
than the fair market value of a share of LifePoint common stock on the
date of grant. The value of LifePoint common stock (determined at the
time of grant) that may be subject to incentive stock options that
become exercisable by an employee in any one year is limited to
$100,000. The maximum term of any stock option will be ten years from
the date of grant. The LifePoint Compensation Committee is to determine
the extent to which an option will become and/or remain exercisable in
the event of termination of employment or service of a participant under
various circumstances, including retirement, death or disability,
subject to certain limitations for incentive stock options. An option
may be exercised in whole or in part at any time during the term thereof
by written notice to LifePoint, together with payment of the aggregate
exercise price of the option. In addition to the exercise price, the
participant must pay LifePoint in cash or, at the LifePoint Compensation
Committee's discretion, in LifePoint common stock, the full amount of
all applicable income tax and employment tax amounts required to be
withheld in connection with the exercise of the option.
. Stock Appreciation Rights. A stock appreciation right may be granted
either in tandem with an option or without a related option. A stock
appreciation right entitles the holder, upon exercise, to receive a
payment based on the difference between the base price of the stock
appreciation right (which may not be less than the fair market value of
a share of LifePoint common stock on the date of grant) and the fair
market value of a share of LifePoint common stock on the date of
exercise, multiplied by the number of shares as to which such stock
appreciation right is being exercised. The maximum term of a stock
appreciation right will be 10 years from the date of grant. No more than
700,000 shares of LifePoint common stock may be subject to stock
appreciation rights granted to any one participant during any calendar
year. Stock appreciation rights are payable, in the discretion of the
LifePoint Compensation Committee, in cash, in shares of LifePoint common
stock, or in a combination of cash and shares of LifePoint common stock.
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<PAGE>
. Performance Awards. Performance awards are units denominated on the date
of grant either in shares of LifePoint common stock ("performance
shares") or in specified dollar amounts ("performance units"). The
Committee may grant performance awards that are intended to qualify as
performance-based compensation under Section 162(m) of the Code (a
"Section 162(m) Award"), as well as performance awards that are not
Section 162(m) Awards. Performance awards are payable upon the
achievement of performance criteria established by the LifePoint
Compensation Committee at the beginning of the applicable performance
period. At the time of grant, the Compensation Committee establishes the
number of units, the duration of the performance period or periods, the
applicable performance criteria, and, in the case of performance units,
the target unit value or range of unit values for the performance
awards. At the end of the performance period, the Compensation Committee
determines the payment to be made, based on the extent to which the
performance goals have been achieved. Performance awards are payable, in
the discretion of the LifePoint Compensation Committee, in cash, in
shares of LifePoint common stock, or in a combination of cash and shares
of LifePoint common stock. The maximum amount of compensation that may
be payable to a participant during any one calendar year with respect to
a performance unit shall be $4.2 million. The maximum number of
performance shares granted to a participant during any one calendar year
shall be 280,000 performance shares.
. Phantom Stock. An award of phantom stock gives the participant the right
to receive payment at the end of a fixed vesting period based on the
value of a share of LifePoint common stock at the time of vesting.
Phantom stock units are subject to such restrictions and conditions to
payment as the LifePoint Compensation Committee determines are
appropriate. An award of phantom stock may be granted, at the discretion
of the LifePoint Compensation Committee, together with an award of
dividend equivalent rights for the same number of shares covered
thereby. Phantom stock awards are payable, in the discretion of the
LifePoint Compensation Committee, in cash, in shares of LifePoint common
stock having an equivalent fair market value on the applicable vesting
dates, or in a combination thereof.
. Restricted Stock Awards. An award of restricted stock represents shares
of LifePoint common stock that are issued subject to such restrictions
on transfer and incidents of ownership, and such forfeiture conditions,
as the LifePoint Compensation Committee deems appropriate. The Committee
may grant an award that is a Section 162(m) Award. The restrictions
imposed upon an award of restricted stock will lapse in accordance with
the vesting requirements specified by the LifePoint Compensation
Committee in the award agreement. Such vesting requirements may be based
on the continued employment of the participant for a specified time
period or on the attainment of specified business goals or performance
criteria established by the LifePoint Compensation Committee. The
LifePoint Compensation Committee may, in connection with an award of
restricted stock, require the payment of a specified purchase price.
Subject to the transfer restrictions and forfeiture restrictions
relating to the restricted stock award, the participant will have the
rights of a stockholder of LifePoint, including all voting and dividend
rights, during the restriction period, unless the LifePoint Compensation
Committee determines otherwise at the time of the grant. The maximum
number of shares of common stock that may be subject to a restricted
stock award granted to a participant during any one calendar year shall
be 280,000 shares.
. Dividend Equivalents. Dividend equivalent awards entitle the holder to a
right to receive cash payments determined by reference to dividends
declared on the LifePoint common stock during the term of the award,
which will not exceed 10 years from the date of grant. Dividend
equivalent awards may be granted on a stand-alone basis or in tandem
with other awards under the LifePoint Long-Term Incentive Plan. Dividend
equivalent awards are payable in cash or in shares of LifePoint common
stock, as determined by the LifePoint Compensation Committee.
Change-In-Control. The LifePoint Compensation Committee may, in an award
agreement, provide for the effect of a change-in-control (as defined in the
LifePoint Long-Term Incentive Plan) on the award. Such provisions may include
the acceleration of an award's vesting or extension of the time for exercise,
the
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<PAGE>
elimination or modification of performance or other conditions, the cash
settlement of an award or other adjustments that the LifePoint Compensation
Committee considers appropriate.
LifePoint Executive Stock Purchase Plan
The LifePoint Executive Stock Purchase Plan will be adopted by LifePoint, and
approved by the Columbia/HCA Board of Directors (as the sole shareholder of
LifePoint common stock), prior to the distribution date.
Reservation of Shares. Under the LifePoint Executive Stock Purchase Plan,
1,000,000 shares of LifePoint common stock will be reserved for issuance
pursuant to all rights granted under the plan. The shares of LifePoint common
stock to be issued will be made available from authorized but unissued shares
of LifePoint common stock or issued shares that have been reacquired by
LifePoint. To the extent that any right to purchase Lifepoint common stock
granted under the plan is forfeited, cancelled, or otherwise terminated, the
shares of LifePoint common stock covered thereunder will no longer be charged
against the maximum share limitation and may again be made subject to rights
granted under the plan. In the event of certain corporate reorganizations,
recapitalizations or other specified corporate transactions affecting LifePoint
or the LifePoint common stock, proportionate adjustments may be made to the
number of shares available for grant and the number of shares under outstanding
grants.
Duration. The LifePoint Executive Stock Purchase Plan will have a term of 10
years, subject to earlier termination or amendment by the LifePoint Board of
Directors.
Administration. The LifePoint Executive Stock Purchase Plan will be
administered by the Compensation Committee of the LifePoint Board of Directors.
Subject to limitations to be set forth in the LifePoint Executive Stock
Purchase Plan, the Compensation Committee will have the authority to determine
the persons to whom rights are granted, the time at which rights will be
granted, the number of shares that may be purchased under a right, the date or
period during which such right may be exercised and all other terms of the
right. With the consent of the affected participant, the Compensation Committee
will have the authority to cancel and replace outstanding rights previously
granted with new rights for the same or a different number of shares and to
amend the terms of any outstanding right.
Eligibility. All executive employees of LifePoint and its subsidiaries will
be eligible to receive rights under the Lifepoint Executive Stock Purchase
Plan.
Initial Grants. The LifePoint Executive Stock Purchase Plan will specifically
provide for initial grants of rights to certain executive officers. These
rights are to be exercised for a period beginning on the distribution date and
ending on the 21st trading date of the LifePoint common stock. LifePoint
expects to grant to each of Messrs. Mercy, Fleetwood, Donahey, Carpenter,
Hemphill, Gracey and Slipkovich, a right to purchase a number of shares of
LifePoint common stock valued at $3,000,000, $1,500,000, $1,500,000,
$1,500,000, $700,000, $500,000, and $500,000, respectively; but in no event
will the number of shares to be purchased by each such executive officer exceed
the number of shares which can be purchased with such officer's above-
referenced dollar limit, based on a value of $9.50 per share. If, as a result
of the foregoing limitation, any executive officer's purchase right is limited,
such executive officer may be allowed to purchase additional shares to the
extent that the maximum number of shares allocated for the initial grants are
not exercised.
Exercise of Rights. A right will be exercised by written notice to LifePoint
on or prior to a specified exercise date. Such written notice will be an
agreement by the participant to pay the full purchase price of the LifePoint
common stock by means of a purchase loan, except to the extent the notice is
accompanied by a cash payment.
Purchase Loan. LifePoint will loan each participant 100% of the purchase
price of LifePoint common stock acquired by the participant under a right, on a
full recourse basis, to the extent the participant does not elect to pay the
purchase price in cash. The purchase price of the LifePoint common stock
acquired shall equal the fair market value of such common stock on the date
preceding the purchase. The loan will be secured by
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<PAGE>
the shares purchased. Interest will be paid upon the loan's maturity or upon
the loan's prepayment and will accrue at the applicable Federal rate,
compounded semi-annually. However, if the participant's employment terminates
for cause or the participant voluntarily terminates employment (other than for
a good reason) within three years of purchasing the shares, in addition to any
amounts otherwise due under the loan (including accrued interest), the
participant will be required to pay LifePoint the additional interest that
would have been payable in respect of the loan, if the regular interest rate on
such purchase loan had been the prime rate, and interest thereon at such rate
to the actual date of payment.
Loan Maturity and Repayment. A loan will mature upon the earlier of (i) the
fifth anniversary following the purchase of the shares, (ii) termination of the
participant's employment for any reason, or (iii) bankruptcy of the
participant. Within 120 days following the loan's maturity, the participant
will be required to pay LifePoint the full amount remaining due on the loan,
including all unpaid accrued interest.
Loan Prepayments. The loan may be prepaid, in whole or in part, at any time.
At any time following the earlier of (i) the second anniversary following the
purchase of the shares, or (ii) a change in control, such shares may, at the
participant's election, be sold to repay the loan. Any cash dividends received
on the purchased shares prior to payment of the full amount due on such loan,
net of assumed Federal, state and local income taxes, will be used to prepay
the loan.
Transfer Restrictions. A participant will not be entitled to delivery of the
stock certificates representing the shares purchased and none of such 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) until the later of (i) full repayment of the purchase price and
accrued interest (and any additional amount that may be due under the LifePoint
Executive Stock Purchase Plan), and (ii) the earlier of (1) the third
anniversary of the date the shares were purchased, (2) the participant's
termination of employment or bankruptcy, and (3) a change in control. However,
such shares may be sold to pay the loan at maturity, or to voluntarily prepay
such loan at any time after the earlier of (i) the second anniversary of the
date the shares were purchased, or (ii) a change in control.
Death or Disability Benefit. In the event of termination of employment
because of death or disability, where the amount remaining due on the loan
(including accrued interest) is greater than the fair market value of the
shares purchased, as of the date of such death or disability, LifePoint will
pay a death or disability benefit equal to the amount of such payment remaining
due over the shares' fair market value as of the date of such death or
disability.
LifePoint Annual Cash Bonus Plan
LifePoint plans to adopt the LifePoint Hospitals, Inc. Annual Cash Bonus Plan
that will provide for the payment of annual cash bonuses following the close of
each plan year, based upon the achievement of objective performance goals. The
Annual Bonus Plan will be administered by the Senior Vice President of Human
Resources and Administration. A Plan Committee, the LifePoint Compensation
Committee and the Chief Executive Officer of LifePoint will also have
administrative functions.
Participation is limited to key management employees. An appropriate senior
officer will recommend non-officer employees for participation in the Annual
Bonus Plan as well as the related performance targets for such bonus. Such
recommendations will be subject to final review and approval by the Chief
Executive Officer. All recommendations regarding officers are to be made by the
Chief Executive Officer, subject to final review and approval by the
Compensation Committee.
As soon as practicable after the end of each plan year and after receiving
the recommendation of the Plan Committee, the Chief Executive Officer will
review and approve bonus payments for all non-officer participants. The
Compensation Committee will review and approve bonus payments for all
participating officers. Bonus payments will be based on the achievement of
specific performance objectives, based on criteria determined in accordance
with the Annual Bonus Plan. Such criteria may include constituency
satisfaction, the financial performance of LifePoint and other selected
strategic components. Performance objectives may be subject to retroactive
adjustments to reflect equitably unforeseen circumstances.
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<PAGE>
The Chief Executive Officer, with the approval of the Compensation Committee,
may modify, amend or terminate the Annual Bonus Plan, in whole or in part, at
any time (except that no such action may negatively affect bonuses for any
prior year).
The LifePoint Management Stock Purchase Plan
The LifePoint Management Stock Purchase Plan will be adopted by the LifePoint
Board of Directors in contemplation of the distribution.
Reservation of Shares. 250,000 shares of LifePoint common stock may be issued
pursuant to all awards of restricted shares or in respect of restricted share
units under the LifePoint Management Stock Purchase Plan. The shares of
LifePoint common stock to be issued will be made available from authorized but
unissued shares of LifePoint common stock or issued shares that have been
reacquired by LifePoint. If any shares of LifePoint common stock that are the
subject of an award are forfeited, the related shares will no longer be charged
against such maximum share limitation and may again be made subject to awards.
In the event of certain corporate reorganizations, recapitalizations, or other
specified corporate transactions affecting LifePoint or the LifePoint common
stock, such substitution or adjustment shall be made in the aggregate number of
LifePoint common stock that may be distributed as restricted shares or in
respect of restricted share units under the LifePoint Management Stock Purchase
Plan, and the number of restricted shares and/or restricted share units
outstanding under the LifePoint Management Stock Purchase Plan, as may be
determined to be appropriate by the Compensation Committee in its sole
discretion.
Duration. The LifePoint Management Stock Purchase Plan has a term of ten
years, subject to earlier termination or amendment by the LifePoint Board of
Directors.
Administration. The LifePoint Management Stock Purchase Plan will be
administered by the Compensation Committee of the LifePoint Board of Directors.
The Compensation Committee shall have authority to administer the plan and to
exercise all the powers and authorities either specifically granted to it
under, or necessary or advisable in the administration of, the LifePoint
Management Stock Purchase Plan, including, without limitation, to interpret the
plan, to prescribe, amend and rescind rules and regulations relating to the
plan, to determine the terms and provisions of agreements (which need not be
identical) entered into under the plan and to make all other determinations
deemed necessary or advisable for the administration of the plan.
Eligibility. All LifePoint employees or groups of employees designated by
the Compensation Committee in its sole discretion are eligible to be granted
awards.
Restricted Share Awards. The Compensation Committee may make awards of
restricted shares. Under the LifePoint Management Stock Purchase Plan, a
participant may elect to reduce his base salary up to a maximum percentage
established by the Compensation Committee with respect to his employee
classification and, in lieu of salary, receive a number of restricted shares
equal to the amount of such salary reduction divided by a dollar amount equal
to 75% of the average market value (as defined in the plan) of LifePoint common
stock on the date on which such restricted share is granted. Restricted shares
will be granted on June 30 and December 31 of each calender year for which a
salary reduction election is in effect.
An award of restricted shares represents shares of LifePoint common stock
that are issued subject to such restrictions on transfer and incidents of
ownership, and such forfeiture conditions, as set forth in the plan and as the
Compensation Committee deems appropriate. Generally, the restricted period of
restricted shares granted under the LifePoint Management Stock Purchase Plan
will be three years from the date of grant. Subject to such transfer and
forfeiture restrictions, 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.
Conversion of Restricted Shares into Restricted Share Units. If during the
restricted period the Compensation Committee determines that LifePoint may lose
its Federal income tax deduction in connection
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<PAGE>
with the future lapsing of the restrictions on restricted shares because of the
deductibility cap of Section 162(m) of the Code, the Compensation Committee, in
its discretion, may convert some or all of the restricted shares into an equal
number of share units, as to which payment will be postponed until such time as
LifePoint will not lose its Federal income tax deduction for such payment under
Section 162(m). Until payment of the restricted share units is made, the
participant will be credited with dividend equivalents on the restricted share
units, which dividend equivalents will be converted into additional restricted
share units.
Termination of Employment During the Restricted Period. If during the
restricted period the participant's employment is terminated by LifePoint
either (i) for cause (as defined) or (ii) for any reason by the participant,
the participant will forfeit his or her rights in the restricted shares, which
shall automatically be considered to be cancelled, and shall have only an
unfunded right to receive from LifePoint's general assets a cash payment equal
to the lesser of (i) the fair market value of such restricted shares on the
participant's last day of employment or (ii) the aggregate base salary foregone
by the participant as a condition of receiving the restricted shares. If a
participant's employment is terminated by LifePoint without cause during the
restricted period, the participant will forfeit his rights in the restricted
shares, which shall automatically be considered to be cancelled, and shall have
only an unfunded right to receive from LifePoint's general assets a cash
payment equal to either (i) the fair market value of such restricted shares on
the participant's last day of employment or (ii) the aggregate base salary
foregone by the participant as a condition of receiving the restricted shares,
with the Compensation Committee to have the sole discretion as to which of such
amounts shall be payable. If the employment of a participant holding restricted
share units terminates during the restricted period relating to the restricted
share units, they shall be treated in a manner substantially equivalent to the
treatment of restricted shares set forth above.
Upon a termination of employment which results from a participant's death or
disability (as defined), all restrictions then outstanding with respect to
restricted shares held by the participant automatically will expire. Upon the
retirement of a participant, the Compensation Committee shall determine, in its
discretion, whether all restrictions then outstanding with respect to
restricted shares held by the participant shall expire or whether the
participant shall instead be treated as though the participant's employment had
been terminated by LifePoint without cause, as described above.
Change-In-Control. Upon the occurrence of a change-in-control of LifePoint
(as defined), the restricted period automatically will terminate as to all
restricted shares awarded under the plan.
LifePoint Employee Stock Ownership Plan
LifePoint expects to establish for the benefit of its employees a leveraged
Employee Stock Ownership Plan (the "LifePoint ESOP") which, shortly after the
distribution, will purchase newly issued shares of LifePoint common stock in an
amount equal to 8.3% of the outstanding shares of LifePoint. The purchase price
of the shares will be financed by issuing a promissory note to LifePoint or by
borrowing from a third party lender (which loan will be guaranteed by
LifePoint). Initially, all such shares will be held in a suspense account under
the LifePoint ESOP. LifePoint will contribute annually to the LifePoint ESOP
the funds required to repay the ESOP loan. As the ESOP loan is repaid, shares
will be released from the suspense account and will be allocated to accounts
established for participants under the LifePoint ESOP. The loan will be repaid
over a 10 year period. Generally, each employee of LifePoint and its
participating subsidiaries will participate in the LifePoint ESOP as of the
first January 1 after his or her date of hire. Each participant in the
LifePoint ESOP will be fully vested in his accounts after completion of seven
years of service with LifePoint (including any pre-distribution service with
Columbia/HCA and its affiliates).
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<PAGE>
Employment Contracts, Termination Of Employment Arrangements and Change in
Control Arrangements
Employment Agreement of Scott Mercy
Columbia/HCA expects to enter into an employment agreement with Scott Mercy
and has agreed to take all steps necessary to ensure that LifePoint assumes and
becomes bound by the employment agreement after the distribution. In addition,
Mr. Mercy will receive stock option awards in connection with entering into the
employment agreement.
The employment agreement provides for a term of employment of five years
(with automatic one-year renewals on the fourth and each subsequent anniversary
of the effective date of the employment agreement, absent notice of non-
extension), subject to earlier termination as provided in the employment
agreement, and provides that Mr. Mercy will serve as Chief Executive Officer, a
Director and Chairman of the Board of LifePoint after the distribution date at
an annual base salary of $300,000, subject to review at least annually. The
employment agreement also provides for guaranteed bonuses in amounts equal to
(i) $66,849 (payable as promptly as practicable after the execution of the
employment agreement), (ii) $450,000 (payable within 90 days following the
distribution and (iii) 50% of Mr. Mercy's base salary in effect on December 31,
1999 (payable as promptly as practicable following the close of 1999. Effective
for LifePoint's first fiscal year beginning after 1999, Mr. Mercy will have an
opportunity to earn an annual target bonus equal to not more than 100% of his
base salary, based upon certain annual targets. Mr. Mercy will also be given an
initial grant under the LifePoint Executive Stock Purchase Plan. See "LifePoint
Compensation Arrangements--Executive Stock Purchase Plan."
In the event that Mr. Mercy's employment is involuntarily terminated without
"Cause" or if he resigns with "Good Reason" (each as defined in the employment
agreement), Mr. Mercy will be entitled to payment of his then-current base
salary and targeted bonus for the shorter of 24 months or the then-remaining
term of the employment agreement, his benefit rights, payments for certain
other accrued amounts and the costs of continued insurance coverage. In
addition, Mr. Mercy will be entitled to certain payments if his employment is
terminated for death or disability. In the event that Mr. Mercy's employment is
terminated following the term of the employment agreement, in addition to his
benefits rights and payments for certain other accrued items, under certain
circumstances he will be entitled to a pro rata portion of 50% of his then-
current base salary. Mr. Mercy will be indemnified in the event that any
payment or benefit provided to him under the employment agreement would subject
him to an excise tax under Section 4999 of the Internal Revenue Code.
The employment agreement includes certain restrictive covenants for the
benefit of Columbia/HCA and LifePoint relating to non-disclosure by Mr. Mercy
of Columbia/HCA or LifePoint's confidential business information and trade
secrets and non-competition by Mr. Mercy with regards to any business that is
in competition with the hospitals owned by of either Columbia/HCA or LifePoint.
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<PAGE>
Certain Termination Arrangements
Each of Messrs. Fleetwood, Donahey, and Gracey will participate in an
enhanced severance plan through December 31, 1999. In the event that either Mr.
Fleetwood or Mr. Donahey is terminated without cause during 1999, he will
receive continued payment of his then-current base salary and his target bonus
for thirty-six months after such termination. In the event that Mr. Gracey is
terminated without cause during 1999, he will receive continued payment of his
then-current base salary and his target bonus for twenty-four months after such
termination. Severance policies for termination occurring subsequent to
December 31, 1999 have not yet been established.
Certain One-Time Payments
Each of Messrs. Mercy, Fleetwood, Donahey, Gracey and Slipkovich will receive
from Columbia/HCA a one-time payment of $450,000, $787,500, $787,500, $270,000,
and $188,900, respectively, to compensate them for a reduction in salary at the
time of the distribution. In return, it is expected that their base salaries
will remain fixed until the third anniversary of the distribution date.
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<PAGE>
LifePoint Security Ownership by Certain Beneficial Owners and Management
Immediately prior to the distribution, Columbia/HCA will own beneficially and
of record approximately shares of LifePoint common stock, representing
100% of the shares of capital stock of LifePoint expected to be issued and
outstanding immediately after the distribution. Columbia/HCA will have sole
voting and sole investment power with respect to the shares owned by it. After
the completion of the distribution, none of the outstanding shares of LifePoint
common stock will be owned by Columbia/HCA.
The following table sets forth the projected beneficial ownership of
LifePoint common stock as of the distribution date of Columbia/HCA sponsored
benefit plans (which collectively are projected to own 5% or more of such class
of securities); certain persons LifePoint believes will become the beneficial
owners of 5% or more of such class of securities; each of the persons who will
be an LifePoint director as of the distribution date; each of the executive
officers named in the Summary Compensation Table; and all of the persons who
will be LifePoint directors and executive officers as of the distribution date
as a group. The ownership information presented below:
. is based on Columbia/HCA's knowledge of the beneficial ownership of
Columbia/HCA Stock as of , 1999;
. reflects the distribution ratio of shares of LifePoint common stock
for every shares of Columbia/HCA Stock outstanding on the record
date;
. reflects the Employee Stock Ownership Plan (the LifePoint Hospitals,
Inc. Retirement Plan) that LifePoint expects to establish in accordance
with the Benefits and Employment Matters Agreement; and
. assumes no change in beneficial ownership of Columbia/HCA Stock between
, 1999 and the record date.
<TABLE>
<CAPTION>
Number of
Name of Beneficial Owner Shares(1)(2) Percent
- ------------------------ ------------ -------
<S> <C> <C>
The Columbia/HCA Healthcare Corporation Stock Bonus Plan
(3)..................................................... 3.5%
The Columbia/HCA Healthcare Corporation Salary Deferral
Plan (3)................................................ 3.3%
The San Leandro Retirement and Savings Plan (3).......... *
LifePoint Hospitals, Inc. Retirement Plan................ 8.3%
FMR Corp., Edward C. Johnson 3d and Abigail P. Johnson
(4)..................................................... 7.0%
Wellington Management Company, LLP (5)................... 8.3%
Scott L. Mercy (6)....................................... *
Ricki Tigert Helfer...................................... *
Dr. John E. Maupin, Jr., D.D.S. ......................... *
DeWitt Ezell, Jr......................................... *
William V. Lapham........................................ *
James M. Fleetwood (6)................................... *
Kenneth C. Donahey (6)................................... *
William Gracey (6)....................................... *
Dan Slipkovich (6)....................................... *
All Directors and Executive Officers as a Group (11
persons) (6)............................................
</TABLE>
- --------
* Less than one percent.
(1) Unless otherwise indicated, each stockholder shown on the table has sole
voting and investment power with respect to the shares beneficially owned.
The number of shares shown does not include the interest of certain persons
in shares held by family members in their own right.
(2) Each named person or group is deemed to be the beneficial owner of
securities which may be acquired within 60 days through the exercise or
conversion of options, warrants and rights, if any, and such securities are
deemed to be outstanding for the purpose of computing the percentage
beneficially owned by
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<PAGE>
such person or group. Such securities are not deemed to be outstanding for
the purpose of computing the percentage beneficially owned by any other
person or group. Accordingly, the indicated number of shares includes
shares issuable upon conversion of convertible securities or upon exercise
of options (including employee stock options) held by such person or group.
(3) The address of the Columbia/HCA Healthcare Corporation Stock Bonus Plan,
the Columbia/HCA Salary Deferral Plan and the San Leandro Retirement and
Savings Plan is One Park Plaza, Nashville, Tennessee 37203. Such shares
are beneficially owned by employees participating in such benefit plans
and voted at the direction of Columbia/HCA's Retirement Committee which is
composed of certain Columbia/HCA officers.
(4) The ownership given for FMR Corp., Edward C. Johnson 3d and Abigail P.
Johnson is based on information contained in the Schedule 13G dated
February 1, 1999, filed with the SEC by FMR Corp. in respect of its
beneficial ownership of Columbia/HCA Common Stock. The address of FMR Corp
is 82 Devonshire Street, Boston, Massachusetts 02109.
(5) The ownership given for Wellington Management Company, LLP is based on
information contained in the Schedule 13G dated December 31, 1998, filed
with the SEC by Wellington Management Company, LLP in respect of its
beneficial ownership of Columbia/HCA Common Stock. The address of
Wellington Management Company, LLP is 75 State Street, Boston,
Massachusetts 02109.
(6) Excludes shares to be purchased pursuant to initial grants under the
LifePoint Executive Stock Purchase Plan. See "LifePoint Management--
Executive Stock Purchase Plan."
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<PAGE>
Triad Management
Directors
On the distribution date, the directors of Triad will be the persons named
below.
<TABLE>
<CAPTION>
Name Age Principal Occupation or Employment for Past Five Years
---- --- ------------------------------------------------------
<C> <C> <S>
James D. Shelton.......... 45 Chairman of the Board, President and Chief Executive Officer of
Triad, as of the distribution date; and since January 1, 1998,
President, the Triad Group of Columbia/HCA; President--Central
Group of Columbia/HCA from June 1994 until January 1, 1998;
Executive Vice President of the Central Division of National
Medical Enterprises, Inc. (presently called Tenet Healthcare
Corporation) (health care services) from May 1993 to June 1994;
Senior Vice President of Operations of National Medical
Enterprises, Inc., prior thereto.
Michael J. Parsons........ 43 Executive Vice President and Chief Operating Officer of Triad,
as of the distribution date; and since January 1, 1998, Chief
Operating Officer, the Pacific Group of Columbia/HCA; Chief
Financial Officer--Central Group of Columbia/HCA from July 1994
until January 1, 1998; Chief Financial Officer of the Central
Group of National Medical Enterprises, Inc. prior thereto.
Thomas G. Loeffler, Esq... 52 Partner, Arter & Hadden LLP (law firm) since June 1993;
attorney and a consultant prior thereto. Mr. Loeffler served as
a member of Congress to the United States House of
Representatives from 1979 to 1987. Mr. Loeffler is a director
of Billing Concepts Corp., Introgen Therapeutics, Inc. and the
University of Texas Investment Management Company and is Vice
Chairman of the Board of Regents of the University of Texas
System.
Thomas F. Frist III....... 31 Co-founder, FS Partners, LLC (private investment firm) since
1994; Assistant to principal, Rainwater, Inc. (private
investment firm) prior thereto.
Marvin Runyon............. 74 Retired 70th Postmaster General of the United States (1992-
1998); Chairman of the Board, Tennessee Valley Authority from
1988 to 1992; President and Chief Executive Officer, Nissan
Motor Manufacturing Corporation U.S.A., prior thereto. Mr.
Runyan is a director of ProTeam.com and Stamps.com.
Uwe E. Reinhardt, Ph.D. .. 60 James Madison Professor of Political Economy and Professor of
Economics and Public Affairs, Princeton University. Mr.
Reinhardt is a Trustee of Duke University Health Center, H&Q
Healthcare Investors and H&Q Life Sciences Investors, a Member
of the Board of the Center for Healthcare Strategies, Inc., and
a Member of the External Advisory Panel for Health, Nutrition
and Population, The World Bank.
Allen A. Copping, D.D.S... 72 Professor, LSU School of Dentistry since 1971; Senior Visiting
Dentist, Medical Staff, Charity Hospital in New Orleans since
1973; President, Louisiana State University System from 1985 to
1999.
</TABLE>
The Triad Certificate provides that the Triad Board of Directors will be
divided into three classes, with the classes to be as nearly equal in number as
possible, and that, of the initial Triad directors following the distribution,
one-third will continue to serve until the 2000 Annual Meeting of Stockholders,
one-third will continue to serve until the 2001 Annual Meeting of Stockholders,
and one-third will continue to serve until the 2002 Annual Meeting of
Stockholders. Of the initial directors, Messrs. Runyon and Copping will serve
until the 2000 Annual Meeting of Stockholders; Messrs. Shelton and Frist will
serve until the 2001 Annual Meeting of Stockholders; and Messrs. Loeffler,
Parsons and Reinhardt will serve until the 2002 Annual Meeting of Stockholders.
Starting with the 2000 Annual Meeting of Stockholders, one class of directors
will be elected each year for a three-year term. See "Triad Description of
Capital Stock--Certain Anti-Takeover Provisions--Triad Certificate and By-
Laws--Classified Board of Directors."
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<PAGE>
The Triad Board of Directors will have a number of standing committees,
including an Executive Committee, an Audit Committee, and a Compensation
Committee. The Triad Board of Directors will not have a standing nominating
committee, but rather will act as a committee of the whole to screen candidates
to be nominated for election thereto by the stockholders or chosen to fill
newly created directorships or vacancies on the Triad Board of Directors.
The Executive Committee may exercise certain powers of the Board of Directors
regarding the management and direction of the business and affairs of Triad
when the Board of Directors is not in session. All action taken by the
Executive Committee is reported to and reviewed by the Triad Board of
Directors. The members of the Executive Committee will be Messrs. Shelton,
Loeffler and Parsons, with Mr. Parsons serving as Chair.
The Audit and Compliance Committee of the Triad Board of Directors will
review and make reports and recommendations to the Board of Directors with
respect to the selection of the independent auditors of Triad and its
subsidiaries, the arrangements for and the scope of the audits to be performed
by them and the internal audit activities, accounting procedures and controls
of Triad, and will review the annual consolidated financial statements of
Triad. The committee also will monitor adherence to Triad's regulatory
compliance program. The members of the Audit and Compliance Committee will be
Messrs. Runyon and Reinhardt, with serving as Chair.
The Compensation Committee of the Triad Board of Directors will be
responsible for approving compensation arrangements for executive management of
Triad, reviewing compensation plans relating to officers, grants of options and
other benefits under Triad's employee benefit plans and reviewing generally
Triad's employee compensation policy. The members of the Compensation Committee
will be Messrs. Loeffler, Frist and Copping, with Mr. Frist serving as Chair.
Compensation of Directors
The annual retainer for outside directors who are neither officers nor
employees of Triad ("Non-Employee Directors") will be $18,000 and the Board
meeting fee will be $1,500 per meeting. Committee members will receive a fee of
$500 per meeting payable only for attendance at committee meetings not held in
conjunction with a meeting of the Triad Board of Directors. Directors also are
reimbursed for expenses incurred relating to attendance at meetings. Under the
Triad Outside Directors Stock and Incentive Compensation Plan, each Non-
Employee Director may elect to receive, in lieu of all or any portion (in
multiples of 25%) of his annual retainer, deferred stock units, the payout of
which, at the election of the director, may be deferred for two years or until
the end of such director's term of office. The payment of deferred stock units
will be made through the issuance of a stock certificate for a number of shares
equal to the number of deferred stock units.
The plan further provides that each Non-Employee Director will receive a one-
time grant of an option, as of a date to be selected by the Triad Board of
Directors, to acquire shares of Triad common stock (exercisable at the fair
market value of Triad common stock on the date of grant) for a number of shares
to be determined by the Triad Board. Each person who is a Non-Employee Director
on the day of the annual meeting of Triad's stockholders will be granted on a
date to be selected by the Triad Board of Directors an option to acquire shares
of Triad common stock (exercisable at the fair market value of Triad common
stock on the date of grant) for a number of shares to be determined by the
Triad Board. The one-time options and the annual options will become
exercisable as to one-fourth of the shares covered by the option on each of the
first four anniversaries of the date of grant.
The plan further provides that Non-Employee Directors may receive
discretionary option grants.
Upon the occurrence of a change in control of Triad (as defined), each
outstanding option shall become fully and immediately exercisable.
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<PAGE>
Executive Officers
On the distribution date, the executive officers of Triad will be as follows:
<TABLE>
<CAPTION>
Name Age Position And Professional Experience
---- --- ------------------------------------
<C> <C> <S>
James D. Shelton....... 45 Chairman of the Board, President and Chief Executive Officer
of Triad, as of the distribution date; and since January 1,
1998, President, the Pacific Group of Columbia/HCA;
President--Central Group of Columbia/HCA from June 1994 until
January 1, 1998; Executive Vice President of the Central
Division of National Medical Enterprises, Inc. (presently
called Tenet Healthcare Corporation) (health care services)
from May 1993 to June 1994; Senior Vice President of
Operations of National Medical Enterprises, Inc., prior
thereto.
Michael J. Parsons..... 43 Executive Vice President and Chief Operating Officer of Triad,
as of the distribution date; and since January 1, 1998, Chief
Operating Officer, the Pacific Group of Columbia/HCA; Chief
Financial Officer--Central Group of Columbia/HCA from July
1994 until January 1, 1998; Chief Financial Officer of the
Central Group of National Medical Enterprises, Inc. prior
thereto.
Burke W. Whitman....... 43 Executive Vice President, Chief Financial Officer and
Treasurer of Triad, as of the distribution date; and since
February 1, 1999, Chief Financial Officer, the Pacific Group
of Columbia/HCA; President, Chief Financial Officer, Director
and Co-founder, Deerfield Health Corporation from May 1994
until January 31, 1999; Vice President, Development and
Finance, Almost Family, Inc. (a wholly owned subsidiary of
Caretenders Health Corporation), prior thereto.
Donald P. Fay.......... 55 Executive Vice President, General Counsel and Secretary of
Triad, as of the distribution date; and since January 1, 1998,
Senior Vice President, the Pacific Group of Columbia/HCA; Vice
President--Legal, Columbia/HCA from February 1994 through
December 1997; Senior Counsel, Columbia/HCA, prior thereto.
Christopher A. Holden.. 34 Senior Vice President of Triad, as of the distribution date;
since January 1, 1998 through the distribution date,
President--West Division of the Pacific Group of Columbia/HCA;
President, West Texas Division of the Central Group of
Columbia/HCA from September 1997 until January 1, 1998; Vice
President of Administration for the Central Group of
Columbia/HCA from August 1994 until September 1997; Assistant
Vice President--Administration of the Central Group of
National Medical Enterprises, Inc. prior thereto.
Nicholas J. Marzocco... 44 Senior Vice President of Triad, as of the distribution date;
since January 1, 1998 through the distribution date,
President--East Division of the Pacific Group of Columbia/HCA;
Chief Operating Officer of the Louisiana Division of
Columbia/HCA from September 1996 until January 1, 1998; Chief
Executive Officer of North Shore Regional Medical Center (a
310-bed hospital owned by National Medical Enterprises, Inc.
and located in Slidell, Louisiana) prior thereto.
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
Name Age Position And Professional Experience
---- --- ------------------------------------
<C> <C> <S>
G. Wayne McAlister .. 52 Senior Vice President of Triad; since March 15, 1999, through
the date of the distribution, President--Central Division of the
Pacific Group of Columbia/HCA; independent senior hospital
management consultant from June 1997 until March 15, 1999;
Regional Vice President of Paracelsus Healthcare Corporation
from June 1995 until May 1997; Vice President, Operations, of
Tenet Healthcare Corporation from August 1993 until May 1995;
and President/Chief Operating Officer and Vice President of
Operations of Healthcare International prior thereto.
W. Stephen Love...... 47 Senior Vice President of Finance/Comptroller of Triad as of the
distribution date; and since March 1, 1999, Senior Vice
President of Finance/Comptroller of the Pacific Group of
Columbia/HCA; Senior Vice President/Corporate Chief Financial
Officer--Operations of Charter Behavioral Health Systems, L.L.C.
(formerly Charter Medical System) from December 1997 until March
1, 1999; Senior Vice President/Corporate Chief Financial Officer
of Charter Behavioral Health Systems, L.L.C. from June 1997
until December 1997; Vice President, Financial and Hospital
Operations of Charter Medical System prior thereto.
William R. Huston.... 44 Senior Vice President of Finance of Triad as of the distribution
date; and since January 1999, Senior Vice President of Finance
of the Pacific Group of Columbia/HCA; Division Chief Financial
Officer of various divisions of the Central Group of
Columbia/HCA from April 1995 to December 1998; Division Chief
Financial Officer of Tenet Healthcare Corporation prior thereto.
</TABLE>
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Executive Compensation
The information under this heading relates to the compensation paid by
Columbia/HCA to the Chief Executive Officer of Triad and the four individuals
who will be executive officers of Triad as of the distribution date and who
were, based on such compensation, the most highly compensated Triad executive
officers for the year ended December 31, 1998. All cash compensation was paid
by Columbia/HCA and all stock compensation was in the form of Columbia/HCA
Common Stock or options to purchase shares of Columbia/HCA Common Stock. The
principal positions listed in the table are those that will be held by such
persons as of the distribution date. For information regarding certain future
compensation arrangements which have been established for Triad as an
independent, publicly-traded company, see "--Triad Compensation Arrangements."
Triad Summary Compensation Table
<TABLE>
<CAPTION>
Annual Compensation Long-Term Compensation
--------------------------------- -------------------------
Securities
Other Annual Restricted Underlying All Other
Name and Principal Salary Compensation Stock Options/SARS Compensation
Position Year ($)(2) Bonus($)(3) ($)(4) Awards($)(5) (#)(6) ($)(7)
------------------ ---- -------- ----------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
James D. Shelton (1)...... 1998 $529,125 $ -- $ -- $121,388 -- $9,448
Chairman, President and 1997 $415,000 $41,500 $ -- $221,400 350,000 $7,629
Chief Executive Officer 1996 $350,000 $35,000 $ -- $187,000 82,500 $7,214
Michael J. Parsons........ 1998 $309,375 $ -- $ -- $ 36,559 -- $7,561
Executive Vice President, 1997 $225,000 $56,250 $ -- $ 75,000 135,000 $7,629
Chief Operating Officer
and Treasurer
Nicholas J. Marzocco...... 1998 $271,688 $ -- $34,448 $ 50,456 -- $7,224
Senior Vice President 1997 $207,000 $77,625 $31,158 $ 34,510 64,000 $7,004
Christopher A. Holden..... 1998 $243,750 $ -- $26,594 $ 63,378 -- $7,399
Senior Vice President 1997 $195,000 $42,840 $28,950 $ -- 60,000 $6,373
Donald P. Fay............. 1998 $240,300 $ -- $ -- $ -- 4,200 $8,348
Executive Vice President 1997 $178,000 $62,300 $ -- $ -- 12,000 $8,438
and General Counsel
</TABLE>
- --------
(1) Pursuant to SEC rules, includes information for 1996 because Mr. Shelton's
compensation for that year was previously included in public disclosure by
Columbia/HCA.
(2) 1998 salary amounts do not include the value of restricted stock awards
granted in lieu of a portion of annual salary.
(3) Reflects bonus earned during the fiscal year. In some instances, all or a
portion of the bonus was paid during the following fiscal year. Each of the
executive officers identified in the table, except for Messrs. Holden and
Fay, had the option to take all or part of their bonus in shares of
Columbia/HCA restricted stock at a 25% discount from the fair market value
at the time of grant, which is reflected in the Restricted Stock Awards
column. Columbia/HCA's cash bonus program was discontinued in August 1997.
(4) Perquisites and other personal benefits did not exceed the lesser of either
$50,000 or 10% of the total of annual salary and bonus for any executive
officer identified in the table. Other compensation consists principally of
relocation expenses.
(5) 1998 amounts represent the average of the closing prices on trading days
during the deferral period of Columbia/HCA shares issued in lieu of a
portion of annual salary. 1997 amounts represent the average of the closing
price on the five trading days prior to the grant date of shares of
Columbia/HCA restricted stock granted in lieu of all or a portion of a cash
bonus. As of January 1, 1999, Messrs. Shelton, Parsons, Marzocco and Holden
held an aggregate of 21,172, 6,971, 3,136 and 2,453 shares of restricted
stock, respectively. Pursuant to Securities and Exchange Commission rules,
after deducting the consideration paid therefor, the shares held by Messrs.
Marzocco and Holden had a net pre-tax value of $12,933 and $11,965,
respectively, and the shares held by Messrs. Shelton and Parsons were
without value. Dividends will be payable on shares of restricted stock if
and to the extent paid on Columbia/HCA's Common Stock generally, regardless
of whether or not the shares are vested.
(6) Options to acquire shares of Columbia/HCA Common Stock. Columbia/HCA
granted options at two separate times in 1997. The 1997 regular grant was
issued in February 1997. A special grant was issued in November 1997 to
help ensure the retention and motivation of key executives, including
Messrs. Shelton, Parsons, Marzocco and Holden, at the time Columbia/HCA was
reorganizing. On average, the size of the November 1997 grant is two times
a competitive median long-term grant for a two-year period (1998-99).
(7) Consists of Columbia/HCA contributions to Columbia/HCA's Savings and
Investment Plan, Money Purchase Plan and Stock Bonus Plan.
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Columbia/HCA Option Grants In 1998
The following table provides information on grants of options to purchase
shares of Columbia/HCA Common Stock made during 1998 to the persons named in
the Triad Summary Compensation Table. For a discussion of the treatment of such
options and certain replacement grants of options to purchase shares of Triad
common stock, see "Arrangements Among Columbia/HCA, LifePoint and Triad
Relating to the Distribution--Benefits and Employment Matters Agreement--
Treatment of Columbia/HCA Common Stock Options."
Option/SAR Grants in Last Fiscal Year
<TABLE>
<CAPTION>
Percent of Potential Realizable
Total Value At Assumed Annual
Number of Options/SARs Rates of
Securities Granted to Stock Price Appreciation
Underlying Employees Exercise or for Option Term (4)
SARS/Options in Fiscal Base Price Expiration ------------------------
Name Granted (#) (1) Year ($/Sh)(2)(3) Date 5% ($) 10% ($)
- ---- --------------- ------------ ------------ ---------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
James D. Shelton........ -- -- -- -- -- --
Michael J. Parsons...... -- -- -- -- -- --
Nicholas J. Marzocco.... -- -- -- -- -- --
Christopher A. Holden... -- -- -- -- -- --
Donald P. Fay........... 4,200 0.06% $26.4688 3/5/08 $ 69,913.56 $ 177,174.69
</TABLE>
- --------
(1) Options to acquire Columbia/HCA Common Stock.
(2) The option exercise price may be paid in shares of Columbia/HCA Common
Stock owned by the executive officer, in cash, or a combination thereof.
(3) The ten-year options become exercisable with respect to 25% of the shares
covered thereby on the second, third, fourth and fifth anniversary dates
following the date of grant. The exercise price was equal to the fair
market value of the Columbia/HCA Common Stock on the date of the grant.
(4) The potential realizable value portion of the foregoing table illustrates
value that might be realized upon exercise of the options immediately prior
to the expiration of their term, assuming the specified compounded rates of
appreciation on the Columbia/HCA Common Stock over the term of the options.
These amounts do not take into account provisions of the options relating
to termination of the option following termination of employment, non-
transferability or vesting over periods of up to five years.
Aggregated Option/SAR Exercises In Last Fiscal Year and FY-End Option/SAR
Values
<TABLE>
<CAPTION>
Number of Securities Underlying Value of Unexercised In-the-
Unexercised Options/SARs at Money Options/SARs at Fiscal
Fiscal Year-End (#) Year-End ($)(1)
----------------------------------- ----------------------------------
Name Exercisable Unexercisable Exercisable Unexercisable
---- --------------- ---------------- -------------- ---------------
<S> <C> <C> <C> <C>
James D. Shelton........ 84,375 453,125 -- --
Michael J. Parsons...... 37,125 178,875 -- --
Nicholas J. Marzocco.... 0 75,250 -- --
Christopher A. Holden... 1,140 71,280 -- --
Donald P. Fay........... 27,750 39,450 -- --
</TABLE>
- --------
(1) The closing price for the Columbia/HCA Common Stock, as reported by the
NYSE, on December 31, 1998 was $24.75. Value is calculated on the basis of
the difference between the option exercise price and $24.75, multiplied by
the number of shares of Columbia/HCA Common Stock underlying the option.
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<PAGE>
Triad Compensation Arrangements
Benefits and Employment Matters Agreement
In connection with the distribution, Columbia/HCA, LifePoint and Triad will
enter into the Benefits and Employment Matters Agreement, which allocates
responsibilities for employee compensation, benefits, labor, benefit plan
administration and certain other employment matters on and after the
distribution date. Among other things, the Benefits and Employment Matters
Agreement generally provides for grants to Triad employees of options to
purchase shares of LifePoint Common Stock and Triad common stock in respect of
vested options to purchase Columbia/HCA Common Stock (other than incentive
stock options) and grants to purchase Triad stock in replacement of incentive
stock options covering Columbia/HCA Common Stock. In addition, the Benefits and
Employment Matters Agreement provides for the cancellation of non-vested
options to purchase Columbia/HCA Common Stock and the discretionary grant of
options to purchase Triad common stock. The Benefits and Employment Matters
Agreement also provides for the establishment of certain of the benefit plans
described in this section. See "Arrangements Among Columbia/HCA, LifePoint and
Triad Relating to the Distribution--Benefits and Employment Matters Agreement."
The Triad 1999 Long-Term Incentive Plan
The Triad 1999 Long-Term Incentive Plan will be adopted by the Board of
Directors of Columbia/HCA in contemplation of the distribution.
Reservation of Shares. Under the Triad Long-Term Incentive Plan, 5,350,000
shares of Triad common stock will be reserved for issuance. The shares of Triad
common stock to be issued will be made available from authorized but unissued
shares of Triad common stock or issued shares that have been reacquired by
Triad. If any shares of Triad common stock that are the subject of an award are
not issued and cease to be issuable for any reason, such shares will no longer
be charged against the maximum share limitations and may again be made subject
to awards. In the event of certain corporate reorganizations,
recapitalizations, or other specified corporate transactions affecting Triad or
the Triad common stock, proportionate adjustments may be made to the number of
shares available for grant, as well as the other maximum share limitations,
under the Triad Long-Term Incentive Plan, and the number of shares and prices
under outstanding awards.
Duration. The Triad Long-Term Incentive Plan will have a term of 10 years,
subject to earlier termination or amendment by the Triad Board of Directors.
Administration. Beginning with the first meeting of the Triad Board of
Directors, the Triad Long-Term Incentive Plan will be administered by the
Compensation Committee of the Triad Board of Directors. Subject to the
limitations set forth in the Triad Long-Term Incentive Plan, the Triad
Compensation Committee has the authority to determine the persons to whom
awards are granted, the types of awards to be granted, the time at which awards
will be granted, the number of shares, units or other rights subject to each
award, the exercise, base or purchase price of an award (if any), the time or
times at which the award will become vested, exercisable or payable, and the
duration of the award.
Eligibility. All employees of Triad and its subsidiaries and, in the case of
awards other than incentive stock options, any consultant or independent
contractor providing services to Triad or a subsidiary, will be eligible to be
granted awards under the Triad Long-Term Incentive Plan, as selected from time
to time by the Triad Compensation Committee in its sole discretion.
Types of Awards. The Triad Long-Term Incentive Plan will authorize the grant
of the following types of awards:
. Stock Options (nonqualified and incentive stock options). The maximum
number of shares that may be covered under options granted to any
individual in any calendar year is 700,000 shares. The exercise price of
an option may be determined by the Triad Compensation Committee,
provided that the exercise price per share of an option may not be less
than the fair market value of a share of Triad common stock on the date
of grant. The value of Triad common stock (determined at the time
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<PAGE>
of grant) that may be subject to incentive stock options that become
exercisable by an employee in any one year is limited to $100,000. The
maximum term of any stock option will be ten years from the date of
grant. The Triad Compensation Committee is to determine the extent to
which an option will become and/or remain exercisable in the event of
termination of employment or service of a participant under various
circumstances, including retirement, death or disability, subject to
certain limitations for incentive stock options. An option may be
exercised in whole or in part at any time during the term thereof by
written notice to Triad, together with payment of the aggregate exercise
price of the option. In addition to the exercise price, the participant
must pay Triad in cash or, at the Triad Compensation Committee's
discretion, in Triad common stock, the full amount of all applicable
income tax and employment tax amounts required to be withheld in
connection with the exercise of the option.
. Stock Appreciation Rights. A stock appreciation right may be granted
either in tandem with an option or without a related option. A stock
appreciation right entitles the holder, upon exercise, to receive a
payment based on the difference between the base price of the stock
appreciation right (which may not be less than the fair market value of
a share of Triad common stock on the date of grant) and the fair market
value of a share of Triad common stock on the date of exercise,
multiplied by the number of shares as to which such stock appreciation
right is being exercised. The maximum term of a stock appreciation right
will be 10 years from the date of grant. No more than 700,000 shares of
Triad common stock may be subject to stock appreciation rights granted
to any one participant during any calendar year. Stock appreciation
rights are payable, in the discretion of the Triad Compensation
Committee, in cash, in shares of Triad common stock, or in a combination
of cash and shares of Triad common stock
. Performance Awards. Performance awards are units denominated on the date
of grant either in shares of Triad common stock ("performance shares")
or in specified dollar amounts ("performance units"). The Committee may
grant performance awards that are intended to qualify as performance-
based compensation under Section 162(m) of the Code (a "Section 162(m)
Award"), as well as performance awards that are not Section 162(m)
Awards. Performance awards are payable upon the achievement of
performance criteria established by the Triad Compensation Committee at
the beginning of the applicable performance period. At the time of
grant, the Compensation Committee establishes the number of units, the
duration of the performance period or periods, the applicable
performance criteria, and, in the case of performance units, the target
unit value or range of unit values for the performance awards. At the
end of the performance period, the Compensation Committee determines the
payment to be made, based on the extent to which the performance goals
have been achieved. Performance awards are payable, in the discretion of
the Triad Compensation Committee, in cash, in shares of Triad common
stock, or in a combination of cash and shares of Triad common stock. The
maximum amount of compensation that may be payable to a participant
during any one calendar year with respect to a performance unit shall be
$4.2 million. The maximum number of performance shares granted to a
participant during any one calendar year shall be 280,000 performance
shares.
. Phantom Stock. An award of phantom stock gives the participant the right
to receive payment at the end of a fixed vesting period based on the
value of a share of Triad common stock at the time of vesting. Phantom
stock units are subject to such restrictions and conditions to payment
as the Triad Compensation Committee determines are appropriate. An award
of phantom stock may be granted, at the discretion of the Triad
Compensation Committee, together with an award of dividend equivalent
rights for the same number of shares covered thereby. Phantom stock
awards are payable, in the discretion of the Triad Compensation
Committee, in cash, in shares of Triad common stock having an equivalent
fair market value on the applicable vesting dates, or in a combination
thereof.
. Restricted Stock Awards. An award of restricted stock represents shares
of Triad common stock that are issued subject to such restrictions on
transfer and incidents of ownership, and such forfeiture conditions, as
the Triad Compensation Committee deems appropriate. The Committee may
grant an
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<PAGE>
award that is a Section 162(m) Award. The restrictions imposed upon an
award of restricted stock will lapse in accordance with the vesting
requirements specified by the Triad Compensation Committee in the award
agreement. Such vesting requirements may be based on the continued
employment of the participant for a specified time period or on the
attainment of specified business goals or performance criteria
established by the Triad Compensation Committee. The Triad Compensation
Committee may, in connection with an award of restricted stock, require
the payment of a specified purchase price. Subject to the transfer
restrictions and forfeiture restrictions relating to the restricted
stock award, the participant will have the rights of a stockholder of
Triad, including all voting and dividend rights, during the restriction
period, unless the Triad Compensation Committee determines otherwise at
the time of the grant. The maximum number of shares of common stock that
may be subject to a restricted stock award granted to a participant
during any one calendar year shall be 280,000 shares.
. Dividend Equivalents. Dividend equivalent awards entitle the holder to a
right to receive cash payments determined by reference to dividends
declared on the Triad common stock during the term of the award, which
will not exceed 10 years from the date of grant. Dividend equivalent
awards may be granted on a stand-alone basis or in tandem with other
awards under the Triad Long-Term Incentive Plan. Dividend equivalent
awards are payable in cash or in shares of Triad common stock, as
determined by the Triad Compensation Committee.
Change-In-Control. The Triad Compensation Committee may, in an award
agreement, provide for the effect of a change-in-control (as defined in the
Triad Long-Term Incentive Plan) on the award. Such provisions may include the
acceleration of an award's vesting or extension of the time for exercise, the
elimination or modification of performance or other conditions, the cash
settlement of an award or other adjustments that the Triad Compensation
Committee considers appropriate.
Triad Executive Stock Purchase Plan
The Triad Executive Stock Purchase Plan will be adopted by Triad, and
approved by the Columbia/HCA Board of Directors (as the sole shareholder of
LifePoint common Stock), prior to the distribution date.
Reservation of Shares. Under the Triad Executive Stock Purchase Plan,
1,000,000 shares of Triad common stock will be reserved for issuance pursuant
to all rights granted under the plan. The shares of Triad common stock to be
issued will be made available from authorized but unissued shares of Triad
common stock or issued shares that have been reacquired by Triad. To the
extent that any right to purchase Triad common stock granted under the plan is
forfeited, cancelled, or otherwise terminated, the shares of Triad common
stock covered thereunder will no longer be charged against the maximum share
limitation and may again be made subject to rights granted under the plan. In
the event of certain corporate reorganizations, recapitalizations or other
specified corporate transactions affecting Triad or the Triad common stock,
proportionate adjustments may be made to the number of shares available for
grant and the number of shares under outstanding grants.
Duration. The Triad Executive Stock Purchase Plan will have a term of 10
years, subject to earlier termination or amendment by the Triad Board of
Directors.
Administration. The Triad Executive Stock Purchase Plan will be administered
by the Compensation Committee of the Triad Board of Directors. Subject to
limitations to be set forth in the Triad Executive Stock Purchase Plan, the
Compensation Committee will have the authority to determine the persons to
whom rights are granted, the time at which rights will be granted, the number
of shares that may be purchased under a right, the date or period during which
such right may be exercised and all other terms of the right. With the consent
of the affected participant, the Compensation Committee will have the
authority to cancel and replace outstanding rights previously granted with new
rights for the same or a different number of shares and to amend the terms of
any outstanding right.
Eligibility. All executive employees of Triad and its subsidiaries will be
eligible to receive rights under the Triad Executive Stock Purchase Plan.
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<PAGE>
Initial Grants. The Triad Executive Stock Purchase Plan will specifically
provide for initial grants of rights to certain executive officers. These
rights are to be exercised for a period beginning on the distribution date and
ending on the 21st trading date of the Triad common stock. Triad expects to
grant each of Messrs. Shelton, Whitman, Parsons, Fay, Marzocco, Holden,
McAllister, Huston, and Love a right to purchase the number of shares of Triad
common stock valued at $5,000,000, $2,000,000, $1,000,000, $500,000, $500,000,
$500,000, $500,000, $500,000, and $500,000, respectively, but in no event will
the number of shares to be purchased by each such executive officer exceed the
number of shares which can be purchased with such officer's above-referenced
dollar limit, based on a value of $12.50 per share. If, as a result of the
foregoing limitation, any executive officer's purchase right is limited, such
executive officer may be allowed to purchase additional shares to the extent
that the maximum number of shares allocated for the initial grants are not
exercised.
Exercise of Rights. A right will be exercised by written notice to Triad on
or prior to a specified exercise date. Such written notice will be an agreement
by the participant to pay the full purchase price of the Triad common stock by
means of a purchase loan, except to the extent the notice is accompanied by a
cash payment.
Purchase Loan. Triad will loan each participant 100% of the purchase price of
Triad common stock acquired by the participant under a right, on a full
recourse basis, to the extent the participant does not elect to pay the
purchase price in cash. The purchase price of the Triad common stock acquired
shall equal the fair market value of such common stock on the date preceding
the purchase. The loan will be secured by the shares purchased. Interest will
be paid upon the loan's maturity or upon the loan's prepayment and will accrue
at the applicable Federal rate, compounded semi-annually. However, if the
participant's employment terminates for cause or the participant voluntarily
terminates employment (other than for a good reason) within three years of
purchasing the shares, in addition to any amounts otherwise due under the loan
(including accrued interest), the participant will be required to pay Triad the
additional interest that would have been payable in respect of the loan, if the
regular interest rate on such purchase loan had been the prime rate, and
interest thereon at such rate to the actual date of payment.
Loan Maturity and Repayment. A loan will mature upon the earlier of (i) the
fifth anniversary following the purchase of the shares, (ii) termination of the
participant's employment for any reason, or (iii) bankruptcy of the
participant. Within 120 days following the loan's maturity, the participant
will be required to pay Triad the full amount remaining due on the loan,
including all unpaid accrued interest.
Loan Prepayments. The loan may be prepaid, in whole or in part, at any time.
At any time following the earlier of (i) the second anniversary following the
purchase of the shares, or (ii) a change in control, such shares may, at the
participant's election, be sold to repay the loan. Any cash dividends received
on the purchased shares prior to payment of the full amount due on such loan,
net of assumed Federal, state and local income taxes, will be used to prepay
the loan.
Transfer Restrictions. A participant will not be entitled to delivery of the
stock certificates representing the shares purchased and none of such 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) until the later of (i) full repayment of the purchase price and
accrued interest (and any additional amount that may be due under the Triad
Executive Stock Purchase Plan), and (ii) the earlier of (1) the third
anniversary of the date the shares were purchased, (2) the participant's
termination of employment or bankruptcy, and (3) a change in control. However,
such shares may be sold to pay the loan at maturity, or to voluntarily prepay
such loan at any time after the earlier of (i) the second anniversary of the
date the shares were purchased, or (ii) a change in control.
Death or Disability Benefit. In the event of termination of employment
because of death or disability, where the amount remaining due on the loan
(including accrued interest) is greater than the fair market value of the
shares purchased, as of the date of such death or disability, Triad will pay a
death or disability benefit equal to the amount of such payment remaining due
over the shares' fair market value as of the date of such death or disability.
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Triad Annual Cash Bonus Plan
Triad plans to adopt an annual cash bonus plan that will provide for the
payment of annual cash bonuses following the close of each plan year, based
upon the achievement of objective performance goals. The annual bonus plan will
be administered by the Vice President of Human Resources and Administration. A
plan committee, the Triad Compensation Committee and the Chief Executive
Officer of Triad will also have administrative functions.
Participation is limited to key management employees. An appropriate senior
officer will recommend non-officer employees for participation in the annual
bonus plan as well as the related performance targets for such bonus. Such
recommendations will be subject to final review and approval by the Chief
Executive Officer. All recommendations regarding officers are to be made by the
Chief Executive Officer, subject to final review and approval by the
Compensation Committee.
As soon as practicable after the end of each plan year and after receiving
the recommendation of the plan committee, the Chief Executive Officer will
review and approve bonus payments for all non-officer participants. The
Compensation Committee will review and approve bonus payments for all
participating officers. Bonus payments will be based on the achievement of
specific performance objectives, based on criteria determined in accordance
with the annual bonus plan. Such criteria may include constituency
satisfaction, the financial performance of Triad and other selected strategic
components. Performance objectives may be subject to retroactive adjustments to
reflect equitably unforeseen circumstances.
The Chief Executive Officer, with the approval of the Compensation Committee,
may modify, amend or terminate the annual bonus plan, in whole or in part, at
any time (except that no such action may negatively affect bonuses for any
prior year).
The Triad Management Stock Purchase Plan
The Triad Management Stock Purchase Plan will be adopted by the Triad Board
of Directors in contemplation of the distribution.
Reservation of Shares. 260,000 shares of Triad common stock may be issued
pursuant to all awards of restricted shares or in respect of restricted share
units under the Triad Management Stock Purchase Plan. The shares of Triad
common stock to be issued will be made available from authorized but unissued
shares of Triad common stock or issued shares that have been reacquired by
Triad. If any shares of Triad common stock that are the subject of an award are
forfeited, the related shares will no longer be charged against such maximum
share limitation and may again be made subject to awards. In the event of
certain corporate reorganizations, recapitalizations, or other specified
corporate transactions affecting Triad or the Triad common stock, such
substitution or adjustment shall be made in the aggregate number of Triad
common stock that may be distributed as restricted shares or in respect of
restricted share units under the Triad Management Stock Purchase Plan, and the
number of restricted shares and/or restricted share units outstanding under the
Triad Management Stock Purchase Plan, as may be determined to be appropriate by
the Compensation Committee in its sole discretion.
Duration. The Triad Management Stock Purchase Plan has a term of ten years,
subject to earlier termination or amendment by the Triad Board of Directors.
Administration. The Triad Management Stock Purchase Plan will be administered
by the Compensation Committee of the Triad Board of Directors. The Compensation
Committee shall have authority to administer the plan and to exercise all the
powers and authorities either specifically granted to it under, or necessary or
advisable in the administration of, the Triad Management Stock Purchase Plan,
including, without limitation, to interpret the plan, to prescribe, amend and
rescind rules and regulations relating to the plan, to determine the terms and
provisions of agreements (which need not be identical) entered into under the
plan and to make all other determinations deemed necessary or advisable for the
administration of the plan.
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Eligibility. All Triad employees or groups of employees designated by the
Compensation Committee in its sole discretion are eligible to be granted
awards.
Restricted Share Awards. The Compensation Committee may make awards of
restricted shares. Under the Triad Management Stock Purchase Plan, a
participant may elect to reduce his base salary up to a maximum percentage
established by the Compensation Committee with respect to his employee
classification and, in lieu of salary, receive a number of restricted shares
equal to the amount of such salary reduction divided by a dollar amount equal
to 75% of the average market value (as defined in the plan) of Triad common
stock on the date on which such restricted share is granted. Restricted shares
will be granted on June 30 and December 31 of each calender year for which a
salary reduction election is in effect.
An award of restricted shares represents shares of Triad common stock that
are issued subject to such restrictions on transfer and incidents of ownership,
and such forfeiture conditions, as set forth in the plan and as the
Compensation Committee deems appropriate. Generally, the restricted period of
restricted shares granted under the Triad Management Stock Purchase Plan will
be three years from the date of grant. Subject to such transfer and forfeiture
restrictions, 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.
Conversion of Restricted Shares into Restricted Share Units. If during the
restricted period the Compensation Committee determines that Triad may lose its
Federal income tax deduction in connection with the future lapsing of the
restrictions on restricted shares because of the deductibility cap of Section
162(m) of the Code, the Compensation Committee, in its discretion, may convert
some or all of the restricted shares into an equal number of share units, as to
which payment will be postponed until such time as Triad will not lose its
Federal income tax deduction for such payment under Section 162(m). Until
payment of the restricted share units is made, the participant will be credited
with dividend equivalents on the restricted share units, which dividend
equivalents will be converted into additional restricted share units.
Termination of Employment During the Restricted Period. If during the
restricted period the participant's employment is terminated by Triad either
(i) for cause (as defined) or (ii) for any reason by the participant, the
participant will forfeit his or her rights in the restricted shares, which
shall automatically be considered to be cancelled, and shall have only an
unfunded right to receive from Triad's general assets a cash payment equal to
the lesser of (i) the fair market value of such restricted shares on the
participant's last day of employment or (ii) the aggregate base salary foregone
by the participant as a condition of receiving the restricted shares. If a
participant's employment is terminated by Triad without cause during the
restricted period, the participant will forfeit his rights in the restricted
shares, which shall automatically be considered to be cancelled, and shall have
only an unfunded right to receive from Triad's general assets a cash payment
equal to either (i) the fair market value of such restricted shares on the
participant's last day of employment or (ii) the aggregate base salary foregone
by the participant as a condition of receiving the restricted shares, with the
Compensation Committee to have the sole discretion as to which of such amounts
shall be payable. If the employment of a participant holding restricted share
units terminates during the restricted period relating to the restricted share
units, they shall be treated in a manner substantially equivalent to the
treatment of restricted shares set forth above.
Upon a termination of employment which results from a participant's death or
disability (as defined), all restrictions then outstanding with respect to
restricted shares held by the participant automatically will expire. Upon the
retirement of a participant, the Compensation Committee shall determine, in its
discretion, whether all restrictions then outstanding with respect to
restricted shares held by the participant shall expire or whether the
participant shall instead be treated as though the participant's employment had
been terminated by Triad without cause, as described above.
Change-In-Control. Upon the occurrence of a change-in-control of Triad (as
defined), the restricted period automatically will terminate as to all
restricted shares awarded under the plan.
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Triad Employee Stock Ownership Plan
Triad expects to establish for the benefit of its employees a leveraged
Employee Stock Ownership Plan (the "Triad ESOP") which, shortly after the
distribution, will purchase newly issued shares of Triad common stock in an
amount equal to 9.0% of the outstanding shares of Triad. The purchase price of
the shares will be financed by issuing a promissory note to Triad or by
borrowing from a third party lender (which loan will be guaranteed by Triad).
Initially, all such shares will be held in a suspense account under the Triad
ESOP. Triad will contribute annually to the Triad ESOP the funds required to
repay the ESOP loan. As the ESOP loan is repaid, shares will be released from
the suspense account and will be allocated to accounts established for
participants under the Triad ESOP. The loan will be repaid over a 10 year
period. Generally, each employee of Triad and its participating subsidiaries
will participate in the Triad ESOP as of the first January 1 after his or her
date of hire. Each participant in the Triad ESOP will be fully vested in his
accounts after completion of seven years of service with Triad (including any
pre-distribution service with Columbia/HCA and its affiliates).
Employment Contracts, Termination Of Employment Arrangements
and Change in Control Arrangements
Each of Messrs. Parsons, Marzocco, Holden and Fay will participate in an
enhanced severance plan through December 31, 1999. In the event that any of
Messrs. Parsons, Marzocco or Holden is terminated without cause during 1999, he
will receive continued payment of his then-current base salary and his target
bonus for twenty-four months after such termination. In the event that Mr. Fay
is terminated without cause during 1999, he will receive continued payment of
his then-current base salary and his target bonus for twelve months after such
termination. Severance policies for termination occurring subsequent to
December 31, 1999 have not yet been established.
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Triad Security Ownership by Certain Beneficial Owners and Management
Immediately prior to the distribution, Columbia/HCA will own beneficially and
of record approximately shares of Triad common stock, representing 100%
of the shares of capital stock of Triad expected to be issued and outstanding
immediately after the distribution. Columbia/HCA will have sole voting and sole
investment power with respect to the shares owned by it. After the completion
of the distribution none of the outstanding shares of Triad common stock will
be owned by Columbia/HCA.
The following table sets forth the projected beneficial ownership of Triad
common stock as of the distribution date of Columbia/HCA sponsored benefit
plans (which collectively are projected to own 5% or more of such class of
securities); certain persons Triad believes will become the beneficial owners
of 5% or more of such class of securities; each of the persons who will be a
Triad director as of the distribution date; each of the executive officers
named in the Summary Compensation Table; and all of the persons who will be
Triad directors and executive officers as of the distribution date as a group.
The ownership information presented below:
. is based on Columbia/HCA's knowledge of the beneficial ownership of
Columbia/HCA Stock as of , 1999;
. reflects the distribution ratio of shares of Triad common stock for
every shares of Columbia/HCA Stock outstanding on the record date;
. reflects the Employee Stock Ownership Plan (the Triad Hospitals, Inc.
Retirement Savings Plan), Triad expects to establish in accordance with
the Benefits and Employment Matters Agreement; and
. assumes no change in beneficial ownership of Columbia/HCA Stock between
, 1999 and the record date.
<TABLE>
<CAPTION>
Number of
Name of Beneficial Owner Shares(1)(2) Percent
- ------------------------ ------------ -------
<S> <C> <C>
The Columbia/HCA Healthcare Corporation Stock Bonus Plan
(3)..................................................... 3.5%
The Columbia/HCA Healthcare Corporation Salary Deferral
Plan (3)................................................ 3.3%
The San Leandro Retirement and Savings Plan (3).......... *
Triad Hospitals, Inc. Retirement Savings Plan............ 9.0%
FMR Corp., Edward C. Johnson 3d and Abigail P. Johnson
(4)..................................................... 6.9%
Wellington Management Company, LLP (5)................... 8.1%
James D. Shelton (6)..................................... *
Thomas G. Loeffler, Esq. ................................ *
Thomas F. Frist III...................................... *
Marvin Runyon............................................ *
Uwe W. Reinhardt, Ph.D................................... *
Allen A. Copping, D.D.S.................................. *
Michael J. Parsons (6)................................... *
Nicholas J. Marzocco (6)................................. *
Christopher A. Holden (6)................................ *
Donald P. Fay (6)........................................ *
All Directors and Executive Officers as a Group (13
persons) (6)............................................
</TABLE>
- --------
* Less than one percent.
(1) Unless otherwise indicated, each stockholder shown on the table has sole
voting and investment power with respect to the shares beneficially owned.
The number of shares shown does not include the interest of certain persons
in shares held by family members in their own right.
(2) Each named person or group is deemed to be the beneficial owner of
securities which may be acquired within 60 days through the exercise or
conversion of options, warrants and rights, if any, and such securities are
deemed to be outstanding for the purpose of computing the percentage
beneficially owned by such person or group. Such securities are not deemed
to be outstanding for the purpose of computing the percentage beneficially
owned by any other person or group. Accordingly, the indicated number of
shares includes shares issuable upon conversion of convertible securities
or upon exercise of options (including employee stock options) held by such
person or group.
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(3) The address of the Columbia/HCA Healthcare Corporation Stock Bonus Plan,
the Columbia/HCA Salary Deferral Plan and the San Leandro Retirement and
Savings Plan is One Park Plaza, Nashville, Tennessee 37203. Such shares are
beneficially owned by employees participating in such benefit plans and
voted at the direction of Columbia/HCA's Retirement Committee which is
composed of certain Columbia/HCA officers.
(4) The ownership given for FMR Corp., Edward C. Johnson 3d and Abigail P.
Johnson is based on information contained in the Schedule 13G dated
February 1, 1999, filed with the SEC by FMR Corp. in respect of its
beneficial ownership of Columbia/HCA Common Stock. The address of FMR Corp
is 82 Devonshire Street, Boston, Massachusetts 02109.
(5) The ownership given for Wellington Management Company, LLP is based on
information contained in the Schedule 13G dated December 31, 1998, filed
with the SEC by Wellington Management Company, LLP in respect of its
beneficial ownership of Columbia/HCA Common Stock. The address of
Wellington Management Company, LLP is 75 State Street, Boston,
Massachusetts 02109.
(6) Excludes shares to be purchased pursuant to initial grants under the Triad
Executive Stock Purchase Plan. See "Triad Management--Executive Stock
Purchase Plan."
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LifePoint Description of Capital Stock
Introduction
LifePoint presently expects to have the following capital stock authorization
and terms and anti-takeover provisions in place on the distribution date.
Authorized And Outstanding Capital Stock
LifePoint's authorized capital stock consists of shares of LifePoint
common stock, par value $.01 per share, and authorized shares of preferred
stock, par value $.01 per share.
After the completion of the distribution, there are expected to be
approximately shares of LifePoint common stock outstanding held of record
by approximately 18,700 persons, excluding shares of LifePoint common stock
issuable upon the exercise of LifePoint stock options granted pursuant to the
LifePoint Corporation 1999 Stock Option Plan in connection with the
distribution. See "The Distribution--Results of the Distribution," and
"LifePoint Management--LifePoint Compensation Arrangements--The LifePoint 1998
Long-Term Incentive Plan."
LifePoint Common Stock; Delaware Anti-Takeover Provisions
The holders of LifePoint common stock are entitled to one vote for each share
on all matters voted on by the stockholders, and are not entitled to cumulate
votes for the election of directors. Subject to any preferences that may be
applicable to any outstanding LifePoint preferred stock, the holders of
LifePoint common stock are entitled to receive ratably such dividends, if any,
as may be declared from time to time by the LifePoint Board of Directors out of
funds legally available therefor. In the event of liquidation, dissolution or
winding up of LifePoint, the holders of shares of LifePoint common stock are
entitled to share ratably in all assets remaining after payment of liabilities,
subject to prior distribution rights of LifePoint preferred stock, if any, then
outstanding. Holders of LifePoint common stock have no preemptive, conversion
or other subscription rights, and there are no redemption or sinking fund
provisions applicable to the LifePoint common stock.
LifePoint is subject to the provisions of Section 203 of the Delaware General
Corporation Law (the "Delaware Law"). Subject to certain exceptions, Section
203 of the Delaware Law prohibits a publicly-held Delaware corporation from
engaging in a "business combination" with an "interested stockholder" for a
period of three years after the time of the transaction in which the person
became an interested stockholder. Subject to certain exceptions, an "interested
stockholder" is a person who, together with affiliates and associates, owns, or
within three years did own, 15% or more of the corporation's voting stock. A
"business combination" includes a merger, consolidation, sale or other
disposition of assets having an aggregate value in excess of 10% of either the
aggregate market value of the consolidated assets of the corporation or the
aggregate market value of all the outstanding stock of the corporation, and
certain transactions that would increase the interested stockholder's
proportionate share ownership in the corporation or which provide the
interested stockholder with a financial benefit. These restrictions do not
apply where:
. the business combination or the transaction in which the stockholder
becomes interested is approved by the corporation's board of directors
prior to the time the interested stockholder acquired its shares;
. the interested stockholder acquired at least 85% of the outstanding
voting stock of the corporation in the transaction in which the
stockholder became an interested stockholder excluding, for purposes of
determining the number of shares outstanding, shares owned by persons
who are directors as well as officers and by employee stock plans in
which participants do not have the right to determine confidentially
whether shares held subject to the plan will be tendered in a tender or
exchange offer; or
. the business combination is approved by the board of directors and the
affirmative vote of two-thirds of the outstanding voting stock not owned
by the interested stockholder at an annual or special meeting.
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The business combinations provisions of Section 203 of the Delaware Law may
have the effect of deterring merger proposals, tender offers or other attempts
to effect changes in control of LifePoint that are not negotiated with and
approved by the LifePoint Board of Directors.
LifePoint Preferred Stock
The LifePoint Certificate of Incorporation (the "LifePoint Certificate")
provides that LifePoint may issue up to shares of LifePoint preferred
stock. The LifePoint Board of Directors has the authority to issue LifePoint
preferred stock in one or more series and to fix for each such series the
voting powers, full, limited or none, and the designations, preferences and
relative, participating, optional or other special rights and qualifications,
limitations or restrictions thereon, and the number of shares constituting any
series and the designations of such series, without any further vote or action
by the stockholders of LifePoint. Because the terms of the LifePoint preferred
stock may be fixed by the LifePoint Board of Directors without stockholder
action, the LifePoint preferred stock could be issued quickly with terms
calculated to defeat a proposed takeover of LifePoint or to make the removal of
management of LifePoint more difficult. Under certain circumstances, this could
have the effect of decreasing the market price of the LifePoint common stock.
In connection with the stockholder rights plan adopted by LifePoint, the
LifePoint Certificate provides for the issuance of a series of shares of
LifePoint preferred stock designated as the Series A Junior Participating
Preferred Stock, par value $.01 per share (the "LifePoint Series A Preferred
Stock"). For a description of the terms of the LifePoint Series A Preferred
Stock, see "--LifePoint Preferred Stock Purchase Rights."
LifePoint Preferred Stock Purchase Rights
LifePoint has adopted a stockholders' rights plan, pursuant to which each
outstanding share of LifePoint common stock is accompanied by one preferred
stock purchase right (a "LifePoint Right," and collectively, the "LifePoint
Rights") (in all cases, unless and until the LifePoint Rights expire or are
redeemed or an LifePoint Rights Distribution Date (as defined below) occurs).
Each LifePoint Right entitles the registered holder to purchase from LifePoint
one one-thousandth of a share of LifePoint Series A Preferred Stock at a price
of $ per one one-thousandth of a share, subject to adjustment. The
description and terms of the LifePoint Rights are set forth in a Rights
Agreement, dated as of 1999 (the "LifePoint Rights Agreement") between
LifePoint and National City Bank as Rights Agent (the "LifePoint Rights
Agent").
Each share of LifePoint Series A Preferred Stock will be entitled, when, as
and if declared, to a preferential quarterly dividend payment in an amount
equal to the greater of $10 or 1,000 times the aggregate of all dividends
declared per share of LifePoint common stock. In the event of liquidation,
dissolution or winding up of LifePoint, the holders of LifePoint Series A
Preferred Stock will be entitled to a minimum preferential liquidation payment
equal to $1,000 per share, plus an amount equal to accrued and unpaid dividends
and distributions thereon, whether or not declared, to the date of such
payment, but will be entitled to an aggregate payment of 1,000 times the
payment made per share of LifePoint common stock. Each share of LifePoint
Series A Preferred Stock will entitle the holder thereof to 1,000 votes on all
matters submitted to a vote of the stockholders of LifePoint. In the event of
any consolidation, merger, combination or other transaction in which shares of
LifePoint common stock are exchanged, each share of LifePoint Series A
Preferred Stock will be entitled to receive 1,000 times the aggregate amount of
stock, securities, cash and/or other property (payable in kind) as the case may
be, into which or for which each share of LifePoint common stock is changed or
exchanged. The rights of LifePoint Series A Preferred Stock as to dividends,
liquidation and voting, and in the event of mergers and consolidations, are
protected by customary anti-dilution provisions.
Initially, the LifePoint Rights will be attached to all LifePoint common
stock certificates and no separate LifePoint Rights certificates will be
issued. Separate certificates evidencing the LifePoint Rights ("LifePoint Right
Certificates") will be mailed to holders of record of the LifePoint common
stock as of the close of business on the earlier to occur of (1) the tenth day
after a public announcement that a person or group of
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affiliated or associated persons (an "Acquiring Person") has acquired
beneficial ownership of 15% or more of the outstanding LifePoint common stock,
or (2) such date as may be determined by action of the Board of Directors of
LifePoint following the commencement of, or announcement of an intention to
make, a tender offer or exchange offer the consummation of which would result
in the beneficial ownership by a person or group of 15% or more of the
outstanding LifePoint common stock (the earlier of such dates being the
"LifePoint Rights Distribution Date"). Prior to the time that a person would
otherwise become an Acquiring Person, however, the Board of Directors may
determine that such person shall not be an Acquiring Person for purposes of the
LifePoint Rights Agreement.
The LifePoint Rights Agreement provides that, until the LifePoint Rights
Distribution Date (or earlier redemption or expiration of the LifePoint
Rights):
. the LifePoint Rights will be transferred with and only with the
certificates for LifePoint common stock,
. new LifePoint common stock certificates issued after the record date
upon transfer or new issuance of LifePoint common stock will contain a
notation incorporating the LifePoint Rights Agreement by reference, and
. the surrender for transfer of any certificates for LifePoint common
stock outstanding as of the record date also will constitute the
transfer of the LifePoint Rights associated with the LifePoint common
stock represented by such certificate.
The LifePoint Rights are not exercisable until the LifePoint Rights
Distribution Date. The LifePoint Rights will expire on , 2009, unless
the expiration date is extended or unless the LifePoint Rights are earlier
redeemed or exchanged by LifePoint, in each case, as described below.
If a person or group becomes an Acquiring Person, each holder of an LifePoint
Right will thereafter have the right to receive, upon exercise, LifePoint
common stock (or, in certain circumstances, LifePoint Series A Preferred Stock
or other similar securities of LifePoint) having a value equal to two times the
exercise price of the LifePoint Right. Notwithstanding any of the foregoing,
following the existence of an Acquiring Person, all LifePoint Rights that are,
or (under certain circumstances specified in the LifePoint Rights Agreement)
were, beneficially owned by any Acquiring Person will be null and void.
In the event that LifePoint is acquired in a merger or other business
combination transaction or 50% or more of its consolidated assets or earning
power are sold after a person or group has become an Acquiring Person, proper
provision will be made so that each holder of a LifePoint Right will thereafter
have the right to receive, upon the exercise thereof at the then current
exercise price of the LifePoint Right, that number of shares of common stock of
the acquiring company which at the time of such transaction will have a market
value of two times the exercise price of the LifePoint Right.
At any time after any person or group becomes an Acquiring Person and prior
to the acquisition by such person or group of 50% or more of the outstanding
shares of LifePoint common stock, the Board of Directors may exchange the
LifePoint Rights (other than LifePoint Rights owned by such person or group
which will have become void), in whole or in part, at an exchange ratio of one
share of LifePoint common stock or one one-thousandth of a share of LifePoint
Series A Preferred Stock (or of a share of a class or series of LifePoint's
preferred stock having equivalent rights, preferences and privileges), as the
case may be, per LifePoint Right (subject to adjustment).
At any time prior to the existence of an Acquiring Person, the Board of
Directors of LifePoint may redeem the LifePoint Rights, in whole but not in
part, at a redemption price of $.01 per LifePoint Right. The redemption of the
LifePoint Rights may be made effective at such time and on such basis with such
conditions as the Board of Directors, in its sole discretion, may establish.
Immediately upon any redemption of the LifePoint Rights, the right to exercise
the LifePoint Rights will terminate and the only right of the holders of
LifePoint Rights will be to receive the redemption price.
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The terms of the LifePoint Rights may be amended by the Board of Directors of
LifePoint without the consent of the holders of the LifePoint Rights, except
that from and after the existence of an Acquiring Person no such amendment may
adversely affect the interests of the holders of the LifePoint Rights (other
than the Acquiring Person).
The number of outstanding LifePoint Rights and the number of one one-
thousandths of a share of LifePoint Series A Preferred Stock issuable upon
exercise of each LifePoint Right are subject to adjustment under certain
circumstances.
Until a LifePoint Right is exercised, the holder thereof, as such, will have
no rights as a stockholder of LifePoint, including, without limitation, the
right to vote or to receive dividends.
The LifePoint Rights have certain anti-takeover effects. The LifePoint Rights
will cause substantial dilution to a person or group that attempts to acquire
LifePoint on terms not determined by the Board of Directors to be in the best
interests of all stockholders. The LifePoint Rights should not interfere with
any merger or other business combination approved by the Board of Directors
since (subject to the limitations described above) the LifePoint Rights may be
redeemed by LifePoint at $.01 per LifePoint Right prior to the time a person or
group has become an Acquiring Person.
Certain Anti-Takeover Provisions--LifePoint Certificate and By-Laws
Certain provisions of the LifePoint Certificate and the LifePoint By-Laws may
have the effect, either alone or in combination with each other, of making more
difficult or discouraging a tender offer, takeover attempt or change in control
that is opposed by LifePoint's Board of Directors but that a stockholder might
consider to be in its best interest. LifePoint believes that such provisions
are necessary to enable LifePoint to develop its business in a manner that will
foster its long-term growth without disruption caused by the threat of a
takeover not deemed by the LifePoint Board of Directors to be in the best
interests of LifePoint and its stockholders. These provisions are summarized in
the following paragraphs.
Classified Board of Directors. The Delaware Law provides that a corporation's
board of directors may be divided into various classes with staggered terms of
office. The LifePoint Certificate provides that the LifePoint Board of
Directors is divided into three classes of directors, with the classes to be as
nearly equal in number as reasonably possible. The Board consists of the
persons referred to in "LifePoint Management-- Directors." The LifePoint
Certificate provides that of the initial directors of LifePoint, one-third will
continue to serve until the 2000 Annual Meeting of Stockholders, one-third will
continue to serve until the 2001 Annual Meeting of Stockholders, and one-third
will continue to serve until the 2002 Annual Meeting of Stockholders. Of the
initial directors, Messrs. and will serve until the 2000 Annual Meeting
of Stockholders; Messrs. , and will serve until the 2001 Annual Meeting
of Stockholders; and Messrs. , and will serve until the 2002 Annual
Meeting of Stockholders. Starting with the 2000 Annual Meeting of Stockholders,
one class of directors will be elected each year for a three-year term.
The classification of directors will have the effect of making it more
difficult for stockholders to change the composition of the LifePoint Board of
Directors. At least two annual meetings of stockholders, instead of one,
generally will be required to effect a change in a majority of the Board of
Directors. Such a delay may help ensure that LifePoint's directors, if
confronted by a holder attempting to force a proxy contest, a tender or
exchange offer, or an extraordinary corporate transaction, would have
sufficient time to review the proposal as well as any available alternatives to
the proposal and to act in what they believe to be the best interest of the
stockholders. The classification provisions will apply to every election of
directors, however, regardless of whether a change in the composition of the
Board would be beneficial to LifePoint and its stockholders and whether or not
a majority of LifePoint's stockholders believe that such a change would be
desirable.
The classification provisions also could have the effect of discouraging a
third party from initiating a proxy contest, making a tender offer or otherwise
attempting to obtain control of LifePoint, even though such an attempt might be
beneficial to LifePoint and its stockholders. The classification of the Board
could thus
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increase the likelihood that incumbent directors will retain their positions.
In addition, because the classification provisions may discourage accumulations
of large blocks of the LifePoint common stock by purchasers whose objective is
to take control of LifePoint and remove a majority of the Board, the
classification of the Board could tend to reduce the likelihood of fluctuations
in the market price of the LifePoint common stock that might result from
accumulations of large blocks for such a purpose. Accordingly, stockholders
could be deprived of certain opportunities to sell their shares of LifePoint
common stock at a higher market price than might otherwise be the case.
Number of Directors; Removal of Directors; Vacancies. The LifePoint
Certificate provides that the number of directors will be fixed from time to
time by action of not less than a majority of the LifePoint Board of Directors
then in office, but in no event shall the number of directors be less than
three nor more than 15. As of the distribution date, the number of directors of
LifePoint will be five. The LifePoint Certificate provides that any vacancies
(including newly-created directorships) will be filled only by the affirmative
vote of a majority of the remaining directors, whether or not they constitute a
quorum of directors. Directors appointed to fill vacancies created by the
resignation or termination of a director will serve the remainder of the term
of the resigning or terminated director. Accordingly, the LifePoint Board of
Directors could prevent any stockholder from enlarging the LifePoint Board of
Directors and filling the new directorships with such stockholder's own
nominees.
Under the Delaware Law, unless provided in the certificate of incorporation,
directors serving on a classified board may be removed by the stockholders only
for cause. The LifePoint Certificate provides that directors may be removed
only for cause and only upon the affirmative vote of holders of at least 80% of
the voting power of all the then outstanding shares of stock entitled to vote
generally in the election of directors, voting as a single class (without a
separate vote of the holders of the LifePoint preferred stock unless required
pursuant to the terms of any series of LifePoint preferred stock).
Business Conducted at Meetings; Director Nominations. The By-Laws provide
that nominations of persons for election to the LifePoint Board and the
proposal of business to be transacted by the stockholders may be made at an
annual meeting of stockholders (a) pursuant to LifePoint's notice with respect
to such meeting, (b) by or at the direction of the LifePoint Board or (c) by
any stockholder of record of LifePoint who was a stockholder of record at the
time of the giving of the notice required by the By-Laws, described below, who
is entitled to vote at the meeting and who has complied with the notice
procedures set forth in the By-Laws. For nominations or other business to be
properly brought before an annual meeting by a stockholder, the stockholder
must have given timely notice thereof in writing to the Secretary of LifePoint,
such business must be a proper matter for stockholder action under the Delaware
Law and, if the stockholder, or the beneficial owner on whose behalf any such
proposal or nomination is made, solicits or participates in the solicitation of
proxies in support of such proposal or nomination, the stockholder must have
timely indicated such stockholder's, or such beneficial owner's, intention to
do so. To be timely, a stockholder's notice must be delivered to the Secretary
at the principal executive offices of LifePoint not less than 90 days prior to
the first anniversary of the preceding year's annual meeting of stockholders;
provided, however, that if the date of the annual meeting is advanced more than
30 days prior to or delayed more than 60 days after such anniversary date,
notice by the stockholder to be timely must be delivered not later than the
close of business on the later of the 90th day prior to such annual meeting or
the 10th day following the day on which public announcement of the date of such
meeting is first made. The notice must include:
. certain information as to each person whom the stockholder proposes to
nominate for election or reelection as a director and such person's
written consent to serve as a director if elected;
. as to any other business that the stockholder proposes to bring before
the meeting, a brief description of such business, the reasons for
conducting such business at the meeting and any material interest in
such business of such stockholder and the beneficial owner, if any, on
whose behalf the proposal is made; and
. certain information as to the stockholder giving the notice and the
beneficial owner, if any, on whose behalf the nomination or proposal is
made, including whether either such stockholder or beneficial owner
intends to solicit or participate in the solicitation of proxies in
favor of such proposal or nominee or nominees.
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In the event that the number of directors to be elected to the LifePoint
Board is increased and there is not a public announcement naming all of the
nominees for director or specifying the size of the increased Board of
Directors made by LifePoint at least 100 days prior to the first anniversary
of the preceding year's annual meeting, a stockholder's notice will be timely,
but only with respect to nominees for any new positions created by such
increase, if it is delivered to the Secretary at the principal executive
offices of LifePoint not later than the close of business on the 10th day
following the day on which such public announcement is first made by
LifePoint.
If the officer of LifePoint or other person presiding at a meeting
determines that a person was not nominated, or other business was not brought
before the meeting, in accordance with these advance notice provisions, such
person will not be eligible for election as a director or such business will
not be conducted at such meeting, as the case may be.
By requiring advance notice of nominations by stockholders, the LifePoint
Board of Directors has an appropriate opportunity to consider the
qualifications of the proposed nominees and, to the extent deemed necessary or
desirable by the LifePoint Board of Directors, to inform stockholders about
such qualifications. By requiring advance notice of other proposed business,
annual meetings of stockholders may be conducted in a more orderly manner and,
to the extent deemed necessary or desirable by the LifePoint Board of
Directors, the LifePoint Board of Directors has an appropriate opportunity to
inform stockholders, prior to such meetings, of any business proposed to be
conducted at such meetings, together with any recommendations as to the
LifePoint Board of Directors' position regarding action to be taken with
respect to such business, so that stockholders can better decide whether to
attend such a meeting or to grant a proxy regarding the disposition of any
such business.
Although the LifePoint By-Laws do not give the LifePoint Board of Directors
any power to approve or disapprove stockholder nominations of the election of
directors or proposals for action, the foregoing provisions may have the
effect of precluding a contest for the election of directors or the
consideration of stockholder proposals if the proper procedures are not
followed, and of discouraging or deterring a third party from conducting a
solicitation of proxies to elect its own slate of directors or to approve its
own proposal, without regard to whether consideration of such nominees or
proposals might be harmful or beneficial to LifePoint and its stockholders.
No Stockholder Action by Written Consent; Stockholder Action at
Meetings. The LifePoint Certificate provides that stockholder action can be
taken only at an annual or special meeting of stockholders and prohibits
stockholder action by written consent in lieu of a meeting. The LifePoint
Certificate also provides that special meetings of stockholders can be called
only by the Chairman of the Board or the Chief Executive Officer of LifePoint,
in either of their discretion or at the written request of a majority of the
LifePoint Board of Directors. Stockholders are not permitted to call a special
meeting or to require that the LifePoint Board of Directors call a special
meeting of stockholders. The business permitted to be conducted at any special
meeting of stockholders is limited to the business brought before the meeting
pursuant to the notice of meeting given by LifePoint.
The provisions of the LifePoint Certificate prohibiting stockholder action
by written consent may have the effect of delaying consideration of a
stockholder proposal until the next annual meeting of stockholders. These
provisions would also prevent the holders of a majority of the outstanding
shares of voting stock of LifePoint from unilaterally using the written
consent procedure to take stockholder action. Moreover, a stockholder could
not force stockholder consideration of a proposal opposed by the Chairman of
the Board, the Chief Executive Officer and a majority of the LifePoint Board
of Directors by calling a special meeting of stockholders prior to the time
the Chairman of the Board, the Chief Executive Officer or a majority of the
LifePoint Board of Directors believes such consideration to be appropriate.
Fair Price Provision. The LifePoint Certificate contains a "fair price"
provision, requiring that, in addition to any other vote required by the
LifePoint Certificate or the Delaware Law, certain "business combination"
transactions with a "related person" will be subject to the affirmative vote
of the holders of not
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less than 85% of the voting power of all of the outstanding shares of voting
stock of LifePoint held by stockholders other than the related person. The 85%
voting requirement will not be applicable if either:
1. The business combination is approved by the Board of Directors of
LifePoint by the affirmative vote of at least 66 2/3% of the "continuing
directors," or
2. All of the following conditions are satisfied:
. the aggregate amount of cash and the fair market value of the
property, securities or other consideration to be received per share
of capital stock of LifePoint in the business combination by the
holders of capital stock of LifePoint, other than the related person
involved in the business combination, will not be less than the
highest of (1) the highest per share price (including brokerage
commissions, soliciting dealers' fees, and dealer-manager
compensation, and with appropriate adjustments for
recapitalizations, stock splits, stock dividends and like
transactions and distributions) paid by such related person in
acquiring any of its holdings of such class or series of capital
stock, (2) the highest per share "market value" of such class or
series of capital stock within the twelve-month period immediately
preceding the date the proposal for such business combination was
first publicly announced, or (3) the book value per share of such
class or series of capital stock, determined in accordance with
generally accepted accounting principles, as of the last day of the
month immediately preceding the date the proposal for such business
combination was first publicly announced;
. the consideration to be received in such business combination by
holders of capital stock other than the related person involved
will, except to the extent that a stockholder agrees otherwise as to
all or part of the shares which he or she owns, be in the same form
and of the same kind as the consideration paid by the related person
in acquiring capital stock already owned by it; provided, however,
that if the related person has paid for capital stock with varying
forms of consideration, the form of consideration for shares of
capital stock acquired in the business combination by the related
person must either be cash or the form used to acquire the largest
number of shares of capital stock previously acquired by it; and
. a proxy statement responsive to the requirements of the Exchange Act
is mailed to the stockholders of LifePoint for the purpose of
soliciting stockholder approval of such business combination and
contains (1) any recommendations as to the advisability (or
inadvisability) of the business combination which the continuing
directors may choose to state and (2) the opinion of a reputable
investment banking firm selected by the continuing directors as to
the fairness of the terms of such business combination, from a
financial point of view, to the public stockholders (other than the
related person) of LifePoint.
For the purpose of the fair price provision included in the LifePoint
Certificate, certain terms are defined as follows.
"Business Combination" means:
. any merger or consolidation of LifePoint or a subsidiary with a related
person;
. any sale, lease, exchange, mortgage, pledge, transfer or other
disposition other than in the ordinary course of business to or with a
related person of any assets of LifePoint or a subsidiary having an
aggregate fair market value of $25,000,000 or more;
. the issuance or transfer by LifePoint of any shares of voting stock of
LifePoint or securities convertible into or exercisable for such shares
(other than by way of pro rata distribution to all stockholders) to a
related person;
. any recapitalization, merger or consolidation that would have the effect
of increasing the voting power of a related person;
. the adoption of any plan or proposal for the liquidation or dissolution
of LifePoint or a subsidiary proposed, directly or indirectly, by or on
behalf of a related person;
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. any merger or consolidation of LifePoint with another person proposed,
directly or indirectly, by or on behalf of a related person, unless the
entity surviving or resulting from such merger or consolidation has a
provision in its certificate or articles of incorporation, charter or
similar governing instrument which is substantially identical to the
fair price provisions of the LifePoint Certificate; or
. any agreement, contract or other arrangement or understanding providing,
directly or indirectly, for any of the foregoing transactions.
"Related Person" means any individual, partnership, corporation, trust or
other person which together with its "affiliates" and "associates," as defined
in Rule 12b-2 under the Exchange Act as in effect on , 1999, and
together with any other individual, partnership, corporation, trust or other
person with which it or they have any agreement, contract or other arrangement
or understanding with respect to acquiring, holding, voting or disposing of
shares of voting stock of LifePoint, "beneficially owns" (within the meaning of
Rule 13d-3 under the Exchange Act on said date) an aggregate of 10% or more of
the voting power of all of the outstanding shares of voting stock of LifePoint.
A related person, its affiliates and associates and all such other individuals,
partnerships, corporations and other persons with whom it or they have any such
agreement, contract or other arrangement or understanding, are deemed a single
related person for purposes of this provision; provided, however, that the
members of the LifePoint Board of Directors shall not be deemed to be
associates or otherwise to constitute a Related Person solely by reason of
their board membership. A person who is a related person (1) as of the time any
definitive agreement relating to a business combination is entered into, (2) as
of the record date for the determination of stockholders entitled to notice of
and to vote on a business combination or (3) immediately prior to the
consummation of a business combination, shall be deemed a related person for
purposes of this provision.
"Continuing Director" means any member of the LifePoint Board of Directors
who is not an affiliate or associate of the related person and was a member of
the LifePoint Board of Directors prior to the time that such person became a
related person, and any successor of a continuing director who is unaffiliated
with such related person and is recommended to succeed a continuing director by
a majority of the continuing directors.
"Market Value" means the average of the high-bid and low-asked quoted sales
price on the date in question (or, if there is no reported sale on such date,
on the last preceding date on which any reported sale occurred) of a share on
the NYSE Composite Tape, or, if the shares are not listed or admitted to
trading on such exchange, on the principal United States securities exchange
registered under the Exchange Act on which the shares are listed or admitted to
trading, or, if the shares are not listed or admitted to trading on any such
exchange, the mean between the closing high-bid and the low-asked quotations
with respect to a share on such date as quoted on Nasdaq, or any similar system
then in use, or, if no such quotations are available, the fair market value on
such date of a share as at least 66 2/3% of the continuing directors shall
determine.
The fair price provision included in the LifePoint Certificate is intended to
ensure that all stockholders of LifePoint receive equal treatment in the event
of a tender or exchange offer and to protect stockholders of LifePoint against
coercive or two-tiered takeover bids. Notwithstanding the foregoing, the
provision could also have the effect of discouraging a third party from making
a tender or exchange offer for LifePoint, even though such an offer might be
beneficial to LifePoint and its stockholders.
Amendment of the LifePoint Certificate and By-laws. The LifePoint Certificate
contains provisions requiring the affirmative vote of the holders of a least
80% of the voting power of all of the outstanding shares of voting stock of
LifePoint to amend certain provisions of the LifePoint Certificate (including
the provisions discussed above relating to directors, action by written
consent, special stockholder meetings and advance notice of stockholder
nominations and stockholder proposals) or to amend any provision of the
LifePoint By-laws. An amendment of the fair price provision included in the
LifePoint Certificate requires the approval of 66 2/3% of the directors of
LifePoint then in office and the affirmative vote of 85% of the voting power of
all of the outstanding shares of voting stock of LifePoint held by stockholders
other than any related person, unless the amendment is approved by 66 2/3% of
the continuing directors. These provisions make it more difficult for
stockholders to make changes in the LifePoint Certificate and the LifePoint By-
laws, including changes designed to facilitate the exercise of control over
LifePoint.
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Other Constituencies. In addition to any other considerations which the
LifePoint Board of Directors may lawfully take into account, in determining
whether to take or to refrain from taking corporate action on any matter,
including proposing any matter to the stockholders of LifePoint, the Board may
consider the effects, both short-term and long-term, of such action on the
interests of the employees, associates, associated physicians, distributors,
patients or other customers, suppliers or creditors of LifePoint, and the
communities in which LifePoint owns or leases property or conducts business.
Limited Liability and Indemnification Provisions
The LifePoint Certificate eliminates to the fullest extent now or hereafter
permitted by the Delaware Law, liability of a director to LifePoint or its
stockholders for monetary damages for any action taken, or failure to take any
action, as a director, except for liability:
. for any breach of the director's duty of loyalty to LifePoint or its
stockholders;
. for acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law;
. under Section 174 of the Delaware Law, relating to prohibited dividends,
distributions and repurchases or redemptions of stock; or
. for any transaction for which the director derives an improper personal
benefit.
This provision is intended to afford directors additional protection from,
and limit their potential liability for, suits alleging a breach of duty by a
director. LifePoint believes this provision will assist it in maintaining and
securing the services of directors who are not employees of LifePoint. As a
result of the inclusion of this provision, stockholders may be unable to
recover monetary damages from directors for actions taken by them that
constitute negligence or gross negligence or that are in violation of their
fiduciary duties, although it may be possible to obtain injunctive or other
equitable relief with respect to such actions, such as an injunction or
rescission based on a director's breach of the duty of care; as a practical
matter, equitable remedies may not be available (e.g., after a transaction has
already been effected). If equitable remedies are found not to be available to
stockholders for any particular case, stockholders may not have any effective
remedy against the challenged conduct.
Section 145 of the Delaware Law permits indemnification of directors,
officers, agents and controlling persons of a corporation under certain
conditions and subject to certain limitations. Section 145 empowers a
corporation to indemnify any person who was or is a party or is threatened to
be made a party to any threatened, pending or completed action, suit or
proceeding, whether civil, criminal, administrative or investigative, by reason
of the fact that such person is or was a director, officer or agent of the
corporation or another enterprise if serving at the request of the corporation.
Depending on the character of the proceeding, a corporation may indemnify
against expenses (including attorneys' fees), judgments, fines and amounts paid
in settlement actually and reasonably incurred in connection with such action,
suit or proceeding if the person indemnified acted in good faith and in a
manner such person reasonably believed to be in or not opposed to, the best
interests of the corporation, and, with respect to any criminal action or
proceeding, had no reasonable cause to believe such person's conduct was
unlawful. In the case of an action by or in the right of LifePoint, no
indemnification may be made with respect to any claim, issue or matter as to
which such person shall have been adjudged to be liable to the corporation
unless and only to the extent that the Delaware Court of Chancery or the court
in which such action or suit was brought shall determine that despite the
adjudication of liability such person is fairly and reasonably entitled to
indemnity for such expenses which the court shall deem proper. Section 145
further provides that to the extent a director or officer of LifePoint has been
successful in the defense of any action, suit or proceeding referred to above
or in the defense of any claim, issue or matter therein, such person shall be
indemnified against expenses (including attorneys' fees) actually and
reasonably incurred by such person in connection therewith.
The LifePoint Certificate contains provisions for indemnification of
directors, officers, employees and agents to the fullest extent permitted by
Section 145 and Delaware law which, in general, presently requires
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that the individual act in good faith and in a manner he or she reasonably
believed to be in or not opposed to LifePoint's best interests and, in the case
of any criminal proceedings, that the individual has no reason to believe his
or her conduct was unlawful. The LifePoint Certificate also permits LifePoint
to purchase insurance and LifePoint has purchased and maintains insurance on
behalf of LifePoint directors, officers, employees and agents against any
liability asserted against such person and incurred by such person in any such
capacity, or arising out of such person's status as such, whether or not
LifePoint would have the power to indemnify such person against such liability
under the foregoing provisions of the LifePoint Certificate.
Triad Description of Capital Stock
Introduction
Triad presently expects to have the following capital stock authorization and
terms and anti-takeover provisions in place on the distribution date.
Authorized And Outstanding Capital Stock
Triad's authorized capital stock consists of authorized shares of Triad
common stock, par value $.01 per share, and authorized shares of preferred
stock, par value $.01 per share.
After the completion of the distribution, there are expected to be
approximately shares of Triad common stock outstanding held of record by
approximately 18,700 persons, excluding shares of Triad common stock issuable
upon the exercise of Triad stock options granted pursuant to the Triad
Corporation 1999 Stock Option Plan in connection with the distribution. See
"The Distribution--Results of the Distribution" and "Triad Management--Triad
Compensation Arrangements--The Triad 1998 Long-Term Incentive Plan."
Triad Common Stock; Delaware Anti-Takeover Provisions
The holders of Triad common stock are entitled to one vote for each share on
all matters voted on by the stockholders, and are not entitled to cumulate
votes for the election of directors. Subject to any preferences that may be
applicable to any outstanding Triad preferred stock, the holders of Triad
common stock are entitled to receive ratably such dividends, if any, as may be
declared from time to time by the Triad Board of Directors out of funds legally
available therefor. In the event of liquidation, dissolution or winding up of
Triad, the holders of shares of Triad common stock are entitled to share
ratably in all assets remaining after payment of liabilities, subject to prior
distribution rights of Triad preferred stock, if any, then outstanding. Holders
of Triad common stock have no preemptive, conversion or other subscription
rights, and there are no redemption or sinking fund provisions applicable to
the Triad common stock.
Triad is subject to the provisions of Section 203 of the Delaware Law.
Subject to certain exceptions, Section 203 of the Delaware Law prohibits a
publicly-held Delaware corporation from engaging in a "business combination"
with an "interested stockholder" for a period of three years after the time of
the transaction in which the person became an interested stockholder. Subject
to certain exceptions, an "interested stockholder" is a person who, together
with affiliates and associates, owns, or within three years did own, 15% or
more of the corporation's voting stock. A "business combination" includes a
merger, consolidation, sale or other disposition of assets having an aggregate
value in excess of 10% of either the aggregate market value of the consolidated
assets of the corporation or the aggregate market value of all the outstanding
stock of the corporation, and certain transactions that would increase the
interested stockholder's proportionate share ownership in the corporation or
which provide the interested stockholder with a financial benefit. These
restrictions do not apply where:
. the business combination or the transaction in which the stockholder becomes
interested is approved by the corporation's board of directors prior to the
time the interested stockholder acquired its shares;
. the interested stockholder acquired at least 85% of the outstanding voting
stock of the corporation in the transaction in which the stockholder became
an interested stockholder excluding, for purposes of
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determining the number of shares outstanding, shares owned by persons who
are directors as well as officers and by employee stock plans in which
participants do not have the right to determine confidentially whether
shares held subject to the plan will be tendered in a tender or exchange
offer; or
. the business combination is approved by the board of directors and the
affirmative vote of two-thirds of the outstanding voting stock not owned by
the interested stockholder at an annual or special meeting.
The business combinations provisions of Section 203 of the Delaware Law may
have the effect of deterring merger proposals, tender offers or other attempts
to effect changes in control of Triad that are not negotiated with and approved
by the Triad Board of Directors.
Triad Preferred Stock
The Triad Certificate of Incorporation (the "Triad Certificate") provides
that Triad may issue up to shares of Triad preferred stock. The Triad Board
of Directors has the authority to issue Triad preferred stock in one or more
series and to fix for each such series the voting powers, full, limited or
none, and the designations, preferences and relative, participating, optional
or other special rights and qualifications, limitations or restrictions
thereon, and the number of shares constituting any series and the designations
of such series, without any further vote or action by the stockholders of
Triad. Because the terms of the Triad preferred stock may be fixed by the Triad
Board of Directors without stockholder action, the Triad preferred stock could
be issued quickly with terms calculated to defeat a proposed takeover of Triad
or to make the removal of management of Triad more difficult. Under certain
circumstances, this could have the effect of decreasing the market price of the
Triad common stock.
In connection with the stockholder rights plan adopted by Triad, the Triad
Certificate provides for the issuance of a series of shares of Triad
preferred stock designated as the Series A Junior Participating Preferred
Stock, par value $.01 per share (the "Triad Series A Preferred Stock"). For a
description of the terms of the Triad Series A Preferred Stock, see "--Triad
Preferred Stock Purchase Rights."
Triad Preferred Stock Purchase Rights
Triad has adopted a stockholders' rights plan, pursuant to which each
outstanding share of Triad common stock is accompanied by one preferred stock
purchase right (a "Triad Right," and collectively, the "Triad Rights") (in all
cases, unless and until the Triad Rights expire or are redeemed or a Triad
Rights Distribution Date (as defined below) occurs). Each Triad Right entitles
the registered holder to purchase from Triad one one-thousandth of a share of
Triad Series A Preferred Stock at a price of $ per one one-thousandth of a
share, subject to adjustment. The description and terms of the Triad Rights are
set forth in a Rights Agreement, dated as of 1999 (the "Triad Rights
Agreement") between Triad and National City Bank as Rights Agent (the "Triad
Rights Agent").
Each share of Triad Series A Preferred Stock will be entitled, when, as and
if declared, to a preferential quarterly dividend payment in an amount equal to
the greater of $10 or 1,000 times the aggregate of all dividends declared per
share of Triad common stock. In the event of liquidation, dissolution or
winding up of Triad, the holders of Triad Series A Preferred Stock will be
entitled to a minimum preferential liquidation payment equal to $1,000 per
share, plus an amount equal to accrued and unpaid dividends and distributions
thereon, whether or not declared, to the date of such payment, but will be
entitled to an aggregate payment of 1,000 times the payment made per share of
Triad common stock. Each share of Triad Series A Preferred Stock will entitle
the holder thereof to 1,000 votes on all matters submitted to a vote of the
stockholders of Triad. In the event of any consolidation, merger, combination
or other transaction in which shares of Triad common stock are exchanged, each
share of Triad Series A Preferred Stock will be entitled to receive 1,000 times
the aggregate amount of stock, securities, cash and/or other property (payable
in kind) as the case may be, into which or for which each share of Triad common
stock is changed or exchanged. The rights of Triad Series A Preferred Stock as
to dividends, liquidation and voting, and in the event of mergers and
consolidations, are protected by customary anti-dilution provisions.
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Initially, the Triad Rights will be attached to all Triad common stock
certificates and no separate Triad Rights certificates will be issued. Separate
certificates evidencing the Triad Rights ("Triad Right Certificates") will be
mailed to holders of record of the Triad common stock as of the close of
business on the earlier to occur of (1) the tenth day after a public
announcement that an Acquiring Person has acquired beneficial ownership of 15%
or more of the outstanding Triad common stock or (2) such date as may be
determined by action of the Board of Directors of Triad following the
commencement of, or announcement of an intention to make, a tender offer or
exchange offer the consummation of which would result in the beneficial
ownership by a person or group of 15% or more of the outstanding Triad common
stock (the earlier of such dates being the "Triad Rights Distribution Date").
Prior to the time that a person would otherwise become an Acquiring Person,
however, the Board of Directors may determine that such person shall not be an
Acquiring Person for purposes of the Triad Rights Agreement.
The Triad Rights Agreement provides that, until the Triad Rights Distribution
Date (or earlier redemption or expiration of the Triad Rights):
. the Triad Rights will be transferred with and only with the certificates
for Triad common stock,
. new Triad common stock certificates issued after the record date upon
transfer or new issuance of Triad common stock will contain a notation
incorporating the Triad Rights Agreement by reference, and
. the surrender for transfer of any certificates for Triad common stock
outstanding as of the record date also will constitute the transfer of
the Triad Rights associated with the Triad common stock represented by
such certificate.
The Triad Rights are not exercisable until the Triad Rights Distribution
Date. The Triad Rights will expire on , 2009, unless the expiration date
is extended or unless the Triad Rights are earlier redeemed or exchanged by
Triad, in each case, as described below.
If a person or group becomes an Acquiring Person, each holder of a Triad
Right will thereafter have the right to receive, upon exercise, Triad common
stock (or, in certain circumstances, Triad Series A Preferred Stock or other
similar securities of Triad) having a value equal to two times the exercise
price of the Triad Right. Notwithstanding any of the foregoing, following the
existence of an Acquiring Person, all Triad Rights that are, or (under certain
circumstances specified in the Triad Rights Agreement) were, beneficially owned
by any Acquiring Person will be null and void.
In the event that Triad is acquired in a merger or other business combination
transaction or 50% or more of its consolidated assets or earning power are sold
after a person or group has become an Acquiring Person, proper provision will
be made so that each holder of a Triad Right will thereafter have the right to
receive, upon the exercise thereof at the then current exercise price of the
Triad Right, that number of shares of common stock of the acquiring company
which at the time of such transaction will have a market value of two times the
exercise price of the Triad Right.
At any time after any person or group becomes an Acquiring Person and prior
to the acquisition by such person or group of 50% or more of the outstanding
shares of Triad common stock, the Board of Directors may exchange the Triad
Rights (other than Triad Rights owned by such person or group which will have
become void), in whole or in part, at an exchange ratio of one share of Triad
common stock or one one-thousandth of a share of Triad Series A Preferred Stock
(or of a share of a class or series of Triad's preferred stock having
equivalent rights, preferences and privileges), as the case may be, per Triad
Right (subject to adjustment).
At any time prior to the existence of an Acquiring Person, the Board of
Directors of Triad may redeem the Triad Rights, in whole but not in part, at a
redemption price of $.01 per Triad Right. The redemption of the Triad Rights
may be made effective at such time and on such basis with such conditions as
the Board of Directors, in its sole discretion, may establish. Immediately upon
any redemption of the Triad Rights, the right to exercise the Triad Rights will
terminate and the only right of the holders of Triad Rights will be to receive
the redemption price.
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The terms of the Triad Rights may be amended by the Board of Directors of
Triad without the consent of the holders of the Triad Rights, except that from
and after the existence of an Acquiring Person no such amendment may adversely
affect the interests of the holders of the Triad Rights (other than the
Acquiring Person).
The number of outstanding Triad Rights and the number of one one-thousandths
of a share of Triad Series A Preferred Stock issuable upon exercise of each
Triad Right are subject to adjustment under certain circumstances.
Until a Triad Right is exercised, the holder thereof, as such, will have no
rights as a stockholder of Triad, including, without limitation, the right to
vote or to receive dividends.
The Triad Rights have certain anti-takeover effects. The Triad Rights will
cause substantial dilution to a person or group that attempts to acquire Triad
on terms not determined by the Board of Directors to be in the best interests
of all stockholders. The Triad Rights should not interfere with any merger or
other business combination approved by the Board of Directors since (subject to
the limitations described above) the Triad Rights may be redeemed by Triad at
$.01 per Triad Right prior to the time a person or group has become an
Acquiring Person.
Certain Anti-Takeover Provisions--Triad Certificate and By-Laws
Certain provisions of the Triad Certificate and the By-Laws may have the
effect, either alone or in combination with each other, of making more
difficult or discouraging a tender offer, takeover attempt or change in control
that is opposed by Triad's Board of Directors but that a stockholder might
consider to be in its best interest. Triad believes that such provisions are
necessary to enable Triad to develop its business in a manner that will foster
its long-term growth without disruption caused by the threat of a takeover not
deemed by the Triad Board of Directors to be in the best interests of Triad and
its stockholders. These provisions are summarized in the following paragraphs.
Classified Board of Directors. The Delaware Law provides that a corporation's
board of directors may be divided into various classes with staggered terms of
office. The Triad Certificate provides that the Triad Board of Directors is
divided into three classes of directors, with the classes to be as nearly equal
in number as reasonably possible. The Board consists of the persons referred to
in "Triad Management--Directors." The Triad Certificate provides that of the
initial directors of Triad, one-third will continue to serve until the 2000
Annual Meeting of Stockholders, one-third will continue to serve until the 2001
Annual Meeting of Stockholders, and one-third will continue to serve until the
2002 Annual Meeting of Stockholders. Of the initial directors, Messrs. Runyon
and Copping will serve until the 2000 Annual Meeting of Stockholders; Messrs.
Shelton and Frist will serve until the 2001 Annual Meeting of Stockholders; and
Messrs. Loeffler, Parsons and Reinhardt will serve until the 2002 Annual
Meeting of Stockholders. Starting with the 2000 Annual Meeting of Stockholders,
one class of directors will be elected each year for a three-year term.
The classification of directors will have the effect of making it more
difficult for stockholders to change the composition of the Triad Board of
Directors. At least two annual meetings of stockholders, instead of one,
generally will be required to effect a change in a majority of the Board of
Directors. Such a delay may help ensure that Triad's directors, if confronted
by a holder attempting to force a proxy contest, a tender or exchange offer, or
an extraordinary corporate transaction, would have sufficient time to review
the proposal as well as any available alternatives to the proposal and to act
in what they believe to be the best interest of the stockholders. The
classification provisions will apply to every election of directors, however,
regardless of whether a change in the composition of the Board would be
beneficial to Triad and its stockholders and whether or not a majority of
Triad's stockholders believe that such a change would be desirable.
The classification provisions also could have the effect of discouraging a
third party from initiating a proxy contest, making a tender offer or otherwise
attempting to obtain control of Triad, even though such an attempt might be
beneficial to Triad and its stockholders. The classification of the Board could
thus increase the likelihood that incumbent directors will retain their
positions. In addition, because the classification provisions
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may discourage accumulations of large blocks of the Triad common stock by
purchasers whose objective is to take control of Triad and remove a majority of
the Board, the classification of the Board could tend to reduce the likelihood
of fluctuations in the market price of the Triad common stock that might result
from accumulations of large blocks for such a purpose. Accordingly,
stockholders could be deprived of certain opportunities to sell their shares of
Triad common stock at a higher market price than might otherwise be the case.
Number of Directors; Removal of Directors; Vacancies. The Triad Certificate
provides that the number of directors will be fixed from time to time by action
of not less than a majority of the Triad Board of Directors then in office, but
in no event shall the number of directors be less than three nor more than 15.
As of the distribution date, the number of directors of Triad will be seven.
The Triad Certificate provides that any vacancies (including newly-created
directorships) will be filled only by the affirmative vote of a majority of the
remaining directors, whether or not they constitute a quorum of directors.
Directors appointed to fill vacancies created by the resignation or termination
of a director will serve the remainder of the term of the resigning or
terminated director. Accordingly, the Triad Board of Directors could prevent
any stockholder from enlarging the Triad Board of Directors and filling the new
directorships with such stockholder's own nominees.
Under the Delaware Law, unless provided in the certificate of incorporation,
directors serving on a classified board may be removed by the stockholders only
for cause. The Triad Certificate provides that directors may be removed only
for cause and only upon the affirmative vote of holders of at least 80% of the
voting power of all the then outstanding shares of stock entitled to vote
generally in the election of directors, voting as a single class (without a
separate vote of the holders of the Triad preferred stock unless required
pursuant to the terms of any series of Triad preferred stock).
Business Conducted at Meetings; Director Nominations. The By-Laws provide
that nominations of persons for election to the Triad Board and the proposal of
business to be transacted by the stockholders may be made at an annual meeting
of stockholders (a) pursuant to Triad's notice with respect to such meeting,
(b) by or at the direction of the Triad Board or (c) by any stockholder of
record of Triad who was a stockholder of record at the time of the giving of
the notice required by the By-Laws, described below, who is entitled to vote at
the meeting and who has complied with the notice procedures set forth in the
By-Laws. For nominations or other business to be properly brought before an
annual meeting by a stockholder, the stockholder must have given timely notice
thereof in writing to the Secretary of Triad, such business must be a proper
matter for stockholder action under the Delaware Law and, if the stockholder,
or the beneficial owner on whose behalf any such proposal or nomination is
made, solicits or participates in the solicitation of proxies in support of
such proposal or nomination, the stockholder must have timely indicated such
stockholder's, or such beneficial owner's, intention to do so. To be timely, a
stockholder's notice must be delivered to the Secretary at the principal
executive offices of Triad not less than 90 days prior to the first anniversary
of the preceding year's annual meeting of stockholders; provided, however, that
if the date of the annual meeting is advanced more than 30 days prior to or
delayed more than 60 days after such anniversary date, notice by the
stockholder to be timely must be delivered not later than the close of business
on the later of the 90th day prior to such annual meeting or the 10th day
following the day on which public announcement of the date of such meeting is
first made. The notice must include:
. certain information as to each person whom the stockholder proposes to
nominate for election or reelection as a director and such person's written
consent to serve as a director if elected;
. as to any other business that the stockholder proposes to bring before the
meeting, a brief description of such business, the reasons for conducting
such business at the meeting and any material interest in such business of
such stockholder and the beneficial owner, if any, on whose behalf the
proposal is made; and
. certain information as to the stockholder giving the notice and the
beneficial owner, if any, on whose behalf the nomination or proposal is
made, including whether either such stockholder or beneficial owner intends
to solicit or participate in the solicitation of proxies in favor of such
proposal or nominee or nominees.
155
<PAGE>
In the event that the number of directors to be elected to the Triad Board is
increased and there is not a public announcement naming all of the nominees for
director or specifying the size of the increased Board of Directors made by
Triad at least 100 days prior to the first anniversary of the preceding year's
annual meeting, a stockholder's notice will be timely, but only with respect to
nominees for any new positions created by such increase, if it is delivered to
the Secretary at the principal executive offices of Triad not later than the
close of business on the 10th day following the day on which such public
announcement is first made by Triad.
If the officer of Triad or other person presiding at a meeting determines
that a person was not nominated, or other business was not brought before the
meeting, in accordance with these advance notice provisions, such person will
not be eligible for election as a director or such business will not be
conducted at such meeting, as the case may be.
By requiring advance notice of nominations by stockholders, the Triad Board
of Directors has an appropriate opportunity to consider the qualifications of
the proposed nominees and, to the extent deemed necessary or desirable by the
Triad Board of Directors, to inform stockholders about such qualifications. By
requiring advance notice of other proposed business, annual meetings of
stockholders may be conducted in a more orderly manner and, to the extent
deemed necessary or desirable by the Triad Board of Directors, the Triad Board
of Directors has an appropriate opportunity to inform stockholders, prior to
such meetings, of any business proposed to be conducted at such meetings,
together with any recommendations as to the Triad Board of Directors' position
regarding action to be taken with respect to such business, so that
stockholders can better decide whether to attend such a meeting or to grant a
proxy regarding the disposition of any such business.
Although the Triad By-laws do not give the Triad Board of Directors any power
to approve or disapprove stockholder nominations of the election of directors
or proposals for action, the foregoing provisions may have the effect of
precluding a contest for the election of directors or the consideration of
stockholder proposals if the proper procedures are not followed, and of
discouraging or deterring a third party from conducting a solicitation of
proxies to elect its own slate of directors or to approve its own proposal,
without regard to whether consideration of such nominees or proposals might be
harmful or beneficial to Triad and its stockholders.
No Stockholder Action by Written Consent; Stockholder Action at Meetings. The
Triad Certificate provides that stockholder action can be taken only at an
annual or special meeting of stockholders and prohibits stockholder action by
written consent in lieu of a meeting. The Triad Certificate also provides that
special meetings of stockholders can be called only by the Chairman of the
Board or the Chief Executive Officer of Triad, in either of their discretion or
at the written request of a majority of the Triad Board of Directors.
Stockholders are not permitted to call a special meeting or to require that the
Triad Board of Directors call a special meeting of stockholders. The business
permitted to be conducted at any special meeting of stockholders is limited to
the business brought before the meeting pursuant to the notice of meeting given
by Triad.
The provisions of the Triad Certificate prohibiting stockholder action by
written consent may have the effect of delaying consideration of a stockholder
proposal until the next annual meeting of stockholders. These provisions would
also prevent the holders of a majority of the outstanding shares of voting
stock of Triad from unilaterally using the written consent procedure to take
stockholder action. Moreover, a stockholder could not force stockholder
consideration of a proposal opposed by the Chairman of the Board, the Chief
Executive Officer and a majority of the Triad Board of Directors by calling a
special meeting of stockholders prior to the time the Chairman of the Board,
the Chief Executive Officer or a majority of the Triad Board of Directors
believes such consideration to be appropriate.
Fair Price Provision. The Triad Certificate contains a "fair price"
provision, requiring that, in addition to any other vote required by the Triad
Certificate or the Delaware Law, certain "business combination" transactions
with a "related person" will be subject to the affirmative vote of the holders
of not less than 85%
156
<PAGE>
of the voting power of all of the outstanding shares of voting stock of Triad
held by stockholders other than the related person. The 85% voting requirement
will not be applicable if either:
1. The business combination is approved by the Board of Directors of Triad
by the affirmative vote of at least 66 2/3% of the "continuing
directors," or
2.All of the following conditions are satisfied:
. the aggregate amount of cash and the fair market value of the
property, securities or other consideration to be received per share
of capital stock of Triad in the business combination by the holders
of capital stock of Triad, other than the related person involved in
the business combination, will not be less than the highest of (1)
the highest per share price (including brokerage commissions,
soliciting dealers' fees, and dealer-manager compensation, and with
appropriate adjustments for recapitalizations, stock splits, stock
dividends and like transactions and distributions) paid by such
related person in acquiring any of its holdings of such class or
series of capital stock, (2) the highest per share "market value" of
such class or series of capital stock within the twelve-month period
immediately preceding the date the proposal for such business
combination was first publicly announced, or (3) the book value per
share of such class or series of capital stock, determined in
accordance with generally accepted accounting principles, as of the
last day of the month immediately preceding the date the proposal
for such business combination was first publicly announced;
. the consideration to be received in such business combination by
holders of capital stock other than the related person involved
will, except to the extent that a stockholder agrees otherwise as to
all or part of the shares which he or she owns, be in the same form
and of the same kind as the consideration paid by the related person
in acquiring capital stock already owned by it; provided, however,
that if the related person has paid for capital stock with varying
forms of consideration, the form of consideration for shares of
capital stock acquired in the business combination by the related
person must either be cash or the form used to acquire the largest
number of shares of capital stock previously acquired by it; and
. a proxy statement responsive to the requirements of the Exchange Act
is mailed to the stockholders of Triad for the purpose of soliciting
stockholder approval of such business combination and contains (1)
any recommendations as to the advisability (or inadvisability) of
the business combination which the continuing directors may choose
to state and (2) the opinion of a reputable investment banking firm
selected by the continuing directors as to the fairness of the terms
of such business combination, from a financial point of view, to the
public stockholders (other than the related person) of Triad.
For the purpose of the fair price provision included in the Triad
Certificate, certain terms are defined as follows.
"Business Combination" means:
. any merger or consolidation of Triad or a subsidiary with a related
person;
. any sale, lease, exchange, mortgage, pledge, transfer or other
disposition other than in the ordinary course of business to or with a
related person of any assets of Triad or a subsidiary having an
aggregate fair market value of $25,000,000 or more;
. the issuance or transfer by Triad of any shares of voting stock of Triad
or securities convertible into or exercisable for such shares (other
than by way of pro rata distribution to all stockholders) to a related
person;
. any recapitalization, merger or consolidation that would have the effect
of increasing the voting power of a related person;
. the adoption of any plan or proposal for the liquidation or dissolution
of Triad or a subsidiary proposed, directly or indirectly, by or on
behalf of a related person;
157
<PAGE>
. any merger or consolidation of Triad with another person proposed,
directly or indirectly, by or on behalf of a related person, unless the
entity surviving or resulting from such merger or consolidation has a
provision in its certificate or articles of incorporation, charter or
similar governing instrument which is substantially identical to the
fair price provisions of the Triad Certificate; or
. any agreement, contract or other arrangement or understanding providing,
directly or indirectly, for any of the foregoing transactions.
"Related Person" means any individual, partnership, corporation, trust or
other person which together with its "affiliates" and "associates," as defined
in Rule 12b-2 under the Exchange Act as in effect on , 1999, and
together with any other individual, partnership, corporation, trust or other
person with which it or they have any agreement, contract or other arrangement
or understanding with respect to acquiring, holding, voting or disposing of
shares of voting stock of Triad, "beneficially owns" (within the meaning of
Rule 13d-3 under the Exchange Act on said date) an aggregate of 10% or more of
the voting power of all of the outstanding shares of voting stock of Triad. A
related person, its affiliates and associates and all such other individuals,
partnerships, corporations and other persons with whom it or they have any such
agreement, contract or other arrangement or understanding, are deemed a single
related person for purposes of this provision; provided, however, that the
members of the Triad Board of Directors shall not be deemed to be associates or
otherwise to constitute a Related Person solely by reason of their board
membership. A person who is a related person (1) as of the time any definitive
agreement relating to a business combination is entered into, (2) as of the
record date for the determination of stockholders entitled to notice of and to
vote on a business combination or (3) immediately prior to the consummation of
a business combination, shall be deemed a related person for purposes of this
provision.
"Continuing Director" means any member of the Triad Board of Directors who is
not an affiliate or associate of the related person and was a member of the
Triad Board of Directors prior to the time that such person became a related
person, and any successor of a continuing director who is unaffiliated with
such related person and is recommended to succeed a continuing director by a
majority of the continuing directors.
"Market Value" means the average of the high-bid and low-asked quoted sales
price on the date in question (or, if there is no reported sale on such date,
on the last preceding date on which any reported sale occurred) of a share on
the NYSE Composite Tape, or, if the shares are not listed or admitted to
trading on such exchange, on the principal United States securities exchange
registered under the Exchange Act on which the shares are listed or admitted to
trading, or, if the shares are not listed or admitted to trading on any such
exchange, the mean between the closing high-bid and the low-asked quotations
with respect to a share on such date as quoted on Nasdaq, or any similar system
then in use, or, if no such quotations are available, the fair market value on
such date of a share as at least 66 2/3% of the continuing directors shall
determine.
The fair price provision included in the Triad Certificate is intended to
ensure that all stockholders of Triad receive equal treatment in the event of a
tender or exchange offer and to protect stockholders of Triad against coercive
or two-tiered takeover bids. Notwithstanding the foregoing, the provision could
also have the effect of discouraging a third party from making a tender or
exchange offer for Triad, even though such an offer might be beneficial to
Triad and its stockholders.
Amendment of the Triad Certificate and By-laws. The Triad Certificate
contains provisions requiring the affirmative vote of the holders of a least
80% of the voting power of all of the outstanding shares of voting stock of
Triad to amend certain provisions of the Triad Certificate (including the
provisions discussed above relating to directors, action by written consent,
special stockholder meetings and advance notice of stockholder nominations and
stockholder proposals) or to amend any provision of the Triad By-laws. An
amendment of the fair price provision included in the Triad Certificate
requires the approval of 66 2/3% of the directors of Triad then in office and
the affirmative vote of 85% of the voting power of all of the outstanding
shares of voting stock of Triad held by stockholders other than any related
person, unless the amendment is approved by 66 2/3% of the continuing
directors. These provisions make it more difficult for stockholders to make
changes in the Triad Certificate and the Triad By-laws, including changes
designed to facilitate the exercise of control over Triad.
158
<PAGE>
Other Constituencies. In addition to any other considerations which the Triad
Board of Directors may lawfully take into account, in determining whether to
take or to refrain from taking corporate action on any matter, including
proposing any matter to the stockholders of Triad, the Board may consider the
effects, both short-term and long-term, of such action on the interests of the
employees, associates, associated physicians, distributors, patients or other
customers, suppliers or creditors of Triad, and the communities in which Triad
owns or leases property or conducts business.
Limited Liability and Indemnification Provisions
The Triad Certificate eliminates to the fullest extent now or hereafter
permitted by the Delaware Law, liability of a director to Triad or its
stockholders for monetary damages for any action taken, or failure to take any
action, as a director, except for liability:
. for any breach of the director's duty of loyalty to Triad or its
stockholders;
. for acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law;
. under Section 174 of the Delaware Law, relating to prohibited dividends,
distributions and repurchases or redemptions of stock; or
. for any transaction for which the director derives an improper personal
benefit.
This provision is intended to afford directors additional protection from,
and limit their potential liability for, suits alleging a breach of duty by a
director. Triad believes this provision will assist it in maintaining and
securing the services of directors who are not employees of Triad. As a result
of the inclusion of this provision, stockholders may be unable to recover
monetary damages from directors for actions taken by them that constitute
negligence or gross negligence or that are in violation of their fiduciary
duties, although it may be possible to obtain injunctive or other equitable
relief with respect to such actions, such as an injunction or rescission based
on a director's breach of the duty of care; as a practical matter, equitable
remedies may not be available (e.g., after a transaction has already been
effected). If equitable remedies are found not to be available to stockholders
for any particular case, stockholders may not have any effective remedy against
the challenged conduct.
Section 145 of the Delaware Law permits indemnification of directors,
officers, agents and controlling persons of a corporation under certain
conditions and subject to certain limitations. Section 145 empowers a
corporation to indemnify any person who was or is a party or is threatened to
be made a party to any threatened, pending or completed action, suit or
proceeding, whether civil, criminal, administrative or investigative, by reason
of the fact that such person is or was a director, officer or agent of the
corporation or another enterprise if serving at the request of the corporation.
Depending on the character of the proceeding, a corporation may indemnify
against expenses (including attorneys' fees), judgments, fines and amounts paid
in settlement actually and reasonably incurred in connection with such action,
suit or proceeding if the person indemnified acted in good faith and in a
manner such person reasonably believed to be in or not opposed to, the best
interests of the corporation, and, with respect to any criminal action or
proceeding, had no reasonable cause to believe such person's conduct was
unlawful. In the case of an action by or in the right of Triad, no
indemnification may be made with respect to any claim, issue or matter as to
which such person shall have been adjudged to be liable to the corporation
unless and only to the extent that the Delaware Court of Chancery or the court
in which such action or suit was brought shall determine that despite the
adjudication of liability such person is fairly and reasonably entitled to
indemnity for such expenses which the court shall deem proper. Section 145
further provides that to the extent a director or officer of Triad has been
successful in the defense of any action, suit or proceeding referred to above
or in the defense of any claim, issue or matter therein, such person shall be
indemnified against expenses (including attorneys' fees) actually and
reasonably incurred by such person in connection therewith.
The Triad Certificate contains provisions for indemnification of directors,
officers, employees and agents to the fullest extent permitted by Section 145
and Delaware law which, in general, presently requires that the
159
<PAGE>
individual act in good faith and in a manner he or she reasonably believed to
be in or not opposed to Triad's best interests and, in the case of any criminal
proceedings, that the individual has no reason to believe his or her conduct
was unlawful. The Triad Certificate also permits Triad to purchase insurance
and Triad has purchased and maintains insurance on behalf of Triad directors,
officers, employees and agents against any liability asserted against such
person and incurred by such person in any such capacity, or arising out of such
person's status as such, whether or not Triad would have the power to indemnify
such person against such liability under the foregoing provisions of the Triad
Certificate.
Additional Information
LifePoint has filed with the SEC a Registration Statement on Form 10 under
the Exchange Act with respect to the shares of LifePoint common stock and
associated LifePoint Rights to be received by Columbia/HCA stockholders in the
distribution, and Triad has filed with the SEC a Registration Statement on Form
10 under the Exchange Act with respect to the shares of Triad common stock and
associated Triad Rights to be received by Columbia/HCA stockholders in the
distribution. This information statement does not contain all of the
information set forth in the LifePoint Form 10 Registration Statement or the
Triad Form 10 Registration Statement and (in each case) the exhibits and
schedules relating thereto. Statements made in this information statement as to
the contents of any contract, agreement, instrument or other document are not
necessarily complete, and in each instance we refer you to the copy of the
contract, agreement, instrument or document filed as an exhibit to the
LifePoint Form 10 Registration Statement and the Triad Form 10 Registration
Statement; each such statement is qualified in all respects by reference to
such documents and the exhibits and schedules thereto.
For further information, we refer you to the LifePoint Form 10 Registration
Statement and the Triad Form 10 Registration Statement and the exhibits and
schedules relating thereto, which are on file at the offices of the SEC and may
be read and copied at the SEC's Public Reference Room at 450 Fifth Street,
N.W., Washington, D.C. 20549 and at the regional offices of the SEC in New York
(Seven World Trade Center, Suite 1300, New York, New York 10048) and Chicago
(500 West Madison Street, Suite 1400, Chicago, Illinois 60661). The public may
obtain information on the operation of the Public Reference Room by calling the
SEC at 1-800-SEC-0330. Such material may also be inspected at the offices of
the NYSE (20 Broad Street, New York, New York 10005) or accessed electronically
by means of the SEC's home page on the World Wide Web (http://www.sec.gov).
Following the distribution, each of LifePoint and Triad will be required to
comply with the reporting requirements of the Exchange Act and will file
annual, quarterly and other reports with the SEC. LifePoint and Triad also will
be subject to the proxy solicitation requirements of the Exchange Act and,
accordingly, will furnish audited financial statements to their respective
stockholders in connection with their annual meetings of stockholders.
You should rely only on the information contained in this information
statement and other documents referred to in this information statement.
Columbia/HCA, LifePoint and Triad have not authorized anyone to provide you
with information that is different.
160
<PAGE>
INDEX TO FINANCIAL STATEMENTS
LIFEPOINT HOSPITALS, INC. COMBINED FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Report of Independent Auditors................................ F-2
Combined Statements of Operations--for the years ended
December 31, 1998, 1997 and 1996............................. F-3
Combined Balance Sheets--December 31, 1998 and 1997........... F-4
Combined Statements of Equity--for the years ended December
31, 1998, 1997 and 1996...................................... F-5
Combined Statements of Cash Flows--for the years ended
December 31, 1998, 1997 and 1996............................. F-6
Notes to Combined Financial Statements........................ F-7 thru F-18
TRIAD HOSPITALS, INC. COMBINED FINANCIAL STATEMENTS
Report of Independent Auditors................................ F-19
Combined Statements of Operations--for the years ended
December 31, 1998, 1997 and 1996............................. F-20
Combined Balance Sheets--December 31, 1998 and 1997........... F-21
Combined Statements of Equity--for the years ended December
31, 1998, 1997 and 1996...................................... F-22
Combined Statements of Cash Flows--for the years ended
December 31, 1998, 1997 and 1996............................. F-23
Notes to Combined Financial Statements........................ F-24 thru F-35
</TABLE>
Explanatory Note: The historical combined financial statements presented
herein are those of the America Group and the Pacific Group of Columbia/HCA
Healthcare Corporation. Prior to the distribution date, the assets and
liabilities of the America Group will be contributed to LifePoint Hospitals,
Inc., a newly-formed Delaware holding company and the assets and liabilities of
the Pacific Group will be contributed to Triad Hospitals, Inc., a newly-formed
Delaware holding company. On the distribution date, the assets and liabilities
of the America Group will constitute substantially all of the assets and
liabilities of LifePoint Hospitals, Inc. and the assets and liabilities of the
Pacific Group will constitute substantially all of the assets and liabilities
of Triad Hospitals, Inc.
F-1
<PAGE>
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors and Stockholders
Columbia/HCA Healthcare Corporation
We have audited the accompanying combined balance sheets of the net assets
and operations to be contributed to LifePoint Hospitals, Inc. (see Note 1) as
of December 31, 1998 and 1997 and the related combined statements of
operations, equity and cash flows for each of the three years in the period
ended December 31, 1998. These combined financial statements are the
responsibility of the management of Columbia/HCA Healthcare Corporation (the
"Company"). Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the combined financial position of the net assets and
operations to be contributed to LifePoint Hospitals, Inc. (see Note 1) at
December 31, 1998 and 1997 and the combined results of their operations and
their cash flows for each of the three years in the period ended December 31,
1998 in conformity with generally accepted accounting principles.
As explained in Note 7 to the combined financial statements, effective
January 1, 1997, the Company changed its method of accounting for start-up
costs.
Ernst & Young LLP
Nashville, Tennessee
March 5, 1999
F-2
<PAGE>
LIFEPOINT HOSPITALS, INC.
COMBINED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
(Dollars in millions, except per share amounts)
<TABLE>
<CAPTION>
1998 1997 1996
------ ------ ------
<S> <C> <C> <C>
Revenues................................................ $498.4 $487.6 $464.0
Salaries and benefits................................... 220.8 196.6 175.2
Supplies................................................ 62.0 55.0 50.9
Other operating expenses................................ 117.2 119.5 99.3
Provision for doubtful accounts......................... 41.6 34.5 28.0
Depreciation and amortization........................... 28.3 27.4 23.5
Interest expense allocated from Columbia/HCA............ 19.1 15.4 14.1
Management fees allocated from Columbia/HCA............. 8.9 8.2 6.2
Impairment of long-lived assets......................... 26.1 -- --
------ ------ ------
524.0 456.6 397.2
------ ------ ------
Income (loss) from continuing operations before minority
interests and income taxes (benefit)................... (25.6) 31.0 66.8
Minority interests in earnings of consolidated
entities............................................... 1.9 2.2 1.2
------ ------ ------
Income (loss) from continuing operations before income
taxes (benefit)........................................ (27.5) 28.8 65.6
Provision for income taxes (benefit).................... (9.8) 11.7 26.3
------ ------ ------
Income (loss) from continuing operations ............... (17.7) 17.1 39.3
Discontinued operations:
Income (loss) from operations, net of income taxes
(benefit) of $(2.6), $(0.1) and $1.2 for the years
ended December 31, 1998, 1997 and 1996,
respectively......................................... (4.1) (.6) 1.9
Estimated loss on disposal, net of income tax benefit
of $2.4.............................................. -- (3.4) --
Cumulative effect of accounting change, net of income
tax benefit of $0.4.................................... -- (.6) --
------ ------ ------
Net income (loss).................................. $(21.8) $ 12.5 $ 41.2
====== ====== ======
Basic earnings (loss) per share (see Note 13):
Income (loss) from continuing operations.............. $(0.59) $ 0.57 $ 1.31
Income (loss) from discontinued operations............ (0.14) (0.14) 0.06
Cumulative effect of accounting change................ -- (0.02) --
------ ------ ------
Net income (loss).................................. $(0.73) $ 0.41 $ 1.37
====== ====== ======
Diluted earnings (loss) per share (see Note 13):
Income (loss) from continuing operations.............. $(0.59) $ 0.57 $ 1.30
Income (loss) from discontinued operations............ (0.14) (0.14) 0.06
Cumulative effect of accounting change................ -- (0.02) --
------ ------ ------
Net income (loss).................................. $(0.73) $ 0.41 $ 1.36
====== ====== ======
</TABLE>
The accompanying notes are an integral part of the combined financial
statements.
F-3
<PAGE>
LIFEPOINT HOSPITALS, INC.
COMBINED BALANCE SHEETS
DECEMBER 31, 1998 AND 1997
(Dollars in millions)
<TABLE>
<CAPTION>
Pro Forma
Liabilities
and Equity
1998
(see Note 2) 1998 1997
------------ ------ ------
(unaudited)
<S> <C> <C> <C>
ASSETS
------
Current assets:
Accounts receivable, less allowances for
doubtful accounts of
$48.3 and $37.5 at December 31, 1998 and 1997.. $ 36.4 $ 53.1
Inventories..................................... 14.0 13.0
Deferred taxes and other current assets......... 18.6 14.4
------ ------
69.0 80.5
Property and equipment, at cost:
Land............................................ 7.2 7.2
Buildings....................................... 203.1 222.9
Equipment....................................... 221.9 198.8
Construction in progress (estimated cost to
complete and equip after December 31, 1998--
$61.8)......................................... 10.4 10.7
------ ------
442.6 439.6
Accumulated depreciation.......................... (176.2) (154.2)
------ ------
266.4 285.4
Intangible assets, net of accumulated amortization
of $7.7 and $6.6 at
December 31, 1998 and 1997....................... 15.2 17.8
Other............................................. 4.4 14.2
------ ------
$355.0 $397.9
====== ======
LIABILITIES AND EQUITY
----------------------
Current liabilities:
Accounts payable................................ $ 15.5 $ 15.5 $ 15.3
Accrued salaries................................ 11.7 11.7 11.7
Other current liabilities....................... 14.9 14.9 12.4
------ ------ ------
42.1 42.1 39.4
Intercompany balances payable to Columbia/HCA .... -- 167.6 182.5
Long-term debt.................................... 260.3 .3 1.4
Deferred taxes and other liabilities.............. 21.4 21.4 28.9
Minority interests in equity of consolidated
entities......................................... 4.9 4.9 5.2
Equity, investments by Columbia/HCA............... 26.3 118.7 140.5
------ ------ ------
$355.0 $355.0 $397.9
====== ====== ======
</TABLE>
The accompanying notes are an integral part of the combined financial
statements.
F-4
<PAGE>
LIFEPOINT HOSPITALS, INC.
COMBINED STATEMENTS OF EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
(Dollars in millions)
<TABLE>
<CAPTION>
Pro Forma
1998
(see Note 2) 1998 1997 1996
------------ ------ ------ ------
(unaudited)
<S> <C> <C> <C> <C>
Equity at beginning of period................ $140.5 $140.5 $128.0 $ 86.8
Net income (loss).......................... (21.8) (21.8) 12.5 41.2
Recapitalization upon assumption of debt... (92.4) -- -- --
------ ------ ------ ------
Equity at end of period...................... $ 26.3 $118.7 $140.5 $128.0
====== ====== ====== ======
</TABLE>
The accompanying notes are an integral part of the combined financial
statements.
F-5
<PAGE>
LIFEPOINT HOSPITALS, INC.
COMBINED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
(Dollars in millions)
<TABLE>
<CAPTION>
1998 1997 1996
------ ----- -----
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss)...................................... $(21.8) $12.5 $41.2
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Provision for doubtful accounts...................... 41.6 34.5 28.0
Depreciation and amortization........................ 28.3 27.4 23.5
Deferred income taxes (benefit)...................... (12.4) 4.1 15.3
Impairment of long-lived assets...................... 26.1 -- --
Loss (income) from discontinued operations........... 4.1 4.0 (1.9)
Cumulative effect of accounting change............... -- .6 --
Increase (decrease) in cash from operating assets and
liabilities:
Accounts receivable................................ (21.3) (37.9) (46.4)
Inventories and other assets....................... .2 .1 (3.8)
Accounts payable and accrued expenses.............. .9 (.1) 7.2
Other................................................ (.4) .2 .7
------ ----- -----
Net cash provided by operating activities.......... 45.3 45.4 63.8
Cash flows from investing activities:
Purchase of property and equipment..................... (29.3) (51.8) (53.4)
Investments in and advances to affiliates.............. .1 (7.2) (2.8)
Other.................................................. (.1) 7.1 (2.4)
------ ----- -----
Net cash used in investing activities.............. (29.3) (51.9) (58.6)
Cash flows from financing activities:
Increase (decrease) in long-term debt, net............. (1.1) -- (.4)
Increase (decrease) in intercompany balances with
Columbia/HCA, net..................................... (14.9) 6.5 (4.8)
------ ----- -----
Net cash provided by (used in) financing
activities........................................ (16.0) 6.5 (5.2)
------ ----- -----
Change in cash and cash equivalents...................... $ -- $ -- $ --
====== ===== =====
Interest payments........................................ $ 19.1 $15.4 $14.1
Income tax payments (refunds), net....................... $ -- $ 4.7 $14.2
</TABLE>
The accompanying notes are an integral part of the combined financial
statements.
F-6
<PAGE>
LIFEPOINT HOSPITALS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS
NOTE 1--COLUMBIA/HCA'S PROPOSED SPIN-OFF OF AMERICA CORPORATION
In 1998, the Board of Directors of Columbia/HCA Healthcare Corporation
("Columbia/HCA" or the "Company") approved in principle the spin-off of its
operations comprising the America Group to its shareholders (the
"Distribution") as an independent, publicly-traded company. The America Group
and the independent, publicly-traded company to which its assets and
liabilities will be contributed are hereinafter referred to as "LifePoint
Hospitals, Inc." or "LifePoint." The Distribution is subject to obtaining a
tax ruling by the Internal Revenue Service ("IRS") that would allow it to be
tax-free to Columbia/HCA and its shareholders, various regulatory approvals
and approval of a definitive plan by Columbia/HCA's Board of Directors.
LifePoint is comprised of 23 general, acute care hospitals and related health
care entities. The entities are located in non-urban areas in the states of
Alabama, Florida, Georgia, Kansas, Kentucky, Louisiana, Tennessee, Utah and
Wyoming. The accompanying financial statements, prepared on the pushed down
basis of the historical cost to Columbia/HCA, represent the combined financial
position, results of operations and cash flows of LifePoint.
In connection with the Distribution, all intercompany amounts payable by
LifePoint to Columbia/HCA will be eliminated, and LifePoint will assume
certain indebtedness from Columbia/HCA. In addition, LifePoint will enter into
various agreements with Columbia/HCA which are intended to facilitate orderly
changes for both companies in a way which would be minimally disruptive to
each entity.
The combined financial statements included herein may not necessarily be
indicative of the results of operations, financial position and cash flows of
LifePoint in the future or had it operated as a separate, independent company
during the periods presented. The combined financial statements included
herein do not reflect any changes that may occur in the financing and
operations of LifePoint as a result of the Distribution.
NOTE 2--ACCOUNTING POLICIES
Principles of Combination
The combined financial statements include the accounts of LifePoint and all
affiliated subsidiaries and entities controlled by LifePoint through
LifePoint's direct or indirect ownership of a majority voting interest or
exclusive rights granted to LifePoint by contract as the sole general partner
to manage and control the ordinary course of the affiliate's business.
Significant intercompany transactions within LifePoint have been eliminated.
Investments in entities which LifePoint does not control, but in which it has
a substantial ownership interest and can exercise significant influence, are
accounted for using the equity method.
The preparation of the combined financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the amounts reported in the financial statements
and accompanying notes. Actual results could differ from those estimates.
Equity
Equity represents the net investment in LifePoint by Columbia/HCA. It
includes common stock, additional paid-in-capital and net earnings.
F-7
<PAGE>
LIFEPOINT HOSPITALS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
NOTE 2--ACCOUNTING POLICIES (continued)
Revenues
LifePoint's health care facilities have entered into agreements with third-
party payers, including government programs and managed care health plans,
under which the facilities are paid based upon established charges, the cost of
providing services, predetermined rates per diagnosis, fixed per diem rates or
discounts from established charges.
Revenues are recorded at estimated amounts due from patients and third-party
payers for the health care services provided. Settlements under reimbursement
agreements with third-party payers are estimated and recorded in the period the
related services are rendered and are adjusted in future periods as final
settlements are determined. The net adjustments to estimated settlements
resulted in increases to revenues of $1.2 million, $3.3 million and $10.6
million for the years ended December 31, 1998, 1997 and 1996, respectively. In
association with the ongoing Federal investigation into certain of
Columbia/HCA's business practices, the applicable governmental agencies have
ceased the settlement of cost reports. Since the cost reports are not being
settled, the Company is not receiving updated information which has
historically been the basis used to adjust estimated settlement amounts. At
this time, the Company cannot predict when, or if, the historical cost report
settlement process will be resumed. Management believes that adequate
provisions have been made for adjustments that may result from final
determination of amounts earned under these programs. Columbia/HCA will retain
sole responsibility for, and be entitled to, any Medicare, Medicaid or cost-
based Blue Cross settlements relating to cost reporting periods ending on or
prior to the distribution date. The net settlement payable estimated as of
December 31, 1998 and included in accounts receivable in the accompanying
balance sheet approximated $14.5 million.
LifePoint provides care without charge to patients who are financially unable
to pay for the health care services they receive. Because LifePoint does not
pursue collection of amounts determined to qualify as charity care, they are
not reported in revenues.
Accounts Receivable
LifePoint receives payment for services rendered from federal and state
agencies (under the Medicare, Medicaid and CHAMPUS programs), managed care
health plans, commercial insurance companies, employers and patients. During
the years ended December 31, 1998, 1997 and 1996, approximately 37.8%, 39.4%
and 40.9%, respectively, of LifePoint's revenues related to patients
participating in the Medicare program. LifePoint recognizes that revenues and
receivables from government agencies are significant to its operations, but it
does not believe that there are significant credit risks associated with these
government agencies. LifePoint does not believe that there are any other
significant concentrations of revenues from any particular payer that would
subject it to any significant credit risks in the collection of its accounts
receivable.
Inventories
Inventories are stated at the lower of cost (first-in, first-out) or market.
Long-Lived Assets
(a) Property and Equipment
Property and equipment are stated at cost. Routine maintenance and repairs
are charged to expense as incurred. Expenditures that increase capacities or
extend useful lives are capitalized.
F-8
<PAGE>
LIFEPOINT HOSPITALS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
NOTE 2--ACCOUNTING POLICIES (continued)
Depreciation expense, computed using the straight-line method, was $27.1
million, $25.1 million and $21.9 million for the years ended December 31, 1998,
1997 and 1996, respectively. Buildings and improvements are depreciated over
estimated useful lives ranging generally from 10 to 40 years. Estimated useful
lives of equipment vary generally from 3 to 10 years.
(b) Intangible Assets
Intangible assets consist primarily of costs in excess of the fair value of
identifiable net assets of acquired entities and are amortized using the
straight-line method, generally over periods ranging from 30 to 40 years for
hospital acquisitions and periods ranging from 5 to 20 years for physician
practice and clinic acquisitions. Noncompete agreements and debt issuance costs
are amortized based upon the terms of the respective contracts or loans.
When events, circumstances and operating results indicate that the carrying
values of certain long-lived assets and the related identifiable intangible
assets might be impaired, LifePoint prepares projections of the undiscounted
future cash flows expected to result from the use of the assets and their
eventual disposition. If the projections indicate that the recorded amounts are
not expected to be recoverable, such amounts are reduced to estimated fair
value.
Income Taxes
Columbia/HCA files consolidated Federal and state income tax returns which
includes all of its eligible subsidiaries, including LifePoint. The provisions
for income taxes (benefits) in the combined statements of operations for all
periods presented have been computed on a separate return basis (i.e., assuming
LifePoint had not been included in a consolidated income tax return with
Columbia/HCA). All income tax payments are made by LifePoint through
Columbia/HCA.
Deferred tax assets and liabilities result principally from certain revenue
and expense items being recognized for tax purposes in years other than the
year in which they are reflected in the combined financial statements.
General and Professional Liability Risks
Columbia/HCA assumes the liability for all general and professional liability
claims incurred through the distribution date. Accordingly, no reserve for
professional and general liability risks is recorded in the accompanying
combined balance sheets. The cost of general and professional liability
coverage is allocated by Columbia/HCA's captive insurance company to LifePoint
based on actuarially determined estimates. LifePoint intends to continue the
general and professional liability coverage with Columbia/HCA under the same
general terms through December 31, 1999. The cost for the years ended
December 31, 1998, 1997 and 1996 was approximately $6.8 million, $6.1 million
and $5.6 million, respectively.
LifePoint participates in a self-insured program for workers' compensation
and health insurance administered by Columbia/HCA. Columbia/HCA will retain
sole responsibility for all workers' compensation and health claims incurred
prior to the distribution date. Accordingly, no reserve for workers'
compensation and health claims liability risks are recorded in the accompanying
combined balance sheets. The cost for these programs is based upon claims paid,
plus an actuarially determined amount for claims incurred but not reported. The
cost was approximately $5.6 million for each of the years ended December 31,
1998, 1997 and 1996.
Management Fees
Columbia/HCA incurs various corporate general and administrative expenses.
These corporate overhead expenses are allocated to LifePoint based on net
revenues. In the opinion of management, this allocation method is reasonable.
F-9
<PAGE>
LIFEPOINT HOSPITALS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
NOTE 2--ACCOUNTING POLICIES (continued)
The management fees allocated to LifePoint are less than management's
estimate of the general and administrative costs that would have been incurred
if LifePoint had been a separate, independent entity and had otherwise managed
comparable general and administrative functions. Based upon LifePoint's
management projections for 1999, if LifePoint had managed comparable general
and administrative functions, LifePoint would have incurred approximately $14.4
million for general and administrative expenses compared to the $8.9 million of
management fees allocated from Columbia/HCA for the year ended December 31,
1998. Subsequent to the Distribution, LifePoint will be required to manage
these functions and will be responsible for the expenses associated with the
management of a separate public corporation.
Pro Forma Data (unaudited)
The pro forma combined balance sheet and statement of equity as of December
31, 1998 includes adjustments to reflect the elimination of intercompany
balances payable to Columbia/HCA and the assumption of $260.6 million
(including $0.3 million included in other current liabilities) in debt
financing in connection with the Distribution. The debt financing, which is
currently being arranged, is expected to consist of senior term loans and
subordinated notes.
Disclosures about Segments of an Enterprise
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 131, Disclosures about Segments of an
Enterprise and Related Information ("SFAS 131"). SFAS 131 establishes standards
for the way that public business enterprises report information about operating
segments in annual financial statements and requires that these enterprises
report selected information about operating segments in interim financial
reports. Management has determined that LifePoint does not have separately
reportable segments as defined under SFAS 131. Rather, LifePoint's facilities
are all similar in their business activities and the economic environments in
which they operate (i.e, non-urban markets). LifePoint intends to monitor its
facilities individually and to develop facility specific strategies. Assessment
of performance and corresponding management decisions will be based upon
individual facility results.
NOTE 3--COLUMBIA/HCA INVESTIGATIONS, LITIGATION AND INDEMNIFICATION RIGHTS
Columbia/HCA is currently the subject of several Federal investigations into
certain of its business practices, as well as governmental investigations by
various states. Columbia/HCA 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,
Columbia/HCA expects additional subpoenas and other 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 for improper claims submitted to the government for reimbursement. The
lawsuits seek damages of three times the amount of all Medicare or Medicaid
claims (involving false claims) presented by the defendants to the Federal
government, civil penalties of not less than $5,000 nor more than $10,000 for
each such Medicare or Medicaid claim, attorneys' fees and costs. The government
has intervened in two 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.
Columbia/HCA is a defendant in a number of other suits, which allege, in
general, improper and fraudulent billing, overcharging, coding and physician
referrals, as well as other violations of law. Certain of the suits have been
conditionally certified as class actions.
F-10
<PAGE>
LIFEPOINT HOSPITALS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
NOTE 3--COLUMBIA/HCA INVESTIGATIONS, LITIGATION AND INDEMNIFICATION RIGHTS
(Continued)
It is too early to predict the effect or outcome of any of the ongoing
investigations or qui tam and other actions, or whether any additional
investigations or litigation will be commenced. If Columbia/HCA is found to
have violated Federal or state laws relating to Medicare, Medicaid or similar
programs, Columbia/HCA 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 may be substantial, and Columbia/HCA could be subject to substantial
costs resulting from an adverse outcome of one or more of such actions. Any
such sanctions or losses could have a material adverse effect on Columbia/HCA's
financial position and results of operations.
Columbia/HCA has agreed to indemnify LifePoint in respect of any losses which
it may incur as a result of the proceedings described above. Columbia/HCA has
also agreed to indemnify LifePoint in respect of any losses which it may incur
as a result of proceedings which may be commenced by government authorities or
by private parties in the future that arise from acts, practices or omissions
engaged in prior to the distribution date and relate to the proceedings
described above. If any of such indemnified matters were successfully asserted
against LifePoint, or any of its facilities, and Columbia/HCA failed to meet
its indemnification obligations, then such losses could have a material adverse
effect on the business, financial position, results of operations and prospects
of LifePoint. (See Note 11--Contingencies). Columbia/HCA will not indemnify
LifePoint for losses relating to any acts, practices and omissions engaged in
by LifePoint after the distribution date, whether or not LifePoint is
indemnified for similar acts, practices and omissions occurring prior to the
distribution date.
NOTE 4--INCOME TAXES
The provision for income taxes (benefit) for the years ended December 31,
1998, 1997 and 1996 consists of the following (dollars in millions):
<TABLE>
<CAPTION>
1998 1997 1996
----- ----- -----
<S> <C> <C> <C>
Current:
Federal................. $ 2.6 $ 6.5 $ 9.3
State................... -- 1.1 1.7
Deferred:
Federal................. (10.5) 3.6 12.9
State................... (1.9) 0.5 2.4
----- ----- -----
$(9.8) $11.7 $26.3
===== ===== =====
A reconciliation of the federal statutory rate to the effective income tax
rate for the years ended December 31, 1998, 1997 and 1996 follows:
<CAPTION>
1998 1997 1996
----- ----- -----
<S> <C> <C> <C>
Federal statutory rate.... 35.0% 35.0% 35.0%
State income taxes, net of
federal income tax bene-
fit...................... 3.9 4.1 4.0
Non-deductible intangible
assets................... (2.6) 1.1 0.7
Other items, net.......... (0.7) 0.5 0.4
----- ----- -----
Effective income tax
rate..................... 35.6% 40.7% 40.1%
===== ===== =====
</TABLE>
A summary of the items comprising the deferred tax assets and liabilities at
December 31 follows (dollars in millions):
F-11
<PAGE>
LIFEPOINT HOSPITALS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
NOTE 4--INCOME TAXES (Continued)
<TABLE>
<CAPTION>
1998 1997
------------------ ------------------
Assets Liabilities Assets Liabilities
------ ----------- ------ -----------
<S> <C> <C> <C> <C>
Depreciation and fixed asset basis dif-
ferences............................... $ -- $24.8 $ -- $32.4
Doubtful accounts....................... 11.4 -- 6.6 --
Compensation............................ 2.6 -- 2.6 --
Other................................... 4.5 0.6 4.5 0.6
----- ----- ----- -----
$18.5 $25.4 $13.7 $33.0
===== ===== ===== =====
</TABLE>
Current deferred income tax assets totaled $14.4 million and $9.5 million at
December 31, 1998 and 1997, respectively. Noncurrent deferred income tax
liabilities totaled $21.3 million and $28.8 million at December 31, 1998 and
1997, respectively.
Columbia/HCA and LifePoint will enter into a tax sharing and indemnification
agreement which will provide that Columbia/HCA will generally be responsible
for all taxes that are allocable to periods prior to the distribution date and
Columbia/HCA and LifePoint will each be responsible for its own tax liabilities
for periods after the distribution date.
The agreement will not have an impact on the realization of deferred tax
assets or the payment of deferred tax liabilities of LifePoint except to the
extent that the temporary differences give rise to such deferred tax assets and
liabilities as of the distribution date and are adjusted as a result of final
tax settlements after the distribution date. In the event of such adjustments,
the tax sharing and indemnification agreement will provide for certain payments
between Columbia/HCA and LifePoint as appropriate.
NOTE 5--IMPAIRMENT OF LONG-LIVED ASSETS
LifePoint adopted Statement of Financial Accounting Standards No. 121,
"Accounting for the Impairment of Long-Lived Assets and Long-Lived Assets to be
Disposed of" ("SFAS 121") during the first quarter of 1996. SFAS 121 addresses
accounting for the impairment of long-lived assets and long-lived assets to be
disposed of, certain identifiable intangibles and goodwill related to those
assets, and provides guidance for recognizing and measuring impairment losses.
The statement requires that the carrying amount of impaired assets be reduced
to fair value.
During the fourth quarter of 1998, LifePoint decided to sell three hospital
facilities that were identified as not compatible with LifePoint's operating
plans, based upon management's review of all facilities, and giving
consideration to current and expected market conditions and the current and
expected capital needs in each market. The carrying value of the long-lived
assets related to these hospital facilities of approximately $47.0 million was
reduced to fair value, based on estimates of selling values, for a total non-
cash charge of $24.8 million. LifePoint expects to complete the sales of these
facilities during 1999. For the years ended December 31, 1998, 1997 and 1996,
respectively, these facilities to be divested had net revenues of approximately
$48.0 million, $50.6 million and $42.1 million and incurred income (losses)
from continuing operations before income taxes (benefits) and the asset
impairment charge of approximately $(9.6) million, $(3.8) million and
$1.8 million.
LifePoint recorded, during the third quarter of 1998, an impairment loss of
approximately $1.3 million related to the write-off of intangibles and other
long-lived assets of certain physician practices where the recorded asset
values were not deemed to be fully recoverable based upon the operating results
trends and projected future cash flows. These assets being held and used are
now recorded at estimated fair value based upon discounted, estimated future
cash flows.
The impairment charges did not have a significant impact on LifePoint's cash
flows and are not expected to significantly impact cash flows for future
periods. As a result of the write-downs, depreciation and amortization expense
related to these assets will decrease in future periods. In the aggregate, the
net effect of the change in depreciation and amortization expense is not
expected to have a material effect on operating results for future periods.
F-12
<PAGE>
LIFEPOINT HOSPITALS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
NOTE 6--DISCONTINUED OPERATIONS
During the fourth quarter of 1998, Columbia/HCA and LifePoint completed the
divestiture of their home health businesses and received proceeds of
approximately $3.8 million which approximated the carrying value of the net
assets of discontinued operations, which amount was included in other
(noncurrent) assets in the accompanying balance sheet at December 31, 1997.
Columbia/HCA and LifePoint implemented plans to sell the home health businesses
during the third quarter of 1997. The combined financial statements reflect the
results of operations and net assets of the home health businesses as
discontinued operations.
LifePoint recorded a loss from discontinued operations of $4.1 million (net
of tax benefits) in 1998. LifePoint was not able to reasonably estimate, at the
time the decision was made to sell the home health businesses, whether these
businesses would incur losses during the period they were being held for sale.
The ability to estimate operating results during the period these businesses
were being held for sale was negatively impacted by certain changes in Medicare
reimbursement rates, and the need to obtain certain regulatory approvals
affected the ability to estimate the timing of the completion of the sales.
Revenues for the home health businesses disposed of were approximately $18.9
million, $55.3 million and $52.5 million for the years ended December 31, 1998,
1997 and 1996, respectively.
The after-tax loss incurred upon the divestiture of the home health
businesses of $3.4 million was recorded during the fourth quarter of 1997 and
is presented in the "Discontinued operations" section of the combined
statements of operations.
NOTE 7--ACCOUNTING CHANGE
During 1997, LifePoint changed its method of accounting for start-up costs.
The change involved expensing these costs as incurred, rather than capitalizing
and subsequently amortizing such costs. LifePoint believes the new method is
preferable due to certain changes in business strategy and reviews of emerging
accounting guidance on accounting for similar (i.e., start-up, software system
training and process reengineering) costs.
The change in accounting principle resulted in the write-off of the costs
capitalized as of January 1, 1997. The cumulative effect of the write-off,
which totals $0.6 million (net of tax benefit), has been expensed and reflected
in the statement of operations for the year ended December 31, 1997. Had the
new method been used in the past, the pro forma effect on prior years would
have primarily affected 1996 (such costs incurred for periods prior to 1996 are
considered immaterial to operations for those periods). The pro forma effect on
the years ended December 31, 1997 and 1996 follows (dollars in millions):
<TABLE>
<CAPTION>
1997 1996
------------------ ------------------
As As
Reported Pro Forma Reported Pro Forma
-------- --------- -------- ---------
<S> <C> <C> <C> <C>
Income from continuing operations.... $17.1 $17.1 $39.3 $38.7
Net income........................... $12.5 $13.1 $41.2 $40.6
</TABLE>
NOTE 8--LONG TERM DEBT AND INTERCOMPANY BALANCES PAYABLE TO COLUMBIA/HCA
Long-term debt consists of various notes payable to third parties with an
average life of 6 years and rates averaging 9%. Current portion of long-term
debt totaled $.3 million and $.2 million at December 31, 1998 and 1997,
respectively, and is included in other current liabilities on the combined
balance sheets.
Intercompany balances represent the net excess of funds transferred to or
paid on behalf of LifePoint over funds transferred to the centralized cash
management account of Columbia/HCA. Generally, this balance is increased by
cash transfers from and payments of debt made by Columbia/HCA, construction
project additions paid by Columbia/HCA, and certain fees and services provided
by Columbia/HCA, including information systems services and other operating
expenses, such as payroll, interest, insurance and income taxes. Generally, the
balance is decreased through daily cash deposits by LifePoint to the account.
LifePoint is charged interest on the intercompany balances at various rates
ranging from 6% to 10% and the interest computations are based
F-13
<PAGE>
LIFEPOINT HOSPITALS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
NOTE 8--LONG TERM DEBT AND INTERCOMPANY BALANCES PAYABLE TO COLUMBIA/HCA
(Continued)
on the outstanding balance at month end. The net intercompany balances were
$167.6 million and $182.5 million at December 31, 1998 and 1997, respectively.
Interest expense related to the net intercompany balances was $19.1 million,
$15.4 million and $14.1 million for the years ended December 31, 1998, 1997,
and 1996, respectively.
In connection with the Distribution, all intercompany amounts payable by
LifePoint to Columbia/HCA will be eliminated, and LifePoint will assume certain
indebtedness from Columbia/HCA.
NOTE 9--STOCK BENEFIT PLANS
LifePoint employees have participated in the Columbia/HCA Healthcare
Corporation 1992 Stock and Incentive Plan (the "1992 Plan"). Under the 1992
Plan, stock options are generally granted at no less than the market price on
the date of grant. Options are exercisable in whole or in part beginning two to
five years after the grant and ending ten years after the grant. The number of
options granted to LifePoint employees under Columbia/HCA's stock option plan
was approximately 185,000 options, 1,324,800 options, and 357,000 options,
during 1998, 1997 and 1996, respectively.
Immediately following the Distribution, nonvested Columbia/HCA stock options
held by LifePoint employees will be cancelled and LifePoint may, in its
discretion, grant stock option awards. The vested Columbia/HCA stock options
held by LifePoint employees will generally be converted into a combination of
LifePoint stock options, Columbia/HCA stock options and stock options of
Columbia/HCA's other spin-off company, Triad Hospitals, Inc., in a manner that
preserves the pre-spin-off intrinsic value and the pre-spin-off ratio of the
exercise prices to the underlying market value of the related common stock.
At December 31, 1998 there were approximately 2,527,300 Columbia/HCA stock
options held by LifePoint employees. That amount includes an aggregate of
approximately 1,937,800 unvested options that will be cancelled. LifePoint
cannot currently determine the number of shares of its common stock that will
be subject to any discretionary grants of options by LifePoint after the
Distribution.
The following table summarizes information regarding the options outstanding
at December 31, 1998:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
-------------------------------- --------------------
Weighted
Average Weighted Weighted
Number Remaining Average Number Average
Outstanding Contractual Exercise Exercisable Exercise
Range of Exercise Prices at 12/31/98 Life Price at 12/31/98 Price
- ------------------------ ----------- ----------- -------- ----------- --------
<S> <C> <C> <C> <C> <C>
$11.17 to $13.92......... 260,100 4 years $12.62 260,100 $12.62
0.40 to 25.75.......... 124,800 5 years 23.50 100,800 22.96
26.75 to 32.50.......... 268,100 6 years 27.97 131,900 27.98
33.67 to 37.67.......... 357,000 7 years 37.24 89,200 37.24
6.47 to 39.88..........1,509,800 9 years 30.93 -- --
0.14................ 7,500 15 years 0.14 7,500 0.14
--------- -------
2,527,300 589,500
========= =======
</TABLE>
LifePoint has adopted the disclosure provisions of Statement of Financial
Accounting Standards No. 123 ("SFAS 123"), Accounting for Stock-Based
Compensation, but continues to measure stock-based compensation cost in
accordance with Accounting Principles Board Opinion No. 25 and its related
interpretations. Accordingly, no compensation cost has been recognized for
LifePoint's stock benefit plans. If LifePoint had
F-14
<PAGE>
LIFEPOINT HOSPITALS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
NOTE 9--STOCK BENEFIT PLANS (Continued)
measured compensation cost for the Columbia/HCA stock options granted to its
employees during 1998, 1997 and 1996 under the fair value based method
prescribed by SFAS 123, the net income (loss) would have been changed to the
pro forma amounts set forth below (dollars in millions):
<TABLE>
<CAPTION>
1998 1997 1996
------ ----- ------
<S> <C> <C> <C>
Net income (loss):
Reported............................................. $(21.8) $12.5 $41.2
Pro forma............................................ $(22.7) $11.7 $40.9
Basic earnings (loss) per share:
As reported.......................................... ($0.73) $0.41 $ 1.37
Pro forma............................................ ($0.76) $0.39 $ 1.36
Diluted earnings (loss) per share:
As reported.......................................... ($0.73) $0.41 $ 1.36
Pro forma............................................ ($0.76) $0.39 $ 1.35
</TABLE>
The fair values of Columbia/HCA stock options granted to LifePoint employees
used to compute pro forma net income (loss) disclosures were estimated on the
date of grant using the Black-Scholes option-pricing model based on the
following weighted average assumptions used by Columbia/HCA:
<TABLE>
<CAPTION>
1998 1997 1996
------- ------- -------
<S> <C> <C> <C>
Risk free interest rate.............................. 4.74% 5.61% 5.81%
Expected life........................................ 6 years 6 years 6 years
Expected volatility.................................. 23.90% 23.90% 23.90%
Expected dividend yield.............................. .30% .23% .19%
</TABLE>
The weighted-average fair values of Columbia/HCA stock options granted to
LifePoint employees during the years ended 1998, 1997 and 1996 were $8.77,
$11.23 and $13.52 per option, respectively.
The pro forma amounts above are not necessarily representative of the effects
of stock-based awards on future pro forma net income because (1) future grants
of employee stock options by management may not be comparable to awards made to
employees while LifePoint was a part of Columbia/HCA, (2) the assumptions used
to compute the fair value of any stock option awards will be specific to
LifePoint and therefore may not be comparable to the Columbia/HCA assumptions
used and (3) they exclude the pro forma compensation expense related to
unvested stock options granted before 1996.
NOTE 10--RETIREMENT PLANS
LifePoint participates in Columbia/HCA's defined contribution retirement
plans, which cover substantially all employees. Benefits are determined
primarily as a percentage of a participant's earned income and are vested over
specific periods of employee service. Certain plans also require LifePoint to
make matching contributions at certain percentages. The cost of these plans was
$5.3 million, $5.9 million and $4.4 million during 1998, 1997 and 1996,
respectively. Amounts approximately equal to expense for these plans are funded
annually.
F-15
<PAGE>
LIFEPOINT HOSPITALS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
NOTE 11--CONTINGENCIES
Significant Legal Proceedings
Various lawsuits, claims and legal proceedings have been and are expected to
be instituted or asserted against Columbia/HCA and LifePoint, including those
relating to shareholder derivative and class action complaints; purported class
action lawsuits filed by patients and payers alleging, in general, improper and
fraudulent billing, coding and physician referrals, as well as other violations
of law; certain qui tam or "whistleblower" actions alleging, in general,
unlawful claims for reimbursement or unlawful payments to physicians for the
referral of patients, as well as other violations and litigation matters. While
the amounts claimed may be substantial, the ultimate liability cannot be
determined or reasonably estimated at this time due to the considerable
uncertainties
that exist. Therefore, it is possible that Columbia/HCA's and LifePoint's
results of operations, financial position and liquidity in a particular period
could be materially, adversely affected upon the resolution of certain of these
contingencies. (See Note 3--Columbia/HCA Investigations, Litigation and
Indemnification Rights, for a description of the ongoing government
investigations and Columbia/HCA's obligations to indemnify LifePoint with
respect to losses incurred by LifePoint arising from such governmental
investigations and related proceedings.)
General Liability Claims
LifePoint 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
claimants may ask for punitive damages against LifePoint, which are usually not
covered by insurance. It is management's opinion that the ultimate resolution
of pending claims and legal proceedings will not have a material adverse effect
on LifePoint's results of operations or financial position.
Physician Commitments
LifePoint has committed to provide certain financial assistance pursuant to
recruiting agreements with various physicians practicing in the communities it
serves. In consideration for a physician relocating to one of its communities
and agreeing to engage in private practice for the benefit of the respective
community, LifePoint may loan certain amounts of money to a physician normally
over a period of one year to assist in establishing his or her practice.
Amounts committed to be advanced approximated $11.9 million at December 31,
1998. The actual amount of such commitments to be subsequently advanced to
physicians often depends upon the financial results of a physician's private
practice during the guaranteed period. Generally, amounts advanced under the
recruiting agreements may be forgiven prorata over a period of 48 months
contingent upon the physician continuing to practice in the respective
community. It is management's opinion that amounts actually advanced and not
repaid will not have a material adverse effect on LifePoint's results of
operations or financial position.
NOTE 12--OTHER CURRENT LIABILITIES AND ALLOWANCES FOR DOUBTFUL ACCOUNTS
A summary of other current liabilities as of December 31 follows (in
millions):
<TABLE>
<CAPTION>
1998 1997
----- -----
<S> <C> <C>
Employee benefit plans.......................................... $ 7.0 $ 7.0
Taxes other than income......................................... 3.6 3.2
Other........................................................... 4.3 2.2
----- -----
$14.9 $12.4
===== =====
</TABLE>
F-16
<PAGE>
LIFEPOINT HOSPITALS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
NOTE 12--OTHER CURRENT LIABILITIES AND ALLOWANCES FOR DOUBTFUL ACCOUNTS
(Continued)
A summary of activity in LifePoint's allowances for doubtful accounts follows
(in millions):
<TABLE>
<CAPTION>
Additions Accounts
Balances at Charged to Written off, Balance
Beginning Costs and Net of at end
of Period Expenses Recoveries of Period
----------- ---------- ------------ ---------
<S> <C> <C> <C> <C>
Allowances for doubtful ac-
counts:
Year ended December 31,
1996..................... $12.7 $28.0 $(11.2) $29.5
Year ended December 31,
1997..................... 29.5 34.5 (26.5) 37.5
Year ended December 31,
1998..................... 37.5 41.6 (30.8) 48.3
</TABLE>
NOTE 13--EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted earnings
per share from continuing operations (dollars and shares in millions, except
per share amounts):
<TABLE>
<CAPTION>
1998 1997 1996
------ ----- -----
<S> <C> <C> <C>
Numerator (a):
Income (loss) from continuing operations................. $(17.7) $17.1 $39.3
Denominator (b):
Share reconciliation:
Shares used for basic earnings per share................. 30.0 30.0 30.0
Effect of dilutive securities (c):
Stock options and other.............................. -- 0.2 0.3
------ ----- -----
Shares used for diluted earnings per share............... 30.0 30.2 30.3
====== ===== =====
Earnings (loss) per share:
Basic earnings (loss) per share from continuing
operations.............................................. $(0.59) $0.57 $1.31
====== ===== =====
Diluted earnings (loss) per share from continuing
operations.............................................. $(0.59) $0.57 $1.30
====== ===== =====
</TABLE>
- --------
(a) Amount is used for both basic and diluted earnings per share computations
since there is no earnings effect related to the dilutive securities.
(b) LifePoint expects to issue 30,000,000 shares of LifePoint common stock on
the distribution date. Earnings per share information has been presented as
if 30,000,000 shares had been outstanding for all periods presented.
(c) The dilutive effect of approximately 0.2 million shares, related to stock
options, for the year ended December 31, 1998 was not included in the
computation of diluted earnings per share because to do so would have been
antidilutive for those periods.
F-17
<PAGE>
LIFEPOINT HOSPITALS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
NOTE 14--UNAUDITED QUARTERLY FINANCIAL INFORMATION
The quarterly interim financial information shown below has been prepared by
the Company's management and is unaudited. It should be read in conjunction
with the audited combined financial statements appearing herein (dollars in
millions, except per share amounts).
<TABLE>
<CAPTION>
1998
--------------------------------
First Second Third Fourth
------ ------ ------ ------
<S> <C> <C> <C> <C>
Revenues.............................. $130.0 $124.4 $124.7 $119.3
Net income (loss)..................... $ 1.6 $ 1.5 $ (2.2)(a) $(22.7)(b)
Basic and diluted earnings (loss) per
share (see Note 13).................. $ .05 $ .05 $ (.07)(a) $ (.76)(b)
<CAPTION>
1997
--------------------------------
First Second Third Fourth
------ ------ ------ ------
<S> <C> <C> <C> <C>
Revenues.............................. $130.7 $128.5 $116.1 $112.3
Net income (loss):
Income (loss) before accounting
change............................. $ 15.3 $ 13.2 $ 0.2 $(15.6)
Cumulative effect of accounting
change............................. (0.6) -- -- --
------ ------ ------ ------
Net income (loss)................. $ 14.7 $ 13.2 $ 0.2 $(15.6)
====== ====== ====== ======
Basic and diluted earnings (loss) per
share (see Note 13):
Income (loss) before accounting
change............................. $ .51 $ .44 $ -- $ (.52)
Cumulative effect of accounting
change............................. (.02) -- -- --
------ ------ ------ ------
Net income (loss)................. $ .49 $ .44 $ -- $ (.52)
====== ====== ====== ======
</TABLE>
- --------
(a) During the third quarter of 1998, LifePoint recorded a $1.3 million pre-
tax charge ($0.8 million after-tax) related to the impairment of certain
long-lived assets. (See Note 5--Impairment of Long-Lived Assets).
(b) During the fourth quarter of 1998, LifePoint recorded a $24.8 million pre-
tax charge ($15.1 million after-tax) related to the impairment of certain
long-lived assets. (See Note 5--Impairment of Long-Lived Assets).
F-18
<PAGE>
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors and Stockholders
Columbia/HCA Healthcare Corporation
We have audited the accompanying combined balance sheets of the net assets
and operations to be contributed to Triad Hospitals, Inc. (see Note 1) as of
December 31, 1998 and 1997 and the related combined statements of operations,
equity and cash flows for each of the three years in the period ended December
31, 1998. These combined financial statements are the responsibility of
management of Columbia/HCA Healthcare Corporation (the "Company"). Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the combined financial position of the net assets and
operations to be contributed to Triad Hospitals, Inc. (see Note 1) at December
31, 1998 and 1997 and the combined results of their operations and their cash
flows for each of the three years in the period ended December 31, 1998 in
conformity with generally accepted accounting principles.
As explained in Note 7 to the combined financial statements, effective
January 1, 1997, the Company changed its method of accounting for start-up
costs.
Ernst & Young LLP
Nashville, Tennessee
February 26, 1999
F-19
<PAGE>
TRIAD HOSPITALS, INC.
COMBINED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
(Dollars in millions, except per share amounts)
<TABLE>
<CAPTION>
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Revenues.......................................... $1,588.7 $1,609.3 $1,600.5
Salaries and benefits............................. 700.5 666.8 628.1
Supplies.......................................... 241.6 232.8 221.9
Other operating expenses.......................... 359.2 383.4 349.5
Provision for doubtful accounts................... 138.4 138.5 106.5
Depreciation and amortization..................... 109.6 102.9 94.5
Interest expense allocated from Columbia/HCA...... 68.9 60.5 52.0
Management fees allocated from Columbia/HCA....... 29.3 25.4 20.7
Impairment of long-lived assets................... 55.1 13.7 --
-------- -------- --------
1,702.6 1,624.0 1,473.2
-------- -------- --------
Income (loss) from continuing operations before
minority interests and
income taxes..................................... (113.9) (14.7) 127.3
Minority interests in earnings of consolidated
entities......................................... 11.0 11.5 10.8
-------- -------- --------
Income (loss) from continuing operations before
income taxes (benefit)........................... (124.9) (26.2) 116.5
Provision for income taxes (benefit).............. (39.4) (7.2) 48.2
-------- -------- --------
Income (loss) from continuing operations.......... (85.5) (19.0) 68.3
Discontinued operations:
Income (loss) from operations, net of income
taxes (benefit) of $(0.7), $3.2 and $4.1 for
the years ended December 31, 1998, 1997 and
1996, respectively............................. (1.6) 4.9 6.4
Estimated loss on disposal, net of income tax
benefit of $1.9................................ -- (2.9) --
Cumulative effect of accounting change, net of
income tax benefit of $1.8....................... -- (2.8) --
-------- -------- --------
Net income (loss)............................. $ (87.1) $ (19.8) $ 74.7
======== ======== ========
Basic earnings (loss) per share (see Note 13):
Income (loss) from continuing operations........ $ (2.85) $ (0.63) $ 2.28
Income (loss) from discontinued operations...... (0.05) 0.06 0.21
Cumulative effect of accounting change.......... -- (0.09) --
-------- -------- --------
Net income (loss)............................. $ (2.90) $ (0.66) $ 2.49
======== ======== ========
Diluted earnings (loss) per share (see Note 13):
Income (loss) from continuing operations........ $ (2.85) $ (0.63) $ 2.26
Income (loss) from discontinued operations...... (0.05) 0.06 0.21
Cumulative effect of accounting change.......... -- (0.09) --
-------- -------- --------
Net income (loss)............................. $ (2.90) $ (0.66) $ 2.47
======== ======== ========
</TABLE>
The accompanying notes are an integral part of the combined financial
statements.
F-20
<PAGE>
TRIAD HOSPITALS, INC.
COMBINED BALANCE SHEETS
DECEMBER 31, 1998 AND 1997
(Dollars in millions)
<TABLE>
<CAPTION>
Pro Forma
Liabilities
and Equity
1998
(see Note 2) 1998 1997
------------ -------- --------
(unaudited)
ASSETS
------
<S> <C> <C> <C>
Current assets:
Accounts receivable, less allowances for
doubtful accounts of $155.9 and $136.9 at
December 31, 1998 and 1997................. $ 199.3 $ 191.8
Inventories................................. 44.8 43.2
Income taxes................................ 37.9 31.9
Other....................................... 23.9 23.3
-------- --------
305.9 290.2
Property and equipment, at cost:
Land........................................ 82.0 81.1
Buildings................................... 604.9 639.4
Equipment................................... 712.0 655.5
Construction in progress (estimated cost to
complete and equip after
December 31, 1998--$107.8)................. 63.7 46.9
-------- --------
1,462.6 1,422.9
Accumulated depreciation...................... (703.1) (624.2)
-------- --------
759.5 798.7
Intangible assets, net of accumulated
amortization of $50.2 and $40.5 at
December 31, 1998 and 1997................... 272.9 279.9
Investment in equity of affiliates............ 24.3 21.6
Other......................................... 8.7 20.1
-------- --------
$1,371.3 $1,410.5
======== ========
<CAPTION>
LIABILITIES AND EQUITY
----------------------
<S> <C> <C> <C>
Current liabilities:
Accounts payable............................ $ 47.5 $ 47.5 $ 62.6
Accrued salaries............................ 34.8 34.8 38.1
Other current liabilities................... 38.7 38.7 39.2
-------- -------- --------
121.0 121.0 139.9
Intercompany balances payable to
Columbia/HCA................................. -- 613.7 525.0
Long-term debt................................ 675.0 13.4 14.4
Deferred taxes and other liabilities.......... 62.5 62.5 81.3
Minority interests in equity of consolidated
entities..................................... 60.0 60.0 62.1
Equity, investments by Columbia/HCA........... 452.8 500.7 587.8
-------- -------- --------
$1,371.3 $1,371.3 $1,410.5
======== ======== ========
</TABLE>
The accompanying notes are an integral part of the combined financial
statements.
F-21
<PAGE>
TRIAD HOSPITALS, INC.
COMBINED STATEMENTS OF EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
(Dollars in millions)
<TABLE>
<CAPTION>
Pro Forma
1998
(see Note 2) 1998 1997 1996
------------ ------ ------ ------
(unaudited)
<S> <C> <C> <C> <C>
Equity at beginning of period.............. $587.8 $587.8 $607.6 $532.9
Net income (loss)........................ (87.1) (87.1) (19.8) 74.7
Recapitalization upon assumption of
debt.................................... (47.9) -- -- --
------ ------ ------ ------
Equity at end of period.................... $452.8 $500.7 $587.8 $607.6
====== ====== ====== ======
</TABLE>
The accompanying notes are an integral part of the combined financial
statements.
F-22
<PAGE>
TRIAD HOSPITALS, INC.
COMBINED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
(Dollars in millions)
<TABLE>
<CAPTION>
1998 1997 1996
------- ------- -------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss)................................. $ (87.1) $ (19.8) $ 74.7
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Provision for doubtful accounts................. 138.4 138.5 106.5
Depreciation and amortization................... 109.6 102.9 94.5
Deferred income taxes (benefit)................. (24.6) (10.8) 0.8
Impairment of long-lived assets................. 55.1 13.7 --
Loss (income) from discontinued operations...... 1.6 (2.0) (6.4)
Cumulative effect of accounting change.......... -- 2.8 --
Increase (decrease) in cash from operating
assets and liabilities:
Accounts receivable........................... (145.9) (115.3) (135.0)
Inventories and other assets.................. (2.1) (1.6) 3.4
Accounts payable and other current
liabilities.................................. (18.9) (6.8) 19.0
Other........................................... (2.2) (1.3) 7.8
------- ------- -------
Net cash provided by operating activities..... 23.9 100.3 165.3
------- ------- -------
Cash flows from investing activities:
Purchase of property and equipment................ (114.9) (120.1) (94.4)
Investment in and advances to affiliates.......... (2.7) (2.5) (19.1)
Other............................................. 5.9 8.1 2.5
------- ------- -------
Net cash used in investing activities......... (111.7) (114.5) (111.0)
------- ------- -------
Cash flows from financing activities:
Decrease in long-term debt, net................... (0.9) (1.3) (11.5)
Increase (decrease) in intercompany balances with
Columbia/HCA, net................................ 88.7 15.5 (42.8)
------- ------- -------
Net cash provided by (used in) financing
activities................................... 87.8 14.2 (54.3)
------- ------- -------
Change in cash and cash equivalents................. $ -- $ -- $ --
======= ======= =======
Interest payments................................... $ 69.4 $ 61.1 $ 52.2
Income tax payments (refunds), net.................. $ (15.9) $ 3.6 $ 46.6
</TABLE>
The accompanying notes are an integral part of the combined financial
statements.
F-23
<PAGE>
TRIAD HOSPITALS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS
NOTE 1--COLUMBIA/HCA'S PROPOSED SPIN-OFF OF PACIFIC CORPORATION
In 1998, the Board of Directors of Columbia/HCA Healthcare Corporation
("Columbia/HCA") approved in principle the spin-off of its operations
comprising the Pacific Group to its shareholders (the "Distribution") as an
independent, publicly-traded company. The Pacific Group and the independent,
publicly-traded company to which its assets and liabilities will be contributed
are hereinafter referred to as "Triad Hospitals, Inc." or "Triad." The
Distribution is subject to obtaining a tax ruling by the Internal Revenue
Service ("IRS") that would allow it to be tax-free to Columbia/HCA and its
shareholders, various regulatory approvals and approval of a definitive plan by
Columbia/HCA's Board of Directors. Triad is comprised of 39 hospitals
(including two facilities that are being leased from Triad and an investment in
one hospital that is accounted for using the equity method), 19 free-standing
ambulatory surgery centers (including three ambulatory surgery centers that are
being leased from Triad and two investments in ambulatory surgery centers that
are accounted for using the equity method) and related health care entities
located in eleven western, southwestern and southeastern states. The
accompanying financial statements, prepared on the pushed down basis of the
historical cost to Columbia/HCA, represent the combined financial position,
results of operations and cash flows of Triad.
In connection with the Distribution, all intercompany amounts payable by
Triad to Columbia/HCA will be eliminated, and Triad will assume certain
indebtedness from Columbia/HCA. In addition, Triad will enter into various
agreements with Columbia/HCA which are intended to facilitate orderly changes
for both companies in a way which will be minimally disruptive to each entity.
The combined financial statements included herein may not necessarily be
indicative of the results of operations, financial position and cash flows of
Triad in the future or had it operated as a separate, independent company
during the periods presented. The combined financial statements included herein
do not reflect any changes that may occur in the financing and operations of
Triad as a result of the Distribution.
NOTE 2--ACCOUNTING POLICIES
Principles of Combination
The combined financial statements include the accounts of Triad and all
affiliated subsidiaries and entities controlled by Triad through Triad's direct
or indirect ownership of a majority voting interest. Significant intercompany
transactions within Triad have been eliminated. Investments in entities which
Triad does not control, but in which it has a substantial ownership interest
and can exercise significant influence, are accounted for using the equity
method.
The preparation of the combined financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the amounts reported in the financial statements
and accompanying notes. Actual results could differ from those estimates.
Equity
Equity represents the net investment in Triad by Columbia/HCA. It includes
common stock, additional paid-in-capital and net earnings.
Revenues
Triad's health care facilities have entered into agreements with third-party
payers, including government programs and managed care health plans, under
which the facilities are paid based upon established charges, the cost of
providing services, predetermined rates per diagnosis, fixed per diem rates or
discounts from established charges.
F-24
<PAGE>
TRIAD HOSPITALS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
NOTE 2--ACCOUNTING POLICIES (Continued)
Revenues are recorded at estimated amounts due from patients and third-party
payers for the health care services provided. Settlements under reimbursement
agreements with third-party payers are estimated and recorded in the period the
related services are rendered and are adjusted in future periods as final
settlements are determined. The net adjustments to estimated settlements
resulted in increases to revenues of $3.0 million and $32.4 million for the
years ended December 31, 1998 and 1996, respectively (adjustments for 1997
netted to zero). In association with the ongoing Federal investigations into
certain of Columbia/HCA's business practices, the applicable governmental
agencies have ceased the settlement of cost reports. Since the cost reports are
not being settled, the Company is not receiving updated information which has
historically been the basis used to adjust estimated settlement amounts. At
this time, the Company cannot predict when, or if, the historical cost report
settlement process will be resumed. Management believes that adequate
provisions have been made for adjustments that may result from final
determination of amounts earned under these programs. Columbia/HCA will retain
sole responsibility for, and be entitled to, any Medicare, Medicaid or cost-
based Blue Cross settlements relating to cost reporting periods ending on or
prior to the Distribution Date. The estimated net settlement amount as of
December 31, 1998 was a credit of approximately $38.3 million and is included
in accounts receivable in the accompanying balance sheet.
Triad provides care without charge to patients who are financially unable to
pay for the health care services they receive. Because Triad does not pursue
collection of amounts determined to qualify as charity care, they are not
reported in revenues.
Accounts Receivable
Triad receives payment for services rendered from federal and state agencies
(under the Medicare, Medicaid and CHAMPUS programs), managed care health plans,
commercial insurance companies, employers and patients. During the years ended
December 31, 1998, 1997 and 1996, approximately 34.6%, 35.4% and 36.5%,
respectively, of Triad's revenues related to patients participating in the
Medicare program. Triad recognizes that revenues and receivables from
government agencies are significant to its operations, but it does not believe
that there are significant credit risks associated with these government
agencies. Triad does not believe that there are any other significant
concentrations of revenues from any particular payer that would subject it to
any significant credit risks in the collection of its accounts receivable.
Inventories
Inventories are stated at the lower of cost (first-in, first-out) or market.
Long-Lived Assets
(a) Property and Equipment
Property and equipment are stated at cost. Routine maintenance and repairs
are charged to expense as incurred. Expenditures that increase capacities or
extend useful lives are capitalized.
Depreciation expense, computed using the straight-line method, was $99.0
million, $90.8 million and $83.2 million for the years ended December 31, 1998,
1997 and 1996, respectively. Buildings and improvements are depreciated over
estimated useful lives ranging generally from 10 to 40 years. Estimated useful
lives of equipment vary generally from 3 to 10 years.
F-25
<PAGE>
TRIAD HOSPITALS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
NOTE 2--ACCOUNTING POLICIES (Continued)
(b) Intangible Assets
Intangible assets consist primarily of costs in excess of the fair value of
identifiable net assets of acquired entities and are amortized using the
straight-line method, generally over periods ranging from 30 to 40 years for
hospital acquisitions and periods ranging from 5 to 20 years for physician
practice and clinic acquisitions. Noncompete agreements and debt issuance costs
are amortized based upon the terms of the respective contracts or loans.
When events, circumstances and operating results indicate that the carrying
values of certain long-lived assets and the related identifiable intangible
assets might be impaired, Triad prepares projections of the undiscounted future
cash flows expected to result from the use of the assets and their eventual
disposition. If the projections indicate that the recorded amounts are not
expected to be recoverable, such amounts are reduced to estimated fair value.
Income Taxes
Columbia/HCA files consolidated federal and state income tax returns which
includes all of its eligible subsidiaries, including Triad. The provisions for
income taxes (benefits) in the combined statements of operations for all
periods presented have been computed on a separate return basis (i.e., assuming
Triad had not been included in a consolidated income tax return with
Columbia/HCA). All income tax payments are made by Triad through Columbia/HCA.
Deferred tax assets and liabilities result principally from certain revenue
and expense items being recognized for tax purposes in years other than the
year in which they are reflected in the combined financial statements.
General and Professional Liability Risks
Columbia/HCA assumes the liability for all general and professional liability
claims incurred through the distribution date. Accordingly, no reserve for
professional and general liability risks is recorded in the accompanying
combined balance sheets. The cost of general and professional liability
coverage is allocated by Columbia/HCA's captive insurance company to Triad
based on actuarially determined estimates. Triad intends to continue the
general and professional coverage with Columbia/HCA under the same general
terms, through December 31, 1999. The cost for the years ended December 31,
1998, 1997 and 1996 was approximately $27.0 million, $22.9 million and $21.4
million, respectively.
Triad participates in a self-insured program for workers' compensation and
health insurance administered by Columbia/HCA. Columbia/HCA will retain sole
responsibility for all workers' compensation and health claims incurred prior
to the distribution date. Accordingly, no reserves for workers' compensation
and health claims liability risks are recorded in the accompanying combined
balance sheets. The cost for these programs is based upon claims paid, plus an
actuarially determined amount for claims incurred but not reported. The cost
for the years ended December 31, 1998, 1997 and 1996 was approximately $8.1
million, $8.1 million and $7.6 million, respectively.
Management Fees
Columbia/HCA incurs various corporate general and administrative expenses.
These corporate overhead expenses are allocated to Triad based on net revenues.
In the opinion of Columbia/HCA management, this allocation method is
reasonable.
F-26
<PAGE>
TRIAD HOSPITALS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
NOTE 2--ACCOUNTING POLICIES (Continued)
The management fees allocated to Triad are greater than management's estimate
of the general and administrative costs that would have been incurred if Triad
had been a separate, independent entity and had otherwise managed comparable
general and administrative functions. Based upon Triad management's projections
for 1999, if Triad had managed comparable general and administrative functions,
Triad would have incurred approximately $22.4 million for general and
administrative expenses compared to the $29.3 million of management fees
allocated from Columbia/HCA for the year ended December 31, 1998. Subsequent to
the Distribution, Triad will be required to manage these functions and will be
responsible for the expenses associated with the management of a separate
public corporation.
Pro Forma Data (unaudited)
The pro forma combined balance sheet and statement of equity as of December
31, 1998 includes adjustments to reflect the elimination of intercompany
balances payable to Columbia/HCA and the assumption of $675 million in debt
financing in connection with the distribution. The debt financing, which is
currently being arranged, is expected to consist of senior term loans,
subordinated notes and other indebtedness.
Disclosures about Segments of an Enterprise
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 131, Disclosures about Segments of an
Enterprise and Related Information ("SFAS 131").
SFAS 131 establishes standards for the way that public business enterprises
report information about operating segments in annual financial statements and
requires that those enterprises report selected information about operating
segments in interim financial reports. It also establishes standards for
related disclosures about products and services, geographic areas and major
customers. Triad will adopt the new requirements in the annual report following
the Distribution as identification of the reportable operating segments has not
been determined by management at this time.
Disclosures of Derivative Instruments
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, Accounting for Derivative Instruments
and Hedging Activities, which is required to be adopted in years beginning
after June 15, 1999. Because of Triad'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 Triad.
NOTE 3--COLUMBIA/HCA INVESTIGATIONS, LITIGATION AND INDEMNIFICATION RIGHTS
Columbia/HCA is currently the subject of several Federal investigations into
certain of its business practices, as well as governmental investigations by
various states. Columbia/HCA 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,
Columbia/HCA expects additional subpoenas and other 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 for improper claims submitted to the government for reimbursement. The
lawsuits seek damages of three times the amount of all Medicare or Medicaid
claims (involving false claims) presented by the defendants to the Federal
F-27
<PAGE>
TRIAD HOSPITALS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
NOTE 3--COLUMBIA/HCA INVESTIGATIONS, LITIGATION AND INDEMNIFICATION RIGHTS
(Continued)
government, civil penalties of not less than $5,000 nor more than $10,000 for
each such Medicare or Medicaid claim, attorneys' fees and costs. The government
has intervened in two 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.
Columbia/HCA is a defendant in a number of other suits, which allege, in
general, improper and fraudulent billing, overcharging, coding and physician
referrals, as well as other violations of law. Certain of the suits have been
conditionally certified as class actions.
It is too early to predict the effect or outcome of any of the ongoing
investigations or qui tam and other actions, or whether any additional
investigations or litigation will be commenced. If Columbia/HCA is found to
have violated Federal or state laws relating to Medicare, Medicaid or similar
programs, Columbia/HCA 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 may be substantial, and Columbia/HCA could be subject to substantial
costs resulting from an adverse outcome of one or more of such actions. Any
such sanctions or losses could have a material adverse effect on Columbia/HCA's
financial position and results of operations.
Columbia/HCA has agreed to indemnify Triad in respect of any losses which it
may incur as a result of the proceedings described above. Columbia/HCA has also
agreed to indemnify Triad in respect of any losses which it may incur as a
result of proceedings which may be commenced by government authorities or by
private parties in the future that arise from acts, practices or omissions
engaged in prior to the distribution date and relate to the proceedings
described above. If any of such indemnified matters were successfully asserted
against Triad, or any of its facilities, and Columbia/HCA failed to meet its
indemnification obligations, then such losses could have a material adverse
effect on the business, financial position, results of operations or prospects
of Triad (See Note 11--Contingencies). Columbia/HCA will not indemnify Triad
for losses relating to any acts, practices and omissions engaged in by Triad
after the distribution date, whether or not Triad is indemnified for similar
acts, practices and omissions occurring prior to the distribution date.
NOTE 4--INCOME TAXES
The provision for income taxes (benefit) for the years ended December 31,
1998, 1997 and 1996 consists of the following (dollars in millions):
<TABLE>
<CAPTION>
1998 1997 1996
------ ----- -----
<S> <C> <C> <C>
Current:
Federal............................................... $(12.5) $ 3.0 $40.0
State................................................. (2.3) 0.6 7.4
Deferred:
Federal............................................... (20.8) (9.1) 0.7
State................................................. (3.8) (1.7) 0.1
------ ----- -----
$(39.4) $(7.2) $48.2
====== ===== =====
</TABLE>
F-28
<PAGE>
TRIAD HOSPITALS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
NOTE 4--INCOME TAXES (Continued)
A reconciliation of the federal statutory rate to the effective income tax
rate follows:
<TABLE>
<CAPTION>
1998 1997 1996
------ ----------- ------
<S> <C> <C> <C> <C>
Federal statutory rate............ 35.0 % 35.0 % 35.0%
State income taxes, net of federal
income tax benefit............... 3.1 2.4 4.3
Non-deductible intangible assets.. (6.5) (8.8) 2.2
Other items, net.................. (0.2) (1.5) 0.3
----- ----- -----
Effective income tax rate......... 31.4 % 27.1 % 41.8%
===== ===== =====
A summary of the items comprising the deferred tax assets and liabilities at
December 31 follows (dollars in millions):
<CAPTION>
1998 1997
-------------------- -------------------
Assets Liabilities Assets Liabilities
------ ----------- ------ -----------
<S> <C> <C> <C> <C>
Depreciation and fixed asset basis
differences...................... $ - $63.4 $ - $82.1
Doubtful accounts................. 29.8 - 24.2 -
Compensation...................... 8.4 - 8.1 -
Other............................. 5.3 4.0 5.4 4.1
----- ----- ----- -----
$43.5 $67.4 $37.7 $86.2
===== ===== ===== =====
</TABLE>
Deferred income taxes of $37.9 million and $31.9 million at December 31, 1998
and 1997, respectively, are included in current assets. Noncurrent deferred
income tax liabilities totaled $61.8 million and $80.4 million at December 31,
1998 and 1997, respectively.
At December 31, 1998, state net operating loss carryforwards (expiring in
years 1999 through 2003) available to offset future taxable income approximated
$69.0 million. Utilization of net operating loss carryforwards in any one year
may be limited and, in certain cases, result in a reduction of intangible
assets. Net deferred tax assets related to such carryforwards are not
significant.
Columbia/HCA and Triad will enter into a tax sharing and indemnification
agreement which will provide that Columbia/HCA will generally be responsible
for all taxes that are allocable to periods prior to the distribution date and
Columbia/HCA and Triad will each be responsible for its own tax liabilities for
periods after the distribution date. The Tax Sharing and Indemnification
Agreement will not have an impact on the realization of deferred tax assets or
the payment of deferred tax liabilities of Triad except to the extent that the
temporary differences giving rise to such deferred tax assets and liabilities
as of the distribution date are adjusted as a result of final tax settlements
after the distribution date. In the event of such adjustments, the tax sharing
and indemnification agreement will provide for certain payments between
Columbia/HCA and Triad as appropriate.
F-29
<PAGE>
TRIAD HOSPITALS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
NOTE 5--IMPAIRMENT OF LONG-LIVED ASSETS
Triad adopted Statement of Financial Accounting Standards No. 121, Accounting
for the Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed of
("SFAS 121"), during the first quarter of 1996. SFAS 121 addresses accounting
for the impairment of long-lived assets and long-lived assets to be disposed
of, certain identifiable intangibles and goodwill related to those assets, and
provides guidance for recognizing and measuring impairment losses. The
statement requires that the carrying amount of impaired assets be reduced to
fair value.
During the third and fourth quarters of 1998 Triad decided to sell certain
hospital facilities and surgery centers that were identified as not compatible
with Triad's operating plans, based upon management's review of all facilities,
and giving consideration to current and expected competition in each market,
expected population trends in each market and the current and expected capital
needs in each market. The carrying value of the long-lived assets related to
certain of these facilities (4 hospital facilities and one surgery center), of
approximately $75.7 million, was reduced to fair value, based on estimates of
selling values, for a total non-cash charge of $31.1 million. For the years
ended December 31, 1998, 1997 and 1996, respectively, these facilities to be
divested had net revenues of approximately $91.8 million, $97.8 million and
$104.1 million and incurred losses from continuing operations before income tax
benefits and the asset impairment charge of approximately $(30.4) million,
$(28.2) million and $(11.7) million. Triad expects to complete the sales of
these facilities during 1999.
Triad recorded, during the fourth quarters of 1998 and 1997, impairment
losses of approximately $24.0 million and $13.7 million, respectively, related
to one hospital facility in 1998 and intangibles and other long-lived assets of
certain surgery centers and physician practices in 1997, where the recorded
asset values were not deemed to be fully recoverable based upon the operating
results trends and projected future cash flows. These assets being held and
used are now recorded at estimated fair value, based upon discounted, estimated
future cash flows.
The impairment charges did not have a significant impact on Triad's cash
flows and are not expected to significantly impact cash flows for future
periods. As a result of the write-downs, depreciation and amortization expense
related to these assets will decrease in future periods. In the aggregate, the
net effect of the change in depreciation and amortization expense is not
expected to have a material effect on operating results for future periods.
NOTE 6--DISCONTINUED OPERATIONS
During the fourth quarter of 1998, Columbia/HCA and Triad completed the
divestiture of their home health businesses and received proceeds of
approximately $3.9 million, which approximated the carrying value of the net
assets of discontinued operations. The $3.9 million amount related to the net
assets of discontinued operations was included in other (noncurrent) assets at
December 31, 1997. Columbia/HCA and Triad implemented plans to sell the home
health businesses during the third quarter of 1997. The combined financial
statements reflect the results of operations and net assets of the home health
businesses as discontinued operations.
Triad recorded a loss from discontinued operations of $1.6 million (net of
tax benefits) in 1998. Triad was not able to reasonably estimate, at the time
the decision was made to sell the home health businesses, whether these
businesses would incur losses during the period they were being held for sale.
The ability to estimate operating results during the period these businesses
were being held for sale was negatively impacted by certain changes in Medicare
reimbursement rates, and the need to obtain certain regulatory approvals
affected the ability to estimate the timing of the completion of the sales.
F-30
<PAGE>
TRIAD HOSPITALS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
NOTE 6--DISCONTINUED OPERATIONS (Continued)
Revenues for the home health businesses disposed of were approximately $38.3
million, $74.4 million and $79.6 million for the years ended December 31, 1998,
1997 and 1996, respectively.
The after-tax loss incurred upon the divestiture of the home health
businesses of $(2.9) million was recorded during the fourth quarter of 1997 and
is presented in the "Discontinued operations" section of the combined
statements of operations.
NOTE 7--ACCOUNTING CHANGE
During 1997, Triad changed its method of accounting for start-up costs. The
change involved expensing these costs as incurred, rather than capitalizing and
subsequently amortizing such costs. Triad believes the new method is preferable
due to certain changes in business strategy and reviews of emerging accounting
guidance on accounting for similar (i.e., start-up, software system training
and process reengineering) costs.
The change in accounting principle resulted in the write-off of the costs
capitalized as of January 1, 1997. The cumulative effect of the write-off,
which totals $2.8 million (net of tax benefit), has been expensed and reflected
in the statements of operations for the year ended December 31, 1997. Had the
new method been used in the past, the pro forma effect on prior years would
have primarily affected 1996 (such costs incurred for periods prior to 1996 are
considered immaterial to operations for those periods). The pro forma effect on
the years ended December 31, 1997 and 1996 follows (dollars in millions):
<TABLE>
<CAPTION>
1997 1996
------------------ ------------------
As As
Reported Pro Forma Reported Pro Forma
-------- --------- -------- ---------
<S> <C> <C> <C> <C>
Income (loss) from continuing
operations......................... $(19.0) $(19.0) $68.3 $65.5
Net income (loss)................... $(19.8) $(17.0) $74.7 $71.9
</TABLE>
NOTE 8--LONG TERM DEBT AND INTERCOMPANY BALANCES PAYABLE TO COLUMBIA/HCA
A summary of long-term debt follows (including related interest rates at
December 31, 1998), (dollars in millions):
<TABLE>
<CAPTION>
1998 1997
----- -----
<S> <C> <C>
Total debt, average life of 5 years (rates averaging 5.7%)..... $14.4 $15.4
Less amounts due within one year............................... 1.0 1.0
----- -----
$13.4 $14.4
===== =====
</TABLE>
Intercompany balances represent the net excess of funds transferred to or
paid on behalf of Triad over funds transferred to the centralized cash
management account of Columbia/HCA. Generally, this balance is increased by
cash transfers from and payments of debt made by Columbia/HCA, construction
project additions paid by Columbia/HCA, and certain fees and services provided
by Columbia/HCA, including information systems services and other operating
expenses, such as payroll, interest, insurance and income taxes. Generally, the
balance is decreased through daily cash deposits by Triad to the account. Triad
is charged interest on the intercompany balances at various rates ranging from
6% to 10% and the interest computations are based on the outstanding balance at
each month end. The net intercompany balances were $613.7 million and $525.0
million at December 31, 1998 and December 31, 1997, respectively. Interest
expense related to the net intercompany balances was $68.0 million, $59.6
million and $51.0 million for the years ended December 31, 1998, 1997 and 1996,
respectively.
In connection with the Distribution, all amounts payable by Triad to
Columbia/HCA will be eliminated, and Triad will assume certain indebtedness
from Columbia/HCA.
F-31
<PAGE>
TRIAD HOSPITALS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
NOTE 9--STOCK BENEFIT PLANS
Triad employees have participated in the Columbia/HCA Healthcare Corporation
1992 Stock and Incentive Plan (the "1992 Plan"). Under the 1992 Plan, stock
options are generally granted at no less than the market price on the date of
grant. Options are exercisable in whole or in part beginning two to five years
after the grant and ending ten years after the grant. The number of options
granted to Triad employees under Columbia/HCA's option plan was approximately
327,400 options, 1,121,800 options and 487,091 options, during 1998, 1997 and
1996, respectively.
Immediately following the Distribution, nonvested Columbia/HCA stock options
held by Triad employees will be cancelled and Triad may, in its discretion,
grant unvested stock option awards. The vested Columbia/HCA stock options held
by Triad employees will generally be converted into a combination of Triad
stock options, Columbia/HCA stock options and stock options of Columbia/HCA's
other spin-off company, LifePoint Hospitals, Inc., in a manner that preserves
the pre-spin-off intrinsic value and the pre-spin-off ratio of the exercise
prices to the underlying market value of the related common stock.
At December 31, 1998 there were approximately 2,482,800 Columbia/HCA stock
options held by Triad employees. That amount includes an aggregate of
approximately 2,011,400 unvested options that will be cancelled. Triad cannot
currently determine the number of shares of its common stock that will be
subject to any discretionary grants of options by Triad after the Distribution.
The following table summarizes information regarding the options outstanding
at December 31, 1998:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
-------------------------------- --------------------
Weighted
Average Weighted Weighted
Number Remaining Average Number Average
Outstanding Contractual Exercise Exercisable Exercise
Range of Exercise Prices at 12/31/98 Life Price at 12/31/98 Price
------------------------ ----------- ----------- -------- ----------- --------
<S> <C> <C> <C> <C> <C>
$11.55 to $12.22........ 45,900 4 years $11.85 45,900 $11.85
0.40 to 26.50......... 171,000 5 years 24.59 132,600 24.17
26.52 to 32.50......... 329,600 6 years 27.91 167,100 27.90
33.67 to 37.92......... 487,100 7 years 37.12 123,400 37.12
28.19 to 39.88......... 1,121,800 8 years 33.81 2,400 39.88
26.47............... 327,400 9 years 26.47 -- --
--------- -------
2,482,800 471,400
========= =======
</TABLE>
Triad has adopted the disclosure provisions of Statement of Financial
Accounting Standards No. 123 ("SFAS 123"), Accounting for Stock-Based
Compensation, but continues to measure stock-based compensation cost in
accordance with Accounting Principles Board Opinion No. 25 and its related
interpretations. If Triad had measured compensation cost for the Columbia/HCA
stock options granted to its employees during 1998, 1997 and 1996 under the
fair value based method prescribed by SFAS 123, the net income (loss) would
have been changed to the pro forma amounts set forth below (dollars in
millions):
<TABLE>
<CAPTION>
1998 1997 1996
------ ------ -----
<S> <C> <C> <C>
Net income (loss)
Reported............................................. $(87.1) $(19.8) $74.7
Pro forma............................................ $(88.0) $(20.8) $74.3
Basic earnings (loss) per share:
As reported.......................................... $(2.90) $(0.66) $2.49
Pro forma............................................ $(2.93) $(0.69) $2.48
Diluted earnings (loss) per share:
As reported.......................................... $(2.90) $(0.66) $2.47
Pro forma............................................ $(2.93) $(0.69) $2.45
</TABLE>
F-32
<PAGE>
TRIAD HOSPITALS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
NOTE 9--STOCK BENEFIT PLANS (Continued)
The fair values of Columbia/HCA stock options granted to Triad employees used
to compute pro forma net income disclosures were estimated on the date of grant
using the Black-Scholes option-pricing model based on the following weighted
average assumptions used by Columbia/HCA:
<TABLE>
<CAPTION>
1998 1997 1996
------- ------- -------
<S> <C> <C> <C>
Risk free interest rate.............................. 4.74% 5.61% 5.81%
Expected life........................................ 6 years 6 years 6 years
Expected volatility.................................. 23.90% 23.90% 23.90%
Expected dividend yield.............................. .30% .23% .19%
</TABLE>
The weighted-average fair values of Columbia/HCA stock options granted to
Triad employees during the years ended 1998, 1997 and 1996 were $8.77, $12.03
and $13.47 per option, respectively.
The pro forma amounts above are not necessarily representative of the effects
of stock-based awards on future pro forma net income because (1) future grants
of employee stock options by management may not be comparable to awards made to
employees while Triad was a part of Columbia/HCA, (2) the assumptions used to
compute the fair value of any stock option awards will be specific to Triad and
therefore may not be comparable to the Columbia/HCA assumptions used and (3)
they exclude the pro forma compensation expense related to unvested stock
options granted before 1996.
NOTE 10--RETIREMENT PLANS
Triad participates in Columbia/HCA's defined contribution retirement plans,
which cover substantially all employees. Benefits are determined primarily as a
percentage of a participant's earned income and are vested over specific
periods of employee service. Retirement plan expense was $21.0 million, $18.6
million and $15.9 million for the years ended December 31, 1998, 1997 and 1996,
respectively. Amounts approximately equal to retirement plan expense are funded
annually.
NOTE 11--CONTINGENCIES
Significant Legal Proceedings
Various lawsuits, claims and legal proceedings have been and are expected to
be instituted or asserted against Columbia/HCA and Triad, including those
relating to shareholder derivative and class action complaints; purported class
action lawsuits filed by patients and payers alleging, in general, improper and
fraudulent billing, coding and physician referrals, as well as other violations
of law; certain qui tam or "whistleblower" actions alleging, in general,
unlawful claims for reimbursement or unlawful payments to physicians for the
referral of patients, as well as other violations and litigation matters. While
the amounts claimed may be substantial, the ultimate liability cannot be
determined or reasonably estimated at this time due to the considerable
uncertainties that exist. Therefore, it is possible that Columbia/HCA's and
Triad's results of operations, financial position and liquidity in a particular
period could be materially, adversely affected upon the resolution of certain
of these contingencies. (See Note 3--Columbia/HCA Investigations, Litigation
and Indemnification Rights, for a description of the ongoing government
investigations and Columbia/HCA's obligations to indemnify Triad with respect
to losses arising from such governmental investigations and related
proceedings).
F-33
<PAGE>
TRIAD HOSPITALS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
NOTE 11--CONTINGENCIES (Continued)
General Liability Claims
Triad 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
claimants may ask for punitive damages against Triad, which are usually not
covered by insurance. It is management's opinion that the ultimate resolution
of pending claims and legal proceedings will not have a material adverse effect
on Triad's results of operations or financial position.
NOTE 12--OTHER CURRENT LIABILITIES AND ALLOWANCES FOR DOUBTFUL ACCOUNTS
A summary of other current liabilities as of December 31 follows (in
millions):
<TABLE>
<CAPTION>
1998 1997
----- -----
<S> <C> <C>
Employee benefit plans.......................................... $20.7 $20.6
Taxes, other than income........................................ 9.3 8.5
Other........................................................... 8.7 10.1
----- -----
$38.7 $39.2
===== =====
</TABLE>
A summary of activity in Triad's allowances for doubtful accounts follows (in
millions):
<TABLE>
<CAPTION>
Accounts
Balances at Additions Written off, Balances
Beginning Charged to Net of at End
of Period Expense Recoveries of Period
----------- ---------- ------------ ---------
<S> <C> <C> <C> <C>
Allowances for doubtful
accounts:
Year ended December 31,
1996..................... $ 59.9 $106.5 $ (63.3) $103.1
Year ended December 31,
1997..................... 103.1 138.5 (104.7) 136.9
Year ended December 31,
1998..................... 136.9 138.4 (119.4) 155.9
</TABLE>
NOTE 13--EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted earnings
per share from continuing operations (dollars and shares in millions, except
per share amounts):
<TABLE>
<CAPTION>
1998 1997 1996
------ ------ -----
<S> <C> <C> <C>
Numerator (a):
Income (loss) from continuing operations............... $(85.5) $(19.0) $68.3
====== ====== =====
Denominator (b):
Share reconciliation:
Shares used for basic earnings per share............... 30.0 30.0 30.0
Effect of dilutive securities (c):..................... -- -- 0.3
------ ------ -----
Shares used for diluted earnings per share............. 30.0 30.0 30.3
====== ====== =====
Earnings per share:
Basic earnings (loss) per share from continuing
operations............................................ $(2.85) $(0.63) $2.28
====== ====== =====
Diluted earnings (loss) per share from continuing
operations............................................ $(2.85) $(0.63) $2.26
====== ====== =====
</TABLE>
- --------
(a) Amount is used for both basic and diluted earnings per share computations
since there is no earnings effect related to the dilutive securities.
(b) Triad expects to issue 30,000,000 shares of Triad common stock on the
distribution date. Earnings per share information has been presented as if
30,000,000 shares had been outstanding for all periods presented.
(c) The dilutive effect of approximately 0.2 million shares, related to stock
options, for each year ended December 31, 1998 and 1997 was not included in
the computation of diluted earnings per share because to do so would have
been antidilutive for those periods.
F-34
<PAGE>
TRIAD HOSPITALS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
NOTE 14--UNAUDITED QUARTERLY FINANCIAL INFORMATION
The quarterly interim financial information shown below has been prepared by
the Company's management and is unaudited. It should be read in conjunction
with the audited combined financial statements appearing herein (dollars in
millions, except per share amounts).
<TABLE>
<CAPTION>
1998
---------------------------------
First Second Third Fourth
------ ------ ------ ------
<S> <C> <C> <C> <C>
Revenues............................. $414.0 $399.8 $389.6 $385.3
Net loss............................. $ (4.5) $(10.1) $(22.1)(a) $(50.4)(b)
Basic and diluted loss per share (see
Note 13)............................ $(0.15) $(0.34) $(0.73)(a) $(1.68)(b)
<CAPTION>
1997
---------------------------------
First Second Third Fourth
------ ------ ------ ------
<S> <C> <C> <C> <C>
Revenues............................. $433.2 $415.9 $382.8 $377.4
Net income (loss):
Income (loss) before accounting
change............................ $ 30.0 $ 21.8 $(12.9) $(55.9)(c)
Cumulative effect of accounting
change............................ (2.8) -- -- --
------ ------ ------ ------
Net income (loss)................ $ 27.2 $ 21.8 $(12.9) $(55.9)
====== ====== ====== ======
Basic and diluted earnings (loss) per
share (see Note 13):
Income (loss) before accounting
change............................ $ 1.00 $ 0.72 $(0.43) $(1.86)(c)
Cumulative effect of accounting
change............................ (0.09) -- -- --
------ ------ ------ ------
Net income (loss)................ $ 0.91 $ 0.72 $(0.43) $(1.86)
====== ====== ====== ======
</TABLE>
- --------
(a) During the third quarter of 1998, Triad recorded a $19.3 million pretax
charge related to the impairment of certain long-lived assets (See Note 5--
Impairment of Long-lived Assets).
(b) During the fourth quarter of 1998, Triad recorded a $35.8 million pretax
charge related to the impairment of certain long-lived assets (See Note 5--
Impairment of Long-lived Assets).
(c) During the fourth quarter of 1997, Triad recorded a $13.7 million pretax
charge related to the impairment of certain long-lived assets (See Note 5--
Impairment of Long-lived Assets).
F-35
<PAGE>
EXHIBIT 4.1
SPECIMEN STOCK CERTIFICATE
COMMON STOCK
[NUMBER] [LOGO] TRIAD [SHARES]
COMMON STOCK HOSPITALS, INC. CUSIP 89579K 10 9
SEE REVERSE FOR CERTAIN
DEFINITIONS
INCORPORATED UNDER THE LAWS OF THE STATE OF DELAWARE
THIS CERTIFICATE IS TRANSFERABLE IN CLEVELAND, OHIO
THIS CERTIFIES THAT __________________________________________________________
______________________________________________________________________________
______________________________________________________________________________
______________________________________________________________________________
IS THE OWNER OF ______________________________________________________________
FULLY PAID AND NON-ASSESSABLE SHARES OF THE COMMON STOCK, $.01 PAR VALUE PER
SHARE, OF
TRIAD HOSPITALS, INC.
transferable in person or by duly authorized attorney on the books of the
Corporation upon surrender of this certificate properly endorsed.
This certificate and the shares represented hereby are issued and shall be held
subject to the laws of the State of Delaware and the provisions of the
Certificate of Incorporation and the By-laws of the Corporation, as amended from
time to time, to which the holder by acceptance hereof assents.
IN WITNESS WHEREOF, the Corporation has caused this certificate to be signed by
the facsimile signatures of its duly authorized officers and a facsimile of its
corporate seal hereunto affixed.
Dated:
COUNTERSIGNED AND REGISTERED /s/ James D. Shelton
NATIONAL CITY BANK [SEAL] CHAIRMAN AND CHIEF EXECUTIVE OFFICER
(CLEVELAND, OHIO)
/s/ Donald P. Fay
GENERAL COUNSEL AND CORPORATE SECRETARY
Transfer Agent and Registrar
By Authorized Signature
<PAGE>
TRIAD HOSPITALS, INC.
STOCKHOLDERS MAY OBTAIN, WIHTOUT CHARGE, A FULL STATEMENT OF THE
DESIGNATIONS, PREFERENCES, RIGHTS, POWERS, RESTRICTIONS, LIMITATIONS,
QUALIFICATIONS, AND TERMS AND CONDITIONS OF THE STOCK OF EACH CLASS AND OF EACH
SERIES AUTHORIZED TO BE ISSUED BY THE CORPORATION BY WRITTEN REQUEST TO THE
SECRETARY OF TRIAD HOSPITALS, INC. AT THE PRINCIPAL OFFICES OF THE CORPORATION.
THIS CERTIFICATE ALSO EVIDENCES AND ENTITLES THE HOLDER HEREOF TO
CERTAIN RIGHTS AS SET FORTH IN A RIGHTS AGREEMENT BETWEEN THE CORPORATION AND
THE RIGHTS AGENT THEREUNDER (THE "RIGHTS AGREEMENT"), THE TERMS OF WHICH ARE
HEREBY INCORPORATED HEREIN BY REFERENCE AND A COPY OF WHICH IS ON FILE AT THE
PRINCIPAL OFFICES OF THE CORPORATION. UNDER CERTAIN CIRCUMSTANCES, AS SET FORTH
IN THE RIGHTS AGREEMENT, SUCH RIGHTS WILL BE EVIDENCED BY SEPARATE CERTIFICATES
AND WILL NO LONGER BE EVIDENCED BY THIS CERTIFICATE. THE CORPORATION WILL MAIL
TO THE HOLDER OF THIS CERTIFICATE A COPY OF THE RIGHTS AGREEMENT WITHOUT CHARGE
AFTER RECEIPT OF A WRITTEN REQUEST THEREFOR. UNDER CERTAIN CIRCUMSTANCES, AS SET
FORTH IN THE RIGHTS AGREEMENT, RIGHTS ISSUED TO ANY PERSON WHO BECOMES AN
ACQUIRING PERSON (AS DEFINED IN THE RIGHTS AGREEMENT), INCLUDING SUCH RIGHTS
HELD BY A SUBSEQUENT HOLDER, MAY BECOME NULL AND VOID.
The following abbreviations, when used in the inscription on the face of
this Certificate, shall be construed as though they were written out in full
according to applicable laws or regulations:
TEN COM - as tenants in common
TEN ENT - as tenants by the entireties
JT TEN - as joint tenants with right
of survivorship and not as
tenants in common
UNIF GIFT MIN ACT- ____________ Custodian ________________
(Cust) (Minor)
under Uniform Gifts to Minors
Act ___________________________________
State
UNIF TRAN MIN ACT- ____________ Custodian ________________
(Cust) (Minor)
under Uniform Transfers to Minors
Act ___________________________________
State
Additional abbreviations may also be used though not in the above list.
For value received, _____________________ hereby sell, assign and transfer unto
PLEASE INSERT SOCIAL SECURITY
IDENTIFYING NUMBER OF ASSIGNEE
_________________________________
________________________________________________________________________________
________________________________________________________________________________
PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS INCLUDING POSTAL ZIP CODE OF ASSIGNEE
________________________________________________________________________________
________________________________________________________________________________
__________________________________________________________________________Shares
of the capital stock represented by the within Certificate, and do hereby
irrevocably constitute and appoint _____________________________________________
________________________________________________________________________________
Attorney to transfer the said stock on the books of the within-named Corporation
with full power of substitution in the premises.
Dated, ____________________________________________
X_______________________________________________________________________________
NOTICE: THE SIGNATURE(S) TO THIS ASSIGNMENT MUST CORRESPOND WITH THE NAME AS
WRITTEN UPON THE FACE OF THE CERTIFICATE, IN EVERY PARTICULAR WITHOUT ALTERATION
OR ENLARGEMENT, OR ANY CHANGE WHATEVER.
THE SIGNAURES(S) SHOULD BE GUARANTEED BY AN ELIGIBLE GUARANTOR
INSTITUTION, (BANKS, STOCKBROKERS, SAVINGS AND LOAN ASSOCIATIONS AND CREDIT
UNIONS WITH MEMEBERSHIP IN AN APPROVED SIGNATURE GUARANTEE MEDALLION PROGRAM),
PURSUANT TO S.E.C. RULE 17Ad-15.
SIGNATURE(S) GUARANTEED:
KEEP THIS CERTIFICATE IN A SAFE PLACE, IF LOST, STOLEN, MUTILTATED OR DESTROYED,
THE CORPORATION WILL REQUIRE A BOND OF INDEMNITY AS A CONDITION TO THE ISSUANCE
OF A REPLACEMENT CERTIFICATE.
<PAGE>
Exhibit 10.7
SUBLEASE AGREEMENT
THIS SUBLEASE is made as of the ____ day of ________________, 1999 by
and between MEDICAL CARE INTERNATIONAL, INC., a Delaware corporation
("Sublessor"), and TRIAD HOSPITALS, INC., a Delaware corporation ("SubTenant"),
under the following circumstances:
A. Pursuant to a certain Lease Agreement, dated August 18, 1993, as
amended by First Amendment to Lease Agreement, dated January 20, 1995 and Second
Amendment to Lease Agreement, dated January, 1996, (collectively, the "Prime
Lease"), a copy of which is attached hereto as Exhibit A, Two Galleria Tower
Limited, a Texas limited partnership ("Prime Lessor") has leased to Sublessor
the premises described therein (the "Premises").
B. Sublessee desires to lease a portion of the premises leased under
the Prime Lease from Sublessor and Sublessor desires to lease the same to
Sublessee, on the terms and conditions set forth in this Sublease, and
NOW, THEREFORE, in consideration of the covenants and agreements of
the parties hereinafter set forth and other good and valuable consideration,
receipt of which is hereby acknowledged by the parties, Sublessor and Sublessee
hereby agree as follows:
1. Subleased Premises. Sublessor hereby subleases to the Sublessee a
------------------
portion of the premises described in the Prime Lease (hereinafter the "Subleased
Premises") consisting of approximately 22,537 square feet of Net Rentable Area
located on Floor 19 of the building known as Two Galleria Tower.
2. Term. The term of this Sublease shall commence on ___________,
----
1999 and terminate on January 31, 2003 (the "Term").
3. Rent. Sublessee shall pay to Sublessor rent for the Subleased
----
Premises equal to all Rent (as defined in the Prime Lease) payable by Sublessor
under the Prime Lease for the Subleased Premises. (See Amendment to Prime Lease
dated January, 1996 for 19th floor rent.)
4. Assignment/Further Subletting. Sublessee shall not, either
-----------------------------
voluntarily or by operation of law, directly or indirectly sell, hypothecate,
assign or transfer this Sublease, in whole or in part, or further sublet all or
any part of the Subleased Premises, or permit the Subleased Premises to be
occupied by any other person, without the prior written consent of Sublessor and
Prime Lessor in each instance.
Any sale, assignment, mortgage, transfer or subletting of this
Sublease, which is not in compliance with the provisions of this Paragraph 4
shall be void and at the option of Sublessor, Sublessor may terminate this
Sublease. Each such assignment, transfer or further subletting of the Subleased
Premises, if consented to by Sublessor and Prime Lessor shall be subject and
subordinate to the Prime Lease and this Sublease and each such assignee or
sublessee shall be bound to perform, observe and comply with all of the
covenants, agreements and terms and conditions of this Sublease, all of which
shall be specifically assumed in writing by such
<PAGE>
assignee or sublessee. Upon the consummation of any such transfer, assignment or
sublease, Sublessee shall deliver to Sublessor promptly thereafter, a copy of
the fully executed assignment, sublease or other instrument of transfer. The
consent of Sublessor or Prime Lessor to any one assignment or sublease shall not
relieve Sublessee or its assignee or subtenants from obtaining the prior written
consent of Prime Lessor and Sublessor to any further assignment or subletting
and shall not release Sublessee from any liability or obligation hereunder,
whether or not then accrued.
5. Prime Lease. Sublessor represents that a true and complete copy
-----------
of the Prime Lease, as amended, supplemented and modified, is attached hereto as
Exhibit A and Sublessee acknowledges receipt thereof. Sublessor represents and
warrants that the Prime Lease is in full force and effect and Sublessor has no
knowledge of any defaults under the Prime Lease. This Sublease is subject and
subordinate to the Prime Lease, all of the terms and conditions thereof and the
performance by Prime Lessor of all of its obligations thereunder, and to the
extent approved by Sublessee, which approval will not be unreasonably withheld,
all amendments and supplements hereafter entered into. All terms contained in
this Sublease shall have the same meanings and definitions ascribed to them in
the Prime Lease, unless any such term is expressly defined in this Sublease or
the context requires otherwise. Sublessee shall not commit or permit to be
committed on the Subleased Premises any act or omission which violates any term
or condition of the Prime Lease. In the event of the termination of the
Sublessor's interest as Sublessee under the Prime Lease for any reason other
than a default by Sublessor under the Prime Lease which occurs for any reason
other than a breach or a default by Sublessee under this Sublease, then this
Sublease shall terminate coincidentally therewith without any liability of
Sublessor to Sublessee. Sublessee shall only have such rights with respect to
the Leased Premises which Sublessor has pursuant to the Prime Lease. Except as
specifically exempted as provided below in this Paragraph 5, Sublessee shall
assume, perform and observe all of the obligations of Sublessor as Tenant under
the Prime Lease, to the extent that such terms and conditions are applicable to
the Subleased Premises, including without limitation thereto payment (or in the
case of payment in the first instance by Sublessor, reimbursement of Sublessor
for payment) of all rent which becomes due under the Prime Lease with respect to
the Subleased Premises only. Sublessee's performance and observance of all such
obligations shall be effected so that, whenever time periods are specified in
the Prime Lease for Sublessor's compliance as Tenant thereunder, Sublessee shall
have so complied on or prior to such date, unless otherwise specifically
provided herein. Except as otherwise provided in this Sublease, all of the
terms and conditions contained in the Prime Lease, except for the provisions of
2.3, 3.3, 5.4, 6.17, 7.1, 7.2, 7.3, and 7.4 are incorporated herein as terms and
conditions of this Sublease (with each reference in the Prime Lease to
"Landlord" being deemed to refer to Sublessor and Prime Lessor, with each
reference to "Tenant" therein being deemed to refer to Sublessee and with each
reference to the Premises being deemed to refer to the Subleased Premises); and
all such provisions along with all of the provisions specifically set forth in
this Sublease, shall be the complete terms and conditions of this Sublease.
If Prime Lessor shall be in default of any of its obligations under
the Prime Lease, Sublessee shall be entitled to all rights and remedies against
Prime Lessor which Sublessor would otherwise be entitled to under the Prime
Lease as a result of such default; subject,
2
<PAGE>
however, to the following provisions and procedures: Insofar as Prime Lessor is
or may be obligated to construct or make any alterations or improvements to the
Subleased Premises, to furnish any services to the Leased Premises, to repair or
rebuild the same, to insure the Subleased Premises, to perform any other act
whatsoever with respect to the Premises or the Subleased Premises or to perform
any obligation or satisfy any condition under the Prime Lease, Sublessee
expressly acknowledges that notwithstanding anything to the contrary provided in
this Paragraph 5, Sublessor does not undertake the performance or observance of
such obligations, but is only obligated to use reasonable efforts to obtain
Prime Lessor's performance for Sublessee's benefit and without obligating itself
to institute legal action or incur any out of pocket expense. If after receipt
of written request from Sublessee, Sublessor fails or refuses to take
appropriate action for the enforcement of Sublessor's rights against Prime
Lessor with respect to the Leased Premises, Sublessee shall have the right to
take such action in Sublessee's own name and for that purpose and only to such
extent, Sublessor's rights under the Prime Lease shall be and hereby are
conferred upon and assigned to Sublessee. Sublessee shall be subrogated to such
rights to the extent that the same shall apply to the Subleased Premises. If any
such action against Prime Lessor in Sublessee's name shall be barred by reason
of lack of privity, nonassignability or otherwise, Sublessor shall permit
Sublessee to take such action in Sublessor's name; provided, however, that
Sublessee shall indemnify, defend and hold Sublessor harmless from and against
all liability, expense, loss or damage which Sublessor may incur or suffer by
reason of any such action, and that copies of all papers, and notices of all
proceedings, shall be given to Sublessor.
6. Defaults and Remedies. The following events of default and
---------------------
remedies shall govern this Sublease:
(a) Defaults. The following events shall constitute a material
--------
default under this Sublease:
(i) The failure by Sublessee to make any payment of rent or
any other payment required to be made by Sublessee hereunder, as and when due,
where such failure shall continue for a period of 10 days after written notice
thereof from Sublessor or Prime Lessor.
(ii) The failure by Sublessee to observe or perform any of the
covenants, conditions or provisions of this Sublease to be observed or performed
by Sublessee other than those described in Section (i) above, where such failure
shall continue for a period of 30 days after written notice thereof from
Sublessor or Prime Lessor, provided that if the cure of such breach shall
reasonably require more than 30 days, then Sublessee shall not be in default if
Sublessee commenced such cure within said 30 day period and thereafter
diligently prosecutes such cure to completion.
(iii) The making by Sublessee of any general assignment, or
general arrangement for the benefit of creditors; the filing by or against
Sublessee of a petition to have Sublessee adjudged a bankrupt or a petition for
reorganization or arrangement under any bankruptcy law (unless the petition
filed against Sublessee is dismissed within 90 days); the appointment of a
trustee or receiver to take possession of substantially all of Sublessee's
assets located at the Subleased Premises or of Sublessee's interest in this
Sublease, where possession is not restored to Sublessee within 30 days; or the
attachment, execution or other judicial seizure of
3
<PAGE>
substantially all of Sublessee's assets located at the Subleased Premises or
of Sublessee's interest in this Sublease, where such seizure is not discharged
within 60 days.
(b) Remedies. In the event of any such material default, Sublessor
--------
may at any time thereafter, and without limiting Sublessee in the exercise of
any right or remedy which Sublessor may have by reason of such default:
(i) Terminate Sublessee's right to possession of the Subleased
Premises by any lawful means, in which case this Sublease shall terminate and
Sublessee shall immediately surrender possession of the Subleased Premises to
Sublessor. In which event Sublessor shall be entitled to recover from Sublessee
all damages incurred by Sublessor by reason of Sublessee's default including,
but not limited to, the cost of recovering possession of the Subleased Premises;
expenses of reletting, including renovation and alteration of the Subleased
Premises, reasonable attorney's fees, and any real estate commissions actually
paid; the worth at the time of award of the amount by which the unpaid rent for
the balance of the term after the time of such award exceeds the amount of such
rental loss for the same period that Sublessee proves could be reasonably
avoided; and that portion of any leasing commission paid by Sublessor applicable
to the unexpired term of this Sublease. Unpaid installments of Rent or other
sums shall bear interest from the date due at the "prime rate" of interest as
announced from time to time in the Wall Street Journal plus 5%, but in no event
more than the maximum interest allowed by law (which rate is hereinafter
referred to as the "Interest Rate"). If Sublessee abandons the Subleased
Premises, Sublessor shall have the option of retaking possession of the
Subleased Premises and recovering from Sublessee the amount as specified in this
paragraph.
(ii) Maintain Sublessee's right to possession in which case
this Sublease shall continue in effect whether or not Sublessee shall have
abandoned the Subleased Premises. In such event, Sublessor shall be entitled to
enforce all of Sublessor's rights and remedies under this Sublease, including
the right to recover the rent as it becomes due hereunder.
(iii) Sublessor may remove any or all items of Sublessee's
property from the Subleased Premises and dispose of them in any commercially
reasonable manner, and Sublessee shall pay upon demand to Sublessor the actual
expense of such removal and disposition together with interest at the Interest
Rate, but in no event more than the maximum interest allowed by law, from the
date of payment by Sublessor until repayment by Sublessee.
(iv) Pursue any other remedy now or hereafter available to
Sublessor under the laws or judicial decisions of the State of Texas.
7. Notices. Any notice or other communication required or permitted
-------
to be given under this Sublease shall be in writing and shall be deemed to have
been effectively given if delivered personally or if mailed certified mail,
postage prepaid, return receipt requested, or sent by nationally recognized
overnight carrier as follows:
4
<PAGE>
If to Sublessor:
Medical Care International, Inc.
c/o Healthtrust, Inc. - The Hospital Company
One Park Plaza
Building 2, 5th Floor
Nashville, TN 37203
If to Sublessee:
Triad Hospitals, Inc.
2000 Two Galleria Tower
13455 Noel Road
Dallas, Texas 75240
Any party may change the address to which notices and other
communications are to be directed to it by giving notice of such change to the
other party in the manner provided in this section.
8. Parking. Sublessee shall be entitled to Parking Permits for the
following number and type of parking spaces in the Garage and shall pay the
following parking fees:
No. of Spaces Monthly Fee
------------- -----------
General Parking Area: 47 -0-
Executive Parking Area: 25 -0-
VIP Parking Area: 6 -0-
9. Headings. The use of headings, captions and numbers in this
--------
Sublease is solely for the convenience of identifying and indexing the various
paragraphs, and shall in no event be considered otherwise in construing or
interpreting any provision of this Sublease.
10. Severability. If any term, covenant, conditions or provision of
------------
this Sublease, or the application thereof to any person or circumstance shall
ever be held to be invalid or unenforceable, then, in each such event, the
remainder of this Sublease or the application of such term, covenant, condition
or provision to any other person or any other circumstances (other than those as
to which it shall be invalid or unenforceable) shall not be thereby affected,
and each term, covenant, condition and provision hereof shall remain valid and
enforceable to the fullest extent provided by law.
5
<PAGE>
11. Entire Agreement. This Sublease (including the Exhibits, the
----------------
Prime Lease and all supplementary agreements provided for herein, if any)
contains the entire agreement of the Sublessor and the Sublessee and no
representations, warranties, inducements, promises or agreements, oral or
otherwise, between the parties not described in this Sublease shall be of any
force or effect.
12. Modifications. This Sublease shall not be modified or amended in
-------------
any respect except by a written agreement executed by the Sublessor and the
Sublessee in the same manner as this Sublease is executed.
IN WITNESS WHEREOF, Sublessor and Sublessee have executed this
instrument as of the day and year first written above.
SUBLESSOR:
MEDICAL CARE INTERNATIONAL, INC.
By: ___________________________________
Title: ___________________________________
SUBLESSEE:
TRIAD HOSPITALS, INC.
By: ___________________________________
Title: ___________________________________
6
<PAGE>
EXHIBIT A
PRIME LEASE
<PAGE>
Exhibit 10.8
SUBLEASE AGREEMENT
THIS SUBLEASE is made as of the ____ day of ________________, 1999 by
and between MEDICAL CARE AMERICA, INC., a Delaware corporation ("Sublessor"),
and TRIAD HOSPITALS, INC., a Delaware corporation ("SubTenant"), under the
following circumstances:
A. Pursuant to a certain Lease Agreement, dated November 12, 1992, as
amended by First Amendment to Lease Agreement, dated November 30, 1993, Second
Amendment to Lease Agreement, dated June 21, 1994, and Third Amendment to Lease
Agreement, dated January 20, 1995 (collectively, the "Prime Lease"), a copy of
which is attached hereto as Exhibit A, Two Galleria Tower Limited, a Texas
limited partnership ("Prime Lessor") has leased to Sublessor the premises
described therein (the "Premises").
B. Sublessee desires to lease the premises leased under the Prime
Lease from Sublessor and Sublessor desires to lease the same to Sublessee, on
the terms and conditions set forth in this Sublease, and
NOW, THEREFORE, in consideration of the covenants and agreements of
the parties hereinafter set forth and other good and valuable consideration,
receipt of which is hereby acknowledged by the parties, Sublessor and Sublessee
hereby agree as follows:
1. Subleased Premises. Sublessor hereby subleases to the Sublessee
------------------
of the premises described in the Prime Lease (hereinafter the "Subleased
Premises") consisting of approximately 22,248 square feet of Net Rentable Area
located on Floor 20 of the building known as Two Galleria Tower.
2. Term. The term of this Sublease shall commence on ___________,
----
1999 and terminate on January 31, 2003 (the "Term").
3. Rent. Sublessee shall pay to Sublessor rent for the Subleased
----
Premises equal to all Rent (as defined in the Prime Lease) payable by Sublessor
under the Prime Lease.
4. Assignment/Further Subletting. Sublessee shall not, either
-----------------------------
voluntarily or by operation of law, directly or indirectly sell, hypothecate,
assign or transfer this Sublease, in whole or in part, or further sublet all or
any part of the Subleased Premises, or permit the Subleased Premises to be
occupied by any other person, without the prior written consent of Sublessor and
Prime Lessor in each instance.
Any sale, assignment, mortgage, transfer or subletting of this
Sublease, which is not in compliance with the provisions of this Paragraph 4
shall be void and at the option of Sublessor, Sublessor may terminate this
Sublease. Each such assignment, transfer or further subletting of the Subleased
Premises, if consented to by Sublessor and Prime Lessor shall be subject and
subordinate to the Prime Lease and this Sublease and each such assignee or
sublessee shall be bound to perform, observe and comply with all of the
covenants, agreements and terms and conditions of this Sublease, all of which
shall be specifically assumed in writing by such assignee or sublessee. Upon
the consummation of any such transfer, assignment or sublease, Sublessee shall
deliver to Sublessor promptly thereafter, a copy of the fully executed
assignment,
<PAGE>
sublease or other instrument of transfer. The consent of Sublessor
or Prime Lessor to any one assignment or sublease shall not relieve Sublessee or
its assignee or subtenants from obtaining the prior written consent of Prime
Lessor and Sublessor to any further assignment or subletting and shall not
release Sublessee from any liability or obligation hereunder, whether or not
then accrued.
5. Prime Lease. Sublessor represents that a true and complete copy
-----------
of the Prime Lease, as amended, supplemented and modified, is attached hereto as
Exhibit A and Sublessee acknowledges receipt thereof. Sublessor represents and
warrants that the Prime Lease is in full force and effect and Sublessor has no
knowledge of any defaults under the Prime Lease. This Sublease is subject and
subordinate to the Prime Lease, all of the terms and conditions thereof and the
performance by Prime Lessor of all of its obligations thereunder, and to the
extent approved by Sublessee, which approval will not be unreasonably withheld,
all amendments and supplements hereafter entered into. All terms contained in
this Sublease shall have the same meanings and definitions ascribed to them in
the Prime Lease, unless any such term is expressly defined in this Sublease or
the context requires otherwise. Sublessee shall not commit or permit to be
committed on the Subleased Premises any act or omission which violates any term
or condition of the Prime Lease. In the event of the termination of the
Sublessor's interest as Sublessee under the Prime Lease for any reason other
than a default by Sublessor under the Prime Lease which occurs for any reason
other than a breach or a default by Sublessee under this Sublease, then this
Sublease shall terminate coincidentally therewith without any liability of
Sublessor to Sublessee. Sublessee shall only have such rights with respect to
the Leased Premises which Sublessor has pursuant to the Prime Lease. Except as
specifically exempted as provided below in this Paragraph 5, Sublessee shall
assume, perform and observe all of the obligations of Sublessor as Tenant under
the Prime Lease, to the extent that such terms and conditions are applicable to
the Subleased Premises, including without limitation thereto payment (or in the
case of payment in the first instance by Sublessor, reimbursement of Sublessor
for payment) of all rent which becomes due under the Prime Lease. Sublessee's
performance and observance of all such obligations shall be effected so that,
whenever time periods are specified in the Prime Lease for Sublessor's
compliance as Lessee thereunder, Sublessee shall have so complied on or prior to
such date, unless otherwise specifically provided herein. Except as otherwise
provided in this Sublease, all of the terms and conditions contained in the
Prime Lease, except for the provisions of 2.3, 3.3, 5.4, 6.17, 7.1, 7.2, 7.3,
and 7.4 are incorporated herein as terms and conditions of this Sublease (with
each reference in the Prime Lease to "Landlord" being deemed to refer to
Sublessor and Prime Lessor, with each reference to "Tenant" therein being deemed
to refer to Sublessee and with each reference to the Premises being deemed to
refer to the Subleased Premises); and all such provisions along with all of the
provisions specifically set forth in this Sublease, shall be the complete terms
and conditions of this Sublease.
If Prime Lessor shall be in default of any of its obligations under
the Prime Lease, Sublessee shall be entitled to all rights and remedies against
Prime Lessor which Sublessor would otherwise be entitled to under the Prime
Lease as a result of such default; subject, however, to the following provisions
and procedures: Insofar as Prime Lessor is or may be obligated to construct or
make any alterations or improvements to the Subleased Premises, to
2
<PAGE>
furnish any services to the Leased Premises, to repair or rebuild the same, to
insure the Subleased Premises, to perform any other act whatsoever with respect
to the Premises or the Subleased Premises or to perform any obligation or
satisfy any condition under the Prime Lease, Sublessee expressly acknowledges
that notwithstanding anything to the contrary provided in this Paragraph 5,
Sublessor does not undertake the performance or observance of such obligations,
but is only obligated to use reasonable efforts to obtain Prime Lessor's
performance for Sublessee's benefit and without obligating itself to institute
legal action or incur any out of pocket expense. If after receipt of written
request from Sublessee, Sublessor fails or refuses to take appropriate action
for the enforcement of Sublessor's rights against Prime Lessor with respect to
the Leased Premises, Sublessee shall have the right to take such action in
Sublessee's own name and for that purpose and only to such extent, Sublessor's
rights under the Prime Lease shall be and hereby are conferred upon and assigned
to Sublessee. Sublessee shall be subrogated to such rights to the extent that
the same shall apply to the Subleased Premises. If any such action against Prime
Lessor in Sublessee's name shall be barred by reason of lack of privity,
nonassignability or otherwise, Sublessor shall permit Sublessee to take such
action in Sublessor's name; provided, however, that Sublessee shall indemnify,
defend and hold Sublessor harmless from and against all liability, expense, loss
or damage which Sublessor may incur or suffer by reason of any such action, and
that copies of all papers, and notices of all proceedings, shall be given to
Sublessor.
6. Defaults and Remedies. The following events of default and
---------------------
remedies shall govern this Sublease:
(a) Defaults. The following events shall constitute a material
--------
default under this Sublease:
(i) The failure by Sublessee to make any payment of rent or
any other payment required to be made by Sublessee hereunder, as and when due,
where such failure shall continue for a period of 10 days after written notice
thereof from Sublessor or Prime Lessor.
(ii) The failure by Sublessee to observe or perform any of the
covenants, conditions or provisions of this Sublease to be observed or performed
by Sublessee other than those described in Section (i) above, where such failure
shall continue for a period of 30 days after written notice thereof from
Sublessor or Prime Lessor, provided that if the cure of such breach shall
reasonably require more than 30 days, then Sublessee shall not be in default if
Sublessee commenced such cure within said 30 day period and thereafter
diligently prosecutes such cure to completion.
(iii) The making by Sublessee of any general assignment, or
general arrangement for the benefit of creditors; the filing by or against
Sublessee of a petition to have Sublessee adjudged a bankrupt or a petition for
reorganization or arrangement under any bankruptcy law (unless the petition
filed against Sublessee is dismissed within 90 days); the appointment of a
trustee or receiver to take possession of substantially all of Sublessee's
assets located at the Subleased Premises or of Sublessee's interest in this
Sublease, where possession is not restored to Sublessee within 30 days; or the
attachment, execution or other judicial seizure of substantially all of
Sublessee's assets located at the Subleased Premises or of Sublessee's interest
in this Sublease, where such seizure is not discharged within 60 days.
3
<PAGE>
(b) Remedies. In the event of any such material default, Sublessor
--------
may at any time thereafter, and without limiting Sublessee in the exercise of
any right or remedy which Sublessor may have by reason of such default:
(i) Terminate Sublessee's right to possession of the Subleased
Premises by any lawful means, in which case this Sublease shall terminate and
Sublessee shall immediately surrender possession of the Subleased Premises to
Sublessor. In which event Sublessor shall be entitled to recover from Sublessee
all damages incurred by Sublessor by reason of Sublessee's default including,
but not limited to, the cost of recovering possession of the Subleased Premises;
expenses of reletting, including renovation and alteration of the Subleased
Premises, reasonable attorney's fees, and any real estate commissions actually
paid; the worth at the time of award of the amount by which the unpaid rent for
the balance of the term after the time of such award exceeds the amount of such
rental loss for the same period that Sublessee proves could be reasonably
avoided; and that portion of any leasing commission paid by Sublessor applicable
to the unexpired term of this Sublease. Unpaid installments of Rent or other
sums shall bear interest from the date due at the "prime rate" of interest as
announced from time to time in the Wall Street Journal plus 5%, but in no event
more than the maximum interest allowed by law (which rate is hereinafter
referred to as the "Interest Rate"). If Sublessee abandons the Subleased
Premises, Sublessor shall have the option of retaking possession of the
Subleased Premises and recovering from Sublessee the amount as specified in this
paragraph.
(ii) Maintain Sublessee's right to possession in which case
this Sublease shall continue in effect whether or not Sublessee shall have
abandoned the Subleased Premises. In such event, Sublessor shall be entitled to
enforce all of Sublessor's rights and remedies under this Sublease, including
the right to recover the rent as it becomes due hereunder.
(iii) Sublessor may remove any or all items of Sublessee's
property from the Subleased Premises and dispose of them in any commercially
reasonable manner, and Sublessee shall pay upon demand to Sublessor the actual
expense of such removal and disposition together with interest at the Interest
Rate, but in no event more than the maximum interest allowed by law, from the
date of payment by Sublessor until repayment by Sublessee.
(iv) Pursue any other remedy now or hereafter available to
Sublessor under the laws or judicial decisions of the State of Texas.
7. Notices. Any notice or other communication required or permitted
-------
to be given under this Sublease shall be in writing and shall be deemed to have
been effectively given if delivered personally or if mailed certified mail,
postage prepaid, return receipt requested, or sent by nationally recognized
overnight carrier as follows:
4
<PAGE>
If to Sublessor:
Medical Care America, Inc.
c/o Healthtrust, Inc. - The Hospital Company
One Park Plaza
Building 2, 5th Floor
Nashville, TN 37203
If to Sublessee:
Triad Hospitals, Inc.
2000 Two Galleria Tower
13455 Noel Road
Dallas, Texas 75240
Any party may change the address to which notices and other
communications are to be directed to it by giving notice of such change to the
other party in the manner provided in this section.
8. Parking. Sublessee shall be entitled to Parking Permits for the
-------
following number and type of parking spaces in the Garage and shall pay the
following parking fees:
<TABLE>
<S> <C> <C>
No. of Spaces Monthly Fee
------------- -----------
General Parking Area: 24 -0-
Executive Parking Area: 40 -0-
VIP Parking Area: 12 -0-
</TABLE>
9. Headings. The use of headings, captions and numbers in this
--------
Sublease is solely for the convenience of identifying and indexing the various
paragraphs, and shall in no event be considered otherwise in construing or
interpreting any provision of this Sublease.
10. Severability. If any term, covenant, conditions or provision of
------------
this Sublease, or the application thereof to any person or circumstance shall
ever be held to be invalid or unenforceable, then, in each such event, the
remainder of this Sublease or the application of such term, covenant, condition
or provision to any other person or any other circumstances (other than those as
to which it shall be invalid or unenforceable) shall not be thereby affected,
and each term, covenant, condition and provision hereof shall remain valid and
enforceable to the fullest extent provided by law.
5
<PAGE>
11. Entire Agreement. This Sublease (including the Exhibits, the
----------------
Prime Lease and all supplementary agreements provided for herein, if any)
contains the entire agreement of the Sublessor and the Sublessee and no
representations, warranties, inducements, promises or agreements, oral or
otherwise, between the parties not described in this Sublease shall be of any
force or effect.
12. Modifications. This Sublease shall not be modified or amended in
-------------
any respect except by a written agreement executed by the Sublessor and the
Sublessee in the same manner as this Sublease is executed.
IN WITNESS WHEREOF, Sublessor and Sublessee have executed this
instrument as of the day and year first written above.
SUBLESSOR:
MEDICAL CARE AMERICA, INC.
By: ___________________________________
Title: ___________________________________
SUBLESSEE:
TRIAD HOSPITALS, INC.
By: ___________________________________
Title: ___________________________________
6
<PAGE>
EXHIBIT A
PRIME LEASE
<PAGE>
Exhibit 10.9
TRIAD HOSPITALS, INC.
1999 LONG-TERM INCENTIVE PLAN
<PAGE>
TRIAD HOSPITALS, INC.
1999 LONG-TERM INCENTIVE PLAN
Table of Contents
1. Purpose of the Plan..................................................1
2. Definitions..........................................................1
(a) Award.......................................................2
(b) Award Agreement.............................................2
(c) Board.......................................................2
(d) Change in Control...........................................2
(e) Code........................................................2
(f) Columbia/HCA................................................2
(g) Committee...................................................2
(h) Common Stock................................................2
(i) Corporation.................................................2
(j) Date of Grant...............................................2
(k) Dividend Equivalent Award...................................2
(l) Effective Date..............................................2
(m) Eligible Person.............................................2
(n) Employee....................................................2
(o) Fair Market Value...........................................2
(p) Incentive Stock Option......................................3
(q) Non-qualified Stock Option..................................3
(r) Option......................................................3
(s) Participant.................................................3
(t) Phantom Stock Award.........................................3
(u) Plan........................................................3
(v) Performance Award...........................................3
(w) Restricted Stock Award......................................3
(x) Section 162(m)..............................................3
(y) Section 162(m) Award........................................3
(z) Stock Appreciation Right....................................3
(aa) Subsidiary..................................................3
3. Shares of Common Stock Subject to the Plan...........................3
3.1. Number of Shares............................................3
3.2. Adjustments.................................................3
4. Administration of the Plan...........................................4
4.1. Committee Members...........................................4
4.2. Discretionary Authority.....................................4
4.3. Changes to Awards...........................................4
5. Eligibility and Awards...............................................4
6. Stock Options........................................................5
6.1. Grant of Option.............................................5
i
<PAGE>
6.2. Exercise Price..............................................5
6.3. Vesting; Term of Option.....................................5
6.4. Option Exercise; Withholding................................5
6.5. Limited Transferability of Non-qualified Options............5
6.6. Additional Rules for Incentive Stock Options................6
(a) Annual Limits......................................6
(b) Termination of Employment..........................6
(c) Other Terms and Conditions; Nontransferability.....6
(d) Disqualifying Dispositions.........................6
6.7. Restrictions on Transfer of Stock...........................6
7. Stock Appreciation Rights............................................8
7.1. Grant of SARs...............................................8
7.2. Tandem SARs.................................................8
7.3. Freestanding SARs...........................................8
7.4. Payment of SARs.............................................8
8. Restricted Stock Award...............................................8
8.1. Grant of Restricted Stock Awards............................8
8.2. Vesting Requirements........................................8
8.3. Restrictions................................................9
8.4. Rights as Shareholder.......................................9
8.5. Section 83(b) Election......................................9
9. Performance Awards...................................................9
9.1. Grant of Performance Awards.................................9
9.2. Payment of Performance Awards..............................10
9.3. Performance Criteria.......................................10
9.4. Section 162(m) Requirements................................10
10. Phantom Stock Award.................................................10
10.1. Grant of Phantom Stock Awards..............................10
10.2. Payment of a Phantom Stock Awards..........................10
11. Dividend Equivalent Award...........................................11
11.1. Grant of a Dividend Equivalent Awards......................11
11.2. Payment of Dividend Equivalent Awards......................11
12. Change in Control...................................................11
12.1. Effect of Change in Control................................11
12.2. Definition of Change in Control............................11
13. Award Agreements....................................................13
13.1. Form of Agreement..........................................13
13.2. Forfeiture Events..........................................13
14. General Provisions..................................................13
ii
<PAGE>
14.1. No Assignment or Transfer; Beneficiaries..................13
14.2. Deferrals of Payment.......................................14
14.3. Rights as Shareholder......................................14
14.4. Employment or Service......................................14
14.5. Securities Laws............................................14
14.6. Tax Withholding............................................14
14.7. Unfunded Plan..............................................14
14.8. Other Compensation and Benefit Plans.......................15
14.9. Plan Binding on Transferees................................15
14.10. Construction and Interpretation............................15
14.11. Severability...............................................15
14.12. Governing Law..............................................15
15. Effective Date, Termination and Amendment...........................15
15.1. Establishment of the Plan..................................15
15.2. Effective Date; Shareholder Approval.......................15
15.3. Termination................................................15
15.4. Amendment..................................................15
iii
<PAGE>
TRIAD HOSPITALS, INC.
1999 LONG-TERM INCENTIVE PLAN
Purpose of the Plan
The purpose of the Triad Hospitals, Inc. 1999 Long-Term Incentive Plan is
to promote the interests of the Corporation and its shareholders by
strengthening the Corporation's ability to attract, motivate, and retain
personnel upon whose judgment, initiative, and efforts the financial success and
growth of the business of the Corporation largely depend, to offer such
personnel additional incentives to put forth maximum efforts for the success of
the business, and to afford them an opportunity to acquire a proprietary
interest in the Corporation through stock ownership and other rights.
Definitions
Wherever the following capitalized terms are used in this Plan, they shall
have the meanings specified below:
1
<PAGE>
"Award" means an award of an Option, Restricted Stock Award, Stock Appreciation
Right, Performance Award, Phantom Stock Award or Dividend Equivalent Award
granted under the Plan.
"Award Agreement" means an agreement entered into between the Corporation and a
Participant setting forth the terms and conditions of an Award granted to a
Participant.
"Board" means the Board of Directors of the Corporation; provided, however, that
-------- -------
with regard to any action to be taken prior to the first meeting of the Board of
Directors of the Corporation, Board shall mean the Board of Directors of
Columbia/HCA.
"Change in Control" shall have the meaning specified in Section 12 hereof.
"Code" means the Internal Revenue Code of 1986, as amended.
"Columbia/HCA" means the Columbia/HCA Healthcare Corporation, a Delaware
corporation.
"Committee" means the committee appointed to administer the Plan and shall
consist of two or more directors of the Corporation (i) none of whom shall be
officers or employees of the Corporation, and (ii) all of whom, to the extent
deemed necessary or appropriate by the Board, shall satisfy the requirements for
an "outside director" under Section 162(m) and a "non-employee director" within
the meaning of Rule 16b-3 of the Securities Exchange Act of 1934. The members
of the Committee shall be appointed by and serve at the pleasure of the Board.
Notwithstanding the foregoing, prior to the date Columbia/HCA distributes all of
its shares of the Corporation to the shareholders of Columbia/HCA, Committee
shall mean a committee of two or more Directors of Columbia/HCA appointed to
administer the plan (i) none of whom shall be officers or employees of
Columbia/HCA, and (ii) all of whom, to the extent deemed necessary or
appropriate by the Board of Columbia/HCA, shall satisfy the requirements for an
"outside director" under Section 162(m) and a "non-employee director" within the
meaning of Rule 16b-3 of the Securities Exchange Act of 1934. If the applicable
Board shall so direct, designated members of the applicable Committee shall act
as a separate subcommittee, which shall administer the Plan as to all Section
162(m) Awards. In such event, all references herein to the applicable Committee
relating to Section 162(m) Awards shall be considered to refer only to the
applicable separate subcommittee.
"Common Stock" means the common stock of the Corporation.
"Corporation" means Triad Hospitals, Inc., a Delaware corporation.
"Date of Grant" means the date on which an Award under the Plan is made by the
Committee, or such later date as the Committee may specify to be the effective
date of the Award.
"Dividend Equivalent Award" means an Award under Section 11 hereof entitling the
Participant to receive payments with respect to dividends declared on the Common
Stock.
"Effective Date" means the Effective Date of this Plan, as defined in Section
15.2 hereof.
"Eligible Person" means any person who is an Employee of the Corporation or any
of its Subsidiaries and, in the case of Awards other than Incentive Stock
Options, any consultant or other independent contractor (not including any non-
employee outside director) providing services to the Corporation or a
Subsidiary.
"Employee" means any person who is employed as a common-law employee.
"Fair Market Value" of a share of Common Stock as of a given date shall mean the
closing sales price of the Common Stock on the Nasdaq Stock Market on the
trading day immediately preceding the date as of which the Fair Market Value is
to be determined, or, in the absence of any reported sales of Shares on such
date, on the first preceding date on which any such sale shall have been
reported (in either case, as reported in the Two Star Edition of The Wall Street
Journal). If the Common Stock is not listed on the Nasdaq Stock Market on the
date as of which
2
<PAGE>
Fair Market Value is to be determined, the Committee shall in good faith
determine the Fair Market Value in whatever manner it considers appropriate.
"Incentive Stock Option" means an option to purchase Common Stock that is
intended to qualify as an incentive stock option under section 422 of the Code
and the Treasury Regulations thereunder.
"Non-qualified Stock Option" means an option to purchase Common Stock that is
not an Incentive Stock Option.
"Option" means an Incentive Stock Option or a Non-qualified Stock Option granted
under Section 6 hereof.
"Participant" means any Eligible Person who holds an outstanding Award under the
Plan.
"Phantom Stock Award" means an Award under Section 10 hereof entitling a
Participant to a payment at the end of a vesting period of a unit value based on
the Fair Market Value of a share of Common Stock.
"Plan" means the Triad Hospitals, Inc. 1999 Long-Term Incentive Plan as set
forth herein, as it may be amended from time to time.
"Performance Award" means an Award under Section 9 hereof entitling a
Participant to a payment based on the Fair Market Value of a share of Common
Stock (a "Performance Share") or based on specified dollar units (a "Performance
Unit") at the end of a performance period, if certain conditions established by
the Committee are satisfied.
"Restricted Stock Award" means an Award under Section 8 hereof entitling a
Participant to shares of Common Stock that are nontransferable and subject to
forfeiture until specific conditions established by the Committee are satisfied.
"Section 162(m)" means section 162(m) of the Code and the Treasury Regulations
thereunder.
"Section 162(m) Award" means any Award that is intended to qualify for the
performance-based compensation exemption under Section 162(m).
"Stock Appreciation Right" or "SAR" means an Award under Section 7 hereof
entitling a Participant to receive an amount representing the difference between
the base price per share of the right and the Fair Market Value of a share of
Common Stock on the date of exercise.
"Subsidiary" means an entity (whether or not a corporation) that is wholly or
majority owned or controlled, directly or indirectly, by the Corporation, or any
other affiliate of the Corporation that is so designated, from time to time, by
the Committee; provided, however, that with respect to Incentive Stock Options,
-------- -------
the term "Subsidiary" shall include only an entity that qualifies under section
424(f) of the Code as a "subsidiary corporation" with respect to the
Corporation.
Shares of Common Stock Subject to the Plan
Number of Shares. Subject to the following provisions of this Section 3, the
- ----------------
aggregate number of shares of Common Stock that may be issued pursuant to all
Awards under the Plan is ___________ shares of Common Stock. The shares of
Common Stock to be delivered under the Plan will be made available from
authorized but unissued shares of Common Stock or issued shares that have been
reacquired by the Corporation. To the extent that any Award payable in Common
Stock is forfeited, cancelled, returned to the Corporation for failure to
satisfy vesting requirements or upon the occurrence of other forfeiture events,
or otherwise terminates without payment being made thereunder, shares of Common
Stock covered thereby will no longer be charged against the foregoing maximum
share limitations and may again be made subject to Awards under the Plan
pursuant to such limitations.
Adjustments. If there shall occur any recapitalization, reclassification, stock
- -----------
dividend, stock split, reverse stock split, or other distribution with respect
to the shares of Common Stock, or
3
<PAGE>
other change in corporate structure affecting the Common Stock, the Committee
may, in the manner and to the extent that it deems appropriate and equitable to
the Participants and consistent with the terms of this Plan, cause an adjustment
to be made in (i) the maximum number and kind of shares provided in Section 3.1
hereof, (ii) the maximum number and kind of shares set forth in Sections 6.1,
7.1, 8.1 and 9.4 hereof, (iii) the number and kind of shares of Common Stock,
share units, or other rights subject to then outstanding Awards, (iv) the price
for each share or unit or other right subject to then outstanding Awards, (v)
the performance targets or goals applicable to any outstanding Performance
Awards (subject to such limitations as are considered appropriate for Section
162(m) Awards), or (vi) any other terms of an Award that are affected by the
event. Notwithstanding the foregoing, in the case of Incentive Stock Options,
any such adjustments shall be made in a manner consistent with the requirements
of section 424(a) of the Code and, to the extent considered advisable by the
Committee, in a manner consistent with the requirements of Section 162(m).
Administration of the Plan
Committee Members. The Plan shall be administered by the Committee. The
- -----------------
Committee shall have such powers and authority as may be necessary or
appropriate for the Committee to carry out its functions as described in the
Plan. No member of the Committee shall be liable for any action or
determination made in good faith by the Committee with respect to the Plan or
any Award thereunder.
Discretionary Authority. Subject to the express limitations of the Plan, the
- -----------------------
Committee shall have authority in its discretion to determine the Eligible
Persons to whom, and the time or times at which, Awards may be granted, the
number of shares, units or other rights subject to each Award, the exercise,
base or purchase price of an Award (if any), the time or times at which an Award
will become vested, exercisable or payable, the performance criteria,
performance goals and other conditions of an Award, the duration of the Award,
and all other terms of the Award. The Committee shall also have discretionary
authority to interpret the Plan, to make all factual determinations under the
Plan, and to make all other determinations necessary or advisable for Plan
administration. The Committee may prescribe, amend, and rescind rules and
regulations relating to the Plan. All interpretations, determinations, and
actions by the Committee shall be final, conclusive, and binding upon all
parties.
Changes to Awards. The Committee shall have the authority to effect, at any
- -----------------
time and from time to time, (i) the cancellation of any or all outstanding
Awards and the grant in substitution therefor of new Awards covering the same or
different numbers of shares of Common Stock and having an exercise or base price
which may be the same as or different than the exercise or base price of the
cancelled Awards, or (ii) the amendment of the terms of any and all outstanding
Awards; provided, however, that no such action by the Committee may adversely
-------- -------
impair the rights of a Participant (or any permitted transferee) under any
outstanding Award without the consent of the Participant (or transferee). The
Committee may in its discretion accelerate the vesting or exercisability of an
Award at any time or on the basis of any specified event.
Eligibility and Awards
All Eligible Persons are eligible to be designated by the Committee to
receive an Award under the Plan. The Committee has authority, in its sole
discretion, to determine and designate from time to time those Eligible Persons
who are to be granted Awards, the types of Awards to be granted and the number
of shares or units subject to the Awards that are granted under the Plan. Each
Award will be evidenced by an Award Agreement between the Corporation and the
Participant that shall include such terms and conditions (consistent with the
Plan) as the
4
<PAGE>
Committee may determine; provided, however, that failure to issue an Award
-------- -------
Agreement shall not invalidate an Award.
Stock Options
Grant of Option. An Option may be granted to any Eligible Person selected by
- ---------------
the Committee; provided, however, that only Employees of the Corporation or a
-------- -------
Subsidiary shall be eligible to receive Incentive Stock Options. Subject to the
applicable provisions of section 422 of the Code, each Option shall be
designated, in the discretion of the Committee, as an Incentive Stock Option or
a Non-qualified Stock Option. The maximum number of shares of Common Stock that
may be granted under Options to any Participant during any calendar year shall
be limited to _______ shares (subject to adjustment as provided in Section 3.2
hereof).
Exercise Price. The exercise price under any Option shall be determined by the
- --------------
Committee; provided, however, that the exercise price per share under an Option
-------- -------
shall not be less than 100 percent of the Fair Market Value per share of the
Common Stock on the Date of Grant.
Vesting; Term of Option. The Committee, in its sole discretion, shall prescribe
- -----------------------
the time or times at which, or the conditions upon which, an Option or portion
thereof shall become vested and exercisable, and may accelerate the
exercisability of any Option at any time. The period during which a vested
Option may be exercised shall be ten years from the Date of Grant, unless a
shorter exercise period is specified by the Committee in an Award, subject to
such limitations as may apply under an Award relating to the termination of a
Participant's employment or other service with the Corporation or any
Subsidiary.
Option Exercise; Withholding. Subject to such terms and conditions as shall be
- ----------------------------
specified in an Award, an Option may be exercised in whole or in part at any
time during the term thereof by written notice to the Corporation, together with
payment of the aggregate exercise price therefor. Payment of the exercise price
shall be made (i) in cash or by cash equivalent, (ii) at the discretion of the
Committee, in shares of Common Stock acceptable to the Committee, valued at the
Fair Market Value of such shares on the date of exercise, (iii) at the
discretion of the Committee, by a delivery of a notice that the Participant has
placed a market sell order (or similar instruction) with a broker with respect
to shares of Common Stock then issuable upon exercise of the Option, and that
the broker has been directed to pay a sufficient portion of the net proceeds of
the sale to the Corporation in satisfaction of the Option exercise price
(conditioned upon the payment of such net proceeds), (iv) at the discretion of
the Committee, by a combination of the methods described above, or (v) by such
other method as may be approved by the Committee and set forth in the Award. In
addition to and at the time of payment of the exercise price, the Participant
shall pay to the Corporation the full amount of any and all applicable income
tax and employment tax amounts required to be withheld in connection with such
exercise, payable under such of the methods described above for the payment of
the exercise price of the Options as may be approved by the Committee.
Limited Transferability of Non-qualified Options. All Options shall be
------------------------------------------------
nontransferable except (i) upon the Participant's death, by the Participant's
will or the laws of descent and distribution or (ii) in the case Non-qualified
Stock Options only, on a case-by-case basis as may be approved by the Committee
in its discretion, in accordance with the terms provided below. An Award
Agreement for a Non-qualified Stock Option may provide that the Participant
shall be permitted to, during his or her lifetime and subject to the prior
approval of the Committee at the time of proposed transfer, transfer all or part
of the Option to the Participant's family member (as defined in the Award
Agreement in a manner consistent with the requirements for the Form S-8
registration statement, if applicable). Any such transfer shall be subject to
the condition that it is
5
<PAGE>
made by the Participant 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 Participant therefor. The transfer of a Non-
qualified Stock Option may be subject to such other terms and conditions as the
Committee may in its discretion impose from time to time, including a condition
that the portion of the Option to be transferred be vested and exercisable by
the Participant at the time of the transfer. Subsequent transfers of an Option
shall be prohibited other than by will or the laws of descent and distribution
upon the death of the transferee.
Additional Rules for Incentive Stock Options.
- --------------------------------------------
(a) Annual Limits. No Incentive Stock Option shall be granted to a
-------------
Participant as a result of which the aggregate Fair Market Value (determined as
of the Date of Grant) of the stock with respect to which Incentive Stock Options
are exercisable for the first time in any calendar year under the Plan and any
other stock option plans of the Corporation, any Subsidiary, or any parent
corporation, would exceed the maximum amount permitted under section 422(d) of
the Code. This limitation shall be applied by taking Options into account in the
order in which granted.
Termination of Employment. An Award of an Incentive Stock Option may provide
- -------------------------
that such Option may be exercised not later than 3 months following termination
of employment of the Participant with the Corporation and all Subsidiaries,
subject to special rules relating to death and disability, as and to the extent
determined by the Committee to be appropriate with regard to the requirements of
section 422 of the Code and Treasury Regulations thereunder.
Other Terms and Conditions; Nontransferability. Any Incentive Stock Option
- ----------------------------------------------
granted hereunder shall contain such additional terms and conditions, not
inconsistent with the terms of this Plan, as are deemed necessary or desirable
by the Committee, which terms, together with the terms of this Plan, shall be
intended and interpreted to cause such Incentive Stock Option to qualify as an
"incentive stock option" under section 422 of the Code. Such terms shall
include, if applicable, limitations on Incentive Stock Options granted to ten-
percent owners of the Corporation. An Award Agreement for an Incentive Stock
Option may provide that such Option shall be treated as a Non-qualified Stock
Option to the extent that certain requirements applicable to "incentive stock
options" under the Code shall not be satisfied. An Incentive Stock Option shall
by its terms be nontransferable otherwise than by will or by the laws of descent
and distribution, and shall be exercisable during the lifetime of a Participant
only by such Participant.
Disqualifying Dispositions. If shares of Common Stock acquired by exercise of
- --------------------------
an Incentive Stock Option are disposed of within two years following the Date of
Grant or one year following the transfer of such shares to the Participant upon
exercise, the Participant shall, promptly following such disposition, notify the
Corporation in writing of the date and terms of such disposition and provide
such other information regarding the disposition as the Committee may reasonably
require.
Restrictions on Transfer of Stock. The Committee may, in its sole
---------------------------------
discretion, impose in any Award of an Option restrictions on the transferability
of the shares of Common Stock issued upon exercise of such Option. If any such
restrictions are imposed, the Committee may require the Participant to enter
into an escrow agreement providing that the certificates representing the shares
subject to such transfer restrictions will remain in the physical custody of an
escrow holder until such restrictions are removed or have expired. The
Committee may require that certificates representing the shares subject to such
restrictions bear a legend making appropriate reference to the restrictions
imposed. Subject to any restrictions imposed in accordance with this Section
6.7, the Participant will have all rights of a shareholder with respect to any
such shares
6
<PAGE>
acquired upon an Option exercise, including the right to vote the shares and
receive all dividends and other distributions paid or made with respect thereto.
7
<PAGE>
Stock Appreciation Rights
Grant of SARs. A Stock Appreciation Right granted to a Participant is an Award
- -------------
in the form of a right to receive, upon surrender of the right but without other
payment, an amount based on appreciation in the Fair Market Value of the Common
Stock over a base price established for the Award, exercisable at such time or
times and upon conditions as may be approved by the Committee. The maximum
number of shares of Common Stock that may be subject to SARs granted to any
Participant during any calendar year shall be limited to ____________ shares
(subject to adjustment as provided in Section 3.2 hereof).
Tandem SARs. A Stock Appreciation Right may be granted in connection with an
- -----------
Option, either at the time of grant or at any time thereafter during the term of
the Option. An SAR granted in connection with an Option will entitle the
holder, upon exercise, to surrender such Option or any portion thereof to the
extent unexercised, with respect to the number of shares as to which such SAR is
exercised, and to receive payment of an amount computed as described in Section
7.4 hereof. Such Option will, to the extent and when surrendered, cease to be
exercisable. An SAR granted in connection with an Option hereunder will have a
base price per share equal to the per share exercise price of the Option, will
be exercisable at such time or times, and only to the extent, that a related
Option is exercisable, and will expire no later than the related Option expires.
Freestanding SARs. A Stock Appreciation Right may be granted without any
- -----------------
related Option, and in such case, will be exercisable as determined by the
Committee, but in no event after 10 years from the Date of Grant. The base
price of an SAR granted without any related Option shall be determined by the
Committee in its sole discretion; provided, however, that the base price per
-------- -------
share of any such freestanding SAR shall not be less than 100 percent of the
Fair Market Value of the Common Stock on the Date of Grant.
Payment of SARs. An SAR will entitle the holder, upon exercise of the SAR, to
- ---------------
receive payment of an amount determined by multiplying: (i) the excess of the
Fair Market Value of a share of Common Stock on the date of exercise of the SAR
over the base price of such SAR, by (ii) the number of shares as to which such
SAR is exercised. Payment of the amount determined under the foregoing may be
made, in the discretion of the Committee, in cash, in shares of Common Stock
valued at their Fair Market Value on the date of exercise, or in a combination
of cash and shares of Common Stock.
Restricted Stock Award
Grant of Restricted Stock Awards. An Award of Restricted Stock to a Participant
- --------------------------------
represents shares of Common Stock that are issued subject to such restrictions
on transfer and other incidents of ownership and such forfeiture conditions as
the Committee may determine. The Committee may, in connection with any
Restricted Stock Award, require the payment of a specified purchase price. The
Committee may grant a Restricted Stock Award that is a Section 162(m) Award (as
described in Section 8.2 below), as well as Restricted Stock Awards that are not
Section 162(m) Awards; provided, however, that the maximum number of shares of
-------- -------
Common Stock that may be subject to a Restricted Stock Award granted to a
Participant during any one calendar year shall be separately limited to
__________ shares (subject to adjustment as provided in Section 3.2 hereof).
Vesting Requirements. The restrictions imposed on shares granted under a
--------------------
Restricted Stock Award shall lapse in accordance with the vesting requirements
specified by the Committee in the Award Agreement. Such vesting requirements
may be based on the continued employment of the Participant with the Corporation
or its Subsidiaries for a specified time period
8
<PAGE>
or periods, provided that any such restriction shall not be scheduled to lapse
in its entirety earlier than the first anniversary of the Date of Grant. Such
vesting requirements may also be based on the attainment of specified business
goals or measures established by the Committee in its sole discretion. In the
case of any Restricted Stock Award that is a Section 162(m) Award, any such
performance-based vesting requirements shall be based upon the performance
criteria identified in Section 9.3 below, and the terms of the Award shall
otherwise comply with the Section 162(m) requirements described in Section 9.4
hereof.
Restrictions. Shares granted under any Restricted Stock Award may not be
- ------------
transferred, assigned or subject to any encumbrance, pledge, or charge until all
applicable restrictions are removed or have expired, unless otherwise allowed by
the Committee. The Committee may require the Participant to enter into an
escrow agreement providing that the certificates representing the shares granted
or sold under a Restricted Stock Award will remain in the physical custody of an
escrow holder until all restrictions are removed or have expired. Failure to
satisfy any applicable restrictions shall result in the subject shares of the
Restricted Stock Award being forfeited and returned to the Corporation, with any
purchase price paid by the Participant to be refunded, unless otherwise provided
by the Committee. The Committee may require that certificates representing the
shares granted under a Restricted Stock Award bear a legend making appropriate
reference to the restrictions imposed.
Rights as Shareholder. Subject to the foregoing provisions of this Section 8
- ---------------------
and the applicable Award Agreement, the Participant will have all rights of a
shareholder with respect to the shares granted to him under a Restricted Stock
Award, including the right to vote the shares and receive all dividends and
other distributions paid or made with respect thereto, unless the Committee
determines otherwise at the time the Restricted Stock Award is granted.
Section 83(b) Election. The Committee may provide in an Award Agreement that
- ----------------------
the Restricted Stock Award is conditioned upon the Participant's refraining from
making an election with respect to the Award under section 83(b) of the Code.
Irrespective of whether an Award is so conditioned, if a Participant makes an
election pursuant to section 83(b) of the Code with respect to a Restricted
Stock Award, the Participant shall be required to promptly file a copy of such
election with the Corporation.
Performance Awards
Grant of Performance Awards. The Committee may grant Performance Awards under
- ---------------------------
the Plan, which shall be represented by units denominated on the Date of Grant
either in shares of Common Stock (Performance Shares) or in dollars (Performance
Units). The Committee may grant Performance Awards that are Section 162(m)
Awards, as well as Performance Awards that are not Section 162(m) Awards. At
the time a Performance Award is granted, the Committee shall determine, in its
sole discretion, one or more performance periods and performance goals to be
achieved during the applicable performance periods, as well as such other
restrictions and conditions as the Committee deems appropriate. In the case of
Performance Units, the Committee shall also determine a target unit value or a
range of unit values for each Award. No performance period shall exceed ten
years from the Date of Grant. The performance goals applicable to a Performance
Award grant may be subject to such later revisions as the Committee shall deem
appropriate to reflect significant unforeseen events, such as changes in law,
accounting practices or unusual or nonrecurring items or occurrences. The
Committee's authority to make such adjustments shall be subject to such
limitations as the Committee deems appropriate in the case of a Performance
Award that is a Section 162(m) Award.
9
<PAGE>
Payment of Performance Awards. At the end of the performance period, the
- -----------------------------
Committee shall determine the extent to which performance goals have been
attained, or a degree of achievement between minimum and maximum levels, in
order to establish the level of payment to be made, if any, and shall determine
if payment is to be made in the form of cash or shares of Common Stock (valued
at their Fair Market Value at the time of payment) or a combination of cash and
shares of Common Stock. Payments of Performance Awards shall generally be made
as soon as practicable following the end of the performance period.
Performance Criteria. The performance criteria upon which the payment or
- --------------------
vesting of a Performance Award that is a Section 162(m) Award may be based shall
be limited to one or more of the following business measures, which may be
applied with respect to the Corporation, any Subsidiary or any business unit,
and which may be measured on an absolute or relative to peer-group basis: (i)
total shareholder return, (ii) stock price increase, (iii) return on equity,
(iv) return on capital, (v) earnings per share, (vi) EBIT (earnings before
interest and taxes), and (vii) cash flow (including operating cash flow, free
cash flow, discounted cash flow return on investment, and cash flow in excess of
costs of capital). In the case of Performance Awards that are not Section
162(m) Awards, the Committee shall designate performance criteria from among the
foregoing or such other business criteria as it shall determine in its sole
discretion.
Section 162(m) Requirements. In the case of a Performance Award that is a
- ---------------------------
Section 162(m) Award, the Committee shall make all determinations necessary to
establish the terms of the Award within 90 days of the beginning of the
performance period (or such other time period as is required under Section
162(m)), including, without limitation, the designation of the Participant to
whom the Performance Award is to be made, the performance criteria or criterion
applicable to the Award and the performance goals that relate to such criteria,
and the dollar amounts or number of shares of Common Stock payable upon
achieving the applicable performance goals. As and to the extent required by
Section 162(m), the terms of a Performance Award that is a Section 162(m) Award
must state, in terms of an objective formula or standard, the method of
computing the amount of compensation payable under the Award, and must preclude
discretion to increase the amount of compensation payable under the terms of the
Award (but may give the Committee discretion to decrease the amount of
compensation payable). The maximum amount of compensation that may be payable
to a Participant during any one calendar year under a Performance Unit Award
shall be $___ million. The maximum number of Common Stock units that may be
subject to a Performance Share Award granted to a Participant during any one
calendar year shall be __________ share units (subject to adjustment as provided
in Section 3.2 hereof).
Phantom Stock Award
Grant of Phantom Stock Awards. A Phantom Stock Award is an Award to a
- -----------------------------
Participant of a number of hypothetical share units with respect to shares of
Common Stock, with an initial value based on the Fair Market Value of the Common
Stock on the Date of Grant. A Phantom Stock Award shall be subject to such
restrictions and conditions as the Committee shall determine. On the Date of
Grant, the Committee shall determine, in its sole discretion, the installment or
other vesting period of the Phantom Stock Award and the maximum value of the
Phantom Stock Award, if any. No vesting period shall exceed 10 years from the
Date of Grant. A Phantom Stock Award may be granted, at the discretion of the
Committee, together with a Dividend Equivalent Award covering the same number of
shares.
Payment of a Phantom Stock Awards. Upon the vesting date or dates applicable to
- ---------------------------------
the Phantom Stock Award granted to a Participant, an amount equal to the Fair
Market Value of one share of
10
<PAGE>
Common Stock upon such vesting dates (subject to any applicable maximum value)
shall be paid with respect to each Phantom Stock Award unit granted to the
Participant. Payment may be made, at the discretion of the Committee, in cash or
in shares of Common Stock valued at their Fair Market Value on the applicable
vesting dates, or in a combination thereof. Dividend Equivalent Award
Grant of a Dividend Equivalent Awards. A Dividend Equivalent Award granted to a
- -------------------------------------
Participant is an Award in the form of a right to receive cash payments
determined by reference to dividends declared on the Common Stock from time to
time during the term of the Award, which shall not exceed 10 years from the Date
of Grant. Dividend Equivalent Awards may be granted on a stand-alone basis or
in tandem with other Awards. Dividend Equivalent Awards granted on a tandem
basis shall expire at the time the underlying Award is exercised or otherwise
becomes payable to the Participant, or expires.
Payment of Dividend Equivalent Awards. Dividend Equivalent Awards shall be
- -------------------------------------
payable in cash or in shares of Common Stock, valued at their Fair Market Value
on either the date the related dividends are declared or the date the Dividend
Equivalent Awards are paid to a Participant, as determined by the Committee.
Dividend Equivalent Awards shall be payable to a Participant as soon as
practicable following the time dividends are declared and paid with respect to
the Common Stock, or at such later date as the Committee shall specify in the
Award Agreement. Dividend Equivalent Awards granted with respect to Options
intended to qualify as a Section 162(m) Award shall be payable regardless of
whether the Option is exercised.
Change in Control
Effect of Change in Control. The Committee may, in an Award Agreement, provide
- ---------------------------
for the effect of a Change in Control on an Award. Such provisions may include
any one or more of the following: (i) the acceleration or extension of time
periods for purposes of exercising, vesting in, or realizing gain from any
Award, (ii) the elimination or modification of performance or other conditions
related to the payment or other rights under an Award, (iii) provision for the
cash settlement of an Award for an equivalent cash value, as determined by the
Committee, or (iv) such other modification or adjustment to an Award as the
Committee deems appropriate to maintain and protect the rights and interests of
Participants upon or following a Change in Control.
Definition of Change in Control. For purposes hereof, a "Change in Control"
- -------------------------------
shall be deemed to have occurred upon the occurrence of any of the following
after the date on which the Corporation becomes a publicly-held Corporation:
An acquisition (other than directly from the Corporation) of any voting
securities of the Corporation (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 Corporation or (B) any
corporation or other Person of which a majority of the voting power or the
equity securities or equity interests is owned directly or indirectly by the
Corporation (a "Control Subsidiary"), or (ii) the Corporation or any Control
Subsidiary.
11
<PAGE>
(ii) The individuals who, as of the date the Corporation issues any
class of equity securities required to be registered under Section 12 of
the 1934 Act, 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
-------
Corporation'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 Corporation to effect a transaction described in clause
(i) or (iii) of this Section 12.2; or
(iii) Consummation, after approval by stockholders of the
Corporation, of:
(1) A merger, consolidation or reorganization involving the
Corporation, unless,
(A) The stockholders of the Corporation, 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 Corporation, any Control
Subsidiary, any employee benefit plan (or any trust forming
a part thereof) maintained by the Corporation, the Surviving
Corporation or any Control 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
12
<PAGE>
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 Corporation; or
(3) The sale or other disposition of all or substantially all of
the assets of the Corporation to any Person (other than a
transfer to a Control 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 Corporation 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 Corporation, and after
such share acquisition by the Corporation, the Subject Person becomes the
Beneficial 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.
Award Agreements
Form of Agreement. Each Award under this Plan shall be evidenced by an Award
- -----------------
Agreement in a form approved by the Committee setting forth the number of shares
of Common Stock, units or other rights (as applicable) subject to the Award, the
exercise, base, or purchase price (if any) of the Award, the time or times at
which an Award will become vested, exercisable or payable, the duration of the
Award, and in the case of Performance Awards, the applicable performance
criteria and goals. The Award Agreement shall also set forth other material
terms and conditions applicable to the Award as determined by the Committee
consistent with the limitations of this Plan. Award Agreements evidencing
Awards that are Section 162(m) Awards shall contain such terms and conditions as
may be necessary to meet the applicable requirements of Section 162(m). Award
Agreements evidencing Incentive Stock Options shall contain such terms and
conditions as may be necessary to meet the applicable provisions of section 422
of the Code.
1.2. Forfeiture Events. The Committee may specify in an Award that the
-----------------
Participant's rights, payments and benefits with respect to an Award shall be
subject to reduction, cancellation, forfeiture or recoupment upon the occurrence
of certain specified events, in addition to any otherwise applicable vesting or
performance conditions of an Award. Such events shall include, but shall not be
limited to, termination of employment for cause, violation of material
Corporation or Subsidiary policies, breach of noncompetition, confidentiality
or other restrictive covenants that may apply to the Participant, or other
conduct by the Participant that is detrimental to the business or reputation of
the Corporation or any Subsidiary.
General Provisions
No Assignment or Transfer; Beneficiaries. Except as provided in Section 6.5
- -----------------------------------------
hereof, Awards under the Plan shall not be assignable or transferable, except by
will or by the laws of descent and distribution, and during the lifetime of a
Participant, the Award shall be exercised only by such Participant or by his
guardian or legal representative. Notwithstanding the foregoing, the Committee
may provide in the terms of an Award Agreement that the Participant shall have
the
13
<PAGE>
right to designate a beneficiary or beneficiaries who shall be entitled to
any rights, payments or other specified under an Award following the
Participant's death.
1.3. Deferrals of Payment. Notwithstanding any other provisions of
--------------------
the Plan, the Committee may permit a Participant to defer the receipt of payment
of cash or delivery of shares of Common Stock that would otherwise be due to the
Participant by virtue of the exercise of a right or the satisfaction of vesting
or other conditions with respect to an Award. If any such deferral is to be
permitted by the Committee, the Committee shall establish the rules and
procedures relating to such deferral, including, without limitation, the period
of time in advance of payment when an election to defer may be made, the time
period of the deferral and the events that would result in payment of the
deferred amount, the interest or other earnings attributable to the deferral and
the method of funding, if any, attributable to the deferred amount.
1.4. Rights as Shareholder. A Participant shall have no rights as a
---------------------
holder of Common Stock with respect to any unissued securities covered by an
Award until the date the Participant becomes the holder of record of such
securities. Except as provided in Section 3.2 hereof, no adjustment or other
provision shall be made for dividends or other shareholder rights, except to the
extent that the Award Agreement is a Dividend Equivalent Award, or otherwise
provides for dividend payments or similar economic benefits.
1.5. Employment or Service. Nothing in the Plan, in the grant of any
---------------------
Award or in any Award Agreement shall confer upon any Eligible Person the right
to continue in the capacity in which he is employed by, or otherwise serves, the
Corporation or any Subsidiary.
1.6. Securities Laws. No shares of Common Stock will be issued or
---------------
transferred pursuant to an Award unless and until all then applicable
requirements imposed by federal and state securities and other laws, rules and
regulations and by any regulatory agencies having jurisdiction, and by any stock
exchanges upon which the Common Stock may be listed, have been fully met. As a
condition precedent to the issuance of shares pursuant to the grant or exercise
of an Award, the Corporation may require the Participant to take any reasonable
action to meet such requirements. The Committee may impose such conditions on
any shares of Common Stock issuable under the Plan as it may deem advisable,
including, without limitation, restrictions under the Securities Act of 1933, as
amended, under the requirements of any stock exchange upon which such shares of
the same class are then listed, and under any blue sky or other securities laws
applicable to such shares.
1.7. Tax Withholding. The Participant shall be responsible for
---------------
payment of any taxes or similar charges required by law to be withheld from an
Award or an amount paid in satisfaction of an Award, which shall be paid by the
Participant on or prior to the payment or other event that results in taxable
income in respect of an Award. The Award Agreement shall specify the manner in
which the withholding obligation shall be satisfied with respect to the
particular type of Award.
Unfunded Plan. The adoption of this Plan and any setting aside of cash amounts
- -------------
or shares of Common Stock by the Corporation with which to discharge its
obligations hereunder shall not be deemed to create a trust or other funded
arrangement. The benefits provided under this Plan shall be a general,
unsecured obligation of the Corporation payable solely from the general assets
of the Corporation, and neither a Participant nor the Participant's permitted
transferees or estate shall have any interest in any assets of the Corporation
by virtue of this Plan, except as a general unsecured creditor of the
Corporation. Notwithstanding the foregoing, the Corporation shall have the right
to implement or set aside funds in a grantor trust, subject to the claims of the
Corporation's creditors, to discharge its obligations under the Plan.
14
<PAGE>
1.8. Other Compensation and Benefit Plans. The adoption of the Plan
------------------------------------
shall not affect any other stock incentive or other compensation plans in effect
for the Corporation or any Subsidiary, nor shall the Plan preclude the
Corporation from establishing any other forms of stock incentive or other
compensation for employees of the Corporation or any Subsidiary. The amount of
any compensation deemed to be received by a Participant pursuant to an Award
shall not constitute compensation with respect to which any other employee
benefits of such Participant are determined, including, without limitation,
benefits under any bonus, pension, profit sharing, life insurance or salary
continuation plan, except as otherwise specifically provided by the terms of
such plan.
1.9. Plan Binding on Transferees. The Plan shall be binding upon the
---------------------------
Corporation, its transferees and assigns, and the Participant, his executor,
administrator and permitted transferees and beneficiaries.
1.10. Construction and Interpretation. Whenever used herein, nouns
-------------------------------
in the singular shall include the plural, and the masculine pronoun shall
include the feminine gender. Headings of Articles and Sections hereof are
inserted for convenience and reference and constitute no part of the Plan.
1.11. Severability. If any provision of the Plan or any Award
------------
Agreement shall be determined to be illegal or unenforceable by any court of law
in any jurisdiction, the remaining provisions hereof and thereof shall be
severable and enforceable in accordance with their terms, and all provisions
shall remain enforceable in any other jurisdiction.
1.12. Governing Law. The validity and construction of this Plan and
-------------
of the Award Agreements shall be governed by the laws of the State of Texas.
Effective Date, Termination and Amendment
Establishment of the Plan. This Plan is being adopted by the Board in connection
- -------------------------
with the anticipated formation of the Corporation as a Subsidiary of
Columbia/HCA and the distribution shortly thereafter by Columbia/HCA of all of
its shares of the Corporation to the shareholders of Columbia/HCA.
Effective Date; Shareholder Approval. The Effective Date of the Plan shall be
- ------------------------------------
the date the Corporation's Common Stock is distributed to Columbia/HCA
Healthcare Corporation stockholders; provided, however, that no amounts may be
-------- -------
paid or shares issued under any Award granted on or after the first meeting of
the shareholders of the Corporation that shall occur more than twelve months
after the date on which the Corporation becomes a publicly held corporation,
unless the shareholders of the Corporation shall have approved the Plan. At
the sole discretion of the Board, in order to comply with the requirements of
Section 162(m) for certain types of Awards under the Plan, the performance
criteria set forth in Section 9.3 shall be reapproved by the shareholders of the
Corporation no later than the first shareholder meeting that occurs in the fifth
calendar year following the calendar year of the initial shareholder approval of
such performance criteria.
Termination. The Plan shall terminate on the date immediately preceding the
- -----------
tenth anniversary of the date the Plan is adopted by the Board. The Board may,
in its sole discretion and at any earlier date, terminate the Plan.
Notwithstanding the foregoing, no termination of the Plan shall adversely affect
any Award theretofore granted without the consent of the Participant or the
permitted transferee of the Award.
Amendment. The Board may at any time and from time to time and in any respect,
- ---------
amend or modify the Plan; provided, however, that no amendment or modification
-------- -------
of the Plan shall be effective without the consent of the Corporation's
shareholders that would (i) change the class of
15
<PAGE>
Eligible Persons under the Plan, (ii) increase the number of shares of Common
Stock reserved for issuance under the Plan in accordance with Section 3.1
hereof, or (iii) allow the grant of Options at an exercise price below Fair
Market Value. In addition, the Board may seek the approval of any amendment or
modification by the Corporation's shareholders to the extent it deems necessary
or advisable in its sole discretion for purposes of compliance with Section
162(m) or section 422 of the Code, the listing requirements of the Nasdaq Stock
Market or for any other purpose. No amendment or modification of the Plan shall
adversely affect any Award theretofore granted without the consent of the
Participant or the permitted transferee of the Award.
16
<PAGE>
Triad Hospitals, Inc. Long-Term Incentive Plan
Appendix A
----------
Notwithstanding anything elsewhere in the Plan to the contrary, the
following rules shall apply in connection with the distribution of Common Stock
to Columbia/HCA stockholders (the "Spin-off").
(i) In the case of each Columbia/HCA Non-Qualified Option that is a
vested option and covers more than 1000 shares, the Committee may
grant an option which covers a number of shares of Common Stock
equal to the Original Number of Shares multiplied by the Triad Share
Multiple and which has a per share exercise price equal to the per
share exercise price of the original Columbia/HCA Non-Qualified
Option multiplied by the Triad Ratio.
(ii) In the case of each Columbia/HCA ISO that is held by a Triad
Employee or Triad Terminee (or his estate), the Committee may grant
an option which covers a number of shares of Common Stock equal to
the Original Number of Shares divided by the Triad Ratio and (2) has
a per share exercise price equal to the original per share exercise
price multiplied by the Triad Ratio.
(iii) In the case of any options granted by the Committee pursuant to this
Appendix, any resulting per share exercise price which is not equal
to a whole multiple of a cent shall be rounded up to the next whole
cent and any resulting number of shares covered by an option which
is not equal to a whole multiple of a share shall be rounded down to
the next whole share.
(iv) The Committee may provide that the terms of any option granted under
this Appendix are to be substantially the same as those of the
related Columbia/HCA Option, subject to such exceptions as the
Committee may provide. Any such option may, in the discretion of the
Committee, also provide that (a) any period of prior employment or
service with Columbia/HCA or any related entity is to be credited as
covered employment or service for purposes of determining the
vesting and exercisability of such option (to the same extent as
such period was credited for such purposes under the related
original Columbia/HCA Option), and (b) in the case
17
<PAGE>
of any Columbia/HCA Non-Qualified Option, the optionee is to be
considered to be employed by or providing services to the
Corporation so long as he is employed by or providing services to
Columbia/HCA or LifePoint Hospitals, Inc. ("LifePoint") (or any
Subsidiary thereof), for purposes of determining when the option
will cease to be exercisable on account of termination of employment
or service, and at such time as the optionee ceases to be employed
by or provide service to Columbia/HCA or LifePoint (or any
Subsidiary thereof), such cessation of employment or service shall
be treated as though it were a cessation of employment or service
with the Corporation under comparable circumstances.
(v) For purposes hereof, the following definitions shall apply:
(a) "Affiliate" shall mean any entity required to be aggregated
with Columbia/HCA, LifePoint or Triad as appropriate, pursuant
to Code sections 414(b), 414(c), 414(m) or 414(o).
(b) "Assets" shall mean all properties, rights, contracts, leases
and claims, of any kind and description, wherever located,
whether tangible or intangible or whether real, personal or
mixed.
(c) "Columbia/HCA ISO" shall mean any option outstanding under a
Columbia/HCA Option Plan on the date of the Spin-off that is
intended to qualify as an "Incentive Stock Option" under
section 422 of the Code.
(d) "Columbia/HCA Non-Qualified Option" shall mean any stock option
outstanding under a Columbia/HCA Option Plan on the date of the
Spin-off that is not a Columbia/HCA ISO. Any such option shall
be considered a "vested option" to the extent that it is
exercisable on the date in question and shall be considered a
"non-vested option" to the extent that it is not yet
exercisable on such date.
(e) "Columbia/HCA Option" shall mean a Columbia/HCA ISO or
Columbia/HCA Non-Qualified Option, as the context shall
indicate.
18
<PAGE>
(f) "Columbia/HCA Option Plan" shall mean any plan maintained by
Columbia/HCA under which there are stock options outstanding on
the date of the Spin-off.
(g) "Ex-Dividend Date" shall mean the first trading date on which
the Columbia/HCA stock shall trade on an ex-dividend basis with
respect to the distribution of the Corporation's Common Stock
and LifePoint's stock.
(h) "Original Number of Shares" shall mean, as to any Columbia/HCA
Option, the number of shares of Columbia/HCA stock covered by
such option immediately prior to the Spin-off.
(i) "Triad Business" shall mean any business now or formerly
conducted by the Corporation, or its present or former
Subsidiaries, including any business now or formerly conducted
by Columbia/HCA and its Subsidiaries that is associated with
the Assets of the Corporation and its Subsidiaries.
(j) "Triad Employee" shall mean an employee of the Corporation, or
any direct or indirect Subsidiary of the Corporation that is an
Affiliate thereof, on the date of the Spin-off.
(k) "Triad Ratio" shall mean a fraction whose numerator is the
closing price of the Common Stock on the first day on which
such stock is traded and whose denominator is the closing price
of the Columbia/HCA stock on the trading date immediately
preceding the Ex-Dividend Date.
(l) "Triad Share Multiple "shall mean the number of shares of
Common Stock to be distributed per share of Columbia/HCA stock
on the date of the Spin-off.
(m) "Triad Terminee" shall mean any individual who is no longer
employed by Columbia/HCA or any Affiliate thereof immediately
prior to the Spin-off but was employed by a Triad Business
immediately prior to his termination of employment from
Columbia/HCA and its Affiliates.
19
<PAGE>
Notwithstanding anything elsewhere in the Plan to the contrary, the
Committee may grant Non-qualified Stock Options, effective as of the date of the
Spin-off, at an exercise price equal to the Fair Market Value of the Common
Stock on the date of the Spin-off, in accordance with the attached Schedule and
in accordance with such other terms as shall be established by the Committee.
20
<PAGE>
Exhibit 10.10
TRIAD HOSPITALS, INC.
EXECUTIVE STOCK PURCHASE PLAN
<PAGE>
TRIAD HOSPITALS, INC.
EXECUTIVE STOCK PURCHASE PLAN
Table of Contents
-----------------
1. Purpose of the Plan................................................1
2. Definitions........................................................1
(a) Accrued Interest..........................................1
(b) Board.....................................................1
(c) Cause.....................................................1
(d) Change in Control.........................................2
(e) Code......................................................4
(f) Committee.................................................4
(g) Corporation...............................................4
(h) Disability................................................4
(i) Duties....................................................5
(j) Eligible Person...........................................5
(k) Employee..................................................5
(l) Fair Market Value.........................................5
(m) Good Reason...............................................5
(n) Loan Date.................................................5
(o) Participant...............................................5
(p) Plan......................................................6
(q) Purchased Shares..........................................6
(r) Right.....................................................6
(s) Share.....................................................6
(t) Share Purchase Date.......................................6
(u) Share Purchase Loan.......................................6
(v) Share Purchase Price......................................6
(w) Stock Purchase Agreement..................................6
(x) Subsidiary................................................6
3. Shares Subject to the Plan.........................................6
3.1. Number of Shares..........................................6
3.2. Adjustments...............................................7
4. Administration of the Plan.........................................7
4.1. Committee Members.........................................7
4.2. Discretionary Authority...................................7
4.3. Changes to Rights.........................................7
5. Grant and Exercise of Rights.......................................7
5.1. Grant of Rights...........................................7
5.2. Exercise of Rights........................................8
6. Share Purchase Loan................................................8
6.1. Loan Amount...............................................8
6.2. Interest Rate.............................................8
6.3. Maturity and Repayment....................................8
(a) Repayment at Maturity................................8
(b) Payment of Additional Interest.......................9
6.4. Prepayments...............................................9
(a) Mandatory Prepayments...............................9
i
<PAGE>
(b) Voluntary Prepayments................................9
7. Shareholder Rights.................................................9
7.1. Security Interest.........................................9
7.2. Transfer Restrictions.....................................0
7.3. Section 83(b) Election....................................0
7.4. Death or Disability Benefit...............................0
8. General Provisions.................................................0
8.1. No Assignment or Transfer.................................0
8.2. Rights as Shareholder.....................................0
8.3. Employment or Service.....................................1
8.4. Securities Laws...........................................1
8.5. Unfunded Plan.............................................1
8.6. Compensation and Benefit Plans............................1
8.7. Plan Binding on Transferees...............................1
8.8. Construction and Interpretation...........................1
8.9. Severability..............................................2
8.10. Governing Law.............................................2
9. Effective Date; Shareholder Approval; Termination; Amendment.......2
9.1. Effective Date............................................2
9.2. Shareholder Approval......................................2
9.3. Termination...............................................2
9.4. Amendment.................................................2
ii
<PAGE>
TRIAD HOSPITALS, INC.
EXECUTIVE STOCK PURCHASE PLAN
1. Purpose of the Plan
The purpose of the Triad Hospitals, Inc. Executive Stock Purchase Plan is
to promote the interests of the Corporation and its shareholders by
strengthening the Corporation's ability to attract, motivate, and retain key
executives upon whose judgment, initiative, and efforts the financial success
and growth of the business of the Corporation largely depend, to offer such
personnel additional incentives to put forth maximum efforts for the success of
the business, and to afford them an opportunity to acquire a proprietary
interest in the Corporation through stock ownership.
2. Definitions
Wherever the following capitalized terms are used in this Plan, they shall
have the meanings specified below:
(a) "Accrued Interest" means, with respect to any Share Purchase Loan, the
----------------
accrued interest on the unpaid balance thereof for the period from the Share
Purchase Date to the Repayment Date (as defined in Section 6.3), determined
using an interest rate equal to the applicable Federal rate in effect, under
section 1274(d) of the Code, as of the date upon which the Share Purchase Loan
is made, compounded semi-annually.
(b) "Board" means the Board of Directors of the Corporation.
-----
(c) "Cause" means (i) the conviction of the Participant of a felony under
-----
the laws of the United States or any state thereof, whether or not appeal is
taken, as determined by the Board in good faith; (ii) the conviction of the
Participant for a violation of criminal law involving the Corporation and its
business that materially damages the Corporation as determined by the Board in
good faith; (iii) the willful misconduct of the Participant, or the willful or
continued failure by the Participant (except in the case of a Disability) to
substantially perform his duties hereunder, in either case which has a material
adverse effect on the Corporation as determined by the Board in good faith; (iv)
the willful fraud or material dishonesty of the Participant in connection with
his performance of his duties to the Corporation and involving the finances of
the Corporation as determined by the Board in good faith; (v) Participant's
repeated use of alcohol in a manner which in the opinion of the Board materially
impairs the ability of the Participant to effectively perform the Participant's
duties and obligations owed to the Corporation, or the illegal use, possession,
or sale of, or impaired performance due to the illegal use of, controlled
substances; or (vi) a violation of the Corporation's policies on sexual or other
illegal harassment of a Corporation employee by the Participant as determined by
the Board in good faith; provided, however, in no event shall the Participant's
-------- -------
employment be considered to have been terminated
1
<PAGE>
for "Cause" unless and until the Participant receives written notice from the
Corporation stating the acts or omissions constituting Cause and the Participant
has the opportunity to cure to the Corporation's satisfaction any such acts or
omissions (in the case of (iii), (v) or (vi) above) within 30 days of the
Participant's receipt of such notice.
(d) "Change in Control" means any of the following events following the
-----------------
date on which the Corporation becomes a publicly-held Corporation:
(i) An acquisition (other than directly from the Corporation) of any
voting securities of the Corporation (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 Corporation or (B) any Corporation or other
Person of which a majority of the voting power or the equity
securities or equity interests is owned directly or indirectly by
the Corporation (a "Control Subsidiary"), or (ii) the Corporation
or any Control Subsidiary.
(ii) The individuals who, as of the date the Corporation issues any
class of equity securities required to be registered under Section
12 of the 1934 Act, 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 Corporation'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 Stock
Purchase 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
2
<PAGE>
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 Stock Purchase
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 Stock Purchase Agreement with the
Corporation to effect a transaction described in clause (i) or
(iii) of this Section 2(d); or
(iii) Consummation, after approval by stockholders of the
Corporation, of:
(1) A merger, consolidation or reorganization involving the
Corporation, unless,
(A) The stockholders of the Corporation, 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 Stock
Purchase 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 Corporation, any Control
Subsidiary, any employee benefit plan (or any trust forming
a part thereof) maintained by the Corporation, the Surviving
Corporation or any Control Subsidiary, or any Person who,
immediately prior to such merger, consolidation or
reorganization, had Beneficial Ownership of twenty
3
<PAGE>
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 Corporation; or
(3) The sale or other disposition of all or substantially all of
the assets of the Corporation to any Person (other than a
transfer to a Control 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 Corporation 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 Corporation, and after
such share acquisition by the Corporation, the Subject Person becomes the
Beneficial 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.
(e) "Code" means the Internal Revenue Code of 1986, as amended.
----
(f) "Committee" means the compensation committee appointed to administer
---------
the Plan and shall consist of two or more directors of the Corporation, (i) none
of whom shall be officers or employees of the Corporation, and (ii) all of whom,
to the extent deemed necessary or appropriate by the Board, shall satisfy the
requirements of a "non-employee director" within the meaning of Rule 16b-3 of
the Securities Exchange Act of 1934. The members of the Committee shall be
appointed by, and serve at the pleasure of, the Board.
(g) "Corporation" means Triad Hospitals, Inc., a Delaware corporation.
-----------
(h) "Disability" means the inability of the Participant, after reasonable
----------
accommodation, to perform the duties required hereunder for a period equal to or
in excess of the waiting period under the Corporation's long term disability
insurance policy, as determined in good faith by the Board.
4
<PAGE>
(i) "Duties" means, as to any Participant, his duties as an Employee with
------
respect to the Corporation and its Subsidiaries (including his duties under any
employment agreement between him and the Corporation or a Subsidiary).
(j) "Eligible Person" means any person who is an Employee of the
---------------
Corporation or any of its Subsidiaries and is employed in an executive position.
(k) "Employee" means any person who is employed as a common-law employee.
--------
(l) "Fair Market Value" of a Share as of a given date means the closing
-----------------
sales price of the common stock of the Corporation on the Nasdaq Stock Market on
the trading day immediately preceding the date as of which the Fair Market Value
is to be determined, or, in the absence of any reported sales of Shares on such
date, on the first preceding date on which any such sale shall have been
reported (in either case, as reported in the Two Star Edition of The Wall Street
Journal). If the Shares are not listed on the Nasdaq Stock Market on the date as
of which Fair Market Value is to be determined, the Committee shall in good
faith determine the Fair Market Value in whatever manner it considers
appropriate.
(m) "Good Reason" means, as to any Share Purchase Loan, (1) the assignment
-----------
to the Participant of any duties inconsistent with the Participant's position
(including status, offices, titles or reporting relationships), authority,
duties or responsibilities on the Loan Date, any adverse change in the
Participant's reporting responsibilities, or any action by the Corporation or a
Subsidiary that results in a diminution in such position, authority, duties or
responsibilities, but excluding for these purposes an isolated and insubstantial
action not taken in bad faith and which is remedied by the Corporation or
Subsidiary (as the case may be) promptly after receipt of written notice thereof
by the Participant, (2) the relocation, without the consent of the Participant,
of the Corporation's principal executive offices or the office of the
Participant to a location more than 40 miles from the applicable location on the
Loan Date, (3) any diminution in the Participant's total compensation or
diminution in Participant's stock purchase rights in violation of any employment
agreement in effect between the Participant and the Corporation, or (4) a
termination of Participant's employment for any reason (other than his death)
within twelve months after a Change in Control.
(n) "Loan Date" means, as to any Share Purchase Loan, the date such loan
---------
is made.
(o) "Participant" means any Eligible Person who has been granted a Right
-----------
(that has not yet been fully exercised or otherwise terminated) under the Plan.
5
<PAGE>
(p) "Plan" means this Triad Hospitals, Inc. Executive Stock Purchase Plan
----
as set forth herein, as it may be amended from time to time.
(q) "Purchased Shares" means Shares purchased by a Participant pursuant to
----------------
a Right granted under the Plan.
(r) "Right" means a right to purchase Shares under the Plan at their Fair
-----
Market Value on the Share Purchase Date.
(s) "Share" means a share of common stock of the Corporation.
-----
(t) "Share Purchase Date" means, as to any Purchased Shares, the date on
-------------------
which the purchase of such Shares occurs.
(u) "Share Purchase Loan" means any loan made by the Corporation to a
-------------------
Participant for the purchase of Shares pursuant to a Right.
(v) "Share Purchase Price" means the aggregate purchase price for
--------------------
Purchased Shares acquired at any time.
(w) "Stock Purchase Agreement" means an agreement entered into between the
------------------------
Corporation and a Participant setting forth the terms and conditions under which
the Participant may purchase Shares pursuant to a Right granted to him,
including but not limited to, the terms of the related Share Purchase Loan.
(x) "Subsidiary" means an entity (whether or not a corporation) that is
----------
wholly or majority owned or controlled, directly or indirectly, by the
Corporation, and any other affiliate of the Corporation that is so designated,
from time to time, by the Committee.
3. Shares Subject to the Plan
3.1. Number of Shares. Subject to the following provisions of this
----------------
Section, the aggregate number of Shares that may be purchased pursuant to all
Rights granted under the Plan is 1,000,000 Shares. The Shares to be delivered
under the Plan shall be made available from authorized but unissued Shares or
issued Shares that have been reacquired by the Corporation. To the extent that
any Right is forfeited, cancelled, or otherwise terminated without the issuance
of all Shares covered thereunder, such Shares shall no longer be charged against
the foregoing maximum Share limitation and may again be made subject to Rights
under the Plan pursuant to such limitation.
6
<PAGE>
3.2. Adjustments. If there shall occur any recapitalization,
-----------
reclassification, stock dividend, stock split, reverse stock split, or other
distribution with respect to Shares, or other change in corporate structure
affecting the Shares, the Committee may, in the manner and to the extent that it
deems appropriate and equitable to the Participants and consistent with the
terms of this Plan, cause an adjustment to be made in: (i) the maximum number
and kind of Shares provided in Section 3.1 hereof, (ii) the number and kind of
Shares subject to then outstanding Rights, or (iii) any other terms of a Right
that are affected by the event.
4. Administration of the Plan
4.1. Committee Members. The Plan shall be administered by the
-----------------
Committee. The Committee shall have such powers and authority as may be
necessary or appropriate for the Committee to carry out its functions as
described in the Plan. No member of the Committee shall be liable for any action
or determination made in good faith by the Committee with respect to the Plan or
any Right thereunder.
4.2. Discretionary Authority. Subject to the express provisions of
-----------------------
the Plan, including the provisions of Section 5.1, the Committee shall have
authority in its discretion to determine the Eligible Persons to whom, and the
time or times at which, Rights are granted, the number of Shares that may be
purchased under a Right, the date or period during which a Right may be
exercised and all other terms of a Right. The Committee shall also have
discretionary authority to interpret the Plan, to make all factual
determinations under the Plan, and to make all other determinations necessary or
advisable for Plan administration. The Committee may prescribe, amend, and
rescind rules and regulations relating to the Plan. All interpretations,
determinations, and actions by the Committee shall be final, conclusive, and
binding upon all parties.
4.3. Changes to Rights. The Committee shall have the authority
-----------------
to effect, at any time and from time to time, (i) the cancellation of any or all
outstanding Rights and the grant in substitution therefor of new Rights covering
the same or different numbers of Shares, or (ii) the amendment of the terms of
any and all outstanding Rights; provided, however, that no such action by the
-------- -------
Committee may adversely impair the rights of a Participant under any outstanding
Right without the consent of the Participant.
5. Grant and Exercise of Rights
5.1. Grant of Rights. Any Eligible Person may be designated by the
---------------
Committee, in its sole discretion, to receive a Right under the Plan.
Notwithstanding the foregoing, the initial Eligible Persons shall be as listed
in Appendix A, and each such individual's Right shall cover the number of whole
Shares that can be purchased with the dollar amount listed for the individual on
Appendix A (based on the Fair Market Value of a Share on the Share Purchase
Date); provided however, such number of Shares shall in no event exceed the
----------------
number of Shares that could be purchased with such dollar amount if the
applicable Fair Market Value of a Share were $12.50; and provided further, that
----------------
no person may be granted more than one Right under the Plan, except that if the
Right of any initial Eligible Person to purchase Shares shall be limited under
the next preceding proviso (because the Fair Market Value of a Share is below
$12.50)
7
<PAGE>
and Shares remain available for issuance under the Plan at the close of the
exercise period for initial Eligible Persons under Section 5.2, the Committee
may, in its discretion, issue an additional Right to any such initial Eligible
Person thus affected by the next preceding proviso. Each Right shall be
evidenced by a Stock Purchase Agreement between the Corporation and the
Participant.
5.2. Exercise of Rights. A Right granted to a Participant may be
------------------
exercised, in whole or in part, by written notice to the Corporation on or prior
to (a) the exercise date selected in the notice in accordance with the terms of
such Right, or (b) the date specified in the related Stock Purchase Agreement as
the permissible exercise date; provided, however, that if a Right shall be thus
-------- -------
exercised by a Participant as to only a portion of the Shares covered thereby,
such Right shall thereupon terminate and shall not be exercisable with respect
to any additional Shares; and provided, further, that a Right may be exercised
-------- -------
by a Participant only if he is an Employee of the Corporation or a Subsidiary on
the exercise date and shall terminate in its entirety upon a Participant's
termination of employment. Notwithstanding the foregoing, in the case of an
initial Eligible Person receiving a Right in accordance with Appendix A, such
Right may be exercised on the date elected by such Participant during the period
which starts on the date the Corporation's Shares are distributed to
Columbia/HCA Healthcare Corporation stockholders and ends on the twenty-first
trading day for the Corporation's Shares. Any Participant giving such a notice
of exercise shall be considered to have agreed to pay the full Share Purchase
Price through a Share Purchase Loan, except to the extent the notice is
accompanied by a cash payment.
6. Share Purchase Loan
6.1. Loan Amount. The Corporation shall loan each Participant
-----------
100% of the Share Purchase Price of any Purchased Shares acquired by the
Participant, on a full recourse basis, to the extent the Participant shall not
elect to pay such Share Purchase Price in cash and contingent upon the
Participant's executing such promissory note and pledge documents relating to
the security interest described in Section 7.1 below as the Corporation shall
reasonably require.
6.2. Interest Rate. Accrued Interest under any Share Purchase
-------------
Loan will be payable only upon maturity or upon prepayment of such Share
Purchase Loan.
6.3. Maturity and Repayment.
----------------------
(a) Repayment at Maturity. A Share Purchase Loan will mature upon
---------------------
the earlier of (i) the fifth anniversary of such Share Purchase Loan's Share
Purchase Date, (ii) termination of the Participant's employment for any reason,
or (iii) bankruptcy of the Participant (the "Repayment Date"). Within 120 days
following the Repayment Date, the Participant shall be required to pay the
Corporation the full amount remaining due on such Share Purchase Loan, including
all unpaid Accrued Interest.
8
<PAGE>
(b) Payment of Additional Interest. In the event a Participant's
------------------------------
employment terminates for Cause or the Participant voluntarily terminates
employment (other than for Good Reason) prior to the third anniversary of a
Share Purchase Loan's Share Purchase Date, or if earlier, the date of a Change
in Control, in addition to any amounts due in repayment of the amount of such
Share Purchase Loan and Accrued Interest, the Participant shall pay the
Corporation an amount equal to the additional interest that would have been
payable in respect of such Share Purchase Loan, if the regular interest rate on
such loan had been the prime rate (as reported in the Two Star Edition of The
Wall St. Journal in effect on the Share Purchase Date), and interest on such
additional interest at such rate to the actual date of payment.
6.4. Prepayments.
-----------
(a) Mandatory Prepayments. Any cash dividends received on
---------------------
Purchased Shares prior to payment of the full amount due on a Share Purchase
Loan (including Accrued Interest), net of assumed Federal, State and Local
income taxes (as reasonably determined by the Participant based upon the highest
marginal tax rates then applicable income tax laws to which the Participant is
subject), shall be used to prepay such Share Purchase Loan. Prepayments shall be
applied first to Accrued Interest, then to principal.
(b) Voluntary Prepayments. A Share Purchase Loan may be prepaid,
---------------------
in whole or in part, at any time. Prepayments shall be applied first to Accrued
Interest, then to principal. Notwithstanding the provisions of Section 7.2, at
any time following the earlier of (i) the second anniversary of a Share Purchase
Loan's Share Purchase Date, or (ii) upon a Change in Control, the Purchased
Shares may, at the Participant's election, be sold to prepay the loan, in whole
or in part, in addition to any transaction costs incurred by the Participant' to
effect such sale and all taxes resulting with respect to such sale (as
reasonably determined by the Participant based upon the highest marginal tax
rates then applicable income tax laws to which the Participant is subject).
7. Shareholder Rights.
7.1. Security Interest. A Share Purchase Loan shall be secured by
-----------------
the related Purchased Shares. At the time the Participant purchases
Purchased Shares hereunder, a certificate representing such Purchased Shares
shall be registered in the name of the Participant. Such certificate shall be
held by the Corporation (or any custodian appointed by the Corporation) for the
account of the Participant, subject to the terms and conditions hereof, and
shall bear a legend setting forth the restrictions imposed thereon hereunder, in
such form as the Corporation, in its discretion, may determine.
9
<PAGE>
7.2. Transfer Restrictions. The Participant shall have all rights
---------------------
of a stockholder with respect to Purchased Shares, including the right to
receive dividends (subject to the provisions of Section 6.4(a)) and the right to
vote such Purchased Shares, except that the Participant shall not be entitled to
delivery of the stock certificates representing Purchased Shares and no
Purchased 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) until the later of (i) full repayment of the Share
Purchase Price for such Purchased Shares and any related Accrued Interest (and
any additional amount due under Section 6.3 ), and (ii) the earliest of (1) the
third anniversary of the Share Purchase Date for such Purchased Shares, (2) the
Participant's termination of employment or bankruptcy and (3) a Change in
Control. Notwithstanding the foregoing, Purchased Shares may be sold to pay the
related Share Purchase Loan (including Accrued Interest) at maturity or (to the
extent provided in Section 6.4(b)) to voluntarily prepay such Share Purchase
Loan (including Accrued Interest). Any Shares, any other securities of the
Corporation and any other property (except cash dividends) distributed with
respect to Purchased Shares shall be subject to the same restrictions, terms and
conditions as such Purchased Shares.
7.3. Section 83(b) Election. The Committee may provide in a Stock
----------------------
Purchase Agreement that the Participant's rights with respect to the Purchased
Shares are conditioned upon the Participant's refraining from making an election
with respect to the related Right under section 83(b) of the Code. If a Right is
not so conditioned and a Participant makes an election pursuant to section 83(b)
of the Code with respect to the Purchased Shares, the Participant shall be
required to promptly file a copy of such election with the Corporation.
7.4. Death or Disability Benefit. In the event a Participant
---------------------------
terminates employment because of death or Disability, if the amount remaining
due on a Share Purchase Loan (including Accrued Interest) is greater than the
Fair Market Value of the related Purchased Shares as of the date of such death
or Disability, the Corporation shall pay a death or Disability benefit equal to
(1) the amount of such payment remaining due over (2) such Purchased Shares'
Fair Market Value as of the date of such death or Disability.
8. General Provisions
8.1. No Assignment or Transfer. Rights under the Plan shall not be
-------------------------
assignable or transferable and shall be exercised only by the Participant.
8.2. Rights as Shareholder. A Participant shall have no rights as a
---------------------
holder of Shares, with respect to any unissued Shares covered by a Right, until
the date the Participant becomes the holder of record of such Shares.
10
<PAGE>
8.3. Employment or Service. Nothing in the Plan, in the grant of any
---------------------
Right or in any Stock Purchase Agreement shall confer upon any Eligible Person
the right to continue in the capacity in which he is employed by, or otherwise
serves, the Corporation or any Subsidiary.
8.4. Securities Laws. No Shares shall be issued or transferred
---------------
pursuant to a Right unless and until all then-applicable requirements imposed by
federal and state securities and other laws, rules and regulations and by any
regulatory agencies having jurisdiction, and by any stock exchanges upon which
the Shares may be listed, have been fully met. As a condition precedent to the
issuance of Shares pursuant to the exercise of a Right, the Corporation may
require the Participant to take any reasonable action to meet such requirements.
The Committee may impose such conditions on any Shares issuable under the Plan
as it may deem advisable, including, without limitation, restrictions designed
to satisfy the requirements of the Securities Act of 1933, as amended, the
requirements of any stock exchange upon which such Shares of the same class are
then listed, and the requirements of any blue sky or other securities laws
applicable to such Shares.
8.5. Unfunded Plan. The adoption of this Plan and any setting aside
-------------
of cash amounts or Shares by the Corporation with which to discharge its
obligations hereunder shall not be deemed to create a trust or other funded
arrangement. The Corporation's obligations under this Plan shall represent
general, unsecured obligations of the Corporation payable solely from the
general assets of the Corporation, and a Participant shall have no interest in
any assets of the Corporation by virtue of this Plan, except as a general
unsecured creditor of the Corporation.
8.6. Compensation and Benefit Plans. The adoption of the Plan shall
------------------------------
not affect any stock incentive or other compensation plans in effect for the
Corporation or any Subsidiary, nor shall the Plan preclude the Corporation from
establishing any form of stock incentive or other compensation for employees of
the Corporation or any Subsidiary.
8.7. Plan Binding on Transferees. The Plan shall be binding upon
---------------------------
the Corporation, its transferees and assigns, and each Participant, his executor
or administrator and beneficiaries. In the event a Participant's legal
representative or legatee succeeds to his interests under the Plan, all
references to the Participant shall be considered to refer to the applicable
successor in interest (unless the context clearly indicates otherwise).
8.8. Construction and Interpretation. Whenever used herein, nouns
-------------------------------
in the singular shall include the plural, and the masculine pronoun shall
include the feminine gender. Headings of Articles and Sections hereof are
inserted for convenience and reference and constitute no part of the Plan.
11
<PAGE>
8.9. Severability. If any provision of the Plan or any Stock
------------
Purchase Agreement shall be determined to be illegal or unenforceable by any
court of law in any jurisdiction, the remaining provisions hereof and thereof
shall be severable and enforceable in accordance with their terms, and all
provisions shall remain enforceable in any other jurisdiction.
8.10. Governing Law. The validity and construction of this Plan and
-------------
of the Stock Purchase Agreements shall be governed by the laws of the State of
Texas.
9. Effective Date; Shareholder Approval; Termination; Amendment
9.1. Effective Date. The Effective Date of the Plan shall be the
--------------
date the Corporation's common stock is distributed to Columbia/HCA Healthcare
Corporation stockholders.
9.2. Shareholder Approval. The Plan shall be approved by the
--------------------
shareholders* of the Corporation within twelve (12) months before or after the
Plan is adopted.
9.3. Termination. The Plan shall terminate on the date
-----------
immediately preceding the tenth anniversary of the date the Plan is adopted by
the Board. The Board may, in its sole discretion and at any earlier date,
terminate the Plan. Notwithstanding the foregoing, no termination of the Plan
shall adversely affect any Right theretofore granted, without the consent of the
Participant.
9.4. Amendment. The Board may at any time and from time to time, and
---------
in any respect, amend or modify the Plan; provided, however, that no amendment
-------- -------
or modification of the Plan shall adversely affect any Right theretofore granted
without the consent of the Participant.
_____________________________________
TRIAD HOSPITALS, INC.
- ----------------------------
*Note: After the Corporation is established but prior to the stock distribution,
- ----
Columbia/HCA should approve the Plan as the Corporation's sole shareholder.
12
<PAGE>
Appendix A
Initial Eligible Persons
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
<S> <C>
Eligible Person Aggregate Share Purchase Price
- --------------------------------------------------------------------------------
Denny Shelton $5,000,000
- --------------------------------------------------------------------------------
Burke Whitman $2,000,000
- --------------------------------------------------------------------------------
Mike Parsons $1,000,000
- --------------------------------------------------------------------------------
Don Fay $500,000
- --------------------------------------------------------------------------------
Chris Holden $500,000
- --------------------------------------------------------------------------------
Nick Marzocco $500,000
- --------------------------------------------------------------------------------
Wayne McCallister $500,000
- --------------------------------------------------------------------------------
Bill Huston $500,000
- --------------------------------------------------------------------------------
Tom Frazier $500,000
- --------------------------------------------------------------------------------
Jim Shannon $500,000
- --------------------------------------------------------------------------------
Joy Case $500,000
- --------------------------------------------------------------------------------
Steve Love $500,000
- --------------------------------------------------------------------------------
</TABLE>
A-1
<PAGE>
Exhibit 10.11
TRIAD HOSPITALS, INC.
OUTSIDE DIRECTORS STOCK AND INCENTIVE COMPENSATION PLAN
<PAGE>
TRIAD HOSPITALS, INC.
OUTSIDE DIRECTORS STOCK AND INCENTIVE COMPENSATION PLAN
Table of Contents
-----------------
1. Introduction....................................... 1
2. Definitions........................................ 1
(a) Agreement.................................... 1
(b) Annual Option................................ 1
(c) Annual Retainer.............................. 1
(d) Black-Scholes Evaluation Method.............. 1
(e) Board........................................ 1
(f) Board Term................................... 2
(g) Code......................................... 2
(h) Common Stock................................. 2
(i) Company...................................... 2
(j) Deferred Stock Unit.......................... 2
(k) Deferred Stock Unit Account.................. 2
(l) Deferred Stock Unit Award.................... 2
(m) Disability................................... 2
(n) Discretionary Option......................... 2
(o) Election Notice.............................. 2
(p) Exchange Act................................. 2
(q) Fair Market Value............................ 2
(r) Initial Option............................... 2
(s) Option....................................... 3
(t) Option Price................................. 3
(u) Outside Director............................. 3
(v) Participant.................................. 3
(w) Realization.................................. 3
(x) Shares....................................... 3
(y) Stock Election............................... 3
(z) Subsidiary................................... 3
3. Administration of the Plan......................... 3
3.1 General Authority........................... 3
4. Stock Subject to Plan............................... 4
4.1 Number of Shares............................ 4
4.2 Reuse of Shares............................. 4
5. Options............................................. 4
5.1 Grant of Annual Options..................... 4
5.2 Grant of Initial Options.................... 4
<PAGE>
5.3 Discretionary Options....................... 4
5.4 Option Price................................ 5
5.5 Term........................................ 5
5.6 Option Exercise............................. 5
5.7 Limited Transferability of Options.......... 5
5.8 Death of Optionee........................... 6
5.9 Disability.................................. 7
5.10 Other Termination of Service................ 7
6. Deferred Stock Unit Awards.......................... 7
6.1 Stock Elections............................. 7
6.2 Deferred Stock Unit Awards.................. 7
6.3 Award Terms................................. 7
7. Change in Control................................... 8
7.1 Effect of Change in Control................. 8
7.2 Definition.................................. 8
8. Antidilution Adjustments............................ 10
9. Conditions of Issuance of Stock Certificates........ 11
9.1 Applicable Conditions....................... 11
9.2 Legends..................................... 11
10. No Rights to Continued Service..................... 11
11. No Rights to Assets of the Company................. 11
12. Amendment and Termination of the Plan.............. 12
13. Term of the Plan................................... 12
14. Governing Law...................................... 12
<PAGE>
TRIAD HOSPITALS, INC.
OUTSIDE DIRECTORS STOCK AND INCENTIVE COMPENSATION PLAN
1. Introduction.
------------
This Plan shall be known as the "Triad Hospitals, Inc. 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 and deferred stock unit awards, to
provide an incentive to such 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 as of the
date the Company's Common Stock is distributed to Columbia/HCA Healthcare
Corporation stockholders.
2. Definitions.
-----------
As used in the Plan, the following words and phrases shall have the
meanings indicated:
(a) "Agreement" shall mean a written agreement entered into between the
Company and a Participant in connection with an Option granted under
the Plan.
(b) "Annual Option" shall mean an Option granted pursuant to Section 5.1
hereof.
(c) "Annual Retainer" shall mean the annual fee earned by the Participant
for his service on the Board.
(d) "Black-Scholes Evaluation Method" shall mean the generally accepted
option pricing model based on the Black-Scholes valuation model as
adapted for use in valuing stock options and using such assumptions as
are determined and adopted from time to time by the Board.
(e) "Board" shall mean the Board of Directors of the Company.
<PAGE>
(f) "Board Term" shall mean each Board year beginning on the date of an
annual meeting of the Company's shareholders and ending on the date
immediately preceding the next annual meeting of the Company's
shareholders.
(g) "Code" shall mean the Internal Revenue Code of 1986, as amended from
time to time.
(h) "Common Stock" shall mean the common stock of the Company.
(i) "Company" shall mean Triad Hospitals, Inc., a Delaware corporation, or
any successor corporation.
(j) "Deferred Stock Unit" shall mean a bookkeeping unit entitling a
Participant to a Share on the Realization Date applicable under the
Plan (and shall include fractional units).
(k) "Deferred Stock Unit Account" shall mean a bookkeeping account
maintained by the Company reflecting the number of Deferred Stock
Units credited to a Participant pursuant to Section 6.2 hereof as a
result of the Participant's Stock Election.
(l) "Deferred Stock Unit Award" shall mean an award under Section 6.2
hereof of Deferred Stock Units as a result of a Participant's Stock
Election for a Board Term.
(m) "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).
(n) "Discretionary Option" shall mean an Option granted pursuant to
Section 5.3.
(o) "Election Notice" shall mean a written election, in such form as the
Board shall prescribe, submitted by a Participant to the Company in
connection with a Stock Election under the Plan.
(p) "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.
(q) "Fair Market Value" per Share or per Deferred Stock Unit as of a given
date shall mean the closing sales price of the Common Stock on the
Nasdaq Stock Market on the trading day immediately preceding the date
as of which the Fair Market Value is to be determined, or, in the
absence of any reported sales of Shares on such date, on the first
preceding date on which any such sale shall have been reported (in
either case, as reported in the Two Star Edition of The Wall Street
Journal). If the Shares are not listed on the Nasdaq Stock Market on
the date as of
2
<PAGE>
which Fair Market Value is to be determined, the Committee shall in
good faith determine the Fair Market Value in whatever manner it
considers appropriate.
(r) "Initial Option" shall mean an Option granted pursuant to Section 5.2
hereof.
(s) "Option" shall mean an Annual Option, Initial Option or Discretionary
Option, as the case may be.
(t) "Option Price" shall mean the price at which each Share subject to an
Option may be purchased, determined in accordance with Section 5.4
hereof.
(u) "Outside Director" shall mean any member of the Board who is not also
an employee of the Company (or any Subsidiary thereof).
(v) "Participant" shall mean any Outside Director who has received an
Option or other award (or credit) hereunder that has not yet
terminated.
(w) "Realization Date" shall mean, as elected by the Participant, with
respect to any Deferred Stock Unit allocated to a Participant's
Deferred Stock Unit Account, the first business day following (i) the
second anniversary of the date such Deferred Stock Unit is credited to
the Participant's Deferred Stock Unit Account, or (ii) the date the
Participant ceases to be a member of the Board.
(x) "Shares" shall mean shares of Common Stock of the Company.
(y) "Stock Election" shall mean an election of the Participant to receive,
in lieu of all or part (in multiples of 25%) of his Annual Retainer, a
Deferred Stock Unit Award pursuant to Section 6.2 hereof.
(z) "Subsidiary" shall have the meaning set forth in Section 7.2.
3. Administration of the Plan.
--------------------------
3.1 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 Election Notices and 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.
3
<PAGE>
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 ___________ Shares, which number
shall be subject to adjustment as provided in Section 8 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 Deferred Stock 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 Annual Options.
-----------------------
Each person who is an Outside Director on the first business day of
any Board Term shall be granted an Annual Option on such date as shall be
selected by the Board which shall cover a number of Shares determined by
the Board. Such Annual Option shall become exercisable in four cumulative
installments, each of which shall relate to 25% of the Shares covered by
the Annual Option, beginning on the first anniversary of the date of grant
and the three next succeeding anniversary dates thereof, respectively.
5.2 Grant of Initial Options.
------------------------
In addition to Annual Options granted under Section 5.1, upon
commencement of service as an Outside Director, each Outside Director shall
be granted an Initial Option, as of such date as shall be selected by the
Board, which shall cover a number of shares determined by the Board. Such
Initial Option shall become exercisable in four cumulative installments,
each of which shall relate to 25% of the Shares covered by the Initial
Option, beginning on the first anniversary of the date of grant and the
three next succeeding anniversary dates thereof, respectively.
5.3 Discretionary Options.
---------------------
The Board may, from time to time, in its sole discretion, designate
Outside Directors who are to be granted 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.
4
<PAGE>
5.4 Option Price.
------------
The Option Price of each Share subject to an Annual Option or Initial
Option shall be 100 percent of the Fair Market Value of a Share on the date
of grant. 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.
5.5 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; provided, however, that the Board may, in the case of a Discretionary
-------- -------
Option, provide for a shorter exercise period in the Agreement.
5.6 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 whole
Shares valued at the closing sales price of the Common Stock on the Nasdaq
Stock Market on the date of exercise (or next succeeding trading date, if
the date of exercise is not a trading date, in which case the exercise date
shall instead be considered to be such next trading date) or (iii) by a
combination of such cash (or cash equivalents) and such Stock; 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 9 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.
5.7 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
5
<PAGE>
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 5.7 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 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 5.7, 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. Any attempted
assignment, transfer, pledge, hypothecation or other disposition of the
Option contrary to the provisions hereof, and the levy of any execution,
attachment or similar process upon the Option, shall be null and void and
without effect.
5.8 Death of Optionee.
-----------------
If an optionee 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 5.7) shall have the right, during the period ending six months
after the date of the optionee's death (subject to the provisions of
Section 5.5 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.
6
<PAGE>
5.9 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 his disability
(subject to the provisions of Section 5.5 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 Disability and shall not have
been previously exercised.
5.10 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 5.5 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. Deferred Stock Unit Awards.
--------------------------
6.1 Stock Elections.
---------------
For each Board Term during which the Plan is in effect, a Participant
may elect to receive, in lieu of all or any portion (in multiples of 25%)
of his Annual Retainer payable for such Board Term, a Deferred Stock Unit
Award pursuant to Section 6.2 hereof. Such an election shall be made for a
Board Term by filing an Election Notice with the Company, in accordance
with procedures adopted by the Board, prior to the commencement of the
Board Term for which such Annual Retainer is to be paid.
6.2 Deferred Stock Unit Awards.
--------------------------
A Participant shall receive a Deferred Stock Unit Award for each Board
Term in respect of which he makes a Stock Election. Such Deferred Stock
Unit Award shall be granted as of the first business day of the Board Term
and shall be for a number of Deferred Stock Units determined by dividing
(A) the additional Annual Retainer amount that would have been payable to
the Participant in cash in the absence of his Stock Election, by (B) the
Fair Market Value of a Share on the date of grant.
6.3 Award Terms.
-----------
Each Deferred Stock Unit Award granted under the Plan shall have the
following terms:
(a) Vesting. All Deferred Stock Units credited to a Participant's
Deferred Stock Unit Account shall immediately be 100% vested.
7
<PAGE>
(b) Dividend Equivalents. A Participant shall be credited with
dividend equivalents on all Deferred Stock Units credited to his
Deferred Stock Unit Account at the time of any payment of
dividends on Shares to stockholders. 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 Deferred Stock Units then
credited to him. Any such dividend equivalent shall be credited
to the Participant's Deferred Stock Unit Account as of the date
on which such dividend would have been payable and shall be
converted into additional Deferred Stock Units (which shall be
immediately vested) based upon the Fair Market Value of a Share
on the date of such crediting.
(c) Payment of Awards. A Participant shall be entitled to payment, in
respect of Deferred Stock Units credited to him, on the
Realization Date for such Deferred Stock Units indicated by
Participant in the applicable Election Notice. Subject to the
provisions of Section 9, such payment in respect of any Deferred
Stock Units shall be made through the issuance to the Participant
of a stock certificate for a number of Shares equal to the number
of such Deferred Stock Units.
7. Change in Control.
-----------------
7.1 Effect of Change in Control.
---------------------------
Upon a "change in control" of the Company (as defined below), 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 provisions of Sections 5.1, 5.2 and 5.3 hereof
concerning exercisability).
7.2 Definition.
----------
For purposes of Section 7.1 hereof, "change in control" of the Company
shall be deemed to have occurred upon the occurrence of any of the
following after the date on which the Corporation becomes a publicly-held
Corporation:
(a) 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
8
<PAGE>
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.
(b) The individuals who, as of the date the Company issues any class
of equity securities required to be registered under Section 12
of the 1934 Act, 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 (a) or (c) of this Section 7.2;
or
(c) Consummation, after approval by stockholders of the Company, of:
(1) A merger, consolidation or reorganization involving the
Company, unless,
(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
9
<PAGE>
(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 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.
8. 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 and (iii) the number and kind of shares represented by Deferred
Stock Units outstanding under the Plan.
10
<PAGE>
9. Conditions of Issuance of Stock Certificates.
--------------------------------------------
9.1 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; and
(d) 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.
9.2 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.
10. No Rights to Continued Service.
------------------------------
Nothing in the Plan, in any grant made, or in any Election Notice 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, Election Notice or
Agreement.
11. No Rights to Assets of the Company.
----------------------------------
Nothing in the Plan, in any grant made, or in any Election Notice or
Agreement entered into pursuant hereto shall confer upon any Participant
any right to any particular assets of the Company. A Participant's rights
under the Plan are limited to those rights of an unsecured creditor except
to the extent Shares are actually issued to such Participant.
11
<PAGE>
12. 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.
13. Term of the Plan.
----------------
The Plan shall have a term of ten years. No grants or awards may be
made after such termination, but termination of the Plan shall not, without
the consent of any Participant who then holds Options or Deferred Stock
Units, alter or impair any rights or obligations in respect of such Options
or Deferred Stock Units.
14. 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 Texas
without giving effect to the choice of law principles thereof, except to
the extent that such laws are preempted by Federal law.
***
___________________________________
TRIAD HOSPITALS, INC.
12
<PAGE>
Exhibit 10.12
Triad Hospitals, Inc.
Management Stock Purchase Plan
<PAGE>
Triad Hospitals, Inc.
Management Stock Purchase Plan
Table of Contents
-----------------
1. Introduction.............................................................1
2. Definitions..............................................................1
(a) Agreement.........................................................1
(b) Average Market Value..............................................1
(c) Base Salary.......................................................1
(d) Board.............................................................1
(e) Cause.............................................................2
(f) Code..............................................................2
(g) Committee.........................................................2
(h) Company...........................................................2
(i) Disability........................................................2
(j) Exchange Act......................................................2
(k) Fair Market Value.................................................2
(l) Participant.......................................................2
(n) Plan..............................................................3
(o) Restricted Period.................................................3
(p) Restricted Share or Restricted Shares.............................3
(q) Restricted Share Unit or Restricted Share Units...................3
(r) Rule 16b-3........................................................3
(s) Section 16 Person.................................................3
(t) Shares............................................................3
(u) Subsidiary........................................................3
3. Administration of the Plan...............................................3
4. Stock Subject to Plan....................................................3
5. Eligibility..............................................................4
6. Restricted Shares........................................................4
7. Termination of Employment................................................6
8. Change in Control........................................................7
9. Dilution and Other Adjustments...........................................9
10. Payment of Withholding and Payroll Taxes.................................9
11. No Rights to Employment..................................................9
<PAGE>
12. Amendment and Termination of the Plan....................................9
13. Term of the Plan........................................................10
14. Governing Law...........................................................10
<PAGE>
Triad Hospitals, Inc.
Management Stock Purchase Plan
1. Introduction.
------------
The purposes of the Triad Hospitals, Inc. Management Stock Purchase Plan
are to attract and retain highly-qualified executives, to align executive and
stockholder long-term interests by creating a direct link between executive
compensation and stockholder return, to enable executives to develop and
maintain a substantial equity-based interest in Triad Hospitals, Inc., and to
provide incentives to such executives to contribute to the success of the
Company's business. The provisions of the Plan are intended to satisfy the
requirements of Section 16(b) of the Securities Exchange Act of 1934, as amended
from time to time, and shall be interpreted in a manner consistent with the
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 as of the date
the Company's common stock is distributed to Columbia/HCA Healthcare Corporation
stockholders.
2. Definitions.
-----------
As used in this 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) "Average Market Value" of a Share on any grant date shall mean the
average of the closing prices on the Nasdaq Stock Market (or its
equivalent if the Shares are not traded on the Nasdaq Stock Market) of
a Share for all trading days (including the grant date, if a trading
day) after the next preceding grant date.
(c) "Base Salary" shall mean the base salary of the Participant without
taking into account any bonuses or other special compensation
received.
(d) "Board" shall mean the Board of Directors of the Company.
(e) "Cause" shall mean (i) the conviction of the Participant of a felony
under the laws of the United States or any state thereof, whether or
not appeal is taken, (ii) the conviction of the Participant for a
violation of criminal law involving the Company or a Subsidiary and
its business, (iii) the willful misconduct of the Participant, or the
willful or continued failure by the Participant (except on account of
death or Disability) to substantially perform his employment duties,
which in either case has a material adverse effect on the Company,
(iv) the willful fraud or material dishonesty of the Participant in
connection with his performance of his employment duties, (v) the use
of alcohol in a manner which in the opinion
<PAGE>
of the Company materially impairs the ability of the Participant to
effectively perform his employment duties, or the use, possession, or
sale of, or impaired performance due to, controlled substances or (vi)
sexual or other illegal harassment of a Company or Subsidiary employee
by the Participant; provided, however, in no event shall the
-------- -------
Participant's employment be considered to have been terminated for
"Cause" unless and until the Participant receives written notice from
the Company stating the acts or omissions constituting Cause and the
Participant has the opportunity to cure to the Company's satisfaction
any such acts or omissions (in the case of (iii) or (v) above) within
15 days of the Participant's receipt of such notice.
(f) "Code" shall mean the Internal Revenue Code of 1986, as amended from
time to time.
(g) "Committee" shall mean the compensation committee appointed to
administer the Plan and shall consist of two or more directors of the
Company, (i) none of whom shall be officers or employees of the
Company, and (ii) all of whom, to the extent deemed necessary or
appropriate by the Board, shall satisfy the requirements of a "non-
employee director" within the meaning of Rule 16b-3 of the Securities
Exchange Act of 1934. The members of the Committee shall be appointed
by, and serve at the pleasure of, the Board.
(h) "Company" shall mean Triad Hospitals, Inc., a Delaware corporation.
(i) "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).
(j) "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.
(k) "Fair Market Value" of a Share, Restricted Share or Restricted Share
Unit as of a given date as of a given date shall mean the closing
sales price of the common stock on the Nasdaq Stock Market on the
trading day immediately preceding the date as of which the Fair Market
Value is to be determined, or, in the absence of any reported sales of
Shares on such date, on the first preceding date on which any such
sale shall have been reported (in either case, as reported in the Two
Star Edition of The Wall Street Journal). If the Shares are not listed
on the Nasdaq Stock Market on the date as of which Fair Market Value
is to be determined, the Committee shall in good faith determine the
Fair Market Value in whatever manner it considers appropriate.
(l) "Participant" shall mean a person who receives a grant of Restricted
Shares under the Plan.
2
<PAGE>
(m) "Plan" shall mean the Triad Hospitals, Inc. Management Stock Purchase
Plan, as in effect from time to time.
(n) "Restricted Period" shall have the meaning given in Section 6(c)
hereof.
(o) "Restricted Share" or "Restricted Shares" shall mean the common stock
purchased hereunder subject to restrictions.
(p) "Restricted Share Unit" or "Restricted Share Units" shall have the
meaning given in Section 6(f) 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) "Section 16 Person" shall mean a Participant who is subject to the
reporting and short-swing liability provisions of Section 16 of the
Exchange Act.
(s) "Shares" shall mean the common stock of the Company.
(t) "Subsidiary" shall have the meaning set forth in Section 8.
3. Administration of the Plan.
--------------------------
The Plan shall be administered by the Committee. The Committee 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 terms and provisions of the Agreements (which need not be
identical) and to make all other determinations deemed necessary or advisable
for the administration of the Plan. The Committee's determinations on the
foregoing matters shall be final and conclusive.
No member of the Board or the Committee shall be liable for any action
taken or determination made in good faith with respect to the Plan or any grant
hereunder.
4. Stock Subject to Plan.
---------------------
The maximum number of Shares which shall be distributed as Restricted
Shares or in respect of Restricted Share Units under the Plan shall be ________
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.
If any outstanding Restricted Shares or Restricted Share Units under the
Plan shall be forfeited, the related Shares shall (unless the Plan shall have
been terminated) again be available for use under the Plan.
3
<PAGE>
5. Eligibility.
-----------
All employees or groups of employees designated by the Committee in its
discretion shall be eligible to become Participants in the Plan.
Each Participant may elect, in writing, to reduce his Base Salary by a
specified percentage thereof up to a maximum percentage established by the
Committee with respect to his employment classification, as set forth in
Appendix A, and, in lieu of receiving such salary, receive a number of
Restricted Shares equal to the amount of such salary reduction divided by a
dollar amount equal to 75% of the Average Market Value of a Share on the date on
which such Restricted Shares are granted. Any such election shall be effective
beginning with the first pay period that ends after January 1 of the calendar
year next following the calendar year in which such election is made (and shall
become irrevocable on December 31 of the calendar year in which it is made).
Any cancellation of, or other change in, any such salary reduction election
shall become effective as of the first pay period ending after January 1 of the
calendar year next following the calendar year in which notice of such
cancellation or change is filed (and any such notice shall become irrevocable on
December 31 of the calendar year in which it is filed).
Any salary reduction hereunder shall apply ratably to the Participant's
salary for each pay period covered by such election. Restricted Shares shall be
granted in respect of such salary reductions on June 30 and December 31 of each
calendar year. The number of Restricted Shares granted on each such date shall
be based upon the aggregate salary reduction for pay periods ending since the
next preceding grant date and 75% of the Average Market Value of a Share on such
grant date.
In the event that a Participant who has elected salary reductions hereunder
shall terminate employment before Restricted Shares are granted in respect of
all such salary reductions, any salary reduction amounts in respect of which
Restricted Shares have not been granted by the date of Participant's termination
of employment shall be paid to the Participant promptly in cash.
6. Restricted Shares.
-----------------
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 Committee shall from time to time approve and shall comply with the
following terms and conditions (and with such other terms and conditions not
inconsistent with such terms as the Committee, in its discretion, may
establish):
(a) Number of Shares. Each Agreement shall state the number of Restricted
Shares to be granted thereunder.
(b) Restricted Period. Subject to such exceptions as may be determined by
the Committee in its discretion, the Restricted Period for Restricted
Shares granted under the Plan shall be three years from the date of
grant.
(c) Ownership and Restrictions. At the time of grant of Restricted Shares,
a certificate representing the number of Restricted Shares granted
shall be
4
<PAGE>
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 Committee, 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 such
other restrictive conditions; and (iii) except as otherwise determined
by the Committee, 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 remains in the continuous employment of the
Company 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 (and shall be similarly taken
into account in determining the amount of any cash payment to a
Participant upon termination of employment).
(d) 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 determined by the
Committee, 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.
(e) Restricted Share Units. Notwithstanding anything elsewhere in the Plan
to the contrary, if during the Restricted Period relating to a
Participant's Restricted Shares the Committee shall determine that the
Company may lose its Federal income tax deduction in connection with
the future lapsing of the restrictions on such Restricted Shares
because of the deductibility cap of section 162(m) of the Code, the
Committee, in its discretion, may convert some or all of such
Restricted Shares into an equal number of Restricted Share Units, as
to which payment will be postponed until such time as the Company will
not lose its Federal income tax deduction for such payment under
section 162(m). Until payment of the Restricted Share Units is made,
the Participant will be credited with dividend equivalents on the
Restricted Share Units, which dividend equivalents will be converted
into additional Restricted Share Units. When payment of any
5
<PAGE>
Restricted Share Units is made, it will be in the same form as would
apply if the Participant were then holding Restricted Shares instead
of Restricted Share Units.
7. Termination of Employment
-------------------------
The following rules shall apply, in the event of a Participant's
termination of employment with the Company and its Subsidiaries, with respect
to Restricted Shares held by the Participant at the time of such termination:
(a) Termination of Employment During Restricted Period. Except as provided
herein, if during the Restricted Period for any Restricted Shares held
by a Participant the Participant's employment is terminated either (i)
for Cause by the Company or a Subsidiary or (ii) for any reason by the
Participant, the Participant shall forfeit all rights with respect to
such Restricted Shares, which shall automatically be considered to be
cancelled, and shall have only an unfunded right to receive from the
Company's general assets a cash payment equal to the lesser of (i) the
Fair Market Value of such Restricted Shares on the Participant's last
day of employment or (ii) the aggregate Base Salary foregone by the
Participant as a condition of receiving such Restricted Shares.
Except as otherwise provided herein, if a Participant's employment is
terminated by the Company or a Subsidiary without Cause during the
Restricted Period for any Restricted Shares held by the Participant,
the Participant shall forfeit all rights with respect to such
Restricted Shares, which shall automatically be considered to be
cancelled, and shall have only an unfunded right to receive from the
Company's general assets a cash payment equal to either (i) the Fair
Market Value of such Restricted Shares on the Participant's last day
of employment or (ii) the aggregate Base Salary foregone by the
Participant as a condition of receiving such Restricted Shares, with
the Committee to have the sole discretion as to which of such amounts
shall be payable.
If the employment of a Participant holding Restricted Share Units
terminates during the Restricted Period relating to such Restricted
Share Units, they shall be treated in a manner substantially
equivalent to the treatment of Restricted Shares.
(b) Accelerated Lapse of Restrictions. Upon a termination of employment
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.
(c) Retirement of Participant. Upon the retirement of a Participant, the
Committee shall determine, in its discretion, whether all restrictions
then outstanding with respect to Restricted Shares held by the
Participant shall expire or whether the Participant shall instead be
treated as though the Participant's employment had been terminated by
the Company without Cause, as described above.
6
<PAGE>
8. Change in Control.
-----------------
Upon the occurrence of a "change in control" of the Company (as defined
below), the Restricted Period shall automatically terminate as to all Restricted
Shares awarded under the Plan (as to which such Restricted Period has not
previously terminated). For purposes hereof, "change in control" of the Company
shall be deemed to have occurred upon the occurrence of any of the following
after the date on which the Corporation becomes a publicly-held Corporation:
(a) 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.
(b) The individuals who, as of the date the Company issues any class of
equity securities required to be registered under Section 12 of the
1934 Act, 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 (a) or (c) of this
Section 8; or
(c) Consummation, after approval by stockholders of the Company, of:
7
<PAGE>
(1) A merger, consolidation or reorganization involving the Company,
unless,
(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
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.
8
<PAGE>
9. Dilution and Other Adjustments.
------------------------------
In the event of any merger, reorganization, consolidation,
recapitalization, stock dividend, stock split, or other change in corporate
structure affecting the Shares, such substitution or adjustment shall be made in
the aggregate number of Shares that may be distributed as Restricted Shares or
in respect of Restricted Share Units under the Plan, and the number of
Restricted Shares and/or Restricted Share Units outstanding under the Plan, as
may be determined to be appropriate by the Committee in its sole discretion;
provided, however, that the number of Shares thus subject to the Plan shall
- -------- -------
always be a whole number.
In addition, in the event of any such change in corporate structure, the
calculation of the Average Market Value of a Share for the grant date coincident
with or next following such event may be adjusted by the Committee in such
manner as it considers to be appropriate.
10. Payment of Withholding and Payroll Taxes.
----------------------------------------
Subject to the requirements of Section 16(b) of the Exchange Act, the
Committee 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 a grant of Restricted Shares hereunder, or the lapse
of restrictions with respect thereto, 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.
11. No Rights to Employment.
-----------------------
Nothing in the Plan or in any grant made or Agreement entered into pursuant
hereto shall confer upon any Participant the right to continue in the employ of
the Company or any Subsidiary or to be entitled to any remuneration or benefits
not set forth in the Plan or such Agreement, or interfere with, or limit in any
way, the right of the Company or any Subsidiary to terminate such Participant's
employment. Grants made under the Plan shall not be affected by any change in
duties or position of a Participant as long as such Participant continues to be
employed by the Company or a Subsidiary.
12. 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 may adversely affect any grants previously made, unless
the written consent of the Participant is obtained.
9
<PAGE>
13. Term of the Plan.
----------------
The Plan shall terminate ten years from the date that the Plan was approved
by the Board. No other grants may be made after such termination, but
termination of the Plan shall not, without the consent of any Participant who
then holds Restricted Shares or to whom Restricted Share Units are then
credited, alter or impair any rights or obligations in respect of such
Restricted Shares or Restricted Share Units.
14. 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 Texas
without giving effect to the choice of law principles thereof, except to the
extent that such laws are preempted by Federal law.
***
_____________________________
TRIAD HOSPITALS, INC.
10
<PAGE>
APPENDIX A
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Employee Classification Maximum Salary Percentage
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[insert classification] [insert applicable percentage]
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A-i
