<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON DECEMBER 11, 1998
- - --------------------------------------------------------------------------------
- - --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
FORM 10
GENERAL FORM FOR REGISTRATION OF SECURITIES
PURSUANT TO SECTION 12(B) OR 12(G) OF THE SECURITIES EXCHANGE ACT OF 1934
LIFEPOINT HOSPITALS LLC
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 62-1762163
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER IDENTIFICATION NO.)
INCORPORATION OR ORGANIZATION)
4525 HARDING ROAD 37205
NASHVILLE, TENNESSEE (ZIP CODE)
(ADDRESS OF PRINCIPAL EXECUTIVE
OFFICES)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE (615) 344-2000
SECURITIES TO BE REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH
TO BE SO REGISTERED EACH CLASS IS TO BE REGISTERED
COMMON STOCK, $.01 PAR VALUE NEW YORK STOCK EXCHANGE
PREFERRED STOCK PURCHASE RIGHTS NEW YORK STOCK EXCHANGE
SECURITIES TO BE REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
NONE
COPIES OF ALL COMMUNICATIONS SHOULD BE SENT TO:
MORTON A. PIERCE, ESQ. WILLIAM F. CARPENTER III, ESQ.
DEWEY BALLANTINE LLP SENIOR VICE PRESIDENT
1301 AVENUE OF THE AMERICAS AND GENERAL COUNSEL
NEW YORK, NEW YORK 10019-6092 LIFEPOINT HOSPITALS LLC
(212) 259-8000 4525 HARDING ROAD
NASHVILLE, TENNESSEE 37205
- - --------------------------------------------------------------------------------
- - --------------------------------------------------------------------------------
<PAGE>
LIFEPOINT 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"; "LifePoint Management's Discussion and Analysis of Financial
Condition and Results of Operations"; "LifePoint Business"; and "LifePoint
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"; "LifePoint Unaudited Pro Forma Condensed Combined Financial
Statements"; "LifePoint Summary Financial Data"; and "LifePoint 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
"LifePoint 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
"LifePoint 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
"LifePoint Management" and "LifePoint 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
"LifePoint 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"; and "Arrangements Among Columbia/HCA, LifePoint
and Triad Relating to the Distribution" 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
"LifePoint 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--LifePoint"; 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"; "LifePoint 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
"LifePoint 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"; "LifePoint Unaudited Pro Forma Condensed Combined Financial
Statements"; "LifePoint Selected Financial Data"; "LifePoint Management's
Discussion and Analysis of Financial Condition and Results of Operations"; and
"LifePoint 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
"LifePoint 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 LifePoint Hospitals, Inc. to
be in effect on the distribution date.
</TABLE>
3
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
3.2 Form of By-Laws of LifePoint Hospitals, Inc. to be in effect on the
distribution date.
4** Form of Rights Agreement, dated as of , 1999, between
LifePoint 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 Group Purchasing Member Agreement to be entered into by and
between Columbia/HCA Healthcare Corporation and LifePoint Hospitals,
Inc.
10.5** Form of Transitional Services Agreement to be entered into by and
between Columbia/HCA Healthcare Corporation and LifePoint Hospitals,
Inc.
10.6** Form of Computer and Data Processing Services Agreement to be
entered into by and between Columbia Information Systems, Inc. and
LifePoint Hospitals, Inc.
10.7** Form of Agreement to Share Telecommunications Services to be entered
into by and between Columbia Information Systems, Inc. and LifePoint
Hospitals, Inc.
10.8** Form of Sub-Lease Agreement to be entered into by and between
LifePoint Hospitals, Inc. and Columbia/HCA Healthcare Corporation.
10.9* ** LifePoint Hospitals, Inc. 1998 Long-Term Incentive Plan.
10.10* ** LifePoint Hospitals, Inc. 1999 Annual Incentive Plan
10.11* ** LifePoint Hospitals, Inc. Executive Stock Purchase Plan
21** Subsidiaries of LifePoint Hospitals, Inc. as of the distribution
date.
27.1 Financial Data Schedule.
27.2 Financial Data Schedule.
27.3 Financial Data Schedule.
27.4 Financial Data Schedule.
</TABLE>
- - --------
* Compensatory plan or arrangement.
** To be filed by amendment.
4
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF SECTION 12 OF THE SECURITIES EXCHANGE ACT OF
1934, THE REGISTRANT HAS DULY CAUSED THIS REGISTRATION STATEMENT TO BE SIGNED
ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED.
LifePoint Hospitals LLC
Date: December 11, 1998 /s/ William F. Carpenter III
By: _________________________________
William F. Carpenter III
Senior Vice President & 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 LifePoint Hospitals, Inc. to
be in effect on the distribution date.
3.2 Form of By-Laws of LifePoint Hospitals, Inc. to be in effect on the
distribution date.
4** Form of Rights Agreement, dated as of , 1999, between
LifePoint 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 Group Purchasing Member Agreement to be entered into by and
between Columbia/HCA Healthcare Corporation and LifePoint Hospitals,
Inc.
10.5** Form of Transitional Services Agreement to be entered into by and
between Columbia/HCA Healthcare Corporation and LifePoint Hospitals,
Inc.
10.6** Form of Computer and Data Processing Services Agreement to be
entered into by and between Columbia Information Systems, Inc. and
LifePoint Hospitals, Inc.
10.7** Form of Agreement to Share Telecommunications Services to be entered
into by and between Columbia Information Systems, Inc. and LifePoint
Hospitals, Inc.
10.8** Form of Sub-Lease Agreement to be entered into by and between
LifePoint Hospitals, Inc. and Columbia/HCA Healthcare Corporation.
10.9* ** LifePoint Hospitals, Inc. 1998 Long-Term Incentive Plan.
10.10* ** LifePoint Hospitals, Inc. 1999 Annual Incentive Plan.
10.11* ** LifePoint Hospitals, Inc. Executive Stock Purchase Plan.
21** Subsidiaries of LifePoint Hospitals, Inc. as of the distribution
date.
27.1 Financial Data Schedule.
27.2 Financial Data Schedule.
27.3 Financial Data Schedule.
27.4 Financial Data Schedule.
</TABLE>
- - --------
* Compensatory plan or arrangement.
**To be filed by amendment.
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 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 Southwestern United States, where Pacific's
hospital is usually either the only hospital or one of two 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. 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. The
distribution of shares of LifePoint common stock and Triad common stock is
conditioned upon receiving a ruling from the Internal Revenue Service that,
among other things, 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.
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
are seeking to list the LifePoint common stock and the Triad common stock on
the New York Stock Exchange, and we expect that they will trade under the
symbols " " and " ," 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 DECEMBER 11, 1998
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 28 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 + The shares of LifePoint common stock and Triad common
+ LifePoint and + stock will be distributed on the effective date of the
+ Triad is not + distribution, which is , 1999, to holders of
+ required. We are + Columbia/HCA common stock at the close of business on
+ not asking you + the record date for the distribution, which is ,
+ for a proxy and + 1999.
+ we request that +
+ you do not send + If you are a Columbia/HCA common stockholder at the
+ us a proxy. + close of business on the record date, you will receive
+ Also, you are + shares of LifePoint common stock and shares of
+ not required to + Triad common stock for every shares of Columbia/HCA
+ make any payment + common stock you hold. Certificates for the shares will
+ for the shares + be mailed on or about , 1999. You will receive a
+ of LifePoint + check for the cash equivalent of any fractional shares
+ common stock or + you otherwise would have received in the distribution.
+ Triad common +
+ stock. + If you have questions regarding the distribution, you
+ + may call National City Bank, Shareholder Services
+ This information + Group, telephone number (800) 622-6757, the
+ statement is not + distribution agent, or W. Mark Kimbrough, telephone
+ an offer to + number (615) 344-1199, Columbia/HCA's investor contact.
+ sell, or a +
+ 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 are seeking to list the LifePoint common
stock and the Triad common stock on the New York Stock Exchange. If the shares
are accepted for listing on the NYSE, we expect that a "when-issued" market
will develop on or shortly before the record date and regular trading will
begin on the first business day after the effective date of the distribution.
PROPOSED NEW YORK STOCK EXCHANGE TRADING SYMBOLS
LIFEPOINT COMMON STOCK --
TRIAD COMMON STOCK --
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......................................... 15
LifePoint Summary Historical Financial Data............................... 16
LifePoint Unaudited Pro Forma Condensed Combined Financial Statements..... 17
LifePoint Unaudited Pro Forma Condensed Combined Statement of Operations
for the Nine Months Ended September 30, 1998............................. 18
LifePoint Unaudited Pro Forma Condensed Combined Statement of Operations
for the Year Ended December 31, 1997..................................... 19
LifePoint Unaudited Pro Forma Condensed Combined Balance Sheet............ 20
LifePoint Notes to Unaudited Pro Forma Condensed Combined Financial
Statements............................................................... 21
Triad Summary Historical Financial Data................................... 22
Triad Unaudited Pro Forma Condensed Combined Financial Statements......... 23
Triad Unaudited Pro Forma Condensed Combined Statement of Operations for
the Nine Months Ended September 30, 1998................................. 24
Triad Unaudited Pro Forma Condensed Combined Statement of Operations for
the Year Ended December 31, 1997......................................... 25
Triad Pro Forma Unaudited Condensed Combined Balance Sheet................ 26
Triad Notes to Unaudited Pro Forma Condensed Combined Financial
Statements............................................................... 27
Risk Factors.............................................................. 28
Dependence on Physicians................................................. 28
Dependence on Key Personnel.............................................. 28
No Operating Histories as Independent Companies.......................... 28
Limits on Reimbursement; Health Care Reform Legislation.................. 28
Impact of Managed Care Organizations..................................... 29
Competition.............................................................. 29
Concentration of Operations.............................................. 30
Extensive Regulation..................................................... 30
Columbia/HCA Investigations, Litigation; Indemnification of LifePoint and
Triad................................................................... 32
Professional Liability Risks............................................. 33
</TABLE>
<TABLE>
<S> <C>
Leverage and Debt Service Obligations.................................... 33
Absence of Dividends..................................................... 34
Tax Treatment of the Distribution........................................ 34
Holding Company Structure................................................ 34
Market Uncertainties With Respect to LifePoint Common Stock and Triad
Common Stock............................................................ 35
Anti-Takeover Provisions................................................. 35
Year 2000 Compliance..................................................... 36
Reasons for Furnishing this Information Statement......................... 37
Forward-Looking Information............................................... 37
The Distribution.......................................................... 38
Background and Purposes of the Distribution.............................. 38
Manner of Effecting the Distribution..................................... 39
Results of the Distribution.............................................. 39
Certain Federal Income Tax Consequences.................................. 39
Regulatory Approvals..................................................... 40
Market for LifePoint Common Stock and Triad Common Stock................. 40
Conditions Precedent to the Distribution................................. 41
Arrangements Among Columbia/HCA, LifePoint and Triad Relating to the
Distribution............................................................. 42
Distribution Agreement................................................... 42
Tax Sharing and Indemnification Agreement................................ 44
Benefits and Employment Matters Agreement................................ 44
Insurance Allocation and Administration Agreement........................ 45
Computer and Data Processing Services Agreement; Year 2000 Agreement..... 46
Lease Agreements......................................................... 46
Transitional Services Agreement.......................................... 47
Other Agreements......................................................... 47
Dividend Policy........................................................... 47
LifePoint................................................................ 47
Triad.................................................................... 47
LifePoint Selected Financial Data......................................... 48
LifePoint Management's Discussion and Analysis of Financial Condition and
Results of Operations.................................................... 49
Forward-Looking Statements............................................... 49
Investigations........................................................... 49
Results of Operations.................................................... 50
Liquidity and Capital Resources.......................................... 55
Impact of Year 2000 Computer Issues...................................... 55
Effects of Inflation and Changing Prices................................. 58
Health Care Reform....................................................... 58
Triad Selected Financial Data............................................. 59
</TABLE>
-ii-
<PAGE>
<TABLE>
<S> <C>
Triad Management's Discussion and Analysis of Financial Condition and
Results of Operations.................................................... 60
Forward-Looking Statements............................................... 60
Investigations........................................................... 60
Results of Operations.................................................... 61
Liquidity and Capital Resources.......................................... 67
Impact of Year 2000 Computer Issues...................................... 67
Effects of Inflation and Changing Prices................................. 70
Health Care Reform....................................................... 70
LifePoint Business........................................................ 71
General.................................................................. 71
The Non-Urban Health Care Market......................................... 71
Business Strategy........................................................ 72
Sources of Revenue....................................................... 73
Hospital Utilization..................................................... 74
Competition.............................................................. 75
Employees and Medical Staff.............................................. 76
Properties............................................................... 77
LifePoint's Regulatory Compliance Program................................ 77
Legal Proceedings........................................................ 78
Triad Business............................................................ 79
General.................................................................. 79
Triad's Markets.......................................................... 80
Business Strategy........................................................ 81
Sources of Revenue....................................................... 81
Hospital Utilization..................................................... 82
Competition.............................................................. 83
Employees and Medical Staff.............................................. 85
Properties............................................................... 85
Triad Regulatory Compliance Program...................................... 87
Legal Proceedings........................................................ 87
Government and Other Sources of Reimbursement for LifePoint and Triad..... 88
Medicare................................................................. 88
Medicaid................................................................. 89
Annual Cost Reports...................................................... 90
Managed Care............................................................. 90
Commercial Insurance..................................................... 90
Regulation and Other Factors Affecting LifePoint and Triad................ 91
Licensure, Certification and Accreditation............................... 91
Certificates of Need..................................................... 91
State Rate Review........................................................ 91
Utilization Review....................................................... 91
Medicare Regulations and Fraud and Abuse................................. 91
Corporate Practice of Medicine........................................... 94
Health Care Reform....................................................... 94
</TABLE>
<TABLE>
<S> <C>
Conversion Legislation.................................................... 94
Revenue Ruling 98-15...................................................... 95
Environmental Matters..................................................... 95
Insurance................................................................. 95
Governmental Investigation of Columbia/HCA and Related Litigation......... 95
LifePoint Management....................................................... 98
Directors................................................................. 98
Compensation of Directors................................................. 99
Executive Officers........................................................ 99
Executive Compensation.................................................... 101
LifePoint Compensation Arrangements....................................... 103
LifePoint Security Ownership by Certain Beneficial Owners and Management... 107
Triad Management........................................................... 109
Directors................................................................. 109
Compensation of Directors................................................. 110
Executive Officers........................................................ 110
Executive Compensation.................................................... 111
Triad Compensation Arrangements........................................... 113
Triad Security Ownership by Certain Beneficial Owners and Management....... 115
LifePoint Description of Capital Stock..................................... 117
Introduction.............................................................. 117
Authorized And Outstanding Capital Stock.................................. 117
LifePoint Common Stock; Delaware Anti-Takeover Provisions................. 117
LifePoint Preferred Stock................................................. 118
LifePoint Preferred Stock Purchase Rights................................. 118
Certain Anti-Takeover Provisions--LifePoint Certificate and By-Laws....... 120
Limited Liability and Indemnification Provisions.......................... 125
Triad Description of Capital Stock......................................... 126
Introduction.............................................................. 126
Authorized And Outstanding Capital Stock.................................. 126
Triad Common Stock; Delaware Anti-Takeover Provisions..................... 126
Triad Preferred Stock..................................................... 127
Triad Preferred Stock Purchase Rights..................................... 127
Certain Anti-Takeover Provisions--Triad Certificate and By-Laws........... 129
Limited Liability and Indemnification Provisions.......................... 134
Additional Information..................................................... 135
LifePoint Hospitals, Inc. and Subsidiaries Index to Financial Statements... F-1
Triad Hospitals, Inc. and Subsidiaries Index to Financial Statements....... F-1
</TABLE>
-iii-
<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 Southwestern United States, where Pacific's hospital
is usually either the only hospital or one of two 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.
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.
. 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. Shortly after the
distribution, each of LifePoint and Triad intends to establish for the
benefit of its
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employees an Employee Stock Ownership Plan (an "ESOP"), which, 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 from Triad 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 certain
liabilities arising out of the pending governmental investigations of some of
Columbia/HCA's business practices and for certain liabilities arising out of
related stockholder and other legal proceedings currently pending against
Columbia/HCA. See "Risk Factors--Columbia/HCA Investigations, Litigation;
Indemnification of LifePoint and Triad" beginning on page 32, and "Regulation
and Other Factors Affecting LifePoint and Triad--Governmental Investigation of
Columbia/HCA and Related Litigation" beginning on page 95. 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 After the distribution, LifePoint and Triad will
OF LIFEPOINT AND TRIAD? continue to provide health care services, through
hospitals and, in the case of Triad, outpatient
surgery centers. LifePoint's hospitals are located in
non-urban areas where, in almost every case,
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
less than 150,000 residents) where Triad's hospital
is usually either the only hospital or one of two
hospitals in the community, and the remainder of
Triad's facilities are located in larger urban areas
typically characterized by a high rate of population
growth. 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 Scott L. Mercy will be the Chairman and Chief
EXECUTIVE OFFICERS AND Executive Officer of LifePoint. Mr. Mercy has
DIRECTORS OF LIFEPOINT extensive experience in the health care services
AND TRIAD? 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 99.
The LifePoint Board of Directors will consist of
persons, including Mr. Mercy, who will serve as
Chairman. See "LifePoint Management--Directors"
beginning on page 98.
James D. Shelton, currently President of the Pacific
Group of Columbia/HCA, will serve as 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
110.
The Triad Board of Directors will consist of
persons, including , who will serve as Chairman.
See "Triad Management--Directors" beginning on page
109.
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
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Triad after the distribution. These agreements also
allocate responsibility 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 42 for a more
complete discussion of these agreements.
HOW MUCH DEBT WILL Columbia/HCA intends to arrange for $250 million in
LIFEPOINT AND TRIAD debt financing prior to the distribution, pursuant to
HAVE AFTER THE a -year term loan agreement with a syndicate of
DISTRIBUTION? banks. This indebtedness will be assumed by LifePoint
immediately prior to the distribution and is expected
to be secured by certain of LifePoint's assets.
Columbia/HCA also intends to arrange for $750 million
in debt financing prior to the distribution, pursuant
to a -year term loan agreement with a syndicate of
banks. This indebtedness will be assumed by Triad
immediately prior to the distribution and is expected
to be secured by certain of Triad's assets. These
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). Each of
LifePoint and 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 $ million, in the case
of LifePoint, and $ million, in the case of Triad.
See "Risk Factors--Leverage and Debt Service
Obligations" beginning on page 33, "LifePoint
Unaudited Pro Forma Condensed Combined Balance Sheet"
beginning on page 20, and "Triad Pro Forma Unaudited
Condensed Combined Balance Sheet" beginning on page
26.
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 are seeking to list the LifePoint common
stock and the Triad common stock on the New York
Stock Exchange); 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.
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
certain liabilities for 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.
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See "Risk Factors" beginning on page 28 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 applied for, and the distribution is
TAXABLE FOR UNITED conditioned on Columbia/HCA receiving, a ruling from
STATES FEDERAL INCOME the Internal Revenue Service that the distribution
TAX PURPOSES? generally will be tax-free to 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.
We expect that the tax ruling will provide 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.
After the distribution, Columbia/HCA will send a
letter to you that explains how to allocate your tax
basis among these securities. See "Risk Factors--Tax
Treatment of the Distribution" beginning on page 34,
and "The Distribution--Certain Federal Income Tax
Consequences" beginning on page 39, for more complete
discussions of the United States Federal income tax
consequences of the distribution to holders of
Columbia/HCA Stock.
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. See
"Dividend Policy" beginning on page 47.
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WHERE WILL MY SHARES OF At present, there is no public market for either
LIFEPOINT COMMON STOCK LifePoint common stock or Triad common stock.
AND TRIAD COMMON STOCK LifePoint and Triad are seeking to list their common
TRADE? stock on the NYSE. If the shares are accepted for
listing, we expect that a "when-issued" trading
market for LifePoint common stock and Triad common
stock will develop on or shortly before the record
date, and that "regular-way" trading will begin on
, 1999. We explain these trading markets in more
detail later in this Summary. Also, see "The
Distribution--Market for LifePoint Common Stock and
Triad Common Stock" beginning on page 40.
WILL THE DISTRIBUTION After the distribution, the trading price of
AFFECT THE TRADING Columbia/HCA Common Stock probably will be lower than
PRICE OF MY the trading price immediately prior to the
COLUMBIA/HCA COMMON distribution. Moreover, until the market has
STOCK? 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 40.
WILL SHARES TRADE ANY Yes. A temporary form of interim trading called when-
DIFFERENTLY AS A RESULT issued trading is likely to develop for LifePoint
OF THE DISTRIBUTION? common stock and Triad common stock on or shortly
before the record date and to continue through the
effective date of the distribution, which is ,
1999. A when-issued listing can be identified by the
"wi" letters next to the LifePoint common stock or
the Triad common stock on the NYSE. If when-issued
trading develops, you may buy or sell LifePoint
common stock or Triad common stock in advance of the
distribution date on a when-issued basis. During this
time, Columbia/HCA Common Stock will continue to
trade on a regular-way basis and also may trade on a
when-issued basis, reflecting an assumed post-
distribution value for Columbia/HCA Common Stock.
Columbia/HCA Common Stock when-issued trading, if
available, could begin on or shortly before the
record date and continue through the distribution
date. If this occurs, an additional listing for
Columbia/HCA Common Stock, followed by the "wi"
letters, will appear on the NYSE. When-issued trading
occurs in order to develop an orderly market and
trading price for LifePoint common stock and Triad
common stock (and possibly Columbia/HCA Common Stock)
after the distribution. There may be differences
between the combined value of when-issued LifePoint
common stock, Triad common stock and Columbia/HCA
Common Stock as compared to the regular-way price of
Columbia/HCA Common Stock during this period. If
Columbia/HCA Common Stock when-issued trading is not
available, the NYSE will require that shares of
Columbia/HCA Common Stock that are sold or purchased
from the period beginning on , 1999 and ending
on the distribution date be accompanied by due-bills
representing the LifePoint common stock and Triad
common stock distributable with respect to such
shares, and that during such period neither the
Columbia/HCA Common Stock nor the due bills may be
purchased or sold separately.
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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 40.
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
DEFERRAL PLAN AND THE distribution, shares of LifePoint common stock and
SAN LEANDRO RETIREMENT shares of Triad common stock for every shares
AND SAVINGS PLAN? of Columbia/HCA Stock you own through the plans on
the record date will be credited to your plan
account.
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.
Unvested employee stock options and incentive stock
options (whether or not vested) 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. In the case of unvested
options that are not incentive stock options, the
exercise price of each replacement option will be set
at the current fair market value and the number of
shares covered by the replacement option will be
fixed so as to preserve for the holder the economic
value of the cancelled option. In the case of
incentive stock options, 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.
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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.
DISTRIBUTION RATIO 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 39.
SHARES TO BE All of the LifePoint common stock and Triad common
DISTRIBUTED 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) -
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) -
After the distribution, the transfer agent and registrar for the LifePoint
common stock and the Triad common stock will be:
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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. 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 will
operate 210 general, acute care hospitals, 10 psychiatric hospitals, and 82
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 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 September 30, 1998, the America Group (the assets
of which will be transferred to LifePoint prior to the distribution) comprised
22 general, acute care hospitals, located in non-urban areas in the States of
Alabama, Georgia, Kansas, Kentucky, Louisiana, Tennessee, Utah and Wyoming.
America Group also owns a minority interest in one non-consolidated hospital in
Florida accounted for using the equity method. This joint venture is building a
replacement hospital and, upon completion, LifePoint is expected to hold a
majority interest in the joint venture. In almost all of LifePoint's markets,
LifePoint's hospital is the only hospital in the community.
LifePoint's primary objective is to provide the communities it serves a
comprehensive array of quality health care services in the most cost effective
manner possible. 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
In recent periods, LifePoint has experienced declines in revenue and volume
growth rates. For example, during the nine months ended September 30, 1998,
LifePoint's revenues declined by 2.9%. During the same period, hospital
admissions decreased by 1.3%, although equivalent admissions (a measure of
combined inpatient and outpatient volume) increased by 0.4%. 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 49. See also
"LifePoint Unaudited Pro Forma Condensed Combined Financial Statements"
beginning on page 21.
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 hospitals aggressively to assure that they operate in
accordance with the strategic objectives described below:
. Develop Facility-Specific Strategies. LifePoint intends to monitor its
facilities individually and to develop strategies designed to benefit
individual facilities. By contrast, while LifePoint has been part of
Columbia/HCA, Columbia/HCA's business strategies have been developed on
a system-wide basis that did not emphasize individual facility
strategies.
. Expand Breadth of Service and Reduce Patient Outmigration. LifePoint
intends to increase 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. Management believes that this expansion of available
treatments should help to encourage local residents in the non-urban
markets that LifePoint serves to seek care at facilities within their
communities. LifePoint believes its strong community focus should also
assist in limiting patient outmigration. As an entity separate from
Columbia/HCA, LifePoint will not have to compete with the Columbia/HCA
facilities
11
<PAGE>
located in larger, urban markets for management attention, support
resources, and capital to finance expansion of the range of services
offered at its hospitals.
. Strengthen Physician Recruiting and Retention. LifePoint believes that
the supply of physicians practicing in the non-urban markets it serves
is limited, and that recruiting physicians in local communities is
critical to increasing the quality of health care and the breadth of
available services. As an independent company, LifePoint intends to take
advantage of its more specific 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. In most of its markets,
LifePoint will be able to take advantage of exemptions from certain
restrictions on business association with physicians that are available
in certain non-urban areas.
. Retain and Develop Stable Management. LifePoint will 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. 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.
. Build Strong Community Relations. Management believes that it is
important to LifePoint's success that its hospitals continue a high
level of involvement in the communities they serve and continue to
develop good relations with local governments and business leaders.
LifePoint employees, particularly the executive teams at the hospitals,
are expected to expend considerable effort on improving community
relationships.
. 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 system-wide basis. LifePoint believes
that independence from Columbia/HCA will enable it over time to decrease
the number of discount arrangements in which it participates and to
negotiate contract terms that are generally more favorable for its
facilities. LifePoint does not intend to enter into capitation
arrangements in the future.
. Acquire Other Hospitals. As part of its business strategy, LifePoint
will seek to identify attractive acquisition candidates and may acquire
additional hospitals in non-urban markets consistent with its strategy.
In the past, Columbia/HCA has been reluctant to pursue acquisitions of
such facilities since they were outside of Columbia/HCA's core markets.
LifePoint will seek to acquire hospitals that are located in non-urban
markets where the projected rate of population growth is above the
national average.
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TRIAD HOSPITALS, INC.
TRIAD'S FACILITIES
Triad will continue to provide health care services through its hospitals and
outpatient surgery centers. As of September 30, 1998, the Pacific Group (the
assets of which will be transferred to Triad prior to the distribution)
comprised 40 general, acute care hospitals, 2 psychiatric hospitals, and 19
outpatient surgery centers, located in the States of Alabama, Arizona,
Arkansas, California, Kansas, Louisiana, Missouri, New Mexico, Oklahoma, Oregon
and Texas (in addition, Pacific operates 1 hospital through a 50/50 joint
venture that is not consolidated for financial reporting purposes).
Approximately three-quarters of Triad's hospitals are located in small cities
(generally with populations less than 150,000 residents) where Triad's hospital
is usually either the only hospital or one of two hospitals in the community,
and the remainder of Triad's hospitals are located in larger urban areas
typically characterized by a high rate of population growth. Triad currently
intends to sell (or, in two cases, to transfer through long-term leases) nine
of the general, acute care hospitals (one of which was sold as of December 1,
1998), one psychiatric hospital and certain of the outpatient surgery centers
that the Pacific Group operated as of September 30, 1998. Approximately half of
Triad's facilities are located in the States of Arizona and Texas.
Triad's primary objective is to provide the communities it serves a
comprehensive array of quality health care services in the most cost effective
manner possible. Triad'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. These hospitals also
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 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 nine months ended September 30, 1998,
revenues (on a same facility basis) declined by 2.5%. During the same period,
hospital admissions (on a same facility basis) decreased by 1.7%, although
equivalent admissions (a measure of combined inpatient and outpatient volume)
increased by 0.5%. 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 60. See also
"Triad Unaudited Pro Forma Condensed Combined Financial Statements" beginning
on page 23.
BUSINESS STRATEGY
Triad's strategic goals are designed to address the specific needs of its
competitive environments. Triad's strategic objectives include the following:
. Build on Population Growth in Western United States. Triad intends to
establish itself as a strong competitor in the health care markets of
the high-growth western states in which it operates. Triad
13
<PAGE>
plans to construct new hospitals and may also seek to make acquisitions
in select markets. As an independent company, Triad will be able to
pursue sources of capital that were unavailable to it as a division of
Columbia/HCA and to devote the required management attention to building
and managing new facilities.
. Introduce Select Specialty Services. In certain markets where the
demographics indicate, Triad intends to introduce specialty services
(e.g., women's health or orthopedic facilities) to help attract new
patients to Triad facilities.
. Join Local Managed Care Organizations. Triad facilities located in areas
where there are other health care providers (e.g., tax-exempt hospitals)
will seek to partner with those other providers and be included in their
managed care networks. This ability to partner with local managed care
networks will be a key to the success of those facilities which operate
in high-managed care environments.
. Work With Local Physicians. As an independent company, Triad intends to
take advantage of the more specific management focus in each of its
markets to work more effectively with individual physicians and
physician practices, many of which management believes would prefer to
deal with a company with Triad's strategic focus. In some of its
markets, Triad also will be able to take advantage of exemptions from
certain restrictions on business association with physicians that are
available in some non-urban areas.
. Retain and Develop Stable Management. Triad will focus its recruitment
of managers and health care professionals on those who wish to live and
practice in the communities in which Triad's hospitals are located. In
the past, managers and health care professionals employed at Triad
hospitals sometimes relocated to advance their careers elsewhere within
the Columbia/HCA system. Triad believes that the stronger market focus
resulting from its local partnering efforts will help attract needed
managerial and health care talent to its hospitals, and that Triad's
ability to provide equity-based compensation linked to its performance
should assist in management retention. Management believes that
achieving long-term retention of executive teams at the hospitals will
enhance medical staff relations and maintain continuity of relationships
with the community.
14
<PAGE>
COMPARATIVE FINANCIAL HIGHLIGHTS
The following table sets forth, for the nine months ended September 30, 1998
and for each of the years ended December 31, 1997 and December 31, 1996,
revenues, operating income and total assets for each of LifePoint, Triad and,
on a pro forma basis after giving effect to the distribution, Columbia/HCA.
This pro forma 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
AS OF AND FOR THE NINE ENDED DECEMBER 31,
MONTHS ENDED ------------------------
SEPTEMBER 30, 1998 1997 1996
----------------------- ----------- -----------
AMOUNT % AMOUNT % AMOUNT %
------------- --------- ------- --- ------- ---
<S> <C> <C> <C> <C> <C> <C>
Columbia/HCA revenues...... $ 12,519 87% $16,542 88% $16,557 89%
LifePoint revenues......... 366 3 490 3 467 2
Triad revenues............. 1,376 10 1,787 9 1,762 9
------------- --------- ------- --- ------- ---
$ 14,261 100% $18,819 100% $18,786 100%
============= ========= ======= === ======= ===
Columbia/HCA operating
income(a)................. $ 2,206 93% $ 2,575 90% $ 3,792 90%
LifePoint operating income
(a)....................... 53 2 84 3 112 3
Triad operating income
(a)....................... 120 5 192 7 310 7
------------- --------- ------- --- ------- ---
$ 2,379 100% $ 2,851 100% $ 4,214 100%
============= ========= ======= === ======= ===
Columbia/HCA total assets.. $ 18,096 90% $20,043 91% $19,206 91%
LifePoint total assets..... 392 2 397 2 382 2
Triad total assets......... 1,520 8 1,562 7 1,528 7
------------- --------- ------- --- ------- ---
$ 20,008 100% $22,002 100% $21,116 100%
============= ========= ======= === ======= ===
</TABLE>
- - --------
(a) Operating income is defined as income from continuing operations before
depreciation and amortization, interest expense, management fees, gains on
sales of facilities, impairment of long-lived assets, restructuring of
operations and investigation related costs, minority interests and income
taxes.
15
<PAGE>
LIFEPOINT
SUMMARY HISTORICAL FINANCIAL DATA
(DOLLARS IN MILLIONS)
<TABLE>
<CAPTION>
NINE MONTHS
ENDED YEARS ENDED DECEMBER 31,
SEPTEMBER 30, -------------------------------
1998 1997 1996 1995 1994
------------- ------- ------ ------ ------
<S> <C> <C> <C> <C> <C>
SUMMARY OF OPERATIONS:
Revenues....................... $366.4 $ 490.4 $466.6 $395.8 $350.1
Operating income (a)........... 53.0 84.1 111.7 82.4 66.3
Income from continuing
operations (b)................ 5.6 15.2 39.6 25.6 14.4
Net income (b)................. 1.9 10.6 41.5 27.4 15.9
OPERATING DATA:
Number of hospitals at end of
period........................ 22 22 22 20 20
Number of licensed beds at end
of period (c)................. 2,056 2,080 2,074 1,881 1,843
Weighted average licensed beds
(d)........................... 2,070 2,078 2,060 1,862 1,783
Admissions (e)................. 45,005 60,487 59,381 54,549 52,681
Equivalent admissions (f)...... 79,704 105,973 99,701 88,915 81,708
Average length of stay (days)
(g)........................... 4.4 4.4 4.7 4.8 4.9
Average daily census (h)....... 731 733 755 713 713
Occupancy rate (i)............. 35% 35% 37% 38% 40%
</TABLE>
- - --------
(a) Operating income 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.
(b) Includes charge related to impairment of long-lived assets of $4.8 million
($2.9 million after-tax) for the twelve months ended December 31, 1997.
(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.
(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.
(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.
16
<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 Statements of Operations reflect
the results of LifePoint's operations as if the distribution had occurred at
the beginning of the respective periods presented. The Unaudited Pro Forma
Condensed Combined Balance Sheet assumes that the distribution had occurred on
September 30, 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.
17
<PAGE>
LIFEPOINT
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 1998
(DOLLARS IN MILLIONS)
<TABLE>
<CAPTION>
PRO FORMA PRO
HISTORICAL ADJUSTMENTS FORMA
---------- ----------- ------
<S> <C> <C> <C>
Revenues...................................................................... $366.4 $366.4
Salaries and benefits......................................................... 158.1 158.1
Supplies...................................................................... 44.6 44.6
Other operating expenses...................................................... 82.4 82.4
Provision for doubtful accounts............................................... 28.3 28.3
Depreciation and amortization................................................. 20.5 20.5
Interest expense.............................................................. 13.9 3.0 (a) 16.9
Management fees............................................................... 6.9 6.9
------ ----- ------
354.7 3.0 357.7
------ ----- ------
Income from continuing operations before minority interests and income taxes.. 11.7 (3.0) 8.7
Minority interests in earnings of consolidated entities....................... 1.7 1.7
------ ----- ------
Income from continuing operations before income taxes......................... 10.0 (3.0) 7.0
Provision for income taxes.................................................... 4.4 (1.2)(b) 3.2
------ ----- ------
Income from continuing operations............................................. $ 5.6 $(1.8) $ 3.8
====== ===== ======
Diluted earnings per share (d)................................................
Shares used in computing diluted earnings per share (d).......................
</TABLE>
The accompanying notes are an integral part of the unaudited pro forma
condensed combined financial statements.
18
<PAGE>
LIFEPOINT
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1997
(DOLLARS IN MILLIONS)
<TABLE>
<CAPTION>
PRO FORMA PRO
HISTORICAL ADJUSTMENTS FORMA
---------- ----------- ------
<S> <C> <C> <C>
Revenues....................................... $490.4 $490.4
Salaries and benefits.......................... 197.3 197.3
Supplies....................................... 55.4 55.4
Other operating expenses....................... 119.0 119.0
Provision for doubtful accounts................ 34.6 34.6
Depreciation and amortization.................. 27.6 27.6
Interest expense............................... 15.5 7.0 (a) 22.5
Management fees................................ 8.2 8.2
Impairment of long-lived assets................ 4.8 4.8
------ ----- ------
462.4 7.0 469.4
------ ----- ------
Income from continuing operations before
minority interests and income taxes........... 28.0 (7.0) 21.0
Minority interests in earnings of consolidated
entities...................................... 2.2 2.2
------ ----- ------
Income from continuing operations before income
taxes......................................... 25.8 (7.0) 18.8
Provisions for income taxes.................... 10.6 (2.8)(b) 7.8
------ ----- ------
Income from continuing operations.............. $ 15.2 $(4.2) $ 11.0
====== ===== ======
Diluted earnings per share (d).................
Shares used in computing diluted earnings per
share (d).....................................
</TABLE>
The accompanying notes are an integral part of the unaudited pro forma
condensed combined financial statements.
19
<PAGE>
LIFEPOINT
UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET
SEPTEMBER 30, 1998
(DOLLARS IN MILLIONS)
<TABLE>
<CAPTION>
PRO FORMA PRO
HISTORICAL ADJUSTMENTS FORMA
---------- ----------- -------
<S> <C> <C> <C>
ASSETS
------
Current assets:
Accounts receivable, net.................. $ 52.7 $ 52.7
Inventories............................... 13.4 13.4
Deferred taxes and other current assets... 15.6 15.6
------- -------
81.7 81.7
Property and equipment, at cost............. 463.2 463.2
Accumulated depreciation.................... (171.4) (171.4)
------- -------
291.8 291.8
Intangible assets, net...................... 17.4 17.4
Other....................................... 1.4 1.4
------- -------
$ 392.3 $ 392.3
======= =======
LIABILITIES AND EQUITY
----------------------
Current liabilities:
Accounts payable.......................... $ 12.0 $ 12.0
Accrued salaries.......................... 9.7 9.7
Other current liabilities................. 15.8 15.8
------- -------
37.5 37.5
Long-term debt.............................. .3 250.0 (c) 250.3
Deferred taxes and other liabilities........ 27.8 27.8
Minority interests in equity of consolidated
entities................................... 6.2 6.2
Equity, investment by and advances from
Columbia/HCA............................... 320.5 (250.0)(c) 70.5
------- ------- -------
$ 392.3 $ - $ 392.3
======= ======= =======
</TABLE>
The accompanying notes are an integral part of the unaudited pro forma
condensed combined financial statements.
20
<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.
NOTE 2--PRO FORMA ADJUSTMENTS
(a) To adjust interest expense to $16.9 million for the nine months ended
September 30, 1998 and $22.5 million for the year ended December 31, 1997.
The interest expense adjustment is based on replacing LifePoint's
intercompany debt balances ($171.4 million at September 30, 1998 and $177.7
million at December 31, 1997, which will be eliminated) with external debt
of $250.0 million at an assumed interest rate of 9%.
(b) To adjust income tax expense for the estimated income tax provision related
to the pro forma adjustments.
(c) To adjust for estimated initial long-term debt of $250.0 million which will
be assumed from Columbia/HCA.
(d) Pro forma shares used to compute pro forma earnings per share was based
upon million shares of LifePoint common stock adjusted for the dilutive
effect of LifePoint stock options. The million shares reflected an
estimate of the shares to be issued at the distribution date based on a
distribution ratio of one share of LifePoint stock for every shares of
Columbia/HCA Stock.
21
<PAGE>
TRIAD
SUMMARY HISTORICAL FINANCIAL DATA
(DOLLARS IN MILLIONS)
<TABLE>
<CAPTION>
NINE MONTHS
ENDED YEARS ENDED DECEMBER 31,
SEPTEMBER 30, --------------------------------------
1998 1997 1996 1995 1994
------------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
SUMMARY OF OPERATIONS:
Revenues................ $1,376.4 $1,786.9 $1,762.1 $1,622.6 $1,326.7
Operating income (a).... 120.3 192.1 309.9 287.8 209.5
Income (loss) from
continuing operations
(b).................... (81.6) (27.0) 69.3 43.3 29.9
Net income (loss) (b)... (82.8) (27.3) 76.6 45.6 31.4
OPERATING DATA:
Number of hospitals at
end of period.......... 42 42 41 41 40
Number of licensed beds
at end of period (c)... 7,007 6,863 6,592 6,186 5,920
Weighted average
licensed beds (d)...... 6,929 6,621 6,590 6,160 5,496
Admissions (e).......... 144,805 189,080 187,211 176,392 151,522
Equivalent admissions
(f).................... 232,846 298,935 289,990 266,705 217,131
Average length of stay
(days) (g)............. 5.0 5.0 5.1 5.2 5.2
Average daily census
(h).................... 2,659 2,587 2,603 2,521 2,170
Occupancy rate (i)...... 38% 39% 39% 41% 39%
</TABLE>
- - --------
(a) Operating income 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.
(b) Includes charge related to impairment of long-lived assets of $71.0 million
($42.0 million after-tax) and $13.7 million ($8.2 million after-tax) for
the nine months ended September 30, 1998 and the twelve months ended
December 31, 1997, respectively.
(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.
(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.
(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.
22
<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 Statements of Operations reflect
the results of Triad's operations as if the distribution and the divestitures
of facilities that Triad intends to divest during the fourth quarter of 1998
and the first two quarters of 1999 had occurred at the beginning of the
respective periods presented. The Unaudited Pro Forma Condensed Combined
Balance Sheet assumes that the distribution and such divestitures had occurred
on September 30, 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.
23
<PAGE>
TRIAD
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 1998
(DOLLARS IN MILLIONS)
<TABLE>
<CAPTION>
PRO FORMA PRO
HISTORICAL ADJUSTMENTS FORMA
---------- ----------- --------
<S> <C> <C> <C>
Revenues................................... $1,376.4 $(242.5)(a) $1,133.9
Salaries and benefits...................... 610.4 (126.1)(a) 484.3
Supplies................................... 209.6 (33.9)(a) 175.7
Other operating expenses................... 305.9 (62.6)(a) 243.3
Provision for doubtful accounts............ 130.2 (31.1)(a) 99.1
Depreciation and amortization.............. 86.3 (11.7)(a) 74.6
Interest expense........................... 61.9 (17.4)(a) 50.6
6.1 (b)
Management fees............................ 23.4 (3.0)(a) 20.4
Impairment of long-lived assets............ 71.0 (71.0)(a) -
-------- ------- --------
1,498.7 (350.7) 1,148.0
-------- ------- --------
Loss from continuing operations before
minority interests and income tax
benefit................................... (122.3) 108.2 (14.1)
Minority interests in earnings of
consolidated entities..................... 8.0 (0.4)(a) 7.6
Income tax benefit......................... (48.7) 40.6 (c) (8.1)
-------- ------- --------
Loss from continuing operations............ $ (81.6) $ 68.0 $ (13.6)
======== ======= ========
Basic loss per share (e)...................
Shares used in computing basic loss per
share (e).................................
</TABLE>
The accompanying notes are an integral part of the unaudited pro forma
condensed combined financial statements.
24
<PAGE>
TRIAD
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1997
(DOLLARS IN MILLIONS)
<TABLE>
<CAPTION>
PRO FORMA PRO
HISTORICAL ADJUSTMENTS FORMA
---------- ----------- --------
<S> <C> <C> <C>
Revenues................................... $1,786.9 $(274.9)(a) $1,512.0
Salaries and benefits...................... 748.8 (132.6)(a) 616.2
Supplies................................... 258.6 (36.0)(a) 222.6
Other operating expenses................... 425.0 (76.6)(a) 348.4
Provision for doubtful accounts............ 162.4 (30.2)(a) 132.2
Depreciation and amortization.............. 108.9 (13.1)(a) 95.8
Interest expense........................... 69.5 (15.5)(a) 67.5
13.5 (b)
Management fees............................ 28.2 (4.1)(a) 24.1
Impairment of long-lived assets............ 13.7 - 13.7
-------- ------- --------
1,815.1 (294.6) 1,520.5
-------- ------- --------
Loss from continuing operations before
minority interests and income tax
benefit................................... (28.2) 19.7 (8.5)
Minority interests in earnings of
consolidated entities..................... 11.5 (0.6)(a) 10.9
Income tax benefit......................... (12.7) 6.5 (c) (6.2)
-------- ------- --------
Loss from continuing operations............ $ (27.0) $ 13.8 $ (13.2)
======== ======= ========
Basic loss per share (e)...................
Shares used in computing basic loss per
share (e).................................
</TABLE>
The accompanying notes are an integral part of the unaudited pro forma
condensed combined financial statements.
25
<PAGE>
TRIAD
UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET
SEPTEMBER 30, 1998
(DOLLARS IN MILLIONS)
<TABLE>
<CAPTION>
PRO FORMA PRO
HISTORICAL ADJUSTMENTS FORMA
---------- ----------- --------
<S> <C> <C> <C>
ASSETS
------
Current assets:
Accounts receivable, net................. $ 230.6 $ (44.5)(a) $ 186.1
Inventories.............................. 50.2 (8.5)(a) 41.7
Income taxes............................. 37.5 37.5
Other.................................... 24.8 (4.2)(a) 20.6
-------- ------- --------
343.1 (57.2) 285.9
Property and equipment, at cost............ 1,525.0 (152.2)(a) 1,372.8
Accumulated depreciation................... (707.3) 73.4 (a) (633.9)
-------- ------- --------
817.7 (78.8) 738.9
Intangible assets, net..................... 308.4 (45.9)(a) 262.5
Other...................................... 50.7 (9.4)(a) 41.3
-------- ------- --------
$1,519.9 $(191.3) $1,328.6
======== ======= ========
LIABILITIES AND EQUITY
----------------------
Current liabilities:
Accounts payable......................... $ 55.9 $ (13.3)(a) $ 42.6
Accrued salaries......................... 39.0 (8.9)(a) 30.1
Other current liabilities................ 55.4 (10.2)(a) 45.2
-------- ------- --------
150.3 (32.4) 117.9
Long-term debt............................. 13.9 736.1 (d) 750.0
Deferred taxes and other liabilities....... 54.3 54.3
Minority interests in equity of
consolidated entities..................... 58.2 (4.7)(a) 53.5
Equity, investments by and advances from
Columbia/HCA.............................. 1,243.2 (154.2)(a) 352.9
(736.1)(d)
-------- ------- --------
$1,519.9 $(191.3) $1,328.6
======== ======= ========
</TABLE>
The accompanying notes are an integral part of the unaudited pro forma
condensed combined financial statements.
26
<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 eliminate the effect of the facilities that Triad expects to divest
during the fourth quarter of 1998 and the first two quarters of 1999.
(b) To adjust interest expense to $50.6 million for the nine months ended
September 30, 1998 and $67.5 million for the year ended December 31, 1997.
The interest expense adjustment is based on replacing Triad's intercompany
debt balances ($736.1 million at September 30, 1998 and $649.3 million at
December 31, 1997, which will be eliminated) with external debt of $750.0
million at an assumed interest rate of 9%.
(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 $750.0 million which will
be assumed from Columbia/HCA.
(e) Pro forma shares used to compute pro forma loss per share was based upon
million shares of common stock. The million shares reflected an
estimate of the shares to be issued at the distribution date based on a
distribution ratio of one share of Triad stock for every shares of
Columbia/HCA stock.
27
<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.
DEPENDENCE ON PHYSICIANS
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 retain physicians to 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 or results of operations. 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.
DEPENDENCE ON KEY PERSONNEL
LifePoint is dependent upon the continued services and management experience
of Scott L. Mercy, James M. Fleetwood, Jr., and other of its executive
officers, and Triad 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, 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 physicians 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
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 Pacific Group have not
generated a profit in recent periods. Although the America Group has been
profitable as part of Columbia/HCA, there can be no assurance that, as a stand-
alone company, LifePoint's future results will be comparable to reported
historical consolidated results before the distribution. 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."
LIMITS ON REIMBURSEMENT; HEALTH CARE REFORM LEGISLATION
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, 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
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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 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 or results of operations of LifePoint or
Triad.
IMPACT OF MANAGED CARE ORGANIZATIONS
During recent years, United States hospital occupancy rates have declined as
a result of changing technology, changes in physician practice patterns from
inpatient to outpatient treatment, changes in government regulation and
reimbursement, and cost containment pressures. 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, which offer prepaid and discounted medical services
packages, represent an increasing segment of health care payers, the effect of
which has been to reduce hospital revenue growth nationwide.
COMPETITION
The health care business is highly competitive and competition among
hospitals and other health care providers for patients has intensified in
recent years. Approximately half of Triad's hospitals operate in geographic
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 approximately 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
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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 as far
as 30 to 50 miles away, patients in these LifePoint and Triad markets often
migrate to, are referred by local physicians to, or are lured by incentives
from managed care plans to travel to, such distant hospitals.
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.
CONCENTRATION OF OPERATIONS
After the distribution, 6 of LifePoint's 22 general, acute care hospitals
will be located in the Commonwealth of Kentucky, and 7 of LifePoint's 22
general, acute care hospitals will be located in the State of Tennessee. For
the nine months ended September 30, 1998, 38.1% and 22.0% of LifePoint's
revenue, and 49.0% and 10.8% of LifePoint's income from continuing operations
before depreciation and amortization, interest expense, minority interests, and
income taxes, were 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 and/or results of
operations of LifePoint.
After the distribution and certain intended divestitures (see "Triad--
Business"), 13 of Triad's remaining 32 hospitals will be located in the State
of Texas, and 5 of Triad's remaining 32 hospitals will be located in the State
of Arizona. Giving effect to such intended divestitures, for the nine months
ended September 30, 1998, 41.4% and 23.6% of Triad's revenue, and 46.6% and
27.7% of Triad's income from continuing operations before depreciation and
amortization, interest expense, management fees, impairment of long lived
assets, minority interests, and income taxes, were 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 and/or results of operations of Triad.
EXTENSIVE REGULATION
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 whose care will be paid for by
Medicaid or other governmental programs. Sanctions for violating the Anti-
Kickback Statute include criminal penalties and civil sanctions, including
civil money penalties and possible exclusion from government programs such as
Medicare and Medicaid. 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 permissible 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 arrangements of LifePoint and Triad with physicians do
not qualify for the Safe Harbors.
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
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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 other physician
arrangements 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 or results of operations 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
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 to comply in all material respects with these 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 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 four
states in which Triad currently owns hospitals, Alabama,
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Oklahoma, Oregon and Missouri, require Certificates of Need. There can be no
assurance that either LifePoint or Triad will be able to obtain required
Certificates of Need in the future or that the failure to obtain any required
Certificates of Need will not have a material adverse effect on the business,
financial condition or results of operations 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."
COLUMBIA/HCA INVESTIGATIONS, 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 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 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. The government has
intervened in one qui tam action. 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 "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.
Columbia/HCA has agreed to indemnify LifePoint and Triad in respect of
certain liabilities arising out of or in connection with the foregoing matters.
See "Arrangements Among Columbia/HCA, LifePoint and Triad Relating to the
Distribution--Distribution Agreement." If any of such indemnified liabilities
were successfully asserted against either LifePoint or Triad, or any of their
facilities, and Columbia/HCA failed to meet its indemnification obligations,
then such liabilities could have a material adverse effect on the financial
position and results of operations of LifePoint and/or Triad, as the case may
be.
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Columbia/HCA believes that the ongoing governmental investigations and
related media coverage may be having 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 possible that these matters could have a material adverse
effect on the financial condition or results of operations of LifePoint or
Triad in future periods.
PROFESSIONAL LIABILITY RISKS
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.
LEVERAGE AND DEBT SERVICE OBLIGATIONS
As of September 30, 1998, after giving pro forma effect to the distribution
and LifePoint's assumption of debt in connection with the distribution,
LifePoint's consolidated long-term debt would have been approximately $250
million. As of September 30, 1998, after giving pro forma effect to the
distribution and Triad's assumption of debt in connection with the
distribution, Triad's consolidated long-term debt would have been approximately
$750 million. See "LifePoint Unaudited Pro Forma Condensed Combined Financial
Statements" and "Triad Unaudited Pro Forma Condensed Combined Financial
Statements." 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 to be assumed by each 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 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 or results of operations of LifePoint
and/or Triad.
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ABSENCE OF DIVIDENDS
Neither LifePoint nor Triad anticipates paying cash dividends in the
foreseeable future. In addition, the terms of the debt to be assumed by
LifePoint and Triad 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
The distribution is conditioned on Columbia/HCA receiving a ruling from the
IRS concerning the United States Federal income tax consequences of the
distribution. The tax ruling is expected to state 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. Nevertheless, the tax ruling will be 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 action. The inaccuracy of any of those factual representations or the
failure to take the intended action (or the taking of actions which were
represented would not be taken) could cause the IRS to revoke the tax ruling
retroactively.
If the distribution were not to qualify under Section 355 of the Code, then,
in general, a 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 under Section 355 of the Code,
the resulting tax liability would have a material adverse effect on the
financial position, results of operations and cash flows of Columbia/HCA and,
possibly, also of LifePoint and Triad. In addition, if the distribution did not
qualify 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--Certain 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 qualification of the distribution (and the restructuring that
will precede the distribution) as tax-free transactions. 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-free nature 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
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. 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. 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."
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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 are seeking to list their
common stock on the NYSE, 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."
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
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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."
YEAR 2000 COMPLIANCE
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 has represented that the software
owned by CIS and provided to LifePoint and Triad will be Year 2000 ready on or
before January 1, 2000, and that CIS will endeavor to address in a timely
manner Year 2000 issues with respect to other software and hardware 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; Year 2000 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; any failure by Columbia/HCA to adequately address such
matters could have a material adverse effect on their businesses, financial
conditions and/or results of operations.
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 or results
of operations 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" within the meaning of the Private Securities Litigation Reform Act
of 1995. 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 almost all
cases, 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 Southwestern United States, where Pacific's hospital is usually either the
only hospital or one of two 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 from Triad 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.
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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 on the
NYSE 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--Certain 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 18,700 record
holders, and approximately outstanding shares, of LifePoint common stock,
and Triad expects to have approximately 18,700 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 from LifePoint, 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 expected to purchase from
Triad, 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 a loan that will
be amortized over a period of not more than ten years, which loan will be
guaranteed by LifePoint in the case of the LifePoint ESOP and by Triad in the
case of the Triad ESOP.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
The distribution is conditioned on Columbia/HCA receiving 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:
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. 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 income) as a result of their
receipt of LifePoint common stock and Triad common stock in the
distribution, except that stockholders that 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.
. Columbia/HCA stockholders will apportion their tax basis in Columbia/HCA
Stock among their Columbia/HCA Stock and the LifePoint common stock and
the Triad common stock they receive in the distribution in accordance
with the relative fair market values of these securities at the time of
the distribution.
. The holding period of 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 will be distributed, provided that the Columbia/HCA
Stock is 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 action. The inaccuracy of any of those factual
representations or the failure to take the intended action (or the taking of
actions which were represented would not be taken) could cause the IRS to
revoke 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."
After the distribution, Columbia/HCA will send a letter to you that will
explain how to allocate your tax basis among Columbia/HCA Stock, LifePoint
common stock and Triad common stock.
The foregoing is only a summary of certain 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 should 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.
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 are seeking to list their common stock on the NYSE. If the
shares are accepted for listing, a when-issued trading market for both
LifePoint common stock and Triad common stock is expected to develop on or
shortly before the record date. The term "when-issued" means that shares can be
traded prior to the time certificates are
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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 the NYSE under the symbol " ," and that Triad common stock will be
traded on the NYSE under the symbol " ."
Columbia/HCA Common Stock will continue to trade on a regular-way basis and
may also trade on a when-issued basis, reflecting an assumed post-distribution
value for Columbia/HCA Common Stock. Columbia/HCA Common Stock when-issued
trading, if available, could last from shortly before the record date through
the distribution date. If Columbia/HCA Common Stock when-issued trading is not
available, the NYSE will require that shares of Columbia/HCA Common Stock that
are sold or purchased from the period beginning on , 1999 and ending on the
distribution date be accompanied by due-bills representing the LifePoint common
stock and Triad common stock distributable with respect to such shares, and
that during such period neither the Columbia/HCA Common Stock nor the due bills
may be purchased or sold separately.
The Transfer Agent and Registrar for the LifePoint common stock and Triad
common stock will be .
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.
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;
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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 have been received and 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 listing on the NYSE, 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; and
6. 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."
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.
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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 generally, 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), as well as the LifePoint Form
10 Registration Statement, 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), as well as the Triad Form 10 Registration
Statement, to Triad.
After the distribution, Columbia/HCA will retain responsibility for certain
liabilities arising out of the pending governmental investigations of some of
Columbia/HCA's business practices and for certain liabilities arising out of
related stockholder and other legal proceedings currently pending against
Columbia/HCA. See "Risk Factors--Columbia/HCA Investigations, Litigation;
Indemnification of LifePoint and Triad" and "Regulation and Other Factors
Affecting LifePoint and Triad--Governmental Investigation of Columbia/HCA and
Related Litigation."
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;
. claims against LifePoint or Triad of professional liability or which
would be covered by a standard policy of comprehensive general public
liability and property insurance, directors' and officers' insurance or
health care errors and omissions insurance (without regard to deductible
amounts, coinsurance amounts or 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, whether relating to periods prior to or after the distribution, but
Columbia/HCA will retain the benefits and burdens of all group appeals relating
to cost reporting 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.
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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 (and the restructuring that
will precede the distribution) as tax-free transactions. 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-free nature 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.
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.
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 new defined contribution plans 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
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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.
Through the end of 1999, Columbia/HCA will provide certain administrative and
investment services in respect of the LifePoint and Triad 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 from LifePoint, 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 from Triad, 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 a loan that will amortize over a period of not more than
ten years, which loan will be guaranteed by LifePoint in the case of the
LifePoint ESOP and by Triad in the case of the Triad ESOP.
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: The option spread (whether positive
or negative) at the 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.
. Non-Vested Nonqualified Stock Options: In the case of persons allocated
to LifePoint and Triad, the aggregate Black-Scholes value of each non-
vested Columbia/HCA Nonqualified Stock Option immediately prior to the
date that Columbia/HCA begins to trade ex-dividend will be preserved
through a Nonqualified Stock Option granted by LifePoint or Triad, as
the case may be. With respect to the replacement Nonqualified Stock
Options issued by LifePoint or Triad, the exercise price under each such
replacement option will be equal to the closing price of the appropriate
stock on the fifth day on which such stock is traded.
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
45
<PAGE>
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
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 ending on , unless extended by
agreement of the parties.
COMPUTER AND DATA PROCESSING SERVICES AGREEMENT; YEAR 2000 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. CIS will also enter into
separate agreements with each of LifePoint and Triad pursuant to which CIS will
continue an ongoing program of inspecting medical equipment at each hospital to
assure Year 2000 compliance. LifePoint and Triad will pay fees to CIS for
services performed under the Year 2000 agreements in amounts equal to the costs
incurred by CIS in providing such services.
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
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<PAGE>
existing Columbia/HCA lease). The LifePoint sub-lease will terminate on ,
2001, 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 November ,
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. 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.
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
the debt to be assumed by LifePoint immediately prior to the distribution 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 the
debt to be assumed by Triad immediately prior to the distribution 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."
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<PAGE>
LIFEPOINT
SELECTED FINANCIAL DATA
(DOLLARS IN MILLIONS)
<TABLE>
<CAPTION>
NINE MONTHS
ENDED YEARS ENDED DECEMBER 31,
SEPTEMBER 30, -------------------------------
1998 1997 1996 1995 1994
------------- ------- ------ ------ ------
<S> <C> <C> <C> <C> <C>
SUMMARY OF OPERATIONS:
Revenues....................... $366.4 $ 490.4 $466.6 $395.8 $350.1
Operating income(a)............ 53.0 84.1 111.7 82.4 66.3
Income from continuing
operations(b)................. 5.6 15.2 39.6 25.6 14.4
Net income(b).................. 1.9 10.6 41.5 27.4 15.9
FINANCIAL POSITION:
Assets......................... $392.3 $ 397.0 $382.0 $324.5 $312.3
Long-term debt, including
amounts due within one year... 0.4 1.6 1.6 2.1 1.7
OPERATING DATA:
Number of hospitals at end of
period........................ 22 22 22 20 20
Number of licensed beds at end
of period(c).................. 2,056 2,080 2,074 1,881 1,843
Weighted average licensed
beds(d)....................... 2,070 2,078 2,060 1,862 1,783
Admissions(e).................. 45,005 60,487 59,381 54,549 52,681
Equivalent admissions(f)....... 79,704 105,973 99,701 88,915 81,708
Average length of stay
(days)(g)..................... 4.4 4.4 4.7 4.8 4.9
Average daily census(h)........ 731 733 755 713 713
Occupancy rate(i).............. 35% 35% 37% 38% 40%
</TABLE>
- - --------
(a) Operating income 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.
(b) Includes charge related to impairment of long-lived assets of $4.8 million
($2.9 million after-tax) for the twelve months ended December 31, 1997.
(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.
(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 LifePoint's
hospitals.
(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.
48
<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 Financial Data"
and "LifePoint Unaudited Pro Forma Condensed Combined Financial Statements" and
the notes thereto. However, 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"
within the meaning of the Private Securities Litigation Reform Act of 1995.
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 be having 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 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.
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<PAGE>
Columbia/HCA has agreed to indemnify LifePoint in respect of certain
liabilities arising out of or in connection with the foregoing matters and in
respect of certain 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." If any of such indemnified liabilities were
successfully asserted against LifePoint, or any of its facilities, and
Columbia/HCA failed to meet its indemnification obligations, then such
liabilities could have a material adverse effect on the financial position and
results of operations of LifePoint. (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
During the nine months ended September 30, 1998, 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: the impact of the government investigation, the shift to
providing services on an outpatient basis, and the trend toward discounting
service pricing.
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 and the announced divestitures of several
facilities), have created uncertainties with physicians, patients and payers in
certain markets. See "Regulation and Other Factors Affecting LifePoint and
Triad--Governmental Investigation of Columbia/HCA and Related Litigation."
LifePoint's revenues 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 direct certain procedures from
inpatient care to outpatient care. Outpatient revenues grew to 48.1% of net
patient revenues for the nine months ended September 30, 1998 from 46.0% during
the same period last year.
LifePoint's revenues also 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. These
purchasers then become discounted payers, similar to HMOs and PPOs, in
virtually all markets and make it increasingly difficult for providers to
maintain their historical revenue growth trends. 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 Federal Balanced Budget Act of 1997 (the "Balanced Budget Act"),
LifePoint's reimbursement from the Medicare and Medicaid programs were reduced
and will be further reduced as some reductions will be phased in over the next
few years. Admissions related to Medicare, Medicaid and managed care plan
patients were 88% and 86% of total admissions for the nine months ended
September 30, 1998 and 1997, respectively. LifePoint's hospitals do not receive
any revenues from capitation arrangements (prepaid health service agreements).
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 an ongoing
challenge to LifePoint. To
50
<PAGE>
maintain and improve its operating margins in future periods, LifePoint must
increase patient volumes while controlling the costs of providing services.
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.
Operating Results Summary
The following is a summary of results from continuing operations for the nine
months ended September 30, 1998 and 1997 and the years ended December 31, 1997
and 1996 (dollars in millions):
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
---------------------------
1997
1998 (UNAUDITED)
-------------- ------------
AMOUNT RATIO AMOUNT RATIO
------ ----- ------ -----
<S> <C> <C> <C> <C>
Revenues.......................................... $366.4 100.0 $377.4 100.0
Salaries and benefits............................. 158.1 43.1 144.3 38.2
Supplies.......................................... 44.6 12.2 40.9 10.8
Other operating expenses.......................... 82.4 22.6 84.6 22.5
Provision for doubtful accounts................... 28.3 7.7 22.9 6.1
Depreciation and amortization..................... 20.5 5.5 20.8 5.4
Interest expense.................................. 13.9 3.8 11.3 3.0
Management fees................................... 6.9 1.9 6.3 1.7
Impairment of long-lived assets................... - - - -
------ ----- ------ -----
354.7 96.8 331.1 87.7
------ ----- ------ -----
Income from continuing operations before minority
interests and income taxes....................... 11.7 3.2 46.3 12.3
Minority interests in earnings of consolidated
entities......................................... 1.7 0.5 1.2 0.3
------ ----- ------ -----
Income from continuing operations before income
taxes............................................ 10.0 2.7 45.1 12.0
Provision for income taxes........................ 4.4 1.2 18.5 5.0
------ ----- ------ -----
Income from continuing operations................. $ 5.6 1.5 $ 26.6 7.0
====== ===== ====== =====
% changes from prior year:
Revenues........................................ (2.9)%
Income from continuing operations before income
taxes.......................................... (77.8)
Income from continuing operations............... (78.9)
Admissions (a).................................. (1.3)
Equivalent admissions (b)....................... 0.4
Revenues per equivalent admission............... (3.2)
Same facility % changes from prior year (c):
Revenues........................................ (2.9)
Admissions (a).................................. (1.3)
Equivalent admissions (b)....................... 0.4
Revenues per equivalent admission............... (3.2)
</TABLE>
51
<PAGE>
Operating Results Summary (continued)
<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31,
--------------------------
1997 1996
------------- ------------
AMOUNT RATIO AMOUNT RATIO
------ ----- ------ -----
<S> <C> <C> <C> <C>
Revenues..................... $490.4 100.0 $466.6 100.0
Salaries and benefits........ 197.3 40.2 175.9 37.7
Supplies..................... 55.4 11.3 51.2 11.0
Other operating expenses..... 119.0 24.3 99.8 21.4
Provision for doubtful
accounts.................... 34.6 7.0 28.0 6.0
Depreciation and
amortization................ 27.6 5.6 23.8 5.1
Interest expense............. 15.5 3.2 14.2 3.0
Management fees.............. 8.2 1.7 6.3 1.3
Impairment of long-lived
assets...................... 4.8 1.0 - -
------ ----- ------ -----
462.4 94.3 399.2 85.5
------ ----- ------ -----
Income from continuing
operations before minority
interests and income taxes.... 28.0 5.7 67.4 14.5
Minority interests in
earnings of consolidated
entities.................... 2.2 0.4 1.3 0.3
------ ----- ------ -----
Income from continuing
operations before income
taxes....................... 25.8 5.3 66.1 14.2
Provision for income taxes... 10.6 2.2 26.5 5.7
------ ----- ------ -----
Income from continuing
operations.................. $ 15.2 3.1 $ 39.6 8.5
====== ===== ====== =====
% changes from prior year:
Revenues................... 5.1%
Income from continuing
operations before income
taxes..................... (61.0)
Income from continuing
operations................ (61.6)
Admissions (a)............. 1.9
Equivalent admissions (b).. 6.3
Revenues per equivalent
admission................. (1.1)
Same facility % changes from
prior year (c):
Revenues................... 2.5
Admissions (a)............. 0.7
Equivalent admissions (b)..... 5.7
Revenues per equivalent
admission................. (3.1)
</TABLE>
- - --------
(a) Admissions represent the total number of patients admitted (in the facility
for a period in excess of 23 hours) to LifePoint's hospitals.
(b) Equivalent admissions is used by management and certain investors as a
general measure of combined inpatient and outpatient volume. Equivalent
admissions are computed by multiplying admissions (inpatient volume) by the
sum of gross inpatient revenue and gross outpatient revenue and then
dividing the resulting amount by gross inpatient revenue. The equivalent
admissions computation "equates" outpatient revenue to the volume measure
(admissions) used to measure inpatient volume resulting in a general
measure of combined inpatient and outpatient volume.
(c) "Same facility" information excludes the operations of hospitals and their
related facilities which were either acquired or divested during the
current and prior year. Reported amounts are the same as "same facility"
for the nine months ended September 30, 1998 compared to September 30, 1997
because all the facilities have been owned for both periods.
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<PAGE>
Nine Months Ended September 30, 1998 and 1997
Revenues decreased 2.9% to $366.4 million in 1998 compared to $377.4 million
in 1997. Inpatient admissions decreased 1.3%, equivalent admissions increased
0.4% and revenues per equivalent admission decreased 3.2% from prior year. The
decline in revenues 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 $5.0 million during 1998), continued increases
in discounts from the growing number of managed care payers (managed care as a
percentage of total admissions increased to 18.4% 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 $2.0 million in 1998 compared to $6.0 million in 1997).
Operating expenses increased as a percentage of revenues in every expense
category. 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 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 volume and revenue declines.
Salaries and benefits, as a percentage of revenues, increased to 43.1% in
1998 from 38.2% in 1997. The increase was due to cost pressures on labor
(salaries and benefits per equivalent admission increased 9.1% over last year)
and a decline in productivity (man-hours per equivalent admission increased
3.1% over last year).
Supply costs increased to 12.2% as a percentage of revenues in 1998 from
10.8% in 1997 primarily due to an 8.5% increase in cost of supplies per
equivalent admission. 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 increased slightly as a percentage of revenues
compared to last year. Other operating expenses consists primarily of contract
services, professional fees, repairs and maintenance, rents and leases,
utilities, insurance and non-income taxes.
Provision for doubtful accounts, as a percentage of revenues, increased to
7.7% in 1998 from 6.1% 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. 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.
Interest expense increased to $13.9 million in 1998 from $11.3 million in
1997 primarily due to additional interest expense related to increases in cash
advances from Columbia/HCA since December 1997.
Provision for income taxes decreased as a percentage of revenues to 1.2% in
1998 from 5.0% in 1997 primarily due to the decline in pretax income.
Net income from continuing operations declined 78.9% to $5.6 million in 1998
compared to $26.6 million in 1997 due to the decline in revenues and the
increase in expenses previously discussed. Net income declined 93.4% to $1.9
million in 1998 compared to $28.7 in 1997. In addition to the decline in income
from continuing
53
<PAGE>
operations, LifePoint incurred a $3.7 million after-tax loss from its
discontinued home health operations in 1998 compared to $2.7 million in after-
tax income in 1997 primarily due to declines in Medicare reimbursement and home
health visits.
Years Ended December 31, 1997 and 1996
Revenues increased 5.1% to $490.4 million in 1997 compared to $466.6 million
in 1996. Inpatient admissions increased 1.9%, equivalent admissions increased
6.3% and revenues per equivalent admission decreased 1.1% from prior year. 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 .7% and revenues per
equivalent admission decreased 3.1%. 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. 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.
Salaries and benefits, as a percentage of revenues, increased to 40.2% in
1997 from 37.7% in 1996. The increase was primarily due to cost pressures on
labor (salaries and benefits per equivalent admission increased 5.6% over last
year).
Other operating expenses increased to 24.3% as a percent of revenues in 1997
compared to 21.4% in 1996. Included in 1997 are costs associated with start-up
activities which 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 such 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
7.0% 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.
During 1997, LifePoint recorded a non-cash asset impairment charge of $4.8
million pre-tax ($2.9 million after-tax). The charge primarily relates to a
surgery center identified to be sold which was reduced to fair value, based on
estimated selling value.
Provision for income taxes decreased as a percentage of revenues to 2.2% in
1997 from 5.7% in 1996 primarily due to the decline in pretax income.
Net income from continuing operations declined 61.6% to $15.2 million
compared to $39.6 million in 1996 due to the increases in expenses, including
the charge for asset impairments, as discussed above. Net income declined 74.5%
to $10.6 million in 1997 compared $41.5 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
54
<PAGE>
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.
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. At September 30,
1998, LifePoint had working capital of $44.2 million.
Cash provided by operating activities decreased to $26.0 million for the nine
months ended September 30, 1998 from $28.7 million during the same period 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 $47.9 million from $62.9 million for the year ended December 31,
1996. The decrease was primarily due to reduced income before non-cash charges
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.
Cash used in investing activities decreased to $18.4 million for the nine
months ended September 30, 1998 from $53.5 million during the same period last
year. The decrease was primarily due to decreased purchases of property and
equipment during the nine months ended September 30, 1998 and a $5.7 million
equity investment in a joint venture during the same period last year. Cash
used in investing activities was $51.6 million for the year ended December 31,
1997 compared to $57.1 million last year.
Routine capital expenditures are expected to approximate $30.0 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 September 30, 1998, there were projects
under construction which had an estimated cost to complete and equip over the
next few years of approximately $52 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 of LifePoint's advances from
Columbia/HCA will be eliminated, and LifePoint will assume $250 million of debt
from Columbia/HCA.
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. 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.
In connection with the distribution, LifePoint expects to enter into a
revolving credit loan agreement providing for a commitment for revolving credit
loans in an aggregate principal amount of $ million. Borrowings under the
revolving credit facility will be available to fund working capital needs and
to finance acquisitions.
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
55
<PAGE>
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 has represented that the software that is
owned by CIS and provided to LifePoint will be Year 2000 ready on or before
January 1, 2000, and that it will endeavor to address in a timely manner Year
2000 issues with respect to other software and hardware 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 made and
will continue to make certain investments in the 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; Year 2000 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 Year 2000
Agreement, Columbia/HCA will continue its ongoing program to inspect medical
equipment at LifePoint facilities for Year 2000 compliance. LifePoint is
therefore dependent upon Columbia/HCA in substantially all respects for the
Year 2000 readiness of its information technology and non-information
technology systems. Any failure by Columbia/HCA to adequately address such
matters could have a material adverse affect on the business, financial
condition and/or results of operations of LifePoint.
Columbia/HCA is utilizing both internal and external resources to manage and
implement its Year 2000 program. With the assistance of such resources,
Columbia/HCA has recently begun to develop 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. This
development phase will continue through the end of 1998 with the implementation
of contingency plans occurring in 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 for 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 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
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
56
<PAGE>
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. Contingency planning
will be established and implemented in an effort to minimize any impact from
Year 2000-related failures.
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 June 1999. 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 the majority of
its 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 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.
Contingency planning will be established and implemented in an effort to
minimize any impact from Year 2000 related failures.
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. Failure
of these third party systems could have a material adverse affect on
LifePoint's business, financial condition, 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 assure their continued
operation through the Year 2000. Columbia/HCA is continuing its efforts to
obtain such assurances from all mission critical suppliers and vendors. The
failure of these third parties could have a material adverse effect on the
business, financial condition or results of operations of LifePoint, and/or the
ability of LifePoint to provide health care services. Contingency planning will
be established and implemented in an effort to minimize any impact from Year
2000-related failures.
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
57
<PAGE>
impacted non-information technology systems. The majority of the costs 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 a PPS.
Total Medicare revenues approximated 37.9% during the nine months ended
September 30, 1998, 39.7% and 40.9% for the years ended December 31, 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 health care systems 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 (similar to the reductions incurred as part of the Balanced Budget
Act as previously discussed). 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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<PAGE>
TRIAD
SELECTED FINANCIAL DATA
(DOLLARS IN MILLIONS)
<TABLE>
<CAPTION>
NINE MONTHS
ENDED YEARS ENDED DECEMBER 31,
SEPTEMBER 30, --------------------------------------
1998 1997 1996 1995 1994
------------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
SUMMARY OF OPERATIONS:
Revenues................ $1,376.4 $1,786.9 $1,762.1 $1,622.6 $1,326.7
Operating income (a).... 120.3 192.1 309.9 287.8 209.5
Income (loss) from
continuing operations
(b).................... (81.6) (27.0) 69.3 43.3 29.9
Net income (loss) (b)... (82.8) (27.3) 76.6 45.6 31.4
FINANCIAL POSITION:
Assets.................. $1,519.9 $1,562.1 $1,527.9 $1,425.7 $1,241.4
Long-term debt,
including amounts due
within one year........ 14.8 20.9 17.1 29.0 34.3
OPERATING DATA:
Number of hospitals at
end of period.......... 42 42 41 41 40
Number of licensed beds
at end of period (c)... 7,007 6,863 6,592 6,186 5,920
Weighted average
licensed beds (d)...... 6,929 6,621 6,590 6,160 5,496
Admissions (e).......... 144,805 189,080 187,211 176,392 151,522
Equivalent admissions
(f).................... 232,846 298,935 289,990 266,705 217,131
Average length of stay
(days) (g)............. 5.0 5.0 5.1 5.2 5.2
Average daily census
(h).................... 2,659 2,587 2,603 2,521 2,170
Occupancy rate (i)...... 38% 39% 39% 41% 39%
</TABLE>
- - --------
(a) Operating income 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.
(b) Includes charge related to impairment of long-lived assets of $71.0 million
($42.0 million after-tax) and $13.7 million ($8.2 million after-tax) for
the nine months ended September 30, 1998 and the twelve months ended
December 31, 1997, respectively.
(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.
(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.
(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.
59
<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 Financial Data" and
"Triad Unaudited Pro Forma Condensed Combined Financial Statements" and the
notes thereto. However, 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"
within the meaning of the Private Securities Litigation Reform Act of 1995.
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 be having a negative effect on Columbia/HCA's results of
operations (which includes Triad for the periods prior to 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.
Columbia/HCA has agreed to indemnify Triad in respect of certain liabilities
arising out of or in connection with the foregoing matters and in respect of
certain liabilities arising out of related stockholder and
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<PAGE>
other legal proceedings currently pending against Columbia/HCA. See
"Arrangements Among Columbia/HCA, LifePoint and Triad Relating to the
Distribution--Distribution Agreement." If any of such indemnified liabilities
were successfully asserted against Triad, or any of its facilities, and
Columbia/HCA failed to meet its indemnification obligations, then such
liabilities could have a material adverse effect on the financial position and
results of operations of Triad. (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 nine months ended September 30, 1998, Triad has experienced
declines in revenue and volume growth rates as well as operational
deficiencies. Management believes three primary factors have contributed to
these declines: the impact of the government investigation, the shift to
providing services on an outpatient basis, and the trend toward discounting
service pricing.
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 and the announced divestitures of several
facilities), have created uncertainties with physicians, patients and payers in
certain markets. See "Regulation and Other Factors Affecting LifePoint and
Triad--Governmental Investigation of Columbia/HCA and Related Litigation."
Triad's revenues 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 direct certain procedures from inpatient care to outpatient
care. Outpatient revenues grew to 41.2% of net patient revenues for the nine
months ended September 30, 1998 from 38.4% during the same period last year.
Triad's revenues also 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. These
purchasers then become discounted payers, similar to HMOs and PPOs, in
virtually all markets and make it increasingly difficult for providers to
maintain their historical growth trends. 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 Federal
Balanced Budget Act of 1997 (the "Balanced Budget Act"), Triad's reimbursement
from the Medicare and Medicaid programs were reduced and will be further
reduced as some reductions will be phased in over the next few years.
Admissions related to Medicare, Medicaid and managed care plan patients were
87.4% and 86.2% of total admissions for the nine months ended September 30,
1998 and 1997, respectively. Revenues from capitation arrangements (prepaid
health service agreements) are less than 1% of consolidated revenues.
Reductions in the rate of increase in Medicare and Medicaid reimbursement,
increasing percentages of the patient volume being related to patients
participating in managed care plans and continuing trends toward more services
being performed on an outpatient basis are expected to present an ongoing
challenge to Triad. To maintain and improve its operating margins in future
periods, Triad must increase patient volumes while controlling the costs of
providing services.
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Management believes that the proper response to these challenges includes the
delivery of a broad range of quality health care services to physicians and
patients with operating decisions being made by the local management teams and
local physicians.
Operating Results Summary
The following is a summary of results from continuing operations for the nine
months ended September 30, 1998 and 1997 and the years ended December 31, 1997
and 1996 (dollars in millions):
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
-------------------------------
1997
1998 (UNAUDITED)
--------------- --------------
AMOUNT RATIO AMOUNT RATIO
-------- ----- -------- -----
<S> <C> <C> <C> <C>
Revenues....................................... $1,376.4 100.0 $1,363.0 100.0
Salaries and benefits.......................... 610.4 44.3 548.7 40.3
Supplies....................................... 209.6 15.2 189.6 13.9
Other operating expenses....................... 305.9 22.3 306.2 22.5
Provision for doubtful accounts................ 130.2 9.5 110.7 8.1
Depreciation and amortization.................. 86.3 6.3 80.8 5.9
Interest expense............................... 61.9 4.5 50.8 3.7
Management fees................................ 23.4 1.7 21.3 1.6
Impairment of long-lived assets................ 71.0 5.1 - -
-------- ----- -------- -----
1,498.7 108.9 1,308.1 96.0
-------- ----- -------- -----
Income (loss) from continuing operations before
minority interests and income taxes........... (122.3) (8.9) 54.9 4.0
Minority interests in earnings of consolidated
entities...................................... 8.0 0.6 9.4 0.7
-------- ----- -------- -----
Income (loss) from continuing operations before
income taxes (benefit)........................ (130.3) (9.5) 45.5 3.3
Provision for income taxes (benefit)........... (48.7) (3.6) 14.6 1.0
-------- ----- -------- -----
Income (loss) from continuing operations....... $ (81.6) (5.9) $ 30.9 2.3
======== ===== ======== =====
% changes from prior year:
Revenues..................................... 1.0%
Income (loss) from continuing operations
before income taxes (benefit) and impairment
of long-lived assets charge................. (230.3)
Income (loss) from continuing operations..... (364.1)
Admissions (a)............................... 2.8
Equivalent admissions (b).................... 4.7
Revenues per equivalent admission............ (3.6)
Same facility % changes from prior year (c):
Revenues..................................... (2.5)
Admissions (a)............................... (1.7)
Equivalent admissions (b).................... 0.5
Revenues per equivalent admission............ (2.9)
</TABLE>
62
<PAGE>
Operating Results Summary (continued)
<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31,
-------------------------------
1997 1996
--------------- --------------
AMOUNT RATIO AMOUNT RATIO
-------- ----- -------- -----
<S> <C> <C> <C> <C>
Revenues....................................... $1,786.9 100.0 $1,762.1 100.0
Salaries and benefits.......................... 748.8 41.9 699.2 39.7
Supplies....................................... 258.6 14.5 246.5 14.0
Other operating expenses....................... 425.0 23.8 386.6 21.9
Provision for doubtful accounts................ 162.4 9.1 119.9 6.8
Depreciation and amortization.................. 108.9 6.1 99.0 5.6
Interest expense............................... 69.5 3.9 59.1 3.4
Management fees................................ 28.2 1.6 22.4 1.3
Impairment of long-lived assets................ 13.7 0.7 - -
-------- ----- -------- -----
1,815.1 101.6 1,632.7 92.7
-------- ----- -------- -----
Income (loss) from continuing operations before
minority interests and income taxes
(benefit)..................................... (28.2) (1.6) 129.4 7.3
Minority interests in earnings of consolidated
entities...................................... 11.5 0.6 10.9 0.6
-------- ----- -------- -----
Income (loss) from continuing operations before
income taxes (benefit)........................ (39.7) (2.2) 118.5 6.7
Provision for income taxes (benefit)........... (12.7) (0.7) 49.2 2.8
-------- ----- -------- -----
Income (loss) from continuing operations....... $ (27.0) (1.5) $ 69.3 3.9
======== ===== ======== =====
% changes from prior year:
Revenues..................................... 1.4%
Income (loss) from continuing operations
before income taxes (benefit) and impairment
of long-lived assets charge................. (121.9)
Income (loss) from continuing operations..... (139.0)
Admissions (a)............................... 1.0
Equivalent admissions (b).................... 3.1
Revenues per equivalent admission............ (1.6)
Same facility % changes from prior year (c):
Revenues..................................... 0.6
Admissions (a)............................... 1.5
Equivalent admissions (b).................... 3.8
Revenues per equivalent admission............ (3.0)
</TABLE>
- - --------
(a) Admissions represent the total number of patients admitted (in the facility
for a period in excess of 23 hours) to Triad's hospitals.
(b) Equivalent admissions is used by management and certain investors as a
general measure of combined inpatient and outpatient volume. Equivalent
admissions are computed by multiplying admissions (inpatient volume) by the
sum of gross inpatient revenue and gross outpatient revenue and then
dividing the resulting amount by gross inpatient revenue. The equivalent
admissions computation "equates" outpatient revenue to the volume measure
(admissions) used to measure inpatient volume resulting in a general
measure of combined inpatient and outpatient volume.
(c) "Same facility" information excludes the operations of hospitals and their
related facilities which were either acquired or divested during the
current and prior year. The facilities that Triad intends to divest will
continue to be included in "same facility" until the date they are
divested.
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Nine Months Ended September 30, 1998 and 1997
Income (loss) from continuing operations before income taxes (benefit) and an
impairment of long-lived assets charge of $71.0 million decreased 230.3% to a
loss of $(59.3) million in 1998 from income of $45.5 million in 1997. The
facilities that management has determined to divest 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 to be
divested incurred losses from continuing operations before income taxes and the
impairment charge of approximately $(43.7) million and approximately $(7.8)
million for the nine months ended September 30, 1998 and 1997, respectively.
Combined revenues increased by 1.0% to $1,376.4 million in 1998 compared to
$1,363.0 million in 1997. Inpatient admissions increased 2.8% from a year ago
and equivalent admissions (adjusted to reflect combined inpatient and
outpatient volume) increased 4.7%. The slight increase in revenues and the 4.7%
increase in equivalent admissions resulted in a 3.6% decline in revenue per
equivalent admission. On a same facility basis, revenues decreased 2.5%,
admissions decreased 1.7% and equivalent admissions increased 0.5% from a year
ago. The decline in revenues combined with an increase in equivalent admissions
resulted in a decline in same facility revenue per equivalent admission of
2.9%.
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 (certain Balanced Budget Act
provisions lowered 1998 revenues by approximately $15 million for the nine
months), continued increases in discounts from the growing number of managed
care payers (managed care as a percentage of total admissions increased to 31%
in 1998 compared to 28% 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 0.2% 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 44.3% in
1998 from 40.3% in 1997. The increase was due to a 6.3% 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 2.2% compared to last year).
Supply costs increased as a percentage of revenues to 15.2% in 1998 from
13.9% in 1997 due to the 3.6% decline in net revenue per equivalent admission,
while the cost of supplies per equivalent admission increased 5.6%, primarily
due to increased costs of certain new technology items such as heart stents,
spinal cages and certain pharmaceuticals which have a high physician
preference.
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 22.3%
in 1998 from 22.5% 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
9.5% in 1998 from 8.1% in 1997. The increase was due to internal factors such
as information system conversions (including patient accounting systems) at
certain facilities and a large increase in bad debt expense at the facilities
to be divested (12.8% of revenues in 1998 compared to 9.9% of revenues in
1997), and external factors such as payer mix
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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.
Depreciation and amortization increased as a percentage of revenues to 6.3%
in 1998 from 5.9% in 1997. The increase was primarily due to the decline in
revenues (2.5% decline on a same-facility basis) and increased capital
expenditures related to ancillary services (such as outpatient services) and
information systems.
Interest expense increased to $61.9 million in 1998 compared to $50.8 million
in 1997, primarily as a result of an increase in the average balance of the
investments by and advances from Columbia/HCA during 1998 compared to the same
period in 1997. This was due, in part, to a $57.1 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
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 $71.0 million. (See Note 5--Impairment of Long-lived
Assets in the Notes to Combined Financial Statements of Triad included
elsewhere herein.)
Minority interests declined 0.1% as a percentage of revenues from 1997 due to
declines in income from Triad's joint ventures that include minority partners.
Triad incurred a $(1.2) million net loss from operations of its discontinued
home health businesses in 1998 compared to net income of $6.1 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) and an
impairment of long-lived assets charge of $13.7 million declined 121.9% to a
loss of $(26.0) million in 1997 from income of $118.5 million in 1996. The
facilities that Triad plans to divest contributed to the decline in
profitability by incurring losses from continuing operations before income
taxes (benefit) and the impairment charge of approximately $(33.9) million and
approximately $(7.0) million for the years ended December 31, 1997 and 1996,
respectively.
Combined revenues increased 1.4% to $1,786.9 million in 1997 compared to
$1,762.1 million in 1996. Inpatient admissions increased 1.0% and equivalent
admissions (adjusted to reflect combined inpatient and outpatient volume)
increased 3.1%. On a same facility basis, revenues increased 0.6%, admissions
increased 1.5% and equivalent admissions increased 3.8% 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 1.6% on a reported basis and 3.0% 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 (such rates lowered fourth
quarter 1997 revenues by approximately $5 million), continued increases in
discounts from the growing number of managed care payers (managed care as a
percentage of total admissions increased to 28% in 1997 compared to 25% during
1996), delays experienced in obtaining Medicare cost report settlements (cost
report filings and settlements results in favorable revenue adjustments of $1.9
million in 1997 compared to $33.6 million in 1996).
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Operating expenses increased, as a percentage of revenues, in every 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 41.9% in
1997 from 39.7% in 1996. The decline in revenues per equivalent admission was a
primary factor in the increase. A 3.9% increase in salaries and benefits per
equivalent admission resulted from the combined effect of man-hours per
equivalent admission remaining constant, while labor cost per man-hour
increased 3.3% and revenue per equivalent admission declined 1.6%.
Supply costs increased as a percentage of revenues to 14.5% in 1997 from
14.0% in 1996 due to a decline in net revenue per equivalent admission while
the cost of supplies per equivalent admission increased 1.8%.
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
21.9% 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
9.1% in 1997 from 6.8% 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. Triad 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 collections resulted in an increase in receivables
reserved under Triad's bad debt allowance policy.
Depreciation and amortization increased as a percentage of revenues to 6.1%
in 1997 from 5.6% in 1996, primarily due to the slowdown in revenue growth.
Interest expense increased to $69.5 million in 1997 compared to $59.1 million
in 1996, primarily as a result of an increase in the average balance of the
investments by and advances from Columbia/HCA during 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 0.6% as a percentage of revenues both in 1997 and
1996.
Triad earned $5.6 million net income from operations of its discontinued home
health business in 1997 compared to net income of $7.3 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 $3.0 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. At September 30, 1998,
Triad had working capital of $192.8 million.
Cash provided by continuing operating activities decreased to $20.2 million
for the nine months ended September 30, 1998 from $77.3 million during the same
period in the previous year. The decrease was primarily due to reduced income
before non-cash impairment charges from net income of $34.1 million for the
nine months ended September 30, 1997 to a loss of $(11.8) million for the 1998
period.
For the year ended December 31, 1997, cash provided by operating activities
declined to $78.6 million from $173.8 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 by investing activities for the nine months ended September 30,
1998 was consistent with the levels used during the same period in 1997. For
the year ended December 31, 1997, cash used in investing activities decreased
to $153.2 million from $160.1 million in 1996. The decrease was due to
reductions in cash used for the acquisition of health care entities and for
investments in and advances to affiliates. These decreases were partially
offset by an increase in the purchase of property and equipment.
In connection with the distribution, all of Triad's advances from
Columbia/HCA will be eliminated, and Triad will assume $750 million of debt
from Columbia/HCA.
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.
In connection with the distribution, Triad expects to enter into a revolving
credit loan agreement providing for a commitment for revolving credit loans in
an aggregate principal amount of $ million. Borrowings under the revolving
credit facility will be available to fund working capital needs and to finance
acquisitions.
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.
Triad obtains most of its information technology and information technology
infrastructure systems from CIS pursuant to the Computer and Data Processing
Services Agreement. CIS has represented that the software
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that is owned by CIS and provided to Triad will be Year 2000 ready on or before
January 1, 2000, and that it will endeavor to address in a timely manner Year
2000 issues with respect to other software and hardware 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 investments in the 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; Year 2000 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 Year 2000
Agreement, Columbia/HCA will continue its ongoing program to inspect medical
equipment at Triad facilities for Year 2000 compliance. Triad is therefore
dependent upon Columbia/HCA in substantially all respects for the Year 2000
readiness of its information technology and non-information technology systems.
Any failure by Columbia/HCA to adequately address such matters could have a
material adverse affect on the business, financial condition and/or results of
operations of Triad.
Columbia/HCA is utilizing both internal and external resources to manage and
implement its Year 2000 program. With the assistance of such resources,
Columbia/HCA has recently begun to develop 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. This
development phase will continue through the end of 1998 with the implementation
of contingency plans occurring in 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 for 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 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
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 Triad. Contingency planning will
be established and implemented in an effort to minimize any impact from Year
2000-related failures.
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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 June 1999. 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 the majority of
its 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 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.
Contingency planning will be established and implemented in an effort to
minimize any impact from Year 2000-related failures.
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 timely converted. Failure of
these third party systems could have a material adverse affect on Triad's
business, financial condition, 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 assure their continued operation through the Year 2000.
Columbia/HCA is continuing its efforts to obtain such assurances from all
mission critical suppliers and vendors. The failure of these third parties
could have a material impact on the business, financial condition or results of
operations of Triad and/or the ability of Triad to provide health care
services. Contingency planning will be established and implemented in an effort
to minimize any impact from Year 2000 related failures.
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 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.
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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 36.5% in 1998, 37.2% in 1997 and 37.9% 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 health care systems 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 (similar to the reductions incurred as part of the Balanced Budget
Act as previously discussed). 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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LIFEPOINT BUSINESS
GENERAL
LifePoint will be organized as a Delaware corporation in 1999 to serve as the
public holding company for the America Group of Columbia/HCA. LifePoint's
principal executive offices are located at 4525 Harding Road, Suite 300,
Nashville, Tennessee 37205 (telephone number (615) - ).
After the distribution, LifePoint will continue to provide health care
services through its hospitals. As of September 30, 1998, the America Group
(the assets of which will be transferred to LifePoint prior to the
distribution) comprised 22 general, acute care hospitals located in non-urban
areas in the States of Alabama, Georgia, Kansas, Kentucky, Louisiana,
Tennessee, Utah and Wyoming. LifePoint will also own a minority interest in one
non-consolidated hospital in Florida accounted for using the equity method.
This joint venture is building a replacement hospital and, upon completion,
LifePoint is expected to hold a majority interest in the joint venture. In
almost all markets that LifePoint serves, its hospital is the only hospital in
the community.
LifePoint's primary objective is to provide the communities it serves a
comprehensive array of quality health care services in the most cost effective
manner possible. 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.
Each of LifePoint'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 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,
certain 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; national
supply and equipment purchasing and leasing contracts; accounting, financial
and clinical systems; governmental reimbursement assistance; 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. LifePoint
also will participate, 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."
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. All of LifePoint's facilities are located in non-urban
markets. Twenty-one of LifePoint's twenty-two hospitals are the only acute-care
hospitals in their respective communities, and the remaining hospital is one of
only two hospitals in its community.
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.
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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.
There is generally a lower level of managed care payer penetration in
LifePoint's markets than there is in urban markets. In addition, LifePoint
believes that non-urban communities are generally characterized by a high level
of patient and physician loyalty that fosters cooperative relationships among
the local hospital, physicians and patients. As a result, the local hospital is
viewed as a key part of the local community.
Although the characteristics of the non-urban health care market present a
number of opportunities, LifePoint believes that hospitals in such markets have
been under considerable pressure. The not-for-profit and governmental entities
that typically own and operate these hospitals may have limited access to the
capital required to keep pace with advances in medical technology and to make
needed capital improvements. Non-urban hospitals also frequently lack the
management resources necessary to control hospital expenses, recruit
physicians, expand health care services and comply with increasingly complex
reimbursement and managed care requirements. The increasingly dynamic and
complex health care regulatory environment compounds these pressures.
Collectively, these factors frequently lead to poor operating performance, a
decline in the breadth of services offered, dissatisfaction by community
physicians and residents, and the perception of sub-par quality of care in the
community. As a result, patients migrate to, are referred by local physicians
to, or are lured by incentives from managed care plans to travel to, hospitals
in larger, urban markets which may be as far as 30 to 50 miles away. Patient
outmigration further increases the financial pressure on non-urban physicians
and hospitals, thereby further limiting their ability to address the issues
which have led to this outmigration. LifePoint 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.
BUSINESS STRATEGY
LifePoint business strategy is centered upon the unique patient and health
care provider needs and opportunities in its non-urban markets. LifePoint
intends to manage its facilities aggressively to assure that they operate in
accordance with the strategic objectives described below:
. Develop Facility-Specific Strategies. LifePoint monitors facilities
individually and develops strategies designed to benefit individual
facilities. By contrast, while LifePoint has been part of Columbia/HCA,
Columbia/HCA's business strategies have been developed on a system-wide
basis that did not emphasize individual facility strategies.
. Expand Breadth of Service and Reduce Patient Outmigration. LifePoint
intends to increase 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. Management believes that this expansion of available
treatments should help to encourage local residents in the non-urban
markets that LifePoint serves to seek care at facilities within their
communities. LifePoint believes its strong community focus should also
assist in limiting patient outmigration. 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.
. Strengthen Physician Recruiting and Retention. LifePoint believes that
the supply of physicians practicing in the non-urban markets it serves
is limited, and that recruiting physicians in local communities is
critical to increasing the quality of health care and the breadth of
available services. As an independent company, LifePoint intends to take
advantage of its more specific 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. In most of its markets,
LifePoint will be able to take advantage of exemptions from certain
restrictions on business association with physicians that are available
in certain non-urban areas.
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<PAGE>
. Retain and Develop Stable Management. LifePoint will 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. 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.
. Build Strong Community Relations. Management believes that it is
important to LifePoint's success that its hospitals continue a high
level of involvement in the communities they serve and continue to
develop good relations with local governments and business leaders.
LifePoint employees, particularly the executive teams at the hospitals,
are expected to expend considerable effort on improving community
relationships.
. 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 system-wide basis. LifePoint believes
that independence from Columbia/HCA will enable it over time to decrease
the number of discount arrangements in which it participates and to
negotiate contract terms that are generally more favorable for its
facilities. LifePoint does not intend to enter into capitation
arrangements in the future.
. Acquire Other Hospitals. As part of its business strategy, LifePoint
will seek to identify attractive acquisition candidates and may acquire
additional hospitals in non-urban markets consistent with its strategy.
In the past, Columbia/HCA has been reluctant to pursue acquisitions of
such facilities since they were outside of Columbia/HCA's core markets.
LifePoint will seek to acquire hospitals that are located in non-urban
markets where the projected rate of population growth is above the
national average.
SOURCES OF REVENUE
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.
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
NINE MONTHS DECEMBER
ENDED 31,
SEPTEMBER 30, ------------
1998 1997 1996
------------- ----- -----
<S> <C> <C> <C>
Medicare....................................... 37.9% 39.7% 40.9%
Medicaid....................................... 11.3% 11.2% 11.5%
Other sources.................................. 50.8% 49.1% 47.6%
----- ----- -----
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 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.
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<PAGE>
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." 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."
HOSPITAL UTILIZATION
LifePoint believes that the two most 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 growth in local population, local economic conditions,
market penetration of managed care programs and the availability of
reimbursement programs such as Medicare and Medicaid.
The following table sets forth certain operating statistics for consolidated
hospitals owned by LifePoint for the nine months ended September 30, 1998 and
for each of the four preceding 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 the
cold weather months.
<TABLE>
<CAPTION>
NINE MONTHS
ENDED YEARS ENDED DECEMBER 31,
SEPTEMBER 30, -------------------------------
1998 1997 1996 1995 1994
------------- ------- ------ ------ ------
<S> <C> <C> <C> <C> <C>
Number of hospitals at end of
period........................ 22 22 22 20 20
Number of licensed beds at end
of period (a)................. 2,056 2,080 2,074 1,881 1,843
Weighted average licensed beds
(b)........................... 2,070 2,078 2,060 1,862 1,783
Admissions (c)................. 45,005 60,487 59,381 54,549 52,681
Equivalent admissions (d)...... 79,704 105,973 99,701 88,915 81,708
Average length of stay (days)
(e)........................... 4.4 4.4 4.7 4.8 4.9
Average daily census (f)....... 731 733 755 713 713
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.
(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.
(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.
74
<PAGE>
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 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. Another factor affecting hospital
utilization levels is improved treatment protocols as a result of advances in
medical technology and pharmacology.
COMPETITION
The primary bases of competition among hospitals in non-urban markets are the
quality and scope of medical services, strength of referral network, location
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 health care services in their respective
communities, its hospitals face competition from hospitals in nearby
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 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. 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 is 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 "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
75
<PAGE>
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
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. LifePoint will endeavor to meet these challenges by
expanding its facilities' outpatient services, offering 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 LifePoint's reputation 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.
EMPLOYEES AND MEDICAL STAFF
At September 30, 1998, LifePoint had approximately 8,100 employees, including
approximately 2,250 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.
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.
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<PAGE>
PROPERTIES
The following table lists the hospitals owned or operated by the America
Group of Columbia/HCA (the assets of which will be transferred to LifePoint
prior to the distribution) as of September 30, 1998:
<TABLE>
<CAPTION>
LICENSED
FACILITY NAME CITY STATE BEDS
- - ------------- ---- ----- --------
<S> <C> <C> <C>
Andalusia Regional Hospital Andalusia AL 101
Bartow Memorial Hospital (1) Bartow FL 56
Barrow Medical Center Winder GA 60
Western Plains Regional Hospital (2) Dodge City KS 110
Halstead Hospital Halstead KS 177
Georgetown Community Hospital Georgetown KY 75
Pine Lake 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 Erin TN 40
Crockett General 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 currently manages and holds a minority equity interest in
a non-consolidated joint venture that is building a replacement hospital
for the Bartow Memorial Hospital. Upon completion of construction, which is
scheduled to occur during 2000, LifePoint is expected to hold a majority of
the equity in this joint venture and operate the replacement hospital.
LifePoint's total cost for this project is projected to be approximately
$32 million.
(2) 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.
LIFEPOINT'S REGULATORY COMPLIANCE PROGRAM
It is LifePoint's policy that its business be conducted with integrity and in
compliance with the law. LifePoint is developing a corporate-wide compliance
program, which will focus on all areas of regulatory
77
<PAGE>
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 LifePoint'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, 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.
78
<PAGE>
TRIAD BUSINESS
GENERAL
Triad will be organized as a Delaware corporation in 1999 to serve as the
public holding company for the Pacific Group of Columbia/HCA. Triad's principal
executive offices are located at 13455 Noel Road, 20th Floor, Dallas, Texas
75240 (telephone number (972) - ).
After the distribution, Triad will continue to provide health care services
through its hospitals and outpatient surgery centers. As of September 30, 1998,
the Pacific Group (the assets of which will be transferred to Triad prior to
the distribution) comprised 40 general, acute care hospitals, two psychiatric
hospitals, and 19 outpatient surgery centers, located in the States of Alabama,
Arizona, Arkansas, California, Kansas, Louisiana, Missouri, New Mexico,
Oklahoma, Oregon and Texas (in addition, Triad operates one hospital through a
50/50 joint venture that is not consolidated for financial reporting purposes).
Triad currently intends to sell (or, in two cases, to transfer through long-
term leases) nine of its general, acute care hospitals (one of which has been
sold as of December 1, 1998), one psychiatric hospital, and certain of the
outpatient surgery centers that it operated as of September 30, 1998.
Approximately three-quarters of the Triad hospitals as of September 30, 1998
were located in small cities (generally with populations less than 150,000
residents), where Triad's hospital was usually either the only hospital or one
of two hospitals in the community. The remainder of Triad's hospitals were
located in larger urban areas. Approximately half of Triad's facilities are
located in the States of Arizona and Texas.
Triad's primary objective is to provide the communities it serves a
comprehensive array of quality health care services in the most cost effective
manner possible. Triad'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. These hospitals also
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 surgery centers operated by
Triad. In addition to the two psychiatric hospitals currently operated by Triad
(one of which Triad intends to sell), 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.
Like most hospitals located in areas with similar demographics, Triad's
hospitals do not engage in extensive medical research and medical education
programs. However, certain of Triad's hospitals have an affiliation with
medical schools, including the clinical rotation of medical students.
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; national supply and equipment
purchasing and 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, 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."
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<PAGE>
TRIAD'S MARKETS
Most of Triad's facilities are located in two distinct markets in the
Southwestern United States. Approximately three-quarters of the hospitals
operated by Triad as of September 30, 1998 were located in small cities
(generally with populations less than 150,000 residents), where Triad's
hospital was usually either the only hospital or one of two hospitals. The
remainder of Triad's hospitals were located in nine 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.
Small Cities
Triad believes that the small cities of the Southwestern United States are
attractive to health care service providers as a result of favorable
demographic and economic trends. Twenty-eight of the forty general, acute care
hospitals that Triad operated as of September 30, 1998 were located in these
markets. Of these hospitals, 23 hospitals are located in communities where they
currently are the sole hospital or one of only two hospitals. After completion
of the planned divestitures described above, 19 of Triad's 31 remaining
general, acute care hospitals will be located in communities where they
currently are the sole hospital or one of only two hospitals. The small cities
where Triad's hospitals are located typically are not near any major
metropolitan markets.
While Triad's hospitals located in the small cities of the Southwest 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.
Triad believes that it is the largest provider of health care services in
these markets and that it is uniquely positioned to build on population growth
in these areas.
Larger Urban Markets
Twelve of the forty general, acute care hospitals that Triad operated as of
September 30, 1998 were located in larger urban markets of the Southwestern
United States, and after completion of the planned divestitures described
above, eight of Triad's thirty-one remaining general, acute care hospitals will
be located in such urban markets. Triad intends to selectively pursue expansion
in certain fast growing urban markets.
In addition to the direct competition Triad faces from other health care
providers in its markets, there are higher levels of managed care penetration,
which create significant downward pressure on revenues.
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<PAGE>
BUSINESS STRATEGY
Triad's business strategies are designed to address the specific needs of its
competitive environments. Triad's strategic objectives include the following:
. Build on Population Growth in Western United States. Triad intends to
establish itself as a strong competitor in the health care markets of
the high-growth western states in which it operates. Triad plans to
construct new hospitals and may also seek to make acquisitions in select
markets. As an independent company, Triad will be able to pursue sources
of capital that were unavailable to it as a division of Columbia/HCA and
to devote the required management attention to building and managing new
facilities.
. Introduce Select Specialty Services. In certain markets where the
demographics indicate, Triad intends to introduce specialty services
(e.g., women's health or orthopedic facilities) to help attract new
patients to Triad facilities.
. Join Local Managed Care Organizations. Triad facilities located in areas
where there are other health care providers (e.g., tax-exempt hospitals)
will seek to partner with those other providers and be included in their
managed care networks. This ability to partner with local managed care
networks will be a key to the success of those facilities which operate
in high-managed care environments.
. Work With Local Physicians. As an independent company, Triad intends to
take advantage of the more specific management focus in each of its
markets to work more effectively with individual physicians and
physician practices, many of which management believes would prefer to
deal with a company with Triad's strategic focus. In some of its
markets, Triad also will be able to take advantage of exemptions from
certain restrictions on business association with physicians that are
available in some non-urban areas.
. Retain and Develop Stable Management. Triad will focus its recruitment
of managers and health care professionals on those who wish to live and
practice in the communities in which Triad's hospitals are located. In
the past, managers and health care professionals employed at Triad
hospitals sometimes relocated to advance their careers elsewhere within
the Columbia/HCA system. Triad believes that the stronger market focus
resulting from its local partnering efforts will help attract needed
managerial and health care talent to its hospitals, and that Triad's
ability to provide equity-based compensation linked to its performance
should assist in management retention. Management believes that
achieving long-term retention of executive teams at the hospitals will
enhance medical staff relations and maintain continuity of relationships
with the community.
SOURCES OF REVENUE
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 has experienced an increase in the percentage of patient revenues
attributable to outpatient services. This increase is primarily the result of
advances in technology (which allow more services to be provided on an
outpatient basis) and increased pressures from Medicare, Medicaid, HMOs, PPOs,
employers and insurers to reduce hospital stays and provide services, where
possible, on a less expensive outpatient basis.
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<PAGE>
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
NINE MONTHS ENDED 31,
SEPTEMBER 30, ------------
1998 1997 1996
----------------- ----- -----
<S> <C> <C> <C>
Medicare................................... 36.5% 37.2% 37.9%
Medicaid................................... 6.0% 5.9% 6.9%
Other sources.............................. 57.5% 56.9% 55.2%
----- ----- -----
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." 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 to 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."
HOSPITAL UTILIZATION
Triad believes that the two most important factors relating to the overall
utilization of a hospital are 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.
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The following table sets forth certain operating statistics for hospitals
owned by Triad for the nine months ended September 30, 1998 and for each of the
four preceding 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 the cold weather months.
<TABLE>
<CAPTION>
NINE MONTHS ENDED YEARS ENDED DECEMBER 31,
SEPTEMBER 30, ----------------------------------
1998 1997 1996 1995 1994
----------------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Number of hospitals at
end of period.......... 42 42 41 41 40
Number of licensed beds
at end of period (a)... 7,007 6,863 6,592 6,186 5,920
Weighted average
licensed beds (b)...... 6,929 6,621 6,590 6,160 5,496
Admissions (c).......... 144,805 189,080 187,211 176,392 151,522
Equivalent admissions
(d).................... 232,846 298,935 289,990 266,705 217,131
Average length of stay
(days) (e)............. 5.0 5.0 5.1 5.2 5.2
Average daily census
(f).................... 2,659 2,587 2,603 2,521 2,170
Occupancy rate (g)...... 38% 39% 39% 41% 39%
</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.
(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.
(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.
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 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. Another factor affecting hospital
utilization levels is improved treatment protocols as a result of advances in
medical technology and pharmacology.
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.
Of the hospitals operated by Triad as of September 30, 1998, approximately
half were located in geographic areas where they competed with at least one
other hospital providing most of the services offered by Triad's 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
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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.
The remainder of the hospitals operated by Triad as of September 30, 1998
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 often migrate to, are
referred by local physicians to, or are lured by incentives from managed care
plans to travel to, such distant hospitals.
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. 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 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 "Regulation
and Other Factors Affecting LifePoint and Triad."
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.
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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.
EMPLOYEES AND MEDICAL STAFF
At September 30, 1998, Triad had approximately 28,300 employees, including
approximately 9,100 part-time employees . Employees at two hospitals are
currently represented by a labor union. Triad considers its employee relations
to be satisfactory. 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.
PROPERTIES
The following table lists the hospitals owned or operated by the Pacific
Group of Columbia/HCA (the assets of which will be transferred to Triad prior
to the distribution) as of September 30, 1998. As described in the notes to the
table, as of December 1, 1998, the Pacific Group had sold one of the general,
acute care hospitals, and currently intends to sell or transfer through long-
term leases an additional eight of the general, acute care hospitals and one of
its psychiatric hospitals.
<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
Medical Center--Phoenix Phoenix AZ 290
Paradise Valley Hospital Phoenix AZ 143
El Dorado Hospital Tucson AZ 166
Northwest Medical Center Tucson AZ 174
Paradise Valley Psychiatric Services Scottsdale AZ 19
San Leandro Hospital San Leandro CA 136
West Anaheim Community Hospital Anaheim CA 219
Healdsburg General Hospital Healdsburg CA** 43
Huntington Beach Hospital Huntington Beach CA 134
Mission Bay Hospital San Diego CA 128
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
LICENSED
FACILITY NAME CITY STATE BEDS
- - ------------- ---- ----- --------
<S> <C> <C> <C>
Palm Drive Hospital Sebastopol CA* 49
Bethany Medical Center Kansas City KS* 415
Overland Park Regional Medical Center Overland Park KS* 360
Women & Children's Hospital Lake Charles LA 80
Independence Regional Health Center Independence MO* 366
Research Psychiatric Center (2) Kansas City MO* 100
Medical Center of Carlsbad Carlsbad NM 135
Lea Regional Medical Center Hobbs NM 250
Claremore Regional Hospital Claremore OK 89
Wagoner Community Hospital (3) Wagoner OK 100
Doctors Hospital-Tulsa Tulsa OK* 199
Tulsa Regional Medical Center Tulsa OK* 462
Willamette Valley Medical Center McMinnville OR 80
Douglas Medical Center Roseburg OR 118
Alice Physicians and Surgeons 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 Laredo TX 117
Longview Regional Medical Center 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 Sherman Sherman TX 160
Medical Center at Terrell (3) Terrell TX 130
Detar Hospital Victoria TX 217
Gulf Coast Medical Center Wharton TX 161
Beaumont Medical and Surgical Center Beaumont TX* 366
Silsbee Doctors Hospital Silsbee TX* 69
</TABLE>
- - --------
* Indicates facility held for sale.
** Indicates facility sold as of December 1, 1998.
(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 holds a sixty percent equity interest in a consolidated
joint venture which owns and operates the Research Psychiatric Center.
(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.
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 July 1999,
Triad's equity interest will be fifty percent and its total investment is
expected to be approximately $40 million.
In addition to the hospitals listed in the table above and the hospital under
construction in South Tulsa, Oklahoma, as of September 30, 1998, the Pacific
Group operated nineteen outpatient surgery centers, 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.
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<PAGE>
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.
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 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 DRG
payments do not include reimbursement for capital costs, which are reimbursed
separately.
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. Medicare reimburses general, acute care
hospitals' capital costs separately from DRG payments.
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 effect 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, therapy services will be
converted to a fee schedule on January 1, 1999, and payments for non-hospital-
based therapy services will be subject to limits on payment.
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 period ended September 30, 1998, LifePoint had
48 units that were reimbursed under this methodology, and Triad had 126 units
that were reimbursed under this methodology.
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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 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%.
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 $10,547, $19,250, and $37,688 per
discharge, respectively. For Federal fiscal year 1999, these limits are
$10,737, $19,962 and $38,393 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, effective for items or services furnished on or after July
1, 1998 or January 1, 1999 at the election of the provider. 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.
Currently, physicians are paid by Medicare on a fee for service basis.
However, physicians working in rural health clinics, such as those maintained
by LifePoint and Triad, are reimbursed at cost, but such reimbursement is
subject to a limit on payments if the rural health clinic is not 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 DRG rate,
which is based on a blend of hospital-specific costs and the national DRG
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 approximately 50% by the states and 50%
by the Federal government. 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
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<PAGE>
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-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. 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 any liabilities arising out of such government
investigations. See "Arrangements Among Columbia/HCA, LifePoint and Triad
Relating to the Distribution--Distribution Agreement," "Risk Factors--
Columbia/HCA Investigations, Litigation; Indemnification of LifePoint and
Triad," and "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. Columbia/HCA, LifePoint and Triad have agreed that any recovery
for pending group appeal issues will belong to Columbia/HCA. Each of LifePoint
and Triad believes that adequate provision has been made in its financial
statements for any material retroactive adjustments that might result from such
audits and that final resolution of the contested issues will not have a
material adverse effect upon its results of operations or financial position.
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 nine months ended September
30, 1997 to 18.4% for the comparable period in 1998 and the percentage of
LifePoint's net revenue from continuing operations attributable to managed care
payers increased from 15.3% for the nine months ended September 30, 1997 to
19.4% for the comparable period in 1998. The percentage of Triad's admissions
attributable to managed care payers increased from 27.5% for the nine months
ended September 30, 1997 to 30.6% for the comparable period in 1998 and the
percentage of Triad's net revenue from continuing operations attributable to
managed care payers increased from 24.3% for the nine months ended September
30, 1997 to 24.8% for the comparable period in 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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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 general, acute care hospitals of LifePoint
and Triad are certified under the Medicare program and 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 the psychiatric hospitals of Triad 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. Each of LifePoint and
Triad will operate some hospitals in states that require approval under a CON
program. 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, 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 LifePoint or Triad will own hospitals
have adopted legislation mandating rate or budget review for hospitals or have
adopted taxes on hospital revenues, assessments or licensure fees to fund
indigent health care within the state.
In the aggregate, state rate or budget review and indigent tax provisions
have not materially adversely affected the results of operations of either
LifePoint or 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 for services not rendered or
misrepresenting actual services rendered in order to obtain higher
reimbursement;
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. paying remuneration to induce Medicare referrals (so called "fraud and
abuse" which is prohibited by the "anti-kickback" provisions of the
Social Security Act);
. failing to stabilize all individuals who come to its emergency room who
have an "emergency medical condition," whether or not the individual is
eligible for Medicare;
. 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).
Moreover, HHS and the courts have interpreted the Anti-Kickback Statute
broadly to include the intentional offer, payment, solicitation or receipt of
anything of value if one purpose of the payment is to induce the referral of
Medicare business. Health care providers generally are concerned that many
relatively innocuous, or even beneficial, commercial arrangements with their
physicians (or others that may provide referrals) may technically violate this
strict interpretation of the Anti-Kickback Statute.
In 1976, Congress established the Office of Inspector General ("OIG") at HHS
to identify and eliminate fraud, abuse and waste in HHS programs and to promote
efficiency and economy in HHS departmental operations. The OIG carries out this
mission through a nationwide program of audits, investigations and inspections.
In order to provide guidance to health care providers on ways to engage in
legitimate business practices and avoid scrutiny under the fraud and abuse
statutes, the OIG has from time to time issued "fraud alerts" identifying
features of transactions, which, if present, may indicate that the transaction
violates 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.
In July 1991, the OIG issued final regulations outlining certain "safe
harbors" for practices, which, although potentially capable of inducing
prohibited referrals of business under Medicare or state health programs, would
not be subject to enforcement action under the Anti-Kickback Statute. The
practices protected
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by the regulations include certain physician joint venture transactions, rental
of space and equipment, personnel services and management contracts, sales of
physician practices, referral services, warranties, discounts, payments to
employees, group purchasing organizations and waivers of beneficiary
deductibles and co-payments.
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 certain 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. 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.
The Health Insurance Portability and Accountability Act of 1996 ("HIPAA"),
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. 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 expands
numerous health care fraud provisions.
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
the Anti-Kickback Statute will not determine that such physician recruiting
activities or other physician arrangements 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 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 these arrangements. 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
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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 making
false claims to Medicare and Medicaid for services not rendered or for
misrepresenting actual services rendered in order to obtain higher
reimbursement. Like the Anti-Kickback Statute, this statute is very broad.
Careful and accurate coding of claims for reimbursement 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 for patient
referrals with statutory language 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 legislation similar to the Stark Law, but also
with broader effect, since the state legislation applies regardless of the
source of payment for care. Little precedent exists for the interpretation or
enforcement of these state laws.
The Federal Medicaid regulations also prohibit fraudulent and abusive
practices and authorize the exclusion from such program of providers in
violation of such regulations.
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 in an effort to structure its arrangements with health care providers to
comply with the relevant state statutes, 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. Among the proposals under consideration are 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 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.
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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, claims which would be covered by a standard policy of
comprehensive general public liability and property insurance, directors' and
officers' insurance or health care errors and omissions insurance 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.
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
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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 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 one qui tam action.
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.
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.
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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.
Columbia/HCA has agreed to indemnify LifePoint and Triad in respect of
certain liabilities arising out of or in connection with the foregoing matters.
See "Arrangements Among Columbia/HCA, LifePoint and Triad Relating to the
Distribution--Distribution Agreement." If any of such indemnified liabilities
were successfully asserted against either LifePoint or Triad, or any of their
facilities, and Columbia/HCA failed to meet its indemnification obligations,
then such liabilities could have a material adverse effect on the financial
position and results of operations of LifePoint and/or Triad, as the case may
be.
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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, the 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
Healthcare Corporation (health care services) from 1994
through 1995; Vice President--Financial Operations and
Director--Financial Operations Support of Hospital Corporation
of America (health care services), prior thereto.
[Director]......
[Director]......
[Director]......
[Director]......
[Director]......
[Director]......
</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 Committee and a Compensation
Committee.
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 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
members of the Audit Committee will be , and , with serving as
Chair.
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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 (payable in
the form of deferred LifePoint common stock units, 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), 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. Each Non-Employee
Director (and, after the distribution, each newly elected Non-Employee
Director) will receive an option to acquire shares of LifePoint common stock
(exercisable at the fair market value of LifePoint common stock on the grant
date) for a number of shares having an aggregate value as of the grant date
equal to two times the Non-Employee Director's annual retainer fee. Each Non-
Employee Director also will receive an initial grant of an option, and
following each annual meeting of stockholders beginning in 2000 an option, to
acquire shares of LifePoint common stock (exercisable at the fair market value
of LifePoint common stock on the grant date) for a number of shares having an
aggregate value as of the grant date equal to the Non-Employee Director's
annual retainer fee then in effect. Such options will become exercisable as to
one-third of such shares on each of the first three anniversaries of the date
of grant.
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, the 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 Healthcare Corporation (health care
services) 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.
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
NAME AGE POSITION AND PROFESSIONAL EXPERIENCE
---- --- ------------------------------------
<C> <C> <S>
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--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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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, 1997. 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 BONUS COMPENSATION STOCK OPTIONS/SARS COMPENSATION
POSITION YEAR SALARY ($) ($)(2) ($)(3) AWARDS ($)(4) (#)(5) ($)(6)
------------------ ---- ---------- -------- ------------ ------------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Scott L. Mercy.......... 1997 $ -- -- -- -- -- --
Chairman and Chief
Executive Officer (1)
James M. Fleetwood,
Jr. ................... 1997 $350,000 $175,000 $8,333 $ -- 340,000 $ 8,439
President and Chief
Operating Officer
Kenneth C. Donahey...... 1997 $275,000 -- -- $183,369 290,000 $15,903
Senior Vice President
and Controller
William Gracey.......... 1997 $210,000 $105,000 -- -- 72,000 $12,084
Division President
Dan Slipkovich.......... 1997 $191,500 $ 95,750 -- -- 125,000 $13,530
Division President
</TABLE>
- - --------
(1) Mr. Mercy became employed by Columbia/HCA in September 1998 and therefore
received no compensation in 1997.
(2) 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 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.
(3) Perquisites and other personal benefits did not exceed the lesser of either
$50,000 or 10% of the total of annual salary and bonus for any executive
officer identified in the table. Other compensation consists principally of
relocation expenses.
(4) Represents fair market value on the date of grant of shares of Columbia/HCA
restricted stock granted in lieu of all or a portion of a cash bonus.
(5) Options to acquire shares of Columbia/HCA Common Stock. Columbia/HCA
granted options at two separate times in 1997. The 1997 regular grant was
issued in February 1997. A special grant was issued in November 1997 to
help ensure the retention and motivation of key executives, including each
of the executive officers identified in the table, at the time Columbia/HCA
was reorganizing. On average, the size of the November 1997 grant is two
times a competitive median long-term grant for a two year period (1998-99).
(6) Consists of Columbia/HCA contributions to Columbia/HCA's Savings and
Investment Plan, Money Purchase Plan and Stock Bonus Plan.
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COLUMBIA/HCA OPTION GRANTS IN 1997
The following table provides information on grants of options to purchase
shares of Columbia/HCA Common Stock made during 1997 to the persons named in
the LifePoint Summary Compensation Table. For a discussion of the treatment of
such options and certain replacement grants of options to purchase shares of
LifePoint common stock, see "Arrangements Among Columbia/HCA, LifePoint and
Triad Relating to the Distribution--Benefits and Employment Matters Agreement--
Treatment of Columbia/HCA Common Stock Options."
OPTION/SAR GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
PERCENT OF VALUE AT ASSUMED ANNUAL
NUMBER OF TOTAL RATES OF
SECURITIES OPTIONS/SARS STOCK PRICE APPRECIATION
UNDERLYING GRANTED TO EXERCISE OR FOR OPTION TERM (5)
SARS/OPTIONS EMPLOYEES BASE PRICE EXPIRATION ------------------------
NAME GRANTED (#) (2) IN FISCAL YEAR ($/SH)(3)(4) DATE 5% ($) 10% ($)
- - ---- --------------- -------------- ------------ ---------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
Scott L. Mercy (1)...... -- -- -- -- -- --
James M. Fleetwood,
Jr..................... 90,000 $39.88 2/3/07 $2,257,229 $ 5,720,260
250,000 1.54% $28.19 11/3/07 $4,431,741 $ 11,230,903
Kenneth C. Donahey...... 40,000 $39.88 2/3/07 $1,003,213 $ 2,542,337
250,000 1.35% $28.19 11/3/07 $4,431,741 $ 11,230,903
William Gracey.......... 22,000 $39.88 2/3/07 $ 551,767 $ 1,398,286
50,000 0.34% $28.19 11/3/07 $ 886,427 $ 2,246,380
Dan Slipkovich.......... 25,000 -- $39.88 2/3/07 $ 627,008 $ 1,598,961
100,000 0.58% $28.19 11/3/07 $1,772,854 $ 4,492,760
</TABLE>
- - --------
(1) Mr. Mercy became employed by Columbia/HCA in September 1998 and therefore
received no compensation in 1997.
(2) Options to acquire 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 at the time Columbia/HCA was
reorganizing.
(3) 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.
(4) 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 is an amount equal to the
fair market value of the Columbia/HCA Common Stock on the date of the
grant.
(5) 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.
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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
SHARES FISCAL YEAR-END (#) YEAR-END($) (2)
ACQUIRED ON VALUE ------------------------------ --------------------------------
NAME EXERCISE (#) REALIZED($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- - ---- ------------ ----------- ------------- -------------- --------------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Scott L. Mercy (1)...... 0 $ 0 7,500 -- $ 221,105 $ 0
James M. Fleetwood,
Jr..................... 0 0 111,120 416,875 1,765,102 386,797
Kenneth C. Donahey...... 0 0 139,484 368,750 2,102,432 414,219
William Gracey.......... 15,750 259,328 10,312 105,938 35,647 132,322
Dan Slipkovich.......... 0 0 26,651 147,500 414,986 158,375
</TABLE>
- - --------
(1) Mr. Mercy became employed by Columbia/HCA in September 1998 and therefore
received no compensation in 1997.
(2) The closing price for the Columbia/HCA Common Stock, as reported by the
NYSE, on December 31, 1997 was $29.625. Value is calculated on the basis of
the difference between the option exercise price and 29.625, 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 in replacement of non-vested options and incentive stock
options (whether or not vested) to purchase Columbia/HCA 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,
7,000,000 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 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.
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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.
. 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").
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
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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
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 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,
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
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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.
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; however, no person will be granted more than one right.
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 on the fifth day on which LifePoint's common stock
is traded.
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 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 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
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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 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 from
LifePoint in an amount equal to 8.3% of the outstanding shares of LifePoint.
Such shares will be purchased using the proceeds of a loan to be made to the
LifePoint ESOP and 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).
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 , 1998;
. reflects the distribution ratio of shares of LifePoint common stock
for every shares of Columbia/HCA Stock outstanding on the record
date;
. reflects the options to purchase LifePoint common stock to be granted
and the Employee Stock Ownership 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 Capital Stock
between , 1998 and the record date.
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<TABLE>
<CAPTION>
NUMBER OF
NAME OF BENEFICIAL OWNER SHARES(1)(2) PERCENT
- - ------------------------ ------------ -------
<S> <C> <C>
The Columbia/HCA Healthcare Corporation Stock Bonus Plan
(3)..................................................... 4.2%
The Columbia/HCA Healthcare Corporation Salary Deferral
Plan (3)................................................ 3.2%
The San Leandro Retirement and Savings Plan (3).......... *
FMR Corp., Edward C. Johnson 3d and Abigail P. Johnson
(4)..................................................... 8.4%
Wellington Management Company, LLP (5)................... 6.4%
Scott L. Mercy........................................... *
[Director]...............................................
[Director]...............................................
[Director]...............................................
[Director]...............................................
[Director]...............................................
James M. Fleetwood....................................... *
Kenneth C. Donahey....................................... *
William Gracey........................................... *
Dan Slipkovich........................................... *
All Directors and Executive Officers as a Group (
persons)................................................
</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.
(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 October
9, 1998, 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 January 27, 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.
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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 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.
[Director]........
[Director]........
[Director]........
[Director]........
[Director]........
[Director]........
[Director]........
</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, , , 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 "Triad Description of Capital Stock--Certain Anti-Takeover
Provisions--Triad Certificate and By-Laws--Classified Board of Directors."
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 , , and ,
with serving as Chair.
The Audit 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 members
of the Audit Committee will be , and , 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
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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 , , and , with serving as
Chair.
COMPENSATION OF DIRECTORS
The annual retainer for Non-Employee Directors (other than the Chairman) will
be $ (payable in the form of restricted shares of Triad common stock), and
the Board meeting fee will be $ per meeting. The annual retainer for the
Chairman of the Board of Directors will be $ (80% of which will be payable
in the form of restricted shares of Triad common stock, with the balance
payable in cash). Except for the Chairman of the Board, who will receive $
per committee meeting (whether or not serving as committee chairperson),
committee chairpersons will receive $ per meeting, and other committee
members will receive a fee of $ per meeting, in each case 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.
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 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 Chief Operating Officer and Treasurer 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.
Donald P. Fay.......... 55 Senior Vice President and General Counsel 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; and since January 1, 1998, 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; and since January 1, 1998, President--East
Division, 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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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, 1997. 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
SALARY COMPENSATION STOCK OPTIONS/SARS COMPENSATION
NAME AND PRINCIPAL POSITION YEAR ($) BONUS($)(2) ($)(3) AWARDS($)(4) (#)(5) ($)(6)
--------------------------- ---- -------- ----------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
James D. Shelton (1)......... 1997 $415,000 $ 41,500 -- $221,400 350,000 $7,629
President and 1996 350,000 35,000 -- 187,000 82,500 7,214
Chief Executive Officer 1995 325,000 32,000 -- 165,000 60,000 7,248
Michael J. Parsons........... 1997 $225,000 $ 56,250 -- $ 75,000 135,000 $7,629
Senior Vice President, Chief
Operating Officer and
Treasurer
Nicholas J. Marzocco......... 1997 $207,000 $103,500 $31,158 -- 64,000 $7,004
Senior Vice President
Christopher A. Holden........ 1997 $195,000 $ 42,840 $28,950 -- 60,000 $6,373
Senior Vice President
Donald P. Fay................ 1997 $178,000 $ 62,300 -- -- 12,000 $8,438
Senior Vice President and
General Counsel
</TABLE>
- - --------
(1) Pursuant to SEC rules, includes information for years prior to 1997 because
Mr. Shelton's compensation during those periods was previously included in
public disclosure by Columbia/HCA.
(2) 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.
(3) Perquisites and other personal benefits did not exceed the lesser of either
$50,000 or 10% of the total of annual salary and bonus for any executive
officer identified in the table. Other compensation consists principally of
relocation expenses.
(4) Represents the fair market value on the date of grant of shares of
Columbia/HCA restricted stock granted in lieu of all or a portion of a cash
bonus.
(5) Options to acquire shares of Columbia/HCA Common Stock. Columbia/HCA
granted options at two separate times in 1997. The 1997 regular grant was
issued in February 1997. A special grant was issued in November 1997 to
help ensure the retention and motivation of key executives, including
Messrs. Shelton, Parsons, Marzocco and Holden, at the time Columbia/HCA was
reorganizing. On average, the size of the November 1997 grant is two times
a competitive median long-term grant for a two-year period (1998-99).
(6) Consists of Columbia/HCA contributions to Columbia/HCA's Savings and
Investment Plan, Money Purchase Plan and Stock Bonus Plan.
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<PAGE>
COLUMBIA/HCA OPTION GRANTS IN 1997
The following table provides information on grants of options to purchase
shares of Columbia/HCA Common Stock made during 1997 to the persons named in
the Triad Summary Compensation Table. For a discussion of the treatment of such
options and certain replacement grants of options to purchase shares of Triad
common stock, see "Arrangements Among Columbia/HCA, LifePoint and Triad
Relating to the Distribution--Benefits and Employment Matters Agreement--
Treatment of Columbia/HCA Common Stock Options."
OPTION/SAR GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
PERCENT OF POTENTIAL REALIZABLE
TOTAL VALUE AT ASSUMED ANNUAL
NUMBER OF OPTIONS/SARS RATES OF
SECURITIES GRANTED TO STOCK PRICE APPRECIATION
UNDERLYING EMPLOYEES EXERCISE OR FOR OPTION TERM (4)
SARS/OPTIONS IN FISCAL BASE PRICE EXPIRATION ------------------------
NAME GRANTED (#) (1) YEAR ($/SH)(2)(3) DATE 5% ($) 10% ($)
- - ---- --------------- ------------ ------------ ---------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
James D. Shelton........ 100,000 $39.88 2/3/07 $2,507,717 $ 6,355,048
250,000 1.58% $28.19 11/3/07 $4,431,741 $11,230,903
Michael J. Parsons...... 35,000 $39.88 2/3/07 $ 877,811 $ 2,224,545
100,000 0.63% $28.19 11/3/07 $1,772,854 $ 4,492,760
Nicholas J. Marzocco.... 14,000 $39.88 2/3/07 $ 351,124 $ 889,818
50,000 0.30% $28.19 11/3/07 $ 886,427 $ 2,246,380
Christopher A. Holden... 10,000 $39.88 2/3/07 $ 250,803 $ 635,000
50,000 0.28% $28.19 11/3/07 $ 886,427 $ 2,246,380
Donald P. Fay........... 12,000 0.06% $39.88 2/3/07 $ 300,964 $ 762,701
</TABLE>
- - --------
(1) Options to acquire 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 at the time Columbia/HCA was
reorganizing.
(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
SHARES FISCAL YEAR-END (#) YEAR-END ($)(1)
ACQUIRED ON VALUE ----------------------------------- --------------------------------
NAME EXERCISE (#) REALIZED ($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ------------ ------------ --------------- ---------------- -------------- ---------------
<S> <C> <C> <C> <C> <C> <C>
James D. Shelton........ 0 $ 0 37,500 500,000 $ 117,188 $ 562,813
Michael J. Parsons...... 0 0 16,875 199,125 51,328 227,421
Nicholas J. Marzocco.... 0 0 0 79,000 0 71,875
Christopher A. Holden... 0 0 1,140 75,420 3,277 81,707
Donald P. Fay........... 15,000 461,250 15,000 48,000 54,375 75,937
</TABLE>
- - --------
(1) The closing price for the Columbia/HCA Common Stock, as reported by the
NYSE, on December 31, 1997 was $29.625. Value is calculated on the basis of
the difference between the option exercise price and 29.625, 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 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 in replacement of non-vested options and incentive stock options
(whether or not vested) to purchase Columbia/HCA 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 1998 LONG-TERM INCENTIVE PLAN
The Triad 1998 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, 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 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 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"). 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 $ . The
maximum number of performance shares granted to a participant during any
one calendar year shall be 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 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
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<PAGE>
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 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 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 from
Triad in an amount equal to 9.0% of the outstanding shares of Triad. Such
shares will be purchased using the proceeds of a loan to be made to the Triad
ESOP and 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).
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 , 1998;
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<PAGE>
. reflects the distribution ratio of shares of Triad common stock for
every shares of Columbia/HCA Stock outstanding on the record date;
. reflects the options to purchase Triad common stock to be granted and
the Employee Stock Ownership 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
, 1998 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)..................................................... 4.2%
The Columbia/HCA Healthcare Corporation Salary Deferral
Plan (3)................................................ 3.2%
The San Leandro Retirement and Savings Plan (3).......... *
FMR Corp., Edward C. Johnson 3d and Abigail P. Johnson
(4)..................................................... 8.4%
Wellington Management Company, LLP (5)................... 6.4%
James D. Shelton......................................... *
[Director]...............................................
[Director]...............................................
[Director]...............................................
[Director]...............................................
[Director]...............................................
[Director]...............................................
Michael J. Parsons....................................... *
Nicholas J. Marzocco..................................... *
Christopher A. Holden.................................... *
Donald P. Fay............................................ *
All Directors and Executive Officers as a Group (
persons)................................................
</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.
(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 October
9, 1998, 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 January 27, 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.
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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
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. 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 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 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.
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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 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
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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.
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
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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 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 seven. 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;
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. 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.
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
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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 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;
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. 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;
. 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
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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.
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
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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 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"
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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.
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 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
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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.
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.
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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.
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. ,
, and will serve until the 2000 Annual Meeting of Stockholders; Messrs.
, and will serve until the 2001 Annual Meeting of Stockholders; and
Messrs.
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, , 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 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 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
[nine/ten]. 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
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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.
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.
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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% 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.
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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;
. 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.
133
<PAGE>
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.
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
134
<PAGE>
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 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).
135
<PAGE>
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.
136
<PAGE>
INDEX TO FINANCIAL STATEMENTS
LIFEPOINT HOSPITALS, INC. COMBINED FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Report of Independent Auditors................................. F-2
Combined Statements of Income--for the nine months ended
September 30, 1998 and 1997, and for the years ended December
31, 1997 and 1996............................................. F-3
Combined Balance Sheets--September 30, 1998 and December 31,
1997.......................................................... F-4
Combined Statements of Equity--for the nine months ended
September 30, 1998 and 1997, and for the years ended December
31, 1997 and 1996............................................. F-5
Combined Statements of Cash Flows--for the nine months ended
September 30, 1998 and 1997, and for the years ended December
31, 1997 and 1996............................................. F-6
Notes to Combined Financial Statements......................... F-7 thru F-16
</TABLE>
TRIAD HOSPITALS, INC. COMBINED FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Report of Independent Auditors................................ F-17
Combined Statements of Operations for the nine months ended
September 30, 1998 and 1997 and the years ended December 31,
1997 and 1996................................................ F-18
Combined Balance Sheets, September 30, 1998 and December 31,
1997......................................................... F-19
Combined Statements of Equity for the nine months ended
September 30, 1998 and 1997 and the years ended December 31,
1997 and 1996................................................ F-20
Combined Statements of Cash Flows for the nine months ended
September 30, 1998 and 1997 and the years ended December 31,
1997 and 1996................................................ F-21
Notes to combined Financial Statements........................ F-22 thru F-31
</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 September 30, 1998 and December 31, 1997 and the related combined statements
of income, equity and cash flows for the nine months ended September 30, 1998
and the years ended December 31, 1997 and 1996. These combined financial
statements are the responsibility of the Company's management. 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 audit 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
September 30, 1998 and December 31, 1997 and the combined results of their
operations and their cash flows for the nine months ended September 30, 1998
and the years ended December 31, 1997 and 1996 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
November 25, 1998
F-2
<PAGE>
LIFEPOINT HOSPITALS, INC.
COMBINED STATEMENTS OF INCOME
(DOLLARS IN MILLIONS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED YEARS ENDED
SEPTEMBER 30, DECEMBER 31,
------------------ --------------
1998 1997 1997 1996
------ ---------- ------ ------
(UNAUDITED
-NOTE 13)
<S> <C> <C> <C> <C>
Revenues..................................... $366.4 $377.4 $490.4 $466.6
Salaries and benefits........................ 158.1 144.3 197.3 175.9
Supplies..................................... 44.6 40.9 55.4 51.2
Other operating expenses..................... 82.4 84.6 119.0 99.8
Provision for doubtful accounts.............. 28.3 22.9 34.6 28.0
Depreciation and amortization................ 20.5 20.8 27.6 23.8
Interest expense............................. 13.9 11.3 15.5 14.2
Management fees.............................. 6.9 6.3 8.2 6.3
Impairment of long-lived assets.............. - - 4.8 -
------ ------ ------ ------
354.7 331.1 462.4 399.2
------ ------ ------ ------
Income from continuing operations before
minority interests and income taxes......... 11.7 46.3 28.0 67.4
Minority interests in earnings of
consolidated entities....................... 1.7 1.2 2.2 1.3
------ ------ ------ ------
Income from continuing operations before
income taxes................................ 10.0 45.1 25.8 66.1
Provision for income taxes................... 4.4 18.5 10.6 26.5
------ ------ ------ ------
Income from continuing operations............ 5.6 26.6 15.2 39.6
Discontinued operations:
Income (loss) from operations, net of
income taxes (benefits) of ($2.3) and $1.7
for the nine months ended September 30,
1998 and 1997 and ($.4) and $1.2 for years
ended December 31, 1997 and 1996,
respectively.............................. (3.7) 2.7 (.6) 1.9
Estimated loss on disposal of certain
discontinued businesses, net of income tax
benefit of $2.4........................... - - (3.4) -
Cumulative effect of accounting change, net
of income tax benefit of $0.4............. - (.6) (.6) -
------ ------ ------ ------
Net income............................... $ 1.9 $ 28.7 $ 10.6 $ 41.5
====== ====== ====== ======
</TABLE>
The accompanying notes are an integral part of the combined financial
statements.
F-3
<PAGE>
LIFEPOINT HOSPITALS, INC.
COMBINED BALANCE SHEETS
(DOLLARS IN MILLIONS)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1998 1997
------------- ------------
<S> <C> <C>
ASSETS
------
Current assets:
Accounts receivable, less allowances for doubtful
accounts of
$42.6 at September 30, 1998 and $37.5 at December
31, 1997......................................... $ 52.7 $ 53.4
Inventories....................................... 13.4 13.0
Deferred taxes and other current assets........... 15.6 13.3
------- -------
81.7 79.7
Property and equipment, at cost:
Land.............................................. 7.6 7.6
Buildings......................................... 225.1 224.2
Equipment......................................... 215.0 200.6
Construction in progress (estimated cost to
complete and equip after September 30, 1998--
$52.0)........................................... 15.5 10.7
------- -------
463.2 443.1
Accumulated depreciation............................ (171.4) (155.6)
------- -------
291.8 287.5
Intangible assets, net of accumulated amortization
of $4.2 at September 30, 1998 and $2.8 at December
31, 1997........................................... 17.4 19.4
Other............................................... 1.4 10.4
------- -------
$ 392.3 $ 397.0
======= =======
LIABILITIES AND EQUITY
----------------------
Current liabilities:
Accounts payable.................................. $ 12.0 $ 15.4
Accrued salaries.................................. 9.7 11.7
Other current liabilities......................... 15.8 11.1
------- -------
37.5 38.2
Long-term debt...................................... .3 1.4
Deferred taxes and other liabilities................ 27.8 26.0
Minority interests in equity of consolidated
entities........................................... 6.2 6.4
Equity, investment by and advances from
Columbia/HCA....................................... 320.5 325.0
------- -------
$ 392.3 $ 397.0
======= =======
</TABLE>
The accompanying notes are an integral part of the combined financial
statements.
F-4
<PAGE>
LIFEPOINT HOSPITALS, INC.
COMBINED STATEMENTS OF EQUITY
(DOLLARS IN MILLIONS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED YEARS ENDED
SEPTEMBER 30, DECEMBER 31,
------------------ ------------- ---
1998 1997 1997 1996
------ ---------- ------ ------
(UNAUDITED
-NOTE 13)
<S> <C> <C> <C> <C> <C>
Equity at beginning of period............ $325.0 $310.6 $310.6 $274.4
Net income............................. 1.9 28.7 10.6 41.5
Investments by and advances from
Columbia/HCA, net..................... (6.4) 24.9 3.8 (5.3)
------ ------ ------ ------
Equity at end of period.................. $320.5 $364.2 $325.0 $310.6
====== ====== ====== ======
</TABLE>
The accompanying notes are an integral part of the combined financial
statements.
F-5
<PAGE>
LIFEPOINT HOSPITALS, INC.
COMBINED STATEMENTS OF CASH FLOWS
(DOLLARS IN MILLIONS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED YEARS ENDED
SEPTEMBER 30, DECEMBER 31,
------------------ --------------
1998 1997 1997 1996
------ ---------- ------ ------
(UNAUDITED
-NOTE 13)
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net income................................ $ 1.9 $ 28.7 $ 10.6 $ 41.5
Adjustments to reconcile net income to net
cash provided by continuing operating
activities:
Provision for doubtful accounts......... 28.3 22.9 34.6 28.0
Depreciation and amortization........... 20.5 20.8 27.6 23.8
Deferred income taxes................... (1.8) - 2.2 13.5
Impairment of long-lived assets......... - - 4.8 -
Loss (income) from discontinued
operations............................. 3.7 (2.7) 4.0 (1.9)
Cumulative effect of accounting change.. - .6 .6 -
Increase (decrease) in cash from
operating assets and liabilities:
Accounts receivable................... (27.6) (41.2) (38.0) (46.5)
Inventories and other assets.......... .4 (.3) .1 (3.8)
Accounts payable and accrued
expenses............................. (.6) .5 - 7.3
Other................................... 1.2 (.6) 1.4 1.0
------ ------ ------ ------
Net cash provided by operating
activities........................... 26.0 28.7 47.9 62.9
Cash flows from investing activities:
Purchase of property and equipment........ (24.8) (40.1) (52.0) (53.6)
Investments in and advances to
affiliates............................... .1 (5.7) (6.0) -
Other..................................... 6.3 (7.7) 6.4 (3.5)
------ ------ ------ ------
Net cash used in investing
activities........................... (18.4) (53.5) (51.6) (57.1)
Cash flows from financing activities:
Repayment of long-term debt, net.......... (1.2) (.1) (.1) (.5)
Transfers of debt from Columbia/HCA, net.. (6.4) 24.9 3.8 (5.3)
------ ------ ------ ------
Net cash provided by (used in)
financing activities................. (7.6) 24.8 3.7 (5.8)
------ ------ ------ ------
Change in cash and cash equivalents......... $ - $ - $ - $ -
====== ====== ====== ======
Interest payments........................... $ 13.9 $ 11.3 $ 15.5 $ 14.2
Income tax payments, net of refunds......... $ 6.2 $ 18.5 $ 8.4 $ 13.0
</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") 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 22 general, acute care hospitals and related health care
entities. LifePoint also owns a minority interest in one non-consolidated
hospital accounted for using the equity method. 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 basis of 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. 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 and advances to LifePoint by
Columbia/HCA. It includes common stock, additional paid-in-capital, net
earnings and net intercompany balances with Columbia/HCA.
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 on the
outstanding balance at month end.
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 adjustments to estimated settlements resulted
in increases to revenues of $2.0 million, $3.3 million and $10.6 million in the
nine months ended September 30, 1998 and the years ended December 31, 1997 and
1996, respectively. Management believes that adequate provisions have been made
for adjustments that may result from final determination of amounts earned
under these programs.
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 nine months ended September 30, 1998 and the years ended December 31, 1997
and 1996, approximately 37.9%, 39.7% 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
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 $19.1
million for the nine months ended September 30, 1998 and $25.1 million and
$21.9 million for the years ended December 31, 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.
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
F-8
<PAGE>
LIFEPOINT HOSPITALS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 2--ACCOUNTING POLICIES (CONTINUED)
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 in the combined statements of income 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.
The net deferred tax liability results principally from certain revenue and
expense items recognized for tax purposes in years other than the year in which
they are reflected in the financial statements.
General and Professional Liability Risks
Columbia/HCA assumes the liability for all general and professional liability
claims incurred and maintains the related reserve. Accordingly, no reserve for
general and professional liability risks is recorded on 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. The cost for the nine months ended
September 30, 1998 and the years ended December 31, 1997 and 1996 was
approximately $5.0 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. The cost was approximately
$1.6 million for the nine months ended September 30, 1998 and $2.1 million for
both years ended December 31, 1997 and 1996.
Management Fees
Columbia/HCA incurs various corporate general and administrative expenses.
These corporate overhead expenses are allocated to LifePoint based on revenues.
In the opinion of management, this allocation method is reasonable.
The management fees allocated to LifePoint are not necessarily indicative of
the expenses that would have been incurred if LifePoint had been a separate,
independent entity and had otherwise managed these functions. 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.
F-9
<PAGE>
LIFEPOINT HOSPITALS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 2--ACCOUNTING POLICIES (CONTINUED)
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. SFAS 131 is effective for
financial statements for fiscal years beginning after December 15, 1997, and
therefore, LifePoint will adopt the new requirements in the annual report
following the Distribution. The 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 No.
133, Accounting for Derivative Instruments and Hedging Activities, which is
required to be adopted in years beginning after June 15, 1999. Because of
LifePoint'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 LifePoint.
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. On October 5,
1998, the United States Department of Justice announced that the Federal
government had joined a qui tam action originally filed in 1993 in which
Columbia/HCA is a defendant. The government has not intervened in the other qui
tam actions unsealed to date. 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
F-10
<PAGE>
LIFEPOINT HOSPITALS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 3--COLUMBIA/HCA INVESTIGATIONS, LITIGATION AND INDEMNIFICATION RIGHTS
(CONTINUED)
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 certain
liabilities arising out of or in connection with the foregoing matters. If any
such indemnified liabilities were successfully asserted against LifePoint or
any of its facilities, and Columbia/HCA failed to meet its indemnification
obligations, then such liabilities could have a material adverse effect on the
financial position and results of LifePoint (See Note 11--Contingencies).
NOTE 4--INCOME TAXES
Provision for income taxes consists of the following (dollars in millions):
<TABLE>
<CAPTION>
NINE MONTHS YEARS ENDED
ENDED DECEMBER 31,
SEPTEMBER 30, --------------
1998 1997 1996
------------- ------ ------
<S> <C> <C> <C>
Current:
Federal.................................... $ 5.2 $ 7.1 $ 11.0
State...................................... 1.0 1.3 2.0
Deferred:
Federal.................................... (1.5) 1.9 11.5
State...................................... (0.3) 0.3 2.0
----- ------ ------
$ 4.4 $ 10.6 $ 26.5
===== ====== ======
A reconciliation of the federal statutory rate to the effective income tax
rate follows:
<CAPTION>
NINE MONTHS YEARS ENDED
ENDED DECEMBER 31,
SEPTEMBER 30, --------------
1998 1997 1996
------------- ------ ------
<S> <C> <C> <C>
Federal statutory rate....................... 35.0% 35.0% 35.0%
State income taxes, net of federal income tax
benefit..................................... 4.4 4.1 4.0
Non-deductible intangible assets............. 3.3 1.5 0.8
Other items, net............................. 1.4 0.5 0.4
----- ------ ------
Effective income tax rate.................... 44.1% 41.1% 40.2%
===== ====== ======
</TABLE>
A summary of the items comprising the deferred tax assets and liabilities
follows (dollars in millions):
<TABLE>
<CAPTION>
SEPTEMBER 30, 1998 DECEMBER 31, 1997
------------------ ------------------
ASSETS LIABILITIES ASSETS LIABILITIES
------ ----------- ------ -----------
<S> <C> <C> <C> <C>
Depreciation and fixed asset basis
differences........................ $30.6 $29.3
Doubtful accounts................... $ 9.1 $ 5.7
Compensation........................ 2.0 2.3
Other............................... 4.6 0.9 4.3 0.6
----- ----- ----- -----
$15.7 $31.5 $12.3 $29.9
===== ===== ===== =====
</TABLE>
F-11
<PAGE>
LIFEPOINT HOSPITALS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 4--INCOME TAXES (CONTINUED)
Current deferred income tax assets totaled $11.4 million and $8.3 million at
September 30, 1998 and December 31, 1997, respectively. Noncurrent deferred
income tax liabilities totaled $27.2 million and $25.9 million at September 30,
1998 and December 31, 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.
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 1997, LifePoint decided to sell a surgery center
that was identified as not compatible with LifePoint's operating plans. The
carrying value of the surgery center was reduced to fair value, based on
estimated selling value, for a total non-cash charge of $4.8 million. LifePoint
expects to complete the sale during the fourth quarter of 1998 or the first
half of 1999. The impairment charges did not have a significant impact on
LifePoint's cash flows and are not expected to significantly impact cash flows
or operating results in future periods.
NOTE 6--DISCONTINUED OPERATIONS
In August 1997, the management of Columbia/HCA and LifePoint implemented
plans to sell its home health care businesses. Accordingly, the operating
results and net assets (liabilities) of LifePoint's home health care businesses
to be disposed of have been segregated from continuing operations. These
businesses are presented as discontinued operations on separate line items in
the combined financial statements.
During 1997, LifePoint recorded an estimated after-tax loss on disposal of
$3.4 million which is reflected in "Discontinued Operations" on the combined
statements of income. LifePoint anticipates that sales of these businesses will
be completed during the fourth quarter of 1998 and the first half of 1999.
Revenues of the home health businesses to be disposed of were approximately
$18.0 million for the nine months ended September 30, 1998 and $54.7 million
and $52.5 million for the years ended December 31, 1997 and 1996, respectively.
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 income for the year ended December 31, 1997 and the nine
months ended September 30, 1997 (unaudited). Had the new method been used in
the past, the pro forma effect on prior years
F-12
<PAGE>
LIFEPOINT HOSPITALS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 7--ACCOUNTING CHANGE (CONTINUED)
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.... $15.2 $15.2 $39.6 $39.0
Net income........................... $10.6 $11.2 $41.5 $40.9
</TABLE>
NOTE 8--LONG TERM DEBT
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 $0.1 million and $0.2 million at September 30, 1998 and December
31, 1997, respectively, and is included in other current liabilities on the
Combined Balance Sheets.
In connection with the Distribution, all intercompany amounts payable by
LifePoint to Columbia/HCA (included in "Equity, investments by and advances
from Columbia/HCA" on the Combined Financial Statements) 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 total
number of options granted to LifePoint employees under Columbia/HCA's stock
option plan was approximately 159,300 in the nine months ended September 30,
1998, approximately 1,287,900 in 1997 and approximately 347,700 in 1996.
Immediately following the Distribution, nonvested Columbia/HCA stock options
held by LifePoint employees will be cancelled and replaced with LifePoint stock
option awards. LifePoint stock options will be granted in amounts such that the
fair value will be equal to that of the cancelled nonvested Columbia/HCA stock
options. The vested Columbia/HCA stock options held by LifePoint employees will
be converted into a combination of LifePoint, Triad Hospitals, Inc. and
Columbia/HCA stock options 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 September 30, 1998 there were approximately 2,422,200 Columbia/HCA stock
options held by LifePoint employees. That amount includes an aggregate of
approximately 1,867,100 million options that are subject to replacement with
LifePoint stock option awards. LifePoint cannot currently determine the number
of shares of its common stock that will be subject to substitute awards after
the Distribution.
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 measured compensation cost
for the Columbia/HCA stock options granted to its employees in the nine
F-13
<PAGE>
LIFEPOINT HOSPITALS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 9--STOCK BENEFIT PLANS (CONTINUED)
months ended September 30, 1998 and the years 1997 and 1996 under the fair
value based method prescribed by SFAS 123, the net income would have been
changed to the pro forma amounts set forth below:
<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31,
NINE MONTHS ENDED -------------
SEPTEMBER 30, 1998 1997 1996
------------------ ------ ------
<S> <C> <C> <C>
Net Income
Reported.................................. $1.9 $ 10.6 $ 41.5
Pro forma................................. $0.8 $ 9.8 $ 41.2
</TABLE>
The fair values of Columbia/HCA stock options granted to LifePoint 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.............................. 4.26% 5.61% 5.81%
Expected life........................................ 6 years 6 years 6 years
Expected volatility.................................. 23.90% 23.90% 23.90%
Expected dividend yield.............................. .28% .23% .19%
</TABLE>
The weighted-average fair values of Columbia/HCA stock options granted to
LifePoint employees during the nine months ended September 30, 1998 and the
years ended 1997 and 1996 were $8.49, $11.22 and $13.49 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--EMPLOYEE RETIREMENT PLANS
LifePoint participates in Columbia/HCA's defined contribution employee
benefit 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
$4.4 million for the nine months ended September 30, 1998 and $5.5 million and
$4.4 million for the years ended December 31, 1997 and 1996, respectively.
Amounts approximately equal to expense for these plans 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 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
F-14
<PAGE>
LIFEPOINT HOSPITALS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 11--CONTINGENCIES (CONTINUED)
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 in respect
of certain liabilities relating thereto.)
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 the
claimants have asked for punitive damages against LifePoint, which are usually
not covered by insurance. It is management's opinion that the ultimate
resolution of these pending claims and legal proceedings will not have a
material adverse effect on LifePoint's results of operations or financial
position.
NOTE 12--OTHER CURRENT LIABILITIES AND ALLOWANCES FOR DOUBTFUL ACCOUNTS
A summary of other current liabilities follows (in millions):
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1998 1997
------------- ------------
<S> <C> <C>
Employee benefit plans............................ $10.0 $ 5.7
Taxes other than income........................... 4.9 3.2
Other............................................. 0.9 2.2
----- -----
$15.8 $11.1
===== =====
</TABLE>
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
accounts:
Year ended December 31,
1996...................... $12.7 $28.0 $(11.1) $29.6
Year ended December 31,
1997...................... 29.6 34.6 (26.7) 37.5
Nine months ended September
30, 1998.................. 37.5 28.3 (23.2) 42.6
</TABLE>
F-15
<PAGE>
LIFEPOINT HOSPITALS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 13--UNAUDITED INTERIM FINANCIAL INFORMATION
The statements of income and changes in cash flows for the nine months ended
September 30, 1997 and the quarterly financial information shown below (interim
financial information) have been prepared by LifePoint and are unaudited.
The interim financial information includes all adjustments consisting of only
normal recurring adjustments necessary for a fair statement of the results of
the interim periods. Certain information and footnote disclosures normally
included in the financial statements prepared in accordance with generally
accepted accounting principles have been condensed or omitted from the interim
financial information. The interim financial information should be read in
conjunction with the audited combined financial statements appearing herein.
<TABLE>
<CAPTION>
1998
(IN MILLIONS)
----------------------
FIRST SECOND THIRD
------ ------ ------
<S> <C> <C> <C> <C>
Revenues................................... $125.6 $120.1 $120.7
Net income (loss):
Income (loss) from continuing opera-
tions................................... $ 3.3 $ 2.5 $ (.2)
Loss from discontinued operations........ (2.1) (.8) (.8)
------ ------ ------
Net income (loss)...................... $ 1.2 $ 1.7 $ (1.0)
====== ====== ======
<CAPTION>
1997
(IN MILLIONS)
------------------------------
FIRST SECOND THIRD FOURTH
------ ------ ------ ------
<S> <C> <C> <C> <C>
Revenues................................... $131.3 $129.1 $117.0 $113.0
Net income (loss):
Income (loss) from continuing operations
(a)..................................... $ 14.4 $ 12.6 $ (.4) $(11.4)
Income (loss) from discontinued opera-
tions (b)............................... .8 1.0 .9 (6.7)
Cumulative effect of accounting change... (.6) - - -
------ ------ ------ ------
Net income (loss)...................... $ 14.6 $ 13.6 $ .5 $(18.1)
====== ====== ====== ======
</TABLE>
- - --------
(a) Fourth quarter results include a $4.8 million pre-tax charge ($2.9 million
after-tax) related to the impairment of certain long-lived assets. (See
Note 5 of the Notes to Combined Financial Statements).
(b) Fourth quarter results include $3.4 million of after-tax charges related
to the estimated loss on disposal of discontinued business (see Note 6 of
the Notes To Combined Financial Statements).
F-16
<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
September 30, 1998 and December 31, 1997 and the related combined statements of
operations, equity and cash flows for the nine months ended September 30, 1998
and the years ended December 31, 1997 and 1996. These combined financial
statements are the responsibility of the Company's management. 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 audit 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 September
30, 1998 and December 31, 1997 and the combined results of their operations and
their cash flows for the nine months ended September 30, 1998 and the years
ended December 31, 1997 and 1996 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
November 25, 1998
F-17
<PAGE>
TRIAD HOSPITALS, INC.
COMBINED STATEMENTS OF OPERATIONS
(DOLLARS IN MILLIONS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED YEARS ENDED
SEPTEMBER 30, DECEMBER 31,
-------------------- ------------------
1998 1997 1997 1996
-------- ---------- -------- --------
(UNAUDITED
-NOTE 13)
<S> <C> <C> <C> <C>
Revenues............................... $1,376.4 $1,363.0 $1,786.9 $1,762.1
Salaries and benefits.................. 610.4 548.7 748.8 699.2
Supplies............................... 209.6 189.6 258.6 246.5
Other operating expenses............... 305.9 306.2 425.0 386.6
Provision for doubtful accounts........ 130.2 110.7 162.4 119.9
Depreciation and amortization.......... 86.3 80.8 108.9 99.0
Interest expense....................... 61.9 50.8 69.5 59.1
Management fees........................ 23.4 21.3 28.2 22.4
Impairment of long-lived assets........ 71.0 - 13.7 -
-------- -------- -------- --------
1,498.7 1,308.1 1,815.1 1,632.7
-------- -------- -------- --------
Income (loss) from continuing
operations before minority interests
and income taxes...................... (122.3) 54.9 (28.2) 129.4
Minority interests in earnings of
consolidated entities................. 8.0 9.4 11.5 10.9
-------- -------- -------- --------
Income (loss) from continuing
operations before income taxes
(benefit)............................. (130.3) 45.5 (39.7) 118.5
Provision for income taxes (benefit)... (48.7) 14.6 (12.7) 49.2
-------- -------- -------- --------
Income (loss) from continuing
operations............................ (81.6) 30.9 (27.0) 69.3
Discontinued operations:
Income (loss) from operations, net of
income taxes (benefit) of $(0.4) and
$3.9 for the nine months ended
September 30, 1998 and 1997 and $3.8
and $4.7 for the years ended
December 31, 1997 and 1996,
respectively........................ (1.2) 6.1 5.6 7.3
Estimated loss on disposal, net of
income tax benefit of $2.1.......... - - (3.0) -
Cumulative effect of accounting change,
net of income tax benefit of $1.9..... - (2.9) (2.9) -
-------- -------- -------- --------
Net income (loss).................. $ (82.8) $ 34.1 $ (27.3) $ 76.6
======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of the combined financial
statements.
F-18
<PAGE>
TRIAD HOSPITALS, INC.
COMBINED BALANCE SHEETS
(DOLLARS IN MILLIONS)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1998 1997
------------- ------------
ASSETS
------
<S> <C> <C>
Current assets:
Accounts receivable, less allowances for doubtful
accounts of $165.5 at September 30, 1998 and
$153.3 at December 31, 1997...................... $ 230.6 $ 216.7
Inventories....................................... 50.2 49.9
Income taxes...................................... 37.5 34.9
Other............................................. 24.8 26.1
-------- --------
343.1 327.6
Property and equipment, at cost:
Land.............................................. 86.7 87.6
Buildings......................................... 633.7 695.4
Equipment......................................... 731.2 683.5
Construction in progress (estimated cost to
complete and equip after September 30, 1998--
$163.0).......................................... 73.4 50.9
-------- --------
1,525.0 1,517.4
Accumulated depreciation............................ (707.3) (636.3)
-------- --------
817.7 881.1
Intangible assets, net of accumulated amortization
of $51.4 at September 30, 1998 and $43.4 at
December 31, 1997.................................. 308.4 299.6
Investment in equity of affiliates.................. 28.7 21.6
Other............................................... 22.0 32.2
-------- --------
$1,519.9 $1,562.1
======== ========
<CAPTION>
LIABILITIES AND EQUITY
----------------------
<S> <C> <C>
Current liabilities:
Accounts payable.................................. $ 55.9 $ 72.5
Accrued salaries.................................. 39.0 44.9
Other current liabilities......................... 55.4 40.8
-------- --------
150.3 158.2
Long-term debt...................................... 13.9 19.8
Deferred taxes and other liabilities................ 54.3 83.7
Minority interests in equity of consolidated
entities........................................... 58.2 62.1
Equity, investments by and advances from
Columbia/HCA....................................... 1,243.2 1,238.3
-------- --------
$1,519.9 $1,562.1
======== ========
</TABLE>
The accompanying notes are an integral part of the combined financial
statements.
F-19
<PAGE>
TRIAD HOSPITALS, INC.
COMBINED STATEMENTS OF EQUITY
(DOLLARS IN MILLIONS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED YEARS ENDED
SEPTEMBER 30, DECEMBER 31,
-------------------- ------------------
1998 1997 1997 1996
-------- ---------- -------- --------
(UNAUDITED
-NOTE 13)
<S> <C> <C> <C> <C>
Equity at beginning of period......... $1,238.3 $1,194.8 $1,194.8 $1,120.0
Net income (loss)................... (82.8) 34.1 (27.3) 76.6
Investments by and advances from
Columbia/HCA, net.................. 87.7 27.8 70.8 (1.8)
-------- -------- -------- --------
Equity at end of period............... $1,243.2 $1,256.7 $1,238.3 $1,194.8
======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of the combined financial
statements.
F-20
<PAGE>
TRIAD HOSPITALS, INC.
COMBINED STATEMENTS OF CASH FLOWS
(DOLLARS IN MILLIONS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED YEARS ENDED
SEPTEMBER 30, DECEMBER 31,
------------------- ----------------
1998 1997 1997 1996
------- ---------- ------- -------
(UNAUDITED
-NOTE 13)
<S> <C> <C> <C> <C>
Cash flows from continuing operating
activities:
Net income (loss)...................... $ (82.8) $ 34.1 $ (27.3) $ 76.6
Adjustments to reconcile net income
(loss) to net cash provided by
continuing operating activities:
Provision for doubtful accounts...... 130.2 110.7 162.4 119.9
Depreciation and amortization........ 86.3 80.8 108.9 99.0
Deferred income taxes (benefit)...... (30.8) 0.9 (11.8) 2.1
Write-down of long-lived assets...... 71.0 - 13.7 -
Loss (income) from discontinued
operations.......................... 1.2 (6.1) (2.6) (7.3)
Cumulative effect of accounting
change.............................. - 2.9 2.9 -
Increase (decrease) in cash from
operating assets and liabilities:
Accounts receivable................ (144.1) (120.1) (154.7) (154.6)
Inventories and other assets....... 0.9 (9.6) (4.4) (1.7)
Accounts payable and other current
liabilities....................... (7.7) (14.9) (7.1) 31.9
Other................................ (4.0) (1.4) (1.4) 7.9
------- ------- ------- -------
Net cash provided by continuing
operating activities.............. 20.2 77.3 78.6 173.8
------- ------- ------- -------
Cash flows from investing activities:
Purchase of property and equipment..... (85.2) (92.3) (156.7) (119.9)
Investment in and advances to
affiliates............................ (7.2) (2.0) (2.5) (19.1)
Other.................................. (9.6) (9.7) 6.0 (21.1)
------- ------- ------- -------
Net cash used in investing
activities.......................... (102.0) (104.0) (153.2) (160.1)
------- ------- ------- -------
Cash flows from financing activities:
Increase (decrease) in long-term debt,
net................................... (5.9) (1.1) 3.8 (11.9)
Increase (decrease) in investments by
and advances from Columbia/HCA, net... 87.7 27.8 70.8 (1.8)
------- ------- ------- -------
Net cash provided by (used in)
financing activities................ 81.8 26.7 74.6 (13.7)
------- ------- ------- -------
Change in cash and cash equivalents...... $ - $ - $ - $ -
======= ======= ======= =======
Interest payments........................ $ 62.0 $ 51.0 $ 69.6 $ 59.3
Income tax payments (refunds), net....... $ (18.3) $ 16.7 $ (1.1) $ 53.9
</TABLE>
The accompanying notes are an integral part of the combined financial
statements.
F-21
<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 43 hospitals
(including an investment in one hospital that is accounted for using the equity
method), 19 free-standing surgery centers and related health care entities
located in eleven western, southwestern and southeastern states. The
accompanying financial statements, prepared on the basis of 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. 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 and advances to Triad by
Columbia/HCA. It includes common stock, additional paid-in-capital, net
earnings and net intercompany balances with Columbia/HCA.
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.
F-22
<PAGE>
TRIAD HOSPITALS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 2--ACCOUNTING POLICIES (CONTINUED)
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.
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 adjustments to estimated settlements resulted
in increases to revenues of $8.5 million, $1.9 million and $33.6 million in the
nine months ended September 30, 1998 and the years ended December 31, 1997 and
1996, respectively. Management believes that adequate provisions have been made
for adjustments that may result from final determination of amounts earned
under these programs.
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 nine months
ended September 30, 1998 and the years ended December 31, 1997 and 1996,
approximately 36.5%, 37.2% and 37.9%, 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
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 $78.3
million for the nine months ended September 30, 1998 and $96.4 million and
$88.0 million for the years ended December 31, 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.
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
F-23
<PAGE>
TRIAD HOSPITALS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 2--ACCOUNTING POLICIES (CONTINUED)
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 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.
The net deferred tax liability results principally from certain revenue and
expense items 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 and maintains the related reserve. Accordingly, no reserve for
general and professional liability risks is recorded on 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. The cost for the nine months ended
September 30, 1998 and the years ended December 31, 1997 and 1996 was
approximately $23.8 million, $25.3 million and $23.8 million, respectively.
Triad participates in a self-insured program for workers' compensation and
health insurance administered by Columbia/HCA. The cost for the nine months
ended September 30, 1998 and the years ended December 31, 1997 and 1996 was
approximately $6.9 million, $9.6 million and $8.4 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 management, this allocation method is reasonable.
The management fees allocated to Triad are not necessarily indicative of the
expenses that would have been incurred if Triad had been a separate,
independent entity and had otherwise managed these functions. 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.
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").
F-24
<PAGE>
TRIAD HOSPITALS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 2--ACCOUNTING POLICIES (CONTINUED)
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. SFAS 131 is effective for financial statements for fiscal years
beginning after December 15, 1997, and therefore, Triad will adopt the new
requirements in the annual report following the Distribution. The
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
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. On October 5,
1998, the United States Department of Justice announced that the Federal
government had joined a qui tam action originally filed in 1993 in which
Columbia/HCA is a defendant. The government has not intervened in the other qui
tam actions unsealed to date. 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.
F-25
<PAGE>
TRIAD HOSPITALS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 3--COLUMBIA/HCA INVESTIGATIONS, LITIGATION AND INDEMNIFICATION RIGHTS
(CONTINUED)
Columbia/HCA has agreed to indemnify Triad in respect of certain liabilities
arising out of or in connection with the foregoing matters. If any such
indemnified liabilities were successfully asserted against Triad or any of its
facilities, and Columbia/HCA failed to meet its indemnification obligations,
then such liabilities could have a material adverse effect on the financial
position and results of Triad (See Note 11--Contingencies).
NOTE 4--INCOME TAXES
Provision for income taxes (benefit) consists of the following (dollars in
millions):
<TABLE>
<CAPTION>
NINE MONTHS YEARS ENDED
ENDED DECEMBER 31,
SEPTEMBER 30, --------------
1998 1997 1996
------------- ------ -----
<S> <C> <C> <C>
Current:
Federal.................................... $(15.1) $ (0.7) $39.7
State...................................... (2.8) (0.2) 7.4
Deferred:
Federal.................................... (26.1) (10.0) 1.8
State...................................... (4.7) (1.8) 0.3
------ ------ -----
$(48.7) $(12.7) $49.2
====== ====== =====
A reconciliation of the federal statutory rate to the effective income tax
rate follows:
<CAPTION>
NINE MONTHS YEARS ENDED
ENDED DECEMBER 31,
SEPTEMBER 30, --------------
1998 1997 1996
------------- ------ -----
<S> <C> <C> <C>
Federal statutory rate....................... 35.0 % 35.0 % 35.0%
State income taxes, net of federal income tax
benefit..................................... 3.7 3.0 4.3
Non-deductible intangible assets............. (1.1) (5.2) 2.2
Other items, net............................. (0.2) (0.9) 0.4
------ ------ -----
Effective income tax rate.................... 37.4 % 31.9 % 41.9%
====== ====== =====
</TABLE>
A summary of the items comprising the deferred tax assets and liabilities
follows (dollars in millions):
<TABLE>
<CAPTION>
DECEMBER 31,
SEPTEMBER 30, 1998 1997
------------------ ------------------
ASSETS LIABILITIES ASSETS LIABILITIES
------ ----------- ------ -----------
<S> <C> <C> <C> <C>
Depreciation and fixed asset basis
differences........................ $ - $48.1 $ - $76.6
Doubtful accounts................... 29.9 - 26.1 -
Compensation........................ 8.8 - 10.1 -
Other............................... 2.6 8.2 3.9 9.3
----- ----- ----- -----
$41.3 $56.3 $40.1 $85.9
===== ===== ===== =====
</TABLE>
F-26
<PAGE>
TRIAD HOSPITALS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 4--INCOME TAXES (CONTINUED)
Deferred income taxes of $37.5 million and $34.9 million at September 30,
1998 and December 31, 1997, respectively, are included in current assets.
Noncurrent deferred income tax liabilities totaled $52.5 million and $80.7
million at September 30, 1998 and December 31, 1997, respectively.
At September 30, 1998, state net operating loss carryforwards (expiring in
years 1999 through 2003) available to offset future taxable income approximated
$24.0 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.
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 quarter of 1998 Triad decided to sell certain hospital
facilities and surgery centers that were identified as not compatible with
Triad's operating plans. The carrying value of the long-lived assets related to
certain of these facilities (seven hospital facilities and one surgery center),
of approximately $171.4 million, was reduced to fair value, based on estimates
of selling values, for a total non-cash charge of $71.0 million. For the nine
months ended September 30, 1998, these facilities to be divested had net
revenues of approximately $242.5 million and incurred a loss from continuing
operations before income tax benefit and the asset impairment charge of
approximately $(43.7) million. Triad expects to complete the majority of these
sales during the fourth quarter of 1998 and the first half of 1999.
Triad recorded, during the fourth quarter of 1997, an impairment loss of
approximately $13.7 million related to the write-off of intangibles and other
long-lived assets of certain surgery centers and 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.
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 third quarter of 1997, Columbia/HCA and Triad implemented plans to
sell their home health businesses. As a result of the plans to divest these
businesses, the combined financial statements reflect the results of operations
and net assets of the home health businesses to be disposed of as discontinued
operations.
F-27
<PAGE>
TRIAD HOSPITALS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 6--DISCONTINUED OPERATIONS (CONTINUED)
Revenues of the home health businesses to be disposed of were approximately
$39.8 million for the nine months ended September 30, 1998, and $82.1 million
and $89.0 million for the years ended December 31, 1997 and 1996, respectively.
Triad anticipates that sales of these home health businesses will be
completed during the fourth quarter of 1998 and the first half of 1999. The
estimated, after-tax loss expected to be incurred upon the sale of these
businesses of $3.0 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 $2.9 million (net of tax benefit), has been expensed and reflected
in the statements of operations for the year ended December 31, 1997 and the
nine months ended September 30, 1997 (Unaudited). 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......................... $(27.0) $(27.0) $69.3 $66.4
Net income (loss)................... $(27.3) $(24.4) $76.6 $73.7
</TABLE>
NOTE 8--LONG TERM DEBT
A summary of long-term debt follows (including related interest rates at
September 30, 1998), (dollars in millions):
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1998 1997
------------- ------------
<S> <C> <C>
Total debt, average life of 5 years (rates
averaging 5.6%)............................... $14.8 $20.9
Less amounts due within one year............... 0.9 1.1
----- -----
$13.9 $19.8
===== =====
</TABLE>
In connection with the Distribution, all amounts payable by Triad to
Columbia/HCA (included in "Equity, investments by and advances from
Columbia/HCA" on the Combined Financial Statements) will be eliminated, and
Triad will assume certain indebtedness from Columbia/HCA.
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
F-28
<PAGE>
TRIAD HOSPITALS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 9--STOCK BENEFIT PLANS (CONTINUED)
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 total number of options granted to Triad employees under
Columbia/HCA's option plan was approximately 0.4 million in the nine months
ended September 30, 1998, approximately 1.2 million in 1997 and approximately
0.6 million in 1996.
Immediately following the Distribution, nonvested Columbia/HCA stock options
held by Triad employees will be cancelled and replaced with Triad stock option
awards. Triad stock options will be granted in amounts such that the fair value
will be equal to that of the cancelled nonvested Columbia/HCA stock options.
The vested Columbia/HCA stock options held by Triad employees will be converted
into a combination of Triad, Life Point Hospitals Inc. and Columbia/HCA stock
options 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 September 30, 1998 there were approximately 2.8 million Columbia/HCA stock
options held by Triad employees. That amount includes an aggregate of
approximately 2.3 million options that are subject to replacement with Triad
stock option awards. Triad cannot currently determine the number of shares of
its common stock that will be subject to substitute awards after the
Distribution.
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 in the nine months ended September 30,
1998 and the years 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>
NINE MONTHS ENDED
SEPTEMBER 30,
1998 1997 1996
----------------- ------ -----
<S> <C> <C> <C>
Net income (loss)
Reported................................... $(82.8) $(27.3) $76.6
Pro forma.................................. $(84.2) $(28.6) $76.2
</TABLE>
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.............................. 4.26% 5.61% 5.81%
Expected life........................................ 6 years 6 years 6 years
Expected volatility.................................. 23.90% 23.90% 23.90%
Expected dividend yield.............................. .28% .23% .19%
</TABLE>
The weighted-average fair values of Columbia/HCA stock options granted to
Triad employees during the nine months ended September 30, 1998 and the years
ended 1997 and 1996 were $ 8.49, $12.20 and $13.36 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
F-29
<PAGE>
TRIAD HOSPITALS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 9--STOCK BENEFIT PLANS (CONTINUED)
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 $18.3 million for the
nine months ended September 30, 1998 and $20.9 million and $17.7 million for
the years ended December 31, 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 in respect of
certain liabilities relating thereto).
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 the
claimants have asked for punitive damages against Triad, which are usually not
covered by insurance. It is management's opinion that the ultimate resolution
of these pending claims and legal proceedings will not have a material adverse
effect on Triad's results of operations or financial position.
NOTE 12--OTHER CURRENT LIABILITIES AND ALLOWANCES FOR DOUBTFUL ACCOUNTS
A summary of other current liabilities follows (in millions):
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1998 1997
------------- ------------
<S> <C> <C>
Employee benefit plans............................ $37.6 $20.8
Taxes, other than income.......................... 13.8 9.1
Other............................................. 4.0 10.9
----- -----
$55.4 $40.8
===== =====
</TABLE>
F-30
<PAGE>
TRIAD HOSPITALS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 12--OTHER CURRENT LIABILITIES AND ALLOWANCES FOR DOUBTFUL ACCOUNTS
(CONTINUED)
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...................... $ 62.1 119.9 $ (74.7) $107.3
Year ended December 31,
1997...................... 107.3 162.4 (116.4) 153.3
Nine months ended September
30, 1998.................. 153.3 130.2 (118.0) 165.5
</TABLE>
NOTE 13--UNAUDITED INTERIM FINANCIAL INFORMATION
The statement of operations and changes in cash flows for the nine months
ended September 30, 1997 (interim financial statements) have been prepared by
Triad and are unaudited. The interim financial statements have been prepared in
conformity with the accounting principles applied in the audited combined
financials for the nine months ended September 30, 1998. In the opinion of
management, the interim financial information includes all material adjustments
necessary for a fair presentation.
The interim financial statements should be read in conjunction with the
audited combined financial statements appearing herein. Quarterly results of
operations information follows (in millions):
<TABLE>
<CAPTION>
1998
----------------------
FIRST SECOND THIRD
------ ------ ------
<S> <C> <C> <C> <C>
Revenues............................. $470.7 $456.7 $449.0
Net loss............................. $ (9.5) $(13.3) $(60.0)(a)
<CAPTION>
1997
---------------------------------
FIRST SECOND THIRD FOURTH
------ ------ ------ ------
<S> <C> <C> <C> <C>
Revenues............................. $478.6 $461.5 $422.9 $423.9
Net income (loss):
Income (loss) before accounting
change............................ $ 26.8 $ 18.8 $ (8.5) $(61.5)(b)
Cumulative effect of accounting
change............................ (2.9) - - -
------ ------ ------ ------
Net income (loss)................ $ 23.9 $ 18.8 $ (8.5) $(61.5)
====== ====== ====== ======
</TABLE>
- - --------
(a) During the third quarter of 1998, Triad recorded a $71.0 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 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-31
<PAGE>
================================================================================
EXHIBIT 3.1
CERTIFICATE OF INCORPORATION
OF
LIFEPOINT HOSPITALS, INC.
______________
DELAWARE
================================================================================
<PAGE>
CERTIFICATE OF INCORPORATION
OF
LIFEPOINT HOSPITALS, INC.
FIRST: The name of the Corporation is LifePoint Hospitals, Inc.
SECOND: The address of the Corporation's registered office in the State
of Delaware is 1013 Centre Road, in the City of Wilmington, County of New
Castle, Delaware 19805. The name of its registered agent at such address is
Corporation Service Company.
THIRD: The purpose of the Corporation is to engage in any lawful act or
activity for which corporations may be organized under the Delaware General
Corporation Law.
FOURTH: The total number of shares of all classes of capital stock
which the Corporation shall have the authority to issue is ________ Million
(________) shares, divided into two classes of which ________ Million (________)
shares, par value $.01 per share, shall be designated Preferred Stock, and
________ Million (________) shares, par value $.01 per share, shall be
designated Common Stock.
A. Preferred Stock
1. Issuance. The Board of Directors is expressly authorized,
--------
subject to limitations prescribed by law, to provide for the issuance of
shares of Preferred Stock in one or more series, to establish the number
of shares to be included in each such series, and to fix the
designations, powers, preferences, and rights of the shares of each such
series, and any qualifications, limitations or restrictions thereof. The
number of authorized shares of Preferred Stock may be increased or
decreased (but not below the number of shares thereof then outstanding)
by the affirmative vote of the holders of at least 80% of the voting
power of all of the then outstanding shares of capital stock of the
Corporation entitled to vote generally in the election of directors,
voting together as a single class, without a separate vote of the
holders of the Preferred Stock, unless a vote of any such holders is
required pursuant to the terms of any such series of Preferred Stock.
2. Series A Junior Participating Preferred Stock.
----------------------------------------------
Section 1. Designation and Amount. ________ million
----------------------
(________) shares of the Preferred Stock of the Corporation
shall be designated as "Series A Junior Participating Preferred
Stock," par value $.01 per share (the "Series A Preferred
Stock"). The number of shares of such series of Preferred Stock
may be increased or decreased by resolution of the Board of
Directors; provided, however, that no decrease shall reduce the
number of shares of such series of Preferred Stock to a number
less than the number of shares then outstanding plus the number
of shares reserved for issuance upon the exercise of outstanding
options, rights or warrants or upon the conversion of any
outstanding securities issued by the Corporation convertible
into Series A Preferred Stock.
-1-
<PAGE>
Section 2. Dividends and Distributions.
----------------------------
(A) Subject to the rights of the holders of any shares of any
series of Preferred Stock (or any similar stock) ranking prior and
superior to the Series A Preferred Stock with respect to dividends, the
holders of shares of Series A Preferred Stock, in preference to the
holders of Common Stock, and of any other junior stock, shall be
entitled to receive, when, as and if declared by the Board of Directors
out of funds legally available for the purpose, quarterly dividends
payable in cash on the first day of March, June, September and December
in each year (each such date being referred to herein as a "Quarterly
Dividend Payment Date"), commencing on the first Quarterly Dividend
Payment Date after the first issuance of a share or fraction of a share
of Series A Preferred Stock, in an amount per share (rounded to the
nearest cent) equal to the greater of (a) $10 or (b) subject to the
provision for adjustment hereinafter set forth, 1,000 times the
aggregate per share amount of all cash dividends, and 1,000 times the
aggregate per share amount (payable in kind) of all non-cash dividends
or other distributions, other than a dividend payable in shares of
Common Stock or a subdivision of the outstanding shares of Common Stock
(by reclassification or otherwise), declared on the Common Stock since
the immediately preceding Quarterly Dividend Payment Date or, with
respect to the first Quarterly Dividend Payment Date, since the first
issuance of any share or fraction of a share of Series A Preferred
Stock. In the event the Corporation shall at any time declare or pay any
dividend on the Common Stock payable in shares of Common Stock, or
effect a subdivision or combination or consolidation of the outstanding
shares of Common Stock (by reclassification or otherwise than by payment
of a dividend in shares of Common Stock) into a greater or lesser number
of shares of Common Stock, then in each such case the amount to which
holders of shares of Series A Preferred Stock were entitled immediately
prior to such event under clause (b) of the preceding sentence shall be
adjusted by multiplying such amount by a fraction, the numerator of
which is the number of shares of Common Stock outstanding immediately
after such event and the denominator of which is the number of shares of
Common Stock that were outstanding immediately prior to such event.
(B) The Corporation shall declare a dividend or distribution on
the Series A Preferred Stock as provided in paragraph (A) of this
Section 2 immediately after it declares a dividend or distribution on
the Common Stock (other than a dividend payable in shares of Common
Stock); provided, however, that, in the event no dividend or
distribution shall have been declared on the Common Stock during the
period between any Quarterly Dividend Payment Date and the next
subsequent Quarterly Dividend Payment Date, a dividend of $10 per share
on the Series A Preferred Stock shall nevertheless be payable on such
subsequent Quarterly Dividend Payment Date.
(C) Dividends shall begin to accrue and be cumulative on
outstanding shares of Series A Preferred Stock from the Quarterly
Dividend Payment Date next preceding the date of issue of such shares,
unless the date of issue of such shares is prior to the record date for
the first Quarterly Dividend Payment Date, in
-2-
<PAGE>
which case dividends on such shares shall begin to accrue from the date
of issue of such shares, or unless the date of issue is a Quarterly
Dividend Payment Date or is a date after the record date for the
determination of holders of shares of Series A Preferred Stock entitled
to receive a quarterly dividend and before such Quarterly Dividend
Payment Date, in either of which events such dividends shall begin to
accrue and be cumulative from such Quarterly Dividend Payment Date.
Accrued but unpaid dividends shall not bear interest. Dividends paid on
the shares of Series A Preferred Stock in an amount less than the total
amount of such dividends at the time accrued and payable on such shares
shall be allocated pro rata on a share-by-share basis among all such
shares at the time outstanding. The Board of Directors may fix a record
date for the determination of holders of shares of Series A Preferred
Stock entitled to receive payment of a dividend or distribution declared
thereon, which record date shall be not more than 60 days prior to the
date fixed for the payment thereof.
Section 3. Voting Rights. The holders of shares of Series A
-------------
Preferred Stock shall have the following voting rights:
(A) Subject to the provision for adjustment hereinafter set
forth, each share of Series A Preferred Stock shall entitle the holder
thereof to 1,000 votes on all matters submitted to a vote of the
stockholders of the Corporation. In the event the Corporation shall at
any time declare or pay any dividend on the Common Stock payable in
shares of Common Stock, or effect a subdivision or combination or
consolidation of the outstanding shares of Common Stock (by
reclassification or otherwise than by payment of a dividend in shares of
Common Stock) into a greater or lesser number of shares of Common Stock,
then in each such case the number of votes per share to which holders of
shares of Series A Preferred Stock were entitled immediately prior to
such event shall be adjusted by multiplying such number by a fraction,
the numerator of which is the number of shares of Common Stock
outstanding immediately after such event and the denominator of which is
the number of shares of Common Stock that were outstanding immediately
prior to such event.
(B) Except as otherwise provided herein, in a resolution or
resolutions adopted by the Board of Directors providing for the issuance
of a series of Preferred Stock or any similar stock (a "Certificate of
Designation"), or by law, the holders of shares of Series A Preferred
Stock and the holders of shares of Common Stock and any other capital
stock of the Corporation entitled to vote generally in the election of
directors shall vote together as a single class on all matters submitted
to a vote of stockholders of the Corporation.
(C) Except as otherwise provided herein, or by law, holders of
Series A Preferred Stock shall have no special voting rights and their
consent shall not be required (except to the extent they are entitled to
vote with holders of Common Stock as set forth herein) for taking any
corporate action.
-3-
<PAGE>
Section 4. Certain Restrictions.
---------------------
(A) Whenever quarterly dividends or other dividends or
distributions payable on the Series A Preferred Stock as provided in
Section 2 of paragraph A of this Article Fourth are in arrears,
thereafter and until all accrued and unpaid dividends and distributions,
whether or not declared, on shares of Series A Preferred Stock
outstanding shall have been paid in full, the Corporation shall not:
(i) declare or pay dividends, or make any other
distributions, on any shares of stock ranking junior (either as to
dividends or upon liquidation, dissolution or winding up) to the
Series A Preferred Stock;
(ii) declare or pay dividends, or make any other distributions,
on any shares of stock ranking on a parity (either as to dividends
or upon liquidation, dissolution or winding up) with the Series A
Preferred Stock, except dividends paid ratably on the Series A
Preferred Stock, and all such parity stock on which dividends are
payable or in arrears in proportion to the total amounts to which
the holders of all such shares are then entitled;
(iii) redeem or purchase or otherwise acquire for consideration
shares of any stock ranking junior (either as to dividends or upon
liquidation, dissolution or winding up) to the Series A Preferred
Stock, provided, however, that the Corporation may at any time
redeem, purchase or otherwise acquire shares of any such junior
stock in exchange for shares of any stock of the Corporation
ranking junior (both as to dividends and upon dissolution,
liquidation or winding up) to the Series A Preferred Stock; or
(iv) redeem or purchase or otherwise acquire for consideration
any shares of Series A Preferred Stock, or any shares of stock
ranking on a parity with the Series A Preferred Stock, except in
accordance with a purchase offer made in writing or by publication
(as determined by the Board of Directors) to all holders of such
shares upon such terms as the Board of Directors, after
consideration of the respective annual dividend rates and other
relative rights and preferences of the respective series and
classes, shall determine in good faith will result in fair and
equitable treatment among the respective series or classes.
(B) The Corporation shall not permit any subsidiary of the
Corporation to purchase or otherwise acquire for consideration any
shares of stock of the Corporation unless the Corporation could, under
paragraph (A) of this Section 4, purchase or otherwise acquire such
shares at such time and in such manner.
Section 5. Reacquired Shares. Any shares of Series A Preferred
-----------------
Stock purchased or otherwise acquired by the Corporation in any manner
whatsoever shall be retired and cancelled promptly after the acquisition
thereof. All such shares shall upon their cancellation become authorized
but unissued shares of Preferred Stock and may be reissued as part of a
new series of Preferred Stock subject to the conditions and restrictions
on issuance set forth herein or in any Certificate of Designation
providing for the issuance of a series of Preferred Stock or any similar
stock or as otherwise required by law.
-4-
<PAGE>
Section 6. Liquidation, Dissolution or Winding Up. Upon any
--------------------------------------
liquidation, dissolution or winding up of the Corporation, no
distribution shall be made (1) to the holders of shares of stock ranking
junior (either as to dividends or upon liquidation, dissolution or
winding up) to the Series A Preferred Stock unless, prior thereto, the
holders of shares of Series A Preferred Stock shall have received $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, provided, however, that the holders of shares of Series A
Preferred Stock shall be entitled to receive an aggregate amount per
share, subject to the provision for adjustment hereinafter set forth,
equal to 1,000 times the aggregate amount to be distributed per share to
holders of shares of Common Stock, or (2) to the holders of shares of
stock ranking on a parity (either as to dividends or upon liquidation,
dissolution or winding up) with the Series A Preferred Stock, except
distributions made ratably on the Series A Preferred Stock, and all such
parity stock in proportion to the total amounts to which the holders of
all such shares are entitled upon such liquidation, dissolution or
winding up. In the event the Corporation shall at any time declare or
pay any dividend on the Common Stock payable in shares of Common Stock,
or effect a subdivision or combination or consolidation of the
outstanding shares of Common Stock (by reclassification or otherwise
than by payment of a dividend in shares of Common Stock) into a greater
or lesser number of shares of Common Stock, then in each such case the
aggregate amount to which holders of shares of Series A Preferred Stock
were entitled immediately prior to such event under the proviso in
clause (1) of the preceding sentence shall be adjusted by multiplying
such amount by a fraction the numerator of which is the number of shares
of Common Stock outstanding immediately after such event and the
denominator of which is the number of shares of Common Stock that were
outstanding immediately prior to such event.
Section 7. Consolidation, Merger, etc. In case the Corporation
--------------------------
shall enter into any consolidation, merger, combination or other
transaction in which the shares of Common Stock are exchanged for or
changed into other stock or securities, cash and/or any other property,
then in any such case each share of Series A Preferred Stock shall at
the same time be similarly exchanged or changed into an amount per
share, subject to the provision for adjustment hereinafter set forth,
equal to 1,000 times the aggregate amount of stock, securities, cash
and/or any other property (payable in kind), as the case may be, into
which or for which each share of Common Stock is changed or exchanged.
In the event the Corporation shall at any time declare or pay any
dividend on the Common Stock payable in shares of Common Stock, or
effect a subdivision or combination or consolidation of the outstanding
shares of Common Stock (by reclassification or otherwise than by payment
of a dividend in shares of Common Stock) into a greater or lesser number
of shares of Common Stock, then in each such case the amount set forth
in the preceding sentence with respect to the exchange or change of
shares of Series A Preferred Stock shall be adjusted by multiplying such
amount by a fraction, the numerator of which is the number of shares of
Common Stock outstanding immediately after such event and the
-5-
<PAGE>
denominator of which is the number of shares of Common Stock that were
outstanding immediately prior to such event.
Section 8. No Redemption. The shares of Series A Preferred Stock
-------------
shall not be redeemable.
Section 9. Rank. The Series A Preferred Stock shall rank, with
----
respect to the payment of dividends and the distribution of assets,
junior to all series of any other class of the Corporation's Preferred
Stock.
Section 10. Amendment. This Certificate of Incorporation shall
---------
not be amended in any manner which would materially alter or change the
powers, preferences or special rights of the Series A Preferred Stock so
as to affect them adversely without the affirmative vote of the holders
of at least two-thirds of the outstanding shares of Series A Preferred
Stock, voting together as a single class.
B. Common Stock.
Section 1. Dividends. Subject to the preferential rights, if
---------
any, of the holders of any series of Preferred Stock then outstanding,
the holders of the Common Stock shall be entitled to receive, when, as
and if declared by the Board of Directors out of funds legally available
for the purpose, dividends payable either in cash, in property or in
shares of Common Stock or other securities of the Corporation.
Section 2. Voting Rights. Subject to the rights, if any, of the
-------------
holders of any series of Preferred Stock then outstanding, and except as
otherwise required by law, the holders of the Common Stock shall
exclusively possess all voting power, and at every annual or special
meeting of stockholders of the Corporation, each holder of Common Stock
shall be entitled to one vote, in person or by proxy, for each share of
Common Stock standing in such holder's name on the books of the
Corporation.
Section 3. Liquidation, Dissolution or Winding Up. Upon any
-----------
voluntary or involuntary liquidation, dissolution or winding up of the
affairs of the Corporation, the holders of the Common Stock shall be
entitled to share ratably in all assets of the Corporation available for
distribution to its stockholders, subject to the preferential rights, if
any, of the holders of any series of Preferred Stock then outstanding.
FIFTH: The business and affairs of the Corporation shall be managed by or
under the direction of the Board of Directors. The Board of Directors may
exercise all such authority and powers of the Corporation and do all such lawful
acts and things as are not by statute or this Certificate of Incorporation
directed or required to be exercised or done by the stockholders.
A. Number of Directors. The number of directors of the Corporation
(exclusive of directors to be elected by the holders of one or more series
of the Preferred Stock of
-6-
<PAGE>
the Corporation which may be outstanding, voting separately as a series or
class) shall be fixed from time to time by action of not less than a
majority of the members of the Board of Directors then in office, but in no
event shall such number of directors of the Corporation be less than three
nor more than fifteen. Unless changed by the Board of Directors pursuant
hereto, the number of directors shall be seven.
B. Classes. The directors, other than those who may be elected by the
holders of any series of Preferred Stock under specified circumstances,
shall be divided with respect to the time for which they severally hold
office, into three classes, as nearly equal in number as reasonably
possible, with the term of office of the first class to expire at the 2000
annual meeting of stockholders, the term of office of the second class to
expire at the 2001 annual meeting of stockholders and the term of office of
the third class to expire at the 2002 annual meeting of stockholders. At
each annual meeting of stockholders, commencing with the 2000 annual
meeting, (i) directors shall be elected to succeed those directors whose
terms expire for a term of office to expire at the third succeeding annual
meeting of stockholders after their election, and (ii) if authorized by a
resolution of the Board of Directors, directors may be elected to fill any
vacancy in the Board of Directors, regardless of how such vacancy was
created. Directors need not be stockholders. All directors shall hold
office until the expiration of the term for which elected and until their
successors are elected, except in the case of the death, resignation,
disqualification or removal of any director.
C. Stockholder Nomination of Director Candidates and Introduction of
Business. Advance notice of stockholder nominations for the election of
directors and of business to be brought by stockholders before any meeting
of the stockholders of the Corporation shall be given in the manner
provided in the By-Laws of the Corporation.
D. Vacancies. Subject to the rights, if any, of the holders of any
series of Preferred Stock then outstanding, and unless the Board of
Directors otherwise determines, newly created directorships resulting from
any increase in the authorized number of directors or any vacancies in the
Board of Directors resulting from death, resignation, disqualification or
removal may be filled only by a majority vote of the directors then in
office, though less than a quorum, and directors so chosen shall hold
office for a term expiring at the annual meeting of stockholders at which
the term of office of the class to which they have been elected expires or,
in the case of newly created directorships, shall hold office until such
time as determined by the directors electing such new director (in a manner
consistent with paragraph B of this Article Fifth). No decrease in the
number of directors constituting the Board of Directors shall shorten the
term of any incumbent director.
E. Removal. Subject to the rights, if any, of the holders of any series
of Preferred Stock then outstanding, any director, or the entire Board of
Directors, may be removed from office at any time, but only for cause and
only by the affirmative vote of the holders of at least 80% of the voting
power of all of the then outstanding shares of capital stock of the
Corporation entitled to vote generally in the election of directors, voting
together as a single class.
-7-
<PAGE>
SIXTH: Subject to the rights, if any, of the holders of any series of
Preferred Stock then outstanding, no action required to be taken or which may be
taken at any annual or special meeting of the stockholders of the Corporation
may be taken without a meeting, and the power of the stockholders to consent in
writing, without a meeting, to the taking of any action, including (without
limitation) the power of stockholders to adopt or amend the By-Laws of the
Corporation by written consent, is hereby specifically denied.
SEVENTH: Special meetings of the stockholders of the Corporation may be
called only by (a) the Chairman of the Board of Directors, if one shall have
been elected or (b) the Chief Executive Officer of the Corporation, and, in
addition, a special meeting shall be called by the Chairman of the Board or the
Chief Executive Officer at the request in writing of a majority of the Board of
Directors. The ability of the stockholders to call a special meeting is hereby
specifically denied.
EIGHTH: In furtherance and not in limitation of the powers conferred upon
it by the laws of the State of Delaware, the Board of Directors shall have the
power to adopt, amend, alter or repeal the By-Laws of the Corporation. The
Corporation's By-Laws may also be adopted, amended, altered or repealed by the
affirmative vote of the holders of at least 80% of the voting power of all
shares of the Corporation entitled to vote generally in the election of
directors, voting together as a single class.
NINTH: Elections of directors need not be by written ballot unless the By-
Laws of the Corporation shall otherwise provide.
TENTH: A director of the Corporation shall not be personally liable to the
Corporation or its stockholders for monetary damages for breach of fiduciary
duty as a director; provided, however, that the foregoing shall not eliminate or
limit the liability of a director (i) for any breach of the director's duty of
loyalty to the Corporation or its stockholders, (ii) for acts or omissions not
in good faith or which involve intentional misconduct or a knowing violation of
law, (iii) under Section 174 of the Delaware General Corporation Law, or (iv)
for any transaction from which the director derived an improper personal
benefit. If the Delaware General Corporation Law is hereafter amended to permit
further elimination or limitation of the personal liability of directors, then
the liability of a director of the Corporation shall be eliminated or limited to
the fullest extent permitted by the Delaware General Corporation Law as so
amended. Any repeal or modification of this Article Tenth shall not adversely
affect any right or protection of a director of the Corporation existing at the
time of such repeal or modification.
ELEVENTH: Whenever a compromise or arrangement is proposed between this
Corporation and its creditors or any class of them or between this Corporation
and its stockholders or any class of them, any court of equitable jurisdiction
within the State of Delaware may, on the application in a summary way of this
Corporation or of any creditor or stockholder thereof or on the application of
any receiver or receivers appointed for this Corporation under the provisions of
Section 291 of the Delaware General Corporation Law or on the application of
trustees in dissolution or of any receiver or receivers appointed for this
Corporation under the provisions of Section 279 of the Delaware General
Corporation Law,
-8-
<PAGE>
order a meeting of the creditors or class of creditors, or of the stockholders
or class of stockholders of this Corporation, as the case may be, to be summoned
in such manner as the said court directs. If a majority in number representing
three-fourths in value of the creditors or class of creditors, or of the
stockholders or class of stockholders of this Corporation, as the case may be,
agree to any compromise or arrangement and to any reorganization of this
Corporation as a consequence of such compromise or arrangement, the said
compromise or arrangement and the said reorganization shall, if sanctioned by
the court to which said application has been made, be binding on all the
creditors or class of creditors, or on all of the stockholders or class of
stockholders, of this Corporation, as the case may be, and also on this
Corporation.
TWELFTH:
A. As used in this Article Twelfth, the following terms shall have
the meanings set forth below:
"Business Combination" shall mean (a) any merger or consolidation of
the Corporation or a Subsidiary with a Related Person, (b) 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
the Corporation or a Subsidiary having an aggregate fair market value of
[$25,000,000] or more, (c) the issuance or transfer by the Corporation of
any shares of Voting Stock or securities convertible into or exercisable
for such shares (other than by way of pro rata distribution to all
stockholders) to a Related Person, (d) any recapitalization, merger or
consolidation that would have the effect of increasing the voting power of
a Related Person, (e) the adoption of any plan or proposal for the
liquidation or dissolution of the Corporation or a Subsidiary proposed,
directly or indirectly, by or on behalf of a Related Person, (f) any merger
or consolidation of the Corporation 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 this Article Twelfth or (g)
any agreement, contract or other arrangement or understanding providing,
directly or indirectly, for any of the transactions described in clauses
(a) through (f) above.
"Related Person" shall mean 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 Voting Stock, "beneficially
owns" (within the meaning of Rule 13d-3 under the Exchange Act on said
date) an aggregate of 10% or more of the outstanding Voting Stock. 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, shall be deemed a single Related Person for purposes of this
Article Twelfth; provided, however, that the members of the Board of
Directors of the Corporation 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 as of (i) the time any
definitive
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agreement relating to a Business Combination is entered into, (ii) the
record date for the determination of stockholders entitled to notice of and
to vote on a Business Combination or (iii) immediately prior to the
consummation of a Business Combination, shall be deemed a Related Person
for purposes of this Article Twelfth.
"Continuing Director" shall mean any member of the Board of Directors
of the Corporation who is not an "affiliate" or "associate" of the Related
Person and was a member of the Board of Directors prior to the time that
such Related 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.
"Person" shall mean any individual, firm, corporation or other entity.
"Subsidiary" shall mean with respect to any Person, (i) any
corporation in which such Person, directly or indirectly, owns or controls,
at the time of determination, at least a majority in interest of the
outstanding voting stock (having by the terms thereof voting power under
ordinary circumstances to elect a majority of the directors of such
corporation, irrespective of whether or not stock of any other class or
classes of such corporation shall have or might have voting power by reason
of the occurrence of a contingency); or (ii) any non-corporate entity in
which such Person either (a) directly or indirectly, at the time of
determination, has at least a majority ownership interest, or (b) at the
date of determination, is a general partner or an entity performing similar
functions (for example, manager of a limited liability company or a trustee
of a trust).
"Voting Stock" shall mean any shares of the Corporation entitled to
vote generally in the election of directors.
"Entire Board of Directors" shall mean the total number of directors
which the Corporation would have if there were no vacancies.
"Market Value" shall mean the average of the high- and low-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 Composite Tape for the New York Stock Exchange Listed
Stocks, 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 low-asked
quotations with respect to a share on such date as quoted on the National
Association of Securities Dealers Automated Quotations System, or 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.
B. In addition to any other vote required by this Certificate of
Incorporation or the Delaware General Corporation Law, the affirmative vote of
the holders of not less than 85% of the outstanding Voting Stock held by
stockholders other than a Related Person by or with whom or on whose behalf,
directly or indirectly, a Business
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Combination is proposed, voting as a single class, shall be required for the
approval or authorization of such Business Combination; provided, however, that
the 85% voting requirement shall not be applicable and such Business Combination
may be approved by the vote required by law or by any other provision of this
Certificate of Incorporation if either:
1. The Business Combination is approved by the Board of Directors of
the Corporation by the affirmative vote of at least 66 2/3% of the Continuing
Directors, or
2. All of the following conditions are satisfied:
(A) 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 the Corporation in the Business Combination by the
holders of capital stock of the Corporation, other than the Related
Person involved in the Business Combination, shall not be less than the
highest of (i) the highest per share price (including brokerage
commissions, soliciting dealers' fees, and dealer-management
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, (ii) 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 (iii) 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;
(B) The consideration to be received in such Business Combination by
holders of capital stock other than the Related Person involved shall,
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 shall either
be cash or the form used to acquire the largest number of shares of
capital stock previously acquired by it; and
(C) A proxy statement responsive to the requirements of the Exchange
Act and regulations promulgated thereunder, whether or not the
Corporation is then subject to such requirements, shall be mailed to the
stockholders of the Corporation for the purpose of soliciting
stockholder approval of such Business Combination and shall contain at
the front thereof, in a prominent place, (i) any recommendations as to
the advisability (or inadvisability) of the Business Combination which
the Continuing Directors may choose to state and (ii) 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
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financial point of view, to the stockholders (other than the Related
Person) of the Corporation.
C. A Related Person shall be deemed for purposes of this Article
Twelfth to have acquired a share of the Corporation at the time when
such Related Person became the beneficial owner thereof (as such term is
defined in paragraph A of this Article Twelfth). With respect to shares
owned by affiliates, associates and other Persons whose ownership is
attributed to a Related Person, if the price paid by such Related Person
for such shares is not determinable, the price so paid shall be deemed
to be the higher of (i) the price paid upon acquisition thereof by the
affiliate, associate or other Person or (ii) the Market Value of the
shares in question at the time when the Related Person became the
beneficial owner thereof.
For purposes of this Article Twelfth, in the event of a Business
Combination upon consummation of which the Corporation would be the
surviving corporation or would continue to exist (unless it is provided,
contemplated or intended that as part of such Business Combination a
plan of liquidation or dissolution of the Corporation will be effected),
the term "other consideration to be received" in paragraph B.2.(A) of
this Article Twelfth shall include (without limitation) common stock or
other capital stock of the Corporation retained by stockholders of the
Corporation (other than Related Persons who are parties to such Business
Combination).
Nothing contained in this Article Twelfth shall be construed to
relieve any Related Person from any fiduciary obligation imposed by law.
D. Notwithstanding any other provision of this Certificate of
Incorporation or the By-Laws of the Corporation (and notwithstanding the
fact that a lesser percentage may be permitted by law), any amendment,
addition, alteration, change or repeal of this Article Twelfth, or any
other amendment of this Certificate of Incorporation or the By-Laws of
the Corporation inconsistent with or modifying or permitting
circumvention of this Article Twelfth, must first be proposed by the
Board of Directors of the Corporation, upon the affirmative vote of at
least 66 2/3% of the directors then in office at a duly constituted
meeting of the Board of Directors called for such purpose, and
thereafter approved by the affirmative vote of the holders of not less
than 85% of the then outstanding Voting Stock held by stockholders other
than a Related Person by or with whom or on whose behalf, directly or
indirectly, a Business Combination is proposed, voting as a single
class; provided, however, that this paragraph D shall not apply to, and
such 85% vote shall not be required for, any such amendment, addition,
alteration, change or repeal recommended to stockholders of the
Corporation by the affirmative vote of not less than 66 2/3% of the
Continuing Directors. For the purposes of this paragraph D only, if at
the time when any such amendment, addition, alteration, change or repeal
is under consideration there is no proposed Business Combination, the
term "Continuing Directors" shall mean the Entire Board of Directors.
THIRTEENTH: The Board of Directors, each committee of the Board of
Directors and each individual director, in discharging their respective duties
under applicable law and this Certificate of Incorporation and in determining
what they each believe to be in the best interests
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of the Corporation and its stockholders, may consider the effects, both short-
term and long-term, of any action or proposed action taken or to be taken by the
Corporation, the Board of Directors or any committee of the Board on the
interests of (i) the employees, associates, associated physicians, distributors,
patients or other customers, suppliers or creditors of the Corporation and its
subsidiaries and (ii) the communities in which the Corporation and its
subsidiaries own or lease property or conduct business, all to the extent that
the Board of Directors, any committee of the Board of Directors or any
individual director deems pertinent under the circumstances (including the
possibility that the interests of the Corporation may best be served by the
continued independence of the Corporation); provided, however, that the
provisions of this Article Thirteenth shall not limit in any way the right of
the Board of Directors to consider any other lawful factors in making its
determinations, including, without limitation, the effects, both short-term and
long-term, of any action or proposed action on the Corporation or its
stockholders directly; and provided further, that this Article Thirteenth shall
be deemed solely to grant discretionary authority to the Board of Directors,
each committee of the Board of Directors and each individual director and shall
not be deemed to provide to any specific constituency any right to be
considered.
FOURTEENTH: Each person who was or is made a party or is threatened to be
made a party to or is involved (including, without limitation, as a witness) in
an actual or threatened action, suit or proceeding, whether civil, criminal,
administrative or investigative (hereinafter a "Proceeding"), by reason of the
fact that he or she is or was a director, officer, employee or agent of the
Corporation or is or was serving at the request of the Corporation as a
director, officer, employee or agent of another corporation or of a partnership,
joint venture, trust or other enterprise, including service with respect to an
employee benefit plan (hereinafter an "Indemnitee"), whether the basis of such
proceeding is alleged action in an official capacity as a director, officer,
employee or agent or in any other capacity while serving as such a director,
officer, employee or agent, shall be indemnified and held harmless by the
Corporation to the full extent authorized by the Delaware General Corporation
Law, as the same exists or may hereafter be amended (but, in the case of any
such amendment, only to the extent that such amendment permits the Corporation
to provide broader indemnification rights than said law permitted the
Corporation to provide prior to such amendment), or by other applicable law as
then in effect, against all expense, liability and loss (including attorneys'
fees, judgments, fines, excise taxes under the Employee Retirement Income
Security Act of 1974, as amended from time to time ("ERISA"), penalties and
amounts to be paid in settlement) actually and reasonably incurred or suffered
by such Indemnitee in connection therewith.
A. Procedure. Any indemnification under this Article
Fourteenth (unless ordered by a court) shall be made by the Corporation
only as authorized in the specific case upon a determination that
indemnification of the Indemnitee is proper in the circumstances because
he or she has met the applicable standard of conduct set forth in the
Delaware General Corporation Law, as the same exists or hereafter may be
amended (but, in the case of any such amendment, only to the extent that
such amendment permits the Corporation to provide broader
indemnification rights than said law permitted the Corporation to
provide prior to such amendment). Such determination shall be made (a)
by the Board of Directors by a majority vote of a quorum consisting of
directors who were not parties to such action, suit or proceeding (the
"Disinterested Directors"), or (b)
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if such a quorum of Disinterested Directors is not obtainable, or, even if
obtainable, a quorum of Disinterested Directors so directs, by independent legal
counsel in a written opinion, or (c) by the stockholders.
B. Advances For Expenses. Costs, charges and expenses (including
attorneys' fees) incurred by a director or officer of the Corporation in
defending a civil or criminal action, suit or proceeding shall be paid by the
Corporation in advance of the final disposition of such action, suit or
proceeding upon receipt of an undertaking by or on behalf of the director or
officer to repay all amounts so advanced in the event that it shall ultimately
be determined that such director or officer is not entitled to be indemnified by
the Corporation as authorized in this Article Fourteenth. Such costs, charges
and expenses incurred by other employees and agents may be so paid upon such
terms and conditions, if any, as the majority of the Disinterested Directors
deems appropriate. The majority of the Disinterested Directors may, in the
manner set forth above, and upon approval of such Indemnitee, authorize the
Corporation's counsel to represent such person, in any action, suit or
proceeding, whether or not the Corporation is a party to such action, suit or
proceeding.
C. Procedure for Indemnification. Any indemnification or advance of
costs, charges and expenses under this Article Fourteenth, shall be made
promptly, and in any event within 60 days upon the written request of the
Indemnitee. The right to indemnification or advances as granted by this Article
Fourteenth, shall be enforceable by the Indemnitee in any court of competent
jurisdiction, if the Corporation denies such request, in whole or in part, or if
no disposition thereof is made within 60 days. Such Indemnitee's costs and
expenses incurred in connection with successfully establishing his or her right
to indemnification, in whole or in part, in any such action shall also be
indemnified by the Corporation. It shall be a defense to any such action (other
than an action brought to enforce a claim for the advance of costs, charges and
expenses under this Article Fourteenth, where the required undertaking, if any,
has been received by the Corporation) that the Indemnitee has not met the
standard of conduct set forth in the Delaware General Corporation Law, as the
same exists or hereafter may be amended (but, in the case of any such amendment,
only to the extent that such amendment permits the Corporation to provide
broader indemnification rights than said law permitted the Corporation to
provide prior to such amendment), but the burden of proving such defense shall
be on the Corporation. Neither the failure of the Corporation (including its
Board of Directors, its independent legal counsel and its stockholders) to have
made a determination prior to the commencement of such action that
indemnification of the Indemnitee is proper in the circumstances because he or
she has met the applicable standard of conduct set forth in the Delaware General
Corporation Law, as the same exists or hereafter may be amended (but, in the
case of any such amendment, only to the extent that such amendment permits the
Corporation to provide broader indemnification rights that said law permitted
the Corporation to provide prior to such amendment), nor the fact that there has
been an actual determination by the Corporation (including its Board of
Directors, its independent legal counsel and its stockholders) that the
Indemnitee has not met such applicable standard of conduct, shall be a defense
to the action or create a presumption that the Indemnitee has not met the
applicable standard of conduct.
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D. Other Rights; Continuation of Right to Indemnification. The
indemnification and advancement of expenses provided by this Article Fourteenth
shall not be deemed exclusive of any other rights to which a person seeking
indemnification or advancement of expenses may be entitled under any law, by-
law, agreement, vote of stockholders or disinterested directors or otherwise,
both as to action in his or her official capacity and as to action in another
capacity while holding office or while employed by or acting as agent for the
Corporation, and shall continue as to a person who has ceased to be a director,
officer, employee or agent, and shall inure to the benefit of the estate, heirs,
executors and administrators of such person. All rights to indemnification
under this Article Fourteenth, shall be deemed to be a contract between the
Corporation and each director, officer, employee or agent of the Corporation who
serves or served in such capacity at any time while this Article Fourteenth, is
in effect. Any repeal or modification of this Article Fourteenth, or any repeal
or modification of relevant provisions of the Delaware General Corporation Law
or any other applicable laws shall not in any way diminish any rights to
indemnification of such director, officer, employee or agent or the obligations
of the Corporation arising hereunder with respect to any action, suit or
proceeding arising out of, or relating to, any actions, transactions or facts
occurring prior to the final adoption of such modification or repeal. For the
purposes of this Article Fourteenth, references to "the Corporation" include all
constituent corporations absorbed in a consolidation or merger as well as the
resulting or surviving corporation, so that any person who is or was a director,
officer, employee or agent of such a constituent corporation or is or was
serving at the request of such constituent corporation as a director, officer,
employee or agent of another corporation, partnership, joint venture, trust or
other enterprise shall stand in the same position under the provisions of this
Article Fourteenth, with respect to the resulting or surviving corporation, as
he would if he or she had served the resulting or surviving corporation in the
same capacity.
E. Insurance. The Corporation shall have power to purchase and maintain
insurance on behalf of any person who is or was or has agreed to become a
director, officer, employee or agent of the Corporation, or is or was serving at
the request of the Corporation as a director, officer, employee or agent of
another corporation, partnership, joint venture, trust or other enterprise
against any liability asserted against him or her and incurred by him or her or
on his or her behalf in any such capacity, or arising out of his or her status
as such, whether or not the Corporation would have the power to indemnify him or
her against such liability under the provisions of this Article Fourteenth;
provided, however, that such insurance is available on acceptable terms, which
determination shall be made by a vote of a majority of the Board of Directors.
F. Savings Clause. If this Article Fourteenth, or any portion hereof
shall be invalidated on any ground by any court of competent jurisdiction, then
the Corporation shall nevertheless indemnify each person entitled to
indemnification under paragraph A of this Article Fourteenth, as to all expense,
liability and loss (including attorneys' fees, judgments, fines, ERISA excise
taxes, penalties and amounts to be paid in settlement) actually and reasonably
incurred or suffered by such person and for which indemnification is available
to such person pursuant to this Article Fourteenth, to the full extent permitted
by any applicable portion of this Article Fourteenth, that shall not have been
invalidated and to the full extent permitted by applicable law.
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FIFTEENTH: In furtherance and not in limitation of the powers conferred by
law or in this Certificate of Incorporation, the Board of Directors (and any
committee of the Board of Directors) is expressly authorized, to the extent
permitted by law, to take such action or actions as the Board or such committee
may determine to be reasonably necessary or desirable to (A) encourage any
person to enter into negotiations with the Board of Directors and management of
the Corporation with respect to any transaction which may result in a change in
control of the Corporation which is proposed or initiated by such person or (B)
contest or oppose any such transaction which the Board of Directors or such
committee determines to be unfair, abusive or otherwise undesirable with respect
to the Corporation and its business, assets or properties or the stockholders of
the Corporation, including, without limitation, the adoption of such plans or
the issuance of such rights, options, capital stock, notes, debentures or other
evidences of indebtedness or other securities of the Corporation, which rights,
options, capital stock, notes, evidences of indebtedness and other securities
(i) may be exchangeable for or convertible into cash or other securities on such
terms and conditions as may be determined by the Board or such committee and
(ii) may provide for the treatment of any holder or class of holders thereof
designated by the Board of Directors or any such committee in respect of the
terms, conditions, provisions and rights of such securities which is different
from, and unequal to, the terms, conditions, provisions and rights applicable to
all other holders thereof.
SIXTEENTH: The Corporation reserves the right to amend, alter, change or
repeal any provision contained in this Certificate of Incorporation, and to add
or adopt new provisions, in the manner now or hereafter prescribed by statute,
and all rights conferred upon stockholders herein are granted subject to this
reservation. In addition to any affirmative vote required by applicable law or
any other provision of this Certificate of Incorporation or specified in any
agreement, and in addition to any voting rights granted to or held by the
holders of any series of Preferred Stock, the affirmative vote of the holders of
not less than 80% of the voting power of all securities of the Corporation
entitled to vote generally in the election of directors shall be required to
amend, alter, change or repeal, or to add or adopt any provisions inconsistent
with, Articles Fifth, Sixth, Seventh, Eight, Tenth, Eleventh, Thirteenth,
Fourteenth, Fifteenth and Sixteenth of this Certificate of Incorporation.
SEVENTEENTH: The name and mailing address of the incorporator is Frank R.
Adams, Esq., Dewey Ballantine LLP, 1301 Avenue of the Americas, New York, New
York 10019.
IN WITNESS WHEREOF, the undersigned incorporator hereby acknowledges
that the foregoing certificate of incorporation is his act and deed and that the
facts stated therein are true on this __ day of ________, 1999.
By:
----------------------------
Frank R. Adams
Incorporator
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EXHIBIT 3.2
BY-LAWS
OF
LIFEPOINT HOSPITALS, INC.
______________
DELAWARE
================================================================================
<PAGE>
ARTICLE I
OFFICES
SECTION 1. REGISTERED OFFICE.
The registered office of the Corporation shall be within the State of
Delaware in the City of Wilmington, County of New Castle.
SECTION 2. OTHER OFFICES.
The Corporation may also have an office or offices other than said
registered office at such place or places, either within or without the State of
Delaware, as the Board of Directors shall from time to time determine or the
business of the Corporation may require.
ARTICLE II
MEETINGS OF STOCKHOLDERS
SECTION 1. PLACE OF MEETINGS.
All meetings of the stockholders for the election of directors or for
any other purpose shall be held at any such place, either within or without the
State of Delaware, as shall be designated from time to time by the Board of
Directors and stated in the notice of meeting or in a duly executed waiver
thereof.
SECTION 2. ANNUAL MEETING.
The annual meeting of stockholders shall be held at such date and time
as shall be designated from time to time by the Board of Directors and stated in
the notice of meeting or in a duly executed waiver thereof. At such annual
meeting, the stockholders shall elect, by a plurality vote, members of a Board
of Directors and transact such other business as may properly be brought before
the meeting.
SECTION 3. SPECIAL MEETINGS.
Special meetings of the stockholders of the Corporation may be called
only by (a) the Chairman of the Board of Directors, if one shall have been
elected or (b) the Chief Executive Officer of the Corporation, and, in addition,
a special meeting shall be called by the Chairman of the Board or the Chief
Executive Officer at the request in writing of a majority of the Board of
Directors. The ability of the stockholders to call a special meeting is hereby
specifically denied.
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SECTION 4. NOTICE OF MEETINGS.
Except as otherwise expressly required by statute, written notice of
each annual and special meeting of stockholders stating the date, place and hour
of the meeting, and, in the case of a special meeting, the purpose or purposes
for which the meeting is called, shall be given to each stockholder of record
entitled to vote thereat not less than ten nor more than sixty days before the
date of the meeting. Business transacted at any special meeting of stockholders
shall be limited to the purposes stated in the notice. Notice shall be given
personally or by mail and, if by mail, shall be sent in a postage prepaid
envelope, addressed to the stockholder at the address appearing on the records
of the Corporation. Notice by mail shall be deemed given at the time when the
same shall be deposited in the United States mail, postage prepaid. Notice of
any meeting shall not be required to be to any person who attends such meeting,
except when such person attends the meeting in person or by proxy for the
express purpose of objecting, at the beginning of the meeting, to the
transaction of any business because the meeting is not lawfully called or
convened, or who, either before or after the meeting, shall submit a signed
written waiver of notice, in person or by proxy. Neither the business to be
transacted at, nor the purpose of, an annual or special meeting of stockholders
need be specified in any written waiver of notice.
SECTION 5. LIST OF STOCKHOLDERS.
The officer who has charge of the stock ledger of the Corporation
shall prepare and make, at least ten days before each meeting of stockholders, a
complete list of the stockholders entitled to vote at the meeting, arranged in
alphabetical order, showing the address of and the number of shares registered
in the name of each stockholder. Such list shall be open to the examination of
any stockholder, for any purpose germane to the meeting, during ordinary
business hours, for a period of at least ten days prior to the meeting, either
at a place within the city, town or village where the meeting is to be held,
which place shall be specified in the notice of meeting, or, if not specified,
at the place where the meeting is to be held. The list shall be produced and
kept at the time and place of the meeting during the whole time thereof, and may
be inspected by any stockholder who is present.
SECTION 6. QUORUM.
The holders of a majority of the voting power of the issued and
outstanding stock of the Corporation entitled to vote thereat, present in person
or represented by proxy, shall constitute a quorum for the transaction of
business at all meetings of stockholders, except as otherwise provided by
statute or by the Certificate of Incorporation. If, however, such quorum shall
not be present or represented by proxy at any meeting of stockholders, the
stockholders entitled to vote thereat, present in person or represented by
proxy, shall have the power to adjourn the meeting from time to time, without
notice other than announcement at the meeting, until a quorum shall be present
or represented by proxy. At such adjourned meeting at which a quorum shall be
present or represented by proxy, any business may be transacted which might have
been transacted at the meeting as originally called. If the adjournment is for
more than thirty days, or, if
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after adjournment a new record date is set, a notice of the adjourned meeting
shall be given to each stockholder of record entitled to vote at the meeting.
SECTION 7. ORGANIZATION.
At each meeting of stockholders, the Chairman of the Board, if one
shall have been elected, or, in his or her absence or if one shall not have been
elected, the Chief Executive Officer, shall act as chairman of the meeting. The
Secretary or, in his or her absence or inability to act, the person whom the
chairman of the meeting shall appoint secretary of the meeting, shall act as
secretary of the meeting and keep the minutes thereof.
SECTION 8. ORDER OF BUSINESS.
The order of business at all meetings of the stockholders shall be as
determined by the chairman of the meeting,
SECTION 9. VOTING.
Except as otherwise provided by statute or the Certificate of
Incorporation, each stockholder of the Corporation shall be entitled at each
meeting of stockholders to one vote for each share of capital stock of the
Corporation standing in his or her name on the record of stockholders of the
Corporation:
(a) on the date fixed pursuant to the provisions of Section 7 of
Article V of these By-Laws as the record date for the determination of the
stockholders who shall be entitled to notice of and to vote at such
meeting; or
(b) if no such record date shall have been so fixed, then at the close
of business on the day next preceding the day on which notice thereof shall
be given.
Each stockholder entitled to vote at any meeting of stockholders may authorize
another person or persons to act for him or her by a proxy signed by such
stockholder or his or her attorney-in-fact, but no proxy shall be voted after
three years from its date, unless the proxy provides for a longer period. Any
such proxy shall be delivered to the secretary of the meeting at or prior to the
time designated in the order of business for so delivering such proxies. Any
copy, facsimile telecommunication or other reliable reproduction of the writing
or transmission created pursuant to this paragraph may be substituted or used in
lieu of the original writing or transmission for any and all purposes for which
the original writing or transmission could be used, provided that such copy,
facsimile telecommunication or other reproduction shall be a complete
reproduction of the entire original writing or transmission.
When a quorum is present at any meeting, the vote of the holders of a
majority of the voting power of the issued and outstanding stock of the
Corporation entitled to vote thereon, present in person or represented by proxy,
shall decide any question brought before such meeting, unless the question is
one upon which by express provision of statute or of the Certificate of
Incorporation or of these By-Laws, a different
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vote is required, in which case such express provision shall, govern and control
the decision of such question. Unless required by statute, or determined by the
chairman of the meeting to be advisable, the vote on any question need not be by
ballot. On a vote by ballot, each ballot shall be signed by the stockholder
voting, or by his or her proxy, and shall state the number of shares voted.
SECTION 10. INSPECTORS.
The Board of Directors shall, in advance of any meeting of
stockholders, appoint one or more inspectors to act at such meeting or any
adjournment thereof and make a written report thereof. If any of the inspectors
so appointed shall fail to appear or shall be unable to act, the chairman of the
meeting shall appoint one or more inspectors. Each inspector, before entering
upon the discharge of his or her duties, shall take and sign an oath faithfully
to execute the duties of inspector at such meeting with strict impartiality and
according to the best of his or her ability. The inspectors shall ascertain the
number of shares of capital stock of the Corporation outstanding and the voting
power of each, determine the number of shares represented at the meeting and the
validity of proxies and ballots, count all votes and ballots, determine and
retain for a reasonable period a record of the disposition of any challenges
made to any determination by the inspectors and certify their determination of
the number of shares represented at the meeting and their count of all votes and
ballots. The inspectors may appoint or retain other persons or entities to
assist the inspectors in the performance of the duties of the inspectors. No
director or candidate for the office of director shall act as an inspector of an
election of directors, or assist an inspector in the performance of such duties.
Inspectors need not be stockholders.
SECTION 11. NOMINATIONS AND STOCKHOLDER BUSINESS.
Nominations of persons for election to the Board of Directors and the
proposal of business to be transacted by the stockholders may be made at an
annual meeting of stockholders (a) pursuant to the Corporation's notice with
respect to such meeting, (b) by or at the direction of the Board of Directors or
(c) by any stockholder of record of the Corporation who was a stockholder of
record at the time of the giving of the notice provided for in this Section 11
who is entitled to vote at the meeting and who has complied with the notice
procedures set forth in this Section 11.
For nominations or other business to be properly brought before an
annual meeting by a stockholder pursuant to this Section 11, the stockholder
must have given timely notice thereof in writing to the Secretary of the
Corporation, such business must be a proper matter for stockholder action under
the Delaware General Corporation 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 as hereinafter provided. To be
timely, a stockholder's notice shall be delivered to the Secretary at the
principal executive offices of the Corporation 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
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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 so 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. Such
stockholder's notice shall set forth (a) as to each person whom the stockholder
proposes to nominate for election or reelection as a director all information
relating to such person as would be required to be disclosed in solicitations of
proxies for the election of such nominees as directors pursuant to Regulation
14A under the Securities Exchange Act of 1934, as amended (the "Exchange Act"),
and such person's written consent to serve as a director if elected; (b) 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; (c) as to
the stockholder giving the notice and the beneficial owner, if any, on whose
behalf the nomination or proposal is made (i) the name and address of such
stockholder, as they appear on the Corporation's books, and of such beneficial
owner, (ii) the class and number of shares of the Corporation which are owned
beneficially and of record by such stockholder and such beneficial owner, and
(iii) 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.
Notwithstanding anything in this Section 11 to the contrary, in the
event that the number of directors to be elected to the Board of Directors is
increased and there is no public announcement naming all of the nominees for
director or specifying the size of the increased Board of Directors made by the
Corporation at least 100 days prior to the first anniversary of the preceding
year's annual meeting, a stockholder's notice required by this section shall
also be considered timely, but only with respect to nominees for any new
positions created by such increase, if it shall be delivered to the Secretary at
the principal executive offices of the Corporation not later than the close of
business on the 10th day following the day on which such public announcement is
first made by the Corporation.
Only such business shall be conducted at a special meeting of
stockholders as shall have been brought before the meeting pursuant to the
Corporation's notice of meeting. Nominations of persons for election to the
Board of Directors may be made at a special meeting of stockholders at which
directors are to be elected pursuant to the Corporation's notice of meeting (a)
by or at the direction of the Board of Directors or (b) by any stockholder of
record of the Corporation who is a stockholder of record at the time of giving
of notice provided for in this Section 11 who shall be entitled to vote at the
meeting and who complies with the notice procedures set forth in this Section
11. Nominations by stockholders of persons for election to the Board of
Directors may be made at such a special meeting of stockholders if the
stockholder's notice required by this Section 11 shall be delivered to the
Secretary at the principal executive offices of the Corporation not later than
the close of business on the later of the 90th day prior to such special meeting
or the 10th day following the day on which public announcement is first made of
the date of the special meeting and of the nominees proposed by the Board of
Directors to be elected at such meeting.
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Only persons nominated in accordance with the procedures set forth in
this section shall be eligible to serve as directors and only such business
shall be conducted at a meeting of stockholders as shall have been brought
before the meeting in accordance with the procedures set forth in this Section
11. The officer of the Corporation or other person presiding over the meeting
shall have the power and the duty to determine whether a nomination or any
business proposed to be brought before the meeting has been made in compliance
with the procedures set forth in this Section 11 and, if any proposed nomination
or business is not in compliance with this Section 11, to declare that such
defective proposed business or nomination shall not be presented for stockholder
action at the meeting and shall be disregarded.
For purposes of this section, "public announcement" shall mean
disclosure in a press release reported by the Dow Jones News Service, Associated
Press or a comparable national news service or in a document publicly filed by
the Corporation with the Securities and Exchange Commission pursuant to Section
13, 14 or 15(d) of the Exchange Act.
Notwithstanding the foregoing provisions of this section, a
stockholder shall also comply with all applicable requirements of the Exchange
Act and the rules and regulations thereunder with respect to matters set forth
in this Section 11. Nothing in this Section 11 shall be deemed to affect any
rights of stockholders to request inclusion of proposals in the Corporation's
proxy statement pursuant to Rule 14a-8 under the Exchange Act.
SECTION 12. ADJOURNMENTS.
Any meeting of stockholders may be adjourned from time to time,
whether or not a quorum is present, by the affirmative vote of a majority of the
votes present and entitled to be cast at the meeting, or by the officer of the
Corporation presiding over the meeting, or by the Board of Directors.
ARTICLE III
BOARD OF DIRECTORS
SECTION 1. PLACE OF MEETINGS.
Meetings of the Board of Directors shall be held at such place or
places, within or without the State of Delaware, as the Board of Directors may
from time to time determine or as shall be specified in the notice of any such
meeting.
SECTION 2. ANNUAL MEETING.
The Board of Directors shall meet for the purpose of organization, the
election of officers and the transaction of other business, as soon as
practicable after each annual meeting of stockholders, on the same day and at
the same place where such annual meeting shall be held. Notice of such meeting
need not be given. In the event such annual meeting is not so held, the annual
meeting of the Board of Directors may be held
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at such other time or place (within or without the State of Delaware) as shall
be specified in a notice thereof given as hereinafter provided in Section 5 of
this Article III.
SECTION 3. REGULAR MEETINGS.
Regular meetings of the Board of Directors shall be held at such time
and place as the Board of Directors may fix. If any day fixed for a regular
meeting shall be a legal holiday at the place where the meeting is to be held,
then the meeting which would otherwise be held on that day shall be held at the
same hour on the next succeeding business day (unless the Chairman of the Board
determines otherwise). Notice of regular meetings of the Board of Directors
need not be given except as otherwise required by statute or these By-Laws.
SECTION 4. SPECIAL MEETINGS.
Special meetings of the Board of Directors may be called by the
Chairman of the Board, if one shall have been elected, by two or more directors
of the Corporation or by the Chief Executive Officer.
SECTION 5. NOTICE OF MEETINGS.
Notice of each special meeting of the Board of Directors (and of each
regular meeting for which notice shall be required) shall be given by the
Secretary as hereinafter provided in this Section 5, in which notice shall be
stated the time and place of the meeting. Except as otherwise required by these
By-Laws, such notice need not state the purposes of such meeting. Notice of
each such meeting shall be sent to each director, addressed to such director at
his or her residence or usual place of business, by telegraph, cable, telex,
telecopier or other similar means, or be delivered to him or her personally or
be given to him or her by telephone or other similar means, at least two hours
before the time at which such meeting is to be held. Notice of any such meeting
need not be given to any director who shall, either before or after the meeting,
submit a signed waiver of notice or who shall attend such meeting, except when
he or she shall attend for the express purpose of objecting, at the beginning of
the meeting, to the transaction of any business because the meeting is not
lawfully called or convened.
SECTION 6. QUORUM AND MANNER OF ACTING.
A majority of the entire Board of Directors shall constitute a quorum
for the transaction of business at any meeting of the Board of Directors, and,
except as otherwise expressly required by statute, the Certificate of
Incorporation or these By-Laws, the act of a majority of the directors present
at any meeting at which a quorum is present shall be the act of the Board of
Directors. In the absence of a quorum at any meeting of the Board of Directors,
a majority of the directors present thereat may adjourn such meeting to another
time and place. Notice of the time and place of any such adjourned meeting
shall be given to all of the directors unless such time and place were announced
at the meeting at which the adjournment was taken, in which case such notice
shall only be given to the directors who were not present thereat. At any
adjourned meeting at which a quorum is present, any business may be transacted
which might have
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been transacted at the meeting as originally called. The directors shall act
only as a Board and the individual directors shall have no power as such.
SECTION 7. ORGANIZATION.
At each meeting of the Board of Directors, the Chairman of the Board,
if one shall have been elected, or, in the absence of the Chairman of the Board
or if one shall not have been elected, another director chosen by a majority of
the directors present, shall act as chairman of the meeting and preside thereat.
The Secretary or, in his or her absence or if one shall not have been elected,
any person appointed by the chairman of the meeting, shall act as secretary of
the meeting and keep the minutes thereof.
SECTION 8. RESIGNATIONS.
Any director of the Corporation may resign at any time by giving
written notice of his or her resignation to the Corporation. Any such
resignation shall take effect at the time specified therein or, if the time when
it shall become effective shall not be specified therein, immediately upon its
receipt by the Corporation. Unless otherwise specified therein, the acceptance
of such resignation shall not be necessary to make it effective.
SECTION 9. COMPENSATION.
The Board of Directors shall have authority to fix the compensation,
including fees and reimbursement of expenses, of directors for services to the
Corporation in any capacity.
SECTION 10. COMMITTEES.
The Board of Directors may, by resolution passed by a majority of the
entire Board of Directors, designate one or more committees, including an
executive committee, each committee to consist of one or more of the directors
of the Corporation. The Board of Directors may designate one or more directors
as alternate members of any committee, who may replace any absent or
disqualified member at any meeting of the committee. In addition, in the
absence or disqualification of a member of a committee, the member or members
thereof present at any meeting and not disqualified from voting, whether or not
he or she or they constitute a quorum, may unanimously appoint another member of
the Board of Directors to act at the meeting in the place of any such absent or
disqualified member.
Except to the extent restricted by statute or the Certificate of
Incorporation, each such committee, to the extent provided in the resolution
creating it, shall have and may exercise all the powers and authority of the
Board of Directors. Each such committee shall serve at the pleasure of the
Board of Directors and have such name as may be determined from time to time by
resolution adopted by the Board of Directors. Each committee shall keep regular
minutes of its meetings and report the same to the Board of Directors.
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SECTION 11. ACTION BY CONSENT.
Unless restricted by the Certificate of Incorporation, any action
required or permitted to be taken by the Board of Directors or any committee
thereof may be taken without a meeting if all members of the Board of Directors
or such committee, as the case may be, consent thereto in writing and the
writing or writings are filed with the minutes of the proceedings of the Board
of Directors or such committee, as the case may be.
SECTION 12. TELEPHONIC MEETINGS.
Any one or more members of the Board of Directors or any committee
thereof may participate in a meeting of the Board of Directors or such committee
by means of a conference telephone or similar communications equipment by means
of which all persons participating in the meeting can hear each other.
Participation by such means shall constitute presence in person at a meeting.
SECTION 13. MANDATORY RETIREMENT POLICY FOR DIRECTORS.
No person shall be nominated to a term of office on the Board of
Directors who has attained the age of 70 or more before the first day of the
proposed term of office.
ARTICLE IV
OFFICERS
SECTION 1. NUMBER AND QUALIFICATIONS.
The officers of the Corporation shall be elected by the Board of
Directors and shall include the Chairman of the Board, the Chief Executive
Officer (who also shall be the President), one or more Vice Presidents
(including Senior or Executive Vice Presidents or other classifications of Vice
Presidents), the Secretary and the Treasurer. If the Board of Directors wishes,
it may also elect other officers (including one or more Assistant Treasurers and
one or more Assistant Secretaries) as may be necessary or desirable for the
business of the Corporation. Any two or more offices may be held by the same
person, and no officer except the Chairman of the Board need be a director.
Each officer shall hold office until his or her successor shall have been duly
elected and shall have qualified, or until his or her death, or until he or she
shall have resigned or have been removed or disqualified, as hereinafter
provided in these By-Laws.
SECTION 2. RESIGNATION AND REMOVAL.
Any officer of the Corporation may resign at any time by giving
written notice of his or her resignation to the Corporation. Any such
resignation shall take effect at the time specified therein or, if the time when
it shall become effective shall not be specified therein, immediately upon
receipt by the Corporation. Unless otherwise specified therein, the acceptance
of any such resignation shall not be necessary to make it effective.
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Any officer of the Corporation may be removed, either with or without
cause, at any time, by the Board of Directors at any meeting thereof.
SECTION 3. VACANCIES.
The Board of Directors may fill any vacancy occurring in any office
for any reason and may, in its discretion, leave unfilled for such period as it
may determine any offices other than those of President, Treasurer and
Secretary. Each successor shall hold office for the unexpired term of his
predecessor and until his successor is elected and qualified, or until his
earlier death, resignation or removal.
SECTION 4. CHAIRMAN OF THE BOARD.
The Chairman of the Board shall be elected from among the members of
the Board. If present, he or she shall preside at all meetings of the Board of
Directors and stockholders. He or she shall advise and counsel with the Chief
Executive Officer, and in his or her absence with other executives of the
Corporation, and shall perform such other duties as may from time to time be
assigned to him or her by the Board of Directors.
SECTION 5. CHIEF EXECUTIVE OFFICER.
The Chief Executive Officer also shall serve as the President and,
subject to the Board of Directors, he or she shall have general executive
charge, management, and control of the properties and operations of the
Corporation in the ordinary course of its business, with all such powers with
respect to such properties and operations as may be reasonably incident to such
responsibilities. If the Board of Directors has not elected a Chairman or in
the absence or inability to act of the Chairman of the Board, the Chief
Executive Officer shall exercise all of the powers and discharge all of the
duties of the Chairman of the Board.
SECTION 6. VICE PRESIDENT.
Each Vice President shall perform all such duties as from time to time
may be assigned to him or her by the Board of Directors, the Chairman of the
Board or the Chief Executive Officer. At the request of the Chief Executive
Officer or in his or her absence or in the event of his or her inability or
refusal to act, the Vice President, or if there shall be more than one, the Vice
Presidents in the order determined by the Board of Directors (or if there be no
such determination, then the Vice Presidents in the order of their election),
shall perform the duties of the Chief Executive Officer, and, when so acting,
shall have the powers of and be subject to the restrictions placed upon the
Chief Executive Officer.
SECTION 7. TREASURER.
The Treasurer shall:
(a) have charge and custody of, and be responsible for, all the funds
and securities of the Corporation;
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(b) keep full and accurate accounts of receipts and disbursements in
books belonging to the Corporation;
(c) deposit all moneys and other valuables to the credit of the
Corporation in such depositaries as may be designated by the Board of
Directors or pursuant to its direction;
(d) receive, and give receipts for, moneys due and payable to the
Corporation from any source whatsoever;
(e) disburse the funds of the Corporation and supervise the investment
of its funds, taking proper vouchers therefor;
(f) render to the Board of Directors, whenever the Board of Directors
may require, an account of the financial condition of the Corporation; and
(g) in general, perform all duties incident to the office of Treasurer
and such other duties as from time to time may be assigned to him or her by
the Board of Directors, the Chairman of the Board or the Chief Executive
Officer.
SECTION 8. SECRETARY.
The Secretary shall
(a) keep or cause to be kept in one or more books provided for the
purpose, the minutes of all meetings of the Board of Directors, the
committees of the Board of Directors and the stockholders;
(b) see that all notices are duly given in accordance with the
provisions of these By-Laws and as required by law;
(c) be custodian of the records and the seal of the Corporation and
affix and attest the seal to all certificates for shares of the Corporation
(unless the seal of the Corporation on such certificates shall be a
facsimile, as hereinafter provided) and affix and attest the seal to all
other documents to be executed on behalf of the Corporation under its seal;
(d) see that the books, reports, statements, certificates and other
documents and records required by law to be kept and filed are properly
kept and filed; and
(e) in general, perform all duties incident to the office of Secretary
and such other duties as from time to time may be assigned to him or her by
the Board of Directors, the Chairman of the Board or the Chief Executive
Officer.
In the absence of the Secretary at any meeting of the Board of
Directors, a committee of the Board of Directors or the stockholders, the
person presiding at the meeting shall designate a temporary secretary to keep a
record of the meeting.
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SECTION 9. ASSISTANT TREASURER.
The Assistant Treasurer, or if there shall be more than one, the
Assistant Treasurers in the order determined by the Board of Directors (or if
there be no such determination, then in the order of their election), shall, in
the absence of the Treasurer or in the event of his or her inability or refusal
to act, perform the duties and exercise the powers of the Treasurer and shall
perform such other duties as from time to time may be assigned by the Board of
Directors, the Chairman of the Board, the Chief Executive Officer or the
Treasurer.
SECTION 10. ASSISTANT SECRETARY.
The Assistant Secretary, or if there shall be more than one, the
Assistant Secretaries in the order determined by the Board of Directors (or if
there be no such determination, then in the order of their election), shall, in
the absence of the Secretary or in the event of his or her inability or refusal
to act, perform the duties and exercise the powers of the Secretary and shall
perform such other duties as from time to time may be assigned by the Board of
Directors, the Chairman of the Board, the Chief Executive Officer or the
Secretary.
SECTION 11. OFFICERS' BONDS OR OTHER SECURITY.
If required by the Board of Directors, any officer of the Corporation
shall give a bond or other security for the faithful performance of his or her
duties, in such amount and with such surety as the Board of Directors may
require.
SECTION 12. COMPENSATION.
The compensation of the officers of the Corporation for their services
as such officers shall be fixed from time to time by the Board of Directors. An
officer of the Corporation shall not be prevented from receiving compensation by
reason of the fact that he or she is also a director of the Corporation.
ARTICLE V
STOCK CERTIFICATES AND THEIR TRANSFER
SECTION 1. STOCK CERTIFICATES.
Every holder of stock in the Corporation shall be entitled to have a
certificate signed by, or in the name of the Corporation by, the Chairman of the
Board, the Chief Executive Officer or a Vice President and by the Treasurer or
an Assistant Treasurer or the Secretary or an Assistant Secretary of the
Corporation, certifying the number of shares owned by him or her in the
Corporation. If the Corporation shall be authorized to issue more than one
class of stock or more than one series of any class, the designations,
preferences and relative, participating, optional or other special rights of
each class of stock or series thereof and the qualifications, limitations or
restrictions of such preferences or rights shall be set forth in full or
summarized on the face or back of
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the certificate which the Corporation shall issue to represent such class or
series of stock, provided that, except as otherwise provided in Section 202 of
the Delaware General Corporation Law, in lieu of the foregoing requirements,
there may be set forth on the face or back of the certificate which the
Corporation shall issue to represent such class or series of stock, a statement
that the Corporation will furnish without charge to each stockholder who so
requests the designations, preferences and relative, participating, optional or
other special rights of each class of stock or series thereof and the
qualifications, limitations or restrictions of such preferences or rights.
SECTION 2. FACSIMILE SIGNATURES.
Any or all of the signatures on a certificate may be a facsimile. In
case any officer, transfer agent or registrar who has signed or whose facsimile
signature has been placed upon a certificate shall have ceased to be such
officer, transfer agent or registrar before such certificate is issued, it may
be issued by the Corporation with the same effect as if he, she or it were such
officer, transfer agent or registrar at the date of issue.
SECTION 3. LOST CERTIFICATES.
The Board of Directors may direct a new certificate or certificates to
be issued in place of any certificate or certificates theretofore issued by the
Corporation alleged to have been lost, stolen, or destroyed. When authorizing
such issue of a new certificate or certificates, the Board of Directors may, in
its discretion and as a condition precedent to the issuance thereof, require the
owner of such lost, stolen, or destroyed certificate or certificates, or his or
her legal representative, to give the Corporation a bond in such sum as it may
direct sufficient to indemnify it against any claim that may be made against the
Corporation on account of the alleged loss, theft or destruction of any such
certificate or the issuance of such new certificate.
SECTION 4. TRANSFERS OF STOCK.
Upon surrender to the Corporation or the transfer agent of a
Corporation of a certificate for shares duly endorsed or accompanied by proper
evidence of succession, assignment or authority to transfer, it shall be the
duty of the Corporation to issue a new certificate to the person entitled
thereto, cancel the old certificate and record a transaction upon its records;
provided, however, that the Corporation shall be entitled to recognize and
enforce any lawful restriction on transfer.
SECTION 5. TRANSFER AGENTS AND REGISTRARS.
The Board of Directors may appoint, or authorize any officer or
officers to appoint, one or more transfer agents and one or more registrars.
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SECTION 6. REGULATIONS.
The Board of Directors may make such additional rules and regulations,
not inconsistent with these By-Laws, as it may deem expedient concerning the
issue, transfer and registration of certificates for shares of stock of the
Corporation.
SECTION 7. FIXING THE RECORD DATE.
In order that the Corporation may determine the stockholders entitled
to notice of or to vote at any meeting of stockholders or any adjournment
thereof or entitled to receive payment of any dividend or other distribution or
allotment of any rights, or entitled to exercise any rights in respect of any
change, conversion or exchange of stock or for the purpose of any other lawful
action, the Board of Directors may fix, in advance, a record date, which shall
not be more than sixty nor less than ten days before the date of such meeting,
nor more than sixty days prior to any other action. A determination of
stockholders of record entitled to notice of or to vote at a meeting of
stockholders shall apply to any adjournment of the meeting; provided, however,
that the Board of Directors may, in its discretion, fix a new record date for
the adjourned meeting.
SECTION 8. REGISTERED STOCKHOLDERS.
The Corporation shall be entitled to recognize the exclusive right of
a person registered on its records as the owner of shares of stock to receive
dividends and to vote as such owner, shall be entitled to hold liable for calls
and assessments a person registered on its records as the owner of shares of
stock, and shall not be bound to recognize any equitable or other claim to or
interest in such share or shares of stock on the part of any other person,
whether or not it shall have express or other notice thereof, except as
otherwise provided by the laws of Delaware.
SECTION 9. LEGENDS.
The Board of Directors shall have the power and authority to provide
that certificates representing shares of stock bear such legends as the Board of
Directors deems appropriate to assure that the Corporation does not become
liable for violations of Federal or state securities laws or other applicable
law.
ARTICLE VI
GENERAL PROVISIONS
SECTION 1. DIVIDENDS.
Subject to the provisions of applicable law and the Certificate of
Incorporation, dividends upon the shares of capital stock of the Corporation may
be declared by the Board of Directors at any regular or special meeting of the
Board of Directors. Dividends may be paid in cash, in property or in shares of
stock of the Corporation, unless otherwise provided by statute or the
Certificate of Incorporation.
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SECTION 2. RESERVES.
Before payment of any dividend, there may be set aside out of any
funds of the Corporation available for dividends such sum or sums as the Board
of Directors may, from time to time, in its absolute discretion, think proper as
a reserve or reserves to meet contingencies, or for equalizing dividends, or for
repairing or maintaining any property of the Corporation or for such other
purpose as the Board of Directors may think conducive to the interests of the
Corporation. The Board of Directors may modify or abolish any such reserve in
the manner in which it was created.
SECTION 3. SEAL.
The seal of the Corporation shall be in such form as shall be approved
by the Board of Directors.
SECTION 4. FISCAL YEAR.
The fiscal year of the Corporation shall end on December 31 of each
year; provided, however that such fiscal year may be changed by resolution of
the Board of Directors.
SECTION 5. CHECKS, NOTES, DRAFTS, ETC.
All checks, notes, drafts or other orders for the payment of money of
the Corporation shall be signed, endorsed or accepted in the name of the
Corporation by such officer, officers, person or persons as from time to time
may be designated by the Board of Directors or by an officer or officers
authorized by the Board of Directors to make such designation.
SECTION 6. EXECUTION OF CONTRACTS, DEEDS, ETC.
The Board of Directors may authorize any officer or officers, agent or
agents, in the name and on behalf of the Corporation to enter into or execute
and deliver all deeds, bonds, mortgages, contracts and other obligations or
instruments, and such authority may be general or confined to specific
instances. The attestation to such execution by the Secretary of the
Corporation shall not be necessary to constitute such deed, bond, mortgage,
contract or other instrument a valid and binding obligation against the
Corporation unless the resolutions, if any, of the Board of Directors
authorizing such execution expressly state that such attestation is necessary.
SECTION 7. VOTING OF STOCK IN OTHER CORPORATIONS.
Unless otherwise provided by resolution of the Board of Directors, the
Chairman of the Board, the Chief Executive Officer or any Vice President, from
time to time may (or may appoint one or more attorneys or agents to) cast the
votes which the Corporation may be entitled to cast as a shareholder or
otherwise in another corporation, any of whose shares or securities may be held
by the Corporation, at meetings of the holders of the shares or other securities
of such other corporation. In the event one or
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more attorneys or agents are appointed, the Chairman of the Board or the Chief
Executive Officer may instruct the person or persons so appointed as to the
manner of casting such votes or giving such consent. The Chairman of the Board
or the Chief Executive Officer may, or may instruct the attorneys or agents
appointed to, execute or cause to be executed in the name and on behalf of the
Corporation and under its seal or otherwise, such written proxies, consents,
waivers or other instruments as may be necessary or proper in the circumstances.
SECTION 8. SEVERABILITY.
Any determination that any provision of these By-Laws is for any
reason inapplicable, illegal or ineffective shall not affect or invalidate any
other provision of these By-Laws.
SECTION 9. CERTIFICATE OF INCORPORATION.
All references in these By-Laws to the Certificate of Incorporation
shall be deemed to refer to the Certificate of Incorporation of the Corporation,
as amended and in effect from time to time.
ARTICLE VII
AMENDMENTS
SECTION 1. BY THE BOARD OF DIRECTORS.
If the Certificate of Incorporation so provides, these By-Laws may be
altered, amended or repealed or new By-Laws may be adopted by the affirmative
vote of a majority of the directors present at any regular or special meeting of
the Board of Directors at which a quorum is present.
SECTION 2. BY THE STOCKHOLDERS.
These By-Laws, including this Section 2 of this Article VII, may be
altered, amended or repealed or new By-Laws may be adopted by the affirmative
vote of the holders of at least 80% of the voting power of all shares of the
Corporation entitled to vote generally in the election of directors, voting
together as a single class.
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<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
STATEMENTS OF INCOME AND BALANCE SHEETS AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
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