<PAGE>
As filed with the Securities and Exchange Commission on April 5, 1999
File No. 0-29818
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- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------
FORM 10/A
(Amendment No. 2)
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) 344-6261
Securities to be registered pursuant to Section 12(b) of the Act:
None
Securities to be registered pursuant to Section 12(g) of the Act:
Common Stock, $.01 par value
(Title of Class)
Preferred Stock Purchase Rights
(Title of Class)
Copies of all communications should be sent to:
Morton A. Pierce, Esq. William F. Carpenter III, Esq.
Dewey Ballantine LLP Senior Vice President and General
1301 Avenue of the Americas Counsel
New York, New York 10019-6092 LifePoint Hospitals LLC
(212) 259-8000 4525 Harding Road
Nashville, Tennessee 37205
(615) 344-6261
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<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 Selected Historical 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 Historical 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.
4.1** Form of Specimen Certificate for LifePoint Hospitals, Inc. Common
Stock.
4.2 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 Transitional Services Agreement to be entered into by and
between Columbia/HCA Healthcare Corporation and LifePoint Hospitals,
Inc.
10.5 Form of Computer and Data Processing Services Agreement to be
entered into by and between Columbia Information Systems, Inc. and
LifePoint Hospitals, Inc.
10.6 Form of Agreement to Share Telecommunications Services to be entered
into by and between Columbia Information Systems, Inc. and LifePoint
Hospitals, Inc.
10.7** Form of Sub-Lease Agreement to be entered into by and between
LifePoint Hospitals, Inc. and Columbia/HCA Healthcare Corporation.
10.8* ** LifePoint Hospitals, Inc. 1998 Long-Term Incentive Plan.
10.9* ** LifePoint Hospitals, Inc. 1999 Annual Incentive Plan.
10.10* ** LifePoint Hospitals, Inc. Executive Stock Purchase Plan.
10.11* ** LifePoint Hospitals, Inc. Outside Director's Stock and Incentive
Compensation Plan.
10.12* ** LifePoint Hospitals, Inc. Management Stock Purchase Plan.
21** Subsidiaries of LifePoint Hospitals, Inc. as of the distribution
date.
</TABLE>
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* Compensatory plan or arrangement.
** To be filed by amendment.
+Previously filed.
4
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 12 of the Securities Exchange Act of
1934, the registrant has duly caused this Amendment No. 2 to this Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized.
LifePoint Hospitals LLC
/s/ William F. Carpenter III
Date: April 2, 1999 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.
4.1** Form of Specimen Certificate for LifePoint Hospitals, Inc. Common
Stock.
4.2 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 Transitional Services Agreement to be entered into by and
between Columbia/HCA Healthcare Corporation and LifePoint Hospitals,
Inc.
10.5 Form of Computer and Data Processing Services Agreement to be
entered into by and between Columbia Information Systems, Inc. and
LifePoint Hospitals, Inc.
10.6 Form of Agreement to Share Telecommunications Services to be entered
into by and between Columbia Information Systems, Inc. and LifePoint
Hospitals, Inc.
10.7** Form of Sub-Lease Agreement to be entered into by and between
LifePoint Hospitals, Inc. and Columbia/HCA Healthcare Corporation.
10.8* ** LifePoint Hospitals, Inc. 1998 Long-Term Incentive Plan.
10.9* ** LifePoint Hospitals, Inc. 1999 Annual Incentive Plan.
10.10* ** LifePoint Hospitals, Inc. Executive Stock Purchase Plan.
10.11* ** LifePoint Hospitals, Inc. Outside Directors' Stock and Incentive
Compensation Plan.
10.12* ** LifePoint Hospitals, Inc. Management Stock Purchase Plan.
21** Subsidiaries of LifePoint Hospitals, Inc. as of the distribution
date.
</TABLE>
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* Compensatory plan or arrangement.
**To be filed by amendment.
+Previously filed.
6
<PAGE>
Exhibit 2.1
Columbia/HCA Healthcare Corporation
-----------------------------
Spin-Offs of LifePoint Hospitals, Inc. and Triad Hospitals, Inc.
Through a Common Stock Distribution
-----------------------------
To the Stockholders of Columbia/HCA Healthcare Corporation:
In November 1997, Columbia/HCA Healthcare Corporation reorganized its
operations into five divisions. Columbia/HCA has now determined to establish
two of those divisions, America Group and Pacific Group, as independent,
publicly-traded companies. America's hospitals are located in non-urban areas
where, in 21 of its 23 markets, America's hospital is the only hospital in the
community. Approximately three-quarters of Pacific's hospitals are located in
small cities, generally in the Southern, Western and Southwestern United
States, where Pacific's hospital is usually either the only hospital or one of
two 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.
Columbia/HCA has received a ruling from the Internal Revenue Service that,
among other things, the distribution of shares of LifePoint common stock and
Triad common stock generally will be tax-free to Columbia/HCA and to
Columbia/HCA's stockholders, except for any cash received instead of fractional
shares.
No Columbia/HCA stockholder action is required, and you do not need to
surrender your shares of Columbia/HCA common stock to receive the shares of
LifePoint common stock and Triad common stock. You will continue to hold the
same number of shares of Columbia/HCA common stock after the distribution. We
have applied for a quotation of the LifePoint common stock and the Triad common
stock on the Nasdaq National Market System and we expect that they will trade
under the symbols "LPNT" and "TRIH," respectively.
This information statement contains detailed information about LifePoint,
Triad and the distribution. We encourage you to read it carefully.
Sincerely,
Thomas F. Frist, Jr., M.D. Jack O. Bovender, Jr.
Chairman of the Board and President and
Chief Executive Officer Chief Operating Officer
, 1999
<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+Information contained herein is subject to completion or amendment. +
+Registration statements relating to these securities have been filed with the +
+Securities and Exchange Commission. These securities will not be issued prior +
+to the time the registration statements become effective. This information +
+statement shall not constitute an offer to sell or the solicitation of any +
+offer to buy any securities of Columbia/HCA Healthcare Corporation, LifePoint +
+Hospitals, Inc. or Triad Hospitals, Inc. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION OR AMENDMENT, DATED APRIL , 1999
Information Statement
------------
LifePoint Hospitals, Inc. Triad Hospitals, Inc.
Common Stock Common Stock
We have prepared this information statement to
provide you with information regarding the pro rata
distribution to Columbia/HCA Healthcare Corporation
Consider common and non-voting common stockholders of all of the
carefully the shares of common stock of LifePoint Hospitals, Inc.,
risk factors which will be a newly-formed holding company for the
beginning on America Group of Columbia/HCA, and Triad Hospitals,
page 29 of this Inc., which will be a newly-formed holding company for
information the Pacific Group of Columbia/HCA.
statement.
The shares of LifePoint common stock and Triad common
Stockholder stock will be distributed on the effective date of the
approval of the distribution, which is , 1999, to holders of
distribution of Columbia/HCA common stock at the close of business on
LifePoint and the record date for the distribution, which is ,
Triad is not 1999.
required. We are
not asking you If you are a Columbia/HCA common stockholder at the
for a proxy and close of business on the record date, you will receive
we request that shares of LifePoint common stock and shares of
you do not send Triad common stock for every shares of Columbia/HCA
us a proxy. common stock you hold. Certificates for the shares will
Also, you are be mailed on or about , 1999. You will receive a
not required to check for the cash equivalent of any fractional shares
make any payment you otherwise would have received in the distribution.
for the shares
of LifePoint If you have questions regarding the distribution, you
common stock or may call National City Bank, Shareholder Services
Triad common Group, telephone number (800) 622-6757, the
stock. distribution agent, or W. Mark Kimbrough, telephone
number (615) 344-1199, Columbia/HCA's investor contact.
This information
statement is not currently exists for either the LifePoint common stock or
an offer to ock. However, we have applied for a quotation of the
sell, or a ock and the Triad common stock on the Nasdaq National Market
solicitation of es are accepted for quotation on Nasdaq, we expect that a
an offer to buy, t will develop on or shortly before the record date and
any securities l begin on the first business day after the effective date
of Columbia/HCA, .
LifePoint or
Triad. Proposed Nasdaq Trading Symbols
LifePoint common stock -- LPNT
Triad common stock -- TRIH
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved the LifePoint common stock or the Triad
common stock, or determined if this information statement is truthful or
complete. Any representation to the contrary is a criminal offense.
We first mailed this information statement to Columbia/HCA stockholders on
, 1999.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<S> <C>
Summary................................................................... 1
Introduction............................................................. 1
Questions and Answers About LifePoint, Triad and the Distribution........ 2
Key Terms of the Distribution............................................ 7
Information Regarding the Distribution, LifePoint and Triad.............. 9
Columbia/HCA Healthcare Corporation...................................... 10
LifePoint Hospitals, Inc. ............................................... 11
Triad Hospitals, Inc. ................................................... 13
Comparative Financial Highlights......................................... 16
LifePoint Summary Financial Data.......................................... 17
LifePoint Unaudited Pro Forma Condensed Combined Financial Statements..... 19
LifePoint Unaudited Pro Forma Condensed Combined Statement of Operations
for the Year Ended December 31, 1998..................................... 20
LifePoint Unaudited Pro Forma Condensed Combined Balance Sheet............ 21
LifePoint Notes to Unaudited Pro Forma Condensed Combined Financial
Statements............................................................... 22
Triad Summary Financial Data.............................................. 23
Triad Unaudited Pro Forma Condensed Combined Financial Statements......... 25
Triad Unaudited Pro Forma Condensed Combined Statement of Operations for
the Year Ended December 31, 1998......................................... 26
Triad Unaudited Pro Forma Condensed Combined Balance Sheet................ 27
Triad Notes to Unaudited Pro Forma Condensed Combined Financial
Statements............................................................... 28
Risk Factors.............................................................. 29
Loss of Physicians or Other Key Personnel Could Adversely Affect
LifePoint and Triad..................................................... 29
No Operating Histories as Independent Companies; Net Losses.............. 29
Limits on Reimbursement and Health Care Reform Legislation May Reduce
Profitability........................................................... 29
Reimbursement by Managed Care Organizations May Reduce Hospital
Profitability........................................................... 30
Competition.............................................................. 30
Risks Associated With Potential Acquisitions............................. 31
Geographic Concentration of Operations Could Adversely Affect LifePoint
and Triad............................................................... 31
Extensive Regulation Could Adversely Affect LifePoint and Triad ......... 32
</TABLE>
<TABLE>
<S> <C>
Potential Adverse Impact of Columbia/HCA Investigations and Litigation;
Indemnification of LifePoint and Triad................................... 33
Professional Liability Risks Could Adversely Affect Results of Operations
and Cash Flow............................................................ 34
High Degree of Leverage and Debt Service Obligations May Adversely Affect
LifePoint and Triad...................................................... 35
Absence of Dividends...................................................... 35
Tax Treatment of the Distribution ........................................ 35
Holding Company Structure Risks........................................... 36
Risks Associated with Fraudulent Conveyance and Legal Dividend
Requirements............................................................. 36
Market Uncertainties With Respect to LifePoint Common Stock and Triad
Common Stock............................................................. 37
Anti-Takeover Provisions.................................................. 38
Possible Lack of Year 2000 Compliance May Adversely Affect LifePoint and
Triad.................................................................... 38
Reasons for Furnishing this Information Statement.......................... 40
Forward-Looking Information................................................ 40
The Distribution........................................................... 41
Background and Purposes of the Distribution............................... 41
Manner of Effecting the Distribution...................................... 42
Results of the Distribution............................................... 42
Material Federal Income Tax Consequences.................................. 43
Regulatory Approvals...................................................... 44
Market for LifePoint Common Stock and Triad Common Stock.................. 44
Conditions Precedent to the Distribution.................................. 45
Arrangements Among Columbia/HCA, LifePoint and Triad Relating to the
Distribution.............................................................. 45
Distribution Agreement.................................................... 45
Tax Sharing and Indemnification Agreement................................. 47
Benefits and Employment Matters Agreement................................. 47
Insurance Allocation and Administration Agreement......................... 49
Computer and Data Processing Services Agreement........................... 50
Lease Agreements.......................................................... 50
Transitional Services Agreement........................................... 50
Other Agreements.......................................................... 50
Dividend Policy............................................................ 51
LifePoint................................................................. 51
Triad..................................................................... 51
</TABLE>
-ii-
<PAGE>
<TABLE>
<S> <C>
LifePoint Selected Historical Financial Data.............................. 52
LifePoint Management's Discussion and Analysis of Financial Condition and
Results of Operations.................................................... 54
Overview.................................................................. 54
Forward-Looking Statements............................................... 54
Investigations........................................................... 54
Results of Operations.................................................... 55
Liquidity and Capital Resources.......................................... 60
Impact of Year 2000 Computer Issues...................................... 61
Effects of Inflation and Changing Prices................................. 64
Health Care Reform....................................................... 64
Description of Certain New LifePoint Indebtedness......................... 64
General.................................................................. 64
Senior Subordinated Notes Due 2009....................................... 64
New Credit Facility...................................................... 65
Triad Selected Historical Financial Data.................................. 66
Triad Management's Discussion and Analysis of Financial Condition and
Results of Operations.................................................... 68
Overview.................................................................. 68
Forward-Looking Statements............................................... 68
Investigations........................................................... 68
Results of Operations.................................................... 69
Liquidity and Capital Resources.......................................... 75
Impact of Year 2000 Computer Issues...................................... 75
Effects of Inflation and Changing Prices................................. 78
Health Care Reform....................................................... 78
Description of Certain New Triad Indebtedness............................. 78
General.................................................................. 78
Senior Subordinated Notes Due 2009....................................... 79
New Credit Facility...................................................... 79
LifePoint Business........................................................ 81
General.................................................................. 81
Principal Executive Offices.............................................. 81
The Non-Urban Health Care Market......................................... 81
Business Strategy........................................................ 82
Operations............................................................... 83
Services and Utilization................................................. 83
Sources of Revenue....................................................... 84
Competition.............................................................. 85
Properties............................................................... 87
Employees and Medical Staff.............................................. 87
LifePoint's Regulatory Compliance Program................................ 88
Legal Proceedings........................................................ 88
Triad Business............................................................ 89
General.................................................................. 89
Principal Executive Offices.............................................. 89
Triad's Markets.......................................................... 89
Business Strategy........................................................ 90
Operations............................................................... 91
</TABLE>
<TABLE>
<S> <C>
Services and Utilization.................................................. 92
Sources of Revenue........................................................ 93
Competition.............................................................. 93
Properties............................................................... 96
Employees and Medical Staff.............................................. 97
Triad's Regulatory Compliance Program.................................... 97
Legal Proceedings........................................................ 98
Government and Other Sources of Reimbursement for LifePoint and Triad..... 99
Medicare................................................................. 99
Medicaid................................................................. 100
Annual Cost Reports...................................................... 101
Managed Care............................................................. 101
Commercial Insurance..................................................... 101
Government Regulation and Other Factors Affecting LifePoint and Triad..... 102
Licensure, Certification and Accreditation............................... 102
Certificates of Need..................................................... 102
State Rate Review........................................................ 102
Utilization Review....................................................... 102
Medicare Regulations and Fraud and Abuse................................. 102
Corporate Practice of Medicine........................................... 105
Health Care Reform....................................................... 105
Conversion Legislation................................................... 106
Revenue Ruling 98-15..................................................... 106
Environmental Matters.................................................... 106
Insurance................................................................ 106
Governmental Investigation of Columbia/HCA and Related Litigation........ 106
LifePoint Management...................................................... 109
Directors................................................................ 109
Compensation of Directors................................................ 110
Executive Officers....................................................... 110
Executive Compensation................................................... 112
LifePoint Compensation Arrangements...................................... 113
Benefits and Employment Matters Agreement................................ 113
The LifePoint 1998 Long-Term Incentive Plan.............................. 113
LifePoint Executive Stock Purchase Plan.................................. 115
LifePoint Annual Cash Bonus Plan......................................... 117
The LifePoint Management Stock Purchase Plan.............................. 117
LifePoint Employee Stock Ownership Plan................................... 119
Employment Contracts, Termination of Employment Arrangements and Change in
Control Arrangements..................................................... 119
LifePoint Security Ownership by Certain Beneficial Owners and Management.. 119
Triad Management.......................................................... 121
Directors................................................................ 121
Compensation of Directors................................................ 122
Executive Officers....................................................... 122
</TABLE>
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<PAGE>
<TABLE>
<S> <C>
Executive Compensation................................................... 123
Columbia/HCA Option Grants in 1998....................................... 125
Triad Compensation Arrangements.......................................... 126
Benefits and Employment Matters Agreement................................ 126
The Triad 1998 Long-Term Incentive Plan.................................. 126
Triad Executive Stock Purchase Plan...................................... 128
The Triad Management Stock Purchase Plan.................................. 129
Triad Employee Stock Ownership Plan....................................... 131
Employment Contracts, Termination of Employment Arrangements and Change in
Control Arrangements..................................................... 131
Triad Security Ownership by Certain Beneficial Owners and Management...... 131
LifePoint Description of Capital Stock.................................... 133
Introduction............................................................. 133
Authorized And Outstanding Capital Stock................................. 133
LifePoint Common Stock; Delaware Anti-Takeover Provisions................ 133
LifePoint Preferred Stock................................................ 134
</TABLE>
<TABLE>
<S> <C>
LifePoint Preferred Stock Purchase Rights................................. 134
Certain Anti-Takeover Provisions--LifePoint Certificate and By-Laws....... 136
Limited Liability and Indemnification Provisions.......................... 141
Triad Description of Capital Stock......................................... 142
Introduction.............................................................. 142
Authorized And Outstanding Capital Stock.................................. 142
Triad Common Stock; Delaware Anti-Takeover Provisions..................... 142
Triad Preferred Stock..................................................... 143
Triad Preferred Stock Purchase Rights..................................... 143
Certain Anti-Takeover Provisions--Triad Certificate and By-Laws........... 145
Limited Liability and Indemnification Provisions.......................... 150
Additional Information..................................................... 151
LifePoint Hospitals, Inc. and Subsidiaries Index to Financial Statements... F-1
Triad Hospitals, Inc. and Subsidiaries Index to Financial Statements....... F-1
</TABLE>
-iv-
<PAGE>
Summary
This summary highlights selected information from this information statement,
but does not contain all details concerning the distribution of the common
stock of LifePoint and Triad to Columbia/HCA stockholders, including
information that may be important to you. To better understand the
distribution, and the businesses and financial position of LifePoint and Triad,
you should carefully review this entire document. References in this document
to "LifePoint" mean LifePoint Hospitals, Inc. and its subsidiaries and
affiliates. References in this document to "Triad" mean Triad Hospitals, Inc.
and its subsidiaries and affiliates. References in this document to
"Columbia/HCA" mean Columbia/HCA Healthcare Corporation and its subsidiaries
and affiliates.
Introduction
Columbia/HCA is the largest provider of health care services in the United
States today, operating approximately 300 hospitals, as well as outpatient
surgery centers, diagnostic centers, cardiac rehabilitation centers, physical
therapy centers, radiation oncology centers, comprehensive outpatient
rehabilitation centers, medical office buildings, physician practices and other
health care programs. In November 1997, Columbia/HCA restructured its
operations into five divisions, including the America Group and the Pacific
Group. America's hospitals are located in non-urban areas where, in almost
every case, America's hospital is the only hospital in the community.
Approximately three-quarters of Pacific's hospitals are located in small
cities, generally in the Southern, Western and Southwestern United States,
where Pacific's hospital is usually either the only hospital or one of two
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.
1
<PAGE>
. Tie Compensation to Performance. Following the distribution, LifePoint
and Triad will be able to more closely tie compensation incentives for
their employees to the performance of their companies. Each of LifePoint
and Triad intends to establish for the benefit of its employees an
Employee Stock Ownership Plan (an "ESOP"), which shortly after the
distribution, in the case of the LifePoint ESOP, will purchase a number
of shares equal to 8.3% of the outstanding common stock of LifePoint and,
in the case of the Triad ESOP, will purchase a number of shares equal to
9.0% of the outstanding common stock of Triad. These equity interests are
expected to help LifePoint and Triad to attract and retain talented and
effective management and to motivate employees throughout the
organization.
. Improve Access to Capital. The distribution will give each of LifePoint
and Triad direct access to capital markets. As divisions of Columbia/HCA,
LifePoint and Triad have competed with each other and with the other
Columbia/HCA divisions for management attention, support resources, and
capital to finance expansion and growth opportunities. As separate
entities, with their own management structures, LifePoint and Triad will
be better able to implement business strategies appropriate for their
markets and to direct capital funding and expansion initiatives.
. Increase Visibility to the Capital Markets. Following the distribution,
the financial markets will be able to focus on the individual strengths
of Columbia/HCA, LifePoint and Triad, and more accurately evaluate the
performance of each distinct business compared to companies in the same
or similar businesses.
After the distribution, Columbia/HCA will retain responsibility for
liabilities arising out of the pending governmental investigations of some of
Columbia/HCA's business practices and for liabilities arising out of related
stockholder and other legal proceedings currently pending against Columbia/HCA.
See "Arrangements Among Columbia/HCA, LifePoint and Triad Relating to the
Distribution--Distribution Agreement" beginning on page 45, "Risk Factors--
Potential Adverse Impact of Columbia/HCA Investigations and Litigation;
Indemnification of LifePoint and Triad" beginning on page 33, and "Government
Regulation and Other Factors Affecting LifePoint and Triad--Governmental
Investigation of Columbia/HCA and Related Litigation" beginning on page 102. In
general, Columbia/HCA also will be responsible for taxes relating to pre-
distribution periods.
This summary includes cross-references to other portions of this information
statement to help you find more detailed information about the distribution,
LifePoint and Triad. We encourage you to read the entire document.
Questions and Answers About LifePoint, Triad and the Distribution
What are the businesses
of LifePoint and Triad? After the distribution, LifePoint and Triad will
continue to provide health care services, through
hospitals and, in the case of Triad, outpatient
surgery centers. LifePoint's hospitals are located in
growing, non-urban areas with an average population
of approximately 31,000 (based on 1997 data). In 21
of LifePoint's 23 markets, LifePoint's hospital is
the only hospital in the community. LifePoint's
hospitals are located in the States of Alabama,
Florida, Georgia, Kansas, Kentucky, Louisiana,
Tennessee, Utah and Wyoming. Approximately three-
quarters of Triad's hospitals are located in small
cities (generally with populations of less than
150,000 residents and located more than 60 miles from
a major urban center) where Triad's hospital is
usually either the only hospital or one of two
hospitals in the community, and the remainder of
Triad's facilities are located in larger urban areas
typically characterized by a high rate of population
growth. Triad's hospitals are located in the States
of Alabama, Arizona, Arkansas, California, Kansas,
Louisiana, Missouri, New Mexico, Oklahoma, Oregon and
Texas.
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Why is Columbia/HCA Columbia/HCA believes that separating the America and
establishing the Pacific Groups into two smaller, strategically
businesses of its focused public companies will allow them to implement
America and Pacific business strategies that are more tailored to their
Groups as separate, particular markets and to more closely tie
publicly-traded compensation incentives for their employees to the
companies? performance of each company. As separate companies,
LifePoint and Triad are also expected to benefit from
more focused management attention and improved access
to the capital markets. After the distribution,
Columbia/HCA will focus its efforts on its core
markets, which are typically located in urban areas
that are characterized by highly integrated facility
networks.
Who will be the
executive officers and Scott L. Mercy will be the Chairman and Chief
directors of LifePoint Executive Officer of LifePoint. Mr. Mercy has
and Triad? extensive experience in the health care services
business, most recently serving as President and
Chief Executive Officer of America Service Group
Inc., a publicly-traded provider of managed health
care services to correctional facilities throughout
the United States. Prior to joining America Service
Group Inc. in April 1996, Mr. Mercy held senior
financial positions with Columbia/HCA and with
Hospital Corporation of America (which became a part
of Columbia/HCA in February 1994). Mr. Mercy will be
supported by a management team that will include
James M. Fleetwood, Jr., who currently is the
President of the America Group of Columbia/HCA and
will serve as President and Chief Operating Officer
of LifePoint, and other senior executives, some of
whom are currently responsible for the operations of
the America Group. See "LifePoint Management --
Executive Officers" beginning on page 110.
The LifePoint Board of Directors will consist of
persons, including Mr. Mercy, who will serve as
Chairman. See "LifePoint Management--Directors"
beginning on page 109.
James D. Shelton, currently President of the Pacific
Group of Columbia/HCA, will serve as Chairman of the
Board, President and Chief Executive Officer of
Triad. Mr. Shelton has extensive experience in the
health care services business and has been associated
with Columbia/HCA since June 1994. Prior to joining
Columbia/HCA, Mr. Shelton held senior executive
positions with National Medical Enterprises, Inc.
(now known as Tenet Healthcare Corporation). Mr.
Shelton will be supported by a management team that
will include many of the senior executives currently
responsible for the operations of the Pacific Group.
See "Triad Management--Executive Officers" beginning
on page 122.
The Triad Board of Directors will consist of seven
persons, including Mr. Shelton, who will serve as
Chairman. See "Triad Management--Directors" beginning
on page 121.
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 45 for a more
complete discussion of these agreements.
How much debt will
LifePoint and Triad Columbia/HCA intends to arrange for $260 million in
have after the debt financing, which will be assumed by LifePoint
distribution? prior to the distribution and is expected to consist
of a $135 million, 6 1/2-year term loan agreement
with a syndicate of banks, and $125 million of Senior
Subordinated Notes due 2009. LifePoint expects that
the new credit agreement will also include an
additional term loan commitment of $35 million
available for limited purposes and a revolving credit
commitment of up to $65 million, which are expected
to be undrawn at closing. The term loan indebtedness
is expected to be secured by certain of LifePoint's
assets. Columbia/HCA also intends to arrange for $715
million in debt financing, which will be assumed by
Triad prior to the distribution, and is expected to
consist of a $ million, -year term loan
agreement with a syndicate of banks, and $300 million
of Senior Subordinated Notes due 2009. The term loan
indebtedness is expected to be secured by certain of
Triad's assets. Triad also expects to enter into a
revolving credit loan agreement providing for a
commitment for revolving credit loans in an aggregate
principal amount of up to $ million, which is
expected to be undrawn at closing. The LifePoint and
Triad debt agreements are expected to contain
customary financial and other restrictive covenants
(including restrictions on the payment of dividends,
incurrences of indebtedness and sale of assets). See
"Risk Factors--High Degree of Leverage and Debt
Service Obligations May Adversely Affect LifePoint
and Triad" beginning on page 35, "LifePoint Unaudited
Pro Forma Condensed Combined Balance Sheet" beginning
on page 19, and "Triad Unaudited Pro Forma Condensed
Combined Balance Sheet" beginning on page 25.
What are the risks The businesses of LifePoint and Triad are subject to
involved in owning risks, among others, related to competition and to
LifePoint common stock possible changes in regulation and legislation
and Triad common stock? relating to the health care services industry, as
well as risks relating to possible changes in the
Medicare program which could further limit
reimbursement for health care services. The
separation of LifePoint and Triad from Columbia/HCA
presents certain additional risks because neither
LifePoint nor Triad has ever operated independently
of Columbia/HCA; there is no existing market for
either LifePoint common stock or Triad common stock
(although we intend to apply for quotation of the
LifePoint common stock and the Triad common stock on
the Nasdaq National Market System); and a large
number of the shares distributed could be sold into
the market at any given time. Each of LifePoint and
Triad also have anti-takeover provisions in place
that could discourage or make more expensive a
takeover attempt that is opposed by its Board of
Directors.
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
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and Triad. Columbia/HCA has agreed to indemnify
LifePoint and Triad in respect of liabilities arising
from such matters. Any failure by Columbia/HCA to
satisfy its indemnification obligation in respect of
such liabilities could have a material adverse effect
on LifePoint and Triad.
See "Risk Factors" beginning on page 29 for a more
complete discussion of certain matters which you
should consider in respect of your ownership of
LifePoint common stock and Triad common stock.
What do I have to do to Nothing. No proxy or vote is necessary for the
participate in the distribution. If you own Columbia/HCA common stock
distribution? ("Columbia/HCA Common Stock") or Columbia/HCA Non-
voting Common Stock ("Columbia/HCA Non-voting Stock,"
and together with Columbia/HCA Common Stock,
"Columbia/HCA Stock") as of the close of business on
the record date, , 1999, shares of LifePoint
common stock and Triad common stock will be mailed to
you or credited to your brokerage account in
1999. You do not need to mail in Columbia/HCA Stock
certificates to receive LifePoint common stock and
Triad common stock certificates. You will not receive
new Columbia/HCA Stock certificates.
Explain the shares of LifePoint common stock and shares
distribution ratio. of Triad common stock will be distributed for every
shares of Columbia/HCA Stock you own on the
record date. For example, if you own 100 shares of
Columbia/HCA Stock as of the close of business on the
record date, you will receive shares of LifePoint
common stock and shares of Triad common stock in
the distribution. You will receive a check for the
cash equivalent of any fractional shares you
otherwise would have received in the distribution.
Is the distribution
taxable for United Columbia/HCA has received a ruling from the Internal
States Federal income Revenue Service that, among other things, the
tax purposes? distribution 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.
The tax ruling provides that you should apportion
your tax basis in Columbia/HCA Stock held immediately
before the distribution among your Columbia/HCA Stock
and the LifePoint common stock and Triad common stock
you receive in the distribution. See "Risk Factors--
Tax Treatment of the Distribution" beginning on page
35, and "The Distribution--Material Federal Income
Tax Consequences" beginning on page 43, for more
complete discussions of the United States Federal
income tax consequences of the distribution to
holders of Columbia/HCA Stock.
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
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subject to change at the discretion of the
Columbia/HCA Board of Directors. Neither LifePoint
nor Triad anticipates paying any cash dividends on
its common stock in the foreseeable future. In
addition, the terms of LifePoint's and Triad's debt
agreements are expected to restrict the payment of
cash dividends. See "Dividend Policy" beginning on
page 51.
Where will my shares of
LifePoint common stock At present, there is no public market for either
and Triad common stock LifePoint common stock or Triad common stock.
trade? LifePoint and Triad have applied for quotation of
their common stock on the Nasdaq National Market
System. If the shares are accepted for quotation, we
expect that a "when-issued" trading market for
LifePoint common stock and Triad common stock will
develop on or shortly before the record date, and
that "regular-way" trading will begin on , 1999.
Also, see "The Distribution--Market for LifePoint
Common Stock and Triad Common Stock" beginning on
page 44.
Will the distribution
affect the trading After the distribution, Columbia/HCA Common Stock
price of my will continue to be listed for trading on the New
Columbia/HCA Common York Stock Exchange. As a result of the distribution,
Stock? the trading price of Columbia/HCA Common Stock likely
will be lower than the trading price immediately
prior to the distribution. Moreover, until the market
has evaluated the operations of Columbia/HCA without
LifePoint and Triad, the trading price of
Columbia/HCA Common Stock may fluctuate. The combined
trading prices of Columbia/HCA Common Stock,
LifePoint common stock and Triad common stock may not
equal the trading price of Columbia/HCA Common Stock
prior to the distribution. See "The Distribution--
Market for LifePoint Common Stock and Triad Common
Stock" beginning on page 44.
Are any regulatory
approvals required for Prior to the distribution date, Columbia/HCA will
the distribution? have provided appropriate notifications regarding the
distribution to, and expects that it will have
received all material approvals from, the Federal and
state regulatory authorities having jurisdiction in
respect of the distribution and related
reorganization transactions. See "The Distribution--
Regulatory Approvals" beginning on page 44.
What will happen to They will be treated the same as all other shares of
shares owned through Columbia/HCA Stock. You will continue to own the
the Columbia/HCA Columbia/HCA Common Stock that you owned through the
Healthcare Corporation Columbia/HCA Healthcare Corporation Stock Bonus Plan,
Stock Bonus Plan, the the Columbia/HCA Healthcare Corporation Salary
Columbia/HCA Healthcare Deferral Plan and the San Leandro Retirement and
Corporation Salary Savings Plan prior to the distribution. In the case
Deferral Plan and the of employees of LifePoint and Triad, such shares will
San Leandro Retirement be owned through successor defined contribution plans
and Savings Plan? established by LifePoint and Triad. In the
distribution, shares of LifePoint common stock and
shares of Triad common stock for every shares
of Columbia/HCA Stock you own through the plans on
the record date will be credited to your account
under the relevant plan. The various tax-qualified
plans of Columbia/HCA, LifePoint and Triad may
thereafter engage in sales and/or exchange of non-
employer securities.
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What will happen to
existing employee stock Generally, vested Columbia/HCA employee stock options
options to purchase (other than options that are "incentive stock
Columbia/HCA Common options" under the Internal Revenue Code) will be
Stock? retained by employees of Columbia/HCA, LifePoint and
Triad and their exercise prices will be adjusted to
reflect the distribution. In addition, each holder of
such vested options will receive vested options to
purchase the number of shares of LifePoint common
stock and Triad common stock that he or she would
have received in the distribution, as if his or her
Columbia/HCA option had been exercised on the record
date. Similar adjustments will be made with respect
to vested Columbia/HCA stock options held by non-
employee directors. In the case of vested employee
stock options to acquire a small number of shares,
however, such options will be adjusted in a manner
that preserves the pre-distribution value of such
options.
Unvested employee stock options held by employees of
LifePoint and Triad will be cancelled and LifePoint
and Triad may, in their discretion, grant unvested
employee stock options to their respective employees.
In the case of unvested employee stock options held
by Columbia/HCA employees, the exercise price will be
adjusted to reflect the distribution. Unvested
options to acquire LifePoint and Triad stock will
also be issued to certain employees of Columbia/HCA.
Incentive stock options held by employees of
LifePoint and Triad will be cancelled and replaced
with options to purchase the common stock of the
employer of the holder. The number of shares covered
by, and the exercise price of, each replacement
option will be fixed so as to preserve the aggregate
exercise price of the cancelled option and the
aggregate spread between exercise price and the fair
market value of the cancelled option.
Key Terms of the Distribution
No Stockholder Action No action is required by Columbia/HCA stockholders to
Required receive LifePoint common stock and Triad common stock
in the distribution.
You do not need to surrender Columbia/HCA Stock to
receive LifePoint common stock and Triad common stock
in the distribution.
The number of shares of Columbia/HCA Stock you own
will not change as a result of the distribution.
Record Date If you are a holder of record of Columbia/HCA Stock
as of the close of business on the record date
( , 1999), you will be entitled to receive
LifePoint common stock and Triad common stock in the
distribution.
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.
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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 37.
Shares to be All of the outstanding LifePoint common stock and
Distributed Triad common stock will be distributed in the
distribution. Based on the shares of
Columbia/HCA Common Stock and 21,000,000 shares of
Columbia/HCA Non-Voting Common Stock outstanding as
of , 1999, shares of LifePoint common
stock and shares of Triad common stock will be
distributed.
Mailing Date The distribution agent will mail LifePoint common
stock and Triad common stock certificates to
Columbia/HCA stockholders on or about , 1999,
which you should receive shortly thereafter.
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Information Regarding the Distribution, LifePoint and Triad
Before the distribution, you should direct inquiries relating to the
distribution to:
National City Bank Columbia/HCA Healthcare Corporation
Shareholder Services Group W. Mark Kimbrough
P. O. Box 92301 Assistant Vice President and Investor
Cleveland, Ohio 44193-0900 Contact
(216) 476-8663 One Park Plaza
(800) 622-6757 Nashville, Tennessee 37203
(615) 344-1199
(615) 344-2266 (facsimile)
After the distribution, you should direct inquiries relating to an investment
in LifePoint common stock to:
LifePoint Hospitals, Inc.
Investor Relations Department
4525 Harding Road
Nashville, Tennessee 37205
(615) 344-6261
After the distribution, you should direct inquiries relating to an investment
in Triad common stock to:
Triad Hospitals, Inc.
Investor Relations Department
13455 Noel Road, 20th Floor
Dallas, Texas 75240
(972) 701-2202
After the distribution, the transfer agent and registrar for the LifePoint
common stock and the Triad common stock will be:
National City Bank
Shareholder Services Group
P.O. Box 92301
Cleveland, Ohio 44193-0900
(216) 476-8663
(800) 622-6757
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Columbia/HCA Healthcare Corporation
After the distribution, Columbia/HCA will continue to be one of the leading
providers of health care services in the United States. As of February 28,
1999, after giving effect to the transfers of certain hospitals and other
health care facilities to LifePoint and Triad immediately prior to the
distribution, Columbia/HCA would have operated 198 general, acute care
hospitals, 10 psychiatric hospitals, and 77 outpatient surgery centers
(including 23 hospitals and 5 outpatient surgery centers which are operated
through 50/50 joint ventures that are managed by Columbia/HCA but are not
consolidated for financial reporting purposes).
Columbia/HCA's primary objective is to provide the communities it serves with
a comprehensive array of quality health care services in the most cost
effective manner possible. Columbia/HCA's general, acute care hospitals usually
provide a full range of services commonly available in hospitals, such as
internal medicine, general surgery, cardiology, oncology, neurosurgery,
orthopedics and obstetrics, as well as diagnostic and emergency services.
Outpatient and ancillary health care services are provided by Columbia/HCA's
general, acute care hospitals, as well as at free-standing facilities operated
by Columbia/HCA, including outpatient surgery and diagnostic centers,
rehabilitation facilities and other facilities. In addition, Columbia/HCA
operates psychiatric hospitals which generally provide a full range of mental
health care services in inpatient, partial hospitalization and outpatient
settings.
By establishing the America and Pacific Groups as separate, independent
companies, Columbia/HCA will be better able to focus its efforts on its core
markets, which are typically located in urban areas that are characterized by
highly integrated facility networks.
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LifePoint Hospitals, Inc.
LifePoint's Facilities
LifePoint will continue to provide health care services through its hospitals
after the distribution. As of December 31, 1998, the America Group (the assets
of which will be transferred to LifePoint prior to the distribution) comprised
23 general, acute care hospitals, located in non-urban areas with an average
population of approximately 31,000 (based on 1997 data). According to industry
sources, population in LifePoint's markets is projected to grow on average in
excess of 5% annually between 1997 and 2002, compared to the expected national
growth rate of 2.7% over the same period. In 21 of LifePoint's 23 markets,
LifePoint's hospital is the only hospital in the community. LifePoint's
hospitals are located in nine states: Alabama, Florida, Georgia, Kansas,
Kentucky, Louisiana, Tennessee, Utah and Wyoming. Approximately half of
LifePoint's facilities are located in the States of Kentucky and Tennessee. All
but five of LifePoint's hospitals are located in states that have certificate
of need laws, which laws may have the effect of limiting the development of
competing facilities.
LifePoint's general, acute care hospitals usually provide the range of
medical and surgical services commonly available in hospitals in non-urban
markets. These hospitals also provide diagnostic and emergency services, as
well as outpatient and ancillary services such as outpatient surgery,
laboratory, radiology, respiratory therapy, cardiology and physical therapy.
Recent Operating Performance
LifePoint has experienced an increase in revenues and volume growth during
1998. On a same facility basis in 1998, LifePoint's revenues declined 1.8% and
hospital admissions decreased by 0.8%, although equivalent admissions (a
measure of combined inpatient and outpatient volume) increased by 0.2%. During
the same period, revenues per equivalent admission (on a same facility basis)
decreased by 2.0%. Management believes that the declines are primarily
attributable to the shift to providing services on an outpatient basis, the
increasing proportion of LifePoint's revenue being derived from fixed payment
and higher discount sources, including Medicare, Medicaid and managed care
plans, and the impact of the government investigations of certain of
Columbia/HCA's business practices and the related media coverage. Under the
Federal Balanced Budget Act of 1997, levels of Medicare and Medicaid
reimbursement have recently been reduced and will be further reduced as
additional reductions are phased in over the next few years. For additional
information regarding LifePoint's financial performance in recent periods, see
the LifePoint consolidated financial statements included elsewhere herein and
"LifePoint Management's Discussion and Analysis of Financial Condition and
Results of Operations" beginning on page 54. See also "LifePoint Unaudited Pro
Forma Condensed Combined Financial Statements" beginning on page 17.
Business Strategy
LifePoint's strategic goals are centered around the unique patient and health
care provider needs and opportunities in its non-urban markets. LifePoint
intends to manage its facilities to ensure that they operate in accordance with
the strategic objectives described below:
. Develop Facility-Specific Strategies for Non-Urban Markets. LifePoint
has developed facility specific strategies tailored for the unique
characteristics of each of its non-urban markets. These strategies are
intended to improve the quality and breadth of health care services, to
provide an outstanding workplace for LifePoint's employees, to recognize
and expand the hospitals' roles as community assets and to improve
financial performance. By contrast, Columbia/HCA's strategy has been
developed on a system-wide basis and has focused on building well-
integrated facility networks with large urban facilities as the
principal providers of specialty services.
. Expand Breadth of Service and Reduce Patient Outmigration. LifePoint
intends to increase revenues by broadening the scope of health care
services available at its facilities, particularly in markets where
significant outmigration is occurring, and to recruit physicians with a
broader range of specialties. As an entity separate from Columbia/HCA,
LifePoint will not have to compete with the
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<PAGE>
Columbia/HCA facilities located in larger, urban markets for management
attention, support resources, and capital to finance expansion of the
range of services offered at its hospitals. LifePoint has recently
undertaken projects in a number of its hospitals targeted at expanding
or renovating specialty service facilities including emergency room
facilities, obstetric care, surgical capacity and outpatient services.
Management believes that this expansion of available treatments and
LifePoint's community focus should help to encourage local residents in
LifePoint's non-urban markets to seek care at facilities within their
communities and limit outmigration.
. Strengthen Physician Recruiting and Retention. LifePoint seeks to
enhance the quality of care available locally (and the revenue derived
therefrom), and believes that recruiting physicians in local communities
is critical to increasing the quality of health care and the breadth of
available services. LifePoint recruited 88 physicians in 1998, the
majority of whom were added during the second half of the year.
LifePoint believes that its recent recruiting success is largely
attributable to the announcement of its spin-off as an independent
company and the community-based focus of its new management team. As
part of LifePoint's physician recruitment program in 1999, LifePoint
plans to focus primarily on recruiting additional specialty care
physicians. LifePoint also intends to take advantage of its management
focus to work more effectively with individual physicians and physician
practices. Management believes that expansion of the range of available
treatments at its hospitals should also assist in physician recruiting.
. Retain and Develop Stable Management. LifePoint's management believes
that achieving long-term retention of executive teams at the hospitals
will enhance medical staff relations and maintain continuity of
relationships within the community. LifePoint intends to focus its
recruitment of managers and health care professionals on those who wish
to live and practice in the communities in which LifePoint's hospitals
are located. In the past, managers and health care professionals
employed at LifePoint hospitals sometimes relocated to advance their
careers elsewhere within the Columbia/HCA system. LifePoint expects that
its ability to provide equity-based compensation linked to its
performance should assist in management retention.
. Improve Managed Care Position. As part of Columbia/HCA, LifePoint's
facilities typically have been included in managed care contracts
negotiated by Columbia/HCA on a market-wide basis emphasizing large
urban facilities. LifePoint believes that independence from Columbia/HCA
and the lower managed care penetration in its markets will enable it
over time to negotiate contract terms that are generally more favorable
for its facilities and to decrease the level of discount arrangements in
which it participates. LifePoint's hospitals do not participate in
capitation arrangements and LifePoint does not intend to do so in the
future.
. Improve Expense Management. LifePoint has begun to implement cost
control initiatives designed to reduce labor costs and improve labor
productivity, control supplies expense and reduce uncollectible
revenues. These initiatives include adjusting staffing levels according
to patient volumes, modifying supply purchases according to patient
needs, providing training to hospital staff in more efficient billing
and collection processes. LifePoint also works with physicians to
eliminate unnecessary tests and procedures.
. Acquire Other Hospitals. Management intends to pursue a disciplined
acquisition strategy that will seek to identify and acquire attractive
hospitals in non-urban markets. In the past, Columbia/HCA has been
reluctant to pursue acquisitions of such facilities as non-urban
hospitals were not consistent with Columbia's urban market focus.
LifePoint will seek to acquire hospitals that are located in non-urban
markets with above average population growth, a strong economic base and
a favorable payor mix.
Recent Developments
On March 23, 1999, LifePoint entered into a letter of intent to sell three of
its general, acute care hospitals for an aggregate purchase price of $25
million, subject to net working capital adjustments. Consummation of this
transaction is subject to execution of definitive documentation and there can
be no assurance that this transaction will be consummated.
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Triad Hospitals, Inc.
Triad's Facilities
Triad will continue to provide health care services through its hospitals and
outpatient surgery centers located in small cities and selected high growth
urban markets in the Southern, Western and Southwestern United States. As of
December 31, 1998, the Pacific Group (the assets of which will be transferred
to Triad prior to the distribution) comprised 38 general, acute care hospitals,
1 psychiatric hospital, and 17 outpatient surgery centers, located in the
States of Alabama, Arizona, Arkansas, California, Kansas, Louisiana, Missouri,
New Mexico, Oklahoma, Oregon and Texas. The Pacific Group operates one of its
hospital through a 50/50 joint venture that is not consolidated for financial
reporting purposes and is building an additional hospital through a 50/50 joint
venture that is currently scheduled to open in May 1999. Triad's management has
focused on streamlining Triad's portfolio of facilities to eliminate those with
poor financial performance, weak competitive market positions or locations in
certain urban markets. As a result of this initiative, Triad has decided to
divest certain of its facilities and, since December 31, 1998, Triad has sold
one of its hospitals . Triad currently intends to sell an additional four of
its general, acute care hospitals, its one psychiatric hospital and certain of
the outpatient surgery centers that it operated as of December 31, 1998, and to
cease operation of another hospital which it leases. Following these
divestitures and the closure, Triad expects to own or operate 32 hospitals
(including the hospital operated through a joint venture and two hospitals
leased to and operated by an unaffiliated third party).
Triad's general, acute care hospitals typically provide a full range of
services commonly available in hospitals, such as internal medicine, general
surgery, cardiology, oncology, neurosurgery, orthopedics and obstetrics, as
well as diagnostic and emergency services. These hospitals also generally
provide outpatient and ancillary health care services such as outpatient
surgery, laboratory, radiology, respiratory therapy, cardiology and physical
therapy. Outpatient services also are provided by surgery centers operated by
Triad. In addition, certain of Triad's general, acute care hospitals have a
limited number of licensed psychiatric beds.
Recent Operating Performance
In recent periods, Triad has experienced declines in revenue and volume
growth rates. For example, during the year ended December 31, 1998, revenues
(on a same facility basis) declined by 1.3%, and hospital admissions (on a same
facility basis) decreased by 1.9%, although equivalent admissions (a measure of
combined inpatient and outpatient volume) increased by 0.6%. During the same
period, revenues per equivalent admission (on a same facility) decreased by
1.9%. Management believes that the declines are primarily attributable to the
shift to providing services on an outpatient basis, the increasing proportion
of Triad's revenue being derived from fixed payment and higher discount
sources, including Medicare, Medicaid and managed care plans and the impact of
the government investigations of certain of Columbia/HCA's business practices
and the related media coverage. Under the Federal Balanced Budget Act of 1997,
levels of Medicare and Medicaid reimbursement have recently been reduced and
will be further reduced as additional reductions are phased in over the next
few years. For additional information regarding Triad's financial performance
in recent periods, see the Triad consolidated financial statements included
elsewhere herein and "Triad Management's Discussion and Analysis of Financial
Condition and Results of Operations" beginning on page 68. See also "Triad
Unaudited Pro Forma Condensed Combined Financial Statements" beginning on page
25.
13
<PAGE>
Business Strategy
Triad's primary objectives are to provide quality health care services and to
enhance the financial performance of the company by increasing hospital
utilization and improving operating efficiencies, using the following
strategies:
. Build on Position in Small Cities and High Population Growth Urban
Markets. Triad believes that, as a result of its efforts to streamline
its base of assets, it is well positioned to build upon its portfolio of
facilities in the Southern, Western and Southwestern United States.
Triad also believes that, unlike rural markets which have small
populations, Triad's small-city markets can support increased specialty
services which produce relatively higher revenues than other health care
services. In addition, in Triad's small-city markets, managed care
penetration (i.e., the relative proportion of the market enrolled in
managed care programs (HMOs and PPOs)) is generally lower than in urban
areas and, therefore, Triad believes that it will be in a better
position to negotiate more favorable managed care contracts in these
markets. Triad also intends to strengthen its competitive position in
the fast growing larger urban areas of the Southwest where it currently
operates.
. Recruit Physicians. Triad plans to actively recruit additional primary
care physicians. Triad believes that primary care physicians are
frequently the first contact point for a patient and that each hospital
must establish strong physician relationships in its community in order
to enhance patient care and fulfill the needs of the growing population
in its markets.
. Enhance Specialty Services, Outpatient Services and Emergency Rooms.
Triad believes that many of its markets are large enough to support
additional specialty services, such as women's centers, orthopedic
facilities, oncology centers and neurology care, and intends to
selectively increase these services in order to reduce patient
outmigration to urban hospitals. To support this expansion of specialty
services, Triad plans to actively recruit additional specialists to its
facilities. Recognizing that the shift from inpatient to outpatient care
recently experienced by the health care industry is likely to continue,
Triad intends to enhance access to and the convenience of its outpatient
service capabilities by improving its free-standing outpatient surgery
centers, restructuring its hospital facilities and surgery capacity to
better accommodate outpatient treatment, and improving its emergency
room facilities.
. Improve Operating Efficiencies Through Enhanced Cost Management and
Resource Control. Triad has initiated several measures to improve the
financial performance of its facilities through greater control of
operating expenses. Triad has focused on reducing salaries, wages and
benefits, the largest component of operating expense, at the facility
level. Triad also has instituted a financial training program for its
hospital managers to teach effective management of hospital revenues and
expenses. Triad plans to improve resource management through cooperative
initiatives with physicians to eliminate unnecessary tests and
procedures.
. Develop Strong Relationships with Physicians. Triad believes recruiting
and retaining motivated physicians is vitally important to its long term
success. Triad believes a model for effective health care service
delivery can be developed cooperatively with physicians and the
hospitals, which will result in improved quality of care. In each of its
markets, Triad has established Physician Leadership Groups made up of
leading area physicians who will work with corporate and hospital
management to establish local priorities. Corporate objectives will be
addressed by a national Physician Leadership Group comprised of
representatives of local Physician Leadership Groups and members of
Triad management. In an effort to further improve communication with its
physicians, Triad has appointed a senior manager who is an experienced
physician to oversee physician relations.
. Grow Through Existing Hospital Expansion, New Hospital and Ambulatory
Service Center Construction, and Selective Acquisitions. Triad intends
to identify expansion opportunities in areas where management perceives
that demand is not being adequately met due to rapid population growth
14
<PAGE>
or insufficient existing health care services. Triad plans to
selectively expand its existing hospitals by adding additional clinical
facilities or medical office buildings. Triad plans to construct new
hospitals and also may seek to make acquisitions in select markets.
Triad is currently in the process of building a new facility in South
Tulsa, Oklahoma through a joint venture with Hillcrest Healthcare
Systems. The facility is scheduled to open in May 1999 and will be 50%
owned by Triad. Triad believes that potential acquisition opportunities
may arise when other health care providers choose to divest facilities
or when independent hospitals believe that they can benefit from
becoming part of a larger hospital company. Currently, Triad does not
have specific plans for additional new facilities or acquisitions.
15
<PAGE>
Comparative Financial Highlights
The following table sets forth, for each of the years ended December 31,
1998, 1997 and 1996, revenues, income (loss) from continuing operations, total
assets and other operating data for each of LifePoint, Triad and, after giving
effect to the distribution, Columbia/HCA. This data is presented for
informational purposes only and is not necessarily indicative of the results of
operations or financial position that any of such companies would have reported
if they had operated independently during the periods presented (dollars in
millions).
<TABLE>
<CAPTION>
As of and for the Year
Ended December 31,
---------------------------------------
1998 1997 1996
------------ ------------ -----------
Amount % Amount % Amount %
------- --- ------- --- ------- ---
<S> <C> <C> <C> <C> <C> <C>
Columbia/HCA revenues................ $16,594 88% $16,722 88% $16,721 89%
LifePoint revenues................... 498 3 488 3 464 2
Triad revenues....................... 1,589 9 1,609 9 1,601 9
------- --- ------- --- ------- ---
$18,681 100% $18,819 100% $18,786 100%
======= === ======= === ======= ===
Columbia/HCA income (loss) from
continuing operations (a)........... $ 636 119% $ 184 100% $ 1,354 92%
LifePoint income (loss) from
continuing
operations (a)...................... (18) (3) 17 10 39 3
Triad income (loss) from continuing
operations (a)...................... (86) (16) (19) (10) 68 5
------- --- ------- --- ------- ---
$ 532 100% $ 182 100% $ 1,461 100%
======= === ======= === ======= ===
Columbia/HCA total assets............ $17,703 91% $20,193 92% $19,314 91%
LifePoint total assets............... 355 2 398 2 376 2
Triad total assets................... 1,371 7 1,411 6 1,426 7
------- --- ------- --- ------- ---
$19,429 100% $22,002 100% $21,116 100%
======= === ======= === ======= ===
Other operating data:
Columbia/HCA EBITDA(b)............... $ 2,662 93% $ 2,581 90% $ 3,808 90%
LifePoint EBITDA(b).................. 57 2 82 3 111 3
Triad EBITDA(b)...................... 149 5 188 7 295 7
------- --- ------- --- ------- ---
$ 2,868 100% $ 2,851 100% $ 4,214 100%
======= === ======= === ======= ===
</TABLE>
- --------
(a) Includes charges (net of tax benefits) related to impairments of long-lived
assets of $300, $16 and $33 million during 1998 for Columbia/HCA, LifePoint
and Triad, respectively, and $282 and $8 million during 1997 for
Columbia/HCA and Triad, respectively.
(b) EBITDA is defined as income from continuing operations before depreciation
and amortization, interest expense, management fees, impairment of long-
lived assets, gains on sales of facilities, restructuring of operations and
investigation related costs, minority interests and income taxes. EBITDA is
commonly used as an analytical indicator within the health care industry,
and also serves as a measure of leverage capacity and debt service ability.
EBITDA should not be considered as a measure of financial performance under
generally accepted accounting principles, and the items excluded from
EBITDA are significant components in understanding and assessing financial
performance. EBITDA should not be considered in isolation or as an
alternative to net income, cash flows generated by operating, investing or
financing activities or other financial statement data presented in the
combined financial statements as an indicator of financial performance or
liquidity. Because EBITDA is not a measurement determined in accordance
with generally accepted accounting principles and is thus susceptible to
varying calculations, EBITDA as presented may not be comparable to other
similarly titled measures of other companies.
16
<PAGE>
LifePoint
Summary Financial Data
The following table sets forth summary historical financial data of LifePoint
for each of the years in the five year period ended December 31, 1998 and
certain unaudited pro forma financial data of LifePoint for the year ended
December 31, 1998. The summary financial data at December 31, 1996, 1995 and
1994 and for the years ended December 31, 1995 and 1994 has been derived from
unaudited financial statements. The table should be read in conjunction with
the LifePoint Hospitals, Inc. Combined Financial Statements, the LifePoint
Unaudited Pro Forma Condensed Combined Financial Statements and the related
notes included elsewhere in this information statement.
<TABLE>
<CAPTION>
Years Ended December 31,
----------------------------------------
1998 1997 1996 1995 1994
------- ------- ------ ------ ------
(Dollars in millions)
<S> <C> <C> <C> <C> <C>
Summary of Operations:
Revenues............................ $ 498.4 $ 487.6 $464.0 $395.8 $350.1
Income (loss) from continuing
operations (a)..................... (17.7) 17.1 39.3 25.6 14.4
Net income (loss) (a)............... (21.8) 12.5 41.2 27.4 15.9
Basic earnings (loss) per share:
Income (loss) from continuing
operations (a)................... $ (0.59) $ 0.57 $ 1.31 $ 0.85 $ 0.48
Net Income (loss) (a)............. $ (0.73) $ 0.41 $ 1.37 $ 0.91 $ 0.53
Shares used in computing basic
earnings (loss)
per share (in millions).......... 30.0 30.0 30.0 30.0 30.0
Diluted earnings (loss) per share:
Income (loss) from continuing
operations (a)................... $ (0.59) $ 0.57 $ 1.30 $ 0.84 $ 0.47
Net income (loss) (a)............. $ (0.73) $ 0.41 $ 1.36 $ 0.90 $ 0.52
Shares used in computing diluted
earnings (loss)
per share (in millions).......... 30.0 30.2 30.3 30.4 30.4
Financial Position:
Assets.............................. $ 355.0 $ 397.9 $376.0 $324.5 $312.3
Long-term debt, including amounts
due within one year................ 0.6 1.6 1.6 2.1 1.7
Intercompany balances payable to
Columbia/HCA....................... 167.6 182.5 176.3 181.3 218.2
Working capital..................... 26.9 41.1 39.0 24.4 19.7
Capital expenditures................ 29.3 51.8 53.4 28.6 34.1
Other Operating Data:
EBITDA (b).......................... $ 56.8 $ 82.0 $110.6 $ 82.4 $ 66.3
Pro forma EBITDA (c)................ $ 50.0
Number of hospitals at end of
period............................. 23 22 22 20 20
Number of licensed beds at end of
period (d)......................... 2,108 2,080 2,074 1,881 1,843
Weighted average licensed beds (e).. 2,122 2,078 2,060 1,862 1,783
Admissions (f)...................... 62,264 60,487 59,381 54,549 52,681
Equivalent admissions (g)........... 109,336 105,126 98,869 88,915 81,708
Average length of stay (days) (h)... 4.4 4.4 4.7 4.8 4.9
Average daily census (i)............ 742 733 755 713 713
Occupancy rate (j).................. 35% 35% 37% 38% 40%
</TABLE>
- --------
(a) Includes charge related to impairment of long-lived assets of $26.1 million
($15.9 million after-tax) for the year ended December 31, 1998.
(b) EBITDA is defined as income from continuing operations before depreciation
and amortization, interest expense, management fees, impairment of long-
lived assets, minority interests and income taxes. EBITDA
17
<PAGE>
is commonly used as an analytical indicator within the health care
industry, and also serves as a measure of leverage capacity and debt
service ability. EBITDA should not be considered as a measure of financial
performance under generally accepted accounting principles, and the items
excluded from EBITDA are significant components in understanding and
assessing financial performance. EBITDA should not be considered in
isolation or as an alternative to net income, cash flows generated by
operating, investing or financing activities or other financial statement
data presented in the combined financial statements as an indicator of
financial performance or liquidity. Because EBITDA is not a measurement
determined in accordance with generally accepted accounting principles and
is thus susceptible to varying calculations, EBITDA as presented may not be
comparable to other similarly titled measures of other companies.
(c) Pro forma EBITDA is EBITDA, as defined in (b) above, adjusted as if the
distribution and the divestitures of certain facilities that LifePoint
intends to divest during 1999 had occurred at the beginning of 1998, to
exclude noncash ESOP expense and include LifePoint management's estimated
corporate overhead costs of $12 million, that are recorded in the Pro
Forma Condensed Combined Statement of Operations to replace the management
fees allocated by Columbia/HCA (see Unaudited Pro Forma Condensed Combined
Financial Statements). In addition to the exclusion of certain items from
pro forma EBITDA as presented and as commonly accepted within the health
care industry, LifePoint believes that the impact on future operations of
certain other unusual costs included in pro forma EBITDA as presented
should also be considered in assessing LifePoint's leverage capacity and
debt service ability. LifePoint believes that certain costs incurred in
1998 and included in 1998 pro forma EBITDA were unusual in nature or
magnitude, and costs similar in nature or magnitude are not expected to
occur in future periods. Such costs included, among other items,
incremental salary costs associated with computer information system
conversions, severance, and certain uninsured legal settlements.
(d) Licensed beds are those beds for which a facility has been granted
approval to operate from the applicable state licensing agency.
(e) Represents the average number of licensed beds weighted based on periods
owned.
(f) Represents the total number of patients admitted (in the facility for a
period in excess of 23 hours) to LifePoint's hospitals and is used by
management and certain investors as a general measure of inpatient volume.
(g) Equivalent admissions is used by management and certain investors as a
general measure of combined inpatient and outpatient volume. Equivalent
admissions is computed by multiplying admissions (inpatient volume) by the
sum of gross inpatient revenue and gross outpatient revenue and then
dividing the resulting amount by gross inpatient revenue. The equivalent
admissions computation "equates" outpatient revenue to the volume measure
(admissions) used to measure inpatient volume resulting in a general
measure of combined inpatient and outpatient volume.
(h) Represents the average number of days admitted patients stay in
LifePoint's hospitals. Average length of stay has declined due to the
continuing pressures from managed care and other payers to restrict
admissions and reduce the number of days that are covered by the payers
for certain procedures, and by technological and pharmaceutical
improvements.
(i) Represents the average number of patients in LifePoint's hospital beds
each day.
(j) Represents the percentage of hospital licensed beds occupied by patients.
Both average daily census and occupancy rate provide measures of the
utilization of inpatient rooms. The declining occupancy rate is primarily
attributed to the trend toward more services, that were previously
performed in an inpatient setting, being performed on an outpatient basis
and the decline in average length of stay per admission.
18
<PAGE>
LifePoint
Unaudited Pro Forma Condensed Combined Financial Statements
The following Unaudited Pro Forma Condensed Combined Financial Statements of
LifePoint are based on the historical combined financial statements, which
reflect periods during which the businesses that will comprise LifePoint did
not operate as a separate, independent company and certain estimates,
assumptions and allocations were made in preparing such financial statements.
Therefore, such historical combined financial statements do not necessarily
reflect the combined results of operations or financial position that would
have existed had LifePoint been a separate, independent company.
The Unaudited Pro Forma Condensed Combined Statement of Operations for the
year ended December 31, 1998 reflects the results of LifePoint's operations as
if the distribution and the divestitures of facilities that LifePoint intends
to divest during 1999 had occurred at the beginning of 1998. The Unaudited Pro
Forma Condensed Combined Balance Sheet assumes that the distribution and such
divestitures had occurred on December 31, 1998.
The Unaudited Pro Forma Condensed Combined Financial Statements should be
read in conjunction with the historical financial statements of LifePoint
included elsewhere herein and the notes thereto. The pro forma condensed
combined financial information is presented for informational purposes only and
does not purport to reflect the results of operations or financial position of
LifePoint or the results of operations or financial position that would have
occurred had LifePoint been operated as a separate, independent company.
19
<PAGE>
LifePoint
Unaudited Pro Forma Condensed Combined Statement of Operations
Year Ended December 31, 1998
(Dollars in millions, except per share amounts)
<TABLE>
<CAPTION>
Pro Forma Pro
Historical Adjustments Forma
---------- ----------- ------
<S> <C> <C> <C>
Revenues................................................................ $498.4 $(48.0)(a) $450.4
Salaries and benefits................................................... 220.8 (23.5)(a) 200.4
(5.3)(b)
8.4 (c)
Supplies................................................................ 62.0 (6.6)(a) 55.9
0.5 (c)
Other operating expenses................................................ 117.2 (12.3)(a) 108.0
3.1 (c)
Provision for doubtful accounts......................................... 41.6 (5.5)(a) 36.1
Depreciation and amortization........................................... 28.3 (3.2)(a) 25.1
ESOP expense............................................................ -- 2.4 (b) 2.4
Interest expense allocated from Columbia/HCA............................ 19.1 (5.6)(a) 23.5
10.0 (d)
Management fees allocated from Columbia/HCA............................. 8.9 (0.9)(a) --
(8.0)(c)
Impairment of long-lived assets......................................... 26.1 (24.8)(a) 1.3
------ ------ ------
524.0 (71.3) 452.7
------ ------ ------
Loss from continuing operations before minority interests and income tax
benefit................................................................ (25.6) 23.3 (2.3)
Minority interests in earnings of consolidated entities................. 1.9 -- 1.9
------ ------ ------
Loss from continuing operations before income taxes..................... (27.5) 23.3 (4.2)
Income tax benefit...................................................... (9.8) 8.1 (e) (1.7)
------ ------ ------
Loss from continuing operations......................................... $(17.7) $ 15.2 $ (2.5)
====== ====== ======
Basic and diluted loss per share (g).................................... $ (.59) $ (.08)
Shares used in computing basic and diluted loss per
share (in millions) (g)................................................ 30.0 30.0
</TABLE>
The accompanying notes are an integral part of the unaudited pro forma
condensed
combined financial statements.
20
<PAGE>
LifePoint
Unaudited Pro Forma Condensed Combined Balance Sheet
December 31, 1998
(Dollars in millions, except per share amounts)
<TABLE>
<CAPTION>
Pro Forma Pro
Historical Adjustments Forma
---------- ----------- ------
<S> <C> <C> <C>
ASSETS
------
Current assets:
Accounts receivable, net................... $ 36.4 $ (5.8)(a) $ 42.6
12.0 (h)
Inventories................................ 14.0 (2.1)(a) 11.9
Deferred taxes and other current assets.... 18.6 (.7)(a) 13.4
(4.5)(h)
------- ------ ------
69.0 (1.1) 67.9
Property and equipment, at cost.............. 442.6 (29.7)(a) 412.9
Accumulated depreciation..................... (176.2) 12.0 (a) (164.2)
------- ------ ------
266.4 (17.7) 248.7
Intangible assets, net....................... 15.2 (.5)(a) 14.7
Other........................................ 4.4 (4.0)(a) 10.4
10.0 (f)
------- ------ ------
$ 355.0 $(13.3) $341.7
======= ====== ======
LIABILITIES AND EQUITY
----------------------
Current liabilities:
Accounts payable........................... $ 15.5 $ (1.6)(a) $ 13.9
Accrued salaries........................... 11.7 (1.0)(a) 10.7
Other current liabilities.................. 14.9 (1.2)(a) 13.7
------- ------ ------
42.1 (3.8) 38.3
Intercompany balances payable to 167.6 (39.0)(a) --
Columbia/HCA................................
(136.1)(f)
7.5 (h)
Long-term debt............................... .3 260.0 (f) 260.3
Deferred taxes and other liabilities......... 21.4 -- 21.4
Minority interests in equity of consolidated
entities.................................... 4.9 -- 4.9
Equity, investments by Columbia/HCA.......... 118.7 12.0 (a) --
(130.7)(f)
Preferred stock, par value $0.01 per share;
authorized shares, no shares issued..... -- -- --
Common stock, par value $0.01 per share;
authorized shares,
30.0 million shares issued and outstanding.. -- 0.3 (f) 0.3
Capital in excess of par value............... -- 16.5 (f) 16.5
------- ------ ------
$ 355.0 $(13.3) $341.7
======= ====== ======
</TABLE>
The accompanying notes are an integral part of the unaudited pro forma
condensed combined financial statements.
21
<PAGE>
LifePoint
Notes to Unaudited Pro Forma Condensed Combined Financial Statements
Note 1--Basis of Presentation
The pro forma condensed combined financial statements reflect the combination
of historical financial information of the facilities to be part of LifePoint
and the pro forma adjustments described in Note 2.
Note 2--Pro Forma Adjustments
(a) To eliminate the assets, liabilities and 1998 results of operations of the
three facilities for which LifePoint management believes divestiture during
1999 is probable.
(b) To adjust for the estimated non-cash charge associated with the
establishment of an Employee Stock Ownership Plan ("ESOP"). The estimated
non-cash charge excludes any impact which would result from a fluctuation
in the fair value of LifePoint common stock.
(c) To adjust for the estimated incremental general and administrative costs
that would have been incurred if LifePoint had managed comparable general
and administrative functions and eliminate the management fee allocated
from Columbia/HCA.
(d) To adjust interest expense to $23.5 million for the year ended December 31,
1998. The interest expense adjustment is based on the elimination of all
intercompany amounts payable by LifePoint to Columbia/HCA ($167.6 million
at December 31, 1998) and the assumption of certain indebtedness from
Columbia/HCA in the aggregate amount of $260.0 million, at an assumed
average interest rate of 9.0%.
(e) To adjust income tax benefit for the estimated impact of the pro forma
adjustments.
(f) To adjust for estimated initial long-term debt of $260.0 million which will
be assumed from Columbia/HCA, record deferred loan costs of $10.0 million,
and record the issuance of 30.0 million shares of LifePoint common stock.
(g) Pro forma basic and diluted loss per share was computed based upon 30.0
million shares of LifePoint common stock, which are expected to be issued
at the distribution date.
(h) To adjust for Columbia/HCA's assumption of responsibility for, and
entitlement to, Medicare, Medicaid, and cost-based Blue Cross receivables
and payables relating to cost reporting periods ending on or prior to the
distribution date pursuant to the Distribution Agreement.
22
<PAGE>
Triad
Summary Financial Data
The following table sets forth summary historical financial data of Triad for
each of the years in the five year period ended December 31, 1998, and certain
unaudited pro forma financial data of Triad for the year ended December 31,
1998. The summary financial data at December 31, 1996, 1995 and 1994 and for
the years ended December 31, 1995 and 1994 has been derived from unaudited
financial statements. The table should be read in conjunction with the Triad
Hospitals, Inc. Combined Financial Statements, the Triad Unaudited Pro Forma
Condensed Combined Financial Statements and the related notes included
elsewhere in this information statement.
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------------------------------
1998 1997 1996 1995 1994
-------- -------- -------- -------- --------
(Dollars in millions)
<S> <C> <C> <C> <C> <C>
Summary of Operations:
Revenues................... $1,588.7 $1,609.3 $1,600.5 $1,558.9 $1,290.5
Income (loss) from
continuing operations
(a)....................... (85.5) (19.0) 68.3 84.9 54.0
Net income (loss) (a)...... (87.1) (19.8) 74.7 87.2 55.5
Basic earnings (loss) per
share:
Income (loss) from
continuing operations
(a)..................... $ (2.85) $ (0.63) $ 2.28 $ 2.83 $ 1.80
Net income (loss) (a).... $ (2.90) $ (0.66) $ 2.49 $ 2.91 $ 1.85
Shares used in computing
basic earnings (loss)
per share (in
millions)............... 30.0 30.0 30.0 30.0 30.0
Diluted earnings (loss) per
share:
Income (loss) from
continuing operations
(a)..................... $ (2.85) $ (0.63) $ 2.26 $ 2.79 $ 1.78
Net income (loss) (a).... $ (2.90) $ (0.66) $ 2.47 $ 2.87 $ 1.83
Shares used in computing
diluted earnings (loss)
per share (in
millions)............... 30.0 30.0 30.3 30.4 30.4
Financial Positions:
Assets..................... $1,371.3 $1,410.5 $1,426.3 $1,351.8 $1,169.4
Long-term debt, including
amounts due within
one year.................. 14.4 15.4 17.1 27.5 32.3
Intercompany balances
payable to Columbia/HCA... 613.7 525.0 521.7 392.6 331.3
Working capital............ 184.9 150.3 156.5 156.3 127.9
Capital expenditures....... 114.9 120.1 94.4 102.9 202.4(k)
Operating Data:
EBITDA (b)................. $ 149.0 $ 187.8 $ 294.5 $ 285.2 $ 206.2
Pro forma EBITDA (c)....... $ 140.8
Number of hospitals at end
of period................. 38 38 38 39 38
Number of licensed beds at
end of period (d)......... 5,909 5,859 5,872 5,926 5,660
Weighted average licensed
beds (e).................. 5,877 5,860 5,882 5,900 5,325
Admissions (f)............. 169,590 172,926 171,265 170,392 147,923
Equivalent admissions (g).. 276,771 275,125 266,660 257,292 211,382
Average length of stay
(days) (h)................ 4.9 4.9 5.0 5.2 5.2
Average daily census (i)... 2,260 2,326 2,338 2,405 2,111
Occupancy rate (j)......... 39% 40% 40% 41% 40%
</TABLE>
- --------
(a) Includes charges related to impairment of long-lived assets of $55.1
million ($32.9 million after-tax) and $13.7 million ($8.2 million after-
tax) for the years ended December 31, 1998 and 1997, respectively.
(b) EBITDA is defined as income from continuing operations before depreciation
and amortization, interest expense, management fees, impairment of long-
lived assets, minority interests and income taxes. EBITDA is commonly used
as an analytical indicator within the health care industry, and also serves
as a measure of leverage capacity and debt service ability. EBITDA should
not be considered as a measure of financial performance under generally
accepted accounting principles, and the items excluded from EBITDA are
23
<PAGE>
significant components in understanding and assessing financial performance.
EBITDA should not be considered in isolation or as an alternative to net
income, cash flows generated by operating, investing or financing activities
or other financial statement data presented in the combined financial
statements as an indicator of financial performance or liquidity. Because
EBITDA is not a measurement determined in accordance with generally accepted
accounting principles and is thus susceptible to varying calculations,
EBITDA as presented may not be comparable to other similarly titled measures
of other companies.
(c) Pro forma EBITDA is EBITDA, as defined in (b) above, adjusted as if the
distribution and the divestitures of certain facilities that Triad intends
to divest during 1999 had occurred at the beginning of 1998, to exclude
noncash ESOP expense and include Triad management's estimated corporate
overhead costs of $22.4 million, that are recorded in the Pro Forma
Condensed Combined Statement of Operations to replace the management fees
allocated by Columbia/HCA (see unaudited Pro Forma Condensed Combined
Financial Statements). In addition to the exclusion of certain items from
pro forma EBITDA as presented and as commonly accepted within the health
care industry, Triad believes that the impact on future operations of
certain other unusual costs included in pro forma EBITDA as presented
should also be considered in assessing Triad's leverage capacity and debt
service ability. Triad believes that certain costs incurred in 1998 and
included in 1998 pro forma EBITDA were unusual in nature or magnitude, and
costs similar in nature or magnitude are not expected to occur in future
periods. Such costs included, among other items, incremental salary costs
associated with computer information system conversions and certain
uninsured legal settlements.
(d) Licensed beds are those beds for which a facility has been granted approval
to operate from the applicable state licensing agency.
(e) Represents the average number of licensed beds, weighted based on periods
owned.
(f) Represents the total number of patients admitted (in the facility for a
period in excess of 23 hours) to Triad's hospitals and is used by
management and certain investors as a general measure of inpatient volume.
(g) Equivalent admissions is used by management and certain investors as a
general measure of combined inpatient and outpatient volume. Equivalent
admissions are computed by multiplying admissions (inpatient volume) by the
sum of gross inpatient revenue and gross outpatient revenue and then
dividing the resulting amount by gross inpatient revenue. The equivalent
admissions computation "equates" outpatient revenue to the volume measure
(admissions) used to measure inpatient volume resulting in a general
measure of combined inpatient and outpatient volume.
(h) Represents the average number of days admitted patients stay in Triad's
hospitals. Average length of stay has declined due to the continuing
pressures from managed care and other payers to restrict admissions and
reduce the number of days that are covered by the payers for certain
procedures, and by technological and pharmaceutical improvements.
(i) Represents the average number of patients in Triad's hospital beds each
day.
(j) Represents the percentage of hospital licensed beds occupied by patients.
Both average daily census and occupancy rate provide measures of the
utilization of inpatient rooms. The declining occupancy rate is primarily
attributed to the trend toward more services, that were previously
performed in an inpatient setting, being performed on an outpatient basis
and the decline in average length of stay per admission.
(k) Includes the acquisition of 7 hospitals from EPIC Healthcare Group, Inc. in
May 1994.
24
<PAGE>
Triad
Unaudited Pro Forma Condensed Combined Financial Statements
The following Unaudited Pro Forma Condensed Combined Financial Statements of
Triad are based on the historical combined financial statements, which reflect
periods during which the businesses that will comprise Triad did not operate as
a separate, independent company and certain estimates, assumptions and
allocations were made in preparing such financial statements. Therefore such
historical combined financial statements do not necessarily reflect the
combined results of operations or financial position that would have existed
had Triad been a separate, independent company.
The Unaudited Pro Forma Condensed Combined Statement of Operations for the
year ended December 31, 1998 reflects the results of Triad's operations as if
the distribution and the divestitures of facilities that Triad intends to
divest during 1999 had occurred at the beginning of 1998. The Unaudited Pro
Forma Condensed Combined Balance Sheet assumes that the distribution and such
divestitures had occurred on December 31, 1998.
The Unaudited Pro Forma Condensed Combined Financial Statements should be
read in conjunction with the historical financial statements of Triad included
elsewhere herein and the notes thereto. The pro forma condensed combined
financial information is presented for informational purposes only and does not
purport to reflect the results of operations or financial position of Triad or
the results of operations or financial position that would have occurred had
Triad been operated as a separate, independent company.
25
<PAGE>
Triad
Unaudited Pro Forma Condensed Combined Statement of Operations
Year Ended December 31, 1998
(Dollars in millions, except per share amounts)
<TABLE>
<CAPTION>
Pro Forma Pro
Historical Adjustments Forma
---------- ----------- --------
<S> <C> <C> <C>
Revenues................................... $1,588.7 $(196.8)(a) $1,391.9
Salaries and benefits...................... 700.5 (104.6)(a) 597.0
5.4 (f)
(4.3)(g)
Supplies................................... 241.6 (23.2)(a) 218.9
0.5 (f)
Other operating expenses................... 359.2 (52.8)(a) 316.5
10.1 (f)
Provision for doubtful accounts............ 138.4 (19.7)(a) 118.7
Depreciation and amortization.............. 109.6 (16.4)(a) 93.2
ESOP expense............................... -- 4.3 (g) 4.3
Interest expense allocated from
Columbia/HCA.............................. 68.9 (14.9)(a) 69.7
15.7 (b)
Management fees allocated from
Columbia/HCA.............................. 29.3 (3.6)(a) --
(25.7)(f)
Impairment of long-lived assets............ 55.1 (31.1)(a) 24.0
-------- ------- --------
1,702.6 (260.3) 1,442.3
-------- ------- --------
Loss from continuing operations before
minority interests and income tax
benefit................................... (113.9) 63.5 (50.4)
Minority interests in earnings of
consolidated entities..................... 11.0 (0.6)(a) 10.4
-------- ------- --------
Loss from continuing operations before
income taxes.............................. (124.9) 64.1 (60.8)
Income tax benefit......................... (39.4) 17.7 (c) (21.7)
-------- ------- --------
Loss from continuing operations............ $ (85.5) $ 46.4 $ (39.1)
======== ======= ========
Basic and diluted loss per share (e)....... $ (2.85) $ (1.30)
Shares (in millions) used in computing
basic and diluted loss per share (e)...... 30.0 30.0
</TABLE>
The accompanying notes are an integral part of the unaudited pro forma
condensed combined financial statements.
26
<PAGE>
Triad
Unaudited Pro Forma Condensed Combined Balance Sheet
December 31, 1998
(Dollars in millions, except per share amounts)
<TABLE>
<CAPTION>
Pro Forma Pro
Historical Adjustments Forma
---------- ----------- --------
<S> <C> <C> <C>
ASSETS
------
Current assets:
Accounts receivable, net.................. $ 199.3 $ (13.9)(a) $ 223.7
38.3 (h)
Inventories............................... 44.8 (4.0)(a) 40.8
Income taxes.............................. 37.9 (2.7)(a) 25.7
(9.5)(h)
Other..................................... 23.9 (9.1)(a) 14.8
-------- ------- --------
305.9 (0.9) 305.0
Property and equipment, at cost............. 1,462.6 (202.4)(a) 1,260.2
Accumulated depreciation.................... (703.1) 119.3 (a) (583.8)
-------- ------- --------
759.5 (83.1) 676.4
Intangible assets, net...................... 272.9 (13.0)(a) 259.9
Other....................................... 33.0 (5.1)(a) 42.9
15.0 (d)
-------- ------- --------
$1,371.3 $ (87.1) $1,284.2
======== ======= ========
LIABILITIES AND EQUITY
----------------------
Current liabilities:
Accounts payable.......................... $ 47.5 $ (5.5)(a) $ 42.0
Accrued salaries.......................... 34.8 (5.7)(a) 29.1
Other current liabilities................. 38.7 (4.7)(a) 34.0
-------- ------- --------
121.0 (15.9) 105.1
Long-term debt.............................. 13.4 701.6 (d) 715.0
Deferred taxes and other liabilities........ 62.5 (3.6)(a) 58.9
Minority interests in equity of consolidated
entities................................... 60.0 (4.4)(a) 55.6
Intercompany balances payable to
Columbia/HCA............................... 613.7 (642.5)(d) --
28.8 (h)
Equity, investments by Columbia/HCA......... 500.7 (107.0)(a) --
(393.7)(d)
Preferred stock, par value $0.01 per share;
authorized shares; no shares issued.. -- -- --
Common stock, par value $0.01 per share;
authorized million shares, 30.0 million
shares issued and outstanding.............. -- 0.3 (d) 0.3
Capital in excess of par value.............. -- 349.3 (d) 349.3
-------- ------- --------
$1,371.3 $ (87.1) $1,284.2
======== ======= ========
</TABLE>
The accompanying notes are an integral part of the unaudited pro forma
condensed combined financial statements.
27
<PAGE>
Triad
Notes to Unaudited Pro Forma Condensed Combined Financial Statements
Note 1--Basis of Presentation
The pro forma condensed combined financial statements reflect the combination
of historical financial information of the facilities to be part of Triad and
the pro forma adjustments described in Note 2.
Note 2--Pro Forma Adjustments
(a) To reflect the following completed divestiture and planned divestitures and
closure in 1999:
(1) elimination of the assets, liabilities and 1998 results of operations
of one acute care hospital which was sold effective as of March 1, 1999
(the proceeds of such sale were received by Columbia/HCA); and
(2) elimination of the assets, liabilities and 1998 results of operations
of four acute care hospitals and one psychiatric hospital for which
Triad management believes sales in 1999 are probable; and
(3) elimination of the assets, liabilities and 1998 results of operations
of one acute care hospital which is expected to cease operations in
April 1999.
(b) To adjust interest expense to $69.7 million for the year ended December 31,
1998. The interest expense adjustment is based on the elimination of all
intercompany amounts payable by Triad to Columbia/HCA ($613.7 million at
December 31, 1998) and the assumption of certain indebtedness from
Columbia/HCA in the aggregate amount of $715.0 million at an assumed
average interest rate of 9.75%.
(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 $715.0 million which will
be assumed from Columbia/HCA, record deferred loan costs associated with
the long-term debt of $15.0 million and record the issuance of 30.0 million
shares of Triad common stock.
(e) Pro forma loss per share was computed based upon 30.0 million shares of
Triad common stock, which are expected to be issued at the distribution
date.
(f) To adjust for the estimated, incremental general and administrative costs
of $16.0 million that would have been incurred if Triad had managed
comparable general and administrative functions and eliminate the
management fee allocated from Columbia/HCA.
(g) To adjust for the estimated noncash charge associated with the
establishment of an Employee Stock Ownership Plan ("ESOP"). The estimated
noncash charge excludes any impact which would result from a fluctuation in
the fair value of Triad common stock.
(h) To adjust for Columbia/HCA's assumption of responsibility for, and
entitlement to, Medicare, Medicaid and cost-based Blue Cross receivables
and payables relating to cost reporting periods ending on or prior to the
distribution date pursuant to the Distribution Agreement.
28
<PAGE>
Risk Factors
Holders of shares of LifePoint common stock and Triad common stock should
carefully consider all information contained in this information statement,
especially the matters described or referred to in the following paragraphs.
Loss of Physicians or Other Key Personnel Could Adversely Affect LifePoint and
Triad
Since physicians generally direct the majority of hospital admissions, the
success of LifePoint and Triad, in part, is dependent upon the number and
quality of physicians on their hospitals' medical staffs, the admissions
practices of such physicians and the maintenance of good relations with such
physicians. Hospital physicians are generally not employees and, in many of the
markets served by Triad, most physicians have admitting privileges at other
hospitals.
With regard to LifePoint, only a limited number of physicians practice in the
non-urban communities in which LifePoint's hospitals are located. Consequently,
the loss of physicians in these communities, the inability of LifePoint to
recruit and to retain physicians in these communities or the inability of
LifePoint to maintain good relations with the physicians on its hospitals'
staffs could have a material adverse effect on its business, financial
condition, results of operations or prospects. The operations of LifePoint's
hospitals could also be materially adversely affected by the shortage of nurses
and certain other health care professionals in these communities.
LifePoint is also dependent upon the continued services and management
experience of Scott L. Mercy, James M. Fleetwood, Jr., and other of its
executive officers, and Triad also is dependent upon the continued services and
management experience of James D. Shelton and other of its executive officers.
If Messrs. Mercy, Fleetwood or Shelton, or any of such other executive
officers, were to resign their positions or otherwise be unable to serve, the
operating results of LifePoint or Triad, as the case may be, could be adversely
affected. In addition, the success of each of LifePoint and Triad depends on
its ability to attract and retain managers at its hospitals and other
facilities, on the ability of its officers and key employees to manage growth
successfully and on its ability to attract and retain skilled employees.
No Operating Histories as Independent Companies; Net Losses
Prior to the distribution, LifePoint operated as the America Group division
and Triad operated as the Pacific Group division of Columbia/HCA. Accordingly,
LifePoint and Triad do not have operating histories as independent, publicly-
traded companies and have historically relied on Columbia/HCA for various
financial, administrative and managerial expertise relevant to the conduct of
their businesses. After the distribution, LifePoint and Triad will maintain
their own lines of credit and banking relationships, employ their own senior
executives, perform their own administrative functions, (except that
Columbia/HCA will continue to provide certain support services to LifePoint and
Triad on a contractual basis.) The operations of the America Group did not
generate a profit for 1998, and the operations of the Pacific Group did not
generate a profit for 1998 or 1997. There can be no assurance that either
LifePoint or Triad will not continue to have net losses as independent,
publicly traded companies. See "LifePoint Unaudited Pro Forma Condensed
Combined Financial Statements," "Triad Unaudited Pro Forma Condensed Combined
Financial Statements," and "Arrangements Among Columbia/HCA, LifePoint and
Triad Relating to the Distribution" and see "LifePoint Management's Discussion
and Analysis of Financial Condition and Results of Operations" and "Triad
Management's Discussion and Analysis of Financial Condition and Results of
Operations" for certain factors that could affect either Lifepoint or Triad's
ability to generate profits.
Limits on Reimbursement and Health Care Reform Legislation May Reduce
Profitability
A significant portion of the revenues of LifePoint and Triad are derived from
the Medicare and Medicaid programs, which are highly regulated and subject to
frequent and substantial changes. In recent years,
29
<PAGE>
fundamental changes in the Medicare and Medicaid programs (including the
implementation of a prospective payment system ("PPS") for inpatient services
at medical/surgical hospitals) have resulted in limitations on, and reduced
levels of payment and reimbursement for, a substantial portion of hospital
procedures and costs. The Federal Balanced Budget Act of 1997 (the "Balanced
Budget Act"), which establishes a plan to balance the Federal budget by fiscal
year 2002, includes significant additional reductions in spending levels for
the Medicare and Medicaid programs. These include, among others, payment
reductions for inpatient and outpatient hospital services, establishment of a
PPS for hospital outpatient services, skilled nursing facilities and home
health agencies under Medicare, and repeal of the Federal payment standard (the
so-called "Boren Amendment") for hospitals and nursing facilities under
Medicaid. A number of states also are considering legislation designed to
reduce their Medicaid expenditures and to provide universal coverage and
additional care, including enrolling Medicaid recipients in managed care
programs and imposing additional taxes on hospitals to help finance or expand
the states' Medicaid systems. In addition, private payers increasingly are
attempting to control health care costs through direct contracting with
hospitals to provide services on a discounted basis, increased utilization
review and greater enrollment in managed care programs such as health
maintenance organizations ("HMOs") and preferred provider organizations
("PPOs"). LifePoint and Triad believe that hospital operating margins have
been, and may continue to be, under significant pressure because of
deterioration in pricing flexibility and payer mix, and growth in operating
expenses in excess of the increase in prospective payments under the Medicare
program.
In recent years, an increasing number of legislative proposals have been
introduced or proposed in Congress and in some state legislatures that would
effect major changes in the health care system, either nationally or at the
state level. Among the proposals under consideration or already enacted are
price controls on hospitals, insurance market reforms to increase the
availability of group health insurance to small businesses, Medicare and
Medicaid managed care programs and requirements that all businesses offer
health insurance coverage to their employees. While LifePoint and Triad
anticipate that the rate of increase in payments to hospitals will be reduced
as a result of future Federal and state legislation, it is uncertain at this
time what legislation on health care reform may ultimately be enacted or
whether other changes in the administration or interpretation of governmental
health care programs will occur. There can be no assurance that future health
care legislation or other changes in the administration or interpretation of
governmental health care programs will not have a material adverse effect on
the business, financial condition, results of operations or prospects of
LifePoint or Triad.
Reimbursement by Managed Care Organizations May Reduce Hospital Profitability
The competitive position of the hospitals of LifePoint and Triad also is
affected by the increasing number of initiatives undertaken during the past
several years by major purchasers of health care, including Federal and state
governments, insurance companies and employers, to revise payment methodologies
and monitor health care expenditures in order to contain health care costs. As
a result of these initiatives, managed care organizations, offering prepaid and
discounted medical services packages represent an increasing portion of
LifePoint's and Triad's admissions, resulting in reduced hospital revenue
growth. If LifePoint and/or Triad is unable to lower costs through increased
operational efficiencies and the trend toward declining reimbursements and
payments continues, LifePoint's and/or Triad's results of operations and cash
flows will be adversely affected.
Competition
The health care business is highly competitive and competition among
hospitals and other health care providers for patients has intensified in
recent years. 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
30
<PAGE>
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
less direct competition in their immediate service areas than would be expected
in larger communities, they do face competition from other hospitals, including
larger tertiary care centers. Although these competing hospitals may be in
excess of 30 to 50 miles away, patients in these LifePoint and Triad markets
may migrate to, may be referred by local physicians to, or may be lured by
incentives from managed care plans to travel to, such distant hospitals.
Risks Associated with Potential Acquisitions
One element of LifePoint's business strategy is expansion through the
acquisition of acute care hospitals in growing non-urban markets, and one
element of Triad's business strategy is expansion through the selective
acquisition of acute care hospitals in selected markets. The competition to
acquire hospitals in the markets targeted by LifePoint and Triad is
significant, and there can be no assurance that suitable acquisitions, for
which other health care companies (including those with greater financial
resources than LifePoint and Triad) may be competing, can be accomplished on
terms favorable to LifePoint or Triad, that financing, if necessary, can be
obtained for such acquisitions or that acquired facilities can be effectively
integrated with LifePoint's or Triad's operations, as the case may be. The
consummation of acquisitions may result in the incurrence or assumption by
LifePoint or Triad of additional indebtedness. In addition, in order to ensure
the tax free treatment of the distribution, each of LifePoint and Triad is
limited in the amount of stock it may issue as consideration for acquisitions.
Acquired businesses may have unknown or contingent liabilities, including
liabilities for failure to comply with health care laws and regulations.
Although LifePoint and Triad have policies to conform the practices of acquired
facilities to its standards, and generally will seek indemnification from
prospective sellers covering these matters, there can be no assurance that
LifePoint or Triad, as the case may be, will not become liable for past
activities of acquired businesses or that any such liabilities will not be
material.
In recent years, the legislatures and attorneys general of several states
have increased their level of interest in transactions involving the sale of
hospitals by not-for-profit entities. Such heightened scrutiny may increase the
cost and difficulty or prevent the completion of transactions with not-for-
profit organizations in certain states in the future.
Geographic Concentration of Operations Could Adversely Affect LifePoint and
Triad
After the distribution and LifePoint's intended divestitures (See Note 5--
Impairment of Long-Lived Assets of the Notes to Combined Financial Statements
of LifePoint included elsewhere herein), 6 of LifePoint's remaining 20 general,
acute care hospitals will be located in the Commonwealth of Kentucky, and 6 of
LifePoint's remaining 20 general, acute care hospitals will be located in the
State of Tennessee. Giving effect to such intended divestitures, for the year
ended December 31, 1998, 38.5% and 21.3% of LifePoint's revenue, was generated
by LifePoint's Kentucky and Tennessee hospitals, respectively. Accordingly, any
change in the current demographic, economic, competitive and regulatory
conditions in Kentucky or Tennessee could have a material adverse effect on the
business, financial condition, results of operations or prospects of LifePoint.
After the distribution and Triad's intended divestitures and hospital closure
(see "Triad Business"), 14 of Triad's remaining 32 hospitals will be located in
the State of Texas, and 4 of Triad's remaining 32 hospitals will be located in
the State of Arizona. Giving effect to such intended divestitures and hospital
closure, for the year ended December 31, 1998, 33.4% and 19.2% of Triad's
revenue was generated by Triad's Texas and Arizona hospitals, respectively.
Accordingly, any change in the current demographic, economic, competitive
31
<PAGE>
and regulatory conditions in Texas or Arizona could have a material adverse
effect on the business, financial condition, results of operations or prospects
of Triad.
Extensive Regulation Could Adversely Affect LifePoint and Triad
The health care industry is subject to extensive Federal, state and local
laws and regulations relating to licensure, conduct of operations, ownership of
facilities, addition of facilities and services, and prices for services that
are extremely complex and for which, in many instances, the industry does not
have the benefit of significant regulatory or judicial interpretation. In
particular, Medicare and Medicaid antifraud and abuse amendments, codified
under Section 1128B(b) of the Social Security Act (the "Anti-Kickback
Statute"), prohibit certain business practices and relationships related to
items or services reimbursable under Medicare, Medicaid and other Federal
health care programs, including the payment or receipt of remuneration to
induce or arrange for the referral of patients covered by a federal or state
health care program. Sanctions for violating the Anti-Kickback Statute include
criminal penalties and civil sanctions, including civil money penalties and
possible exclusion from such government programs. Pursuant to the Medicare and
Medicaid Patient and Program Protection Act of 1987, the United States
Department of Health and Human Services has issued regulations which describe
some of the conduct and business relationships immune from prosecution under
the Anti-Kickback Statute (the "Safe Harbors"). The fact that a given business
arrangement does not fall within a Safe Harbor does not render the arrangement
illegal. However, business arrangements of health care service providers that
fail to satisfy the applicable Safe Harbor criteria risk scrutiny by
enforcement authorities. Certain of the current business arrangements of
LifePoint and Triad do not qualify for a Safe Harbor.
The Health Insurance Portability and Accountability Act of 1996, which became
effective January 1, 1997, amends, among other things, Title XI (42 U.S.C. (S)
1301 et seq.) to broaden the scope of certain fraud and abuse laws to include
all health care services, whether or not they are reimbursed under a Federal
program, and creates new enforcement mechanisms to combat fraud and abuse,
including an incentive program under which individuals can receive up to $1,000
for providing information on Medicare fraud and abuse that leads to the
recovery of at least $100 of Medicare funds.
Each of LifePoint and Triad provide financial incentives to recruit
physicians into the communities served by its hospitals, including loans and
minimum revenue guarantees. Although HHS has proposed a Safe Harbor for certain
physician recruitment, no Safe Harbor for physician recruitment is currently in
force. Each of LifePoint and Triad also enter into certain employment
agreements, leases and other agreements with physicians. There can be no
assurance that regulatory authorities who enforce the Anti-Kickback Statute
will not determine that such physician recruiting activities or any other
arrangements of any of the hospitals owned and operated by LifePoint or Triad
violate the Anti-Kickback Statute or other Federal laws. Such a determination
could subject LifePoint or Triad to liabilities under the Social Security Act,
including criminal penalties, civil monetary penalties and/or exclusion from
participation in Medicare, Medicaid or other Federal health care programs, any
of which could have a material adverse effect on the business, financial
condition, results of operations or prospects of LifePoint or Triad.
In addition, Section 1877 of the Social Security Act (commonly known as the
"Stark Law") was amended, effective January 1, 1995, to significantly broaden
the scope of prohibited referrals by physicians under the Medicare and Medicaid
programs to providers of designated health services with which such physicians
have ownership or certain other financial arrangements. Certain exceptions are
available for employment agreements, leases, physician recruitment and certain
other physician arrangements. Final implementing regulations have not yet been
adopted, and there can be no assurance that the physician arrangements of
LifePoint or Triad will be found to be in compliance with the Stark Law, as
such law ultimately may be interpreted. Many states have adopted or are
considering similar anti-kickback and physician self-referral legislation, some
of which extends beyond the scope of the Federal law to prohibit the payment or
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
32
<PAGE>
Department of Health and Human Services and the Department of Justice have from
time to time established enforcement initiatives that focus on specific billing
practices or other suspected areas of abuse. Current initiatives include a
focus on hospital billing for outpatient charges associated with inpatient
services, as well as hospital laboratory billing practices. Each of LifePoint
and Triad is cooperating with the government agencies which are responsible for
such initiatives where such initiatives involve their respective hospitals.
Each of LifePoint and Triad exercises care in structuring its arrangements
with physicians and other referral sources to comply in all material respects
with applicable laws. It is possible, however, that government officials
charged with responsibility for enforcing such laws could assert that
LifePoint, Triad or certain transactions in which either of them is involved,
are in violation of such laws. It is also possible that such laws ultimately
could be interpreted by the courts in a manner inconsistent with the
interpretations of LifePoint or Triad.
Many states have enacted or are considering enacting laws affecting the
conversion or sale of not-for-profit hospitals. These laws, in general, include
provisions relating to state attorney general approval, advance notification
and community involvement. In addition, state attorneys general in states
without specific conversion legislation may exercise authority over these
transactions based upon existing law. In many states there has been an
increased interest in the oversight of not-for-profit conversions. The adoption
of conversion legislation and the increased review of not-for-profit hospital
conversions may limit the ability of LifePoint or Triad to acquire not-for-
profit hospitals.
Some states require prior approval for the purchase, construction and
expansion of health care facilities, based upon a state's determination of need
for additional or expanded health care facilities or services. Such
determinations, embodied in certificates of need ("CONs") issued by
governmental agencies with jurisdiction over health care facilities, may be
required for capital expenditures exceeding a prescribed amount, changes in bed
capacity or services and certain other matters. Five states in which LifePoint
currently owns hospitals, Alabama, Florida, Georgia, Kentucky and Tennessee,
and one state in which Triad currently owns hospitals, Alabama, have enacted
CON legislation. There can be no assurance that either LifePoint or Triad will
be able to obtain required CONs in the future or that the failure to obtain any
required CONs will not have a material adverse effect on the business,
financial condition, or results of operations or prospects of LifePoint or
Triad.
The laws, rules and regulations described above are complex and subject to
interpretation. In the event of a determination that either of LifePoint or
Triad is in violation of such laws, rules or regulations, or if further changes
in the regulatory framework occur, any such determination or changes could have
a material adverse effect on business, financial condition or results of
operations of LifePoint or Triad. See "Regulation and Other Factors Affecting
LifePoint and Triad."
Potential Adverse Impact of Columbia/HCA Investigations and Litigation;
Indemnification of LifePoint and Triad
Columbia/HCA is currently the subject of several Federal investigations into
certain of its business practices, as well as governmental investigations by
various states. Columbia/HCA is cooperating in these investigations and
understands, through written notice and other means, that it is a target in
these investigations. Given the breadth of the ongoing investigations,
Columbia/HCA expects additional subpoenas and other investigative and
prosecutorial activity to occur in these and other jurisdictions in the future.
Columbia/HCA is the subject of a formal order of investigation by the
Securities and Exchange Commission. Columbia/HCA understands that the SEC
investigation includes the anti-fraud, periodic reporting and internal
accounting control provisions of the Federal securities laws.
Columbia/HCA is a defendant in several qui tam actions brought by private
parties on behalf of the United States of America, which have been unsealed and
served on Columbia/HCA. The actions allege, in general, that 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
33
<PAGE>
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 two qui tam actions. Columbia/HCA is aware of
additional qui tam actions that remain under seal and believes that there may
be other sealed qui tam cases of which it is unaware.
Columbia/HCA is a defendant in a number of other suits, which allege, in
general, improper and fraudulent billing, overcharging, coding and physician
referrals, as well as other violations of law. Certain of the suits have been
conditionally certified as class actions. See "Government Regulation and Other
Factors Affecting LifePoint and Triad--Governmental Investigation of
Columbia/HCA and Related Litigation."
It is too early to predict the effect or outcome of any of the ongoing
investigations or qui tam and other actions, or whether any additional
investigations or litigation will be commenced. If Columbia/HCA is found to
have violated Federal or state laws relating to Medicare, Medicaid or similar
programs, then Columbia/HCA could be subject to substantial monetary fines,
civil and criminal penalties, and exclusion from participation in the Medicare
and Medicaid programs. Similarly, the amounts claimed in the qui tam and other
actions may be substantial, and Columbia/HCA could be subject to substantial
costs resulting from an adverse outcome of one or more of such actions. Any
such sanctions or losses could have a material adverse effect on Columbia/HCA's
financial position and results of operations.
Columbia/HCA has agreed to indemnify LifePoint and Triad in respect of any
losses which they may incur as a result of the proceedings described above.
Columbia/HCA has also agreed to indemnify LifePoint and Triad in respect of any
losses which they may incur as a result of proceedings which may be commenced
by government authorities or by private parties in the future that arise from
acts, practices or omissions engaged in prior to the distribution date and
relate to the proceedings described above. See "Arrangements Among
Columbia/HCA, LifePoint and Triad Relating to the Distribution--Distribution
Agreement." If any of such indemnified matters were successfully asserted
against either LifePoint or Triad, or any of their facilities, and Columbia/HCA
failed to meet its indemnification obligations, then such losses could have a
material adverse effect on the business, financial position, results of
operations and prospects of LifePoint and/or Triad, as the case may be.
Columbia/HCA will not indemnify LifePoint or Triad for losses relating to any
acts, practices and omissions engaged in by LifePoint or Triad after the
distribution date, whether or not LifePoint or Triad is indemnified for similar
acts, practices and omissions occurring prior to the distribution date.
Columbia/HCA believes that the ongoing governmental investigations and
related media coverage may 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 business, financial condition, results of operations or prospects
of LifePoint or Triad in future periods.
Professional Liability Risks Could Adversely Affect Results of Operations and
Cash Flow
As is typical in the health care industry, LifePoint and Triad are subject to
claims and legal actions by patients and others in the ordinary course of
business. Columbia/HCA, LifePoint and Triad intend to cooperate in the purchase
of insurance coverage for professional and general liability risks for periods
ending on or after the distribution date. Substantially all losses in periods
prior to the distribution are insured through a wholly-owned insurance
subsidiary of Columbia/HCA and excess loss policies maintained by Columbia/HCA.
See "Arrangements Among Columbia/HCA, LifePoint and Triad Relating to the
Distribution--Insurance Allocation and Administration Agreement."
Because substantially all liability for professional and general liability
claims incurred is insured through a wholly-owned insurance subsidiary of
Columbia/HCA and excess loss policies maintained by Columbia/HCA,
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and Columbia/HCA maintains the related reserve, no reserve for professional and
general liability risks is recorded on the balance sheets of LifePoint and
Triad. While the professional and general liability insurance coverage
maintained for the LifePoint and Triad businesses has been adequate to provide
for liability claims in the past, and the insurance coverage to be obtained for
future periods is expected to be adequate for future claims, there can be no
assurance that such insurance will be adequate. If actual payments of claims
after the distribution with respect to professional and general liabilities
exceed anticipated payments of claims, the results of operations and cash flow
of LifePoint or Triad, as the case may be, could be adversely affected.
High Degree of Leverage and Debt Service Obligations May Adversely Affect
LifePoint and Triad
After the distribution, LifePoint and Triad will be highly leveraged. As of
December 31, 1998, after giving pro forma effect to the distribution and the
related assumption by LifePoint of debt obligations under the $135 million term
loan agreement and $125 million Senior Subordinated Notes due 2009 and the
elimination of facilities to be divested by LifePoint, LifePoint's consolidated
long-term debt would have been approximately $260 million. LifePoint expects
that its new credit agreement will also include an additional term loan
commitment of $35 million available for limited purposes and a revolving credit
commitment of up to $65 million. As of December 31, 1998, after giving pro
forma effect to the distribution and the related assumption by Triad of debt
obligations under the $ million term loan agreement and $300 million Senior
Subordinated Notes due 2009 and the elimination of facilities, divested or to
be divested or closed by Triad, Triad's consolidated long-term debt would have
been approximately $715 million. See "LifePoint Unaudited Pro Forma Condensed
Combined Financial Statements" and "Triad Unaudited Pro Forma Condensed
Combined Financial Statements." 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. LifePoint and Triad also
have the ability to incur additional debt, subject to limitations imposed by
the new credit agreement and the indentures governing their notes. While each
of LifePoint and Triad believe that future operating cash flow, together with
available financing arrangements, will be sufficient to fund their respective
operating requirements, leverage and debt service requirements could have
important consequences to holders of the LifePoint common stock and the Triad
common stock, including the following: (i) such requirements may make LifePoint
and Triad more vulnerable to economic downturns and to adverse changes in
business conditions (e.g., further limitations on reimbursement under Medicare
and Medicaid programs); (ii) either of LifePoint's or Triad's ability to obtain
additional financing in the future for working capital, capital expenditures,
acquisitions, general corporate purposes or other purposes may be impaired;
(iii) a substantial portion of each of LifePoint's and Triad's cash flow from
operations may have to be dedicated to the payment of principal and interest on
its indebtedness, thereby reducing the funds available for operations; (iv)
certain of the borrowings may be at variable rates of interest, which would
make LifePoint and Triad vulnerable to increases in interest rates; and (v) the
indebtedness of LifePoint and Triad is expected to contain numerous financial
and other restrictive covenants (including restrictions on payments of
dividends, incurrences of indebtedness and sale of assets), the failure to
comply with which may result in an event of default which, if not cured or
waived, could cause such indebtedness to be declared immediately due and
payable. Any substantial increase in LifePoint's or Triad's debt levels or the
inability of either to borrow funds at favorable interest rates or to comply
with the financial or other restrictive covenants could have a material adverse
effect on the business, financial condition, results of operations or prospects
of LifePoint and/or Triad.
Absence of Dividends
Neither LifePoint nor Triad anticipates paying cash dividends in the
foreseeable future. In addition, the terms of LifePoint's and Triad's debt
agreements immediately prior to the distribution are expected to restrict the
payment of cash dividends, and any future indebtedness incurred by LifePoint or
Triad to refinance such debt, or to fund future growth, also may prohibit or
limit their ability to pay dividends. See "Dividend Policy."
Tax Treatment of the Distribution
On March 30, 1999, Columbia/HCA received a ruling from the IRS concerning
the United States Federal income tax consequences of the distribution. The tax
ruling provides that, because the distribution will qualify
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under Section 355 of the Internal Revenue Code of 1986, as amended (the
"Code"), the distribution generally will be tax-free to Columbia/HCA and to
Columbia/HCA's stockholders, except for any cash received instead of fractional
shares. The tax ruling is based upon the accuracy of representations made by
Columbia/HCA as to numerous factual matters and as to the intention to take (or
to refrain from taking) certain future actions. The inaccuracy of any of those
factual representations or the failure to take the intended actions (or the
taking of actions which were represented would not be taken) could cause the
IRS to revoke all or part of the tax ruling retroactively.
If the distribution were not to qualify for tax-free treatment under Section
355 of the Code, then, in general, additional corporate tax (which could be
substantial) would be payable by the consolidated group of which Columbia/HCA
is the common parent. Under the consolidated return rules, each member of the
consolidated group (including LifePoint and Triad) would be jointly and
severally liable for such tax liability. If the distribution did not qualify
for tax-free treatment under Section 355 of the Code, the resulting tax
liability could have a material adverse effect on the business, financial
position, results of operations and prospects of Columbia/HCA and, possibly,
also of LifePoint and Triad. In addition, if the distribution did not qualify
for tax-free treatment under Section 355 of the Code, then, depending on the
circumstances, Columbia/HCA stockholders could be taxable on their receipt of
shares of LifePoint and Triad common stock. See "The Distribution--Material
Federal Income Tax Consequences."
Columbia/HCA, LifePoint and Triad will enter into a Tax Sharing and
Indemnification Agreement, which will allocate tax liabilities among
Columbia/HCA, LifePoint and Triad and address certain other tax matters such as
responsibility for filing tax returns, control of and cooperation in tax
litigation, and qualification of the distribution as a tax-free transaction.
Generally, Columbia/HCA will be responsible for taxes that are allocable to
periods prior to the distribution date, and each of Columbia/HCA, LifePoint and
Triad will be responsible for its own tax liabilities (including its allocable
share of taxes shown on any consolidated, combined or other tax return filed by
Columbia/HCA) for periods after the distribution date. The Tax Sharing and
Indemnification Agreement will prohibit LifePoint and Triad from taking actions
that could jeopardize the tax treatment of the distribution or the
restructuring that will precede the distribution, and will require LifePoint
and Triad to indemnify each other and Columbia/HCA for any taxes or other
losses that result from any such actions.
Holding Company Structure Risks
LifePoint and Triad will be holding companies and each will hold most of its
assets at, and conduct most of its operations through, direct and indirect
subsidiaries. As holding companies, the results of operations of LifePoint and
Triad will depend on the results of operations of their subsidiaries. Moreover,
LifePoint and Triad will be dependent on dividends or other intercompany
transfers of funds from their subsidiaries to meet their debt service and other
obligations. Claims of creditors of the subsidiaries of LifePoint and Triad,
including trade creditors, will generally have priority as to the assets of
such subsidiaries over the claims of LifePoint or Triad. As of December 31,
1998, on a pro forma basis after giving effect to the distribution and the
elimination of the facilities to be divested or closed, the aggregate amount of
indebtedness and other obligations of LifePoint's subsidiaries, including trade
payables, would have been approximately $274.2, and the aggregate amount of
indebtedness and other obligations of Triad's subsidiaries, including trade
payables, would have been approximately $757.0 million . See "LifePoint
Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources," and "Triad Management's
Discussion and Analysis of Financial Condition and Results of Operations--
Liquidity and Capital Resources."
Risks Associated with Fraudulent Conveyance and Legal Dividend Requirements
If a court in a lawsuit by an unpaid creditor of Columbia/HCA, or
HealthTrust, Inc.--The Hospital Company ("Healthtrust"), a wholly owned
subsidiary of Columbia/HCA that will issue the Senior Subordinated Notes and
incur the term loan indebtedness that will be assumed by LifePoint and Triad,
or representative of creditors of Columbia/HCA or HealthTrust, such as a
trustee in bankruptcy, were to find that at the time Columbia/HCA effected the
distribution, Columbia/HCA, or such subsidiary as the case may be, (a) (1) was
insolvent; (2) was rendered insolvent by reason of the distribution; (3) was
engaged in a business or
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transaction for which its remaining assets constituted unreasonably small
capital; or (4) intended to incur, or believed it would incur, debts beyond its
ability to pay as such debts matured or (b) intended to hinder, delay or
defraud creditors, such court could void the distribution (in whole or in part)
as a fraudulent conveyance and require stockholders to return some or all of
the shares of LifePoint common stock or Triad common stock issued in the
distribution to Columbia/HCA, or require LifePoint or Triad to fund certain
liabilities for the benefit of creditors.
If a court in a lawsuit by an unpaid creditor of LifePoint or Triad, the
subsidiary of LifePoint or Triad, as the case may be, that ultimately will
assume such indebtedness under the Senior Subordinated Notes due 2009 and term
loans ("LifePoint Holdings" and "Triad Holdings," respectively) or HealthTrust,
or representative of creditors of any such entities, such as a trustee in
bankruptcy, were to find that at the time the Senior Subordinated Notes due
2009 and the term loan indebtedness were assumed, LifePoint, LifePoint
Holdings, Triad or Triad Holdings, as the case may be, (a)(1) was insolvent;
(2) was rendered insolvent by reason of such assumption of indebtedness; (3)
was engaged in a business or transaction for which its remaining assets
constituted unreasonably small capital; or (4) intended to incur, or believed
it would incur, debts beyond its ability to pay as such debts matured or (b)
intended to hinder, delay or defraud creditors, such court could, in whole or
in part, void the indebtedness or subordinate the indebtedness to existing and
future debt of LifePoint Holdings or Triad Holdings, as the case may be, as a
fraudulent conveyance. In addition, the payment of interest and principal on
the LifePoint or Triad indebtedness could be voided and required to be returned
to the obligor, or to a fund for the benefit of creditors.
The measure of insolvency for purposes of the foregoing will vary depending
upon the jurisdiction whose law is being applied. Generally, however, a company
would be considered insolvent if the fair value of its assets was less than the
amount of its liabilities or if it incurred debt beyond its ability to repay
such debt when due in the usual course of business. In addition, under the
Delaware General Corporation Law (which is applicable to the distribution), a
corporation generally may make distributions to its stockholders only out of
its surplus (net assets minus capital) and not out of capital.
The Columbia/HCA Board of Directors and management believe that (i)
LifePoint, Lifepoint Holdings Triad, Triad Holdings, Health Trust and
Columbia/HCA each will be solvent before and after the issuance and assumption
by LifePoint and Triad of the notes and term loan indebtedness and the
distribution (in accordance with the above definitions), will be able to repay
their respective debts when due in the usual course of business following the
issuance and assumption of the notes and term loan indebtedness and the
distribution and will have sufficient capital to carry on their respective
businesses, (ii) the notes are not being issued the term loan indebtedness is
not being incurred, and the distribution is not being effected to hinder, delay
or defraud creditors and (iii) the distribution will be made entirely out of
surplus, as provided in the Delaware Law. There can be no assurance, however,
that a court passing on such questions would agree with this view.
Market Uncertainties With Respect to LifePoint Common Stock and Triad Common
Stock
There is no existing market for either the LifePoint common stock or the
Triad common stock. Although LifePoint and Triad have applied for a quotation
of their common stock on Nasdaq, there can be no assurance as to the trading
prices for either security before or after the distribution date. Until the
LifePoint common stock and the Triad common stock are fully distributed and
orderly markets develop, the trading prices for such securities may fluctuate.
Prices for the LifePoint common stock and Triad common stock will be determined
in the trading markets and may be influenced by many factors, including the
depth and liquidity of the market for such securities, investor perceptions of
LifePoint, Triad and their respective businesses, the results of LifePoint and
Triad, the dividend policies of LifePoint and Triad and general economic and
market conditions. The LifePoint common stock and Triad common stock
distributed to Columbia/HCA stockholders in the distribution generally will be
freely transferable under the Securities Act of 1933, as amended (the
"Securities Act"), and the sale of a substantial number of shares of LifePoint
common stock or Triad common stock after the distribution could adversely
affect the market price of the LifePoint common stock or Triad common stock,
respectively. See "The Distribution--Market for LifePoint Common Stock and
Triad Common Stock."
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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 tax purposes, could
discourage certain takeover proposals or make them more expensive. See
"Arrangements Among Columbia/HCA, LifePoint and Triad Relating to the
Distribution--Tax Sharing and Indemnification Agreement."
Possible Lack of Year 2000 Compliance May Adversely Affect LifePoint and Triad
Until 2006, LifePoint and Triad will continue to obtain most of their
computer applications and support from Columbia Information Systems, Inc.
("CIS"), a wholly owned subsidiary of Columbia/HCA, pursuant to the Computer
and Data Processing Services Agreement. CIS does not warrant that the software
and hardware used by CIS in providing services to LifePoint and Triad will be
Year 2000 ready, but CIS is currently making efforts in a professional, timely,
and workmanlike manner that it deems reasonable to address Year 2000 issues
with respect to the software licensed to LifePoint and Triad under the Computer
and Data Processing Services Agreement. CIS also has undertaken to examine and
remediate the software systems and applications of LifePoint and Triad not
obtained from Columbia/HCA and the non-information technology systems (e.g.,
vendor products, medical equipment and other related equipment with embedded
chips) of
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LifePoint and Triad to ensure that they are Year 2000 ready. See "Arrangements
Among Columbia/HCA, LifePoint and Triad Relating to the Distribution--Computer
and Data Processing Services Agreement" and "--Transitional Services
Agreement."
Any malfunctions in such systems, applications or equipment could have a
material adverse effect on the business, financial condition or results of
operations of LifePoint or Triad. Neither LifePoint nor Triad is currently able
to reasonably estimate the ultimate cost to be incurred by it for the
assessment, remediation, upgrade, replacement and testing of its impacted
information and non-information technology systems. LifePoint and Triad are
dependent upon Columbia/HCA in substantially all respects for the Year 2000
readiness of their respective information technology and non-information
technology systems and for contingency planning in respect of Year 2000-related
risks. Any failure by Columbia/HCA to adequately address such matters could
have a material adverse effect on the businesses, financial conditions, results
of operations and prospects of LifePoint and Triad.
In addition, each of LifePoint and Triad has significant ongoing
relationships with government agencies, third party payers, vendors, suppliers
and others that may have computer systems with Year 2000 problems. The Health
Care Financing Administration recently announced that, due to potential Year
2000 concerns, Medicare reimbursement updates for hospitals scheduled to take
effect October 1, 1999 will be delayed until April 1, 2000, although
reimbursement rates will be adjusted to replace revenues lost due to such
delay. If the fiscal intermediaries and governmental agencies with which
LifePoint and Triad transact business, and which are responsible for payment to
LifePoint and Triad under the Medicare and Medicaid programs, other payers, or
suppliers and vendors experience problems in Year 2000 readiness, that could
have a material adverse effect on the business, financial condition, results of
operations and prospects of LifePoint or Triad. See "LifePoint Management's
Discussion and Analysis of Financial Condition and Results of Operations--
Impact of Year 2000 Computer Issues" and "Triad Management's Discussion and
Analysis of Financial Condition and Results of Operations--Impact of Year 2000
Computer Issues."
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Reasons For Furnishing This Information Statement
This information statement is being furnished by Columbia/HCA solely to
provide information to Columbia/HCA stockholders who will receive LifePoint
common stock and Triad common stock in the distribution. It is not, and is not
to be construed as, an inducement or encouragement to buy or sell any
securities of Columbia/HCA, LifePoint, or Triad. Columbia/HCA, LifePoint and
Triad believe that the information presented herein is accurate as of the date
hereof. Changes will occur after the date hereof, and none of Columbia/HCA,
LifePoint or Triad will update the information except to the extent required in
the normal course of their respective public disclosure practices.
Forward-looking Information
This information statement and other materials filed or to be filed by
LifePoint or Triad with the SEC (as well as information included in oral
statements or other written statements made, or to be made, by LifePoint or
Triad) contain, or will contain, disclosures which are "forward-looking
statements." Forward-looking statements include all statements that do not
relate solely to historical or current facts, and can be identified by the use
of words such as "may," "believe," "will," "expect," "project," "estimate,"
"anticipate," "plan" or "continue." These forward-looking statements address,
among other things, strategic objectives and the anticipated effects of the
distribution. See "Summary--Introduction," "Summary--Questions and Answers
About LifePoint, Triad and the Distribution," "Risk Factors," "The
Distribution--Background and Purposes of the Distribution," "LifePoint
Business--Business Strategy," "Triad Business--Business Strategy," "LifePoint
Management's Discussion and Analysis of Financial Condition and Results of
Operations" and "Triad Management's Discussion and Analysis of Financial
Condition and Results of Operations." These forward-looking statements are
based on the current plans and expectations of LifePoint and Triad and are
subject to a number of uncertainties and risks that could significantly affect
current plans and expectations and the future financial condition and results
of LifePoint and Triad. These factors include, but are not limited to, (i) the
highly competitive nature of the health care business, (ii) the efforts of
insurers, health care providers and others to contain health care costs, (iii)
possible changes in the Medicare program that may further limit reimbursements
to health care providers and insurers, (iv) changes in Federal, state or local
regulation affecting the health care industry, (v) the possible enactment of
Federal or state health care reform, (vi) the departure of key executive
officers from LifePoint or Triad, (vii) claims and legal actions relating to
professional liability, (viii) fluctuations in the market value of LifePoint
common stock or Triad common stock, (ix) changes in accounting practices, (x)
changes in general economic conditions, (xi) the complexity of integrated
computer systems and the success and expense of the remediation efforts of
Columbia/HCA, LifePoint, Triad and relevant third parties in achieving Year
2000 readiness, and (xii) other risk factors described above. As a consequence,
current plans, anticipated actions and future financial conditions and results
may differ from those expressed in any forward-looking statements made by or on
behalf of LifePoint or Triad. You are cautioned not to unduly rely on such
forward-looking statements when evaluating the information presented herein.
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The Distribution
Background and Purposes of the Distribution
Columbia/HCA is the largest provider of health care services in the United
States today, operating approximately 300 hospitals, as well as outpatient
surgery centers, diagnostic centers, cardiac rehabilitation centers, physical
therapy centers, radiation oncology centers, comprehensive outpatient
rehabilitation centers, medical office buildings, physician practices and other
health care programs. In November 1997, Columbia/HCA restructured its
operations into five divisions, including the America Group and the Pacific
Group. America's hospitals are located in non-urban areas where, in 21 of its
23 markets, America's hospital is the only hospital in the community.
Approximately three-quarters of Pacific's hospitals are located in small
cities, generally in the Southern, Western and Southwestern United States,
where Pacific's hospital is usually either the only hospital or one of two
hospitals in the community, and the remainder of Pacific's hospitals are
located in larger urban areas typically characterized by a high rate of
population growth. Following that restructuring, Columbia/HCA determined to
concentrate its efforts on its core markets, which are typically located in
urban areas that are characterized by highly integrated facility networks, and
to reorganize the America Group and the Pacific Group as two independent,
publicly-traded companies, LifePoint and Triad, respectively.
Columbia/HCA management believes that separating the America and Pacific
Groups into two smaller, strategically focused public companies will provide
the following benefits:
. Implement Tailored Business Strategies. Columbia/HCA's management
believes that, because of the different community characteristics and
levels of network integration that exist in the LifePoint and Triad
markets, the LifePoint and Triad business strategies need to be
distinguished from each other and from those pursued in Columbia/HCA's
core markets. As smaller companies, LifePoint and Triad will have more
flexibility in responding to the needs of the communities in which they
operate.
. Increase Management Focus and Attention. The managements of LifePoint and
Triad will be able to focus on making capital improvements to existing
facilities in order to expand specialized services, invest in physician
and executive recruitment and retention, and improve outreach programs
and general health education initiatives.
. Tie Compensation to Performance. Following the distribution, LifePoint
and Triad will be able to more closely tie compensation incentives for
their employees to the performance of their companies. Each of LifePoint
and Triad expects to establish for the benefit of its employees an
Employee Stock Ownership Plan (an "ESOP"). Shortly after the
distribution, the LifePoint ESOP will purchase a number of shares equal
to 8.3% of the outstanding common stock of LifePoint and the Triad ESOP
will purchase a number of shares equal to 9.0% of the outstanding common
stock of Triad. These equity interests are expected to help LifePoint and
Triad to attract and retain talented and effective management and to
motivate employees throughout the organization.
. Improve Access to Capital. The distribution will give each of LifePoint
and Triad direct access to capital markets. As divisions of Columbia/HCA,
the America and Pacific Groups competed with each other and with the
other Columbia/HCA divisions for management attention, support resources,
and capital to finance expansion and growth opportunities. As separate
entities, with their own management structures, LifePoint and Triad will
be better able to implement business strategies appropriate for their
markets and to direct capital funding and expansion initiatives.
. Increase Visibility to the Capital Markets. Following the distribution,
the financial markets will be able to focus on the individual strengths
of Columbia/HCA, LifePoint and Triad, and more accurately evaluate the
performance of each distinct business compared to companies in the same
or similar businesses.
Columbia/HCA expects that, in addition to allowing it to focus on its core
markets, the distribution of LifePoint and Triad will assist Columbia/HCA in
fulfilling its business plan of becoming a smaller company, focused on local,
community-based delivery of care, streamlining its organizational structure,
and reducing its
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overhead and administrative costs. After the distribution, however,
Columbia/HCA's revenue base will be diminished by approximately 11% and its
asset base will be diminished by approximately 9% (based on revenues and assets
reported for the year ended December 31, 1998). The separation of the LifePoint
and Triad hospitals may adversely affect Columbia/HCA's ability to negotiate
favorable managed care contracts in certain markets. Also, to the extent that
LifePoint and Triad succeed in stemming outmigration, some patients who
previously might have been treated at Columbia/HCA hospitals will instead be
treated at LifePoint and Triad hospitals.
Manner of Effecting the Distribution
The general terms and conditions relating to the distribution are set forth
in a Distribution Agreement among Columbia/HCA, LifePoint and Triad. See
"Arrangements Among Columbia/HCA, LifePoint and Triad Relating to the
Distribution--Distribution Agreement."
On the distribution date, Columbia/HCA will effect the distribution by
delivering all of the outstanding shares of LifePoint common stock and Triad
common stock to National City Bank, as distribution agent, for distribution to
the holders of record of Columbia/HCA Stock at the close of business on the
record date. The distribution will be made on the basis of shares of
LifePoint common stock and shares of Triad common stock for every
shares of Columbia/HCA Stock. The actual number of shares of LifePoint common
stock and Triad common stock that will be distributed will depend on the number
of shares of Columbia/HCA Stock outstanding on the record date. The shares of
LifePoint common stock and Triad common stock will be fully paid and
nonassessable, and the holders of such shares will not be entitled to
preemptive rights. See "LifePoint Description of Capital Stock" and "Triad
Description of Capital Stock." It is expected that certificates representing
shares of LifePoint common stock and of Triad common stock will be mailed to
Columbia/HCA stockholders on or about , 1999.
Certificates or scrip representing fractional shares of LifePoint common
stock or Triad common stock will not be issued to Columbia/HCA stockholders as
part of the distribution. Instead, each holder of Columbia/HCA Stock who would
otherwise be entitled to receive a fractional share will receive cash for such
fractional interests. The distribution agent will, as soon as practicable after
the distribution date, aggregate and sell all such fractional interests in the
open market at then prevailing market prices and distribute the aggregate
proceeds ratably to Columbia/HCA stockholders otherwise entitled to such
fractional interests. Columbia/HCA will pay all brokers' fees and commissions
in respect of such sale. See "The Distribution--Material Federal Income Tax
Consequences" for a discussion of the Federal income tax treatment of
fractional share interests.
Results of the Distribution
After the distribution, LifePoint and Triad will be separate, independent
publicly-traded companies. The number and identity of stockholders of LifePoint
and Triad immediately after the distribution will be the same as the number and
identity of stockholders of Columbia/HCA on the record date. Based on the
number of record stockholders and the number of issued and outstanding shares
of Columbia/HCA Stock as of the close of business on , 1999 and the
distribution ratios of shares of LifePoint common stock and shares of
Triad common stock for every shares of Columbia/HCA Stock, immediately
after the distribution, LifePoint expects to have approximately 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, at fair market value,
a number of newly issued shares of LifePoint common stock equal to 8.3% of the
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outstanding shares of LifePoint common stock (approximately shares), and
the Triad ESOP is expected to purchase, at fair market value, a number of newly
issues shares of Triad common stock equal to 9.0% of the outstanding shares of
Triad common stock (approximately shares). Each purchase will be financed
by (i) issuing a promissory note to LifePoint in the case of the LifePoint ESOP
or issuing a promissory note to Triad in the case of the Triad ESOP or (ii)
borrowing from a third party lender (which loan will be guaranteed by
LifePoint, in the case of the LifePoint ESOP or Triad, in the case of the Triad
ESOP). Each loan will be amortized over a period of not more than 10 years.
Material Federal Income Tax Consequences
Columbia/HCA has received a tax ruling from the IRS to the effect, among
other things, that, as the distribution will qualify as a tax-free distribution
under Section 355 of the Code, for Federal income tax purposes:
. Columbia/HCA will not recognize gain or loss upon the distribution of
the LifePoint common stock and the Triad common stock to Columbia/HCA's
stockholders.
. Columbia/HCA stockholders will not recognize any gain or loss (and will
not be required to include any amount as taxable income) as a result of
their receipt of LifePoint common stock and Triad common stock in the
distribution, except as described below in connection with cash received
in lieu of fractional shares of LifePoint common stock or Triad common
stock.
. Columbia/HCA stockholders will have an aggregate basis in their
Columbia/HCA Stock, LifePoint common stock and Triad common stock
immediately after the distribution equal to their aggregate basis in
their Columbia/HCA Stock immediately before the Distribution.
Columbia/HCA stockholders will apportion their tax basis in their
Columbia/HCA Stock among their Columbia/HCA Stock and the LifePoint
common stock and the Triad common stock they receive (including any
fractional share interest in LifePoint common stock and Triad common
stock to which the Columbia/HCA stockholders are entitled) in accordance
with the relative fair market values of these securities at the time of
the distribution.
. Columbia/HCA stockholders' holding period in the LifePoint common stock
and Triad common stock received in the distribution will include the
holding period of the Columbia/HCA Stock with respect to which the
LifePoint common stock and Triad common stock is distributed, provided
that the Columbia/HCA Stock is held as a capital asset on the
distribution date.
. Columbia/HCA stockholders who receive cash in lieu of fractional shares
of LifePoint common stock or Triad common stock will recognize gain or
loss equal to the difference between the cash received and the tax basis
allocated to such fractional shares. Any gain or loss will be capital
gain or loss if the fractional shares would have been held as a capital
asset on the distribution date.
The tax ruling will be based upon representations made by Columbia/HCA as to
numerous factual matters and as to the intention to take (or to refrain from
taking) certain future actions. The inaccuracy of any of those factual
representations or the failure to take the intended actions (or the taking of
actions which were represented would not be taken) could cause the IRS to
revoke all or part of the tax ruling retroactively. In that event, the IRS
might assert that the distribution was taxable. See "Risk Factors--Tax
Treatment of the Distribution" and "Arrangements Among Columbia/HCA, LifePoint
and Triad Relating to the Distribution--Tax Sharing and Indemnification
Agreement."
The foregoing is only a summary of the material United States Federal income
tax consequences of the distribution under current law. It does not purport to
cover all tax consequences and may not apply to stockholders who acquired their
Columbia/HCA stock in connection with a grant of shares as compensation, who
are not citizens or residents of the United States, or who are otherwise
subject to special treatment under the Code. Each stockholder is urged to
consult his or her tax advisor as to the particular consequences of the
distribution to such stockholder, including the application of state, local and
foreign tax laws, and as to possible changes in tax laws that may affect the
tax consequences described above.
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Regulatory Approvals
The distribution is subject to review and approvals by certain Federal
agencies, state departments of insurance, state health planning and licensure
agencies. Prior to the distribution date, Columbia/HCA will have provided
appropriate notifications regarding the distribution to, and expects that all
material approvals from or reviews of the regulatory authorities having
jurisdiction in respect of the distribution and related reorganization
transactions will have been received or completed, respectively.
Market for LifePoint Common Stock and Triad Common Stock
There is no existing market for LifePoint common stock or Triad common stock.
LifePoint and Triad have applied for quotation of their common stock on Nasdaq.
If the shares are accepted for quotation, a when-issued trading market for both
LifePoint common stock and Triad common stock is expected to develop on or
shortly before the record date. The term "when-issued" means that shares can be
traded prior to the time certificates are actually available or issued. There
can be no assurance about the trading prices for LifePoint common stock and
Triad common stock before or after the distribution date, and until the
LifePoint common stock and Triad common stock are fully distributed and an
orderly market develops, the trading prices for such securities may fluctuate.
Prices for LifePoint common stock and Triad common stock will be determined in
the trading markets and may be influenced by many factors, including the depth
and liquidity of the market for such securities, developments affecting the
businesses of LifePoint and Triad generally, the impact of the factors referred
to in "Risk Factors," investor perceptions of LifePoint, Triad and their
businesses, the results of LifePoint and Triad, the dividend policies of
LifePoint and Triad, and general economic and market conditions. It is
anticipated that LifePoint common stock will be traded on Nasdaq under the
symbol "LPNT," and that Triad common stock will be traded on Nasdaq under the
symbol "TRIH."
Columbia/HCA Common Stock will continue to trade on the New York Stock
Exchange. After the distribution, the trading price of Columbia/HCA Common
Stock likely will be lower than the trading price immediately prior to the
distribution. Moreover, until the market has evaluated the operations of
Columbia/HCA without LifePoint and Triad, the trading price of Columbia/HCA
Common Stock may fluctuate.
The Transfer Agent and Registrar for the LifePoint common stock and Triad
common stock will be National City Bank, Shareholder Services Group, P.O. Box
92301, Cleveland, Ohio, 44193-0900.
For certain information regarding options to purchase LifePoint common stock
and Triad common stock that will be granted in connection with the
distribution, see "Arrangements Among Columbia/HCA, LifePoint and Triad
Relating to the Distribution--Benefits and Employment Matters Agreement--
Treatment of Columbia/HCA Common Stock Options"; "LifePoint Management--
LifePoint Compensation Arrangements--The LifePoint 1998 Long-Term Incentive
Plan"; and "Triad Management--Triad Compensation Arrangements--The Triad 1998
Long-Term Incentive Plan." For certain information regarding the LifePoint ESOP
and the Triad ESOP, see "Arrangements Among Columbia/HCA, LifePoint and Triad
Relating to the Distribution--Benefits and Employment Matters Agreement--The
LifePoint ESOP and the Triad ESOP."
Shares of LifePoint common stock and Triad common stock distributed to
Columbia/HCA stockholders in the distribution will be freely transferable under
the Securities Act, except for shares of LifePoint common stock received by
persons who may be deemed to be affiliates of LifePoint and shares of Triad
common stock received by persons who may be deemed to be affiliates of Triad.
Persons who may be deemed to be affiliates of LifePoint or Triad after the
distribution generally include individuals or entities that control, are
controlled by, or are under common control with, LifePoint or Triad,
respectively, and may include certain officers and directors, or principal
stockholders, of LifePoint or Triad, as applicable. After LifePoint and Triad
become publicly-traded companies, securities held by persons who are their
affiliates will be subject to resale restrictions under the Securities Act.
Affiliates of LifePoint and Triad will be permitted to sell shares of the
entity of which such persons are affiliates only pursuant to an effective
registration statement or an exemption from the registration requirements of
the Securities Act, such as the exemption afforded by Rule 144 under the
Securities Act.
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Conditions Precedent to the Distribution
It is expected that the distribution will be effective on the distribution
date, , 1999, provided that, among other things:
1. the Registration Statements on Form 10 under the Securities Exchange Act
of 1934, as amended (the "Exchange Act"), filed by each of LifePoint
(the "LifePoint Form 10 Registration Statement") and Triad (the "Triad
Form 10 Registration Statement") shall have been declared effective and
no stop order relating to either Registration Statement shall be in
effect;
2. all necessary permits, registrations and consents required under the
securities or blue sky laws of states or other political subdivisions of
the United States in connection with the distribution shall have been
received or become effective;
3. the IRS tax ruling shall not have been revoked or modified in any
material respect;
4. each of the LifePoint common stock and the Triad common stock shall have
been approved for quotation on Nasdaq, subject to official notice of
issuance;
5. the transfers of assets and liabilities to LifePoint and Triad required
to constitute LifePoint and Triad as described herein shall have been
completed; 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."
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Transfers of Assets to LifePoint and Triad
The Distribution Agreement provides that Columbia/HCA will transfer all of
its right, title and interest in the assets constituting the America Group
business to LifePoint and all of its right, title and interest in the assets
constituting the Pacific Group business to Triad. The Distribution Agreement
further provides that each of LifePoint and Triad will take such action, if
any, as may be necessary to transfer assets owned by it so that, upon
completion of all asset transfers by Columbia/HCA, LifePoint and Triad, the
assets constituting the America Group business are owned by LifePoint and the
assets constituting the Pacific Group business are owned by Triad.
Each party to the Distribution Agreement agrees to exercise its reasonable
efforts to obtain promptly any necessary consents and approvals and to take
such actions as may be reasonably necessary or desirable to carry out the
purposes of the Distribution Agreement and the other agreements summarized
below. In the event that any transfers contemplated by the Distribution
Agreement are not effected on or prior to the distribution date, the parties
agree to cooperate to effect such transfers as promptly as practicable
following the distribution date, and pending any such transfers, to hold any
asset not so transferred in trust for the use and benefit of the party entitled
thereto (at the expense of the party entitled thereto), and to retain any
liability not so transferred for the account of the party by whom such
liability is to be assumed. All assets are being transferred without any
representation or warranty, on an "as is-where is" basis and the relevant
transferee bears the risk that any necessary consent to transfer is not
obtained.
Allocation of Financial Responsibility
The Distribution Agreement provides for, among other things, assumptions of
liabilities and cross-indemnities designed to allocate, effective as of the
distribution date, financial responsibility for the liabilities arising out of
or in connection with:
. the assets and entities that will constitute LifePoint and its
subsidiaries (including liabilities arising in respect of the transfer
of such assets and entities to LifePoint) to LifePoint; and
. the assets and entities that will constitute Triad and its subsidiaries
(including liabilities arising in respect of the transfer of such assets
and entities to Triad) to Triad.
After the distribution, Columbia/HCA will indemnify LifePoint and Triad for
any losses which they may incur arising from the pending governmental
investigations of certain of Columbia/HCA's business practices. Columbia/HCA
will also indemnify LifePoint and Triad for any losses which they may incur
arising from stockholder actions and other legal proceedings related to the
governmental investigations which are currently pending against Columbia/HCA,
and from proceedings which may be commenced by government authorities or by
private parties in the future that arise from acts, practices or omissions
engaged in prior to the Distribution Date and relate to the pending
proceedings. Columbia/HCA will not indemnify LifePoint or Triad for losses
relating to any acts, practices and omissions engaged in by LifePoint or Triad
after the distribution date, whether or not LifePoint or Triad is indemnified
for similar acts, practices and omissions occurring prior to the distribution
date. See "Risk Factors--Potential Adverse Impact of Columbia/HCA
Investigations and Litigation; Indemnification of LifePoint and Triad" and
"Government Regulation and Other Factors Affecting LifePoint and Triad--
Governmental Investigation of Columbia/HCA and Related Litigation."
Prior to the distribution, Columbia/HCA, through its wholly owned insurance
subsidiary and through third party carriers, maintained insurance for the
businesses of LifePoint and Triad. The Distribution Agreement provides that
Columbia/HCA also will be solely responsible for:
. claims against LifePoint or Triad covered by an insurance policy
maintained by Columbia/HCA (without regard to deductible amounts,
coinsurance amounts and policy limits), which are based upon facts and
circumstances occurring prior to the distribution date; and
. workers' compensation claims against LifePoint or Triad if the
underlying injury or condition was incurred before the distribution.
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Government Programs
LifePoint and Triad will be responsible for the Medicare, Medicaid and Blue
Cross cost reports, and associated receivables and payables, for their
facilities for all periods ending after the distribution date. Columbia/HCA
will be responsible for the Medicare, Medicaid and Blue Cross cost reports for
the LifePoint and Triad facilities relating to periods ending on or prior to
the distribution date. LifePoint and Triad will be responsible for their own
cost report functions after the distribution date, as well as for any
terminating cost reports required to be filed in respect of the distribution.
Other Matters
Each of Columbia/HCA, LifePoint and Triad generally agrees to provide to the
other parties reasonable access to certain corporate records and information
reasonably requested by another party. Each of Columbia/HCA, LifePoint and
Triad is generally required to maintain the confidentiality of confidential
information it possesses regarding another party. The parties will endeavor to
resolve any disputes which may arise through discussion among senior management
of the affected parties. If such discussions do not succeed in resolving a
disputed matter, the parties retain the right to commence a legal action.
The Distribution Agreement also provides that, generally, the costs and
expenses incurred through the distribution date in connection with the
distribution are properly allocable to, and will be paid by, Columbia/HCA.
Except as set forth in the Distribution Agreement or any related agreement,
each party shall bear its own costs and expenses after the distribution.
Tax Sharing and Indemnification Agreement
Columbia/HCA, LifePoint and Triad will enter into a Tax Sharing and
Indemnification Agreement, which will allocate tax liabilities among
Columbia/HCA, LifePoint and Triad and address certain other tax matters such as
responsibility for filing tax returns, control of and cooperation in tax
litigation and qualification of the distribution as a tax-free transaction.
Generally, Columbia/HCA will be responsible for taxes that are allocable to
periods prior to the distribution date, and each of Columbia/HCA, LifePoint and
Triad will be responsible for its own tax liabilities (including its allocable
share of taxes shown on any consolidated, combined or other tax return filed by
Columbia/HCA) for periods after the distribution date. The Tax Sharing and
Indemnification Agreement will prohibit LifePoint and Triad from taking actions
that could jeopardize the treatment of the distribution or the internal
restructuring that will precede the distribution, and will require LifePoint
and Triad to indemnify each other and Columbia/HCA for any taxes or other
losses that result from any such actions.
Benefits and Employment Matters Agreement
Columbia/HCA, LifePoint and Triad will enter into a Benefits and Employment
Matters Agreement, which allocates responsibilities for employee compensation,
benefits, labor, benefit plan administration and certain other employment
matters on and after the distribution date.
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.
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Defined Contribution and Welfare Benefit Plans
The Benefits and Employment Matters Agreement provides that each of LifePoint
and Triad will adopt a new defined contribution plan for their respective
employees, as well as for the respective former employees associated with the
facilities and operations of LifePoint and Triad. Generally, assets of the
current Columbia/HCA money purchase pension, stock bonus and salary deferral
plans that are attributable to current and former employees of LifePoint and
Triad will be transferred, effective immediately prior to the distribution
date, to the new plans, and LifePoint and Triad thereafter will provide
benefits under such plans to their current and former employees. Except for
such transferred assets, Columbia/HCA will retain sole responsibility for all
liabilities and obligations under the existing Columbia/HCA defined
contribution plans.
LifePoint and Triad will adopt welfare benefit plans for their employees
that, as of the distribution date, will be substantially identical to the
benefit plans of Columbia/HCA. Generally, Columbia/HCA will be responsible for
all liabilities and obligations relating to claims incurred or premiums owed in
respect of welfare plans for periods prior to the distribution date and
LifePoint or Triad, as appropriate, will assume such responsibility for periods
thereafter with respect to their current or former employees.
Columbia/HCA will provide certain administrative and investment services in
respect of the LifePoint and Triad welfare plans. Services will be provided
through the end of 1999 in respect of Triad welfare plans and through May 31,
1999 in respect of LifePoint welfare plans. LifePoint and Triad have agreed to
indemnify Columbia/HCA and its agents in respect of the services performed for
such plans, so long as Columbia/HCA and its agents shall have acted in good
faith in performing such services.
The LifePoint ESOP and the Triad ESOP
Each of LifePoint and Triad expects to establish an ESOP. Shortly after the
distribution, the LifePoint ESOP is expected to purchase, at fair market value,
a number of newly issued shares of LifePoint common stock equal to 8.3% of the
outstanding LifePoint common stock (approximately shares), and the Triad
ESOP is expected to purchase, at fair market value, a number of newly issued
shares of Triad common stock equal to 9.0% of the outstanding Triad common
stock (approximately shares). Each purchase will be financed by (i)
issuing a promissory note to LifePoint in the case of the LifePoint ESOP or
issuing a promissory note to Triad in the case of the Triad ESOP or (ii)
borrowing from a third party lender (which loan will be guaranteed by
LifePoint, in the case of the LifePoint ESOP or Triad, in the case of the Triad
ESOP). Each loan will be amortized over a period of not more than 10 years.
Treatment of Columbia/HCA Common Stock Options
The Benefits and Employment Matters Agreement provides that each of LifePoint
and Triad will establish new stock option plans, and that outstanding
Columbia/HCA Common Stock options will be adjusted to reflect the distribution.
The nature of the adjustment will depend on the type of option, as follows:
. Incentive Stock Options: The option spread (whether positive or
negative) at the distribution date with respect to each of the existing
Columbia/HCA options intended to qualify as Incentive Stock Options
under Section 422 of the Code ("ISOs") will be preserved by having each
such ISO replaced entirely by an ISO issued by the appropriate post-
distribution date employer.
. Vested Nonqualified Stock Options: Except in the case of vested
Columbia/HCA Nonqualified Stock Options to acquire a small number of
shares, the option spread (whether positive or negative) at the
distribution date with respect to each of the existing vested
Columbia/HCA Nonqualified Stock Options will be preserved by (i)
adjusting the exercise price of such Columbia/HCA options and (ii)
having LifePoint and Triad issue additional vested Nonqualified Stock
Options. This rule will apply regardless of which post-distribution date
employer employs the optionee. Similar adjustments will be
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made with respect to vested Columbia/HCA Nonqualified Stock Options held
by non-employee directors. In the case of vested Columbia/HCA
Nonqualified Stock Options to acquire a small number of shares, such
Columbia/HCA Options will be adjusted in a manner that preserves the
pre-distribution value of such Columbia/HCA Options.
. Non-Vested Nonqualified Stock Options: Non-vested Columbia/HCA
Nonqualified Stock Options held by employees of LifePoint and Triad will
be cancelled and LifePoint and Triad may, in their discretion, grant
non-vested nonqualified stock options to their respective employees. In
the case of non-vested Columbia/HCA Nonqualified Stock Options held by
Columbia/HCA employees, the exercise price will be adjusted to reflect
the distribution. Non-vested non-qualified options to acquire LifePoint
and Triad stock will also be issued to certain employees of
Columbia/HCA.
See "LifePoint Management--LifePoint Compensation Arrangements--The LifePoint
1998 Long-Term Incentive Plan" and "Triad Management--Triad Compensation
Arrangements--The Triad 1998 Long-Term Incentive Plan."
Insurance Allocation and Administration Agreement
Columbia/HCA has maintained various insurance policies for the benefit and
protection of its America Group and Pacific Group divisions. Substantially all
losses in periods prior to the distribution are insured through a wholly-owned
insurance subsidiary of Columbia/HCA and excess loss policies maintained by
Columbia/HCA. In connection with the distribution, Columbia/HCA, LifePoint and
Triad will enter into the Insurance Allocation and Administration Agreement to
provide for their continuing rights and obligations in respect of such
insurance after the distribution date and to define their relationship
regarding the insurance on their respective properties.
The Insurance Allocation and Administration Agreement provides that any
claims against insurers outstanding on the distribution date will be for the
benefit of the party who will own the asset which is the basis for the claim,
or, in the case of a liability claim, which is the owner of the facility at
which the activity which is the subject of the claim occurred. In addition,
Columbia/HCA will pay to LifePoint or Triad, as the case may be, any portion of
such a claim that is unpaid by an insurer to satisfy deductible, co-insurance
or self-insurance amounts (unless such amounts were paid to or accounted for by
the affected entity prior to the distribution date). Columbia/HCA, LifePoint
and Triad will do all things necessary to ensure that all of the insurance
policies which provide coverage to LifePoint and Triad remain available after
the distribution date to the same extent they were available prior to the
distribution date. Any retroactive rate adjustments for periods ending on or
before the distribution date in respect of any such insurance policies will be
paid or received by Columbia/HCA.
Columbia/HCA, LifePoint and Triad will cooperate with each other in the
purchase of insurance coverage for periods after the distribution date,
although each retains the right to obtain separate insurance under certain
circumstances. It is anticipated that LifePoint and Triad will purchase
continuous coverage under extensions or renewals of existing, or new, policies
issued by Health Care Indemnity, Inc., a subsidiary of Columbia/HCA. They also
will endeavor to obtain coverage for claims incurred but not reported prior to
the distribution date which would have been covered by the insurance policies
existing at that time, if the policies obtained to cover periods after the
distribution do not cover such claims. Columbia/HCA will bear the cost of any
such additional coverage.
Columbia/HCA will defend any claim made against two or more of the parties,
if indemnification for the claim is available to LifePoint or Triad, as the
case may be, under the Distribution Agreement. If indemnification under the
Distribution Agreement is not available and there is no other agreement or
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.
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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
Columbia/HCA's wholly owned subsidiary Columbia Information Services, Inc.
("CIS"), will enter into separate Computer and Data Processing Services
Agreements with each of LifePoint and Triad. Pursuant to this agreement, CIS
will provide computer installation, support, training, maintenance, data
processing and other related services to LifePoint and Triad. The initial term
of each agreement will be seven years, which will be followed by a wind-down
period of up to one year. CIS will charge fees to LifePoint and Triad for
services provided under this agreement that are market competitive based on
CIS's costs incurred in providing such services. In the event the agreement is
terminated by either LifePoint or Triad, it will be required to pay a
termination fee equal to the first month's billed fees, multiplied by the
remaining number of months in the agreement. CIS does not warrant that the
software and hardware used by CIS in providing services to LifePoint and Triad
will be Year 2000 ready. CIS is currently making efforts in a professional,
timely and workmanlike manner that it deems reasonable to address Year 2000
issues with respect to the software licensed to LifePoint and Triad under the
Computer and Data Processing Services Agreement.
Lease Agreements
Columbia/HCA will enter into an agreement with LifePoint pursuant to which
LifePoint will sub-lease from Columbia/HCA its principal executive offices (at
the same price per square foot as is payable under the existing Columbia/HCA
lease). The LifePoint sub-lease will terminate on , 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. Columbia/HCA also will continue its ongoing program of inspecting
medical equipment at each of LifePoint's and Triad's hospitals to assure Year
2000 compliance. Each agreement will terminate on December 31, 2000, but may be
terminated by LifePoint or Triad as to specific services before December 31,
2000. LifePoint and Triad will pay fees to Columbia/HCA for services provided
in amounts equal to Columbia/HCA's costs incurred in providing such services.
Other Agreements
Columbia/HCA will enter into agreements with each of LifePoint and Triad
whereby Columbia/HCA will share telecommunications services with LifePoint and
Triad under Columbia/HCA's agreements with its telecommunications services
provider and whereby Columbia/HCA will make certain account collection services
available to LifePoint and Triad. Each of LifePoint and Triad will also
participate, along with Columbia/HCA, in a group purchasing organization which
will make certain national supply and equipment contracts available to their
respective facilities. In addition, Columbia/HCA and LifePoint will enter into
an agreement pursuant to which they will jointly own a corporate aircraft.
LifePoint will reimburse Columbia/HCA for a portion of the cost of operating
the aircraft proportionate to LifePoint's ownership interest.
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Dividend Policy
LifePoint
LifePoint currently intends to retain its earnings for use in the operation
and expansion of its business and therefore does not anticipate declaring or
paying any cash dividends in the foreseeable future. In addition, the terms of
LifePoint's debt agreements are expected to restrict the payment of cash
dividends by LifePoint. Any future determination to declare or pay cash
dividends will be made by the LifePoint Board of Directors. The actual amount
and timing of dividends, if any, will depend on LifePoint's financial
condition, results of operations, business prospects, capital requirements,
credit agreements and such other matters as the LifePoint Board of Directors
may deem relevant. See "LifePoint Management's Discussion and Analysis of
Financial Condition and Results of Operations--Liquidity and Capital
Resources."
Triad
Triad currently intends to retain its earnings for use in the operation and
expansion of its business and therefore does not anticipate declaring or paying
any cash dividends in the foreseeable future. In addition, the terms of Triad's
debt agreements are expected to restrict the payment of cash dividends by
Triad. Any future determination to declare or pay cash dividends will be made
by the Triad Board of Directors. The actual amount and timing of dividends, if
any, will depend on Triad's financial condition, results of operations,
business prospects, capital requirements, credit agreements and such other
matters as the Triad Board of Directors may deem relevant. See "Triad
Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources."
51
<PAGE>
LifePoint
Selected Historical Financial Data
The following table sets forth selected historical financial data of
LifePoint for each of the years in the five year period ended December 31,
1998. The selected financial data at December 31, 1996, 1995 and 1994 and for
the years ended December 31, 1995 and 1994 has been derived from unaudited
financial statements. The table should be read in conjunction with the
LifePoint Combined Financial Statements and related notes included elsewhere in
this information statement and "LifePoint's Management's Discussion and
Analysis of Financial Condition and Results of Operations."
<TABLE>
<CAPTION>
Years Ended December 31,
----------------------------------------
1998 1997 1996 1995 1994
------- ------- ------ ------ ------
(Dollars in millions)
<S> <C> <C> <C> <C> <C>
Summary of Operations:
Revenues............................. $ 498.4 $ 487.6 $464.0 $395.8 $350.1
Salaries and benefits................ 220.8 196.6 175.2 158.1 141.1
Supplies............................. 62.0 55.0 50.9 48.8 44.4
Other operating expenses............. 117.2 119.5 99.3 83.3 75.7
Provision for doubtful accounts...... 41.6 34.5 28.0 23.2 24.6
Depreciation and amortization........ 28.3 27.4 23.5 20.3 17.6
Interest expense allocated from
Columbia/HCA........................ 19.1 15.4 14.1 11.3 13.5
Management fees allocated from
Columbia/HCA........................ 8.9 8.2 6.2 8.1 9.2
Impairment of long-lived assets...... 26.1 -- -- -- --
------- ------- ------ ------ ------
524.0 456.6 397.2 353.1 326.1
Income (loss) from continuing
operations before minority interests
and income taxes (benefit).......... (25.6) 31.0 66.8 42.7 24.0
Minority interests in earnings of
consolidated entities............... 1.9 2.2 1.2 -- --
Income (loss) from continuing
operations before income taxes
(benefit)........................... (27.5) 28.8 65.6 42.7 24.0
Provision for income taxes
(benefit)........................... (9.8) 11.7 26.3 17.1 9.6
Income (loss) from continuing
operations(a)....................... (17.7) 17.1 39.3 25.6 14.4
Net income (loss)(a)................. (21.8) 12.5 41.2 27.4 15.9
Basic earnings (loss) per share:
Income (loss) from continuing
operations (a)..................... $ (0.59) $ 0.57 $ 1.31 $ 0.85 $ 0.48
Net Income (loss) (a)............... $ (0.73) $ 0.41 $ 1.37 $ 0.91 $ 0.53
Shares used in computing basic
earnings (loss)
per share (in millions)............ 30.0 30.0 30.0 30.0 30.0
Diluted earnings (loss) per share:
Income (loss) from continuing
operations (a)..................... $ (0.59) $ 0.57 $ 1.30 $ 0.84 $ 0.47
Net income (loss) (a)............... $ (0.73) $ 0.41 $ 1.36 $ 0.90 $ 0.52
Shares used in computing diluted
earnings (loss)
per share (in millions)............ 30.0 30.2 30.3 30.4 30.4
Financial Position:
Assets............................... $ 355.0 $ 397.9 $376.0 $324.5 $312.3
Long-term debt, including amounts due
within one year..................... 0.6 1.6 1.6 2.1 1.7
Intercompany balances payable to
Columbia/HCA........................ 167.6 182.5 176.3 181.3 218.2
Working capital...................... 26.9 41.1 39.0 24.4 19.7
Capital expenditures................. 29.3 51.8 53.4 28.6 34.1
Other Operating Data:
EBITDA(b)............................ $ 56.8 $ 82.0 $110.6 $ 82.4 $ 66.3
Number of hospitals at end of
period.............................. 23 22 22 20 20
Number of licensed beds at end of
period(c)........................... 2,108 2,080 2,074 1,881 1,843
Weighted average licensed beds(d).... 2,122 2,078 2,060 1,862 1,783
Admissions(e)........................ 62,264 60,487 59,381 54,549 52,681
Equivalent admissions(f)............. 109,336 105,126 98,869 88,915 81,708
Average length of stay (days)(g)..... 4.4 4.4 4.7 4.8 4.9
Average daily census(h).............. 742 733 755 713 713
Occupancy rate(i).................... 35% 35% 37% 38% 40%
</TABLE>
- --------
(a) Includes charge related to impairment of long-lived assets of $26.1 million
($15.9 million after-tax) for the year ended December 31, 1998.
(b) EBITDA is defined as income from continuing operations before depreciation
and amortization, interest expense, management fees, impairment of long-
lived assets, minority interests and income taxes. EBITDA is commonly used
as an analytical indicator within the health care industry, and also serves
as a measure of leverage capacity and debt service ability. EBITDA should
not be considered as a measure of financial performance under generally
accepted accounting principles, and the items excluded from EBITDA are
52
<PAGE>
significant components in understanding and assessing financial performance.
EBITDA should not be considered in isolation or as an alternative to net
income, cash flows generated by operating, investing or financing activities
or other financial statement data presented in the combined financial
statements as an indicator of financial performance or liquidity. Because
EBITDA is not a measurement determined in accordance with generally accepted
accounting principles and is thus susceptible to varying calculations,
EBITDA as presented may not be comparable to other similarly titled measures
of other companies.
(c) Licensed beds are those beds for which a facility has been granted approval
to operate from the applicable state licensing agency.
(d) Represents the average number of licensed beds weighted based on periods
owned.
(e) Represents the total number of patients admitted (in the facility for a
period in excess of 23 hours) to LifePoint's hospitals and is used by
management and certain investors as a general measure of inpatient volume.
(f) Equivalent admissions is used by management and certain investors as a
general measure of combined inpatient and outpatient volume. Equivalent
admissions is computed by multiplying admissions (inpatient volume) by the
sum of gross inpatient revenue and gross outpatient revenue and then
dividing the resulting amount by gross inpatient revenue. The equivalent
admissions computation "equates" outpatient revenue to the volume measure
(admissions) used to measure inpatient volume resulting in a general
measure of combined inpatient and outpatient volume.
(g) Represents the average number of days admitted patients stay in LifePoint's
hospitals. Average length of stay has declined due to the continuing
pressures from managed care and other payers to restrict admissions and
reduce the number of days that are covered by the payers for certain
procedures, and by technological and pharmaceutical improvements.
(h) Represents the average number of patients in LifePoint's hospital beds each
day.
(i) Represents the percentage of hospital licensed beds occupied by patients.
Both average daily census and occupancy rate provide measures of the
utilization of inpatient rooms. The declining occupancy rate is primarily
attributed to the trend toward more services, that were previously
performed in an inpatient setting, being performed on an outpatient basis
and the decline in average length of stay per admission.
53
<PAGE>
LifePoint Management's Discussion and Analysis of
Financial Condition and Results of Operations
This discussion should be read together with the historical financial
statements of LifePoint Hospitals, Inc. included elsewhere herein and the notes
thereto and the information set forth under "LifePoint Selected Historical
Financial Data" and "LifePoint Unaudited Pro Forma Condensed Combined Financial
Statements" and the notes thereto.
Overview
LifePoint will own and operate the health care service business which has
comprised the America Group of Columbia/HCA until the distribution by
Columbia/HCA to its shareholders of all of the shares of outstanding common
stock of LifePoint. The distribution marks the beginning of LifePoint's
operations as an independent, publicly-traded company. As such, the historical
financial statements of LifePoint Hospitals, Inc. may not be indicative of
LifePoint's future performance, nor do they necessarily reflect what the
financial position and results of operations of LifePoint would have been if it
had operated as a separate, stand-alone entity during the periods covered. See
"Risk Factors--No Operating Histories as Independent Companies."
Forward-Looking Statements
This "Management's Discussion and Analysis of Financial Condition and Results
of Operations" contains disclosures which are "forward-looking statements."
Forward-looking statements include all statements that do not relate solely to
historical or current facts, and can be identified by the use of words such as
"may," "believe," "will," "expect," "project," "estimate," "anticipate," "plan"
or "continue." These forward-looking statements are based on the current plans
and expectations of LifePoint and are subject to a number of uncertainties and
risks that could significantly affect current plans and expectations and the
future financial condition and results of LifePoint. These factors include, but
are not limited to, (i) the highly competitive nature of the health care
business, (ii) the efforts of insurers, health care providers and others to
contain health care costs, (iii) possible changes in the Medicare program that
may further limit reimbursements to health care providers and insurers, (iv)
changes in Federal, state or local regulation affecting the health care
industry, (v) the possible enactment of Federal or state health care reform,
(vi) the departure of key executive officers from LifePoint, (vii) claims and
legal actions relating to professional liability, (viii) fluctuations in the
market value of LifePoint common stock, (ix) changes in accounting practices,
(x) changes in general economic conditions, (xi) the complexity of integrated
computer systems and the success and expense of the remediation efforts of
Columbia/HCA, LifePoint and relevant third parties in achieving Year 2000
readiness, and (xii) other risk factors described above. As a consequence,
current plans, anticipated actions and future financial condition and results
may differ from those expressed in any forward-looking statements made by or on
behalf of LifePoint. You are cautioned not to unduly rely on such forward-
looking statements when evaluating the information presented in this
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
Investigations
Columbia/HCA is currently the subject of several Federal investigations into
certain of its business practices, as well as governmental investigations by
various states. Columbia/HCA is cooperating in these investigations and
understands, through written notice and other means, that it is a target in
these investigations. Given the breadth of the ongoing investigations,
Columbia/HCA expects additional subpoenas and other investigative and
prosecutorial activity to occur in these and other jurisdictions in the future.
Columbia/HCA is the subject of a formal order of investigation by the
Securities and Exchange Commission. Columbia/HCA understands that the SEC
investigation includes the anti-fraud, periodic reporting and internal
accounting control provisions of the Federal securities laws.
Management believes that the ongoing governmental investigations and related
media coverage may 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
54
<PAGE>
additional investigations, if any, and the related media coverage cannot be
predicted. It is possible that these matters could have a material adverse
effect on the financial condition or results of operations of LifePoint in
future periods.
Columbia/HCA has agreed to indemnify LifePoint in respect of any losses which
it may incur arising from the governmental investigations described above and
from stockholder actions and other legal proceedings related to the
governmental investigations which are currently pending against Columbia/HCA.
Columbia/HCA has also agreed to indemnify LifePoint in respect of any losses
which it may incur as a result of proceedings which may be commenced by
government authorities or by private parties in the future that arise from
acts, practices or omissions engaged in prior to the distribution date and
relate to the proceedings described above. See "Arrangements Among
Columbia/HCA, LifePoint and Triad Relating to the Distribution--Distribution
Agreement." If any of such indemnified matters were successfully asserted
against LifePoint, or any of its facilities, and Columbia/HCA failed to meet
its indemnification obligations, then such losses could have a material adverse
effect on the business, financial position, results of operations and prospects
of LifePoint. Columbia/HCA will not indemnify LifePoint for losses relating to
any acts, practices and omissions engaged in by LifePoint after the
distribution date, whether or not LifePoint is indemnified for similar acts,
practices and omissions occurring prior to the distribution date. (See Note 3--
Columbia/HCA Investigations, Litigation and Indemnification Rights and Note
11--Contingencies of the Notes to Combined Financial Statements of LifePoint
included elsewhere herein).
Results of Operations
Revenue/Volume Trends
LifePoint has experienced an increase in revenues and volume growth during
1998. However, on a same facility basis, LifePoint has experienced declines in
revenues and volume growth rates as well as operational deficiencies.
Management believes three primary factors have contributed to these declines in
revenue and volume growth rate (on a same facility basis): the impact of
reductions in Medicare payments mandated by the Balanced Budget Act of 1997
(the "Balanced Budget Act"), the continuing trend toward the conversion of more
services to an outpatient basis and the impact of the government
investigations.
LifePoint's revenues continue to be affected by an increasing proportion of
revenue being derived from fixed payment, higher discount sources, including
Medicare, Medicaid and managed care plans. In addition, insurance companies,
government programs (other than Medicare) and employers purchasing health care
services for their employees are also negotiating discounted amounts that they
will pay health care providers rather than paying standard prices. LifePoint
expects patient volumes from Medicare and Medicaid to continue to increase due
to the general aging of the population and the expansion of state Medicaid
programs. However, under the Balanced Budget Act, LifePoint's reimbursement
from the Medicare and Medicaid programs was reduced in 1998 and will be further
reduced as some reductions in reimbursement levels are phased in over the next
two years. The Balanced Budget Act has accelerated a shift, by certain Medicare
beneficiaries, from traditional Medicare coverage to medical coverage that is
provided under managed care plans. LifePoint generally receives lower payments
per patient under managed care plans than under traditional indemnity insurance
plans. With an increasing proportion of services being reimbursed based upon
fixed payment amounts (where the payment is based upon the diagnosis,
regardless of the cost incurred or the level of service provided) revenues,
earnings and cash flows are being significantly reduced. Admissions related to
Medicare, Medicaid and managed care plan patients were 87.7% and 86.1% of total
admissions for the years ended December 31, 1998 and 1997, respectively.
LifePoint's hospitals do not receive any revenues from capitation arrangements
(prepaid health service agreements). See "Government and Other Sources of
Reimbursement for LifePoint and Triad."
LifePoint's revenues also continue to be affected by the trend toward certain
services being performed more frequently on an outpatient basis. Growth in
outpatient services is expected to continue in the health care industry as
procedures performed on an inpatient basis are converted to outpatient
procedures through continuing advances in pharmaceutical and medical
technologies. The redirection of certain procedures to an
55
<PAGE>
outpatient basis is also influenced by pressures from payers to perform certain
procedures as outpatient care rather than inpatient care. Generally, the
payments received for an outpatient procedure are less than for a similar
procedure performed in an inpatient setting. Outpatient revenues grew to 47.9%
of net patient revenues for the year ended December 31, 1998 from 47.1% during
the prior year.
Management believes that the impact of the ongoing governmental
investigations of certain of Columbia/HCA's business practices and the related
media coverage, combined with Columbia/HCA's restructuring of operations
(including the distribution of Triad and LifePoint and the announced
divestitures of several facilities), have created uncertainties with
physicians, patients and payers in certain markets. See "Government Regulation
and Other Factors Affecting LifePoint and Triad--Governmental Investigation of
Columbia/HCA and Related Litigation."
Reductions in the rate of increase in Medicare and Medicaid reimbursement,
increasing percentages of the patient volume being related to patients
participating in managed care plans and continuing trends toward more services
being performed on an outpatient basis are expected to present an ongoing
challenge to LifePoint. The challenges presented by these trends are magnified
by LifePoint's inability to control these trends and the associated risks. To
maintain and improve its operating margins in future periods, LifePoint must
increase patient volumes while controlling the costs of providing services. If
LifePoint is not able to achieve reductions in the cost of providing services
through increased operational efficiencies, and the trend toward declining
reimbursements and payments continues, results of operations and cash flow will
deteriorate.
Management believes that the proper response to these challenges includes the
delivery of a broad range of quality health care services to patients by
assuring that physicians with appropriate specializations practice in the
hospitals, that the appropriate equipment and range of specialized services are
available within the hospitals, and that the hospitals are positioned as
community assets.
Operating Results Summary
The following are comparative summaries of results from continuing operations
for the years ended December 31, 1998, 1997 and 1996 (dollars in millions):
<TABLE>
<CAPTION>
Years Ended
December 31,
------------------------------------
1998 1997
------------------ -----------------
Amount Percentage Amount Percentage
------ ---------- ------ ----------
<S> <C> <C> <C> <C>
Revenues.................................. $498.4 100.0 $487.6 100.0
Salaries and benefits..................... 220.8 44.3 196.6 40.3
Supplies.................................. 62.0 12.4 55.0 11.3
Other operating expenses.................. 117.2 23.5 119.5 24.5
Provision for doubtful accounts........... 41.6 8.4 34.5 7.1
Depreciation and amortization............. 28.3 5.7 27.4 5.6
Interest expense allocated from
Columbia/HCA............................. 19.1 3.8 15.4 3.2
Management fees allocated from
Columbia/HCA............................. 8.9 1.8 8.2 1.7
Impairment of long-lived assets........... 26.1 5.2 - -
------ ----- ------ -----
524.0 105.1 456.6 93.7
------ ----- ------ -----
Income (loss) from continuing operations
before minority interests and income
taxes (benefit).......................... (25.6) (5.1) 31.0 6.3
Minority interests in earnings of
consolidated entities.................... 1.9 0.4 2.2 0.4
------ ----- ------ -----
Income (loss) from continuing operations
before income taxes (benefit)............ (27.5) (5.5) 28.8 5.9
Provision (benefit) for income taxes...... (9.8) (2.0) 11.7 2.4
------ ----- ------ -----
Income (loss) from continuing operations.. $(17.7) (3.5) $ 17.1 3.5
====== ===== ====== =====
% changes from prior year:
Revenues................................. 2.2%
Income (loss) from continuing operations
before income taxes (benefit)........... (195.4)
Income (loss) from continuing
operations.............................. (204.0)
Admissions (a)........................... 2.9
Equivalent admissions (b)................ 4.0
Revenues per equivalent admission........ (1.7)
Same facility % changes from prior year
(c):
Revenues................................. (1.8)
Admissions (a)........................... (.8)
Equivalent admissions (b)................ .2
Revenues per equivalent admission........ (2.0)
</TABLE>
56
<PAGE>
Operating Results Summary (continued)
<TABLE>
<CAPTION>
Years Ended
December 31,
------------------------------------
1997 1996
------------------ -----------------
Amount Percentage Amount Percentage
------ ---------- ------ ----------
<S> <C> <C> <C> <C>
Revenues.................................. $487.6 100.0 $464.0 100.0
Salaries and benefits..................... 196.6 40.3 175.2 37.8
Supplies.................................. 55.0 11.3 50.9 11.0
Other operating expenses.................. 119.5 24.5 99.3 21.4
Provision for doubtful accounts........... 34.5 7.1 28.0 6.0
Depreciation and amortization............. 27.4 5.6 23.5 5.1
Interest expense allocated from
Columbia/HCA............................. 15.4 3.2 14.1 3.0
Management fees allocated from
Columbia/HCA............................. 8.2 1.7 6.2 1.3
------ ----- ------ -----
456.6 93.7 397.2 85.6
------ ----- ------ -----
Income from continuing operations before
minority interests and income taxes...... 31.0 6.3 66.8 14.4
Minority interests in earnings of
consolidated entities.................... 2.2 0.4 1.2 0.3
------ ----- ------ -----
Income from continuing operations before
income taxes............................. 28.8 5.9 65.6 14.1
Provision for income taxes................ 11.7 2.4 26.3 5.7
------ ----- ------ -----
Income from continuing operations......... $ 17.1 3.5 $ 39.3 8.4
====== ===== ====== =====
% changes from prior year:
Revenues................................. 5.1%
Income from continuing operations before
income taxes............................ (56.1)
Income from continuing operations........ (56.5)
Admissions (a)........................... 1.9
Equivalent admissions (b)................ 6.3
Revenues per equivalent admission........ (1.2)
Same facility % changes from prior year
(c):
Revenues................................. 2.5
Admissions (a)........................... 0.7
Equivalent admissions (b)................ 5.8
Revenues per equivalent admission........ (3.1)
</TABLE>
- --------
(a) Represents the total number of patients admitted (in the facility for a
period in excess of 23 hours) to LifePoint's hospitals and is used by
management and certain investors as a general measure of inpatient volume.
(b) Equivalent admissions are used by management and certain investors as a
general measure of combined inpatient and outpatient volume. Equivalent
admissions are computed by multiplying admissions (inpatient volume) by the
sum of gross inpatient revenue and gross outpatient revenue and then
dividing the resulting amount by gross inpatient revenue. The equivalent
admissions computation "equates" outpatient revenue to the volume measure
(admissions) used to measure inpatient volume resulting in a general
measure of combined inpatient and outpatient volume.
(c) "Same facility" information excludes the operations of hospitals and their
related facilities which were either acquired, consolidated or divested
during the current and prior year. The facilities that LifePoint intends to
divest will continue to be included in "same facility" until the date they
are divested.
Years Ended December 31, 1998 and 1997
Revenues increased 2.2% to $498.4 million in 1998 compared to $487.6 million
in 1997. Inpatient admissions increased 2.9%, equivalent admissions (adjusted
to reflect combined inpatient and outpatient volume) increased 4.0% and
revenues per equivalent admission decreased 1.7% from 1997. On a same facility
basis, revenues decreased 1.8%, inpatient admissions decreased .8%, equivalent
admissions increased .2% and revenues per equivalent admission decreased 2.0%.
The decline in revenues (on a same facility basis) and revenues per equivalent
admission was due to several factors, including decreases in Medicare
reimbursement rates mandated by the Balanced Budget Act which became effective
October 1, 1997 (such rates lowered 1998 revenues by approximately $7 million),
continued increases in discounts from the growing number of managed
57
<PAGE>
care payers (managed care as a percentage of total admissions increased to
18.6% in 1998 compared to 16.7% in 1997) and delays experienced in obtaining
Medicare cost report settlements (cost report filings and settlements resulted
in favorable revenue adjustments of $1.2 million in 1998 compared to favorable
adjustments of $3.3 million in 1997).
Operating expenses increased as a percentage of revenues in every expense
category except for other operating expenses, which decreased 1.0%. The primary
reason for the increases, as a percentage of revenues, was LifePoint's
inability to adjust expenses in line with the decreases experienced in same
facility volume and reimbursement trends. The level of management's attention
being devoted to the governmental investigations, reactions by certain
physicians and patients to the related negative media coverage and management
changes at several levels and locations throughout LifePoint contributed to
LifePoint's inability to implement changes to reduce operating expenses in
response to the revenue and volume growth rate declines on a same facility
basis.
Salaries and benefits, as a percentage of revenues, increased to 44.3% in
1998 from 40.3% in 1997. The increase was due to cost pressures on labor
(salaries and benefits per equivalent admission increased 8.0% over last year)
and a decline in productivity (man-hours per equivalent admission increased
2.9% over last year).
Supply costs increased to 12.4% as a percentage of revenues in 1998 from
11.3% in 1997 primarily due to the 1.7% decline in revenues per equivalent
admission, while the cost of supplies per equivalent admission increased 8.4%.
The higher cost of supplies per equivalent admission resulted from significant
increases in pharmaceutical costs and other increases in new product
development costs and general inflation.
Other operating expenses decreased as a percentage of revenues to 23.5% in
1998 from 24.5% in 1997. Other operating expenses consists primarily of
contract services, professional fees, repairs and maintenance, rents and
leases, utilities, insurance, marketing and non-income taxes. The decrease was
due to small decreases in several of these expense categories as a percentage
of revenues, including lower marketing costs being incurred due to the
cancellation of a national branding campaign.
Provision for doubtful accounts, as a percentage of revenues, increased to
8.4% in 1998 from 7.1% in 1997 due to internal factors such as computer
information system conversions (including patient accounting systems) at
various facilities and external factors such as payer mix shifts to managed
care plans (resulting in increased amounts of patient co-payments and
deductibles) and payer remittance slowdowns. The information system conversions
hampered the business office billing functions and collection efforts in those
facilities as some resources were directed to installing and converting systems
and building new data files, rather than devoting full effort to billing and
collecting receivables. The information systems conversion was substantially
completed in 1998. LifePoint has experienced an increased occurrence of charge
audits from certain payers due to the negative publicity surrounding the
government investigations which have resulted in delays in the collection of
receivables. The delays in collection resulted in an increase in receivables
reserved under LifePoint's bad debt allowance policy. Management is not able to
quantify the effects of each of these factors, but the shift in payer mix is
expected to continue and the provision for doubtful accounts is likely to
remain at higher levels than in past years (1996 and prior).
Interest expense, which is primarily represented by interest incurred on the
net intercompany balance with Columbia/HCA, increased to $19.1 million in 1998
from $15.4 million in 1997 primarily as a result of an increase in the average
balance of the advances from Columbia/HCA during 1998 compared to the same
period in 1997.
During 1998, LifePoint, as part of its strategic business plan, decided to
divest three of its facilities. The divestitures are expected to be completed
through sales. The carrying value for these facilities expected to be sold was
reduced to fair value, based upon estimated selling values, resulting in a pre-
tax impairment charge of $24.8 million. An additional pre-tax impairment loss
of approximately $1.3 million was recorded during 1998 related to the write-off
of intangibles and other long-lived assets of certain physician practices where
the recorded asset values were not deemed to be fully recoverable based upon
the operating results trends and projected future cash flows. These assets are
now recorded at estimated fair value. (See Note 5--Impairment of Long-Lived
Assets in the Notes to Combined Financial Statements of LifePoint included
elsewhere herein.)
58
<PAGE>
Income (loss) from continuing operations before income taxes (benefit)
declined to a loss of $27.5 million in 1998 from income of $28.8 million in
1997 primarily due to the $15.9 million after-tax charge related to impairment
of long-lived assets. Also, the three facilities that management has determined
to divest as part of their plan to establish the structure for the future
operations of LifePoint contributed significantly to the decline in results of
operations. These facilities to be divested incurred losses from continuing
operations before income tax benefit of approximately $9.6 million and $3.8
million for the years ended December 31, 1998 and 1997, respectively.
Net income declined to a loss of $21.8 million in 1998 compared to income of
$12.5 million in 1997. In addition to the decline in income from continuing
operations, LifePoint incurred a $4.1 million after-tax loss from its
discontinued home health operations in 1998 compared to a $0.6 million after-
tax loss in 1997, primarily due to declines in Medicare rates of reimbursement
under the Balanced Budget Act and declines in home health visits.
Years Ended December 31, 1997 and 1996
Revenues increased 5.1% to $487.6 million in 1997 compared to $464.0 million
in 1996. Inpatient admissions increased 1.9%, equivalent admissions (adjusted
to reflect combined inpatient and outpatient volume) increased 6.3% and
revenues per equivalent admission decreased 1.2% from 1996. The increase in
revenues and equivalent admissions was primarily due to the acquisition of two
hospitals during March and May of 1996. On a same facility basis, revenues
increased 2.5%, admissions increased 0.7%, equivalent admissions increased 5.8%
and revenues per equivalent admission decreased 3.1%. The increase in
outpatient volume (reflected by the increases in equivalent admissions) is
primarily a result of the continuing trend of certain services, previously
provided in an inpatient setting, being converted to an outpatient setting. The
decline in revenues per equivalent admission was due in part to delays
experienced in obtaining cost report settlements (cost reports resulted in
favorable revenue adjustments of $3.3 million in 1997 compared to $10.6 million
in 1996), decreases in Medicare rates of reimbursement mandated by the Balanced
Budget Act which became effective October 1, 1997 (such rates lowered fourth
quarter 1997 revenues by approximately $1.5 million) and increased discounts
from the growing number of managed care payers (managed care as a percentage of
total admissions increased to 16.7% in 1997 compared to 13.8% in 1996).
Operating expenses increased as a percentage of revenues in every expense
category primarily due to LifePoint's inability to control expenses in line
with the reimbursement rate declines. The level of management's attention being
devoted to the governmental investigations during the fourth quarter of 1997,
reactions by certain physicians and patients to the related negative media
coverage and management changes at several levels and locations throughout
LifePoint contributed to LifePoint's inability to control operating expenses.
Salaries and benefits, as a percentage of revenues, increased to 40.3% in
1997 from 37.8% in 1996. The increase was primarily due to cost pressures on
labor (salaries and benefits per equivalent admission increased 5.5% over last
year).
Other operating expenses increased to 24.5% of revenues in 1997 compared to
21.4% in 1996. Included in 1997 are costs associated with start-up activities
whereby in prior years similar costs were previously capitalized and
subsequently amortized. LifePoint changed its policy on accounting for start-up
costs effective January 1, 1997, which resulted in approximately $4.6 million
being recorded as other operating expenses for 1997, compared to similar costs
being capitalized and the related expense recorded as amortization expense
during 1996. (See Note 7--Accounting Change of the Notes to Combined Financial
Statements of LifePoint included elsewhere herein). The increase was also due,
in part, to small increases in various operating expense categories including
contract services as a percentage of revenues.
Provision for doubtful accounts, as a percentage of revenues, increased to
7.1% in 1997 from 6.0% in 1996 due to internal factors such as computer
information system conversions (including patient accounting systems) at
various facilities and external factors such as payer mix shifts to managed
care plans (resulting in increased amounts of patient co-payments and
deductibles) and payer remittance slowdowns.
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Depreciation and amortization increased as a percentage of revenues to 5.6%
in 1997 from 5.1% in 1996. The increase was primarily due to increased capital
expenditures related to ancillary services (such as outpatient services) and
information systems.
Interest expense, which is primarily represented by interest incurred on the
net intercompany balance with Columbia/HCA, increased to $15.4 million in 1997
compared to $14.1 million in 1996, primarily as a result of an increase in the
average balance of the advances from Columbia/HCA during 1997 compared to 1996.
This was due, in part, to a $18.4 million decline in net cash flows provided
from operations during 1997 compared to 1996.
Income from continuing operations before income taxes declined to $28.8
million in 1997 from $65.6 million in 1996 due to the increases in expenses as
discussed above. Also, the three facilities that LifePoint plans to divest
contributed to the decline in results of operations. These facilities to be
divested incurred losses from continuing operations before income tax benefit
of approximately $3.8 million for the year ended December 31, 1997 compared to
income from continuing operations before income taxes of $1.8 million for the
year ended December 31, 1996.
Net income declined to $12.5 million in 1997 compared to $41.2 million in
1996. In addition to the decline in income from continuing operations,
LifePoint incurred a $4.0 million after-tax loss from its discontinued home
health operations in 1997 compared to $1.9 million in after-tax income in 1996.
The 1997 loss includes a $3.4 million after-tax estimated loss on disposal of
its home health operations. The majority of the decline in income from
operations of the discontinued home health businesses was due to reductions in
Medicare rates of reimbursement under the Balanced Budget Act.
Liquidity and Capital Resources
LifePoint has previously relied upon Columbia/HCA for liquidity and sources
of capital to supplement any needs not met by operations. Following the
distribution, as an independent, publicly-traded company, LifePoint will have
direct access to the capital markets and the ability to enter into its own bank
borrowing arrangements. At December 31, 1998, LifePoint had working capital of
$26.9 million.
Cash provided by operating activities decreased slightly to $45.3 million for
the year ended December 31, 1998 from $45.4 million last year. The decrease was
due to reduced income before non-cash charges and partially offset by higher
growth in accounts receivable balances in the prior period.
For the year ended December 31, 1997, cash provided by operating activities
decreased to $45.4 million from $63.8 million for the year ended December 31,
1996. The decrease was primarily due to reduced income from continuing
operations and partially offset by a decline in working capital outflows during
1997 compared to the prior year. The decline in working capital outflows was
primarily due to a higher growth in accounts receivable balances in the prior
year partially offset by a growth in accounts payable in the same year.
Cash used in investing activities decreased to $29.3 million for the year
ended December 31, 1998 from $51.9 million during the same period last year.
The decrease was primarily due to decreased purchases of property and equipment
during the year ended 1998 and approximately $7.2 million in equity investments
in joint ventures during the same period last year. Cash used in investing
activities was $51.9 million for the year ended December 31, 1997 compared to
$58.6 million in 1996.
Routine capital expenditures approximated $29.3 million for the year ended
December 31, 1998. Management believes that its capital expenditure program is
adequate to expand, improve and equip LifePoint's existing health care
facilities. At December 31, 1998, there were projects under construction which
had an estimated cost to complete and equip over the next eighteen months of
approximately $61.8 million (including the construction of a replacement
hospital located in Florida that is estimated to cost approximately $32.0
million).
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In connection with the distribution, all intercompany accounts payable by
LifePoint to Columbia/HCA will be eliminated, and LifePoint will assume $260
million of debt obligations from Columbia/HCA. $135 million of this debt
financing is expected to consist of a 6 1/2-year term loan with a syndicate of
banks, and $125 million is expected to consist of Senior Subordinated Notes due
2009. LifePoint expects that the new credit agreement will also include an
additional term loan commitment of $35 million available for limited purposes
and a revolving credit commitment of up to $65 million, which are expected to
be undrawn at closing. Borrowings under the revolving credit facility will be
available to fund working capital needs and to finance acquisitions.
Management does not consider the sale of any assets to be necessary to repay
LifePoint's indebtedness or to provide working capital. However, for other
reasons, certain of LifePoint's hospitals may be sold in the future from time
to time. LifePoint has entered into a letter of intent to sell three of its
general, acute care hospitals for an aggregate purchase price of $25 million,
subject to net working capital adjustments. See "LifePoint Business--General."
Although LifePoint's indebtedness will be more substantial than was
historically the case for its predecessor entities, management expects that
operations and working capital facilities will provide sufficient liquidity for
fiscal 1999.
LifePoint does not expect to pay dividends on its common stock in the
foreseeable future.
Impact of Year 2000 Computer Issues
Background and General Information
The Year 2000 problem is the result of two potential malfunctions that could
have an impact on Columbia/HCA's systems and equipment, including systems and
equipment on which LifePoint relies. The first problem arises due to computers
being programmed to use two rather than four digits to define the applicable
year. The second problem arises in embedded chips, where microchips and
microcontrollers have been designed using two rather than four digits to define
the applicable year. Certain of Columbia/HCA's computer programs, building
infrastructure components (e.g., alarm systems and HVAC systems) and medical
devices that are date sensitive, may recognize a date using "00" as the year
1900 rather than the year 2000. If uncorrected, the problem could result in
computer system and program failures or equipment and medical device
malfunctions that could result in a disruption of business operations or that
could affect patient diagnosis and treatment.
LifePoint obtains most of its information technology and information
technology infrastructure systems from CIS pursuant to the Computer and Data
Processing Services Agreement. CIS does not warrant that the software and
hardware used by CIS in providing services to LifePoint will be Year 2000, but
CIS is currently making efforts in a professional, timely, and workmanlike
manner that it deems reasonable to address Year 2000 issues with respect to the
software licensed to LifePoint under the Computer and Data Processing Services
Agreement. In connection with its participation in Columbia/HCA's Year 2000
project, LifePoint has made and will continue to make certain expenditures in
respect of software systems and applications not obtained from CIS and non-
information technology systems (e.g., vendor products, medical equipment and
other related equipment with embedded chips) to ensure that they are Year 2000
ready. See "Arrangements Among Columbia/HCA, LifePoint and Triad Relating to
the Distribution--Computer and Data Processing Services Agreement" and "--
Transitional Services Agreement."
Pursuant to the Computer and Data Processing Services Agreement, after the
distribution, LifePoint will rely on CIS to provide virtually all of its
computer support and information technology services. Pursuant to the
Transitional Services Agreement, Columbia/HCA will continue its ongoing program
to inspect medical equipment at LifePoint facilities for Year 2000 readiness.
LifePoint is dependent upon Columbia/HCA in substantially all respects for the
Year 2000 readiness of its information technology and non-information
technology systems and for contingency planning in respect of Year 2000-related
risks. Any failure by Columbia/HCA to adequately address such matters could
have a material adverse effect on the business, financial condition, results of
operations or prospects of LifePoint.
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Columbia/HCA is utilizing both internal and external resources to manage and
implement its Year 2000 program. With the assistance of external resources,
Columbia/HCA has undertaken development of contingency plans in the event that
its Year 2000 efforts, or the Year 2000 efforts of third-parties upon which
Columbia/HCA and LifePoint rely, are not accurately or timely completed.
LifePoint management consults regularly with the Columbia/HCA personnel
responsible for development of such contingency plans. Columbia/HCA has
developed a contingency planning methodology and will implement contingency
plans throughout 1999.
Information Technology Systems
With respect to the information technology portions of Columbia/HCA's Year
2000 project, which address the inventory, assessment, remediation, testing and
implementation of internally developed software, Columbia/HCA has identified
various software applications that are being addressed on separate time lines.
Columbia/HCA has begun remediating all these software applications and is
testing the software applications where remediation has been completed.
Columbia/HCA has also completed the assessment of mission critical third party
software (i.e., that software which is essential for day-to-day operations) and
has developed testing and implementation plans with separate time lines.
Columbia/HCA has completed and placed into production 60% of software
applications and is 75% complete on most of the remaining software
applications, and anticipates completing, in all material respects,
remediation, testing and implementation for internally developed and mission
critical third party software by June 1999. Columbia/HCA's efforts are
currently on schedule in all material respects.
With respect to the information technology infrastructure portion of
Columbia/HCA's Year 2000 project, Columbia/HCA has undertaken a program to
inventory, assess and correct, replace or otherwise address impacted vendor-
supplied products (hardware, systems software, business software, and
telecommunication equipment). Columbia/HCA has implemented a program to contact
vendors, analyze information provided, and remediate, replace or otherwise
address information technology products that pose a material Year 2000 impact.
Columbia/HCA anticipates completion, in all material respects, of the
information technology infrastructure portion of its program by June 1999. The
information technology infrastructure portion of Columbia/HCA's Year 2000
project is currently on schedule in all material respects.
Columbia/HCA presently believes that with modifications to existing software
or the installation of upgraded software under the information technology
infrastructure portion, the Year 2000 will not pose material operational
problems for its computer systems. However, if such modifications or upgrades
are not accomplished in a timely manner, Year 2000 related failures may present
a material adverse impact on the operations of LifePoint.
Non-Information Technology Systems and Equipment
With respect to the non-information technology infrastructure portion of
Columbia/HCA's Year 2000 project, Columbia/HCA has undertaken a program to
inventory, assess and correct, replace or otherwise address impacted vendor
products, medical equipment and other related equipment with embedded chips.
Columbia/HCA has implemented a program to contact vendors, analyze information
provided, and remediate, replace or otherwise address devices or equipment that
pose a material Year 2000 impact. Columbia/HCA anticipates completion, in all
material respects, of the non-information technology infrastructure portion of
its program by a revised date of September 30, 1999, from the previously
anticipated date of June 30, 1999. With respect to such revised date, the non-
information technology infrastructure portion of Columbia/HCA's Year 2000
project is currently on schedule in all material respects.
Columbia/HCA is prioritizing its non-information technology infrastructure
efforts by focusing on equipment and medical devices that will have a direct
impact on patient safety and health. Columbia/HCA is directing substantial
efforts to repair, replace, upgrade or otherwise address this equipment and
these medical devices in order to minimize risk to patient safety and health.
Columbia/HCA is relying on information that is being provided to it by
equipment and medical device manufacturers regarding the Year 2000 readiness of
their
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products. While Columbia/HCA is attempting to evaluate information provided by
its past and present vendors, there can be no assurance that in all instances
accurate information is being provided. Columbia/HCA also cannot in all
instances guarantee that the repair, replacement or upgrade of all non-
information technology infrastructure systems will occur on a timely basis or
that such repairs, replacement or upgrades will avoid any Year 2000 problems.
Third-Party Payers and Intermediaries, and Suppliers
Columbia/HCA has initiated communications with LifePoint's major third party
payers and intermediaries, including government payers and intermediaries.
LifePoint relies on these entities for accurate and timely reimbursement of
claims, often through the use of electronic data interfaces. Columbia/HCA has
not received assurances that these interfaces will be timely converted. Testing
with payers and intermediaries will not be completed by June 30, 1999 because
the payers and intermediaries are not ready to test with Columbia/HCA's
systems. Failure of these third party systems could have a material adverse
effect on LifePoint's cash flow, or results of operations.
Columbia/HCA also has initiated communications with LifePoint's mission
critical suppliers and vendors (i.e. those suppliers and vendors whose products
and services are essential for day-to-day operations) to verify their ability
to continue to deliver goods and services through the Year 2000. Columbia/HCA
has not received assurances from all mission critical suppliers and vendors
that they will be able to continue to deliver goods and services through the
Year 2000, but Columbia/HCA is continuing its efforts to obtain such
assurances. The failure of these third parties could have a material adverse
effect on the business, financial condition, results of operations or prospects
of LifePoint, and/or the ability of LifePoint to provide health care services.
With the assistance of external resources, Columbia/HCA has undertaken the
development of contingency plans in the event that its Year 2000 efforts, or
the Year 2000 efforts of third parties upon which Columbia/HCA and LifePoint
rely, are not accurately or timely completed. Columbia/HCA has developed a
contingency planning methodology and will implement contingency plans
throughout 1999.
Year 2000 Risks
While Columbia/HCA is developing contingency plans to address possible
failure scenarios, LifePoint recognizes that there are "worst-case" scenarios
which may develop and are largely outside its or Columbia/HCA's control.
LifePoint recognizes the risks associated with extended infrastructure (e.g.,
power, water and telecommunications) failure, the interruption of insurance and
government program payments to the organization and the failure of equipment or
software that could impact patient safety or health despite the assurances of
third parties. Columbia/HCA is addressing these and other failure scenarios in
its contingency planning effort and is engaging third parties in discussions
regarding how to manage common failure scenarios, but neither Columbia/HCA nor
Lifepoint can currently estimate the likelihood or the potential cost of such
failures.
Costs and Expenses
The Year 2000 project costs incurred by Columbia/HCA will have an impact on
the Computer and Data Processing Services Agreement with LifePoint. LifePoint
is not currently able to reasonably estimate the ultimate cost to be incurred
by it for the assessment, remediation, upgrade, replacement and testing of its
impacted non-information technology systems. The majority of the costs (except
the cost of new equipment) related to the Year 2000 project will be expensed as
incurred and are expected to be funded through operating cash flows.
The successful completion of the project and completion dates for the Year
2000 modifications are based on management's best estimates, which were derived
utilizing numerous assumptions of future events, including the continued
availability of certain resources, third party modification plans and other
factors. However, there can be no guarantees that these estimates will be
achieved and actual results could differ
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materially from those anticipated. Specific factors that might cause such
material differences include, but are not limited to, the availability and cost
of personnel trained in this area and the ability to locate and correct all
relevant computer codes and all medical equipment.
Effects of Inflation and Changing Prices
Various federal, state and local laws have been enacted that, in certain
cases, limit LifePoint's ability to increase prices. Revenues for acute care
hospital services rendered to Medicare patients are established under the
Federal government's prospective payment system. Total Medicare revenues
approximated 37.8%, 39.4% and 40.9% for the years ended December 31, 1998, 1997
and 1996, respectively.
Management believes that hospital industry operating margins have been, and
may continue to be, under significant pressure because of deterioration in
inpatient volumes, changes in payer mix, and growth in operating expenses in
excess of the increase in prospective payments under the Medicare program.
Management expects that the average rate of increase in Medicare prospective
payments will continue to decline slightly in 1999. In addition, as a result of
increasing regulatory and competitive pressures, LifePoint's ability to
maintain operating margins through price increases to non-Medicare patients is
limited.
Health Care Reform
In recent years, an increasing number of legislative proposals have been
introduced or proposed to Congress and in some state legislatures that would
significantly affect the services provided by and reimbursement to health care
providers in LifePoint's markets. The cost of certain proposals would be funded
in significant part by reduction in payments by government programs, including
Medicare and Medicaid, to health care providers or taxes levied on hospitals or
other providers. While LifePoint is unable to predict which, if any, proposals
for health care reform will be adopted, there can be no assurance that
proposals adverse to the business of LifePoint will not be adopted.
Description of Certain New LifePoint Indebtedness
General
Upon consummation of the distribution, LifePoint Hospitals Holdings, Inc., a
wholly owned subsidiary of LifePoint ("LifePoint Holdings"), expects to have
outstanding $125 million aggregate principal amount of notes due 2009 and $135
million aggregate principal amount of indebtedness under its bank facilities.
The notes will initially be issued, and indebtedness incurred, by a wholly
owned subsidiary of Columbia/HCA. Following the issuance and sale of the notes
and the incurrence of the indebtedness, the America Group assets will be
transferred to LifePoint, and LifePoint will assume all obligations under the
notes and bank facilities. LifePoint will then transfer substantially all of
its assets to LifePoint's wholly owned subsidiary, LifePoint Holdings, and
LifePoint Holdings will assume all obligations under the notes and bank
facilities. The initial issuer of the notes and obligor under the bank
facilities will receive the net proceeds and will use such proceeds to repay
debt owed to Columbia/HCA and an affiliate of Columbia/HCA.
Senior Subordinated Notes due 2009
Certain of LifePoint Holdings' subsidiaries will fully and unconditionally
guarantee the notes on a senior subordinated basis. Future subsidiaries also
may be required to guarantee the notes on a senior subordinated basis. The
notes will be general unsecured obligations of LifePoint Holdings and will be
subordinated in right of payment to all of LifePoint Holdings' existing and
future senior indebtedness. The notes will rank equally with LifePoint
Holdings' existing and future senior subordinated obligations and will rank
senior to all of LifePoint Holdings' subordinated indebtedness. The guarantees
will be subordinated to all existing and future senior indebtedness of the
guarantors.
LifePoint Holdings may redeem the notes at any time prior to the fifth
anniversary of the issue date at the redemption prices set forth in the notes.
In addition, on or before the third anniversary of the issue date LifePoint
Holdings may redeem up to 35% of the notes with the net proceeds of certain
equity offerings at the
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redemption price set forth in the notes. Upon certain change of control events,
each holder of notes may require LifePoint Holdings to repurchase all or a
portion of its notes at a purchase price equal to 101% of the principal amount
thereof, plus accrued interest.
The indenture governing the notes will contain covenants that, among other
things, will limit LifePoint Holdings' and certain of its subsidiaries' ability
to incur additional indebtedness, pay dividends on, redeem or purchase its
capital stock, make investments, engage in transactions with affiliates, create
certain liens, in the case of certain of its subsidiaries, guarantee
indebtedness, sell assets, sell capital stock of restricted subsidiaries and
consolidate, merge or transfer all or substantially all its assets. See "Risk
Factors--High Degree of Leverage and Debt Service Obligations May Adversely
Affect LifePoint and LifePoint."
A registration rights agreement will be executed in connection with the
offering of the notes whereby LifePoint Holdings will agree to exchange the
unregistered notes for registered notes with substantially identical terms. If
the consummation of the exchange offer and certain other events in connection
with such exchange offer do not occur prior to certain specified dates,
LifePoint Holdings will be obligated to pay additional interest on the notes
during the existence of such default.
New Credit Facility
The $235 million Senior Secured Credit Facilities, to be assumed by
LifePoint, will consist of:
. a $85 million Tranche A term loan facility ($35 million of which may be
available for limited purposes subsequent to the distribution),
. a $85 million Tranche B term loan facility, and
. a $65 million revolving credit facility.
Repayments under the term loan facilities are expected to be due in quarterly
installments, with quarterly amortization based on annual amounts to be
determined. The final payment under the Tranche A term loan facility will be
due and payable 5 1/2 years after the distribution date and the final payment
under the Tranche B term loan facility will be due and payable years after
the distribution date. In addition to the scheduled amortization, LifePoint
will be required to repay borrowings under the term loan and revolving
facilities with proceeds from asset sales, subject to certain exceptions, and
with proceeds from issuance of equity securities or the incurrence of certain
debt obligations (other than the notes to be assumed at the time that the bank
facilities are assumed), which amounts may not be re-borrowed. The revolving
credit facility, which will be undrawn at the time of the distribution, is
expected to be available for working capital and other general corporate
purposes, and any outstanding amounts thereunder will be due and payable 5 1/2
years after the distribution date.
It is expected that, at LifePoint's option, the bank facilities will bear
interest at a rate per annum equal to
. LIBOR plus an applicable margin; or
. the higher of the administrative agent's prime rate or 0.5% above the
federal funds rate, in each case plus an applicable margin.
The applicable margin will be determined based on LifePoint's consolidated
funded indebtedness to its consolidated adjusted EBITDA ratio.
LifePoint will guarantee the borrowings and other obligations under the bank
facilities, which guarantee will be secured by a pledge of the capital stock of
LifePoint Holdings and each of LifePoint's subsidiaries, as well as all of
LifePoint and its subsidiaries' personal property. LifePoint also expects that
the bank facilities may be secured by other property of LifePoint and its
subsidiaries.
The bank facility will contain covenants that, among other things, will limit
LifePoint Holdings' and certain of its subsidiaries' ability to incur
additional indebtedness, pay dividends on, redeem or purchase its capital
stock, make investments and capital expenditures, engage in transactions with
affiliates, create certain liens, sell assets and consolidate, merge or
transfer assets. In addition, LifePoint expects that it will be required to
comply with various financial ratios and tests, including a minimum net worth
test, a consolidated funded debt to adjusted EBITDA ratio and a minimum fixed
charge coverage ratio.
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Triad
Selected Historical Financial Data
The following table sets forth selected historical financial data of Triad
for each of the years in the five year period ended December 31, 1998. The
selected financial data at December 31, 1996, 1995 and 1994 and for the years
ended December 31, 1995 and 1994 has been derived from unaudited financial
statements. The table should be read in conjunction with the Triad Combined
Financial Statements and related notes included elsewhere in this information
statement and "Triad Management's Discussion and Analysis of Financial
Condition and Results of Operations."
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------------------------------ ---------------
1998 1997 1996 1995 1994
-------- -------- -------- -------- --------
(Dollars in millions)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Summary of Operations:
Revenues.................. $1,588.7 $1,609.3 $1,600.5 $1,558.9 $1,290.5
Salaries and benefits..... 700.5 668.8 628.1 636.8 541.4
Supplies.................. 241.6 232.8 221.9 217.7 180.2
Other operating expenses.. 359.2 383.4 349.5 321.0 273.5
Provision for doubtful
accounts................. 138.4 138.5 106.5 98.2 89.2
Depreciation and
amortization............. 109.6 102.9 94.5 84.3 68.0
Interest expense allocated
from Columbia/HCA........ 68.9 60.5 52.0 36.6 30.7
Management fees allocated
from Columbia/HCA........ 29.3 25.4 20.7 21.0 17.4
Impairment of long-lived
assets................... 55.1 13.7 -- -- --
-------- -------- -------- -------- --------
1,702.6 1,624.0 1,473.2 1,415.6 1,200.4
-------- -------- -------- -------- --------
Income (loss) from
continuing operations
before minority interests
and income taxes......... (113.9) (14.7) 127.3 143.3 90.1
Minority interests in
earnings of consolidated
entities................. 11.0 11.5 10.8 1.4 0.6
-------- -------- -------- -------- --------
Income (loss) from
continuing operations
before income taxes
(benefit) ............... (124.9) (26.2) 116.5 141.9 89.5
Provision for income taxes
(benefit)................ (39.4) (7.2) 48.2 57.0 35.5
-------- -------- -------- -------- --------
Income (loss) from
continuing operations
(a)...................... (85.5) (19.0) 68.3 84.9 54.0
Net income (loss) (a)..... (87.1) (19.8) 74.7 87.2 55.5
Basic earnings (loss) per
share:
Income (loss) from
continuing operations
(a).................... $ (2.85) $ (0.63) $ 2.28 $ 2.83 $ 1.80
Net income (loss) (a)... $ (2.90) $ (0.66) $ 2.49 $ 2.91 $ 1.85
Shares used in computing
basic earnings (loss)
per share (in
millions).............. 30.0 30.0 30.0 30.0 30.0
Diluted earnings (loss)
per share:
Income (loss) from
continuing operations
(a).................... $ (2.85) $ (0.63) $ 2.26 $ 2.79 $ 1.78
Net income (loss) (a)... $ (2.90) $ (0.66) $ 2.47 $ 2.87 $ 1.83
Shares used in computing
diluted earnings (loss)
per share (in
millions).............. 30.0 30.0 30.3 30.4 30.4
Financial Position:
Assets.................... $1,371.3 $1,410.5 $1,426.3 $1,351.8 $1,169.4
Long-term debt, including
amounts due within one
year..................... 14.4 15.4 17.1 27.5 32.3
Intercompany balances
payable to Columbia/HCA.. 613.7 525.0 521.7 392.6 331.3
Working capital........... 184.9 150.3 156.5 156.3 127.9
Capital expenditures...... 114.9 120.1 94.4 102.9 202.4(j)
Other Operating Data:
EBITDA(b)................. $ 149.0 $ 187.8 $ 294.5 $ 285.2 $ 206.2
Number of hospitals at end
of period................ 38 38 38 39 38
Number of licensed beds at
end of period (c)........ 5,909 5,859 5,872 5,926 5,660
Weighted average licensed
beds (d)................. 5,877 5,860 5,882 5,900 5,325
Admissions (e)............ 169,590 172,926 171,265 170,392 147,923
Equivalent admissions
(f)...................... 276,771 275,125 266,660 257,292 211,382
Average length of stay
(days) (g)............... 4.9 4.9 5.0 5.2 5.2
Average daily census (h).. 2,260 2,326 2,338 2,405 2,111
Occupancy rate (i)........ 39% 40% 40% 41% 40%
</TABLE>
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- --------
(a) Includes charges related to impairment of long-lived assets of $55.1
million ($32.9 million after-tax) and $13.7 million ($8.2 million after-
tax) for the years ended December 31, 1998 and 1997, respectively.
(b) EBITDA is defined as income from continuing operations before depreciation
and amortization, interest expense, management fees, impairment of long-
lived assets, minority interests and income taxes. EBITDA is commonly used
as an analytical indicator within the health care industry, and also serves
as a measure of leverage capacity and debt service ability. EBITDA should
not be considered as a measure of financial performance under generally
accepted accounting principles, and the items excluded from EBITDA are
significant components in understanding and assessing financial
performance. EBITDA should not be considered in isolation or as an
alternative to net income, cash flows generated by operating, investing or
financing activities or other financial statement data presented in the
combined financial statements as an indicator of financial performance or
liquidity. Because EBITDA is not a measurement determined in accordance
with generally accepted accounting principles and is thus susceptible to
varying calculations, EBITDA as presented may not be comparable to other
similarly titled measures of other companies.
(c) Licensed beds are those beds for which a facility has been granted approval
to operate from the applicable state licensing agency.
(d) Represents the average number of licensed beds, weighted based on periods
owned.
(e) Represents the total number of patients admitted (in the facility for a
period in excess of 23 hours) to Triad's hospitals and is used by
management and certain investors as a general measure of inpatient volume.
(f) Equivalent admissions is used by management and certain investors as a
general measure of combined inpatient and outpatient volume. Equivalent
admissions are computed by multiplying admissions (inpatient volume) by the
sum of gross inpatient revenue and gross outpatient revenue and then
dividing the resulting amount by gross inpatient revenue. The equivalent
admissions computation "equates" outpatient revenue to the volume measure
(admissions) used to measure inpatient volume resulting in a general
measure of combined inpatient and outpatient volume.
(g) Represents the average number of days admitted patients stay in Triad's
hospitals. Average length of stay has declined due to the continuing
pressures from managed care and other payers to restrict admissions and
reduce the number of days that are covered by the payers for certain
procedures, and by technological and pharmaceutical improvements.
(h) Represents the average number of patients in Triad's hospital beds each
day.
(i) Represents the percentage of hospital licensed beds occupied by patients.
Both average daily census and occupancy rate provide measures of the
utilization of inpatient rooms. The declining occupancy rate is primarily
attributed to the trend toward more services, that were previously
performed in an inpatient setting, being performed on an outpatient basis
and the decline in average length of stay per admission.
(j) Includes the acquisition of 7 hospitals from EPIC Healthcare Group, Inc. in
May 1994.
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Triad Management's Discussion and Analysis of
Financial Condition and Results of Operations
This discussion should be read together with the historical financial
statements of Triad Hospitals, Inc. included elsewhere herein and the notes
thereto and the information set forth under "Triad Selected Historical
Financial Data" and "Triad Unaudited Pro Forma Condensed Combined Financial
Statements" and the notes thereto.
Overview
Triad will own and operate the health care service business which has
comprised the Pacific Group of Columbia/HCA until the distribution by
Columbia/HCA to its shareholders of all of the shares of outstanding common
stock of Triad. The distribution marks the beginning of Triad's operations as
an independent, publicly-traded company. As such, the historical financial
statements of Triad Hospitals, Inc. may not be indicative of Triad's future
performance, nor do they necessarily reflect what the financial position and
results of operations of Triad would have been if it had operated as a
separate, stand-alone entity during the periods covered. See "Risk Factors--No
Operating Histories as Independent Companies."
Forward-Looking Statements
This "Management's Discussion and Analysis of Financial Condition and Results
of Operations" contains disclosures which are "forward-looking statements."
Forward-looking statements include all statements that do not relate solely to
historical or current facts, and can be identified by the use of words such as
"may," "believe," "will," "expect," "project," "estimate," "anticipate," "plan"
or "continue." These forward-looking statements are based on the current plans
and expectations of Triad and are subject to a number of uncertainties and
risks that could significantly affect current plans and expectations and the
future financial condition and results of Triad. These factors include, but are
not limited to, (i) the highly competitive nature of the health care business,
(ii) the efforts of insurers, health care providers and others to contain
health care costs, (iii) possible changes in the Medicare program that may
further limit reimbursements to health care providers and insurers, (iv)
changes in Federal, state or local regulation affecting the health care
industry, (v) the possible enactment of Federal or state health care reform,
(vi) the departure of key executive officers from Triad, (vii) claims and legal
actions relating to professional liability, (viii) fluctuations in the market
value of Triad common stock, (ix) changes in accounting practices, (x) changes
in general economic conditions, (xi) the complexity of integrated computer
systems and the success and expense of the remediation efforts of Columbia/HCA,
Triad and relevant third parties in achieving Year 2000 readiness, and (xii)
other risk factors described above. As a consequence, current plans,
anticipated actions and future financial condition and results may differ from
those expressed in any forward-looking statements made by or on behalf of
Triad. You are cautioned not to unduly rely on such forward-looking statements
when evaluating the information presented in this "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
Investigations
Columbia/HCA is currently the subject of several Federal investigations into
certain of its business practices, as well as governmental investigations by
various states. Columbia/HCA is cooperating in these investigations and
understands, through written notice and other means, that it is a target in
these investigations. Given the breadth of the ongoing investigations,
Columbia/HCA expects additional subpoenas and other investigative and
prosecutorial activity to occur in these and other jurisdictions in the future.
Columbia/HCA is the subject of a formal order of investigation by the
Securities and Exchange Commission. Columbia/HCA understands that the SEC
investigation includes the anti-fraud, periodic reporting and internal
accounting control provisions of the Federal securities laws.
Management believes that the ongoing governmental investigations and related
media coverage may 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.
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Columbia/HCA has agreed to indemnify Triad in respect of any losses which it
may incur arising from the governmental investigations described above and from
stockholder actions and other legal proceedings related to the governmental
investigations which are currently pending against Columbia/HCA. Columbia/HCA
has also agreed to indemnify Triad in respect of any losses which it may incur
as a result of proceedings which may be commenced by government authorities or
by private parties in the future that arise from acts, practices or omissions
engaged in prior to the Distribution Date and related to the proceedings
described above. See "Arrangements Among Columbia/HCA, LifePoint and Triad
Relating to the Distribution--Distribution Agreement." If any such indemnified
matters were successfully asserted against Triad, or any of its facilities, and
Columbia/HCA failed to meet its indemnification obligations, then such losses
could have a material adverse effect on the business, financial position,
results of operations and prospects of Triad. Columbia/HCA will not indemnify
Triad for losses relating to any acts, practices and omissions engaged in by
Triad after the distribution date, whether or not Triad is indemnified for
similar acts, practices and omissions occurring prior to the distribution date.
(See Note 3--Columbia/HCA Investigations, Litigation and Indemnification Rights
and Note 11--Contingencies of the Notes to Combined Financial Statements of
Triad included elsewhere herein).
Results of Operations
Revenue/Volume Trends
During the year ended December 31, 1998, Triad has experienced declines in
revenue and volume growth rates as well as operational deficiencies. Management
believes four primary factors have contributed to the declines in revenue and
volume growth rate: the impact of reductions in Medicare payments mandated by
the Balanced Budget Act, the continuing trend toward the conversion of more
services to an outpatient basis, the impact of the government investigations,
and the impact of factors relating to the distribution.
Triad's revenues continue to be affected by an increasing proportion of
revenue being derived from fixed payment, higher discount sources, including
Medicare, Medicaid and managed care plans. In addition, insurance companies,
government programs (other than Medicare) and employers purchasing health care
services for their employees are also negotiating discounted amounts that they
will pay health care providers rather than paying standard prices. Triad
expects patient volumes from Medicare and Medicaid to continue to increase due
to the general aging of the population and expansion of state Medicaid
programs. However, under the Balanced Budget Act, Triad's reimbursement from
the Medicare and Medicaid programs was reduced in 1998 and will be further
reduced as some reductions in reimbursement levels are phased in over the next
two years. The Balanced Budget Act has accelerated a shift, by certain Medicare
beneficiaries, from traditional Medicare coverage to medical coverage that is
provided under managed care plans. Triad generally receives lower payments per
patient under managed care plans than under traditional indemnity insurance
plans. With an increasing proportion of services being reimbursed based upon
fixed payment amounts (where the payment is based upon the diagnosis,
regardless of the cost incurred or level of service provided), revenues,
earnings and cash flows are being significantly reduced. Admissions related to
Medicare, Medicaid and managed care plan patients were 88.4% and 87.3% of total
admissions for the years ended December 31, 1998 and 1997, respectively.
Revenues from capitation arrangements (prepaid health service agreements) are
less than 1% of revenues. See "Government and Other Sources of Reimbursement
for LifePoint and Triad."
Triad's revenues also continue to be affected by the trend toward certain
services being performed more frequently on an outpatient basis. Growth in
outpatient services is expected to continue in the health care industry as
procedures performed on an inpatient basis are converted to outpatient
procedures through continuing advances in pharmaceutical and medical
technologies. The redirection of certain procedures to an outpatient basis is
also influenced by pressures from payers to perform certain procedures as
outpatient care rather than inpatient care. Outpatient revenues grew to 43.3%
of net patient revenues for the year ended December 31, 1998 from 40.4% during
the prior year.
Management believes that the impact of the ongoing governmental
investigations of certain Columbia/HCA business practices and the related media
coverage, have created uncertainties with physicians, patients and payers in
certain markets. See "Government Regulation and Other Factors Affecting
LifePoint and Triad--Governmental Investigation of Columbia/HCA and Related
Litigation."
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<PAGE>
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. The challenges presented by these trends are magnified by
Triad's inability to control these trends and the associated risks. To maintain
and improve its operating margins in future periods, Triad must increase
patient volumes while controlling the costs of providing services. If Triad is
not able to achieve reductions in the cost of providing services through
increased operational efficiencies, and the trend toward declining
reimbursements and payments continues, results of operations and cash flows
will deteriorate.
Management believes that the proper response to these challenges includes the
delivery of a broad range of quality health care services to physicians and
patients with operating decisions being made by the local management teams and
local physicians.
Operating Results Summary
Following are comparative summaries of results from continuing operations for
the years ended December 31, 1998, 1997 and 1996 (dollars in millions):
<TABLE>
<CAPTION>
Years Ended
December 31,
------------------------------------------
1998 1997
--------------------- --------------------
Amount Percentage Amount Percentage
-------- ---------- -------- ----------
<S> <C> <C> <C> <C>
Revenues........................... $1,588.7 100.0 $1,609.3 100.0
Salaries and benefits.............. 700.5 44.1 666.8 41.4
Supplies........................... 241.6 15.2 232.8 14.5
Other operating expenses........... 359.2 22.6 383.4 23.8
Provision for doubtful accounts.... 138.4 8.7 138.5 8.6
Depreciation and amortization...... 109.6 7.0 102.9 6.3
Interest expense allocated from
Columbia/HCA...................... 68.9 4.3 60.5 3.8
Management fees allocated from
Columbia/HCA...................... 29.3 1.8 25.4 1.6
Impairment of long-lived assets.... 55.1 3.5 13.7 0.9
-------- ----- -------- -----
1,702.6 107.2 1,624.0 100.9
-------- ----- -------- -----
Loss from continuing operations
before minority interests and
income taxes...................... (113.9) (7.2) (14.7) (0.9)
Minority interests in earnings of
consolidated entities............. 11.0 0.7 11.5 0.7
-------- ----- -------- -----
Loss from continuing operations
before income tax benefit......... (124.9) (7.9) (26.2) (1.6)
Income tax benefit................. (39.4) (2.5) (7.2) (0.4)
-------- ----- -------- -----
Loss from continuing operations.... $ (85.5) (5.4) $ (19.0) (1.2)
======== ===== ======== =====
% changes from prior year:
Revenues......................... (1.3%)
Loss from continuing operations.. 350.8
Admissions (a)................... (1.9)
Equivalent admissions (b)........ 0.6
Revenues per equivalent
admission....................... (1.9)
Same facility % changes from prior
year (c):
Revenues......................... (1.3)
Admissions (a)................... (1.9)
Equivalent admissions (b)........ 0.6
Revenues per equivalent
admission....................... (1.9)
</TABLE>
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<PAGE>
Operating Results Summary (continued)
<TABLE>
<CAPTION>
Years Ended
December 31,
----------------------------------------
1997 1996
-------------------- -------------------
Amount Percentage Amount Percentage
-------- ---------- -------- ----------
<S> <C> <C> <C> <C>
Revenues.............................. $1,609.3 100.0 $1,600.5 100.0
Salaries and benefits................. 666.8 41.4 628.1 39.2
Supplies.............................. 232.8 14.5 221.9 13.9
Other operating expenses.............. 383.4 23.8 349.5 21.8
Provision for doubtful accounts....... 138.5 8.6 106.5 6.7
Depreciation and amortization......... 102.9 6.3 94.5 5.9
Interest expense allocated from
Columbia/HCA......................... 60.5 3.8 52.0 3.2
Management fees allocated from
Columbia/HCA......................... 25.4 1.6 20.7 1.3
Impairment of long-lived assets....... 13.7 0.9 - -
-------- ----- -------- -----
1,624.0 100.9 1,473.2 92.0
-------- ----- -------- -----
Income (loss) from continuing
operations before minority interests
and income taxes (benefit)........... (14.7) (0.9) 127.3 8.0
Minority interests in earnings of
consolidated entities................ 11.5 0.7 10.8 0.7
-------- ----- -------- -----
Income (loss) from continuing
operations before income taxes
(benefit)............................ (26.2) (1.6) 116.5 7.3
Provision for income taxes (benefit).. (7.2) (0.4) 48.2 3.0
-------- ----- -------- -----
Income (loss) from continuing
operations........................... $ (19.0) (1.2) $ 68.3 4.3
======== ===== ======== =====
% changes from prior year:
Revenues............................ 0.6%
Income (loss) from continuing
operations......................... (127.8)
Admissions (a)...................... 1.0
Equivalent admissions (b)........... 3.2
Revenues per equivalent admission... (2.5)
Same facility % changes from prior
year (c):
Revenues............................ 0.6
Admissions (a)...................... 1.7
Equivalent admissions (b)........... 3.9
Revenues per equivalent admission... (3.1)
</TABLE>
- --------
(a) Represents the total number of patients admitted (in the facility for a
period in excess of 23 hours) to Triad's hospitals and is used by
management and certain investors as a general measure of inpatient volume.
(b) Equivalent admissions are used by management and certain investors as a
general measure of combined inpatient and outpatient volume. Equivalent
admissions are computed by multiplying admissions (inpatient volume) by the
sum of gross inpatient revenue and gross outpatient revenue and then
dividing the resulting amount by gross inpatient revenue. The equivalent
admissions computation "equates" outpatient revenue to the volume measure
(admissions) used to measure inpatient volume resulting in a general
measure of combined inpatient and outpatient volume.
(c) "Same facility" information excludes the operations of hospitals and their
related facilities which were either acquired or divested during the
current and prior year. The facilities that Triad intends to divest will
continue to be included in "same facility" until the date they are
divested.
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<PAGE>
Years Ended December 31, 1998 and 1997
The loss from continuing operations before income tax benefit increased
377.2% to a loss of $124.9 million in 1998 from a loss from continuing
operations before income tax benefit of $26.2 million in 1997. The facilities
(6 general, acute care hospitals and one psychiatric hospital) that management
has determined to divest in 1999 as part of their plan to establish the
structure for the future operations of Triad contributed significantly to the
decline in results of operations. These facilities to be divested incurred
losses from continuing operations before income taxes (benefit) of
approximately $70.1 million and $29.7 million for the years ended December 31,
1998 and 1997, respectively. Management established these divestiture plans
based upon analysis of the market potential for each of its facilities
considering current competitive conditions, anticipated changes in competitive
conditions, expected demographic trends, lease opportunities, joint venture
opportunities and capital allocation requirements.
Revenues decreased by 1.3% to $1,588.7 million in 1998 compared to $1,609.3
million in 1997. Inpatient admissions decreased 1.9% from a year ago and
equivalent admissions (adjusted to reflect combined inpatient and outpatient
volume) increased 0.6%. The decrease in revenues and the small 0.6% increase in
equivalent admissions resulted in a 1.9% decline in revenue per equivalent
admission. On a same facility basis, revenues decreased 1.3%, admissions
decreased 1.9% and equivalent admissions increased 0.6% from a year ago. The
decline in revenues combined with the small increase in equivalent admissions
resulted in a decline in same facility revenue per equivalent admission of
1.9%.
The decline in revenue per equivalent admission was due to several factors,
including decreases in Medicare reimbursement rates mandated by the Balanced
Budget Act which became effective October 1, 1997 (which reimbursement rates
lowered 1998 revenues by approximately $17 million), continued increases in
discounts from the growing number of managed care payers (managed care as a
percentage of total admissions increased to 32% in 1998 compared to 29% during
1997), and the announced divestitures of hospitals in certain markets.
Operating expenses increased as a percentage of revenues in each expense
category, except other operating expenses (which decreased 1.2% from 1997). The
primary reason for the increases, as a percentage of revenues, in all the
expense categories was the inability to adjust expenses in line with the
decreases experienced in volume and reimbursement trends. The level of
management's attention being devoted to the governmental investigations,
reactions by certain physicians and patients to the related negative media
coverage and management changes at several levels and locations throughout
Triad have contributed to Triad's inability to implement changes to reduce
operating expenses in response to the volume and revenue growth rate declines.
Salaries and benefits, as a percentage of revenues, increased to 44.1% in
1998 from 41.4% in 1997. The increase was due to a 4.4% increase in salaries
and benefits per equivalent admission and Triad's inability to adjust staffing
levels to mitigate the declining revenue per equivalent admission (man-hours
per equivalent admission increased 1.1% compared to last year).
Supply costs increased as a percentage of revenues to 15.2% in 1998 from
14.5% in 1997 due to the 1.9% decline in net revenue per equivalent admission,
while the cost of supplies per equivalent admission increased 3.2%.
Other operating expenses (which includes contract services, professional
fees, repairs and maintenance, rents and leases, utilities, insurance,
marketing and non-income taxes) decreased as a percentage of revenues to 22.6%
in 1998 from 23.8% in 1997. The decrease was due to small decreases in several
of these expense categories as a percentage of revenues, including lower
marketing costs being incurred due to the cancellation of a national branding
campaign.
Provision for doubtful accounts, as a percentage of revenues, increased to
8.7% in 1998 from 8.6% in 1997. The increase was due to internal factors such
as information system conversions (including patient accounting systems) at
certain facilities and external factors such as payer mix shifts to managed
care plans
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(resulting in increased amounts of patient co-payments and deductibles) and
increases in claim audits and remittance denials from certain payers.
Management is not able to quantify the effects of each of these factors, but
the shift in payer mix is expected to continue and the provision for doubtful
accounts is likely to remain at higher levels than in past years (1996 and
prior).
Depreciation and amortization increased as a percentage of revenues to 7.0%
in 1998 from 6.3% in 1997. The increase was primarily due to the 1.3% decline
in revenues on a same facility basis and increased capital expenditures related
to ancillary services (such as outpatient services) and information systems.
Interest expense, which is primarily represented by interest incurred on the
net intercompany balance with Columbia/HCA, increased to $68.9 million in 1998
compared to $60.5 million in 1997, primarily as a result of an increase in the
average balance of the advances from Columbia/HCA during 1998 compared to the
same period in 1997. This was due, in part, to a $76.4 million decline in cash
flows from operations.
During 1998, Triad, as part of its strategic business plan, decided to divest
certain of its facilities. The divestitures are expected to be completed in
1999 through sales, leases, joint ventures or closures. The carrying value for
these facilities expected to be sold was reduced to fair value, based upon
estimated selling values, resulting in a pre-tax impairment charge of $55.1
million. (See Note 5--Impairment of Long-lived Assets in the Notes to Combined
Financial Statements of Triad included elsewhere herein.)
Minority interests were 0.7% as a percentage of revenues in both 1998 and
1997.
Triad incurred a $1.6 million net loss from operations of its discontinued
home health businesses in 1998 compared to net income of $4.9 million during
the prior year period. The loss is primarily due to revenue reductions related
to Medicare rates of reimbursement for home health visits under the Balanced
Budget Act and a decline in home health visits.
Years Ended December 31, 1997 and 1996
Income (loss) from continuing operations before income taxes (benefit)
declined 122.5% to a loss of $(26.2) million in 1997 from income of $116.5
million in 1996. The facilities that Triad plans to divest contributed to the
decline in profitability by incurring losses from continuing operations before
income tax benefit of approximately $(29.7) million and approximately $(4.6)
million for the years ended December 31, 1997 and 1996, respectively.
Revenues increased 0.6% to $1,609.3 million in 1997 compared to $1,600.5
million in 1996. Inpatient admissions increased 1.0% and equivalent admissions
(adjusted to reflect combined inpatient and outpatient volume) increased 3.2%.
On a same facility basis, revenues increased 0.6%, admissions increased 1.7%
and equivalent admissions increased 3.9% from 1996. The lower growth rate in
both reported and same facility revenues, compared to the increases in
equivalent admissions, resulted in declines in revenue per equivalent admission
of 2.5% on a reported basis and 3.1% on a same facility basis. As previously
discussed, the increase in outpatient volume (reflected by the increases in
equivalent admissions) is primarily a result of the continuing trend of certain
services, previously provided in an inpatient setting, being converted to an
outpatient setting.
The decline in revenue per equivalent admission was due to several factors
including decreases in Medicare reimbursement rates mandated by the Balanced
Budget Act which became effective October 1, 1997 (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 29% in 1997 compared to 25% during
1996), delays experienced in obtaining Medicare cost report settlements (cost
report filings and settlements netted to zero in 1997 compared to favorable
revenue adjustments of $32.4 million in 1996).
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<PAGE>
Operating expenses increased, as a percentage of revenues, in each expense
category. The primary reason for the increases as a percentage of revenues in
all expense categories was Triad's inability to adjust expenses in line with
the decreases experienced in revenue and reimbursement trends. Management's
attention to the governmental investigations, reactions by certain physicians
and patients to the related negative media coverage and management changes at
several levels and locations throughout Triad contributed to Triad's inability
to implement changes to reduce operating expenses in response to the revenue
and reimbursement rate declines.
Salaries and benefits, as a percentage of revenues, increased to 41.4% in
1997 from 39.2% in 1996. The decline in revenues per equivalent admission was a
primary factor in the increase. A 2.9% increase in salaries and benefits per
equivalent admission resulted from the combined effect of decreasing man-hours
per equivalent admission of 1.8, while labor cost per man-hour increased 4.3%
and revenue per equivalent admission declined 2.5%.
Supply costs increased as a percentage of revenues to 14.5% in 1997 from
13.9% in 1996 due to a decline in net revenue per equivalent admission while
the cost of supplies per equivalent admission increased 1.7%.
Other operating expenses (which includes professional fees, contract
services, repairs and maintenance, rent, utilities, insurance, marketing and
non-income taxes) increased as a percentage of revenues to 23.8% in 1997 from
21.8% in 1996. The increase was due to small increases in several of these
expense categories as a percentage of revenues.
Provision for doubtful accounts, as a percentage of revenues, increased to
8.6% in 1997 from 6.7% in 1996 due to internal factors such as continued
computer information system conversions (including patient accounting systems)
at various facilities and external factors such as payer mix shifts to managed
care plans (resulting in increased amounts of patient co-payments and
deductibles) and payer remittance slowdowns. The information system conversions
hampered the business office billing functions and collection efforts in those
facilities as some resources are directed to installing and converting systems
and building new data files, rather than devoting full effort to billing and
collecting receivables.
Depreciation and amortization increased as a percentage of revenues to 6.3%
in 1997 from 5.9% in 1996, primarily due to the slowdown in revenue growth.
Interest expense increased to $60.5 million in 1997 compared to $52.0 million
in 1996, primarily as a result of an increase in the average balance of the
advances from Columbia/HCA during 1997 compared to 1996. Net cash provided by
operating activities declined by $65.0 million in 1997 compared to 1996.
During the fourth quarter of 1997 Triad determined that the recorded values
of certain long-lived assets related to certain surgery centers and physician
practices were not deemed fully recoverable based upon the operating results
trends and projected future cash flows. The recorded value for these surgery
centers and physician practices was reduced to estimated fair value resulting
in a pre-tax impairment charge of $13.7 million.
Minority interests were 0.7% as a percentage of revenues both in 1997 and
1996.
Triad earned $4.9 million net income from operations of its discontinued home
health business in 1997 compared to net income of $6.4 million during 1996. The
majority of the decline in income from operations of the discontinued home
health businesses was due to revenue reductions related to Medicare rates of
reimbursement for home health visits under the Balanced Budget Act. During
1997, Triad recorded a $2.9 million charge, net of tax benefits, on the
expected divestiture of the home health businesses.
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<PAGE>
Liquidity and Capital Resources
Triad has previously relied upon Columbia/HCA for liquidity and sources of
capital to supplement any needs not met by operations. Following the
distribution, as an independent, publicly-traded company, Triad will have
direct access to the capital markets and the ability to enter into its own
borrowing arrangements. At December 31, 1998, Triad had working capital of
$184.9 million.
Cash provided by continuing operating activities declined to $23.9 million
for the year ended December 31, 1998 from $100.3 million during the previous
year. The decrease was primarily due to a larger net loss incurred for 1998 (a
loss of $87.1 million in 1998 compared to a loss of $19.8 million in 1997) and
an increase in accounts receivable balances during 1998.
For the year ended December 31, 1997, cash provided by operating activities
declined to $100.3 million from $165.3 million for the year ended December 31,
1996. The decrease was due to reduced income before non-cash charges in
addition to decreases in cash related to working capital items. The increase in
working capital outflows was primarily the result of reductions in accounts
payable and accrued expenses compared to the prior year.
Cash used in investing activities for the year ended December 31, 1998 was
consistent with the levels used during 1997 and 1996. At December 31, 1998,
there were projects under construction which had an estimated cost to complete
of approximately $107.8 million. These construction projects are expected to be
completed over the next eighteen months.
In connection with the distribution, all intercompany accounts payable by
Triad to Columbia/HCA will be eliminated, and Triad will assume approximately
$715 million of debt obligations from Columbia/HCA. Such debt financing is
expected to consist of a $ million, -year term loan with a syndicate of
banks, and $300 million is expected to consist of Senior Subordinated Notes
due 2009. 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. Borrowings under the revolving credit facility
will be available to fund working capital needs and to finance acquisitions.
Management does not consider the sale of any assets to be necessary to repay
Triad's indebtedness or to provide working capital. However, for other reasons,
certain of Triad's hospitals may be sold in the future from time to time.
Although Triad's indebtedness will be more substantial than was historically
the case for its predecessor entities, management expects that operations and
working capital facilities will provide sufficient liquidity for fiscal 1999.
Triad does not expect to pay dividends on its common stock in the foreseeable
future.
Impact of Year 2000 Computer Issues
Background and General Information
The Year 2000 problem is the result of two potential malfunctions that could
have an impact on Columbia/HCA's systems and equipment including systems and
equipment on which Triad relies. The first problem arises due to computers
being programmed to use two rather than four digits to define the applicable
year. The second problem arises in embedded chips, where microchips and
microcontrollers have been designed using two rather than four digits to define
the applicable year. Certain of Columbia/HCA's computer programs, building
infrastructure components (e.g. alarm systems and HVAC systems) and medical
devices that are date sensitive, may recognize a date using "00" as the year
1900 rather than the year 2000. If uncorrected, the problem could result in
computer system and program failures or equipment and medical device
malfunctions that could result in a disruption of business operations or that
could affect patient diagnosis and treatment.
Triad obtains most of its information technology and information technology
infrastructure systems from CIS pursuant to the Computer and Data Processing
Services Agreement. CIS does not warrant that the software
75
<PAGE>
and hardware used by CIS in providing services to Triad will be Year 2000 ready
but CIS is currently making efforts in a professional, timely, and workmanlike
manner that it deems reasonable to address Year 2000 issues with respect to the
software licensed to Triad under the Computer and Data Processing Services
Agreement. In connection with its participation in Columbia/HCA's Year 2000
project, Triad has made and will continue to make certain expenditures related
to software systems and applications not obtained from CIS and non-information
technology systems (e.g., vendor products, medical equipment and other related
equipment with embedded chips) to ensure that they are Year 2000 ready. See
"Arrangements Among Columbia/HCA, LifePoint and Triad Relating to the
Distribution--Computer and Data Processing Services Agreement" and "--
Transitional Services Agreement."
Pursuant to the Computer and Data Processing Services Agreement, after the
distribution, Triad will rely on CIS to provide virtually all of its computer
support and information technology services. Pursuant to the Transitional
Services Agreement, Columbia/HCA will continue its ongoing program to inspect
medical equipment at Triad facilities for Year 2000 readiness. Triad is
dependent upon Columbia/HCA in substantially all respects for the Year 2000
readiness of its information technology and non-information technology systems
and for contingency planning in respect of Year 2000-related risks. Any failure
by Columbia/HCA to adequately address such matters could have a material
adverse effect on the business, financial condition, results of operations or
prospects of Triad.
Columbia/HCA is utilizing both internal and external resources to manage and
implement its Year 2000 program. With the assistance of external resources,
Columbia/HCA has undertaken development of contingency plans in the event that
its Year 2000 efforts, or the Year 2000 efforts of third-parties upon which
Columbia/HCA and Triad rely, are not accurately or timely completed. Triad
management consults regularly with Columbia/HCA personnel for development of
such contingency plans. Columbia/HCA has developed a contingency planning
methodology and will implement contingency plans throughout 1999.
Information Technology Systems
With respect to the information technology portions of Columbia/HCA's Year
2000 project, which address the inventory, assessment, remediation, testing and
implementation of internally developed software, Columbia/HCA has identified
various software applications that are being addressed on separate time lines.
Columbia/HCA has begun remediating all these software applications and is
testing the software applications where remediation has been completed.
Columbia/HCA has also completed the assessment of mission critical third party
software (i.e., that software which is essential for day to day operations) and
has developed testing and implementation plans with separate time lines.
Columbia/HCA has completed and placed into production 60% of software
applications and is 75% complete on most of the remaining software
applications, and anticipates completing, in all material respects,
remediation, testing and implementation for internally developed and mission
critical third party software by June 1999. Columbia/HCA's efforts are
currently on schedule in all material respects.
With respect to the information technology infrastructure portion of
Columbia/HCA's Year 2000 project, Columbia/HCA has undertaken a program to
inventory, assess and correct, replace or otherwise address impacted vendor-
supplied products (hardware, systems software, business software, and
telecommunication equipment). Columbia/HCA has implemented a program to contact
vendors, analyze information provided, and remediate, replace or otherwise
address information technology products that pose a material Year 2000 impact.
Columbia/HCA anticipates completion, in all material respects, of the
information technology infrastructure portion of its program by June 1999. The
information technology infrastructure portion of Columbia/HCA's Year 2000
project is currently on schedule in all material respects.
Columbia/HCA presently believes that with modifications to existing software
or the installation of upgraded software under the information technology
infrastructure portion, the Year 2000 will not pose 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.
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Non-Information Technology Systems and Equipment
With respect to the non-information technology infrastructure portion of
Columbia/HCA's Year 2000 project, Columbia/HCA has undertaken a program to
inventory, assess and correct, replace or otherwise address impacted vendor
products, medical equipment and other related equipment with embedded chips.
Columbia/HCA has implemented a program to contact vendors, analyze information
provided, and remediate, replace or otherwise address devices or equipment that
pose a material Year 2000 impact. Columbia/HCA anticipates completion, in all
material respects, of the non-information technology infrastructure portion of
its program by a revised date of September 30, 1999, from the previously
anticipated date of June 30, 1999. With respect to such revised date, the non-
information technology infrastructure portion of Columbia/HCA's Year 2000
project is currently on schedule in all material respects.
Columbia/HCA is prioritizing its non-information technology infrastructure
efforts by focusing on equipment and medical devices that will have a direct
impact on patient safety and health. Columbia/HCA is directing substantial
efforts to repair, replace, upgrade or otherwise address this equipment and
these medical devices in order to minimize risk to patient safety and health.
Columbia/HCA is relying on information that is being provided to it by
equipment and medical device manufacturers regarding the Year 2000 readiness of
their products. While Columbia/HCA is attempting to evaluate information
provided by its past and present vendors, there can be no assurance that in all
instances accurate information is being provided. Columbia/HCA also cannot in
all instances guarantee that the repair, replacement or upgrade of all non-
information technology infrastructure systems will occur on a timely basis or
that such repairs, replacements or upgrades will avoid any Year 2000 problems.
Third-Party Payers and Intermediaries, and Suppliers
Columbia/HCA has initiated communications with Triad's major third party
payers and intermediaries, including government payers and intermediaries.
Triad relies on these entities for accurate and timely reimbursement of claims,
often through the use of electronic data interfaces. Columbia/HCA has not
received assurances that these interfaces will be timely converted. Testing
with payers and intermediaries will not be completed by June 30, 1999 because
the payers and intermediaries are not ready to test with Columbia/HCA's
systems. Failure of these third party systems could have a material adverse
effect on Triad's cash flow or results of operations.
Columbia/HCA also has initiated communications with its mission critical
suppliers and vendors (i.e., those suppliers and vendors whose products and
services are essential for day-to-day operations) to verify their ability to
continue to deliver goods and services through the Year 2000. Columbia/HCA has
not received assurances from all mission critical suppliers and vendors that
they will be able to continue to deliver goods and services through the Year
2000, but Columbia/HCA is continuing its efforts to obtain such assurances. The
failure of these third parties could have a material impact on the business,
financial condition, results of operations or prospects of Triad and/or the
ability of Triad to provide health care services.
With the assistance of external resources, Columbia/HCA has undertaken the
development of contingency plans in the event that its Year 2000 efforts, or
the Year 2000 efforts of third parties upon which Columbia/HCA and Triad rely,
are not accurately or timely completed. Columbia/HCA has developed a
contingency planning methodology and will implement contingency plans
throughout 1999.
Year 2000 Risks
While Columbia/HCA is developing contingency plans to address possible
failure scenarios, Triad recognizes that there are "worst-case" scenarios which
may develop and are largely outside its or Columbia/HCA's control. Triad
recognizes the risks associated with extended infrastructure (e.g., power,
water and telecommunications) failure, the interruption of insurance and
government program payments to the organization and the failure of equipment or
software that could impact patient safety or health despite the assurances of
third parties. Columbia/HCA is addressing these and other failure scenarios in
its contingency
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planning effort and is engaging third parties in discussions regarding how to
manage common failure scenarios, but neither Columbia/HCA nor Triad can
currently estimate the likelihood or the potential cost of such failures.
Costs and Expenses
The Year 2000 project costs incurred by Columbia/HCA will have an impact on
the Computer and Data Processing Services Agreement with Triad. Triad is not
currently able to reasonably estimate the ultimate cost to be incurred by it
for the assessment, remediation, upgrade, replacement and testing of its
impacted non-information technology systems. The majority of the costs (except
the cost of new equipment) related to the Year 2000 project will be expensed as
incurred and are expected to be funded through operating cash flows.
The successful completion of the project and completion dates for the Year
2000 modifications are based on management's best estimates, which were derived
utilizing numerous assumptions of future events, including the continued
availability of certain resources, third party modification plans and other
factors. However, there can be no guarantees that these estimates will be
achieved and actual results could differ materially from those anticipated.
Specific factors that might cause such material differences include, but are
not limited to, the availability and cost of personnel trained in this area and
the ability to locate and correct all relevant computer codes and all medical
equipment.
Effects of Inflation and Changing Prices
Various federal, state and local laws have been enacted that, in certain
cases, limit Triad's ability to increase prices. Revenues for acute care
hospital services rendered to Medicare patients are established under the
federal government's prospective payment system. Total Medicare revenues
approximated 34.6% in 1998, 35.4% in 1997 and 36.5% in 1996.
Management believes that hospital industry operating margins have been, and
may continue to be, under significant pressure because of deterioration in
inpatient volumes, changes in payer mix and growth in operating expenses in
excess of the increase in prospective payments under the Medicare program.
Management expects that the average rate of increase in Medicare prospective
payments will continue to decline slightly in 1999. In addition, as a result of
increasing regulatory and competitive pressures, Triad's ability to maintain
operating margins through price increases to non-Medicare patients is limited.
Health Care Reform
In recent years, an increasing number of legislative proposals have been
introduced or proposed to Congress and in some state legislatures that would
significantly affect the services provided by and reimbursement to health care
providers in Triad's markets. The cost of certain proposals would be funded in
significant part by reduction in payments by government programs, including
Medicare and Medicaid, to health care providers or taxes levied on hospitals or
other providers. While Triad is unable to predict which, if any, proposals for
health care reform will be adopted, there can be no assurance that proposals
adverse to the business of Triad will not be adopted.
Description of Certain New Triad Indebtedness
General
Upon consummation of the distribution, Triad Hospitals Holdings, Inc., a
wholly owned subsidiary of Triad ("Triad Holdings"), expects to have
outstanding $300 million aggregate principal amount of notes due 2009 and $415
million aggregate principal amount of indebtedness under its bank facilities.
The notes will initially be issued, and indebtedness incurred, by a wholly
owned subsidiary of Columbia/HCA. Following the issuance and sale of the notes
and the incurrence of the indebtedness, the Pacific Group assets will be
transferred to Triad, and Triad will assume all obligations under the notes and
bank facilities. Triad will then transfer substantially all of its assets to
Triad's wholly-owned subsidiary, Triad Holdings, and Triad Holdings
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will assume all obligations under the notes and bank facilities. The initial
issuer of the notes and obligor under the bank facilities will receive the net
proceeds and will use such proceeds to repay debt owed to Columbia/HCA and an
affiliate of Columbia/HCA.
Senior Subordinated Notes due 2009
Certain of Triad Holdings' subsidiaries will fully and unconditionally
guarantee the notes on a senior subordinated basis. Future subsidiaries also
may be required to guarantee the notes on a senior subordinated basis. The
notes will be general unsecured obligations of Triad Holdings and will be
subordinated in right of payment to all of Triad Holdings' existing and future
senior indebtedness. The notes will rank equally with Triad Holdings' existing
and future senior subordinated obligations and will rank senior to all of Triad
Holdings' subordinated indebtedness. The guarantees will be subordinated to all
existing and future senior indebtedness of the guarantors.
Triad Holdings may redeem the notes at any time prior to the fifth
anniversary of the issue date at the redemption prices set forth in the notes.
In addition, on or before the third anniversary of the issue date Triad
Holdings may redeem up to 35% of the notes with the net proceeds of certain
equity offerings at the redemption price set forth in the notes. Upon certain
change of control events, each holder of notes may require Triad Holdings to
repurchase all or a portion of its notes at a purchase price equal to 101% of
the principal amount thereof, plus accrued interest.
The indenture governing the notes will contain covenants that, among other
things, will limit Triad Holdings' and certain of its subsidiaries' ability to
incur additional indebtedness, pay dividends on, redeem or purchase its capital
stock, make investments, engage in transactions with affiliates, create certain
liens, in the case of certain of its subsidiaries, guarantee indebtedness, sell
assets, sell capital stock of restricted subsidiaries and consolidate, merge or
transfer all or substantially all its assets. See "Risk Factors--High Degree of
Leverage and Debt Service Obligation May Adversely Affect LifePoint and Triad."
A registration rights agreement will be executed in connection with the
offering of the notes whereby Triad Holdings will agree to exchange the
unregistered notes for registered notes with substantially identical terms. If
the consummation of the exchange offer and certain other events in connection
with such exchange offer do not occur prior to certain specified dates, Triad
Holdings will be obligated to pay additional interest on the notes during the
existence of such default.
New Credit Facility
The $ million Senior Secured Credit Facilities, to be assumed by Triad,
will consist of:
. $ million Tranche A term loan facility,
. $ million Tranche B term loan facility,
. $ million bridge loan facility, and
. $125 million revolving credit facility.
Repayments under the term loan facilities are expected to be due in quarterly
installments, with quarterly amortization based on annual amounts to be
determined. The final payments under the Tranche A term loan facility and
Tranche B term loan facility will be due and payable 6 years after the
distribution date. In addition to the scheduled amortization, Triad will be
required to repay borrowings under the bridge loan facility and the term loan
facilities with proceeds from asset sales, subject to certain exceptions, and
with proceeds from issuance of equity or debt securities (other than the notes
to be assumed at the time that the bank facilities are to be assumed). The
proceeds from sales of certain identified assets, including the hospitals Triad
currently is holding for sale, first will be used to repay the bridge loan
facility, until that facility is paid in full. The
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revolving credit facility, which will be undrawn at the time of the
distribution, is expected to be available for working capital and other general
corporate purposes, and any outstanding amounts thereunder will be due and
payable 6 years after the distribution date.
It is expected that, at Triad's option, the Senior Secured Credit Facilities
will bear interest at a rate per annum equal to
. LIBOR plus an applicable margin; or
. the higher of the administrative agent's prime rate or 0.5% above the
federal funds rate, in each case plus an applicable margin.
The applicable margin will be determined initially based on the ratings
assigned to Triad's bank facilities by Standard & Poor's and Moody's, and after
six months, based on the ratio of Triad's consolidated total funded debt to
EBITDA ratio.
Triad will guarantee the borrowings and other obligations under the bank
facilities, which guarantees will be secured by a pledge of the capital stock
of Triad Holdings and each of Triad's other subsidiaries, as well as all of
Triad and its subsidiaries' personal property. Triad also expects that the bank
facilities may be secured by other property of Triad and its subsidiaries.
The bank facility will contain covenants that, among other things, will limit
Triad Holdings' and certain of its subsidiaries' ability to incur additional
indebtedness, pay dividends on, redeem or purchase its capital stock, make
investments and capital expenditures, engage in transactions with affiliates,
create certain liens, sell assets and consolidate, merge or transfer assets. In
addition, Triad expects that it will be required to comply with various
financial ratios and tests, including a minimum net worth test, a total funded
debt to EBITDA ratio, a senior funded debt to EBITDA ratio and a minimum fixed
charge coverage ratio.
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LifePoint Business
General
LifePoint operates 23 general, acute care hospitals located in non-urban
areas with an average population of approximately 31,000 (based on 1997 data).
According to industry sources, population in LifePoint's markets is projected
to grow on average in excess of 5% annually between 1997 and 2002, compared to
the expected national growth rate of 2.7% over the same period. LifePoint will
be a successor to the America Group, which was created by Columbia/HCA in
November 1997 to operate these hospitals. In 21 of its 23 markets, LifePoint's
hospital is the only hospital in the community. LifePoint's hospitals are
located in the States of Alabama, Florida, Georgia, Kansas, Kentucky,
Louisiana, Tennessee, Utah and Wyoming. All but five of LifePoint's hospitals
are located in states that have certificate of need laws, which laws may have
the effect of limiting the development of competing facilities. On March 23,
1999, LifePoint entered into a letter of intent to sell three of its general,
acute care hospitals for an aggregate purchase price of $25 million, subject to
net working capital adjustments. Consummation of this transaction is subject to
execution of definitive documentation and there can be no assurance that this
transaction will be consummated.
Principal Executive Offices
LifePoint's principal executive offices are located at 4525 Harding Road,
Suite 300, Nashville, Tennessee 37205 (telephone number (615) 344-6261).
The Non-Urban Health Care Market
LifePoint believes that growing, non-urban health care markets are attractive
to health care service providers as a result of favorable demographic and
economic trends and competitive conditions. All of LifePoint's facilities are
located in non-urban markets.
Because non-urban service areas have smaller populations, there are generally
fewer hospitals and other health care service providers in each community,
resulting in less direct competition for hospital-based services. Management
believes that the smaller populations and relative dominance of the one or two
acute care hospitals in these markets also limit the entry of alternate non-
hospital providers, such as outpatient surgery centers or rehabilitation or
diagnostic imaging centers. In addition, LifePoint also believes that non-urban
communities generally view the local hospital as a key part of the local
community. Additionally, there is generally a lower level of managed care payer
penetration (i.e., the relative proportion of the market population enrolled in
managed care programs (HMOs and PPOs)) in LifePoint's markets than there is in
urban markets.
Management believes that the characteristics of the non-urban health care
market provide LifePoint with attractive acquisition opportunities. Currently,
the majority of non-urban hospitals are owned by not-for-profit and
governmental entities that typically have limited access to capital to keep
pace with advances in medical technology. In addition, such entities frequently
lack the management resources necessary to control hospital expenses, recruit
and retain physicians, expand healthcare services and comply with increasingly
complex reimbursement and managed care requirements. As a result, patients may
migrate to, may be referred by local physicians to, or may be lured by
incentives from managed care plans to travel to, hospitals in larger, urban
markets. Management believes that as a result of these pressures, not-for-
profit and governmental owners of non-urban hospitals who wish to preserve the
local availability of quality health care services have sought to sell or lease
these hospitals to companies, like LifePoint, that have the access to capital
and management resources which can better serve the community and are committed
to the local delivery of health care.
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Business Strategy
LifePoint's strategy goals centered around the unique patient and health care
provider needs and opportunities in its non-urban markets. LifePoint intends to
manage its facilities to ensure that they operate in accordance with the
strategic objectives described below:
. Develop Facility-Specific Strategies for Non-Urban Markets. LifePoint
has developed facility-specific strategies tailored for the unique
characteristics of each of its non-urban markets. These strategies are
intended to improve the quality and breadth of health care services, to
provide an outstanding workplace for LifePoint's employees, to recognize
and expand the hospitals' roles as community assets and to improve
financial performance. By contrast, Columbia/HCA's strategy has been
developed on a system-wide basis and has focused on building well-
integrated facility networks with large urban facilities as the
principal providers of specialty services.
. Expand Breadth of Service and Reduce Patient Outmigration. LifePoint
intends to increase revenues by broadening the scope of health care
services available at its facilities, particularly in markets where
significant outmigration is occurring, and to recruit physicians with a
broader range of specialties. As an entity separate from Columbia/HCA,
LifePoint will not have to compete with the Columbia/HCA facilities
located in larger, urban markets for management attention, support
resources, and capital to finance expansion of the range of services
offered at its hospitals. LifePoint has recently undertaken projects in
a number of its hospitals targeted at expanding or renovating specialty
service facilities including emergency room facilities, obstetric care,
surgical capacity and outpatient services. Management believes that this
expansion of available treatments and LifePoint's community focus should
help to encourage local residents in LifePoint's non-urban markets to
seek care at facilities within their communities and limit outmigration.
. Strengthen Physician Recruiting and Retention. LifePoint seeks to
enhance the quality of care available locally (and the revenue derived
therefrom), and believes that recruiting physicians in local communities
is critical to increasing the quality of health care and the breadth of
available services. LifePoint recruited 88 physicians in 1998, the
majority of whom were added during the second half of the year.
LifePoint believes that its recent recruiting success is largely
attributable to the announcement of its spin-off as an independent
company and the community-based focus of its new management team. As
part of LifePoint's physician recruitment program in 1999, LifePoint
plans to focus primarily on recruiting additional specialty care
physicians. LifePoint also intends to take advantage of its management
focus to work more effectively with individual physicians and physician
practices. Management believes that expansion of the range of available
treatments at its hospitals should also assist in physician recruiting.
. Retain and Develop Stable Management. Management believes that achieving
long-term retention of executive teams at the hospitals will enhance
medical staff relations and maintain continuity of relationships within
the community. LifePoint intends to focus its recruitment of managers
and health care professionals on those who wish to live and practice in
the communities in which LifePoint's hospitals are located. In the past,
managers and health care professionals employed at LifePoint hospitals
sometimes relocated to advance their careers elsewhere within the
Columbia/HCA system. LifePoint expects that its ability to provide
equity-based compensation linked to its performance should assist in
management retention.
. Improve Managed Care Position. As part of Columbia/HCA, LifePoint's
facilities typically have been included in managed care contracts
negotiated by Columbia/HCA on a market-wide basis emphasizing large
urban facilities. LifePoint believes that independence from Columbia/HCA
and the lower managed care penetration in its markets will enable it
over time to negotiate contract terms that are generally more favorable
for its facilities and to decrease the level of discount arrangements in
which it participates. LifePoint's hospitals do not participate in
capitation arrangements and LifePoint does not intend to do so in the
future.
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. Improve Expense Management. LifePoint has begun to implement cost
control initiatives designed to reduce labor costs and improve labor
productivity, control supplies expense and reduce uncollectible
revenues. These initiatives include adjusting staffing levels according
to patient volumes, modifying supply purchases according to patient need
and providing training to hospital staff in more efficient billing and
collection processes.
. Acquire Other Hospitals. Management intends to pursue a disciplined
acquisition strategy that will seek to identify and acquire attractive
hospitals in non-urban markets. In the past, Columbia/HCA has been
reluctant to pursue acquisitions of such facilities as non-urban
hospitals were not consistent with Columbia's urban market focus.
LifePoint will seek to acquire hospitals that are located in non-urban
markets with above average population growth, a strong economic base and
a favorable payor mix.
Operations
LifePoint's general, acute care hospitals usually provide the range of
medical and surgical services commonly available in hospitals in non-urban
markets. These hospitals also provide diagnostic and emergency services, as
well as outpatient and ancillary services such as outpatient surgery,
laboratory, radiology, respiratory therapy and physical therapy.
Each of LifePoint's hospitals is governed by a board of trustees, which
includes members of the hospital's medical staff as well as community leaders.
The board of trustees establishes policies concerning medical, professional and
ethical practices, monitors such practices, and is responsible for ensuring
that these practices conform to established standards. LifePoint maintains
quality assurance programs to support and monitor quality of care standards and
to meet accreditation and regulatory requirements. Patient care evaluations and
other quality of care assessment activities are monitored on a continuing
basis.
Like most hospitals located in non-urban areas, LifePoint's hospitals do not
engage in extensive medical research and medical education programs. However, a
number of LifePoint's hospitals have an affiliation with medical schools,
including the clinical rotation of medical students.
In addition to providing capital resources, LifePoint will make available a
variety of management services to its health care facilities. These services
will include information systems; ethics and compliance programs; leasing
contracts; accounting, financial and clinical systems; legal support; personnel
management; internal audit; and resource management. Some of these services
initially will be provided through transitional arrangements made with
Columbia/HCA. LifePoint also will participate and have an equity interest,
along with Columbia/HCA and Triad, in a group purchasing organization which
will make certain national supply and equipment contracts available to
LifePoint's facilities. See "Arrangements Among Columbia/HCA, LifePoint and
Triad Relating to the Distribution" and "--Other Agreements."
Services and Utilization
LifePoint believes that two important factors relating to the overall
utilization of a hospital are the quality and market position of the hospital
and the number, quality and specialties of physicians providing patient care
within the facility. Generally, LifePoint believes that the ability of a
hospital to meet the health care needs of its community is determined by its
breadth of services, level of technology, emphasis on quality of care and
convenience for patients and physicians. Other factors which impact utilization
include the size of and growth in local population, local economic conditions,
the availability of reimbursement programs such as Medicare and Medicaid and
market penetration of managed care programs. Utilization across the industry
also is being affected by improved treatment protocols as a result of advances
in medical technology and pharmacology.
The following table sets forth certain operating statistics for consolidated
hospitals owned by LifePoint for each of the past five years ended December 31.
Medical/surgical hospital operations are subject to certain seasonal
fluctuations, including decreases in patient utilization during holiday periods
and increases in the cold weather months.
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<TABLE>
<CAPTION>
Years Ended December 31,
----------------------------------------
1998 1997 1996 1995 1994
------- ------- ------ ------ ------
<S> <C> <C> <C> <C> <C>
Number of hospitals at end of
period............................. 23 22 22 20 20
Number of licensed beds at end of
period (a)......................... 2,108 2,080 2,074 1,881 1,843
Weighted average licensed beds (b).. 2,122 2,078 2,060 1,862 1,783
Admissions (c)...................... 62,264 60,487 59,381 54,549 52,681
Equivalent admissions (d)........... 109,336 105,126 98,869 88,915 81,708
Average length of stay (days) (e)... 4.4 4.4 4.7 4.8 4.9
Average daily census (f)............ 742 733 755 713 713
Occupancy rate (g).................. 35% 35% 37% 38% 40%
</TABLE>
- --------
(a) Licensed beds are those beds for which a facility has been granted approval
to operate from the applicable state licensing agency.
(b) Represents the average number of licensed beds weighted based on periods
owned.
(c) Represents the total number of patients admitted (in the facility for a
period in excess of 23 hours) to LifePoint's hospitals and is used by
management and certain investors as a general measure of inpatient volume.
(d) Equivalent admissions is used by management and certain investors as a
general measure of combined inpatient and outpatient volume. Equivalent
admissions are computed by multiplying admissions (inpatient volume) by the
sum of gross inpatient revenue and gross outpatient revenue and then
dividing the resulting amount by gross inpatient revenue. The equivalent
admissions computation "equates" outpatient revenue to the volume measure
(admissions) used to measure inpatient volume resulting in a general
measure of combined inpatient and outpatient volume.
(e) Represents the average number of days admitted patients stay in LifePoint's
hospitals. Average length of stay has declined due to the continuing
pressures from managed care and other payers to restrict admissions and
reduce the number of days that are covered by the payers for certain
procedures, and by technological and pharmaceutical improvements.
(f) Represents the average number of patients in LifePoint's hospital beds each
day.
(g) Represents the percentage of hospital licensed beds occupied by patients.
Both average daily census and occupancy rate provide measures of the
utilization of inpatient rooms. The declining occupancy rate is primarily
attributed to the trend toward more services, that were previously
performed in an inpatient setting, being performed on an outpatient basis
and the decline in average length of stay per admission.
LifePoint's hospitals have experienced significant shifts from inpatient to
outpatient care as well as decreases in average lengths of inpatient stay,
primarily as a result of improvements in technology and clinical practices and
hospital payment changes by Medicare, insurance carriers and self-insured
employers. These hospital payment changes generally encourage the utilization
of outpatient, rather than inpatient, services whenever possible, and shortened
lengths of stay for inpatient care. In response to this shift toward outpatient
care, LifePoint is reconfiguring certain hospitals to more effectively
accommodate outpatient services and restructuring existing surgical capacity to
permit additional outpatient volume and a greater variety of outpatient
services.
Sources of Revenue
LifePoint receives payment for patient services from the Federal government
primarily under the Medicare program, state governments under their respective
Medicaid programs, HMOs, PPOs and other private insurers, as well as directly
from patients. The approximate percentages of net patient revenues from
continuing operations of LifePoint's facilities from such sources during the
periods specified below were as follows:
<TABLE>
<CAPTION>
Years Ended
December 31,
-------------------
1998 1997 1996
----- ----- -----
<S> <C> <C> <C>
Medicare.............................................. 37.8% 39.4% 40.9%
Medicaid.............................................. 11.1 11.1 11.5
Other sources......................................... 51.1 49.5 47.6
----- ----- -----
Total............................................... 100.0% 100.0% 100.0%
===== ===== =====
</TABLE>
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Medicare is a Federal program that provides certain hospital and medical
insurance benefits to persons age 65 and over, some disabled persons and
persons with end-stage renal disease. Medicaid is a Federal-state program
administered by the states which provides hospital benefits to qualifying
individuals who are unable to afford care. All of LifePoint's hospitals are
certified as providers of Medicare and Medicaid services. Amounts received
under the Medicare and Medicaid programs are generally significantly less than
the hospital's customary charges for the services provided.
To attract additional volume, most of LifePoint's hospitals offer discounts
from established charges to certain large group purchasers of health care
services, including private insurance companies, employers, HMOs, PPOs and
other managed care plans. These discount programs limit LifePoint's ability to
increase charges in response to increasing costs. See "LifePoint Business--
Competition." In addition to government programs, LifePoint is reimbursed by
private payers including HMOs, PPOs, private insurance companies, employers and
individual private payers. Patients are generally not responsible for any
difference between customary hospital charges and amounts reimbursed for such
services under Medicare, Medicaid, some private insurance plans, HMOs or PPOs,
but are responsible for services not covered by such plans, exclusions,
deductibles or co-insurance features of their coverage. The amount of such
exclusions, deductibles and co-insurance has generally been increasing each
year. Collection of amounts due from individuals is typically more difficult
than from governmental or business payers. For more information on the
reimbursement programs on which LifePoint's revenues are dependent, see
"Government and Other Sources of Reimbursement for LifePoint and Triad."
Competition
The primary bases of competition among hospitals in non-urban markets are the
quality and scope of medical services, availability of physicians, location,
community reputation and, to a lesser extent, price. Generally, LifePoint
serves markets in which its hospital is the only hospital in the community.
Therefore, most of LifePoint's hospitals face less competition in their
immediate patient service areas than would be expected in larger communities.
While LifePoint's hospitals are generally the primary provider of institutional
health care services in their respective communities, its hospitals face
competition from hospitals in surrounding communities, including larger
tertiary care centers and, in some cases, other non-urban hospitals. Some of
the hospitals that compete with LifePoint are owned by tax-supported
governmental agencies or by not-for-profit entities supported by endowments and
charitable contributions which can finance capital expenditures on a tax-exempt
basis.
One of the most significant factors in the competitive position of a hospital
is the number and quality of physicians affiliated with the hospital. Although
physicians may at any time terminate their affiliation with a hospital operated
by LifePoint, LifePoint's hospitals seek to retain physicians of varied
specialties on the hospitals' medical staffs and to attract other qualified
physicians. LifePoint believes that physicians refer patients to a hospital
primarily on the basis of the quality of services it renders to patients and
physicians, the quality of other physicians on the medical staff, the location
of the hospital and the quality of the hospital's facilities, equipment and
employees. Accordingly, LifePoint strives to maintain high ethical and
professional standards and quality facilities, equipment, employees and
services for physicians and their patients.
Another factor in the competitive position of a hospital is management's
ability to negotiate service contracts with purchasers of group health care
services. HMOs and PPOs attempt to direct and control the use of hospital
services through managed care programs and to obtain discounts from hospitals'
established charges. In addition, employers and traditional health insurers are
increasingly interested in containing costs through negotiations with hospitals
for managed care programs and discounts from established charges. Generally,
hospitals compete for service contracts with group health care service
purchasers on the basis of market reputation, geographic location, quality and
range of services, quality of the medical staff, convenience and price. The
importance of obtaining contracts with managed care organizations varies from
market to market, depending on the market strength of such organizations.
Managed care contracts generally are less
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<PAGE>
important in the non-urban markets served by LifePoint than they are in urban
and suburban markets where there is typically a higher level of managed care
penetration.
State certificate of need ("CON") laws, which place limitations on a
hospital's ability to expand hospital services and add new equipment, also may
have the effect of restricting competition. Every state in which LifePoint
operates has CON laws except Kansas, Louisiana, Utah and Wyoming. The
application process for approval of covered services, facilities, changes in
operations and capital expenditures is, therefore, highly competitive. In those
states which have no CON laws or which set relatively high thresholds before
expenditures become reviewable by state authorities, competition in the form of
new services, facilities and capital spending may be more prevalent. LifePoint
has not experienced, and does not expect to experience, any material adverse
effects from state CON requirements or from the imposition, elimination or
relaxation of such requirements. See "Government Regulation and Other Factors
Affecting LifePoint and Triad."
LifePoint, and the health care industry as a whole, face the challenge of
continuing to provide quality patient care while dealing with rising costs,
strong competition for patients and a general reduction of reimbursement rates
by both private and government payers. As both private and government payers
reduce the scope of what may be reimbursed and reduce reimbursement levels for
what is covered, Federal and state efforts to reform the health care system may
further impact reimbursement rates. Changes in medical technology, existing and
future legislation, regulations and interpretations and competitive contracting
for provider services by private and government payers may require changes in
LifePoint's facilities, equipment, personnel, rates and/or services in the
future.
The hospital industry and LifePoint's hospitals continue to have significant
unused capacity. Inpatient utilization, average lengths of stay and average
inpatient occupancy rates continue to be negatively affected by payer-required
pre-admission authorization, utilization review, and payment mechanisms to
maximize outpatient and alternative health care delivery services for less
acutely ill patients. Admissions constraints, payer pressures and increased
competition are expected to continue. LifePoint will endeavor to meet these
challenges by expanding its facilities' outpatient services, offering
appropriate discounts to private payer groups, upgrading facilities and
equipment, and offering new programs and services.
One element of LifePoint's business strategy is expansion through the
acquisition of acute care hospitals in growing non-urban markets. The
competition to acquire non-urban hospitals is significant, and there can be no
assurance that suitable acquisitions, for which other health care companies
(including those with greater financial resources than LifePoint) may be
competing, can be accomplished on terms favorable to LifePoint or that
financing, if necessary, can be obtained for such acquisitions. LifePoint
believes that often the acquiror will be selected for a variety of reasons and
not exclusively on the basis of price. LifePoint believes that its strategic
goals align its interests with those of the local communities served by its
hospitals. LifePoint believes that its commitment to maintaining the local
availability of health care services, together with the reputation of
LifePoint's hospitals for providing market-specific, high quality health care,
its focus on physician recruiting and retention, its management's operating
experience, and its direct access to capital will enable LifePoint to compete
successfully for acquisitions.
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Properties
The following table lists the hospitals owned (except as otherwise indicated)
by the America Group of Columbia/HCA (the assets of which will be transferred
to LifePoint prior to the distribution) as of December 31, 1998:
<TABLE>
<CAPTION>
Licensed
Facility Name City State Beds
- ------------- ---- ----- --------
<S> <C> <C> <C>
Andalusia Hospital Andalusia AL 101
Bartow Memorial Hospital (1) Bartow FL 56
Barrow Medical Center Winder GA 56
Western Plains Regional Hospital (2) Dodge City KS 110
Halstead Hospital Halstead KS 177
Georgetown Community Hospital Georgetown KY 75
PineLake Regional Hospital Mayfield KY 106
Meadowview Regional Medical Center Maysville KY 111
Bourbon Community Hospital Paris KY 58
Logan Memorial Hospital Russellville KY 100
Lake Cumberland Regional Hospital Somerset KY 227
Riverview Medical Center Gonzales LA 104
Springhill Medical Center Springhill LA 63
Smith County Memorial Hospital Carthage TN 63
Trinity Hospital Erin TN 40
Crockett Hospital Lawrenceburg TN 107
Livingston Regional Hospital Livingston TN 116
Hillside Hospital Pulaski TN 95
Emerald-Hodgson Hospital Sewanee TN 24
Southern Tennessee Medical Center Winchester TN 126
Castleview Hospital Price UT 84
Ashley Valley Medical Center Vernal UT 39
Riverton Memorial Hospital Riverton WY 70
</TABLE>
- --------
(1) The America Group operates and is general partner of a partnership that
leases and operates Bartow Memorial Hospital.
(2) The America Group operates and holds a majority equity interest in a
consolidated joint venture which owns and operates Western Plains Regional
Hospital.
Medical office buildings also are operated in conjunction with its hospitals.
These office buildings are primarily occupied by physicians who practice at
LifePoint's hospitals.
LifePoint's headquarters are located in approximately 17,280 square feet of
space in one office building in Nashville, Tennessee. After the distribution
date, LifePoint will sub-lease this space from Columbia/HCA. See "Arrangements
Among Columbia/HCA, LifePoint and Triad Relating to the Distribution--Lease
Agreements."
LifePoint's headquarters, hospitals and other facilities are suitable for
their respective uses and are, in general, adequate for LifePoint's present
needs.
Employees and Medical Staff
At December 31, 1998, LifePoint had approximately 6,800 employees, including
approximately 1,780 part-time employees. No LifePoint employees are subject to
collective bargaining agreements. LifePoint considers its employee relations to
be good. While some of LifePoint's hospitals experience union organizing
activity from time to time, LifePoint does not expect such efforts to
materially affect its future operations. LifePoint's hospitals, like most
hospitals, have experienced labor costs rising faster than the general
inflation rate. There can be no assurance as to future availability and cost of
qualified medical personnel.
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LifePoint's hospitals are staffed by licensed physicians who have been
admitted to the medical staff of individual hospitals. Any licensed physician
may apply to be admitted to the medical staff of any of LifePoint's hospitals,
but admission to the staff must be approved by the hospital's medical staff and
the appropriate governing board of the hospital in accordance with established
credentialling criteria. With certain exceptions, physicians generally are not
employees of LifePoint's hospitals. However, LifePoint has conducted a
physician practice management program pursuant to which some physicians provide
services in LifePoint's hospitals by contract. After the distribution,
LifePoint intends to limit the scope of its physician practice management
program.
LifePoint's Regulatory Compliance Program
It is LifePoint's policy that its business be conducted with integrity and in
compliance with the law. LifePoint has in place and continues to develop a
corporate-wide compliance program, which focuses on all areas of regulatory
compliance, including physician recruitment, reimbursement and cost reporting
practices, and laboratory operations.
This regulatory compliance program is intended to ensure that high standards
of conduct are maintained in the operation of LifePoint's business and to help
ensure that policies and procedures are implemented so that employees act in
full compliance with all applicable laws, regulations and company policies.
Under the regulatory compliance program, LifePoint will provide initial and
periodic legal compliance and ethics training to every employee, review various
areas of LifePoint's operations, and develop and implement policies and
procedures designed to foster compliance with the law. LifePoint will regularly
monitor its ongoing compliance efforts. The program also will include a
mechanism for employees to report, without fear of retaliation, any suspected
legal or ethical violations to their supervisors or designated compliance
officers in the LifePoint's hospitals.
Legal Proceedings
LifePoint is, from time to time, subject to claims and suits arising in the
ordinary course of business, including claims for damages for personal
injuries, breach of management contracts or for wrongful restriction of or
interference with physician's staff privileges. In certain of these actions,
plaintiffs request punitive or other damages that may not be covered by
insurance. LifePoint is currently not a party to any such proceeding which, in
management's opinion, would have a material adverse effect on LifePoint's
business, financial condition or results of operations.
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Triad Business
General
Triad will be organized as a Delaware corporation to own and operate the
health care services business that has constituted the Pacific Group of
Columbia/HCA. The Pacific Group (the assets of which will be transferred to
Triad prior to the distribution) was formed by Columbia/HCA in November 1997.
After the distribution, Triad will continue to provide health care services
through its hospitals and outpatient surgery centers located in small cities
and selected high growth urban markets in the Southern, Western and
Southwestern United States.
As of December 31, 1998, the Pacific Group comprised 38 general, acute care
hospitals, 1 psychiatric hospital, and 17 outpatient surgery centers, located
in the States of Alabama, Arizona, Arkansas, California, Kansas, Louisiana,
Missouri, New Mexico, Oklahoma, Oregon and Texas. Triad operates one of its
hospitals through a 50/50 joint venture that is not consolidated for financial
reporting purposes and is building an additional hospital through a 50/50 joint
venture that is currently scheduled to open in May 1999. Triad's management has
focused on streamlining Triad's portfolio of facilities to eliminate those with
poor financial performance, weak competitive market positions or locations in
certain urban markets. As a result of this initiative, Triad has decided to
divest certain of its facilities and, since December 31, 1998, has sold one of
its general, acute care hospitals. Triad currently intends to sell an
additional four of its general, acute care hospitals, its one psychiatric
hospital, and certain of the outpatient surgery centers that it operated as of
December 31, 1998, and to cease operation of another hospital which it leases.
Following these divestitures and closure, Triad expects to own 32 hospitals
(including the hospital operated through a joint venture and two hospitals
leased to and operated by an unaffiliated third party).
In addition to providing capital resources, Triad will make available a
variety of management services to its health care facilities. These services
will include ethics and compliance programs; leasing contracts; accounting,
financial and clinical systems; governmental reimbursement assistance;
information systems; legal support; personnel management and internal audit;
access to regional managed care networks; and resource management. Some of
these services initially will be provided through transitional arrangements
made with Columbia/HCA. Triad also will participate and have an equity
interest, along with Columbia/HCA and LifePoint, in a group purchasing
organization which will make certain national supply and equipment contracts
available to Triad's facilities. See "Arrangements Among Columbia/HCA,
LifePoint and Triad Relating to Distribution" and "--Other Agreements."
Principal Executive Offices
Triad's principal executive offices are located at 13455 Noel Road, 20th
Floor, Dallas, Texas 75240 (telephone number (972) 789- ). Triad's
corporate Website address is http://www.triadhospitals.com. Information
contained on Triad's Website is not part of this information statement.
Triad's Markets
Most of Triad's facilities are located in two distinct types of markets in
the Southern, Western and Southwestern United States. Approximately three-
quarters of the hospitals owned or operated by Triad as of December 31, 1998
were located in small cities (generally with populations of less than 150,000
residents and located more than 60 miles from a major urban center), where
Triad's hospital was usually either the only hospital or one of two hospitals.
The remainder of Triad's hospitals were located in five larger urban areas. The
urban areas where Triad operates are typically characterized by a high rate of
population growth (e.g., Phoenix and Tucson, Arizona). Approximately half of
Triad's facilities are located in the States of Arizona and Texas.
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Small Cities
Triad believes that the small cities of the Southern, Western and
Southwestern United States are attractive to health care service providers as a
result of favorable demographic and economic trends. Twenty-nine of the thirty-
eight general, acute care hospitals that Triad operated as of December 31, 1998
(including the hospital operated through a joint venture) were located in these
markets. Of these hospitals, seventeen hospitals are located in communities
where they currently are the sole hospital and six hospitals are located in
communities where they currently are one of only two hospitals. After
completion of the planned divestitures and closures described above, twenty-
five of Triad's thirty-two remaining general, acute care hospitals (including
the hospital operated through a joint venture and two hospitals leased to a
third party) will be located in small cities. Of these, fourteen will be
located in communities where they currently are the sole hospital and six
hospitals will be located in communities where they currently are one of only
two hospitals.
While Triad's hospitals located in these small cities are more likely to face
direct competition than facilities located in smaller non-urban markets, that
competition usually is limited to a single competitor in the relevant market.
Triad believes that the smaller populations and relative dominance of the one
or two acute care hospitals in these markets also limit the entry of alternate
non-hospital providers, such as outpatient surgery centers or rehabilitation or
diagnostic imaging centers, as well as managed care plans.
Larger Urban Markets
Nine of the thirty-eight general, acute care hospitals that Triad operated as
of December 31, 1998 (including the hospital operated through a joint venture)
were located in larger urban markets of the Southwestern United States, and
after completion of the planned divestitures and closure described above, seven
of Triad's thirty-two remaining general, acute care hospitals (including the
hospital operated through a joint venture and two hospitals leased to a third
party) will be located in such 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
in the larger urban markets (i.e., the relative proportion of the market
population enrolled in managed care programs (HMOs and PPOs)).
Business Strategy
Triad's primary objectives are to provide quality health care services and to
enhance the financial performance of the company by increasing hospital
utilization and improving operating efficiencies, using the following
strategies:
. Build on Position in Small Cities and High Population Growth Urban
Markets. Triad believes that, as a result of its efforts to streamline
its base of assets, it is well positioned to build upon its portfolio of
facilities in the Southern, Western and Southwestern United States.
Triad also believes that, unlike rural markets which have small
populations, Triad's small-city markets can support increased specialty
services which produce relatively higher revenues than other health care
services. In addition, in Triad's small-city markets, managed care
penetration (i.e., the relative proportion of the market enrolled in
managed care programs (HMOs and PPOs)) is generally lower than in urban
areas and, therefore, Triad believes that it will be in a better
position to negotiate more favorable managed care contracts in these
markets. Triad also intends to strengthen its competitive position in
the fast growing larger urban areas of the Southwest where it currently
operates.
. Recruit Physicians. Triad plans to actively recruit additional primary
care physicians. Triad believes that primary care physicians are
frequently the first contact point for a patient and that each hospital
must establish strong physician relationships in its community in order
to enhance patient care and fulfill the needs of the growing population
in its markets.
. Enhance Specialty Services, Outpatient Services and Emergency
Rooms. Triad believes that many of its markets are large enough to
support additional specialty services, such as women's centers,
orthopedic facilities, oncology centers and neurology care, and intends
to selectively increase these
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services in order to reduce patient outmigration to urban hospitals. To
support this expansion of specialty services, Triad plans to actively
recruit additional specialists to its facilities. Recognizing that the
shift from inpatient to outpatient care recently experienced by the
health care industry is likely to continue, Triad intends to enhance
access to and the convenience of its outpatient service capabilities by
improving its free-standing outpatient surgery centers, restructuring
its hospital facilities and surgery capacity to better accommodate
outpatient treatment, and improving its emergency room facilities.
. Improve Operating Efficiences Through Enhanced Cost Management and
Resource Control. Triad has initiated several measures to improve the
financial performance of its facilities through greater control of
operating expenses. Triad has focused on reducing salaries, wages and
benefits, the largest component of operating expense, at the facility
level. Triad also has instituted a financial training program for its
hospital managers to teach effective management of hospital revenues and
expenses. Triad plans to improve resource management through cooperative
initiatives with physicians to eliminate unnecessary tests and
procedures.
. Develop Strong Relationships with Physicians. Triad believes recruiting
and retaining motivated physicians is vitally important to its long term
success. Triad believes a model for effective health care service
delivery can be developed cooperatively with physicians and the
hospitals which will result in improved quality of care. In each of its
markets, Triad has established a Physician Leadership Group made up of
leading area physicians who will work with corporate and hospital
management to establish local priorities. Corporate objectives will be
addressed by a national Physician Leadership Group comprised of
representatives of local Physician Leadership Groups and members of
Triad management. In an effort to further improve communication with its
physicians, Triad has appointed a senior manager who is an experienced
physician to oversee physician relations.
. Grow Through Existing Hospital Expansion, New Hospital and Ambulatory
Service Center Construction, and Selective Acquisitions. Triad intends
to identify expansion opportunities in areas where management perceives
that demand is not being adequately met due to rapid population growth
or insufficient existing health care services. Triad plans to
selectively expand its existing hospitals by adding additional clinical
facilities or medical office buildings. Triad plans to construct new
hospitals and also may seek to make acquisitions in select markets.
Triad is currently in the process of building a new facility in South
Tulsa, Oklahoma through a joint venture with Hillcrest Healthcare
Systems. The facility is scheduled to open in May 1999 and will be 50%
owned by Triad. Triad believes that potential acquisition opportunities
may arise when other health care providers choose to divest facilities
or when independent hospitals believe that they can benefit from
becoming part of a larger hospital company. Currently, Triad does not
have specific plans for additional new facilities or acquisitions.
Operations
Triad's general, acute care hospitals typically provide a full range of
services commonly available in hospitals, such as internal medicine, general
surgery, cardiology, oncology, neurosurgery, orthopedics and obstetrics, as
well as diagnostic and emergency services. These hospitals also generally
provide outpatient and ancillary health care services such as outpatient
surgery, laboratory, radiology, respiratory therapy, cardiology and physical
therapy. Outpatient services also are provided by surgery centers operated by
Triad. In addition, certain of Triad's general, acute care hospitals have a
limited number of licensed psychiatric beds.
Each of Triad's hospitals is governed by a board of trustees, which includes
members of the hospital's medical staff. The board of trustees establishes
policies concerning the medical, professional and ethical practices, monitors
such practices, and is responsible for ensuring that these practices conform to
established standards. Triad maintains quality assurance programs to support
and monitor quality of care standards and to meet accreditation and regulatory
requirements. Patient care evaluations and other quality of care assessment
activities are monitored on a continuing basis.
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<PAGE>
Services and Utilization
Hospital revenues depend upon inpatient occupancy levels, the volume of
outpatient procedures and the charges or negotiated payment rates for such
services. Charges and reimbursement rates for inpatient routine services vary
significantly depending on the type of service (e.g., medical/surgical,
intensive care or psychiatric) and the geographic location of the hospital.
Triad believes that important factors relating to the overall utilization of
a hospital include the quality and market position of the hospital and the
number, quality and specialities of physicians providing patient care within
the facility. Generally, Triad believes that the ability of a hospital to meet
the health care needs of its community is determined by its breadth of
services, level of technology, emphasis on quality of care and
convenience for patients and physicians. Other factors which impact utilization
include the growth in local population, local economic conditions, market
penetration of managed care programs and the availability of reimbursement
programs such as Medicare and Medicaid. Utilization across the industry also is
being affected by improved treatment protocols as a result of advances in
medical technology and pharmacology.
The following table sets forth certain operating statistics for hospitals
owned by Triad for each of the past five years ended December 31.
Medical/surgical hospital operations are subject to certain seasonal
fluctuations, including decreases in patient utilization during holiday periods
and increases in the cold weather months.
<TABLE>
<CAPTION>
Years Ended December 31,
-------------------------------------------
1998 1997 1996 1995 1994
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Number of hospitals at end of
period.......................... 38 38 38 39 38
Number of licensed beds at end of
period (a)...................... 5,909 5,859 5,872 5,926 5,660
Weighted average licensed beds
(b)............................. 5,877 5,860 5,882 5,900 5,325
Admissions (c)................... 169,590 172,926 171,265 170,392 147,923
Equivalent admissions (d)........ 276,771 275,125 266,660 257,292 211,382
Average length of stay (days)
(e)............................. 4.9 4.9 5.0 5.2 5.2
Average daily census (f)......... 2,260 2,326 2,338 2,405 2,111
Occupancy rate (g)............... 39% 40% 40% 41% 40%
</TABLE>
- --------
(a) Licensed beds are those beds for which a facility has been granted approval
to operate from the applicable state licensing agency.
(b) Represents the average number of licensed beds weighted based on periods
owned.
(c) Represents the total number of patients admitted (in the facility for a
period in excess of 23 hours) to Triad's hospitals and is used by
management and certain investors as a general measure of inpatient volume.
(d) Equivalent admissions is used by management and certain investors as a
general measure of combined inpatient and outpatient volume. Equivalent
admissions are computed by multiplying admissions (inpatient volume) by the
sum of gross inpatient revenue and gross outpatient revenue and then
dividing the resulting amount by gross inpatient revenue. The equivalent
admissions computation "equates" outpatient revenue to the volume measure
(admissions) used to measure inpatient volume resulting in a general
measure of combined inpatient and outpatient volume.
(e) Represents the average number of days admitted patients stay in Triad's
hospitals. Average length of stay has declined due to the continuing
pressures from managed care and other payers to restrict admissions and
reduce the number of days that are covered by the payers for certain
procedures, and by technological and pharmaceutical improvements.
(f) Represents the average number of patients in Triad's hospital beds each
day.
(g) Represents the percentage of hospital licensed beds occupied by patients.
Both average daily census and occupancy rate provide measures of the
utilization of inpatient rooms. The declining occupancy rate is primarily
attributed to the trend toward more services, that were previously
performed in an inpatient setting, being performed on an outpatient basis
and the decline in average length of stay per admission.
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Triad's hospitals have experienced significant shifts from inpatient to
outpatient care as well as decreases in average lengths of inpatient stay,
primarily as a result of improvements in technology and clinical practices and
hospital payment changes by Medicare, insurance carriers, and self-insured
employers. These hospital payment changes generally encourage the utilization
of outpatient, rather than inpatient, services whenever possible, and shortened
lengths of stay for inpatient care. Triad has responded to the outpatient trend
by enhancing its hospitals' outpatient service capabilities, including (i)
dedicating resources to its freestanding outpatient surgery centers at or near
certain of its hospital facilities, (ii) reconfiguring certain hospitals to
more effectively accommodate outpatient treatment by, among other things,
providing more convenient registration procedures and separate entrances, and
(iii) restructuring existing surgical capacity to allow a greater number and
range of procedures to be performed on an outpatient basis. Triad's facilities
will continue to emphasize those outpatient services that can be provided on a
quality, cost-effective basis and that the company believes will experience
increased demand.
Sources of Revenue
Triad receives payment for patient services from the Federal government
primarily under the Medicare program, state governments under their respective
Medicaid programs, HMOs, PPOs and other private insurers as well as directly
from patients. The approximate percentages of net patient revenues from
continuing operations of Triad's facilities from such sources during the
periods specified below were as follows:
<TABLE>
<CAPTION>
Years Ended
December 31,
-------------------
1998 1997 1996
----- ----- -----
<S> <C> <C> <C>
Medicare.............................................. 34.6% 35.4% 36.5%
Medicaid.............................................. 6.5 6.0 6.9
Other sources......................................... 58.9 58.6 56.6
----- ----- -----
Total............................................... 100.0% 100.0% 100.0%
===== ===== =====
</TABLE>
Medicare is a Federal program that provides certain hospital and medical
insurance benefits to persons age 65 and over, some disabled persons and
persons with end-stage renal disease. Medicaid is a Federal-state program
administered by the states which provides hospital benefits to qualifying
individuals who are unable to afford care. All of Triad's hospitals are
certified as providers of Medicare and Medicaid services. Amounts received
under the Medicare and Medicaid programs are generally significantly less than
the hospital's customary charges for the services provided.
To attract additional volume, most of Triad's hospitals offer discounts from
established charges to certain large group purchasers of health care services,
including private insurance companies, employers, HMOs, PPOs and other managed
care plans. These discount programs limit Triad's ability to increase charges
in response to increasing costs. See "--Competition." In addition to government
programs, Triad is reimbursed by private payers including HMOs, PPOs, private
insurance companies, employers and individual private payers. Patients are
generally not responsible for any difference between customary hospital charges
and amounts reimbursed for such services under Medicare, Medicaid, some private
insurance plans, HMOs or PPOs, but are responsible 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."
Competition
The competition among hospitals and other health care providers has
intensified in recent years as hospital occupancy rates have declined. Triad's
strategies are designed, and management believes that its hospitals are
positioned, to be competitive under these changing circumstances.
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Seventeen of the hospitals operated by Triad as of December 31, 1998
(including the hospital operated through a joint venture) were located in
geographic areas where they were the only hospital in the community. These
hospitals generally face less competition in their immediate patient service
areas than would be expected in larger communities, and there is usually a
lower level of managed care penetration in these areas than there would be in
larger urban markets. While these Triad hospitals are generally the primary
provider of hospital services in their respective communities, they face
competition from larger tertiary care centers. Although these competitive
hospitals may be as far as 30 to 50 miles away, patients may migrate to, may be
referred by local physicians to, or may be lured by incentives from managed
care plans to travel to, such distant hospitals.
Eight of the hospitals operated by Triad as of December 31, 1998 were located
in geographic areas where they competed with only one other hospital. The
remainder of the hospitals were located in geographic areas where they competed
with more than one other hospital. Additionally, in the past several years, the
number of freestanding outpatient surgery and diagnostic centers in the
geographic areas in which Triad operates has increased significantly. As a
result, Triad's hospitals operate in an increasingly competitive environment.
The rates charged by Triad's hospitals are intended to be competitive with
those charged by other local hospitals for similar services. In some cases,
competing hospitals are more established than Triad's hospitals. Certain of
these competing facilities, particularly in Triad's urban markets, offer
services, including extensive medical research and medical education programs,
which are not offered by Triad's facilities. In addition, in certain of the
urban markets where Triad operates, there are large teaching hospitals which
provide highly specialized facilities, equipment and services which may not be
available at Triad's hospitals. Also, some of the hospitals that compete with
Triad's facilities are owned by tax-supported governmental agencies or by not-
for-profit entities supported by endowments and charitable contributions which
can finance capital expenditures on a tax-exempt basis.
One of the most significant factors in the competitive position of a hospital
is the number and quality of physicians affiliated with the hospital. Although
physicians may at any time terminate their affiliation with a hospital operated
by Triad, Triad's hospitals seek to retain physicians of varied specialties on
the hospitals' medical staffs and to attract other qualified physicians. Triad
believes that physicians refer patients to a hospital primarily on the basis of
the quality of services it renders to patients and physicians, the quality of
other physicians on the medical staff, the location of the hospital and the
quality of the hospital's facilities, equipment and employees. Accordingly,
Triad strives to maintain high ethical and professional standards and quality
facilities, equipment, employees and services for physicians and their
patients.
Another major factor in the competitive position of a hospital is
management's ability to negotiate service contracts with purchasers of group
health care services. HMOs and PPOs attempt to direct and control the use of
hospital services through managed care programs and to obtain discounts from
hospitals' established charges. In addition, employers and traditional health
insurers are increasingly interested in containing costs through negotiations
with hospitals for managed care programs and discounts from established
charges. Generally, hospitals compete for service contracts with group health
care service purchasers on the basis of price, market reputation, geographic
location, quality and range of services, quality of the medical staff and
convenience. The importance of obtaining contracts with managed care
organizations varies from market to market depending on the market strength of
such organizations.
State CON laws, which place limitations on a hospital's ability to expand
hospital services and add new equipment, may also have the effect of
restricting competition. Alabama is the only state where Triad operates that
has CON laws affecting acute care services. The application process for
approval of covered services, facilities, changes in operations and capital
expenditures in Alabama is, therefore, highly competitive. In those states
which have no CON laws or which set relatively high thresholds before
expenditures become reviewable by state authorities, competition in the form of
new services, facilities and capital spending is more prevalent. Triad has not
experienced, and does not expect to experience, any material adverse effects
from state CON requirements or from the imposition, elimination or relaxation
of such requirements. See "Government Regulation and Other Factors Affecting
LifePoint and Triad."
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Triad, and the health care industry as a whole, face the challenge of
continuing to provide quality patient care while dealing with rising costs,
strong competition for patients and a general reduction of reimbursement rates
by both private and government payers. As both private and government payers
reduce the scope of what may be reimbursed and reduce reimbursement levels for
what is covered, Federal and state efforts to reform the health care system may
further impact reimbursement rates. Changes in medical technology, existing and
future legislation, regulations and interpretations and competitive contracting
for provider services by private and government payers may require changes in
Triad's facilities, equipment, personnel, rates and/or services in the future.
The hospital industry and Triad's hospitals continue to have significant
unused capacity. Inpatient utilization, average lengths of stay and average
occupancy rates continue to be negatively affected by payer-required pre-
admission authorization, utilization review, and payer pressure to maximize
outpatient and alternative health care delivery services for less acutely ill
patients. Admissions constraints, payer pressures and increased competition are
expected to continue. Triad endeavors to meet these challenges by expanding
many of its facilities to include outpatient centers, offering discounts to
private payer groups, upgrading facilities and equipment, and offering new
programs and services.
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Properties
The following table lists the hospitals owned (except as otherwise indicated)
by the Pacific Group of Columbia/HCA (the assets of which will be transferred
to Triad prior to the distribution) as of December 31, 1998. As described in
the table, the Pacific Group has sold or currently intends to sell certain of
the general, acute care hospitals and its psychiatric hospital.
<TABLE>
<CAPTION>
Licensed
Facility Name City State Beds
- ------------- ---- ----- --------
<S> <C> <C> <C>
Crestwood Medical Center Huntsville AL 120
DeQueen Regional Medical Center DeQueen AR 122
Medical Center of South Arkansas (1) El Dorado AR 360
Medical Park Hospital Hope AR 91
Phoenix Regional Medical Center Phoenix AZ 290
Paradise Valley Hospital Phoenix AZ 162
El Dorado Hospital Tucson AZ 166
Northwest Hospital Tucson AZ 174
San Leandro Hospital San Leandro CA 136
Mission Bay Memorial Hospital San Diego CA 128
Women & Children's Hospital Lake Charles LA 80
Medical Center of Carlsbad Carlsbad NM 135
Lea Regional Hospital Hobbs NM 250
Claremore Regional Hospital Claremore OK 89
Willamette Valley Medical Center McMinnville OR 80
Douglas Medical Center Roseburg OR 118
Panhandle Surgical Hospital Amarillo TX 21
Alice Regional Hospital Alice TX 131
Brownwood Regional Medical Center (2) 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 Hospital Longview TX 164
Woodland Heights Medical Center Lufkin TX 127
Medical Center of Pampa Pampa TX 107
San Angelo Community Medical Center San Angelo TX 165
Community Medical Center of Sherman Sherman TX 160
Medical Center at Terrell (2) Terrell TX 130
DeTar Hospital Victoria TX 217
Gulf Coast Medical Center Wharton TX 161
Overland Park Regional Medical Center
(3) Overland Park KS 360
Independence Regional Health Center
(3) Independence MO 366
Divested as of March 1, 1999
Palm Drive Hospital Sebastopol CA 49
Held For Sale
Wagoner Community Hospital (2) (4) Wagoner OK 100
Beaumont Medical and Surgical Hospital Beaumont TX 366
Silsbee Doctors Hospital Silsbee TX 69
West Anaheim Medical Center Anaheim CA 219
Huntington Beach Hospital Huntington Beach CA 134
Research Psychiatric Center (5) Kansas City MO 100
</TABLE>
- --------
(1) The Pacific Group holds a fifty percent equity interest in a non-
consolidated joint venture which owns and operates the Medical Center of
South Arkansas.
(2) The Pacific Group 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.
(3) The Pacific Group continues to own the assets related to these hospitals,
but has transferred the exclusive rights to use and control the hospitals'
operations to a separate, independent entity pursuant to a long-term lease
agreement effective as of January 1, 1999.
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(4) The Pacific Group will cease to operate this facility in April 1999.
(5) The Pacific Group holds a sixty percent equity interest in a consolidated
joint venture which owns and operates the Research Psychiatric Center.
The Pacific Group holds an equity interest in a joint venture that is
building a new hospital in South Tulsa, Oklahoma, which will be operated by
Triad. Upon completion of this project, which is scheduled for May 1999,
Triad's equity interest will be fifty percent.
In addition to the hospitals listed in the table above and the hospital under
construction in South Tulsa, Oklahoma, as of December 31, 1998, the Pacific
Group operated 17 outpatient surgery centers (including 3 surgery centers that
are operated by an unaffiliated third party pursuant to a long-term lease),
certain of which Triad currently intends to sell. Medical office buildings also
are operated in conjunction with its hospitals. These office buildings are
primarily occupied by physicians who practice at Triad's hospitals.
Triad's headquarters are located in approximately 45,000 square feet of space
in one office building in Dallas, Texas. After the distribution date, Triad
will sub-lease this space from Columbia/HCA. See "Arrangements Among
Columbia/HCA, LifePoint and Triad relating to the Distribution--Lease
Agreements."
Triad's headquarters, hospitals and other facilities are suitable for their
respective uses and are, in general, adequate for Triad's present needs.
Employees and Medical Staff
At December 31, 1998, Triad had approximately 28,300 employees, including
approximately 9,100 part-time employees. Employees at one hospital are
currently represented by a labor union. Triad considers its employee relations
to be good. While Triad's non-union hospitals experience union organizational
activity from time to time, Triad does not expect such efforts to materially
affect its future operations. Triad's hospitals, like most hospitals, have
experienced labor costs rising faster than the general inflation rate. There
can be no assurance as to future availability and cost of qualified medical
personnel.
Triad's hospitals are staffed by licensed physicians who have been admitted
to the medical staff of individual hospitals. With certain exceptions,
physicians generally are not employees of Triad's hospitals. However, some
physicians provide services in Triad's hospitals under contracts, which
generally describe a term of service, provide and establish the duties and
obligations of such physicians, require the maintenance of certain performance
criteria and fix compensation for such services. Any licensed physician may
apply to be admitted to the medical staff of any of Triad's hospitals, but
admission to the staff must be approved by the hospital's medical staff and the
appropriate governing board of the hospital in accordance with established
credentialling criteria. Members of the medical staffs of Triad's hospitals
located in areas where there are other hospitals often also serve on the
medical staffs of other hospitals and may terminate their affiliation with a
hospital at any time.
Triad's Regulatory Compliance Program
It is Triad's policy that its business be conducted with integrity and in
compliance with the law. Triad is developing a corporate-wide compliance
program, which will focus on all areas of regulatory compliance, including
physician recruitment, reimbursement and cost reporting practices, and
laboratory operations.
This regulatory compliance program is intended to assure that high standards
of conduct are maintained in the operation of Triad's business and to help
assure that policies and procedures are implemented so that employees act in
full compliance with all applicable laws, regulations and company policies.
Under the regulatory compliance program, Triad will provide initial and
periodic legal compliance and ethics training to 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
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efforts. The program also will include a mechanism for employees to report,
without fear of retaliation, any suspected legal or ethical violations to their
supervisors or designated compliance officers in Triad's hospitals.
Legal Proceedings
Triad is, from time to time, subject to claims and suits arising in the
ordinary course of business, including claims for damages for personal
injuries, breach of management contracts or for wrongful restriction of or
interference with physician's staff privileges. In certain of these actions,
plaintiffs request punitive or other damages that may not be covered by
insurance. Triad is currently not a party to any such proceeding which, in
management's opinion, would have a material adverse effect on Triad's business,
financial condition or results of operations.
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Government and Other Sources of Reimbursement for LifePoint and Triad
Medicare. Under the Medicare program, LifePoint and Triad hospitals receive
reimbursement under a prospective payment system ("PPS") for inpatient hospital
services. Psychiatric, long-term care, rehabilitation, specially designated
children's hospitals and certain designated cancer research hospitals, as well
as psychiatric or rehabilitation units that are distinct parts of a hospital
and meet Health Care Financing Administration criteria for exemption, are
currently exempt from PPS and are reimbursed on a cost-based system, subject to
certain cost limits (known as TEFRA limits).
Under the PPS, fixed payment amounts per inpatient discharge are established
based on the patient's assigned diagnosis related group ("DRG"). DRGs classify
treatments for illnesses according to the estimated intensity of hospital
resources necessary to furnish care for each principal diagnosis. DRG rates
have been established for each hospital participating in the Medicare program
and are based upon a statistically normal distribution of severity. When
treatments for certain patients fall well outside the normal distribution,
providers receive additional payments. DRG payments do not consider a specific
hospital's costs, but are adjusted for area wage differentials. The majority of
capital costs for acute care facilities are reimbursed on a prospective payment
system based on DRG weights times a federal rate adjusted for a geographic
rate.
DRG rates are updated and re-calibrated annually and have been affected by
several recent Federal enactments. The index used to adjust the DRG rates gives
consideration to the inflation experienced by hospitals (and entities outside
of the health care industry) in purchasing goods and services ("market
basket"). However, for several years the percentage increases to the DRG rates
have been lower than the percentage increases in the costs of goods and
services purchased by hospitals. The DRG rates are adjusted each Federal fiscal
year, which begins on October 1. The historical DRG rate increases were 1.1%,
1.5% and 2.0% for Federal fiscal years 1995, 1996 and 1997, respectively. For
Federal fiscal year 1998, there was no increase. The budgeted updates for
Federal fiscal years 1999 through 2002 are market basket minus 1.9%, 1.8%, 1.1%
and 1.1%, respectively. LifePoint and Triad anticipate that future legislation
may decrease the future rate of increase for DRG payments, but neither is able
to predict the amount of the reduction.
Outpatient services provided at general, acute care hospitals typically are
reimbursed by Medicare at the lower of customary charges or approximately 82%
of actual cost, subject to additional limits on the reimbursement of certain
outpatient services. The Balanced Budget Act, enacted August 5, 1997, contains
provisions that affect outpatient hospital services, including a requirement
that HCFA adopt a prospective payment system for outpatient hospital services
to begin January 1, 1999. However, implementation of the PPS will be delayed
because of Year 2000 systems concerns. The outpatient PPS will be implemented
as soon as possible after January 1, 2000. At such time as the PPS is
implemented, the rates will be based on the rates that would have been in
effect January 1, 1999, updated by the rate of increase in the hospital market
basket minus one percentage point. Neither LifePoint nor Triad is able to
predict the effect, if any, that the new payment system will have on its
financial results. After the fee schedule is established for this new system,
the fee schedule is to be updated by the market basket minus 1.0% for each of
Federal fiscal years 2000 through 2002. Similarly, therapy services rendered by
hospitals to outpatients and inpatients not reimbursed under Medicare Part A,
are reimbursed according to the Medicare physician fee schedule.
The Balanced Budget Act mandates a prospective payment system for skilled
nursing facility services for Medicare cost reporting periods commencing after
June 30, 1998, hospital outpatient services beginning January 1, 1999, home
health services for Medicare cost reporting periods beginning after September
30, 1999, and inpatient rehabilitation hospital services for Medicare cost
reporting periods beginning after September 30, 2000. Prior to the commencement
of the prospective payment systems, payment constraints will be applied to PPS-
exempt hospitals and units for Medicare cost reporting periods beginning on or
after October 1, 1997. For the year ended December 31, 1998, LifePoint had 49
units that were reimbursed under this methodology, and Triad had 126 units that
were reimbursed under this methodology.
Payments to PPS-exempt hospitals and units, (i.e., inpatient psychiatric,
rehabilitation and long-term hospital services), are based upon reasonable
cost, subject to a cost per discharge target. These limits are updated annually
by a market basket index. For Federal fiscal year 1995, 1996 and 1997, the
market basket rate of increase was
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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 $10,787, $19,952 and $38,593 per discharge, respectively. In
addition, the cost per discharge for new hospitals/hospital units cannot
exceed 110% of the national median target rate for hospitals in the same
category. For Federal fiscal year 1998, these amounts were $8,517, $16,738,
and $18,947 per discharge for psychiatric, rehabilitation and long-term
hospital services, respectively. For Federal fiscal year 1999, these amounts
are $8,686, $17,077 and $22,010 per discharge, respectively.
Skilled nursing facilities have historically been reimbursed by Medicare on
the basis of actual costs, subject to certain limits. The Balanced Budget Act
requires the establishment of a prospective payment system for Medicare
skilled nursing facilities under which facilities will be paid a Federal per
diem rate for virtually all covered services. The new payment system will be
phased in over three cost reporting periods, starting with cost reporting
periods beginning on or after July 1, 1998. The law also institutes
consolidated billing for skilled nursing facility services, under which
payments for most non-physician Part B services for beneficiaries no longer
eligible for Part A skilled nursing facility care will be made to the
facility, regardless of whether the item or service was furnished by the
facility, by others under arrangement, or under any other contracting or
consulting arrangement. Consolidated billing is being implemented on a
transition basis. The Balanced Budget Act also requires United States
Department of Health and Human Services ("HHS") to establish a PPS for home
health services, to be implemented beginning October 1, 1999. Prior to
implementation, the Balanced Budget Act establishes certain interim payment
reforms for cost reporting periods beginning on or after October 1, 1997,
including reduced home health limits, reduced per visit costs limits, and
agency-specific per beneficiary annual limits on an agency's costs. As of
December 31, 1998, ten of LifePoint's hospitals and twenty-four of Triad's
hospitals operated skilled nursing facilities.
Currently, physicians are paid by Medicare according to the physician fees
schedule. However, physicians working in rural health clinics, such as those
maintained by LifePoint and Triad, are reimbursed for their professional and
administrative services through the rural health clinic subject to per visit
limits unless the rural health clinic is based at a rural hospital with less
than 50 beds.
Medicare has special payment provisions for "sole community hospitals." A
sole community hospital is generally the only hospital in at least a 35-mile
radius. Five of LifePoint's facilities and six of Triad's facilities qualify
as sole community hospitals under Medicare regulations. Special payment
provisions related to sole community hospitals include a higher reimbursement
rate, which is based on a blend of hospital-specific costs and the national
reimbursement rate, and a 90% payment "floor" for capital costs which
guarantees the sole community hospital capital reimbursement equal to 90% of
capital cost. In addition, the CHAMPUS program has special payment provisions
for hospitals recognized as sole community hospitals for Medicare purposes.
Medicaid. Most state Medicaid payments are made under a prospective payment
system or under programs which negotiate payment levels with individual
hospitals. Medicaid reimbursement is often less than a hospital's cost of
services. Medicaid is currently funded jointly by the state Federal
governments. The Federal government and many states are currently considering
significant reductions in the level of Medicaid funding while at the same time
expanding Medicaid benefits, which could adversely affect future levels of
Medicaid reimbursement received by the hospitals of LifePoint and Triad.
On November 27, 1991, Congress enacted the Medicaid Voluntary Contribution
and Provider-Specific Tax Amendments of 1991, which limit the amount of
voluntary contributions and provider-specific taxes that can be used by states
to fund Medicaid and require the use of broad-based taxes for such funding. As
a result of enactment of these amendments, certain states in which LifePoint
and Triad operate have adopted broad-based provider taxes to fund their
Medicaid programs. The impact of these new taxes upon LifePoint and Triad has
not been materially adverse. However, neither LifePoint nor Triad can predict
whether any additional broad-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.
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Annual Cost Reports. All hospitals participating in the Medicare program,
whether paid on a reasonable cost basis or under PPS, are required to meet
certain financial reporting requirements. Federal regulations require
submission of annual cost reports covering medical costs and expenses
associated with the services provided by each hospital to Medicare
beneficiaries. Review of previously submitted annual cost reports and the cost
report preparation process are areas included in the ongoing government
investigations of Columbia/HCA. It is too early to predict the outcome of these
investigations, but if LifePoint or Triad, or any of their facilities, were
found to be in violation of Federal or state laws relating to Medicare,
Medicaid or similar programs, they could be subject to substantial monetary
fines, civil and criminal penalties and exclusion from participation in the
Medicare and Medicaid programs. Any such sanctions could have a material
adverse effect on the financial position and results of operations of LifePoint
or Triad, as the case may be. Columbia/HCA has agreed to indemnify LifePoint
and Triad in respect of losses arising from such government investigations. See
"Arrangements Among Columbia/HCA, LifePoint and Triad Relating to the
Distribution--Distribution Agreement," "Risk Factors--Potential Adverse Impact
of Columbia/HCA Investigations and Litigation; Indemnification of LifePoint and
Triad," and "Government Regulation and Other Factors Affecting LifePoint and
Triad--Governmental Investigation of Columbia/HCA and Related Litigation."
Annual cost reports required under the Medicare and Medicaid programs are
subject to routine audits, which may result in adjustments to the amounts
ultimately determined to be due to LifePoint and Triad under these
reimbursement programs. These audits often require several years to reach the
final determination of amounts earned under the programs. Providers also have
rights of appeal, and it is common to contest issues raised in audits of prior
years' reports. Pursuant to the terms of the Distribution Agreement, LifePoint
and Triad will be responsible for the Medicare, Medicaid and Blue Cross cost
reports, and associated receivables and payables, for their facilities for all
periods ending after the distribution date. Columbia/HCA will be responsible
for the Medicare, Medicaid and Blue Cross cost reports for the LifePoint and
Triad facilities relating to periods ending on or prior to the distribution
date. See "Arrangements Among Columbia/HCA, LifePoint and Triad Relating to the
Distribution--Distribution Agreement".
Managed Care. Pressures to control the cost of health care have resulted in
increases to the percentage of admissions and net revenues attributable to
managed care payers. The percentage of LifePoint's admissions attributable to
managed care payers increased from 16.7% for the year ended December 31, 1997
to 18.6% for the year ended December 31, 1998. The percentage of LifePoint's
net revenue from continuing operations attributable to managed care payers
increased from 15.9% for the year ended December 31, 1997 to 20.1% for the year
ended December 31, 1998. The percentage of Triad's admissions attributable to
managed care payers increased from 28.7% for the year ended December 31, 1997
to 32.2% for the year ended December 31, 1998 and the percentage of Triad's net
revenue from continuing operations attributable to managed care payers
increased from 24.2% for the year ended December 31, 1997 to 29.5% for the year
ended December 31, 1998. LifePoint and Triad expect that the trend toward
increasing percentages related to managed care payers will continue in the
future. LifePoint and Triad generally receive lower payments from managed care
payers than from traditional commercial/indemnity insurers; however, as part of
their business strategy, LifePoint and Triad intend to take steps to improve
their managed care positions, see "LifePoint Business--Business Strategy" and
"Triad Business--Business Strategy."
Commercial Insurance. The hospitals of LifePoint and of Triad provide
services to individuals covered by private health care insurance. Private
insurance carriers make direct payments to such hospitals or, in some cases,
reimburse their policy holders, based upon the particular hospital's
established charges and the particular coverage provided in the insurance
policy.
Commercial insurers are continuing efforts to limit the costs of hospital
services by adopting discounted payment mechanisms, including prospective
payment or DRG based payment systems, for more inpatient and outpatient
services. To the extent that such efforts are successful and reduce the
insurers' reimbursement to hospitals for the costs of providing services to
their beneficiaries, such reduced levels of reimbursement may have a negative
impact on the operating results of the hospitals of LifePoint and of Triad.
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Government Regulation and Other Factors Affecting LifePoint and Triad
Licensure, Certification and Accreditation. Health care facility construction
and operation is subject to Federal, state and local regulations relating to
the adequacy of medical care, equipment, personnel, operating policies and
procedures, fire prevention, rate-setting and compliance with building codes
and environmental protection laws. Facilities are subject to periodic
inspection by governmental and other authorities to assure continued compliance
with the various standards necessary for licensing and accreditation. All of
the health care facilities of LifePoint and Triad are properly licensed under
appropriate state laws. All of the hospitals affiliated with LifePoint and
Triad are certified under the Medicare program and, except for one of Triad's
hospitals, all of such hospitals are accredited by the Joint Commission on
Accreditation of Healthcare Organizations, the effect of which is to permit the
facilities to participate in the Medicare and Medicaid programs. Certain of 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. Lifepoint will operate
some hospitals and Triad will operate one hospital in states that require
approval under a CON program to expand acute care hospital services. Such laws
generally require appropriate state agency determination of public need and
approval prior to the addition of beds or services or certain other capital
expenditures. Failure to obtain necessary state approval can result in the
inability to expand facilities, add services or complete an acquisition.
Further, violation may result in the imposition of civil sanctions or the
revocation of a facility's license.
State Rate Review. Some states in which Triad will own hospitals have adopted
legislation mandating rate or budget review for hospitals. In the aggregate,
state rate or budget review and indigent tax provisions have not materially
adversely affected the results of operations of Triad. Neither LifePoint nor
Triad is able to predict whether any additional state rate or budget review or
indigent tax provisions will be adopted and, accordingly, neither is able to
assess the effect thereof on its results of operations or financial condition.
Utilization Review. Federal l aw contains numerous provisions designed to
ensure that services rendered by hospitals to Medicare and Medicaid patients
meet professionally recognized standards, are medically necessary and that
claims for reimbursement are properly filed. These provisions include a
requirement that a sampling of admissions of Medicare and Medicaid patients
must be reviewed by peer review organizations, which review the appropriateness
of Medicare and Medicaid patient admissions and discharges, the quality of care
provided, the validity of DRG classifications and the appropriateness of cases
of extraordinary length of stay or cost. Peer review organizations may deny
payment for services provided, may assess fines and also have the authority to
recommend to the HHS that a provider which is in substantial noncompliance with
the standards of the peer review organization be excluded from participation in
the Medicare program. Utilization review is also a requirement of most non-
governmental managed care organizations.
Medicare Regulations and Fraud and Abuse. Participation in the Medicare
program is heavily regulated by Federal statute and regulation. If a hospital
provider fails substantially to comply with the numerous conditions of
participation in the Medicare program or performs certain prohibited acts, such
hospital's participation in the Medicare program may be terminated or civil or
criminal penalties may be imposed upon it under certain provisions of the
Social Security Act. Prohibited acts include:
. making false claims to Medicare including claims for services not
rendered, misrepresenting actual services rendered in order to obtain
higher reimbursement or cost report fraud;
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. paying remuneration to induce the referral of patients where services
provided are reimbursable under a federal health program;
. failing to stabilize any individual who comes to a hospital's emergency
room with an "emergency medical condition," within the scope of the
services available from the facility;
. transferring any stabilized patient to another health care facility
before the other facility has agreed to the transfer of the patient, if
the other facility does not have sufficient room and staff to treat the
patient, without the patient's emergency department medical records, or
without appropriate life support equipment; and
. transferring any unstabilized patient (except those transferred at the
patient's request or with physician certification that the medical risks
from the transfer are less harmful than continued treatment at the
transferring facility).
The Anti-Kickback Statute prohibits providers and others from soliciting,
receiving, offering or paying, directly or indirectly, any remuneration in
return for either making a referral for a service or item covered by a federal
healthcare program or ordering any covered service or item. Violations of this
statue may be punished by a fine of up to $50,000 or imprisonment for each
violation and damages up to three times the total amount of remuneration. In
addition, the Medicare Patient and Program Protection Act of 1987, as amended
by the Health Insurance Portability and Accountability Act of 1996 and the
Balanced Budget Act, ("HIPAA") (as so amended, the "Protection Act"), imposes
civil penalties for a violation of these prohibitions, including exclusion from
federal healthcare programs.
The Protection Act authorized the Office of the Inspector General ("OIG") to
publish regulations outlining certain categories of activities that would be
deemed not to violate the Anti-Kickback Statute (the "Safe Harbors"). In 1991,
the OIG published final Safe Harbor regulations implementing the Congressional
intent expressed in the Protection Act. Currently there are Safe Harbors for
certain physician investments, rental of space or equipment, personal services
and management contracts, warranties, discounts, payments to employees, group
repurchasing organizations and waivers of deductibles. The preamble to the Safe
Harbor regulations states that the failure of a particular business arrangement
to comply with the regulations does not determine whether the arrangement
violates the Anti-Kickback Statute because the regulations do not make conduct
illegal. Any conduct that could be construed to be illegal after the
promulgation of this rule would have been illegal prior to the publication of
the regulations. Additionally, Safe Harbors have been proposed for physician
investments in entities located in rural areas as well as freestanding
ambulatory surgery centers. Neither LifePoint nor Triad is able to determine if
or when such proposed Safe Harbors will be enacted, and if enacted whether it
will be able to meet the requirements for protection.
HIPAA amends, among other things, Title XI (42 U.S.C. (S) 1301 et seq.) to
broaden the scope of certain fraud and abuse laws to include all health care
services, whether or not they are reimbursed under a Federal program, and
creates new enforcement mechanisms to combat fraud and abuse, including an
incentive program under which individuals can receive up to $1,000 for
providing information on Medicare fraud and abuse that leads to the recovery of
at least $100 of Medicare funds. Under HIPAA, health care fraud, now defined as
knowingly and willfully executing or attempting to execute a "scheme or device"
to defraud any health care benefit program, is made a Federal criminal offense.
In addition, for the first time, Federal enforcement officials will have the
ability to exclude from Medicare and Medicaid any investors, officers and
managing employees associated with business entities that have committed health
care fraud, even if the investor, officer or employee had no knowledge of the
fraud. HIPAA also establishes a new violation for the payment of inducements to
Medicare or Medicaid beneficiaries in order to influence those beneficiaries to
order or receive services from a particular provider or practitioner. The
Balanced Budget Act also expands numerous health care fraud provisions.
The OIG at HHS is responsible for identifying and eliminating fraud, abuse
and waste in HHS programs and for promoting efficiency and economy in HHS
departmental operations. The OIG carries out this mission through a nationwide
program of audits, investigations and inspections. In order to provide guidance
to health
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care providers, the OIG has from time to time issued "fraud alerts" which,
although they do not have the force of law, identify features of transactions,
which may indicate that the transaction could violate the Anti-Kickback
Statute. The OIG has identified the following incentive arrangements as
potential violations:
. payment of any sort of incentive by the hospital each time a physician
refers a patient to the hospital;
. the use of free or significantly discounted office space or equipment
(in facilities usually located close to the hospital);
. provision of free or significantly discounted billing, nursing or other
staff services;
. free training for a physician's office staff in areas such as management
techniques and laboratory techniques;
. guarantees which provide that, if the physician's income fails to reach
a predetermined level, the hospital will supplement the remainder up to
a certain amount;
. low-interest or interest-free loans, or loans which may be forgiven if a
physician refers patients (or some number of patients) to the hospital;
. payment of the costs of a physician's travel and expenses for
conferences;
. coverage on the hospital's group health insurance plans at an
inappropriately low cost to the physician; or
. payment for services (which may include consultations at the hospital)
which require few, if any, substantive duties by the physician, or
payment for services in excess of the fair market value of services
rendered.
The OIG has encouraged persons having information about hospitals who offer
the above types of incentives to physicians to report such information to the
OIG.
Section 1877 of the Social Security Act (commonly known as the "Stark Law")
prohibits referrals of Medicare and Medicaid patients by physicians to entities
with which the physician has a financial relationship and which provide certain
"designated health services" which are reimbursable by Medicare or Medicaid.
"Designated health services" include, among other things, clinical laboratory
services, physical and occupational therapy services, radiology services,
durable medical equipment, home health, and inpatient and outpatient hospital
services. Sanctions for violating the Stark Law include civil money penalties
up to $15,000 per prohibited service provided, assessments equal to twice the
dollar value of each such service provided and exclusion from the Medicare and
Medicaid programs. There are 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. Proposed
regulations implementing the Stark Law, as amended, have not been implemented.
Neither LifePoint nor Triad can predict the final form that such regulations
will take or the effect that the Stark Law or the regulations promulgated
thereunder will have on LifePoint and Triad.
Each of LifePoint and Triad provide financial incentives to recruit
physicians into the communities served by its hospitals, including loans and
minimum revenue guarantees. Although HHS has proposed a Safe Harbor for certain
physician recruitment, no Safe Harbor for physician recruitment is currently in
force. Each of LifePoint and Triad also enter into certain employment
agreements, leases and other agreements with physicians. Although each of
LifePoint and Triad believes that its arrangements with physicians comply with
current law, there can be no assurance that regulatory authorities who enforce
such laws will not determine that such physician recruiting activities or other
physician arrangements violate the Anti-Kickback Statute or other
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applicable laws. Such a determination could subject LifePoint or Triad to
liabilities under the Social Security Act, including criminal penalties, civil
monetary penalties and/or exclusion from participation in Medicare, Medicaid or
other Federal health care programs, any of which could have a material adverse
effect on the business, financial condition or results of operations of
LifePoint or Triad.
Evolving interpretations of current, or the adoption of new, federal or state
laws or regulations could affect many of the arrangements entered into by each
of LifePoint's and Triad's hospitals. There is increasing scrutiny by law
enforcement authorities, the HHS, OIG, the courts and Congress of arrangements
between health care providers and potential referral sources to ensure that the
arrangements are not designed as a mechanism to exchange remuneration for
patient care referrals and opportunities. Investigators have also demonstrated
a willingness to look behind the formalities of a business transaction to
determine the underlying purpose of payments between health care providers and
potential referral sources.
The Social Security Act also imposes criminal and civil penalties for
submitting false claims to Medicare and Medicaid. False claims include but are
not limited to billing for services not rendered, misrepresenting actual
services rendered in order to obtain higher reimbursement and cost report
fraud. Like the Anti-Kickback Statute, this statute is very broad. Careful and
accurate coding of claims for reimbursement, including cost reports, must be
performed to avoid liability under the false claims statutes.
Many states in which LifePoint or Triad will operate also have adopted, or
are considering adopting, laws that prohibit payments to physicians in exchange
for referrals similar to the Anti-Kickback Statute, some of which apply
regardless of the source of payment for care. These statutes typically provide
criminal and civil penalties as well as loss of licensure. Many states also
have passed self-referral legislation similar to the Stark Law, prohibiting the
referrals of patients to entities with which the physician has a financial
relationship regardless of the source of payment for care. Little precedent
exists for the interpretation or enforcement of these state laws.
Corporate Practice of Medicine. Some of the states in which LifePoint and
Triad will operate have laws that prohibit corporations and other entities from
employing physicians or that prohibit certain direct and indirect payments or
fee-splitting arrangements between health care providers. In addition, some
states restrict certain business relationships between physicians and
pharmacies. Possible sanctions for violation of these restrictions include loss
of a physicians's license and civil and criminal penalties. These statutes vary
from state to state, are often vague and have seldom been interpreted by the
courts or regulatory agencies. Although each of LifePoint and Triad exercises
care to structure its arrangements with health care providers to comply with
the relevant state law, and each believes such arrangements comply with
applicable laws in all material respects, there can be no assurance that
governmental officials charged with responsibility for enforcing these laws
will not assert that LifePoint or Triad, or certain transactions in which
either of them is involved, are in violation of such laws, or that such laws
ultimately will be interpreted by the courts in a manner consistent with the
interpretations of LifePoint or Triad.
Health Care Reform. Health care, as one of the largest industries in the
United States, continues to attract much legislative interest and public
attention. In recent years, an increasing number of legislative proposals have
been introduced or proposed in Congress and in some state legislatures that
would effect major changes in the health care system, either nationally or at
the state level. Proposals that have been considered include cost controls on
hospitals, insurance market reforms to increase the availability of group
health insurance to small businesses, and requirements that all businesses
offer health insurance coverage to their employees. The costs of certain
proposals would be funded in significant part by reductions in payments by
governmental programs, including Medicare and Medicaid, to health care
providers such as hospitals. There can be no assurance that future health care
legislation or other changes in the administration or interpretation of
governmental health care programs will not have a material adverse effect on
the business, financial condition or results of operations of LifePoint or
Triad.
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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 increase the cost and difficulty or prevent the completion of
transactions with not-for-profit organizations in certain states in the future.
Revenue Ruling 98-15. During March 1998, the IRS issued guidance regarding
the tax consequences of joint ventures between for-profit and not-for-profit
hospitals. Neither LifePoint nor Triad has determined the impact of the tax
ruling on its existing joint ventures, or the development of future ventures,
and is consulting with its joint venture partners and tax advisers to develop
an appropriate course of action. The tax ruling could limit joint venture
development with not-for-profit hospitals, require the restructuring of certain
existing joint ventures with not-for-profits and influence the exercise of "put
agreements" (that require the purchase of the partner's interest in the joint
venture) by certain existing joint venture partners.
Environmental Matters. LifePoint and Triad are subject to various Federal,
state and local statutes and ordinances regulating the discharge of materials
into the environment. Neither LifePoint nor Triad expects that it will be
required to expend any material amounts in order to comply with these laws and
regulations or that compliance will materially affect its capital expenditures,
earnings or competitive position.
Insurance. As is typical in the health care industry, LifePoint and Triad are
subject to claims and legal actions by patients in the ordinary course of
business. To cover these claims, LifePoint and Triad maintain professional
malpractice liability insurance and general liability insurance in amounts
which each believes to be sufficient for its operations, although some claims
may exceed the scope of the coverage in effect. Each of LifePoint and Triad
also maintains umbrella coverage. At various times in the past, the cost of
malpractice and other liability insurance has risen significantly. Therefore,
there can be no assurance that such insurance will continue to be available at
reasonable prices which will allow LifePoint and Triad to maintain adequate
levels of coverage. Substantially all losses in periods prior to the
distribution are insured through a wholly-owned insurance subsidiary of
Columbia/HCA and excess loss policies maintained by Columbia/HCA. Columbia/HCA
has agreed to indemnify LifePoint and Triad in respect of claims covered by
such insurance policies and workers compensation claims arising prior to the
distribution. See "Arrangements Among Columbia/HCA, LifePoint and Triad
Relating to the Distribution--Distribution Agreement" and "--Insurance
Allocation and Administration Agreement."
Because substantially all liability for general and professional liability
claims incurred is insured through a wholly-owned insurance subsidiary of
Columbia/HCA and excess loss policies maintained by Columbia/HCA, and
Columbia/HCA maintains the related reserve, no reserve for general and
professional liability risks is recorded on the balance sheets of LifePoint and
Triad. Any losses incurred in excess of amounts maintained under such insurance
will be funded from working capital. There can be no assurance that the cash
flow of LifePoint and Triad will be adequate to provide for professional and
general liability claims in the future. If payments for general and
professional liabilities exceed anticipated losses, the results of operations
and financial condition of LifePoint or Triad, as the case may be, could be
adversely affected.
Governmental Investigation of Columbia/HCA and Related Litigation. In March
1997, various facilities of Columbia/HCA's El Paso, Texas operations were
searched by Federal authorities pursuant to search warrants, and government
agents removed various records and documents. In February 1998, an additional
warrant was executed and a single computer was seized.
In July 1997, various Columbia/HCA affiliated facilities and offices were
searched pursuant to search warrants. During July, September and November 1997,
Columbia/HCA also was served with subpoenas requesting records and documents
related to laboratory billing and DRG coding in various states and home
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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 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 two qui tam
actions. Columbia/HCA is aware of additional qui tam actions that remain under
seal and believes that there may be other sealed qui tam cases of which it is
unaware.
Since April 8, 1997, numerous Federal securities class action and derivative
lawsuits have been brought against Columbia/HCA and a number of its current and
former directors, officers and employees. On October 10, 1997, all of the
securities class action claims were consolidated into a single-captioned case
which seeks the certification of a class of persons or entities who acquired
Columbia/HCA's common stock from April 9, 1994 to September 9, 1997. The
lawsuit alleges, among other things, that the defendants committed violations
of the Federal securities laws by materially inflating Columbia/HCA's revenues
and earnings through a number of practices, including upcoding, maintaining
reserve cost reports, disseminating false and misleading statements, cost
shifting, illegal reimbursements, improper billing, unbundling, and violating
various Medicare laws. The lawsuit seeks compensatory damages, costs, and
expenses. On October 10, 1997, all of the derivative law claims were
consolidated into a single-captioned case. The lawsuit alleges, among other
things, derivative claims against the individual defendants that they
intentionally or negligently breached their fiduciary duties to Columbia/HCA by
authorizing, permitting, or failing to prevent Columbia/HCA from engaging in
various schemes to improperly increase revenue, upcoding, improper cost
reporting, improper referrals, improper acquisition practices, and overbilling.
In addition, the lawsuit asserts a derivative claim against some of the
individual defendants for breaching their fiduciary duties by engaging in
insider trading. The lawsuit seeks restitution, damages, recoupment of fines or
penalties paid by Columbia/HCA, restitution and pre-judgment interest against
the alleged insider trading defendants, and costs and disbursements. In
addition, the lawsuit seeks orders prohibiting Columbia/HCA from paying
individual defendants employment benefits, terminating all improper business
relationships with individual defendants, and requiring Columbia/HCA to
implement
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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.
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 any
losses which they may incur as a result of the proceedings described above.
Columbia/HCA has also agreed to indemnify LifePoint and Triad in respect of any
losses which they may incur as a result of proceedings which may be commenced
by government authorities or by private parties in the future that arise from
acts, practices or omissions engaged in prior to the Distribution Date and
relate to the proceedings described above. See "Arrangements Among
Columbia/HCA, LifePoint and Triad Relating to the Distribution--Distribution
Agreement." If any of such indemnified matters were successfully asserted
against either LifePoint or Triad, or any of their facilities, and Columbia/HCA
failed to meet its indemnification obligations, then such losses could have a
material adverse effect on the business, financial position, results of
operations or prospects of LifePoint and/or Triad, as the case may be.
Columbia/HCA will not indemnify LifePoint or Triad for losses relating to any
acts, practices and omissions engaged in by LifePoint or Triad after the
distribution date, whether or not LifePoint or Triad is indemnified for similar
acts, practices and omissions occurring prior to the distribution date.
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LifePoint Management
Directors
On the distribution date, the directors of LifePoint will be the persons
named below.
<TABLE>
<CAPTION>
Principal Occupation or Employment
Name Age for Past Five Years
---- --- ----------------------------------
<C> <C> <S>
Scott L. Mercy................ 37 Chairman and Chief Executive Officer, LifePoint,
as of the distribution date and, since September
1, 1998, Chief Executive Officer, America Group
of Columbia/HCA; President and Chief Executive
Officer of America Service Group, Inc. (health
care services for correctional facilities) from
1996 through September 1, 1998; Senior Vice
President--Financial Operations of Columbia/HCA
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.
Ricki Tigert Helfer........... 53 Senior Fellow, The Brookings Institution, since
January 1998; Chairman of the Board of Directors
and Chief Executive Officer, Federal Deposit
Insurance Corporation (banking regulation), 1994
to 1997; Partner, Gibson, Dunn & Crutcher (law
firm), prior thereto.
John E. Maupin, Jr., D.D.S. .. 51 President, Meharry Medical College, since July
1994; Executive Vice President, Morehouse School
of Medicine, prior thereto. Dr. Maupin is a
member of the Nashville Advisory Board, First
American National Bank and a director, Monarch
Dental Corporation.
[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.
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The Audit and Compliance Committee of the LifePoint Board of Directors will
review and make reports and recommendations to the Board of Directors with
respect to the selection of the independent auditors of LifePoint and its
subsidiaries, the arrangements for and the scope of the audits to be performed
by them and the internal audit activities, accounting procedures and controls
of LifePoint, and will review the annual consolidated financial statements of
LifePoint. The committee will also monitor adherence to LifePoint's regulatory
compliance program. The members of the Audit and Compliance Committee will be
, and , with serving as Chair.
The Compensation Committee of the LifePoint Board of Directors will be
responsible for approving compensation arrangements for executive management of
LifePoint, reviewing compensation plans relating to officers, grants of options
and other benefits under LifePoint's employee benefit plans and reviewing
generally LifePoint's employee compensation policy. The members of the
Compensation Committee will be , and , with serving as Chair.
Compensation of Directors
The annual retainer for outside directors who are neither officers nor
employees of LifePoint ("Non-Employee Directors") will be $18,000 and the Board
meeting fee will be $1,500 per meeting. Committee members will receive a fee of
$1,000 per meeting payable only for attendance at committee meetings not held
in conjunction with a meeting of the LifePoint Board of Directors. Directors
also are reimbursed for expenses incurred relating to attendance at meetings.
Under the LifePoint Outside Directors Stock and Incentive Compensation Plan,
each Non-Employee Director may elect to receive, in lieu of all or any portion
(in multiples of 25%) of his annual retainer, deferred stock units, the payout
of which, at the election of the director, may be deferred for two years or
until the end of such director's term of office. The payment of deferred stock
units will be made through the issuance of a stock certificate for a number of
shares equal to the number of deferred stock units.
The plan further provides that each Non-Employee Director will receive a one-
time grant of an option, as of the first business day of the director's first
term of office, to acquire shares of LifePoint common stock (exercisable at the
fair market value of LifePoint common stock on the date of grant) for a number
of shares having an aggregate value as of such date, equal to two times the
Non-Employee Director's annual retainer fee. Each person who is a Non-Employee
Director on the day of the annual meeting of LifePoint's stockholders will be
granted on that day an option to acquire shares of LifePoint common stock
(exercisable at the fair market value of LifePoint common stock on the date of
grant) for a number of shares having an aggregate value as of such date, equal
to the Non-Employee Director's annual retainer fee. The one-time options
described above will become exercisable as to all of the shares covered by the
option on the third anniversary of the date of grant. The annual options will
become exercisable as to one-third of the shares covered by the option on each
of the first three anniversaries of the date of grant.
The plan further provides that Non-Employee Directors may receive
discretionary option grants.
Executive Officers
On the distribution date, the executive officers of LifePoint will be as
follows:
<TABLE>
<CAPTION>
Name Age Position And Professional Experience
---- --- ------------------------------------
<C> <C> <S>
Scott L. Mercy.. 37 Chairman and Chief Executive Officer, LifePoint, as of the
distribution date and, since September 1, 1998, Chief Executive
Officer, America Group of Columbia/HCA; President and Chief
Executive Officer of America Service Group, Inc. (health care
services for correctional facilities) from 1996 through
September 1, 1998; Senior Vice President--Financial Operations
of Columbia/HCA 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.
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
Name Age Position And Professional Experience
---- --- ------------------------------------
<C> <C> <S>
James M. Fleetwood, Jr. .. 51 President and Chief Operating Officer of LifePoint,
as of the distribution date, and since January 1,
1998, President, the America Group of Columbia/HCA;
President--Florida Group of Columbia/HCA from May
1996 to January 1, 1998; President of the North
Florida Division of Columbia/HCA from April 1995 to
May 1996; Regional Vice President of Healthtrust,
Inc.--The Hospital Company (health care services),
prior thereto.
William F. Carpenter III.. 44 Senior Vice President and General Counsel,
LifePoint, as of the distribution date, and since
November 16, 1998, General Counsel, the America
Group of Columbia/HCA; Member, Waller Lansden
Dortch & Davis, PLLC (law firm), prior to December
31, 1998.
Kenneth C. Donahey........ 48 Senior Vice President and Chief Financial Officer,
LifePoint, as of the distribution date, and since
November 5, 1998, Chief Financial Officer, the
America Group of Columbia/HCA; Senior Vice
President and Controller, Columbia/HCA from April
1995 through November 4, 1998; Senior Vice
President and Controller, Healthtrust, Inc.--The
Hospital Company, prior thereto.
Neil D. Hemphill.......... 45 Senior Vice President of Administration and Human
Resources, LifePoint, as of the distribution date
and, since September 1, 1998, Senior Vice President
of Administration and Human Resources, the America
Group of Columbia/HCA; Senior Vice President of
Human Resources, Columbia/HCA from February 1994 to
September 1, 1998; Vice President of Human
Resources, Columbia Healthcare Corporation, prior
thereto.
William Gracey............ 45 Division President, LifePoint, as of the
distribution date and, since July 1998, Division
President, the America Group of Columbia/HCA;
President of Operations Support for the Atlantic
Group of Columbia/HCA from January 1998 through
June 1998; Division President, Columbia/HCA from
September 1995 to December 1997; Chief Operating
Officer of the Pacific Division of Columbia/HCA
from February 1995 to September 1995; Chief
Executive Officer of other facilities of Hospital
Corporation of America (health care services),
prior thereto.
Dan Slipkovich............ 41 Division President, LifePoint, as of the
distribution date; and since October 1998, Division
President of the America Group of Columbia/HCA;
Chief Financial Officer of the America Group of
Columbia/HCA, January 1998 to October 1998; Chief
Financial Officer and Vice President of the Florida
Group of Columbia/HCA from July 1996 to January
1998; Chief Financial Officer and Vice President of
the North Florida Division of Columbia/HCA from
April 1995 to July 1996; Regional Assistant Vice
President of Healthtrust, Inc.--The Hospital
Company, prior thereto.
</TABLE>
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Executive Compensation
The information under this heading relates to the compensation paid by
Columbia/HCA to the Chief Executive Officer of LifePoint and the four
individuals who will be executive officers of LifePoint as of the distribution
date and who were, based on such compensation, the most highly compensated
LifePoint executive officers for the year ended December 31, 1998. All cash
compensation was paid by Columbia/HCA and all stock compensation was in the
form of Columbia/HCA Common Stock or options to purchase shares of Columbia/HCA
Common Stock. The principal positions listed in the table are those that will
be held by such persons as of the distribution date. For information regarding
certain future compensation arrangements which have been established for
LifePoint as an independent, publicly-traded company, see "--LifePoint
Compensation Arrangements."
LifePoint Summary Compensation Table
<TABLE>
<CAPTION>
Annual Compensation Long-Term Compensation
---------------------------------- --------------------------
Securities
Other Annual Restricted Underlying All Other
Name and Principal Salary Bonus Compensation Stock Options/SARS Compensation
Position Year ($)(2) ($)(3) ($)(4) Awards ($)(5) (#)(6) ($)(7)
------------------ ---- -------- -------- ------------ ------------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Scott L. Mercy.......... 1998 $133,333 $ 66,667 $ -- $ -- -- $ --
Chairman and Chief 1997 $ -- $ -- $ -- $ -- -- $ --
Executive Officer (1)
James M. Fleetwood,
Jr. ................... 1998 $481,250 $ -- $ 31,978 $ 56,866 -- $10,864
President and Chief 1997 $350,000 $175,000 $ 76,799 $ -- 340,000 $ 8,439
Operating Officer
Kenneth C. Donahey...... 1998 $412,500 $ -- $ -- $ -- -- $15,738
Senior Vice President 1997 $275,000 $ -- $ -- $183,369 290,000 $15,903
and Controller
William Gracey.......... 1998 $299,250 $ 80,000 (8) $ -- $ 20,463 -- $14,480
Division President 1997 $210,000 $ 52,500 $ -- $ 70,011 72,000 $12,084
Dan Slipkovich.......... 1998 $263,359 $ -- $ 63,408 $ 31,108 -- $13,380
Division President 1997 $191,500 $ 95,750 $ -- $ -- 125,000 $13,530
</TABLE>
- --------
(1) Mr. Mercy became employed by Columbia/HCA in September 1998 and therefore
received no compensation in 1997.
(2) 1998 salary amounts do not include the value of restricted stock awards
granted in lieu of a portion of annual salary.
(3) Reflects bonus earned during 1997. In some instances, all or a portion of
the bonus was paid during 1998. Each of the Executive officers identified
in the table had the option to take all or part of their bonus in shares of
Columbia/HCA restricted stock at a 25% discount from the fair market value
at the time of grant, which is reflected in the Restricted Stock Awards
column. Columbia/HCA's cash bonus program was discontinued in August 1997.
(4) Perquisites and other personal benefits did not exceed the lesser of either
$50,000 or 10% of the total of annual salary and bonus for any executive
officer identified in the table. Other compensation consists principally of
relocation expenses.
(5) 1998 amounts represent the fair market value on the date of grant of
Columbia/HCA shares issued in lieu of a portion of annual salary. 1997
amounts represent 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. The value of the restricted stock awards was determined by
multiplying the fair market value of Columbia/HCA's Common Stock on the
date of grant by the number of shares awarded, and deducting therefrom, the
consideration paid for the shares. As of December 31, 1998, Messrs.
Fleetwood, Donahey, Gracey and Slipkovich held an aggregate of 4,200,
10,436, 2,667 and 406 shares of restricted stock, respectively. Pursuant to
SEC rules, after deducting the consideration paid therefore, the shares
held by Messrs. Gracey and Slipkovich had a net pre-tax value as of
December 31, 1998 of $7,225 and $483, respectively, and the shares held by
Messrs. Fleetwood and Donahey were without value. Dividends will be payable
on shares of restricted stock if and to the extent paid on Columbia/HCA's
Common Stock generally, regardless of whether or not the shares are vested.
(6) Options to acquire shares of Columbia/HCA Common Stock. Columbia/HCA
granted options at two separate times in 1997. The 1997 regular grant was
issued in February 1997. A special grant was issued in November 1997 to
help ensure the retention and motivation of key executives, including each
of the executive officers identified in the table, at the time Columbia/HCA
was reorganizing. On average, the size of the November 1997 grant is two
times a competitive median long-term grant for a two year period (1998-99).
(7) Consists of Columbia/HCA contributions to Columbia/HCA's Savings and
Investment Plan, Money Purchase Plan and Stock Bonus Plan.
(8) In 1998, Columbia/HCA paid Mr. Gracey $80,000 in connection with his
services regarding the divestiture of the Atlantic Group division.
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<PAGE>
Aggregated Option/SAR Exercises In Last Fiscal Year and FY-End Option/SAR
Values
<TABLE>
<CAPTION>
Number of
Securities Underlying Value of Unexercised In-the-
Unexercised Options/SARs at Money Options/SARs at Fiscal
Fiscal Year-End (#) Year-End($) (1)
------------------------------ -----------------------------------
Name Exercisable Unexercisable Exercisable Unexercisable
- ---- ------------- -------------- ------------------- ---------------
<S> <C> <C> <C> <C>
Scott L. Mercy.......... 7,500 -- $ 184,542.75 $ 0
James M. Fleetwood,
Jr..................... 131,745 396,250 1,241,673.28 0
Kenneth C. Donahey...... 161,984 346,250 1,459,010.81 0
William Gracey.......... 17,624 94,876 0 0
Dan Slipkovich.......... 33,026 141,125 294,813.30 0
</TABLE>
- --------
(1) The closing price for the Columbia/HCA Common Stock, as reported by the
NYSE, on December 31, 1998 was $24.75. Value is calculated on the basis of
the difference between the option exercise price and $24.75, multiplied by
the number of shares of Columbia/HCA Common Stock underlying the option.
LifePoint Compensation Arrangements
Benefits and Employment Matters Agreement
In connection with the distribution, Columbia/HCA, LifePoint and Triad will
enter into the Benefits and Employment Matters Agreement, which allocates
responsibilities for employee compensation, benefits, labor, benefit plan
administration and certain other employment matters on and after the
distribution date. Among other things, the Benefits and Employment Matters
Agreement generally provides for grants to LifePoint employees of options to
purchase shares of LifePoint common stock and Triad common stock in respect of
vested options to purchase Columbia/HCA Common Stock (other than incentive
stock options), and grants to purchase LifePoint stock in replacement of
incentive stock options covering Columbia/HCA Common Stock. In addition, the
Benefits and Employment Matters Agreement provides for the cancellation of non-
vested options to purchase Columbia/HCA Common Stock and the discretionary
grant of options to purchase LifePoint common stock. The Benefits and
Employment Matters Agreement also provides for the establishment of certain of
the benefit plans described in this section. See "Arrangements Among
Columbia/HCA, LifePoint and Triad Relating to the Distribution--Benefits and
Employment Matters Agreement."
The LifePoint 1998 Long-Term Incentive Plan
The LifePoint 1998 Long-Term Incentive Plan has been adopted by the Board of
Directors of Columbia/HCA in contemplation of the distribution.
Reservation of Shares. Under the LifePoint Long-Term Incentive Plan,
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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<PAGE>
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 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
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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<PAGE>
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 $ million. 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 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 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 purchase Lifepoint common stock
granted under the plan is forfeited, cancelled, or otherwise terminated, the
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<PAGE>
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 within the 20 trading-day period beginning on the
distribution date.
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 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.
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<PAGE>
Death or Disability Benefit. In the event of termination of employment
because of death or disability, where the amount remaining due on the loan
(including accrued interest) is greater than the fair market value of the
shares purchased, as of the date of such death or disability, LifePoint will
pay a death or disability benefit equal to the amount of such payment remaining
due over the shares' fair market value as of the date of such death or
disability.
LifePoint Annual Cash Bonus Plan
LifePoint plans to adopt the LifePoint Hospitals, Inc. Annual Cash Bonus Plan
(the "Bonus Plan") that will provide for the payment of annual cash bonuses
following the close of each plan year, based upon the achievement of objective
performance goals. The Bonus Plan will be administered by the Office of the
SVP, Human Resources and Administration. A Plan Committee, the Compensation
Committee of the Board of Directors (the "Compensation Committee") and the
Chief Executive Officer of LifePoint will also have administrative functions.
Participation is limited to key management employees. An appropriate senior
officer will recommend non-officer employees for participation in the Bonus
Plan as well as the related performance targets. Such recommendations will be
subject to final review and approval by the Chief Executive Officer. All
recommendations regarding officers are to be made by the Chief Executive
Officer, subject to final review and approval by the Compensation Committee.
As soon as practicable after the end of each plan year and after receiving
the recommendation of the Plan Committee, the Chief Executive Officer will
review and approve bonus payments for all non-officer participants. The
Compensation Committee will review and approve bonus payments for all
participating officers. Bonus payments are based on the achievement of specific
performance objectives, based on criteria determined in accordance with the
Bonus Plan's terms. Such criteria may include constituency satisfaction, the
financial performance of the Company and other selected strategic components.
Performance objectives may be subject to retroactive adjustments to reflect
equitably unforeseen circumstances.
The Chief Executive Officer, with the approval of the Compensation Committee,
may modify, amend or terminate the Bonus Plan, in whole or in part, at any time
(except that no such action may negatively affect bonuses for any prior year).
The LifePoint Management Stock Purchase Plan
The LifePoint Management Stock Purchase Plan will be adopted by the LifePoint
Board of Directors in contemplation of the distribution.
Reservation of Shares. shares of LifePoint common stock may be issued
pursuant to all awards of restricted shares or in respect of restricted share
units under the LifePoint Management Stock Purchase Plan. The shares of
LifePoint common stock to be issued will be made available from authorized but
unissued shares of LifePoint common stock or issued shares that have been
reacquired by LifePoint. If any shares of LifePoint common stock that are the
subject of an award are forfeited, the related shares will no longer be charged
against such maximum share limitation and may again be made subject to awards.
In the event of certain corporate reorganizations, recapitalizations, or other
specified corporate transactions affecting LifePoint or the LifePoint common
stock, such substitution or adjustment shall be made in the aggregate number of
LifePoint common stock that may be distributed as restricted shares or in
respect of restricted share units under the LifePoint Management Stock Purchase
Plan, and the number of restricted shares and/or restricted share units
outstanding under the LifePoint Management Stock Purchase Plan, as may be
determined to be appropriate by the Compensation Committee in its sole
discretion.
Duration. The LifePoint Management Stock Purchase Plan has a term of ten
years, subject to earlier termination or amendment by the LifePoint Board of
Directors.
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<PAGE>
Administration. The LifePoint Management Stock Purchase Plan will be
administered by the Compensation Committee of the LifePoint Board of Directors.
The Compensation Committee shall have authority to administer the plan and to
exercise all the powers and authorities either specifically granted to it
under, or necessary or advisable in the administration of, the LifePoint
Management Stock Purchase Plan, including, without limitation, to interpret the
plan, to prescribe, amend and rescind rules and regulations relating to the
plan, to determine the terms and provisions of agreements (which need not be
identical) entered into under the plan and to make all other determinations
deemed necessary or advisable for the administration of the plan.
Eligibility. All LifePoint employees or groups of employees designated by
the Compensation Committee in its sole discretion are eligible to be granted
awards.
Restricted Share Awards. The Compensation Committee may make awards of
restricted shares. Under the LifePoint Management Stock Purchase Plan, a
participant may elect to reduce his base salary up to a maximum percentage
established by the Compensation Committee with respect to his employee
classification and, in lieu of salary, receive a number of restricted shares
equal to the amount of such salary reduction divided by a dollar amount equal
to 75% of the average market value (as defined in the plan) of LifePoint common
stock on the date on which such restricted share is granted. Restricted shares
will be granted on June 30 and December 31 of each calender year for which a
salary reduction election is in effect.
An award of restricted shares represents shares of LifePoint common stock
that are issued subject to such restrictions on transfer and incidents of
ownership, and such forfeiture conditions, as set forth in the plan and as the
Compensation Committee deems appropriate. Generally, the restricted period of
restricted shares granted under the LifePoint Management Stock Purchase Plan
will be three years from the date of grant. Subject to such transfer and
forfeiture restrictions, the participant shall have all rights of a stockholder
with respect to such restricted shares, including the right to receive
dividends and the right to vote such restricted shares.
Conversion of Restricted Shares into Restricted Share Units. If during the
restricted period the Compensation Committee determines that LifePoint may lose
its Federal income tax deduction in connection with the future lapsing of the
restrictions on restricted shares because of the deductibility cap of Section
162(m) of the Code, the Compensation Committee, in its discretion, may convert
some or all of the restricted shares into an equal number of share units, as to
which payment will be postponed until such time as LifePoint will not lose its
Federal income tax deduction for such payment under Section 162(m). Until
payment of the restricted share units is made, the participant will be credited
with dividend equivalents on the restricted share units, which dividend
equivalents will be converted into additional restricted share units.
Termination of Employment During the Restricted Period. If during the
restricted period the participant's employment is terminated by LifePoint
either (i) for cause (as defined) or (ii) for any reason by the participant,
the participant will forfeit his or her rights in the restricted shares, which
shall automatically be considered to be cancelled, and shall have only an
unfunded right to receive from LifePoint's general assets a cash payment equal
to the lesser of (i) the fair market value of such restricted shares on the
participant's last day of employment or (ii) the aggregate base salary foregone
by the participant as a condition of receiving the restricted shares. If a
participant's employment is terminated by LifePoint without cause during the
restricted period, the participant will forfeit his rights in the restricted
shares, which shall automatically be considered to be cancelled, and shall have
only an unfunded right to receive from LifePoint's general assets a cash
payment equal to either (i) the fair market value of such restricted shares on
the participant's last day of employment or (ii) the aggregate base salary
foregone by the participant as a condition of receiving the restricted shares,
with the Compensation Committee to have the sole discretion as to which of such
amounts shall be payable. If the employment of a participant holding restricted
share units terminates during the restricted period relating to the restricted
share units, they shall be treated in a manner substantially equivalent to the
treatment of restricted shares set forth above.
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<PAGE>
Upon a termination of employment which results from a participant's death or
disability (as defined), all restrictions then outstanding with respect to
restricted shares held by the participant automatically will expire. Upon the
retirement of a participant, the Compensation Committee shall determine, in its
discretion, whether all restrictions then outstanding with respect to
restricted shares held by the participant shall expire or whether the
participant shall instead be treated as though the participant's employment had
been terminated by LifePoint without cause, as described above.
Change-In-Control. Upon the occurrence of a change-in-control of LifePoint
(as defined), the restricted period automatically will terminate as to all
restricted shares awarded under the plan.
LifePoint Employee Stock Ownership Plan
LifePoint expects to establish for the benefit of its employees a leveraged
Employee Stock Ownership Plan (the "LifePoint ESOP") which, shortly after the
distribution, will purchase newly issued shares of LifePoint common stock in an
amount equal to 8.3% of the outstanding shares of LifePoint. The purchase price
of the shares will be financed by issuing a promissory note to LifePoint or by
borrowing from a third party lender (which loan will be guaranteed by
LifePoint). Initially, all such shares will be held in a suspense account under
the LifePoint ESOP. LifePoint will contribute annually to the LifePoint ESOP
the funds required to repay the ESOP loan. As the ESOP loan is repaid, shares
will be released from the suspense account and will be allocated to accounts
established for participants under the LifePoint ESOP. The loan will be repaid
over a 10 year period. Generally, each employee of LifePoint and its
participating subsidiaries will participate in the LifePoint ESOP as of the
first January 1 after his or her date of hire. Each participant in the
LifePoint ESOP will be fully vested in his accounts after completion of seven
years of service with LifePoint (including any pre-distribution service with
Columbia/HCA and its affiliates).
Employment Contracts, Termination Of Employment Arrangements and Change in
Control Arrangements
Each of Messrs. Fleetwood, Donahey, and Gracey will participate in an
enhanced severance plan through December 31, 1999. In the event that either Mr.
Fleetwood or Mr. Donahey is terminated without cause during 1999, he will
receive continued payment of his then-current base salary and his target bonus
for thirty-six months after such termination. In the event that Mr. Gracey is
terminated without cause during 1999, he will receive continued payment of his
then-current base salary and his target bonus for twenty-four months after such
termination. Severance policies for termination occurring subsequent to
December 31, 1999 have not yet been established.
LifePoint Security Ownership by Certain Beneficial Owners and Management
Immediately prior to the distribution, Columbia/HCA will own beneficially and
of record approximately shares of LifePoint common stock, representing
100% of the shares of capital stock of LifePoint expected to be issued and
outstanding immediately after the distribution. Columbia/HCA will have sole
voting and sole investment power with respect to the shares owned by it. After
the completion of the distribution, none of the outstanding shares of LifePoint
common stock will be owned by Columbia/HCA.
The following table sets forth the projected beneficial ownership of
LifePoint common stock as of the distribution date of Columbia/HCA sponsored
benefit plans (which collectively are projected to own 5% or more of such class
of securities); certain persons LifePoint believes will become the beneficial
owners of 5% or more of such class of securities; each of the persons who will
be an LifePoint director as of the distribution date; each of the executive
officers named in the Summary Compensation Table; and all of the persons who
will be LifePoint directors and executive officers as of the distribution date
as a group. The ownership information presented below:
. is based on Columbia/HCA's knowledge of the beneficial ownership of
Columbia/HCA Stock as of , 1999;
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<PAGE>
. reflects the distribution ratio of shares of LifePoint common stock
for every shares of Columbia/HCA Stock outstanding on the record
date;
. reflects the Employee Stock Ownership Plan that LifePoint expects to
establish in accordance with the Benefits and Employment Matters
Agreement; and
. assumes no change in beneficial ownership of Columbia/HCA Stock between
, 1999 and the record date.
<TABLE>
<CAPTION>
Number of
Name of Beneficial Owner Shares(1)(2) Percent
- ------------------------ ------------ -------
<S> <C> <C>
The Columbia/HCA Healthcare Corporation Stock Bonus Plan
(3)..................................................... 4.2%
The Columbia/HCA Healthcare Corporation Salary Deferral
Plan (3)................................................ 3.2%
The San Leandro Retirement and Savings Plan (3).......... *
LifePoint Hospitals, Inc. Employee Stock Ownership Plan.. 9.0%
FMR Corp., Edward C. Johnson 3d and Abigail P. Johnson
(4)..................................................... 8.3%
Wellington Management Company, LLP (5)................... 7.0%
Scott L. Mercy........................................... *
Ricki Tigert Helfer......................................
Dr. John E. Marpin, Jr., D.D.S. .........................
[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
February 1, 1999, filed with the SEC by FMR Corp. in respect of its
beneficial ownership of Columbia/HCA Common Stock. The address of FMR Corp
is 82 Devonshire Street, Boston, Massachusetts 02109.
(5) The ownership given for Wellington Management Company, LLP is based on
information contained in the Schedule 13G dated December 31, 1998, filed
with the SEC by Wellington Management Company, LLP in respect of its
beneficial ownership of Columbia/HCA Common Stock. The address of
Wellington Management Company, LLP is 75 State Street, Boston,
Massachusetts 02109.
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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 Chairman of the Board, President and Chief Executive Officer of
Triad, as of the distribution date; and since January 1, 1998,
President, the Triad Group of Columbia/HCA; President--Central
Group of Columbia/HCA from June 1994 until January 1, 1998;
Executive Vice President of the Central Division of National
Medical Enterprises, Inc. (presently called Tenet Healthcare
Corporation) (health care services) from May 1993 to June 1994;
Senior Vice President of Operations of National Medical
Enterprises, Inc., prior thereto.
Michael J. Parsons........ 43 Senior Vice President, 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.
Thomas G. Loeffler, Esq... 57 Partner, Arter & Hadden LLP (law firm) since June 1993;
attorney and consultant prior thereto. Mr. Loeffler served as a
member of Congress to the United States House of
Representatives from 1979 to 1987. Mr. Loeffler is a director
of Billing Concepts Corp., Introgen Therapeutics, Inc. and the
University of Texas Investment Management Company and is Vice
Chairman of the Board of Regents of the University of Texas
System.
Thomas F. Frist III....... 31 Co-founder, FS Partners, LLC (private investment firm) since
1994; Assistant to principal, Rainwater, Inc. (private
investment firm) prior thereto.
Marvin Runyon............. Retired 70th Postmaster General of the United States (1992-
1998); Chairman of the Board, Tennessee Valley Authority from
1988 to 1992; President and Chief Executive Officer, Nissan
Motor Manufacturing Corporation U.S.A., prior thereto.
Uwe E. Reinhardt, Ph.D. .. 60 James Madison Professor of Political Economy and Professor of
Economics and Public Affairs, Princeton University. Mr.
Reinhardt is a Trustee of Duke University Health Center, a
Trustee of H&Q Healthcare Investors and H&Q Life Sciences
Investors, a Member of the Board, Center for Healthcare
Strategies, Inc., and a Member of the External Advisory Panel
for Health, Nutrition and Population, The World Bank.
</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 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.
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<PAGE>
The Executive Committee may exercise certain powers of the Board of Directors
regarding the management and direction of the business and affairs of 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 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 outside directors who are neither officers nor
employees of Triad ("Non-Employee Directors") will be $18,000 and the Board
meeting fee will be $ per meeting. Committee members will receive a fee of
$1,500 per meeting payable only for attendance at committee meetings not held
in conjunction with a meeting of the Triad Board of Directors. Directors also
are reimbursed for expenses incurred relating to attendance at meetings. Under
the Triad Outside Directors Stock and Incentive Compensation Plan, each Non-
Employee Director may elect to receive, in lieu of all or any portion (in
multiples of 25%) of his annual retainer, deferred stock units, the payout of
which, at the election of the director, may be deferred for two years or until
the end of such director's term of office. The payment of deferred stock units
will be made through the issuance of a stock certificate for a number of shares
equal to the number of deferred stock units.
The plan further provides that each Non-Employee Director will receive a one-
time grant of an option, as of the first business day of the director's first
term of office, to acquire shares of Triad common stock (exercisable at the
fair market value of Triad common stock on the date of grant) for a number of
shares having an aggregate value as of such date, under the Black-Scholes
valuation method, equal to two times the Non-Employee Director's annual
retainer fee. Each person who is a Non-Employee Director on the day of the
annual meeting of Triad's stockholders will be granted on that day an option to
acquire shares of Triad common stock (exercisable at the fair market value of
Triad common stock on the date of grant) for a number of shares having an
aggregate value as of such date, under the Black-Scholes valuation method,
equal to the Non-Employee Director's annual retainer fee. The one-time options
described above will become exercisable as to all of the shares covered by the
option on the third anniversary of the date of grant. The annual options will
become exercisable as to one-third of the shares covered by the option on each
of the first three anniversaries of the date of grant.
The plan further provides that Non-Employee Directors may receive
discretionary option grants.
Executive Officers
On the distribution date, the executive officers of Triad will be as follows:
<TABLE>
<CAPTION>
Name Age Position And Professional Experience
---- --- ------------------------------------
<C> <C> <S>
James D. Shelton.. 45 Chairman of the Board, President and Chief Executive Officer
of Triad, as of the distribution date; and since January 1,
1998, President, the Pacific Group of Columbia/HCA;
President--Central Group of Columbia/HCA from June 1994 until
January 1, 1998; Executive Vice President of the Central
Division of National Medical Enterprises, Inc. (presently
called Tenet Healthcare Corporation) (health care services)
from May 1993 to June 1994; Senior Vice President of
Operations of National Medical Enterprises, Inc., prior
thereto.
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
Name Age Position And Professional Experience
---- --- ------------------------------------
<C> <C> <S>
Michael J. Parsons..... 43 Chief Operating Officer of Triad, as of the distribution
date; and since January 1, 1998, Chief Operating
Officer, the Pacific Group of Columbia/HCA; Chief
Financial Officer--Central Group of Columbia/HCA from
July 1994 until January 1, 1998; Chief Financial Officer
of the Central Group of National Medical Enterprises,
Inc. prior thereto.
Burke W. Whitman....... 43 Chief Financial Officer and Treasurer of Triad, as of
the distribution date; and since February 1, 1999, Chief
Financial Officer, the Pacific Group of Columbia/HCA;
President, Chief Financial Officer, Director and Co-
founder, Deerfield Health Corporation from May 1994
until January 31, 1999; Vice President, Development and
Finance, Almost Family, Inc. (a wholly owned subsidiary
of Caretenders Health Corporation), prior thereto.
Donald P. Fay.......... 55 General Counsel and Secretary of Triad, as of the
distribution date; and since January 1, 1998, Senior
Vice President, the Pacific Group of Columbia/HCA; Vice
President--Legal, Columbia/HCA from February 1994
through December 1997; Senior Counsel, Columbia/HCA,
prior thereto.
Christopher A. Holden.. 34 Senior Vice President of Triad, as of the distribution
date; since January 1, 1998 through the distribution
date, President--West Division, the Pacific Group of
Columbia/HCA; President, West Texas Division of the
Central Group of Columbia/HCA from September 1997 until
January 1, 1998; Vice President of Administration for
the Central Group of Columbia/HCA from August 1994 until
September 1997; Assistant Vice President--Administration
of the Central Group of National Medical Enterprises,
Inc. prior thereto.
Nicholas J. Marzocco... 44 Senior Vice President of Triad, as of the distribution
date; since January 1, 1998 through the distribution
date, President--East Division, 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.
G. Wayne McAlister .... 52 Senior Vice President of Triad; since March 15, 1999,
through the date of the distribution, President--Central
Division, of the Pacific Group of Columbia/HCA;
independent senior hospital management consultant from
June 1997 until March 15, 1999; Regional Vice President
of Paracelsus Healthcare Corporation from June 1995
until May 1997; Vice President, Operations, of Tenet
Healthcare Corporation from August 1993 until May 1995;
and President/Chief Operating Officer and Vice President
of Operations of Healthcare International prior thereto.
</TABLE>
Executive Compensation
The information under this heading relates to the compensation paid by
Columbia/HCA to the Chief Executive Officer of Triad and the four individuals
who will be executive officers of Triad as of the distribution date and who
were, based on such compensation, the most highly compensated Triad executive
officers for the year ended December 31, 1998. All cash compensation was paid
by Columbia/HCA and all stock compensation was in the form of Columbia/HCA
Common Stock or options to purchase shares of Columbia/HCA Common Stock. The
principal positions listed in the table are those that will be held by such
persons as of the distribution date. For information regarding certain future
compensation arrangements which have been established for Triad as an
independent, publicly-traded company, see "--Triad Compensation Arrangements."
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<PAGE>
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 ($)(2) Bonus($)(3) ($)(4) Awards($)(5) (#)(6) ($)(7)
--------------------------- ---- -------- ----------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
James D. Shelton (1)......... 1998 $529,125 $ -- $ -- $121,388 -- $9,448
Chairman, President and 1997 $415,000 $41,500 $ -- $221,400 350,000 $7,629
Chief Executive Officer 1996 $350,000 $35,000 $ -- $187,000 80,500 $7,214
Michael J. Parsons........... 1998 $309,375 $ -- $ -- $ 36,559 -- $7,561
Senior Vice President, Chief 1997 $225,000 $56,250 $ -- $ 75,000 135,000 $7,629
Operating Officer and
Treasurer
Nicholas J. Marzocco......... 1998 $271,688 $ -- $34,448 $ 50,456 -- $7,224
Senior Vice President 1997 $207,000 $77,625 $31,158 $ 34,510 64,000 $7,004
Christopher A. Holden........ 1998 $243,750 $ -- $26,594 $ 63,378 -- $7,399
Senior Vice President 1997 $195,000 $42,840 $28,950 $ -- 60,000 $6,373
Donald P. Fay................ 1998 $240,300 $ -- $ -- $ -- 4,200 $8,348
Senior Vice President and 1997 $178,000 $62,300 $ -- $ -- 12,000 $8,438
General Counsel
</TABLE>
- --------
(1) Pursuant to SEC rules, includes information for 1996 because Mr. Shelton's
compensation for that year was previously included in public disclosure by
Columbia/HCA.
(2) 1998 salary amounts do not include the value of restricted stock awards
granted in lieu of a portion of annual salary.
(3) Reflects bonus earned during 1997. In some instances, all or a portion of
the bonus was paid during 1998. Each of the executive officers identified
in the table, except for Messrs. Holden and Fay, had the option to take all
or part of their bonus in shares of Columbia/HCA restricted stock at a 25%
discount from the fair market value at the time of grant, which is
reflected in the Restricted Stock Awards column. Columbia/HCA's cash bonus
program was discontinued in August 1997.
(4) Perquisites and other personal benefits did not exceed the lesser of either
$50,000 or 10% of the total of annual salary and bonus for any executive
officer identified in the table. Other compensation consists principally of
relocation expenses.
(5) 1998 amounts represent the fair market value on the date of grant of
Columbia/HCA shares issued in lieu of a portion of annual salary and shares
earned under Columbia/HCA's 1998 Performance Equity Incentive Plan and
granted in 1999. 1997 amounts represent 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. The value of the restricted stock awards was
determined by multiplying the fair market value of Columbia/HCA's Common
Stock on the date of grant by the number of shares awarded, and deducting
therefrom, the consideration paid for the shares. As of December 31, 1998,
Messrs. Shelton, Parsons, Marzocco and Holden held an aggregate of 13,478,
4,661, 1,841 and 827 shares of restricted stock, respectively. Pursuant to
SEC rules, after deducting the consideration paid therefore, the shares
held by Messrs. Marzocco and Holden had a net pre-tax value of $4,187 and
$984, respectively, and the shares held by Messrs. Shelton and Parsons were
without value. Dividends will be payable on shares of restricted stock if
and to the extent paid on Columbia/HCA's Common Stock generally, regardless
of whether or not the shares are vested.
(6) Options to acquire shares of Columbia/HCA Common Stock. Columbia/HCA
granted options at two separate times in 1997. The 1997 regular grant was
issued in February 1997. A special grant was issued in November 1997 to
help ensure the retention and motivation of key executives, including
Messrs. Shelton, Parsons, Marzocco and Holden, at the time Columbia/HCA was
reorganizing. On average, the size of the November 1997 grant is two times
a competitive median long-term grant for a two-year period (1998-99).
(7) Consists of Columbia/HCA contributions to Columbia/HCA's Savings and
Investment Plan, Money Purchase Plan and Stock Bonus Plan.
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<PAGE>
Columbia/HCA Option Grants In 1998
The following table provides information on grants of options to purchase
shares of Columbia/HCA Common Stock made during 1998 to the persons named in
the Triad Summary Compensation Table. For a discussion of the treatment of such
options and certain replacement grants of options to purchase shares of Triad
common stock, see "Arrangements Among Columbia/HCA, LifePoint and Triad
Relating to the Distribution--Benefits and Employment Matters Agreement--
Treatment of Columbia/HCA Common Stock Options."
Option/SAR Grants in Last Fiscal Year
<TABLE>
<CAPTION>
Percent of Potential Realizable
Total Value At Assumed Annual
Number of Options/SARs Rates of
Securities Granted to Stock Price Appreciation
Underlying Employees Exercise or for Option Term (4)
SARS/Options in Fiscal Base Price Expiration ------------------------
Name Granted (#) (1) Year ($/Sh)(2)(3) Date 5% ($) 10% ($)
- ---- --------------- ------------ ------------ ---------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
James D. Shelton........ -- -- -- -- -- --
Michael J. Parsons...... -- -- -- -- -- --
Nicholas J. Marzocco.... -- -- -- -- -- --
Christopher A. Holden... -- -- -- -- -- --
Donald P. Fay........... 4,200 0.06% $26.4688 3/5/08 $ 69,913.56 $ 177,174.69
</TABLE>
- --------
(1) Options to acquire Columbia/HCA Common Stock.
(2) The option exercise price may be paid in shares of Columbia/HCA Common
Stock owned by the executive officer, in cash, or a combination thereof.
(3) The ten-year options become exercisable with respect to 25% of the shares
covered thereby on the second, third, fourth and fifth anniversary dates
following the date of grant. The exercise price was equal to the fair
market value of the Columbia/HCA Common Stock on the date of the grant.
(4) The potential realizable value portion of the foregoing table illustrates
value that might be realized upon exercise of the options immediately prior
to the expiration of their term, assuming the specified compounded rates of
appreciation on the Columbia/HCA Common Stock over the term of the options.
These amounts do not take into account provisions of the options relating
to termination of the option following termination of employment, non-
transferability or vesting over periods of up to five years.
Aggregated Option/SAR Exercises In Last Fiscal Year and FY-End Option/SAR
Values
<TABLE>
<CAPTION>
Number of Securities Underlying Value of Unexercised In-the-
Unexercised Options/SARs at Money Options/SARs at Fiscal
Fiscal Year-End (#) Year-End ($)(1)
----------------------------------- ----------------------------------
Name Exercisable Unexercisable Exercisable Unexercisable
---- --------------- ---------------- -------------- ---------------
<S> <C> <C> <C> <C>
James D. Shelton........ 84,375 453,125 -- --
Michael J. Parsons...... 37,125 178,875 -- --
Nicholas J. Marzocco.... 0 75,250 -- --
Christopher A. Holden... 1,140 71,280 -- --
Donald P. Fay........... 27,750 39,450 -- --
</TABLE>
- --------
(1) The closing price for the Columbia/HCA Common Stock, as reported by the
NYSE, on December 31, 1998 was $24.75. Value is calculated on the basis of
the difference between the option exercise price and $24.75, multiplied by
the number of shares of Columbia/HCA Common Stock underlying the option.
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<PAGE>
Triad Compensation Arrangements
Benefits and Employment Matters Agreement
In connection with the distribution, Columbia/HCA, LifePoint and Triad will
enter into the Benefits and Employment Matters Agreement, which allocates
responsibilities for employee compensation, benefits, labor, benefit plan
administration and certain other employment matters on and after the
distribution date. Among other things, the Benefits and Employment Matters
Agreement generally provides for grants to Triad employees of options to
purchase shares of LifePoint Common Stock and Triad common stock in respect of
vested options to purchase Columbia/HCA Common Stock (other than incentive
stock options) and grants to purchase Triad stock in replacement of incentive
stock options covering Columbia/HCA Common Stock. In addition, the Benefits and
Employment Matters Agreement provides for the cancellation of non-vested
options to purchase Columbia/HCA Common Stock and the discretionary grant of
options to purchase Triad common stock. The Benefits and Employment Matters
Agreement also provides for the establishment of certain of the benefit plans
described in this section. See "Arrangements Among Columbia/HCA, LifePoint and
Triad Relating to the Distribution--Benefits and Employment Matters Agreement."
The Triad 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
126
<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
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<PAGE>
the continued employment of the participant for a specified time period
or on the attainment of specified business goals or performance criteria
established by the Triad Compensation Committee. The Triad Compensation
Committee may, in connection with an award of restricted stock, require
the payment of a specified purchase price. Subject to the transfer
restrictions and forfeiture restrictions relating to the restricted
stock award, the participant will have the rights of a stockholder of
Triad, including all voting and dividend rights, during the restriction
period, unless the Triad Compensation Committee determines otherwise at
the time of the grant. The maximum number of shares of common stock that
may be subject to a restricted stock award granted to a participant
during any one calendar year shall be shares.
. Dividend Equivalents. Dividend equivalent awards entitle the holder to a
right to receive cash payments determined by reference to dividends
declared on the Triad common stock during the term of the award, which
will not exceed 10 years from the date of grant. Dividend equivalent
awards may be granted on a stand-alone basis or in tandem with other
awards under the Triad Long-Term Incentive Plan. Dividend equivalent
awards are payable in cash or in shares of Triad common stock, as
determined by the Triad Compensation Committee.
Change-In-Control. The Triad Compensation Committee may, in an award
agreement, provide for the effect of a change-in-control (as defined in the
Triad Long-Term Incentive Plan) on the award. Such provisions may include the
acceleration of an award's vesting or extension of the time for exercise, the
elimination or modification of performance or other conditions, the cash
settlement of an award or other adjustments that the Triad Compensation
Committee considers appropriate.
Triad Executive Stock Purchase Plan
The Triad Executive Stock Purchase Plan will be adopted by Triad, and
approved by the Columbia/HCA Board of Directors (as the sole shareholder of
LifePoint common Stock), prior to the distribution date.
Reservation of Shares. Under the Triad Executive Stock Purchase Plan,
shares of Triad common stock will be reserved for issuance pursuant to all
rights granted under the plan. The shares of Triad common stock to be issued
will be made available from authorized but unissued shares of Triad common
stock or issued shares that have been reacquired by Triad. To the extent that
any right to purchase Triad common stock granted under the plan is forfeited,
cancelled, or otherwise terminated, the shares of Triad common stock covered
thereunder will no longer be charged against the maximum share limitation and
may again be made subject to rights granted under the plan.
Duration. The Triad Executive Stock Purchase Plan will have a term of 10
years, subject to earlier termination or amendment by the Triad Board of
Directors.
Administration. The Triad Executive Stock Purchase Plan will be administered
by the Compensation Committee of the Triad Board of Directors. Subject to
limitations to be set forth in the Triad Executive Stock Purchase Plan, the
Compensation Committee will have the authority to determine the persons to whom
rights are granted, the time at which rights will be granted, the number of
shares that may be purchased under a right, the date or period during which
such right may be exercised and all other terms of the right. With the consent
of the affected participant, the Compensation Committee will have the authority
to cancel and replace outstanding rights previously granted with new rights for
the same or a different number of shares and to amend the terms of any
outstanding right.
Eligibility. All executive employees of Triad and its subsidiaries will be
eligible to receive rights under the Triad Executive Stock Purchase Plan;
however, no person will be granted more than one right.
Initial Grants. The Triad Executive Stock Purchase Plan will specifically
provide for initial grants of rights to certain executive officers. These
rights are to be exercised within the 20 trading-day period beginning on the
distribution date.
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<PAGE>
Exercise of Rights. A right will be exercised by written notice to Triad on
or prior to a specified exercise date. Such written notice will be an agreement
by the participant to pay the full purchase price of the Triad common stock by
means of a purchase loan, except to the extent the notice is accompanied by a
cash payment.
Purchase Loan. Triad will loan each participant 100% of the purchase price of
Triad common stock acquired by the participant under a right, on a full
recourse basis, to the extent the participant does not elect to pay the
purchase price in cash. The loan will be secured by the shares purchased.
Interest will be paid upon the loan's maturity or upon the loan's prepayment
and will accrue at the applicable Federal rate, compounded semi-annually.
However, if the participant's employment terminates for cause or the
participant voluntarily terminates employment (other than for a good reason)
within three years of purchasing the shares, in addition to any amounts
otherwise due under the loan (including accrued interest), the participant will
be required to pay Triad the additional interest that would have been payable
in respect of the loan, if the regular interest rate on such purchase loan had
been the prime rate, and interest thereon at such rate to the actual date of
payment.
Loan Maturity and Repayment. A loan will mature upon the earlier of (i) the
fifth anniversary following the purchase of the shares, (ii) termination of the
participant's employment for any reason, or (iii) bankruptcy of the
participant. Within 120 days following the loan's maturity, the participant
will be required to pay Triad the full amount remaining due on the loan,
including all unpaid accrued interest.
Loan Prepayments. The loan may be prepaid, in whole or in part, at any time.
At any time following the earlier of (i) the second anniversary following the
purchase of the shares, or (ii) a change in control, such shares may, at the
participant's election, be sold to repay the loan. Any cash dividends received
on the purchased shares prior to payment of the full amount due on such loan,
net of assumed Federal, state and local income taxes, will be used to prepay
the loan.
Transfer Restrictions. A participant will not be entitled to delivery of the
stock certificates representing the shares purchased and none of such shares
may be sold, assigned, transferred, pledged, hypothecated or otherwise
encumbered or disposed of (except by will or the applicable laws of descent and
distribution) until the later of (i) full repayment of the purchase price and
accrued interest (and any additional amount that may be due under the Triad
Executive Stock Purchase Plan), and (ii) the earlier of (1) the third
anniversary of the date the shares were purchased, (2) the participant's
termination of employment or bankruptcy, and (3) a change in control. However,
such shares may be sold to pay the loan at maturity, or to voluntarily prepay
such loan at any time after the earlier of (i) the second anniversary of the
date the shares were purchased, or (ii) a change in control.
Death or Disability Benefit. In the event of termination of employment
because of death or disability, where the amount remaining due on the loan
(including accrued interest) is greater than the fair market value of the
shares purchased, as of the date of such death or disability, Triad will pay a
death or disability benefit equal to the amount of such payment remaining due
over the shares' fair market value as of the date of such death or disability.
The Triad Management Stock Purchase Plan
The Triad Management Stock Purchase Plan will be adopted by the Triad Board
of Directors in contemplation of the distribution.
Reservation of Shares. shares of Triad common stock may be issued
pursuant to all awards of restricted shares or in respect of restricted share
units under the Triad Management Stock Purchase Plan. The shares of Triad
common stock to be issued will be made available from authorized but unissued
shares of Triad common stock or issued shares that have been reacquired by
Triad. If any shares of Triad common stock that are the subject of an award are
forfeited, the related shares will no longer be charged against such maximum
share limitation and may again be made subject to awards. In the event of
certain corporate reorganizations, recapitalizations, or other specified
corporate transactions affecting Triad or the Triad common stock, such
substitution or adjustment shall be made in the aggregate number of Triad
common stock that may be
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distributed as restricted shares or in respect of restricted share units under
the Triad Management Stock Purchase Plan, and the number of restricted shares
and/or restricted share units outstanding under the Triad Management Stock
Purchase Plan, as may be determined to be appropriate by the Compensation
Committee in its sole discretion.
Duration. The Triad Management Stock Purchase Plan has a term of ten years,
subject to earlier termination or amendment by the Triad Board of Directors.
Administration. The Triad Management Stock Purchase Plan will be administered
by the Compensation Committee of the Triad Board of Directors. The Compensation
Committee shall have authority to administer the plan and to exercise all the
powers and authorities either specifically granted to it under, or necessary or
advisable in the administration of, the Triad Management Stock Purchase Plan,
including, without limitation, to interpret the plan, to prescribe, amend and
rescind rules and regulations relating to the plan, to determine the terms and
provisions of agreements (which need not be identical) entered into under the
plan and to make all other determinations deemed necessary or advisable for the
administration of the plan.
Eligibility. All Triad employees or groups of employees designated by the
Compensation Committee in its sole discretion are eligible to be granted
awards.
Restricted Share Awards. The Compensation Committee may make awards of
restricted shares. Under the Triad Management Stock Purchase Plan, a
participant may elect to reduce his base salary up to a maximum percentage
established by the Compensation Committee with respect to his employee
classification and, in lieu of salary, receive a number of restricted shares
equal to the amount of such salary reduction divided by a dollar amount equal
to 75% of the average market value (as defined in the plan) of Triad common
stock on the date on which such restricted share is granted. Restricted shares
will be granted on June 30 and December 31 of each calender year for which a
salary reduction election is in effect.
An award of restricted shares represents shares of Triad common stock that
are issued subject to such restrictions on transfer and incidents of ownership,
and such forfeiture conditions, as set forth in the plan and as the
Compensation Committee deems appropriate. Generally, the restricted period of
restricted shares granted under the Triad Management Stock Purchase Plan will
be three years from the date of grant. Subject to such transfer and forfeiture
restrictions, the participant shall have all rights of a stockholder with
respect to such restricted shares, including the right to receive dividends and
the right to vote such restricted shares.
Conversion of Restricted Shares into Restricted Share Units. If during the
restricted period the Compensation Committee determines that Triad may lose its
Federal income tax deduction in connection with the future lapsing of the
restrictions on restricted shares because of the deductibility cap of Section
162(m) of the Code, the Compensation Committee, in its discretion, may convert
some or all of the restricted shares into an equal number of share units, as to
which payment will be postponed until such time as Triad will not lose its
Federal income tax deduction for such payment under Section 162(m). Until
payment of the restricted share units is made, the participant will be credited
with dividend equivalents on the restricted share units, which dividend
equivalents will be converted into additional restricted share units.
Termination of Employment During the Restricted Period. If during the
restricted period the participant's employment is terminated by Triad either
(i) for cause (as defined) or (ii) for any reason by the participant, the
participant will forfeit his or her rights in the restricted shares, which
shall automatically be considered to be cancelled, and shall have only an
unfunded right to receive from Triad's general assets a cash payment equal to
the lesser of (i) the fair market value of such restricted shares on the
participant's last day of employment or (ii) the aggregate base salary foregone
by the participant as a condition of receiving the restricted shares. If a
participant's employment is terminated by Triad without cause during the
restricted period, the participant will forfeit his rights in the restricted
shares, which shall automatically be considered to be cancelled, and shall have
only an unfunded right to receive from Triad's general assets a cash payment
equal to either (i) the fair market value of such restricted shares on the
participant's last day of employment or (ii) the aggregate base salary foregone
by the participant as a condition of receiving the restricted shares, with the
Compensation Committee
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to have the sole discretion as to which of such amounts shall be payable. If
the employment of a participant holding restricted share units terminates
during the restricted period relating to the restricted share units, they shall
be treated in a manner substantially equivalent to the treatment of restricted
shares set forth above.
Upon a termination of employment which results from a participant's death or
disability (as defined), all restrictions then outstanding with respect to
restricted shares held by the participant automatically will expire. Upon the
retirement of a participant, the Compensation Committee shall determine, in its
discretion, whether all restrictions then outstanding with respect to
restricted shares held by the participant shall expire or whether the
participant shall instead be treated as though the participant's employment had
been terminated by Triad without cause, as described above.
Change-In-Control. Upon the occurrence of a change-in-control of Triad (as
defined), the restricted period automatically will terminate as to all
restricted shares awarded under the plan.
Triad Employee Stock Ownership Plan
Triad expects to establish for the benefit of its employees a leveraged
Employee Stock Ownership Plan (the "Triad ESOP") which, shortly after the
distribution, will purchase newly issued shares of Triad common stock in an
amount equal to 9.0% of the outstanding shares of Triad. The purchase price of
the shares will be financed by issuing a promissory note to Triad or by
borrowing from a third party lender (which loan will be guaranteed by Triad).
Initially, all such shares will be held in a suspense account under the Triad
ESOP. Triad will contribute annually to the Triad ESOP the funds required to
repay the ESOP loan. As the ESOP loan is repaid, shares will be released from
the suspense account and will be allocated to accounts established for
participants under the Triad ESOP. The loan will be repaid over a 10 year
period. Generally, each employee of Triad and its participating subsidiaries
will participate in the Triad ESOP as of the first January 1 after his or her
date of hire. Each participant in the Triad ESOP will be fully vested in his
accounts after completion of seven years of service with Triad (including any
pre-distribution service with Columbia/HCA and its affiliates).
Employment Contracts, Termination Of Employment Arrangements
and Change in Control Arrangements
Each of Messrs. Parsons, Marzocco, Holden and Fay will participate in an
enhanced severance plan through December 31, 1999. In the event that any of
Messrs. Parsons, Marzocco or Holden is terminated without cause during 1999, he
will receive continued payment of his then-current base salary and his target
bonus for twenty-four months after such termination. In the event that Mr. Fay
is terminated without cause during 1999, he will receive continued payment of
his then-current base salary and his target bonus for twelve months after such
termination. Severance policies for termination occurring subsequent to
December 31, 1999 have not yet been established.
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
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Triad directors and executive officers as of the distribution date as a group.
The ownership information presented below:
. is based on Columbia/HCA's knowledge of the beneficial ownership of
Columbia/HCA Stock as of , 1999;
. reflects the distribution ratio of shares of Triad common stock for
every shares of Columbia/HCA Stock outstanding on the record date;
. reflects the Employee Stock Ownership Plan Triad expects to establish in
accordance with the Benefits and Employment Matters Agreement; and
. assumes no change in beneficial ownership of Columbia/HCA Stock between
, 1999 and the record date.
<TABLE>
<CAPTION>
Number of
Name of Beneficial Owner Shares(1)(2) Percent
- ------------------------ ------------ -------
<S> <C> <C>
The Columbia/HCA Healthcare Corporation Stock Bonus Plan
(3)..................................................... 4.2%
The Columbia/HCA Healthcare Corporation Salary Deferral
Plan (3)................................................ 3.2%
The San Leandro Retirement and Savings Plan (3).......... *
Triad Hospitals, Inc. Employee Stock Ownership Plan......
FMR Corp., Edward C. Johnson 3d and Abigail P. Johnson
(4)..................................................... 8.3%
Wellington Management Company, LLP (5)................... 7.0%
James D. Shelton......................................... 8.3%
Thomas G. Loeffler, Esq. ................................
Thomas F. Frist III......................................
Marvin Runyon............................................
Michael J. Parsons....................................... *
Nicholas J. Marzocco..................................... *
Christopher A. Holden.................................... *
Donald P. Fay............................................ *
All Directors and Executive Officers as a Group (10
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
February 1, 1999, filed with the SEC by FMR Corp. in respect of its
beneficial ownership of Columbia/HCA Common Stock. The address of FMR Corp
is 82 Devonshire Street, Boston, Massachusetts 02109.
(5) The ownership given for Wellington Management Company, LLP is based on
information contained in the Schedule 13G dated December 31, 1998, filed
with the SEC by Wellington Management Company, LLP in respect of its
beneficial ownership of Columbia/HCA Common Stock. The address of
Wellington Management Company, LLP is 75 State Street, Boston,
Massachusetts 02109.
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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.
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.
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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 seven.
The Triad Certificate provides that any vacancies (including newly-created
directorships) will be filled only by the affirmative vote of a majority of the
remaining directors, whether or not they constitute a quorum of directors.
Directors appointed to fill vacancies created by the resignation or termination
of a director will serve the remainder of the term of the resigning or
terminated director. Accordingly, the Triad Board of Directors could prevent
any stockholder from enlarging the Triad Board of Directors and filling the new
directorships with such stockholder's own nominees.
Under the Delaware Law, unless provided in the certificate of incorporation,
directors serving on a classified board may be removed by the stockholders only
for cause. The Triad Certificate provides that directors may be removed only
for cause and only upon the affirmative vote of holders of at least 80% of the
voting power of all the then outstanding shares of stock entitled to vote
generally in the election of directors, voting as a single class (without a
separate vote of the holders of the Triad preferred stock unless required
pursuant to the terms of any series of Triad preferred stock).
Business Conducted at Meetings; Director Nominations. The By-Laws provide
that nominations of persons for election to the Triad Board and the proposal of
business to be transacted by the stockholders may be made at an annual meeting
of stockholders (a) pursuant to Triad's notice with respect to such meeting,
(b) by or at the direction of the Triad Board or (c) by any stockholder of
record of Triad who was a stockholder of record at the time of the giving of
the notice required by the By-Laws, described below, who is entitled to vote at
the meeting and who has complied with the notice procedures set forth in the
By-Laws. For nominations or other business to be properly brought before an
annual meeting by a stockholder, the stockholder must have given timely notice
thereof in writing to the Secretary of Triad, such business must be a proper
matter for stockholder action under the Delaware Law and, if the stockholder,
or the beneficial owner on whose behalf any such proposal or nomination is
made, solicits or participates in the solicitation of proxies in support of
such proposal or nomination, the stockholder must have timely indicated such
stockholder's, or such beneficial owner's, intention to do so. To be timely, a
stockholder's notice must be delivered to the Secretary at the
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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.
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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
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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).
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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.
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INDEX TO FINANCIAL STATEMENTS
LIFEPOINT HOSPITALS, INC. COMBINED FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Report of Independent Auditors................................ F-2
Combined Statements of Operations--for the years ended
December 31, 1998, 1997 and 1996............................. F-3
Combined Balance Sheets--December 31, 1998 and 1997........... F-4
Combined Statements of Equity--for the years ended December
31, 1998, 1997 and 1996...................................... F-5
Combined Statements of Cash Flows--for the years ended
December 31, 1998, 1997 and 1996............................. F-6
Notes to Combined Financial Statements........................ F-7 thru F-18
TRIAD HOSPITALS, INC. COMBINED FINANCIAL STATEMENTS
Report of Independent Auditors................................ F-19
Combined Statements of Operations--for the years ended
December 31, 1998, 1997 and 1996............................. F-20
Combined Balance Sheets--December 31, 1998 and 1997........... F-21
Combined Statements of Equity--for the years ended December
31, 1998, 1997 and 1996...................................... F-22
Combined Statements of Cash Flows--for the years ended
December 31, 1998, 1997 and 1996............................. F-23
Notes to Combined Financial Statements........................ F-24 thru F-35
</TABLE>
Explanatory Note: The historical combined financial statements presented
herein are those of the America Group and the Pacific Group of Columbia/HCA
Healthcare Corporation. Prior to the distribution date, the assets and
liabilities of the America Group will be contributed to LifePoint Hospitals,
Inc., a newly-formed Delaware holding company and the assets and liabilities of
the Pacific Group will be contributed to Triad Hospitals, Inc., a newly-formed
Delaware holding company. On the distribution date, the assets and liabilities
of the America Group will constitute substantially all of the assets and
liabilities of LifePoint Hospitals, Inc. and the assets and liabilities of the
Pacific Group will constitute substantially all of the assets and liabilities
of Triad Hospitals, Inc.
F-1
<PAGE>
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors and Stockholders
Columbia/HCA Healthcare Corporation
We have audited the accompanying combined balance sheets of the net assets
and operations to be contributed to LifePoint Hospitals, Inc. (see Note 1) as
of December 31, 1998 and 1997 and the related combined statements of
operations, equity and cash flows for each of the three years in the period
ended December 31, 1998. These combined financial statements are the
responsibility of the management of Columbia/HCA Healthcare Corporation (the
"Company"). Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the combined financial position of the net assets and
operations to be contributed to LifePoint Hospitals, Inc. (see Note 1) at
December 31, 1998 and 1997 and the combined results of their operations and
their cash flows for each of the three years in the period ended December 31,
1998 in conformity with generally accepted accounting principles.
As explained in Note 7 to the combined financial statements, effective
January 1, 1997, the Company changed its method of accounting for start-up
costs.
Ernst & Young LLP
Nashville, Tennessee
March 5, 1999
F-2
<PAGE>
LIFEPOINT HOSPITALS, INC.
COMBINED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
(Dollars in millions, except per share amounts)
<TABLE>
<CAPTION>
1998 1997 1996
------ ------ ------
<S> <C> <C> <C>
Revenues................................................ $498.4 $487.6 $464.0
Salaries and benefits................................... 220.8 196.6 175.2
Supplies................................................ 62.0 55.0 50.9
Other operating expenses................................ 117.2 119.5 99.3
Provision for doubtful accounts......................... 41.6 34.5 28.0
Depreciation and amortization........................... 28.3 27.4 23.5
Interest expense allocated from Columbia/HCA............ 19.1 15.4 14.1
Management fees allocated from Columbia/HCA............. 8.9 8.2 6.2
Impairment of long-lived assets......................... 26.1 -- --
------ ------ ------
524.0 456.6 397.2
------ ------ ------
Income (loss) from continuing operations before minority
interests and income taxes (benefit)................... (25.6) 31.0 66.8
Minority interests in earnings of consolidated
entities............................................... 1.9 2.2 1.2
------ ------ ------
Income (loss) from continuing operations before income
taxes (benefit)........................................ (27.5) 28.8 65.6
Provision for income taxes (benefit).................... (9.8) 11.7 26.3
------ ------ ------
Income (loss) from continuing operations ............... (17.7) 17.1 39.3
Discontinued operations:
Income (loss) from operations, net of income taxes
(benefit) of $(2.6), $(0.1) and $1.2 for the years
ended December 31, 1998, 1997 and 1996,
respectively......................................... (4.1) (.6) 1.9
Estimated loss on disposal, net of income tax benefit
of $2.4.............................................. -- (3.4) --
Cumulative effect of accounting change, net of income
tax benefit of $0.4.................................... -- (.6) --
------ ------ ------
Net income (loss).................................. $(21.8) $ 12.5 $ 41.2
====== ====== ======
Basic earnings (loss) per share (see Note 13):
Income (loss) from continuing operations.............. $(0.59) $ 0.57 $ 1.31
Income (loss) from discontinued operations............ (0.14) (0.14) 0.06
Cumulative effect of accounting change................ -- (0.02) --
------ ------ ------
Net income (loss).................................. $(0.73) $ 0.41 $ 1.37
====== ====== ======
Diluted earnings (loss) per share (see Note 13):
Income (loss) from continuing operations.............. $(0.59) $ 0.57 $ 1.30
Income (loss) from discontinued operations............ (0.14) (0.14) 0.06
Cumulative effect of accounting change................ -- (0.02) --
------ ------ ------
Net income (loss).................................. $(0.73) $ 0.41 $ 1.36
====== ====== ======
</TABLE>
The accompanying notes are an integral part of the combined financial
statements.
F-3
<PAGE>
LIFEPOINT HOSPITALS, INC.
COMBINED BALANCE SHEETS
DECEMBER 31, 1998 AND 1997
(Dollars in millions)
<TABLE>
<CAPTION>
Pro Forma
Liabilities
and Equity
1998
(See Note 2) 1998 1997
------------ ------ ------
(unaudited)
<S> <C> <C> <C>
ASSETS
------
Current assets:
Accounts receivable, less allowances for
doubtful accounts of
$48.3 and $37.5 at December 31, 1998 and 1997.. $ 36.4 $ 53.1
Inventories..................................... 14.0 13.0
Deferred taxes and other current assets......... 18.6 14.4
------ ------
69.0 80.5
Property and equipment, at cost:
Land............................................ 7.2 7.2
Buildings....................................... 203.1 222.9
Equipment....................................... 221.9 198.8
Construction in progress (estimated cost to
complete and equip after December 31, 1998--
$61.8)......................................... 10.4 10.7
------ ------
442.6 439.6
Accumulated depreciation.......................... (176.2) (154.2)
------ ------
266.4 285.4
Intangible assets, net of accumulated amortization
of $7.7 and $6.6 at
December 31, 1998 and 1997....................... 15.2 17.8
Other............................................. 4.4 14.2
------ ------
$355.0 $397.9
====== ======
LIABILITIES AND EQUITY
----------------------
Current liabilities:
Accounts payable................................ $ 15.5 $ 15.5 $ 15.3
Accrued salaries................................ 11.7 11.7 11.7
Other current liabilities....................... 14.9 14.9 12.4
------ ------ ------
42.1 42.1 39.4
Intercompany balances payable to Columbia/HCA .... -- 167.6 182.5
Long-term debt.................................... 260.3 .3 1.4
Deferred taxes and other liabilities.............. 21.4 21.4 28.9
Minority interests in equity of consolidated
entities......................................... 4.9 4.9 5.2
Equity, investments by Columbia/HCA............... 26.3 118.7 140.5
------ ------ ------
$355.0 $355.0 $397.9
====== ====== ======
</TABLE>
The accompanying notes are an integral part of the combined financial
statements.
F-4
<PAGE>
LIFEPOINT HOSPITALS, INC.
COMBINED STATEMENTS OF EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
(Dollars in millions)
<TABLE>
<CAPTION>
Pro Forma
1998
(See Note 2) 1998 1997 1996
------------ ------ ------ ------
(unaudited)
<S> <C> <C> <C> <C>
Equity at beginning of period................ $140.5 $140.5 $128.0 $ 86.8
Net income (loss).......................... (21.8) (21.8) 12.5 41.2
Recapitalization upon assumption of debt... (92.4) -- -- --
------ ------ ------ ------
Equity at end of period...................... $ 26.3 $118.7 $140.5 $128.0
====== ====== ====== ======
</TABLE>
The accompanying notes are an integral part of the combined financial
statements.
F-5
<PAGE>
LIFEPOINT HOSPITALS, INC.
COMBINED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
(Dollars in millions)
<TABLE>
<CAPTION>
1998 1997 1996
------ ----- -----
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss)...................................... $(21.8) $12.5 $41.2
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Provision for doubtful accounts...................... 41.6 34.5 28.0
Depreciation and amortization........................ 28.3 27.4 23.5
Deferred income taxes (benefit)...................... (12.4) 4.1 15.3
Impairment of long-lived assets...................... 26.1 -- --
Loss (income) from discontinued operations........... 4.1 4.0 (1.9)
Cumulative effect of accounting change............... -- .6 --
Increase (decrease) in cash from operating assets and
liabilities:
Accounts receivable................................ (21.3) (37.9) (46.4)
Inventories and other assets....................... .2 .1 (3.8)
Accounts payable and accrued expenses.............. .9 (.1) 7.2
Other................................................ (.4) .2 .7
------ ----- -----
Net cash provided by operating activities.......... 45.3 45.4 63.8
Cash flows from investing activities:
Purchase of property and equipment..................... (29.3) (51.8) (53.4)
Investments in and advances to affiliates.............. .1 (7.2) (2.8)
Other.................................................. (.1) 7.1 (2.4)
------ ----- -----
Net cash used in investing activities.............. (29.3) (51.9) (58.6)
Cash flows from financing activities:
Increase (decrease) in long-term debt, net............. (1.1) -- (.4)
Increase (decrease) in intercompany balances with
Columbia/HCA, net..................................... (14.9) 6.5 (4.8)
------ ----- -----
Net cash provided by (used in) financing
activities........................................ (16.0) 6.5 (5.2)
------ ----- -----
Change in cash and cash equivalents...................... $ -- $ -- $ --
====== ===== =====
Interest payments........................................ $ 19.1 $15.4 $14.1
Income tax payments (refunds), net....................... $ -- $ 4.7 $14.2
</TABLE>
The accompanying notes are an integral part of the combined financial
statements.
F-6
<PAGE>
LIFEPOINT HOSPITALS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS
NOTE 1--COLUMBIA/HCA'S PROPOSED SPIN-OFF OF AMERICA CORPORATION
In 1998, the Board of Directors of Columbia/HCA Healthcare Corporation
("Columbia/HCA" or the "Company") approved in principle the spin-off of its
operations comprising the America Group to its shareholders (the
"Distribution") as an independent, publicly-traded company. The America Group
and the independent, publicly-traded company to which its assets and
liabilities will be contributed are hereinafter referred to as "LifePoint
Hospitals, Inc." or LifePoint." The Distribution is subject to obtaining a tax
ruling by the Internal Revenue Service ("IRS") that would allow it to be tax-
free to Columbia/HCA and its shareholders, various regulatory approvals and
approval of a definitive plan by Columbia/HCA's Board of Directors. LifePoint
is comprised of 23 general, acute care hospitals and related health care
entities. The entities are located in non-urban areas in the states of
Alabama, Florida, Georgia, Kansas, Kentucky, Louisiana, Tennessee, Utah and
Wyoming. The accompanying financial statements, prepared on the pushed down
basis of the historical cost to Columbia/HCA, represent the combined financial
position, results of operations and cash flows of LifePoint.
In connection with the Distribution, all intercompany amounts payable by
LifePoint to Columbia/HCA will be eliminated, and LifePoint will assume
certain indebtedness from Columbia/HCA. In addition, LifePoint will enter into
various agreements with Columbia/HCA which are intended to facilitate orderly
changes for both companies in a way which would be minimally disruptive to
each entity.
The combined financial statements included herein may not necessarily be
indicative of the results of operations, financial position and cash flows of
LifePoint in the future or had it operated as a separate, independent company
during the periods presented. The combined financial statements included
herein do not reflect any changes that may occur in the financing and
operations of LifePoint as a result of the Distribution.
NOTE 2--ACCOUNTING POLICIES
Principles of Combination
The combined financial statements include the accounts of LifePoint and all
affiliated subsidiaries and entities controlled by LifePoint through
LifePoint's direct or indirect ownership of a majority voting interest or
exclusive rights granted to LifePoint by contract as the sole general partner
to manage and control the ordinary course of the affiliate's business.
Significant intercompany transactions within LifePoint have been eliminated.
Investments in entities which LifePoint does not control, but in which it has
a substantial ownership interest and can exercise significant influence, are
accounted for using the equity method.
The preparation of the combined financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the amounts reported in the financial statements
and accompanying notes. Actual results could differ from those estimates.
Equity
Equity represents the net investment in LifePoint by Columbia/HCA. It
includes common stock, additional paid-in-capital and net earnings.
F-7
<PAGE>
LIFEPOINT HOSPITALS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
NOTE 2--ACCOUNTING POLICIES (continued)
Revenues
LifePoint's health care facilities have entered into agreements with third-
party payers, including government programs and managed care health plans,
under which the facilities are paid based upon established charges, the cost of
providing services, predetermined rates per diagnosis, fixed per diem rates or
discounts from established charges.
Revenues are recorded at estimated amounts due from patients and third-party
payers for the health care services provided. Settlements under reimbursement
agreements with third-party payers are estimated and recorded in the period the
related services are rendered and are adjusted in future periods as final
settlements are determined. The net adjustments to estimated settlements
resulted in increases to revenues of $1.2 million, $3.3 million and $10.6
million for the years ended December 31, 1998, 1997 and 1996, respectively. In
association with the ongoing Federal investigation into certain of
Columbia/HCA's business practices, the applicable governmental agencies have
ceased the settlement of cost reports. Since the cost reports are not being
settled, the Company is not receiving updated information which has
historically been the basis used to adjust estimated settlement amounts. At
this time, the Company cannot predict when, or if, the historical cost report
settlement process will be resumed. Management believes that adequate
provisions have been made for adjustments that may result from final
determination of amounts earned under these programs. Columbia/HCA will retain
sole responsibility for, and be entitled to, any Medicare, Medicaid or cost-
based Blue Cross settlements relating to cost reporting periods ending on or
prior to the distribution date. The net settlement payable estimated as of
December 31, 1998 and included in accounts receivable in the accompanying
balance sheet approximated $14.5 million.
LifePoint provides care without charge to patients who are financially unable
to pay for the health care services they receive. Because LifePoint does not
pursue collection of amounts determined to qualify as charity care, they are
not reported in revenues.
Accounts Receivable
LifePoint receives payment for services rendered from federal and state
agencies (under the Medicare, Medicaid and CHAMPUS programs), managed care
health plans, commercial insurance companies, employers and patients. During
the years ended December 31, 1998, 1997 and 1996, approximately 37.8%, 39.4%
and 40.9%, respectively, of LifePoint's revenues related to patients
participating in the Medicare program. LifePoint recognizes that revenues and
receivables from government agencies are significant to its operations, but it
does not believe that there are significant credit risks associated with these
government agencies. LifePoint does not believe that there are any other
significant concentrations of revenues from any particular payer that would
subject it to any significant credit risks in the collection of its accounts
receivable.
Inventories
Inventories are stated at the lower of cost (first-in, first-out) or market.
Long-Lived Assets
(a) Property and Equipment
Property and equipment are stated at cost. Routine maintenance and repairs
are charged to expense as incurred. Expenditures that increase capacities or
extend useful lives are capitalized.
F-8
<PAGE>
LIFEPOINT HOSPITALS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
NOTE 2--ACCOUNTING POLICIES (continued)
Depreciation expense, computed using the straight-line method, was $27.1
million, $25.1 million and $21.9 million for the years ended December 31, 1998,
1997 and 1996, respectively. Buildings and improvements are depreciated over
estimated useful lives ranging generally from 10 to 40 years. Estimated useful
lives of equipment vary generally from 3 to 10 years.
(b) Intangible Assets
Intangible assets consist primarily of costs in excess of the fair value of
identifiable net assets of acquired entities and are amortized using the
straight-line method, generally over periods ranging from 30 to 40 years for
hospital acquisitions and periods ranging from 5 to 20 years for physician
practice and clinic acquisitions. Noncompete agreements and debt issuance costs
are amortized based upon the terms of the respective contracts or loans.
When events, circumstances and operating results indicate that the carrying
values of certain long-lived assets and the related identifiable intangible
assets might be impaired, LifePoint prepares projections of the undiscounted
future cash flows expected to result from the use of the assets and their
eventual disposition. If the projections indicate that the recorded amounts are
not expected to be recoverable, such amounts are reduced to estimated fair
value.
Income Taxes
Columbia/HCA files consolidated Federal and state income tax returns which
includes all of its eligible subsidiaries, including LifePoint. The provisions
for income taxes (benefits) in the combined statements of operations for all
periods presented have been computed on a separate return basis (i.e., assuming
LifePoint had not been included in a consolidated income tax return with
Columbia/HCA). All income tax payments are made by LifePoint through
Columbia/HCA.
Deferred tax assets and liabilities result principally from certain revenue
and expense items being recognized for tax purposes in years other than the
year in which they are reflected in the combined financial statements.
General and Professional Liability Risks
Columbia/HCA assumes the liability for all general and professional liability
claims incurred through the distribution date. Accordingly, no reserve for
professional and general liability risks is recorded in the accompanying
combined balance sheets. The cost of general and professional liability
coverage is allocated by Columbia/HCA's captive insurance company to LifePoint
based on actuarially determined estimates. LifePoint intends to continue the
general and professional liability coverage with Columbia/HCA under the same
general terms through December 31, 1999. The cost for the years ended
December 31, 1998, 1997 and 1996 was approximately $6.8 million, $6.1 million
and $5.6 million, respectively.
LifePoint participates in a self-insured program for workers' compensation
and health insurance administered by Columbia/HCA. Columbia/HCA will retain
sole responsibility for all workers' compensation and health claims incurred
prior to the distribution date. Accordingly, no reserve for workers'
compensation and health claims liability risks are recorded in the accompanying
combined balance sheets. The cost for these programs is based upon claims paid,
plus an actuarially determined amount for claims incurred but not reported. The
cost was approximately $5.6 million for each of the years ended December 31,
1998, 1997 and 1996.
Management Fees
Columbia/HCA incurs various corporate general and administrative expenses.
These corporate overhead expenses are allocated to LifePoint based on net
revenues. In the opinion of management, this allocation method is reasonable.
F-9
<PAGE>
LIFEPOINT HOSPITALS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
NOTE 2--ACCOUNTING POLICIES (continued)
The management fees allocated to LifePoint are less than management's
estimate of the general and administrative costs that would have been incurred
if LifePoint had been a separate, independent entity and had otherwise managed
comparable general and administrative functions. Based upon LifePoint's
management projections for 1999, if LifePoint had managed comparable general
and administrative functions, LifePoint would have incurred an additional $8.4
million of salaries and benefits and $3.6 million of other operating expenses
compared to the $8.9 million of management fees allocated from Columbia/HCA for
the year ended December 31, 1998. Subsequent to the Distribution, LifePoint
will be required to manage these functions and will be responsible for the
expenses associated with the management of a separate public corporation.
Pro Forma Data (unaudited)
The pro forma combined balance sheet and statement of equity as of December
31, 1998 includes adjustments to reflect the elimination of intercompany
balances payable to Columbia/HCA and the assumption of $260 million in debt
financing in connection with the Distribution. The debt financing, which is
currently being arranged for, is expected to consist of senior term loans and
subordinated notes.
Disclosures about Segments of an Enterprise
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 131, Disclosures about Segments of an
Enterprise and Related Information ("SFAS 131"). SFAS 131 establishes standards
for the way that public business enterprises report information about operating
segments in annual financial statements and requires that these enterprises
report selected information about operating segments in interim financial
reports. Management has determined that LifePoint does not have separately
reportable segments as defined under SFAS 131. Rather, LifePoint's facilities
are all similar in their business activities and the economic environments in
which they operate (i.e, non-urban markets). LifePoint intends to monitor its
facilities individually and to develop facility specific strategies. Assessment
of performance and corresponding management decisions will be based upon
individual facility results.
NOTE 3--COLUMBIA/HCA INVESTIGATIONS, LITIGATION AND INDEMNIFICATION RIGHTS
Columbia/HCA is currently the subject of several Federal investigations into
certain of its business practices, as well as governmental investigations by
various states. Columbia/HCA is cooperating in these investigations and
understands, through written notice and other means, that it is a target in
these investigations. Given the breadth of the ongoing investigations,
Columbia/HCA expects additional subpoenas and other investigative and
prosecutorial activity to occur in these and other jurisdictions in the future.
Columbia/HCA is a defendant in several qui tam actions brought by private
parties on behalf of the United States of America, which have been unsealed and
served on Columbia/HCA. The actions allege, in general, that Columbia/HCA and
certain subsidiaries and/or affiliated partnerships violated the False Claims
Act for improper claims submitted to the government for reimbursement. The
lawsuits seek damages of three times the amount of all Medicare or Medicaid
claims (involving false claims) presented by the defendants to the Federal
government, civil penalties of not less than $5,000 nor more than $10,000 for
each such Medicare or Medicaid claim, attorneys' fees and costs. The government
has intervened in two qui tam actions. Columbia/
HCA is aware of additional qui tam actions that remain under seal and believes
that there are other sealed qui tam cases of which it is unaware.
Columbia/HCA is a defendant in a number of other suits, which allege, in
general, improper and fraudulent billing, overcharging, coding and physician
referrals, as well as other violations of law. Certain of the suits have been
conditionally certified as class actions.
F-10
<PAGE>
LIFEPOINT HOSPITALS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
NOTE 3--COLUMBIA/HCA INVESTIGATIONS, LITIGATION AND INDEMNIFICATION RIGHTS
(Continued)
It is too early to predict the effect or outcome of any of the ongoing
investigations or qui tam and other actions, or whether any additional
investigations or litigation will be commenced. If Columbia/HCA is found to
have violated Federal or state laws relating to Medicare, Medicaid or similar
programs, Columbia/HCA could be subject to substantial monetary fines, civil
and criminal penalties, and exclusion from participation in the Medicare and
Medicaid programs. Similarly, the amounts claimed in the qui tam and other
actions may be substantial, and Columbia/HCA could be subject to substantial
costs resulting from an adverse outcome of one or more of such actions. Any
such sanctions or losses could have a material adverse effect on Columbia/HCA's
financial position and results of operations.
Columbia/HCA has agreed to indemnify LifePoint in respect of any losses which
it may incur as a result of the proceedings described above. Columbia/HCA has
also agreed to indemnify LifePoint in respect of any losses which it may incur
as a result of proceedings which may be commenced by government authorities or
by private parties in the future that arise from acts, practices or omissions
engaged in prior to the Distribution Date and relate to the proceedings
described above. If any of such indemnified matters were successfully asserted
against LifePoint, or any of its facilities, and Columbia/HCA failed to meet
its indemnification obligations, then such losses could have a material adverse
effect on the business, financial position, results of operations and prospects
of LifePoint. (See Note 11--Contingencies). Columbia/HCA will not indemnify
LifePoint for losses relating to any acts, practices and omissions engaged in
by LifePoint after the distribution date, whether or not LifePoint is
indemnified for similar acts, practices and omissions occurring prior to the
distribution date.
NOTE 4--INCOME TAXES
The provision for income taxes (benefit) for the years ended December 31,
1998, 1997 and 1996 consists of the following (dollars in millions):
<TABLE>
<CAPTION>
1998 1997 1996
----- ----- -----
<S> <C> <C> <C>
Current:
Federal................. $ 2.6 $ 6.5 $ 9.3
State................... -- 1.1 1.7
Deferred:
Federal................. (10.5) 3.6 12.9
State................... (1.9) 0.5 2.4
----- ----- -----
$(9.8) $11.7 $26.3
===== ===== =====
A reconciliation of the federal statutory rate to the effective income tax
rate for the years ended December 31, 1998, 1997 and 1996 follows:
<CAPTION>
1998 1997 1996
----- ----- -----
<S> <C> <C> <C>
Federal statutory rate.... 35.0% 35.0% 35.0%
State income taxes, net of
federal income tax bene-
fit...................... 3.9 4.1 4.0
Non-deductible intangible
assets................... (2.6) 1.1 0.7
Other items, net.......... (0.7) 0.5 0.4
----- ----- -----
Effective income tax
rate..................... 35.6% 40.7% 40.1%
===== ===== =====
</TABLE>
A summary of the items comprising the deferred tax assets and liabilities at
December 31 follows (dollars in millions):
F-11
<PAGE>
LIFEPOINT HOSPITALS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
NOTE 4--INCOME TAXES (Continued)
<TABLE>
<CAPTION>
1998 1997
------------------ ------------------
Assets Liabilities Assets Liabilities
------ ----------- ------ -----------
<S> <C> <C> <C> <C>
Depreciation and fixed asset basis dif-
ferences............................... $ -- $24.8 $ -- $32.4
Doubtful accounts....................... 11.4 -- 6.6 --
Compensation............................ 2.6 -- 2.6 --
Other................................... 4.5 0.6 4.5 0.6
----- ----- ----- -----
$18.5 $25.4 $13.7 $33.0
===== ===== ===== =====
</TABLE>
Current deferred income tax assets totaled $14.4 million and $9.5 million at
December 31, 1998 and 1997, respectively. Noncurrent deferred income tax
liabilities totaled $21.3 million and $28.8 million at December 31, 1998 and
1997, respectively.
Columbia/HCA and LifePoint will enter into a tax sharing and indemnification
agreement which will provide that Columbia/HCA will generally be responsible
for all taxes that are allocable to periods prior to the distribution date and
Columbia/HCA and LifePoint will each be responsible for its own tax liabilities
for periods after the distribution date.
The agreement will not have an impact on the realization of deferred tax
assets or the payment of deferred tax liabilities of LifePoint except to the
extent that the temporary differences give rise to such deferred tax assets and
liabilities as of the distribution date and are adjusted as a result of final
tax settlements after the distribution date. In the event of such adjustments,
the tax sharing and indemnification agreement will provide for certain payments
between Columbia/HCA and LifePoint as appropriate.
NOTE 5--IMPAIRMENT OF LONG-LIVED ASSETS
LifePoint adopted Statement of Financial Accounting Standards No. 121,
"Accounting for the Impairment of Long-Lived Assets and Long-Lived Assets to be
Disposed of" ("SFAS 121") during the first quarter of 1996. SFAS 121 addresses
accounting for the impairment of long-lived assets and long-lived assets to be
disposed of, certain identifiable intangibles and goodwill related to those
assets, and provides guidance for recognizing and measuring impairment losses.
The statement requires that the carrying amount of impaired assets be reduced
to fair value.
During the fourth quarter of 1998, LifePoint decided to sell three hospital
facilities that were identified as not compatible with LifePoint's operating
plans, based upon management's review of all facilities, and giving
consideration to current and expected market conditions and the current and
expected capital needs in each market. The carrying value of the long-lived
assets related to these hospital facilities of approximately $47.0 million was
reduced to fair value, based on estimates of selling values, for a total non-
cash charge of $24.8 million. LifePoint expects to complete the sales of these
facilities during 1999. For the years ended December 31, 1998, 1997 and 1996,
respectively, these facilities to be divested had net revenues of approximately
$48.0 million, $50.6 million and $42.1 million and incurred income (losses)
from continuing operations before income taxes (benefit) and the asset
impairment charge of approximately $(9.6) million, $(3.8) million and
$1.8 million.
LifePoint recorded, during the third quarter of 1998, an impairment loss of
approximately $1.3 million related to the write-off of intangibles and other
long-lived assets of certain physician practices where the recorded asset
values were not deemed to be fully recoverable based upon the operating results
trends and projected future cash flows. These assets are now recorded at
estimated fair value.
The impairment charges did not have a significant impact on LifePoint's cash
flows and are not expected to significantly impact cash flows for future
periods. As a result of the write-downs, depreciation and amortization expense
related to these assets will decrease in future periods. In the aggregate, the
net effect of the change in depreciation and amortization expense is not
expected to have a material effect on operating results for future periods.
F-12
<PAGE>
LIFEPOINT HOSPITALS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
NOTE 6--DISCONTINUED OPERATIONS
During the fourth quarter of 1998, Columbia/HCA and LifePoint completed the
divestiture of their home health businesses for proceeds of approximately $3.8
million which approximated the carrying value of the net assets of discontinued
operations, which amount was included in other (noncurrent) assets in the
accompanying balance sheet at December 31, 1997. Columbia/HCA and LifePoint
implemented plans to sell the home health businesses during the third quarter
of 1997. The combined financial statements reflect the results of operations
and net assets of the home health businesses as discontinued operations.
Revenues for the home health businesses disposed of were approximately $18.9
million, $55.3 million and $52.5 million for the years ended December 31, 1998,
1997 and 1996, respectively.
The after-tax loss incurred upon the divestiture of the home health
businesses of $3.4 million was recorded during the fourth quarter of 1997 and
is presented in the "Discontinued operations" section of the combined
statements of operations.
NOTE 7--ACCOUNTING CHANGE
During 1997, LifePoint changed its method of accounting for start-up costs.
The change involved expensing these costs as incurred, rather than capitalizing
and subsequently amortizing such costs. LifePoint believes the new method is
preferable due to certain changes in business strategy and reviews of emerging
accounting guidance on accounting for similar (i.e., start-up, software system
training and process reengineering) costs.
The change in accounting principle resulted in the write-off of the costs
capitalized as of January 1, 1997. The cumulative effect of the write-off,
which totals $0.6 million (net of tax benefit), has been expensed and reflected
in the statement of operations for the year ended December 31, 1997. Had the
new method been used in the past, the pro forma effect on prior years would
have primarily affected 1996 (such costs incurred for periods prior to 1996 are
considered immaterial to operations for those periods). The pro forma effect on
the years ended December 31, 1997 and 1996 follows (dollars in millions):
<TABLE>
<CAPTION>
1997 1996
------------------ ------------------
As As
Reported Pro Forma Reported Pro Forma
-------- --------- -------- ---------
<S> <C> <C> <C> <C>
Income from continuing operations.... $17.1 $17.1 $39.3 $38.7
Net income........................... $12.5 $13.1 $41.2 $40.6
</TABLE>
NOTE 8--LONG TERM DEBT AND INTERCOMPANY BALANCES PAYABLE TO COLUMBIA/HCA
Long-term debt consists of various notes payable to third parties with an
average life of 6 years and rates averaging 9%. Current portion of long-term
debt totaled $.3 million and $.2 million at December 31, 1998 and 1997,
respectively, and is included in other current liabilities on the combined
balance sheets.
Intercompany balances represent the net excess of funds transferred to or
paid on behalf of LifePoint over funds transferred to the centralized cash
management account of Columbia/HCA. Generally, this balance is increased by
cash transfers from and payments of debt made by Columbia/HCA, construction
project additions paid by Columbia/HCA, and certain fees and services provided
by Columbia/HCA, including information systems services and other operating
expenses, such as payroll, interest, insurance and income taxes. Generally, the
balance is decreased through daily cash deposits by LifePoint to the account.
LifePoint is charged interest on the intercompany balances at various rates
ranging from 6% to 10% and the interest computations are based
F-13
<PAGE>
LIFEPOINT HOSPITALS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
NOTE 8--LONG TERM DEBT AND INTERCOMPANY BALANCES PAYABLE TO COLUMBIA/HCA
(Continued)
on the outstanding balance at month end. The net intercompany balances were
$167.6 million and $182.5 million at December 31, 1998 and 1997, respectively.
Interest expense related to the net intercompany balances was $19.1 million,
$15.4 million and $14.1 million for the years ended December 31, 1998, 1997,
and 1996, respectively.
In connection with the Distribution, all intercompany amounts payable by
LifePoint to Columbia/HCA will be eliminated, and LifePoint will assume certain
indebtedness from Columbia/HCA.
NOTE 9--STOCK BENEFIT PLANS
LifePoint employees have participated in the Columbia/HCA Healthcare
Corporation 1992 Stock and Incentive Plan (the "1992 Plan"). Under the 1992
Plan, stock options are generally granted at no less than the market price on
the date of grant. Options are exercisable in whole or in part beginning two to
five years after the grant and ending ten years after the grant. The number of
options granted to LifePoint employees under Columbia/HCA's stock option plan
was approximately 185,000 options, 1,324,800 options, and 357,000 options,
during 1998, 1997 and 1996, respectively.
Immediately following the Distribution, nonvested Columbia/HCA stock options
held by LifePoint employees will be cancelled and LifePoint may, in its
discretion, grant stock option awards. The vested Columbia/HCA stock options
held by LifePoint employees will generally be converted into a combination of
LifePoint stock options, Columbia/HCA stock options and stock options of
Columbia/HCA's other spin-off company, Triad Hospitals, Inc., in a manner that
preserves the pre-spin-off intrinsic value and the pre-spin-off ratio of the
exercise prices to the underlying market value of the related common stock.
At December 31, 1998 there were approximately 2,527,300 Columbia/HCA stock
options held by LifePoint employees. That amount includes an aggregate of
approximately 1,937,800 unvested options that will be cancelled. LifePoint
cannot currently determine the number of shares of its common stock that will
be subject to any discretionary grants of options by LifePoint after the
Distribution.
The following table summarizes information regarding the options outstanding
at December 31, 1998:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
-------------------------------- --------------------
Weighted
Average Weighted Weighted
Number Remaining Average Number Average
Outstanding Contractual Exercise Exercisable Exercise
Range of Exercise Prices at 12/31/98 Life Price at 12/31/98 Price
- ------------------------ ----------- ----------- -------- ----------- --------
<S> <C> <C> <C> <C> <C>
$11.17 to $13.92......... 260,100 4 years $12.62 260,100 $12.62
0.40 to 25.75.......... 124,800 5 years 23.50 100,800 22.96
26.75 to 32.50.......... 268,100 6 years 27.97 131,900 27.98
33.67 to 37.67.......... 357,000 7 years 37.24 89,200 37.24
6.47 to 39.88..........1,509,800 9 years 30.93 -- --
0.14................ 7,500 15 years 0.14 7,500 0.14
--------- -------
2,527,300 589,500
========= =======
</TABLE>
LifePoint has adopted the disclosure provisions of Statement of Financial
Accounting Standards No. 123 ("SFAS 123"), Accounting for Stock-Based
Compensation, but continues to measure stock-based compensation cost in
accordance with Accounting Principles Board Opinion No. 25 and its related
interpretations. Accordingly, no compensation cost has been recognized for
LifePoint's stock benefit plans. If LifePoint had
F-14
<PAGE>
LIFEPOINT HOSPITALS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
NOTE 9--STOCK BENEFIT PLANS (Continued)
measured compensation cost for the Columbia/HCA stock options granted to its
employees during 1998, 1997 and 1996 under the fair value based method
prescribed by SFAS 123, the net income (loss) would have been changed to the
pro forma amounts set forth below (dollars in millions):
<TABLE>
<CAPTION>
1998 1997 1996
------ ----- ------
<S> <C> <C> <C>
Net income (loss):
Reported............................................. $(21.8) $12.5 $41.2
Pro forma............................................ $(22.7) $11.7 $40.9
Basic earnings (loss) per share:
As reported.......................................... ($0.73) $0.41 $ 1.37
Pro forma............................................ ($0.76) $0.39 $ 1.36
Diluted earnings (loss) per share:
As reported.......................................... ($0.73) $0.41 $ 1.36
Pro forma............................................ ($0.76) $0.39 $ 1.35
</TABLE>
The fair values of Columbia/HCA stock options granted to LifePoint employees
used to compute pro forma net income (loss) disclosures were estimated on the
date of grant using the Black-Scholes option-pricing model based on the
following weighted average assumptions used by Columbia/HCA:
<TABLE>
<CAPTION>
1998 1997 1996
------- ------- -------
<S> <C> <C> <C>
Risk free interest rate.............................. 4.74% 5.61% 5.81%
Expected life........................................ 6 years 6 years 6 years
Expected volatility.................................. 23.90% 23.90% 23.90%
Expected dividend yield.............................. .30% .23% .19%
</TABLE>
The weighted-average fair values of Columbia/HCA stock options granted to
LifePoint employees during the years ended 1998, 1997 and 1996 were $8.77,
$11.23 and $13.52 per option, respectively.
The pro forma amounts above are not necessarily representative of the effects
of stock-based awards on future pro forma net income because (1) future grants
of employee stock options by management may not be comparable to awards made to
employees while LifePoint was a part of Columbia/HCA, (2) the assumptions used
to compute the fair value of any stock option awards will be specific to
LifePoint and therefore may not be comparable to the Columbia/HCA assumptions
used and (3) they exclude the pro forma compensation expense related to
unvested stock options granted before 1996.
NOTE 10--RETIREMENT PLANS
LifePoint participates in Columbia/HCA's defined contribution retirement
plans, which cover substantially all employees. Benefits are determined
primarily as a percentage of a participant's earned income and are vested over
specific periods of employee service. Certain plans also require LifePoint to
make matching contributions at certain percentages. The cost of these plans was
$5.3 million, $5.9 million and $4.4 million during 1998, 1997 and 1996,
respectively. Amounts approximately equal to expense for these plans are funded
annually.
F-15
<PAGE>
LIFEPOINT HOSPITALS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
NOTE 11--CONTINGENCIES
Significant Legal Proceedings
Various lawsuits, claims and legal proceedings have been and are expected to
be instituted or asserted against Columbia/HCA and LifePoint, including those
relating to shareholder derivative and class action complaints; purported class
action lawsuits filed by patients and payers alleging, in general, improper and
fraudulent billing, coding and physician referrals, as well as other violations
of law; certain qui tam or "whistleblower" actions alleging, in general,
unlawful claims for reimbursement or unlawful payments to physicians for the
referral of patients, as well as other violations and litigation matters. While
the amounts claimed may be substantial, the ultimate liability cannot be
determined or reasonably estimated at this time due to the considerable
uncertainties
that exist. Therefore, it is possible that Columbia/HCA's and LifePoint's
results of operations, financial position and liquidity in a particular period
could be materially, adversely affected upon the resolution of certain of these
contingencies. (See Note 3--Columbia/HCA Investigations, Litigation and
Indemnification Rights, for a description of the ongoing government
investigations and Columbia/HCA's obligations to indemnify LifePoint with
respect to losses incurred by LifePoint arising from such governmental
investigations and related proceedings.)
General Liability Claims
LifePoint is subject to claims and suits arising in the ordinary course of
business, including claims for personal injuries or wrongful restriction of, or
interference with, physicians staff privileges. In certain of these actions
claimants may ask for punitive damages against LifePoint, which are usually not
covered by insurance. It is management's opinion that the ultimate resolution
of pending claims and legal proceedings will not have a material adverse effect
on LifePoint's results of operations or financial position.
Physician Commitments
LifePoint has committed to provide certain financial assistance pursuant to
recruiting agreements with various physicians practicing in the communities it
serves. In consideration for a physician relocating to one of its communities
and agreeing to engage in private practice for the benefit of the respective
community, LifePoint may loan certain amounts of money to a physician normally
over a period of one year to assist in establishing his or her practice.
Amounts committed to be advanced approximated $11.9 million at December 31,
1998. The actual amount of such commitments to be subsequently advanced to
physicians often depends upon the financial results of a physician's private
practice during the guaranteed period. Generally, amounts advanced under the
recruiting agreements may be forgiven prorata over a period of 48 months
contingent upon the physician continuing to practice in the respective
community. It is management's opinion that amounts actually advanced and not
repaid will not have a material adverse effect on LifePoint's results of
operations or financial position.
NOTE 12--OTHER CURRENT LIABILITIES AND ALLOWANCES FOR DOUBTFUL ACCOUNTS
A summary of other current liabilities as of December 31 follows (in
millions):
<TABLE>
<CAPTION>
1998 1997
----- -----
<S> <C> <C>
Employee benefit plans.......................................... $ 7.0 $ 7.0
Taxes other than income......................................... 3.6 3.2
Other........................................................... 4.3 2.2
----- -----
$14.9 $12.4
===== =====
</TABLE>
F-16
<PAGE>
LIFEPOINT HOSPITALS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
NOTE 12--OTHER CURRENT LIABILITIES AND ALLOWANCES FOR DOUBTFUL ACCOUNTS
(Continued)
A summary of activity in LifePoint's allowances for doubtful accounts follows
(in millions):
<TABLE>
<CAPTION>
Additions Accounts
Balances at Charged to Written off, Balance
Beginning Costs and Net of at end
of Period Expenses Recoveries of Period
----------- ---------- ------------ ---------
<S> <C> <C> <C> <C>
Allowances for doubtful ac-
counts:
Year ended December 31,
1996..................... $12.7 $28.0 $(11.2) $29.5
Year ended December 31,
1997..................... 29.5 34.5 (26.5) 37.5
Year ended December 31,
1998..................... 37.5 41.6 (30.8) 48.3
</TABLE>
NOTE 13--EARNINGS PER SHARE
LifePoint expects to issue 30,000,000 shares of LifePoint common stock on the
distribution date. Earnings per share information has been presented as if
30,000,000 shares had been outstanding for all periods presented.
The following table sets forth the computation of basic and diluted earnings
per share from continuing operations (dollars and shares in millions, except
per share amounts):
<TABLE>
<CAPTION>
1998 1997 1996
------ ----- -----
<S> <C> <C> <C>
Numerator (a):
Income (loss) from continuing operations................. $(17.7) $17.1 $39.3
Denominator:
Share reconciliation:
Shares used for basic earnings per share................. 30.0 30.0 30.0
Effect of dilutive securities:
Stock options and other.............................. -- 0.2 0.3
------ ----- -----
Shares used for diluted earnings per share............... 30.0 30.2 30.3
====== ===== =====
Earnings (loss) per share:
Basic earnings (loss) per share from continuing
operations.............................................. $(0.59) $0.57 $1.31
====== ===== =====
Diluted earnings (loss) per share from continuing
operations.............................................. $(0.59) $0.57 $1.30
====== ===== =====
</TABLE>
F-17
<PAGE>
LIFEPOINT HOSPITALS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
NOTE 14--UNAUDITED QUARTERLY FINANCIAL INFORMATION
The quarterly interim financial information shown below has been prepared by
the Company's management and is unaudited. It should be read in conjunction
with the audited combined financial statements appearing herein (dollars in
millions, except per share amounts).
<TABLE>
<CAPTION>
1998
--------------------------------
First Second Third Fourth
------ ------ ------ ------
<S> <C> <C> <C> <C>
Revenues.............................. $130.0 $124.4 $124.7 $119.3
Net income (loss)..................... $ 1.6 $ 1.5 $ (2.2)(a) $(22.7)(b)
Basic and diluted earnings (loss) per
share (see Note 13).................. $ .05 $ .05 $ (.07)(a) $ (.76)(b)
<CAPTION>
1997
--------------------------------
First Second Third Fourth
------ ------ ------ ------
<S> <C> <C> <C> <C>
Revenues.............................. $130.7 $128.5 $116.1 $112.3
Net income (loss):
Income (loss) before accounting
change............................. $ 15.3 $ 13.2 $ 0.2 $(15.6)
Cumulative effect of accounting
change............................. (0.6) -- -- --
------ ------ ------ ------
Net income (loss)................. $ 14.7 $ 13.2 $ 0.2 $(15.6)
====== ====== ====== ======
Basic and diluted earnings (loss) per
share (see Note 13):
Income (loss) before accounting
change............................. $ .51 $ .44 $ -- $ (.52)
Cumulative effect of accounting
change............................. (.02) -- -- --
------ ------ ------ ------
Net income (loss)................. $ .49 $ .44 $ -- $ (.52)
====== ====== ====== ======
</TABLE>
- --------
(a) During the third quarter of 1998, LifePoint recorded a $1.3 million pre-
tax charge ($0.8 million after-tax) related to the impairment of certain
long-lived assets. See Note 5--Impairment of Long-Lived Assets).
(b) During the fourth quarter of 1998, LifePoint recorded a $24.8 million pre-
tax charge ($15.1 million after-tax) related to the impairment of certain
long-lived assets. See Note 5--Impairment of Long-Lived Assets).
F-18
<PAGE>
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors and Stockholders
Columbia/HCA Healthcare Corporation
We have audited the accompanying combined balance sheets of the net assets
and operations to be contributed to Triad Hospitals, Inc. (see Note 1) as of
December 31, 1998 and 1997 and the related combined statements of operations,
equity and cash flows for each of the three years in the period ended December
31, 1998. These combined financial statements are the responsibility of
management of Columbia/HCA Healthcare Corporation (the "Company"). Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the combined financial position of the net assets and
operations to be contributed to Triad Hospitals, Inc. (see Note 1) at December
31, 1998 and 1997 and the combined results of their operations and their cash
flows for each of the three years in the period ended December 31, 1998 in
conformity with generally accepted accounting principles.
As explained in Note 7 to the combined financial statements, effective
January 1, 1997, the Company changed its method of accounting for start-up
costs.
Ernst & Young LLP
Nashville, Tennessee
February 26, 1999
F-19
<PAGE>
TRIAD HOSPITALS, INC.
COMBINED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
(Dollars in millions, except per share amounts)
<TABLE>
<CAPTION>
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Revenues.......................................... $1,588.7 $1,609.3 $1,600.5
Salaries and benefits............................. 700.5 666.8 628.1
Supplies.......................................... 241.6 232.8 221.9
Other operating expenses.......................... 359.2 383.4 349.5
Provision for doubtful accounts................... 138.4 138.5 106.5
Depreciation and amortization..................... 109.6 102.9 94.5
Interest expense allocated from Columbia/HCA...... 68.9 60.5 52.0
Management fees allocated from Columbia/HCA....... 29.3 25.4 20.7
Impairment of long-lived assets................... 55.1 13.7 --
-------- -------- --------
1,702.6 1,624.0 1,473.2
-------- -------- --------
Income (loss) from continuing operations before
minority interests and
income taxes..................................... (113.9) (14.7) 127.3
Minority interests in earnings of consolidated
entities......................................... 11.0 11.5 10.8
-------- -------- --------
Income (loss) from continuing operations before
income taxes (benefit)........................... (124.9) (26.2) 116.5
Provision for income taxes (benefit).............. (39.4) (7.2) 48.2
-------- -------- --------
Income (loss) from continuing operations.......... (85.5) (19.0) 68.3
Discontinued operations:
Income (loss) from operations, net of income
taxes (benefit) of $(0.7), $3.2 and $4.1 for
the years ended December 31, 1998, 1997 and
1996, respectively............................. (1.6) 4.9 6.4
Estimated loss on disposal, net of income tax
benefit of $1.9................................ -- (2.9) --
Cumulative effect of accounting change, net of
income tax benefit of $1.8....................... -- (2.8) --
-------- -------- --------
Net income (loss)............................. $ (87.1) $ (19.8) $ 74.7
======== ======== ========
Basic earnings (loss) per share (see Note 13):
Income (loss) from continuing operations........ $ (2.85) $ (0.63) $ 2.28
Income (loss) from discontinued operations...... (0.05) 0.06 0.21
Cumulative effect of accounting change.......... -- (0.09) --
-------- -------- --------
Net income (loss)............................. $ (2.90) $ (0.66) $ 2.49
======== ======== ========
Diluted earnings (loss) per share (see Note 13):
Income (loss) from continuing operations........ $ (2.85) $ (0.63) $ 2.26
Income (loss) from discontinued operations...... (0.05) 0.06 0.21
Cumulative effect of accounting change.......... -- (0.09) --
-------- -------- --------
Net income (loss)............................. $ (2.90) $ (0.66) $ 2.47
======== ======== ========
</TABLE>
The accompanying notes are an integral part of the combined financial
statements.
F-20
<PAGE>
TRIAD HOSPITALS, INC.
COMBINED BALANCE SHEETS
DECEMBER 31, 1998 AND 1997
(Dollars in millions)
<TABLE>
<CAPTION>
Pro Forma
Liabilities
and Equity
1998
(See Note 2) 1998 1997
------------ -------- --------
(unaudited)
ASSETS
------
<S> <C> <C> <C>
Current assets:
Accounts receivable, less allowances for
doubtful accounts of $155.9 and $136.9 at
December 31, 1998 and 1997................. $ 199.3 $ 191.8
Inventories................................. 44.8 43.2
Income taxes................................ 37.9 31.9
Other....................................... 23.9 23.3
-------- --------
305.9 290.2
Property and equipment, at cost:
Land........................................ 82.0 81.1
Buildings................................... 604.9 639.4
Equipment................................... 712.0 655.5
Construction in progress (estimated cost to
complete and equip after
December 31, 1998--$107.8)................. 63.7 46.9
-------- --------
1,462.6 1,422.9
Accumulated depreciation...................... (703.1) (624.2)
-------- --------
759.5 798.7
Intangible assets, net of accumulated
amortization of $50.2 and $40.5 at
December 31, 1998 and 1997................... 272.9 279.9
Investment in equity of affiliates............ 24.3 21.6
Other......................................... 8.7 20.1
-------- --------
$1,371.3 $1,410.5
======== ========
<CAPTION>
LIABILITIES AND EQUITY
----------------------
<S> <C> <C> <C>
Current liabilities:
Accounts payable............................ $ 47.5 $ 47.5 $ 62.6
Accrued salaries............................ 34.8 34.8 38.1
Other current liabilities................... 38.7 38.7 39.2
-------- -------- --------
121.0 121.0 139.9
Intercompany balances payable to
Columbia/HCA................................. -- 613.7 525.0
Long-term debt................................ 715.0 13.4 14.4
Deferred taxes and other liabilities.......... 62.5 62.5 81.3
Minority interests in equity of consolidated
entities..................................... 60.0 60.0 62.1
Equity, investments by Columbia/HCA........... 412.8 500.7 587.8
-------- -------- --------
$1,371.3 $1,371.3 $1,410.5
======== ======== ========
</TABLE>
The accompanying notes are an integral part of the combined financial
statements.
F-21
<PAGE>
TRIAD HOSPITALS, INC.
COMBINED STATEMENTS OF EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
(Dollars in millions)
<TABLE>
<CAPTION>
Pro Forma
1998
(see Note 2) 1998 1997 1996
------------ ------ ------ ------
(unaudited)
<S> <C> <C> <C> <C>
Equity at beginning of period.............. $587.8 $587.8 $607.6 $532.9
Net income (loss)........................ (87.1) (87.1) (19.8) 74.7
Recapitalization upon assumption of
debt.................................... (87.9) -- --
------ ------ ------ ------
Equity at end of period.................... $412.8 $500.7 $587.8 $607.6
====== ====== ====== ======
</TABLE>
The accompanying notes are an integral part of the combined financial
statements.
F-22
<PAGE>
TRIAD HOSPITALS, INC.
COMBINED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
(Dollars in millions)
<TABLE>
<CAPTION>
1998 1997 1996
------- ------- -------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss)................................. $ (87.1) $ (19.8) $ 74.7
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Provision for doubtful accounts................. 138.4 138.5 106.5
Depreciation and amortization................... 109.6 102.9 94.5
Deferred income taxes (benefit)................. (24.6) (10.8) 0.8
Impairment of long-lived assets................. 55.1 13.7 --
Loss (income) from discontinued operations...... 1.6 (2.0) (6.4)
Cumulative effect of accounting change.......... -- 2.8 --
Increase (decrease) in cash from operating
assets and liabilities:
Accounts receivable........................... (145.9) (115.3) (135.0)
Inventories and other assets.................. (2.1) (1.6) 3.4
Accounts payable and other current
liabilities.................................. (18.9) (6.8) 19.0
Other........................................... (2.2) (1.3) 7.8
------- ------- -------
Net cash provided by operating activities..... 23.9 100.3 165.3
------- ------- -------
Cash flows from investing activities:
Purchase of property and equipment................ (114.9) (120.1) (94.4)
Investment in and advances to affiliates.......... (2.7) (2.5) (19.1)
Other............................................. 5.9 8.1 2.5
------- ------- -------
Net cash used in investing activities........... (111.7) (114.5) (111.0)
------- ------- -------
Cash flows from financing activities:
Decrease in long-term debt, net................... (0.9) (1.3) (11.5)
Increase (decrease) in intercompany balances with
Columbia/HCA, net................................ 88.7 15.5 (42.8)
------- ------- -------
Net cash provided by (used in) financing
activities..................................... 87.8 14.2 (54.3)
------- ------- -------
Change in cash and cash equivalents................. $ -- $ -- $ --
======= ======= =======
Interest payments................................... $ 69.4 $ 61.1 $ 52.2
Income tax payments (refunds), net.................. $ (15.9) $ 3.6 $ 46.6
</TABLE>
The accompanying notes are an integral part of the combined financial
statements.
F-23
<PAGE>
TRIAD HOSPITALS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS
NOTE 1--COLUMBIA/HCA'S PROPOSED SPIN-OFF OF PACIFIC CORPORATION
In 1998, the Board of Directors of Columbia/HCA Healthcare Corporation
("Columbia/HCA") approved in principle the spin-off of its operations
comprising the Pacific Group to its shareholders (the "Distribution") as an
independent, publicly-traded company. The Pacific Group and the independent,
publicly-traded company to which its assets and liabilities will be contributed
are hereinafter referred to as "Triad Hospitals, Inc." or "Triad." The
Distribution is subject to obtaining a tax ruling by the Internal Revenue
Service ("IRS") that would allow it to be tax-free to Columbia/HCA and its
shareholders, various regulatory approvals and approval of a definitive plan by
Columbia/HCA's Board of Directors. Triad is comprised of 39 hospitals
(including two facilities that are being leased from Triad and an investment in
one hospital that is accounted for using the equity method), 17 free-standing
surgery centers (including three surgery centers that are being leased from
Triad) and related health care entities located in eleven western, southwestern
and southeastern states. The accompanying financial statements, prepared on the
pushed down basis of the historical cost to Columbia/HCA, represent the
combined financial position, results of operations and cash flows of Triad.
In connection with the Distribution, all intercompany amounts payable by
Triad to Columbia/HCA will be eliminated, and Triad will assume certain
indebtedness from Columbia/HCA. In addition, Triad will enter into various
agreements with Columbia/HCA which are intended to facilitate orderly changes
for both companies in a way which will be minimally disruptive to each entity.
The combined financial statements included herein may not necessarily be
indicative of the results of operations, financial position and cash flows of
Triad in the future or had it operated as a separate, independent company
during the periods presented. The combined financial statements included herein
do not reflect any changes that may occur in the financing and operations of
Triad as a result of the Distribution.
NOTE 2--ACCOUNTING POLICIES
Principles of Combination
The combined financial statements include the accounts of Triad and all
affiliated subsidiaries and entities controlled by Triad through Triad's direct
or indirect ownership of a majority voting interest. Significant intercompany
transactions within Triad have been eliminated. Investments in entities which
Triad does not control, but in which it has a substantial ownership interest
and can exercise significant influence, are accounted for using the equity
method.
The preparation of the combined financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the amounts reported in the financial statements
and accompanying notes. Actual results could differ from those estimates.
Equity
Equity represents the net investment in Triad by Columbia/HCA. It includes
common stock, additional paid-in-capital and net earnings.
Revenues
Triad's health care facilities have entered into agreements with third-party
payers, including government programs and managed care health plans, under
which the facilities are paid based upon established charges, the cost of
providing services, predetermined rates per diagnosis, fixed per diem rates or
discounts from established charges.
F-24
<PAGE>
TRIAD HOSPITALS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
NOTE 2--ACCOUNTING POLICIES (Continued)
Revenues are recorded at estimated amounts due from patients and third-party
payers for the health care services provided. Settlements under reimbursement
agreements with third-party payers are estimated and recorded in the period the
related services are rendered and are adjusted in future periods as final
settlements are determined. The net adjustments to estimated settlements
resulted in increases to revenues of $3.0 million and $32.4 million for the
years ended December 31, 1998 and 1996, respectively (adjustments for 1997
netted to zero). In association with the ongoing Federal investigations into
certain of Columbia/HCA's business practices, the applicable governmental
agencies have ceased the settlement of cost reports. Since the cost reports are
not being settled, the Company is not receiving updated information which has
historically been the basis used to adjust estimated settlement amounts. At
this time, the Company cannot predict when, or if, the historical cost report
settlement process will be resumed. Management believes that adequate
provisions have been made for adjustments that may result from final
determination of amounts earned under these programs. Columbia/HCA will retain
sole responsibility for, and be entitled to, any Medicare, Medicaid or cost-
based Blue Cross settlements relating to cost reporting periods ending on or
prior to the Distribution Date. The net settlement payable estimated as of
December 31, 1998 and included in accounts receivable in the accompanying
balance sheet approximated $38.3 million.
Triad provides care without charge to patients who are financially unable to
pay for the health care services they receive. Because Triad does not pursue
collection of amounts determined to qualify as charity care, they are not
reported in revenues.
Accounts Receivable
Triad receives payment for services rendered from federal and state agencies
(under the Medicare, Medicaid and CHAMPUS programs), managed care health plans,
commercial insurance companies, employers and patients. During the years ended
December 31, 1998, 1997 and 1996, approximately 34.6%, 35.4% and 36.5%,
respectively, of Triad's revenues related to patients participating in the
Medicare program. Triad recognizes that revenues and receivables from
government agencies are significant to its operations, but it does not believe
that there are significant credit risks associated with these government
agencies. Triad does not believe that there are any other significant
concentrations of revenues from any particular payer that would subject it to
any significant credit risks in the collection of its accounts receivable.
Inventories
Inventories are stated at the lower of cost (first-in, first-out) or market.
Long-Lived Assets
(a) Property and Equipment
Property and equipment are stated at cost. Routine maintenance and repairs
are charged to expense as incurred. Expenditures that increase capacities or
extend useful lives are capitalized.
Depreciation expense, computed using the straight-line method, was $99.0
million, $90.8 million and $83.2 million for the years ended December 31, 1998,
1997 and 1996, respectively. Buildings and improvements are depreciated over
estimated useful lives ranging generally from 10 to 40 years. Estimated useful
lives of equipment vary generally from 3 to 10 years.
F-25
<PAGE>
TRIAD HOSPITALS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
NOTE 2--ACCOUNTING POLICIES (Continued)
(b) Intangible Assets
Intangible assets consist primarily of costs in excess of the fair value of
identifiable net assets of acquired entities and are amortized using the
straight-line method, generally over periods ranging from 30 to 40 years for
hospital acquisitions and periods ranging from 5 to 20 years for physician
practice and clinic acquisitions. Noncompete agreements and debt issuance costs
are amortized based upon the terms of the respective contracts or loans.
When events, circumstances and operating results indicate that the carrying
values of certain long-lived assets and the related identifiable intangible
assets might be impaired, Triad prepares projections of the undiscounted future
cash flows expected to result from the use of the assets and their eventual
disposition. If the projections indicate that the recorded amounts are not
expected to be recoverable, such amounts are reduced to estimated fair value.
Income Taxes
Columbia/HCA files consolidated federal and state income tax returns which
includes all of its eligible subsidiaries, including Triad. The provisions for
income taxes (benefits) in the combined statements of operations for all
periods presented have been computed on a separate return basis (i.e., assuming
Triad had not been included in a consolidated income tax return with
Columbia/HCA). All income tax payments are made by Triad through Columbia/HCA.
Deferred tax assets and liabilities result principally from certain revenue
and expense items being recognized for tax purposes in years other than the
year in which they are reflected in the combined financial statements.
General and Professional Liability Risks
Columbia/HCA assumes the liability for all general and professional liability
claims incurred through the distribution date. Accordingly, no reserve for
professional and general liability risks is recorded in the accompanying
combined balance sheets. The cost of general and professional liability
coverage is allocated by Columbia/HCA's captive insurance company to Triad
based on actuarially determined estimates. Triad intends to continue the
general and professional coverage with Columbia/HCA under the same general
terms, through December 31, 1999. The cost for the years ended December 31,
1998, 1997 and 1996 was approximately $27.0 million, $22.9 million and $21.4
million, respectively.
Triad participates in a self-insured program for workers' compensation and
health insurance administered by Columbia/HCA. Columbia/HCA will retain sole
responsibility for all workers' compensation and health claims incurred prior
to the distribution date. Accordingly, no reserves for workers' compensation
and health claims liability risks are recorded in the accompanying combined
balance sheets. The cost for these programs is based upon claims paid, plus an
actuarially determined amount for claims incurred but not reported. The cost
for the years ended December 31, 1998, 1997 and 1996 was approximately $8.1
million, $8.1 million and $7.6 million, respectively.
Management Fees
Columbia/HCA incurs various corporate general and administrative expenses.
These corporate overhead expenses are allocated to Triad based on net revenues.
In the opinion of Columbia/HCA management, this allocation method is
reasonable.
F-26
<PAGE>
TRIAD HOSPITALS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
NOTE 2--ACCOUNTING POLICIES (Continued)
The management fees allocated to Triad are greater than management's estimate
of the general and administrative costs that would have been incurred if Triad
had been a separate, independent entity and had otherwise managed comparable
general and administrative functions. Based upon Triad management's projections
for 1999, if Triad had managed comparable general and administrative functions,
Triad would have incurred an additional $5.4 million of salaries and benefits,
$0.5 million of supplies and $10.1 million of other operating expenses compared
to the $29.3 million of management fees allocated from Columbia/HCA for the
year ended December 31, 1998. Subsequent to the Distribution, Triad will be
required to manage these functions and will be responsible for the expenses
associated with the management of a separate public corporation.
Pro Forma Data (unaudited)
The pro forma combined balance sheet and statement of equity as of December
31, 1998 includes adjustments to reflect the elimination of intercompany
balances payable to Columbia/HCA and the assumption of $715 million in debt
financing in connection with the distribution. The debt financing, which is
currently being arranged for, is expected to consist of senior term loans and
subordinated notes.
Disclosures about Segments of an Enterprise
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 131, Disclosures about Segments of an
Enterprise and Related Information ("SFAS 131").
SFAS 131 establishes standards for the way that public business enterprises
report information about operating segments in annual financial statements and
requires that those enterprises report selected information about operating
segments in interim financial reports. It also establishes standards for
related disclosures about products and services, geographic areas and major
customers. Triad will adopt the new requirements in the annual report following
the Distribution as identification of the reportable operating segments has not
been determined by management at this time.
Disclosures of Derivative Instruments
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, Accounting for Derivative Instruments
and Hedging Activities, which is required to be adopted in years beginning
after June 15, 1999. Because of Triad's minimal use of derivatives, management
does not anticipate that the adoption of the new statement will have a
significant effect on earnings or the financial position of Triad.
NOTE 3--COLUMBIA/HCA INVESTIGATIONS, LITIGATION AND INDEMNIFICATION RIGHTS
Columbia/HCA is currently the subject of several Federal investigations into
certain of its business practices, as well as governmental investigations by
various states. Columbia/HCA is cooperating in these investigations and
understands, through written notice and other means, that it is a target in
these investigations. Given the breadth of the ongoing investigations,
Columbia/HCA expects additional subpoenas and other investigative and
prosecutorial activity to occur in these and other jurisdictions in the future.
Columbia/HCA is a defendant in several qui tam actions brought by private
parties on behalf of the United States of America, which have been unsealed and
served on Columbia/HCA. The actions allege, in general, that Columbia/HCA and
certain subsidiaries and/or affiliated partnerships violated the False Claims
Act for improper claims submitted to the government for reimbursement. The
lawsuits seek damages of three times the amount of all Medicare or Medicaid
claims (involving false claims) presented by the defendants to the Federal
F-27
<PAGE>
TRIAD HOSPITALS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
NOTE 3--COLUMBIA/HCA INVESTIGATIONS, LITIGATION AND INDEMNIFICATION RIGHTS
(Continued)
government, civil penalties of not less than $5,000 nor more than $10,000 for
each such Medicare or Medicaid claim, attorneys' fees and costs. The government
has intervened in two qui tam actions. Columbia/HCA is aware of additional qui
tam actions that remain under seal and believes that there are other sealed qui
tam cases of which it is unaware.
Columbia/HCA is a defendant in a number of other suits, which allege, in
general, improper and fraudulent billing, overcharging, coding and physician
referrals, as well as other violations of law. Certain of the suits have been
conditionally certified as class actions.
It is too early to predict the effect or outcome of any of the ongoing
investigations or qui tam and other actions, or whether any additional
investigations or litigation will be commenced. If Columbia/HCA is found to
have violated Federal or state laws relating to Medicare, Medicaid or similar
programs, Columbia/HCA could be subject to substantial monetary fines, civil
and criminal penalties, and exclusion from participation in the Medicare and
Medicaid programs. Similarly, the amounts claimed in the qui tam and other
actions may be substantial, and Columbia/HCA could be subject to substantial
costs resulting from an adverse outcome of one or more of such actions. Any
such sanctions or losses could have a material adverse effect on Columbia/HCA's
financial position and results of operations.
Columbia/HCA has agreed to indemnify Triad in respect of any losses which it
may incur as a result of the proceedings described above. Columbia/HCA has also
agreed to indemnify Triad in respect of any losses which it may incur as a
result of proceedings which may be commenced by government authorities or by
private parties in the future that arise from acts, practices or omissions
engaged in prior to the Distribution Date and relate to the proceedings
described above. If any of such indemnified matters were successfully asserted
against Triad, or any of its facilities, and Columbia/HCA failed to meet its
indemnification obligations, then such losses could have a material adverse
effect on the business, financial position, results of operations or prospects
of Triad (See Note 11--Contingencies). Columbia/HCA will not indemnify Triad
for losses relating to any acts, practices and omissions engaged in by Triad
after the distribution date, whether or not Triad is indemnified for similar
acts, practices and omissions occurring prior to the distribution date.
NOTE 4--INCOME TAXES
The provision for income taxes (benefit) for the years ended December 31,
1998, 1997 and 1996 consists of the following (dollars in millions):
<TABLE>
<CAPTION>
1998 1997 1996
------ ----- -----
<S> <C> <C> <C>
Current:
Federal............................................... $(12.5) $ 3.0 $40.0
State................................................. (2.3) 0.6 7.4
Deferred:
Federal............................................... (20.8) (9.1) 0.7
State................................................. (3.8) (1.7) 0.1
------ ----- -----
$(39.4) $(7.2) $48.2
====== ===== =====
</TABLE>
F-28
<PAGE>
TRIAD HOSPITALS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
NOTE 4--INCOME TAXES (Continued)
A reconciliation of the federal statutory rate to the effective income tax
rate follows:
<TABLE>
<CAPTION>
1998 1997 1996
------ ----------- ------
<S> <C> <C> <C> <C>
Federal statutory rate............ 35.0 % 35.0 % 35.0%
State income taxes, net of federal
income tax benefit............... 3.1 2.4 4.3
Non-deductible intangible assets.. (6.5) (8.8) 2.2
Other items, net.................. (0.2) (1.5) 0.3
----- ----- -----
Effective income tax rate......... 31.4 % 27.1 % 41.8%
===== ===== =====
A summary of the items comprising the deferred tax assets and liabilities at
December 31 follows (dollars in millions):
<CAPTION>
1998 1997
-------------------- -------------------
Assets Liabilities Assets Liabilities
------ ----------- ------ -----------
<S> <C> <C> <C> <C>
Depreciation and fixed asset basis
differences...................... $ - $63.4 $ - $82.1
Doubtful accounts................. 29.8 - 24.2 -
Compensation...................... 8.4 - 8.1 -
Other............................. 5.3 4.0 5.4 4.1
----- ----- ----- -----
$43.5 $67.4 $37.7 $86.2
===== ===== ===== =====
</TABLE>
Deferred income taxes of $37.9 million and $31.9 million at December 31, 1998
and 1997, respectively, are included in current assets. Noncurrent deferred
income tax liabilities totaled $61.8 million and $80.4 million at December 31,
1998 and 1997, respectively.
At December 31, 1998, state net operating loss carryforwards (expiring in
years 1999 through 2003) available to offset future taxable income approximated
$69.0 million. Utilization of net operating loss carryforwards in any one year
may be limited and, in certain cases, result in a reduction of intangible
assets. Net deferred tax assets related to such carryforwards are not
significant.
Columbia/HCA and Triad will enter into a tax sharing and indemnification
agreement which will provide that Columbia/HCA will generally be responsible
for all taxes that are allocable to periods prior to the distribution date and
Columbia/HCA and Triad will each be responsible for its own tax liabilities for
periods after the distribution date. The Tax Sharing and Indemnification
Agreement will not have an impact on the realization of deferred tax assets or
the payment of deferred tax liabilities of Triad except to the extent that the
temporary differences giving rise to such deferred tax assets and liabilities
as of the distribution date are adjusted as a result of final tax settlements
after the distribution date. In the event of such adjustments, the tax sharing
and indemnification agreement will provide for certain payments between
Columbia/HCA and Triad as appropriate.
F-29
<PAGE>
TRIAD HOSPITALS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
NOTE 5--IMPAIRMENT OF LONG-LIVED ASSETS
Triad adopted Statement of Financial Accounting Standards No. 121, Accounting
for the Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed of
("SFAS 121"), during the first quarter of 1996. SFAS 121 addresses accounting
for the impairment of long-lived assets and long-lived assets to be disposed
of, certain identifiable intangibles and goodwill related to those assets, and
provides guidance for recognizing and measuring impairment losses. The
statement requires that the carrying amount of impaired assets be reduced to
fair value.
During the third and fourth quarters of 1998 Triad decided to sell certain
hospital facilities and surgery centers that were identified as not compatible
with Triad's operating plans, based upon management's review of all facilities,
and giving consideration to current and expected competition in each market,
expected population trends in each market and the current and expected capital
needs in each market. The carrying value of the long-lived assets related to
certain of these facilities (4 hospital facilities and one surgery center), of
approximately $75.7 million, was reduced to fair value, based on estimates of
selling values, for a total non-cash charge of $31.1 million. For the years
ended December 31, 1998, 1997 and 1996, respectively, these facilities to be
divested had net revenues of approximately $91.8 million, $97.8 million and
$104.1 million and incurred losses from continuing operations before income tax
benefit and the asset impairment charge of approximately $(30.4) million,
$(28.2) million and $(11.7) million. Triad expects to complete the sales of
these facilities during 1999.
Triad recorded, during the fourth quarters of 1998 and 1997, impairment
losses of approximately $24.0 million and $13.7 million, respectively, related
to one hospital facility in 1998 and intangibles and other long-lived assets of
certain surgery centers and physician practices in 1997, where the recorded
asset values were not deemed to be fully recoverable based upon the operating
results trends and projected future cash flows. These assets 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 fourth quarter of 1998, Columbia/HCA and Triad completed the
divestiture of their home health businesses for proceeds of approximately $3.9
million, which approximated the carrying value of the net assets of
discontinued operations. The $3.9 million amount related to the net assets of
discontinued operations was included in other (noncurrent) assets at December
31, 1997. Columbia/HCA and Triad implemented plans to sell the home health
businesses during the third quarter of 1997. The combined financial statements
reflect the results of operations and net assets of the home health businesses
as discontinued operations.
Revenues for the home health businesses disposed of were approximately $38.3
million, $74.4 million and $79.6 million for the years ended December 31, 1998,
1997 and 1996, respectively.
The after-tax loss incurred upon the divestiture of the home health
businesses of $(2.9) million was recorded during the fourth quarter of 1997 and
is presented in the "Discontinued operations" section of the combined
statements of operations.
F-30
<PAGE>
TRIAD HOSPITALS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
NOTE 7--ACCOUNTING CHANGE
During 1997, Triad changed its method of accounting for start-up costs. The
change involved expensing these costs as incurred, rather than capitalizing and
subsequently amortizing such costs. Triad believes the new method is preferable
due to certain changes in business strategy and reviews of emerging accounting
guidance on accounting for similar (i.e., start-up, software system training
and process reengineering) costs.
The change in accounting principle resulted in the write-off of the costs
capitalized as of January 1, 1997. The cumulative effect of the write-off,
which totals $2.8 million (net of tax benefit), has been expensed and reflected
in the statements of operations for the year ended December 31, 1997. Had the
new method been used in the past, the pro forma effect on prior years would
have primarily affected 1996 (such costs incurred for periods prior to 1996 are
considered immaterial to operations for those periods). The pro forma effect on
the years ended December 31, 1997 and 1996 follows (dollars in millions):
<TABLE>
<CAPTION>
1997 1996
------------------ ------------------
As As
Reported Pro Forma Reported Pro Forma
-------- --------- -------- ---------
<S> <C> <C> <C> <C>
Income (loss) from continuing
operations......................... $(19.0) $(19.0) $68.3 $65.5
Net income (loss)................... $(19.8) $(17.0) $74.7 $71.9
</TABLE>
NOTE 8--LONG TERM DEBT AND INTERCOMPANY BALANCES PAYABLE TO COLUMBIA/HCA
A summary of long-term debt follows (including related interest rates at
December 31, 1998), (dollars in millions):
<TABLE>
<CAPTION>
1998 1997
----- -----
<S> <C> <C>
Total debt, average life of 5 years (rates averaging 5.7%)..... $14.4 $15.4
Less amounts due within one year............................... 1.0 1.0
----- -----
$13.4 $14.4
===== =====
</TABLE>
Intercompany balances represent the net excess of funds transferred to or
paid on behalf of Triad over funds transferred to the centralized cash
management account of Columbia/HCA. Generally, this balance is increased by
cash transfers from and payments of debt made by Columbia/HCA, construction
project additions paid by Columbia/HCA, and certain fees and services provided
by Columbia/HCA, including information systems services and other operating
expenses, such as payroll, interest, insurance and income taxes. Generally, the
balance is decreased through daily cash deposits by Triad to the account. Triad
is charged interest on the intercompany balances at various rates ranging from
6% to 10% and the interest computations are based on the outstanding balance at
each month end. The net intercompany balances were $613.7 million and $525.0
million at December 31, 1998 and December 31, 1997, respectively. Interest
expense related to the net intercompany balances was $68.0 million, $59.6
million and $51.0 million for the years ended December 31, 1998, 1997 and 1996,
respectively.
In connection with the Distribution, all amounts payable by Triad to
Columbia/HCA will be eliminated, and Triad will assume certain indebtedness
from Columbia/HCA.
F-31
<PAGE>
TRIAD HOSPITALS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
NOTE 9--STOCK BENEFIT PLANS
Triad employees have participated in the Columbia/HCA Healthcare Corporation
1992 Stock and Incentive Plan (the "1992 Plan"). Under the 1992 Plan, stock
options are generally granted at no less than the market price on the date of
grant. Options are exercisable in whole or in part beginning two to five years
after the grant and ending ten years after the grant. The number of options
granted to Triad employees under Columbia/HCA's option plan was approximately
327,400 options, 1,121,800 options and 487,091 options, during 1998, 1997 and
1996, respectively.
Immediately following the Distribution, nonvested Columbia/HCA stock options
held by Triad employees will be cancelled and Triad may, in its discretion,
grant unvested stock option awards. The vested Columbia/HCA stock options held
by Triad employees will generally be converted into a combination of Triad
stock options, Columbia/HCA stock options and stock options of Columbia/HCA's
other spin-off company, LifePoint Hospitals, Inc., in a manner that preserves
the pre-spin-off intrinsic value and the pre-spin-off ratio of the exercise
prices to the underlying market value of the related common stock.
At December 31, 1998 there were approximately 2,482,800 Columbia/HCA stock
options held by Triad employees. That amount includes an aggregate of
approximately 2,011,400 unvested options that will be cancelled. Triad cannot
currently determine the number of shares of its common stock that will be
subject to any discretionary grants of options by Triad after the Distribution.
The following table summarizes information regarding the options outstanding
at December 31, 1998:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
-------------------------------- --------------------
Weighted
Average Weighted Weighted
Number Remaining Average Number Average
Outstanding Contractual Exercise Exercisable Exercise
Range of Exercise Prices at 12/31/98 Life Price at 12/31/98 Price
- ------------------------ ----------- ----------- -------- ----------- --------
<S> <C> <C> <C> <C> <C>
$11.55 to $12.22....... 45,900 4 years $11.85 45,900 $11.85
0.40 to 26.50.......... 171,000 5 years 24.59 132,600 24.17
26.52 to 32.50......... 329,600 6 years 27.91 167,100 27.90
33.67 to 37.92......... 487,100 7 years 37.12 123,400 37.12
28.19 to 39.88......... 1,121,800 8 years 33.81 2,400 39.88
26.47............... 327,400 9 years 26.47 -- --
--------- -------
2,482,800 471,400
========= =======
</TABLE>
Triad has adopted the disclosure provisions of Statement of Financial
Accounting Standards No. 123 ("SFAS 123"), Accounting for Stock-Based
Compensation, but continues to measure stock-based compensation cost in
accordance with Accounting Principles Board Opinion No. 25 and its related
interpretations. If Triad had measured compensation cost for the Columbia/HCA
stock options granted to its employees during 1998, 1997 and 1996 under the
fair value based method prescribed by SFAS 123, the net income (loss) would
have been changed to the pro forma amounts set forth below (dollars in
millions):
<TABLE>
<CAPTION>
1998 1997 1996
------ ------ -----
<S> <C> <C> <C>
Net income (loss)
Reported............................................. $(87.1) $(19.8) $74.7
Pro forma............................................ $(88.0) $(20.8) $74.3
Basic earnings (loss) per share:
As reported.......................................... $(2.90) $(0.66) $2.49
Pro forma............................................ $(2.93) $(0.69) $2.48
Diluted earnings (loss) per share:
As reported.......................................... $(2.90) $(0.66) $2.47
Pro forma............................................ $(2.93) $(0.69) $2.45
</TABLE>
F-32
<PAGE>
TRIAD HOSPITALS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
NOTE 9--STOCK BENEFIT PLANS (Continued)
The fair values of Columbia/HCA stock options granted to Triad employees used
to compute pro forma net income disclosures were estimated on the date of grant
using the Black-Scholes option-pricing model based on the following weighted
average assumptions used by Columbia/HCA:
<TABLE>
<CAPTION>
1998 1997 1996
------- ------- -------
<S> <C> <C> <C>
Risk free interest rate.............................. 4.74% 5.61% 5.81%
Expected life........................................ 6 years 6 years 6 years
Expected volatility.................................. 23.90% 23.90% 23.90%
Expected dividend yield.............................. .30% .23% .19%
</TABLE>
The weighted-average fair values of Columbia/HCA stock options granted to
Triad employees during the years ended 1998, 1997 and 1996 were $8.77, $12.03
and $13.47 per option, respectively.
The pro forma amounts above are not necessarily representative of the effects
of stock-based awards on future pro forma net income because (1) future grants
of employee stock options by management may not be comparable to awards made to
employees while Triad was a part of Columbia/HCA, (2) the assumptions used to
compute the fair value of any stock option awards will be specific to Triad and
therefore may not be comparable to the Columbia/HCA assumptions used and (3)
they exclude the pro forma compensation expense related to unvested stock
options granted before 1996.
NOTE 10--RETIREMENT PLANS
Triad participates in Columbia/HCA's defined contribution retirement plans,
which cover substantially all employees. Benefits are determined primarily as a
percentage of a participant's earned income and are vested over specific
periods of employee service. Retirement plan expense was $21.0 million, $18.6
million and $15.9 million for the years ended December 31, 1998, 1997 and 1996,
respectively. Amounts approximately equal to retirement plan expense are funded
annually.
NOTE 11--CONTINGENCIES
Significant Legal Proceedings
Various lawsuits, claims and legal proceedings have been and are expected to
be instituted or asserted against Columbia/HCA and Triad, including those
relating to shareholder derivative and class action complaints; purported class
action lawsuits filed by patients and payers alleging, in general, improper and
fraudulent billing, coding and physician referrals, as well as other violations
of law; certain qui tam or "whistleblower" actions alleging, in general,
unlawful claims for reimbursement or unlawful payments to physicians for the
referral of patients, as well as other violations and litigation matters. While
the amounts claimed may be substantial, the ultimate liability cannot be
determined or reasonably estimated at this time due to the considerable
uncertainties that exist. Therefore, it is possible that Columbia/HCA's and
Triad's results of operations, financial position and liquidity in a particular
period could be materially, adversely affected upon the resolution of certain
of these contingencies. (See Note 3--Columbia/HCA Investigations, Litigation
and Indemnification Rights, for a description of the ongoing government
investigations and Columbia/HCA's obligations to indemnify Triad with respect
to losses arising from such governmental investigations and related
proceedings).
F-33
<PAGE>
TRIAD HOSPITALS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
NOTE 11--CONTINGENCIES (Continued)
General Liability Claims
Triad is subject to claims and suits arising in the ordinary course of
business, including claims for personal injuries or wrongful restriction of, or
interference with, physicians staff privileges. In certain of these actions
claimants may ask for punitive damages against Triad, which are usually not
covered by insurance. It is management's opinion that the ultimate resolution
of pending claims and legal proceedings will not have a material adverse effect
on Triad's results of operations or financial position.
NOTE 12--OTHER CURRENT LIABILITIES AND ALLOWANCES FOR DOUBTFUL ACCOUNTS
A summary of other current liabilities as of December 31 follows (in
millions):
<TABLE>
<CAPTION>
1998 1997
----- -----
<S> <C> <C>
Employee benefit plans.......................................... $20.7 $20.6
Taxes, other than income........................................ 9.3 8.5
Other........................................................... 8.7 10.1
----- -----
$38.7 $39.2
===== =====
</TABLE>
A summary of activity in Triad's allowances for doubtful accounts follows (in
millions):
<TABLE>
<CAPTION>
Accounts
Balances at Additions Written off, Balances
Beginning Charged to Net of at End
of Period Expense Recoveries of Period
----------- ---------- ------------ ---------
<S> <C> <C> <C> <C>
Allowances for doubtful
accounts:
Year ended December 31,
1996..................... $ 59.9 $106.5 $ (63.3) $103.1
Year ended December 31,
1997..................... 103.1 138.5 (104.7) 136.9
Year ended December 31,
1998..................... 136.9 138.4 (119.4) 155.9
</TABLE>
NOTE 13--EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted earnings
per share from continuing operations (dollars and shares in millions, except
per share amounts):
<TABLE>
<CAPTION>
1998 1997 1996
------ ------ -----
<S> <C> <C> <C>
Numerator (a):
Income (loss) from continuing operations............... $(85.5) $(19.0) $68.3
====== ====== =====
Denominator:
Share reconciliation:
Shares used for basic earnings per share............... 30.0 30.0 30.0
Effect of dilutive securities.......................... -- -- 0.3
------ ------ -----
Shares used for diluted earnings per share............. 30.0 30.0 30.3
====== ====== =====
Earnings per share:
Basic earnings (loss) per share from continuing
operations............................................ $(2.85) $(0.63) $2.28
====== ====== =====
Diluted earnings (loss) per share from continuing
operations............................................ $(2.85) $(0.63) $2.26
====== ====== =====
</TABLE>
Triad expects to issue 30,000,000 shares of Triad common stock on the
distribution date. Earnings per share information has been presented as if
30,000,000 shares had been outstanding for all periods presented.
F-34
<PAGE>
TRIAD HOSPITALS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
NOTE 14--UNAUDITED QUARTERLY FINANCIAL INFORMATION
The quarterly interim financial information shown below has been prepared by
the Company's management and is unaudited. It should be read in conjunction
with the audited combined financial statements appearing herein (dollars in
millions, except per share amounts).
<TABLE>
<CAPTION>
1998
---------------------------------
First Second Third Fourth
------ ------ ------ ------
<S> <C> <C> <C> <C>
Revenues............................. $414.0 $399.8 $389.6 $385.3
Net loss............................. $ (4.5) $(10.1) $(22.1)(a) $(50.4)(b)
Basic and diluted loss per share (see
Note 13)............................ $(0.15) $(0.34) $(0.73)(a) $(1.68)(b)
<CAPTION>
1997
---------------------------------
First Second Third Fourth
------ ------ ------ ------
<S> <C> <C> <C> <C>
Revenues............................. $433.2 $415.9 $382.8 $377.4
Net income (loss):
Income (loss) before accounting
change............................ $ 30.0 $ 21.8 $(12.9) $(55.9)(c)
Cumulative effect of accounting
change............................ (2.8) -- -- --
------ ------ ------ ------
Net income (loss)................ $ 27.2 $ 21.8 $(12.9) $(55.9)
====== ====== ====== ======
Basic and diluted earnings (loss) per
share (see Note 13):
Income (loss) before accounting
change............................ $ 1.00 $ 0.72 $(0.43) $(1.86)(c)
Cumulative effect of accounting
change............................ (0.09) -- -- --
------ ------ ------ ------
Net income (loss)................ $ 0.91 $ 0.72 $(0.43) $(1.86)
====== ====== ====== ======
</TABLE>
- --------
(a) During the third quarter of 1998, Triad recorded a $19.3 million pretax
charge related to the impairment of certain long-lived assets (See Note 5--
Impairment of Long-lived Assets).
(b) During the fourth quarter of 1998, Triad recorded a $35.8 million pretax
charge related to the impairment of certain long-lived assets (See Note 5--
Impairment of Long-lived Assets).
(c) During the fourth quarter of 1997, Triad recorded a $13.7 million pretax
charge related to the impairment of certain long-lived assets (See Note 5--
Impairment of Long-lived Assets).
F-35
<PAGE>
EXHIBIT 4.2
- --------------------------------------------------------------------------------
LIFEPOINT HOSPITALS, INC.
and
-------------------------,
as Rights Agent
------------
Rights Agreement
Dated as of __________ __, 1999
- --------------------------------------------------------------------------------
<PAGE>
TABLE OF CONTENTS
<TABLE>
<S> <C>
Section 1. Certain Definitions....................................................................... 1
Section 2. Appointment of Rights Agent............................................................... 4
Section 3. Issue of Right Certificates............................................................... 5
Section 4. Form of Right Certificates................................................................ 6
Section 5. Countersignature and Registration......................................................... 6
Section 6. Transfer, Split Up, Combination and Exchange of Right Certificates;
Mutilated, Destroyed, Lost or Stolen Right Certificates................................... 7
Section 7. Exercise of Rights; Purchase Price; Expiration Date of Rights............................. 8
Section 8. Cancellation and Destruction of Right Certificates........................................ 8
Section 9. Availability of Preferred Shares.......................................................... 9
Section 10. Preferred Shares Record Date.............................................................. 9
Section 11. Adjustment of Purchase Price, Number of Shares or Number of Rights........................ 10
Section 12. Certificate of Adjusted Purchase Price or Number of Shares................................ 16
Section 13. Consolidation, Merger or Sale or Transfer of Assets or Earning Power...................... 16
Section 14. Fractional Rights and Fractional Shares................................................... 17
Section 15. Rights of Action.......................................................................... 18
Section 16. Agreement of Right Holders................................................................ 19
Section 17. Right Certificate Holder Not Deemed a Stockholder......................................... 19
Section 18. Concerning the Rights Agent............................................................... 19
Section 19. Merger or Consolidation or Change of Name of Rights Agent................................. 20
Section 20. Duties of Rights Agent.................................................................... 20
Section 21. Change of Rights Agent.................................................................... 22
Section 22. Issuance of New Right Certificates........................................................ 23
Section 23. Redemption................................................................................ 23
Section 24. Exchange.................................................................................. 24
Section 25. Notice of Certain Events.................................................................. 25
Section 26. Notices................................................................................... 26
Section 27. Supplements and Amendments................................................................ 26
Section 28. Successors................................................................................ 27
Section 29. Benefits of this Rights Agreement......................................................... 27
Section 30. Severability.............................................................................. 27
Section 31. Governing Law............................................................................. 27
Section 32. Counterparts.............................................................................. 27
Section 33. Descriptive Headings...................................................................... 27
</TABLE>
Exhibit A - Form of Right Certificate
Exhibit B - Summary of Rights to Purchase Preferred Shares
<PAGE>
Rights Agreement
Rights Agreement, dated as of ____ __, 1999, by and between LifePoint
Hospitals, Inc., a Delaware corporation (the "Company"), and __________ (the
"Rights Agent").
The Board of Directors of the Company has authorized and directed the
issuance of one preferred share purchase right (a "Right") for each Common Share
to be issued in the distribution of Common Shares (the "Spin-Off") described in
the Company's Registration Statement on Form 10 ( __________ ), dated __________
__, 1999 (the "Record Date"). Each Right represents the right to purchase one
one-thousandth of a Preferred Share, upon the terms and subject to the
conditions herein set forth. The Board of Directors of the Company has further
authorized and directed the issuance of one Right with respect to each Common
Share that shall become outstanding between the Record Date and the earliest of
the Distribution Date, the Redemption Date and the Expiration Date.
Accordingly, in consideration of the premises and the mutual agreements
herein set forth, the parties hereby agree as follows:
Section 1. Certain Definitions. For purposes of this Rights Agreement,
-------------------
the following terms have the meanings indicated:
(a) "Acquiring Person" shall mean any Person who or which, together
with all Affiliates and Associates of such Person, shall be the Beneficial Owner
of 15% or more of the Common Shares then outstanding, but shall not include (i)
the Company, any Subsidiary of the Company, any employee benefit plan of the
Company or of any Subsidiary of the Company, or any entity holding Common Shares
for or pursuant to the terms of any such plan, (ii) any Person who or which
becomes the Beneficial Owner of 15% or more of the Common Shares then
outstanding as the result of a reduction in the outstanding Common Shares
resulting from acquisition of Common Shares by the Company approved by the Board
of Directors, unless and until such Person becomes the Beneficial Owner of any
additional Common Shares, other than pursuant to a stock dividend or stock
split, (iii) any Person who or which the Board of Directors of the Company
determines, in good faith, became an Acquiring Person inadvertently, if such
Person divests as promptly as practicable a sufficient number of Common Shares
so that such Person would no longer be an Acquiring Person or (iv) any Person
who or which the Board of Directors of the Company determines, prior to the time
such Person would otherwise be an Acquiring Person, should be exempted from the
definition of Acquiring Person, provided that the Board of Directors may make
such exemption subject to such conditions, if any, which the Board may
determine. Notwithstanding anything in this paragraph (a) to the contrary,
neither Columbia/HCA Healthcare Corporation nor any of its affiliates shall be
deemed to be an Acquiring Person as a result of its ownership of Common Shares
prior to the Spin-Off.
<PAGE>
(b) "Affiliate" and "Associate" shall have the respective meanings
ascribed to such terms in Rule 12b-2 under the Exchange Act.
(c) A Person shall be deemed the "Beneficial Owner" of and shall be
deemed to "Beneficially Own" any securities:
(i) which such Person or any of such Person's Affiliates or
Associates beneficially owns, directly or indirectly;
(ii) which such Person or any of such Person's Affiliates or
Associates has (A) the right to acquire (whether such right is exercisable
immediately or only after the passage of time) pursuant to any agreement,
arrangement or understanding (other than customary agreements with and between
underwriters and selling group members with respect to a bona fide public
offering of securities), or upon the exercise of conversion rights, exchange
rights, rights (other than these Rights), warrants or options, or otherwise,
provided, however, that a Person shall not be deemed the Beneficial Owner of, or
to Beneficially Own, securities tendered pursuant to a tender or exchange offer
made by or on behalf of such Person or any of such Person's Affiliates or
Associates until such tendered securities are accepted for purchase or exchange
or (B) the right to vote pursuant to any agreement, arrangement or
understanding, provided, however, that a Person shall not be deemed the
Beneficial Owner of, or to Beneficially Own, any security if the agreement,
arrangement or understanding to vote such security (1) arises solely from a
revocable proxy or consent given to such Person in response to a public proxy or
consent solicitation made pursuant to, and in accordance with, the applicable
rules and regulations promulgated under the Exchange Act and (2) is not also
then reportable on Schedule 13D under the Exchange Act (or any comparable or
successor report); or
(iii) which are beneficially owned, directly or indirectly, by
any other Person with which such Person or any of such Person's Affiliates or
Associates has any agreement, arrangement or understanding (other than customary
agreements with and between underwriters and selling group members with respect
to a bona fide public offering of securities) for the purpose of acquiring,
holding, voting (except to the extent contemplated by the proviso to Section
1(c)(ii)(B)) or disposing of any securities of the Company.
Notwithstanding anything in this definition of Beneficial Ownership to the
contrary, the phrase "then outstanding," when used with reference to a Person's
Beneficial Ownership of securities of the Company, shall mean the number of such
securities then issued and outstanding together with the number of such
securities not then actually issued and outstanding which such Person would be
deemed to Beneficially Own hereunder.
(d) A determination, approval, consent or other action of the "Board
of Directors" shall require approval or consent of a majority of the Board of
Directors of the Company.
2
<PAGE>
(e) "Business Day" shall mean any day other than a Saturday, a
Sunday, or a day on which banking institutions in New York are authorized or
obligated by law or executive order to close.
(f) "Close of Business" on any given date shall mean 5:00 p.m., New
York City time, on such date, provided, however, that, if such date is not a
Business Day, it shall mean 5:00 p.m., New York City time, on the next
succeeding Business Day.
(g) "Common Shares" shall mean the shares of common stock, par value
$.01 per share, of the Company, except that "Common Shares" when used with
reference to any Person other than the Company shall mean the capital stock (or
equity interest) with the greatest voting power of such other Person or, if such
other Person is a Subsidiary of another Person, the Person or Persons which
ultimately control such first-mentioned Person.
(h) "Company" shall have the meaning set forth in the preamble
hereof.
(i) "Current per share market price" shall have the meaning set forth
in Section 11(d) hereof.
(j) "Distribution Date" shall have the meaning set forth in Section
3(a) hereof.
(k) "Equivalent preferred shares" shall have the meaning set forth in
Section 11(b) hereof.
(l) "Exchange Act" shall mean the Securities Exchange Act of 1934.
(m) "Exchange Ratio" shall have the meaning set forth in Section
24(a) hereof.
(n) "Expiration Date" shall mean the Close of Business on ___ __,
2009.
(o) "NASDAQ" shall mean the National Association of Securities
Dealers, Inc. Automated Quotations System.
(p) "Person" shall mean any individual, firm, corporation,
partnership or other entity, and shall include any successor (by merger or
otherwise) of such entity.
(q) "Preferred Shares" shall mean shares of Series A Junior
Participating Preferred Stock, par value $.01 per share, of the Company having
the rights and preferences set forth in the Company's Certificate of
Incorporation.
3
<PAGE>
(r) "Purchase Price" shall initially be $____ for each one one-
thousandth of a Preferred Share purchasable pursuant to the exercise of a Right,
and shall be subject to adjustment from time to time as provided in Section 11
or 13 hereof.
(s) "Record Date" shall have the meaning set forth in the second
paragraph hereof.
(t) "Redemption Date" shall mean the time at which the Rights are
redeemed as provided in Section 23 hereof.
(u) "Redemption Price" shall have the meaning set forth in Section
23(a) hereof.
(v) "Right" shall have the meaning set forth in the second paragraph
hereof.
(w) "Right Certificate" shall have the meaning set forth in Section
3(a) hereof.
(x) "Rights Agent" shall have the meaning set forth in the preamble
hereof.
(y) "Security" shall have the meaning set forth in Section 11(d)(i)
hereof.
(aa) "Stock Acquisition Date" shall mean the first date of public
announcement (including, without limitation, by a filing under the Exchange Act)
by the Company or an Acquiring Person that an Acquiring Person has become such
or such earlier date as a majority of the Board shall become aware of the
existence of an Acquiring Person.
(bb) "Subsidiary" of any Person shall mean any corporation or
other entity of which a majority of the voting power of the voting equity
securities or equity interest is owned or otherwise controlled, directly or
indirectly, by such Person.
(cc) "Trading Day" shall have the meaning set forth in Section
11(d)(i) hereof.
Section 2. Appointment of Rights Agent. The Company hereby appoints the
---------------------------
Rights Agent to act as agent for the Company and the holders of the Rights (who,
in accordance with Section 3 hereof, shall prior to the Distribution Date also
be the holders of the Common Shares) in accordance with the terms and conditions
hereof, and the Rights Agent hereby accepts such appointment. The Company may
from time to time appoint such co-Rights Agents as it may deem necessary or
desirable.
4
<PAGE>
Section 3. Issue of Right Certificates. (a) Until the earlier of the Close
---------------------------
of Business on (i) the tenth day after the Stock Acquisition Date or (ii) such
date, if any, as may be determined by action of the Board of Directors of the
Company after the date of the commencement by any Person (other than the
Company, any Subsidiary of the Company, any employee benefit plan of the Company
or of any Subsidiary of the Company or any entity holding Common Shares for or
pursuant to the terms of any such plan) of, or of the first public announcement
of the intention of any Person (other than the Company, any Subsidiary of the
Company, any employee benefit plan of the Company or of any Subsidiary of the
Company or any entity holding Common Shares for or pursuant to the terms of any
such plan) to commence, a tender or exchange offer the consummation of which
would result in any Person becoming an Acquiring Person (including any such date
which is after the date of this Rights Agreement and prior to the issuance of
the Rights; the earlier of such dates being herein referred to as the
"Distribution Date"), (x) the Rights will be evidenced (subject to the
provisions of Section 3(b) hereof) by the certificates for Common Shares
registered in the names of the holders thereof (which certificates shall also be
deemed to be Right Certificates) and not by separate Right Certificates and (y)
the right to receive Right Certificates will be transferable only in connection
with the transfer of Common Shares. As soon as practicable after the
Distribution Date, the Company will prepare and execute, the Rights Agent will
countersign, and the Company will send or cause to be sent (and the Rights Agent
will, if requested, send) by first-class, insured, postage-prepaid mail, to each
record holder of Common Shares as of the Close of Business on the Distribution
Date, at the address of such holder shown on the records of the Company, a Right
Certificate, in substantially the form of Exhibit A hereto (a "Right
Certificate"), evidencing one Right for each Common Share so held. As of the
Distribution Date, the Rights will be evidenced solely by such Right
Certificates.
(b) The Company will make available, as promptly as practicable
following the Record Date, a Summary of Rights to Purchase Preferred Shares, in
substantially the form of Exhibit B hereto, to any holder of Rights who may so
request from time to time prior to the Expiration Date. With respect to
certificates for Common Shares outstanding as of the Record Date, until the
Distribution Date, the Rights will be evidenced by such certificates and the
registered holders of the Common Shares shall also be the registered holders of
the associated Rights. Until the Distribution Date (or the earlier of the
Redemption Date or the Expiration Date), the surrender for transfer of any
certificate for Common Shares in respect of which Rights have been issued shall
also constitute the transfer of the Rights associated with such Common Shares.
(c) Rights shall be issued in respect of all Common Shares which are
issued (whether originally issued or from the Company's treasury) after the
Record Date but prior to the earliest of the Distribution Date, the Redemption
Date or the Expiration Date. Certificates representing such Common Shares shall
bear the following legend:
This certificate also evidences and entitles the holder hereof to
certain rights as set forth in a Rights Agreement between LifePoint
Hospitals, Inc. (the "Company") and the Rights Agent thereunder (the
"Rights
5
<PAGE>
Agreement"), the terms of which are hereby incorporated herein by
reference and a copy of which is on file at the principal offices of
the Company. Under certain circumstances, as set forth in the Rights
Agreement, such rights will be evidenced by separate certificates and
will no longer be evidenced by this certificate. The Company will mail
to the holder of this certificate a copy of the Rights Agreement
without charge after receipt of a written request therefor. Under
certain circumstances, as set forth in the Rights Agreement, rights
issued to any person who becomes an Acquiring Person (as defined in
the rights agreement), including such rights held by a subsequent
holder, may become null and void.
With respect to such certificates containing the foregoing legend, until
the Distribution Date, the Rights associated with the Common Shares represented
by such certificates shall be evidenced by such certificates alone, and the
surrender for transfer of any such certificate shall also constitute the
transfer of the Rights associated with the Common Shares represented thereby.
In the event that the Company purchases or acquires any Common Shares after the
Record Date but prior to the Distribution Date, any Rights associated with such
Common Shares shall be deemed cancelled and retired so that the Company shall
not be entitled to exercise any Rights associated with the Common Shares which
are no longer outstanding.
Section 4. Form of Right Certificates. The Right Certificates (and the
--------------------------
forms of election to purchase Preferred Shares and of assignment to be printed
on the reverse thereof) shall be substantially the same as Exhibit A hereto and
may have such marks of identification or designation and such legends, summaries
or endorsements printed thereon as the Company may deem appropriate and as are
not inconsistent with the provisions of this Rights Agreement, or as may be
required to comply with any applicable law or with any rule or regulation made
pursuant thereto or with any rule or regulation of any stock exchange or
automated quotation system on which the Rights may from time to time be listed,
or to conform to usage. Subject to the provisions of Sections 11 and 22 hereof,
the Right Certificates shall entitle the holders thereof to purchase such number
of one one-thousandths of a Preferred Share as shall be set forth therein at the
price per one one-thousandth of a Preferred Share set forth therein, but the
number of one one-thousandths of a Preferred Share and the Purchase Price shall
be subject to adjustment as provided herein.
Section 5. Countersignature and Registration. (a) The Right Certificates
---------------------------------
shall be executed on behalf of the Company by its Chairman of the Board, its
Chief Executive Officer, its President, any of its Vice Presidents or its
Treasurer, either manually or by facsimile signature, shall have affixed thereto
the Company's seal or a facsimile thereof, and shall be attested by the
Secretary or an Assistant Secretary of the Company, either manually or by
facsimile signature. The Right Certificates shall be countersigned by the Rights
Agent, either manually or by facsimile signature, and shall not be valid for any
purpose unless so countersigned. In case any officer of the Company who shall
have signed any of the Right Certificates shall cease to be such officer of the
Company before
6
<PAGE>
countersignature by the Rights Agent and issuance and delivery by the Company,
such Right Certificates, nevertheless, may be countersigned by the Rights Agent
and issued and delivered by the Company with the same force and effect as though
the Person who signed such Right Certificates had not ceased to be such officer
of the Company; and any Right Certificate may be signed on behalf of the Company
by any Person who, at the actual date of the execution of such Right
Certificate, shall be a proper officer of the Company to sign such Right
Certificate although at the date of the execution of this Rights Agreement any
such Person was not such an officer.
(b) Following the Distribution Date, the Rights Agent will keep or
cause to be kept, at its principal office, books for registration and transfer
of the Right Certificates issued hereunder. Such books shall show the names and
addresses of the respective holders of the Right Certificates, the number of
Rights evidenced on its face by each of the Right Certificates and the date of
each of the Right Certificates.
Section 6. Transfer, Split Up, Combination and Exchange of Right
-----------------------------------------------------
Certificates; Mutilated, Destroyed, Lost or Stolen Right Certificates.
- ---------------------------------------------------------------------
(a) Subject to the provisions of Section 14 hereof, at any time
after the Close of Business on the Distribution Date, and at or prior to the
Close of Business on the earlier of the Redemption Date or the Expiration Date,
any Right Certificate or Right Certificates (other than Right Certificates
representing Rights that have become void pursuant to Section 11(a)(ii) hereof
or that have been exchanged pursuant to Section 24 hereof) may be transferred,
split up, combined or exchanged for another Right Certificate or Right
Certificates entitling the registered holder to purchase a like number of one
one-thousandths of a Preferred Share as the Right Certificate or Right
Certificates surrendered then entitled such holder to purchase. Any registered
holder desiring to transfer, split up, combine or exchange any Right Certificate
or Right Certificates shall make such request in writing delivered to the Rights
Agent, and shall surrender the Right Certificate or Right Certificates to be
transferred, split up, combined or exchanged at the principal office of the
Rights Agent. Thereupon the Rights Agent shall countersign and deliver to the
Person entitled thereto a Right Certificate or Right Certificates, as the case
may be, as so requested. The Company may require payment of a sum sufficient to
cover any tax or governmental charge that may be imposed in connection with any
transfer, split up, combination or exchange of Right Certificates.
(b) Upon receipt by the Company and the Rights Agent of evidence
reasonably satisfactory to them of the loss, theft, destruction or mutilation of
a Right Certificate, and, in case of loss, theft or destruction, of indemnity or
security reasonably satisfactory to them, and, at the Company's request,
reimbursement to the Company and the Rights Agent of all reasonable expenses
incidental thereto, and upon surrender to the Rights Agent and cancellation of
the Right Certificate if mutilated, the Company will make and deliver a new
Right Certificate of like tenor to the Rights Agent for delivery to the
registered holder in lieu of the Right Certificate so lost, stolen, destroyed or
mutilated.
7
<PAGE>
Section 7. Exercise of Rights; Purchase Price; Expiration Date of Rights.
-------------------------------------------------------------
(a) The registered holder of any Right Certificate may exercise the
Rights evidenced thereby (except as otherwise provided herein), in whole or in
part, at any time after the Distribution Date, upon surrender of the Right
Certificate, with the form of election to purchase on the reverse side thereof
duly executed, to the Rights Agent at the principal office of the Rights Agent,
together with payment of the Purchase Price for each one one-thousandth of a
Preferred Share as to which the Rights are exercised, at or prior to the
earliest of (i) the Expiration Date, (ii) the Redemption Date or (iii) the time
at which such Rights are exchanged as provided in Section 24 hereof.
(b) The Purchase Price shall be payable in lawful money of the United
States of America in accordance with paragraph (c) below.
(c) Upon receipt of a Right Certificate representing exercisable
Rights, with the form of election to purchase duly executed, accompanied by
payment of the Purchase Price for the shares to be purchased and an amount equal
to any applicable transfer tax required to be paid by the holder of such Right
Certificate in accordance with Section 9 hereof by certified check, cashier's
check or money order payable to the order of the Company, the Rights Agent shall
thereupon promptly (i) (A) requisition from any transfer agent of the Preferred
Shares certificates for the number of Preferred Shares to be purchased and the
Company hereby irrevocably authorizes any such transfer agent to comply with all
such requests or (B) requisition from the depositary agent depositary receipts
representing such number of one one-thousandths of a Preferred Share as are to
be purchased (in which case certificates for the Preferred Shares represented by
such receipts shall be deposited by the transfer agent of the Preferred Shares
with such depositary agent) and the Company hereby directs such depositary agent
to comply with such request; (ii) when appropriate, requisition from the Company
the amount of cash to be paid in lieu of issuance of fractional shares in
accordance with Section 14 hereof; (iii) promptly after receipt of such
certificates or depositary receipts, cause the same to be delivered to or upon
the order of the registered holder of such Right Certificate, registered in such
name or names as may be designated by such holder; and (iv) when appropriate,
after receipt, promptly deliver such cash to or upon the order of the registered
holder of such Right Certificate.
(d) In case the registered holder of any Right Certificate shall
exercise less than all the Rights evidenced thereby, a new Right Certificate
evidencing Rights equivalent to the Rights remaining unexercised shall be issued
by the Rights Agent to the registered holder of such Right Certificate or to
such holder's duly authorized assigns, subject to the provisions of Section 14
hereof.
Section 8. Cancellation and Destruction of Right Certificates. All Right
--------------------------------------------------
Certificates surrendered for the purpose of exercise, transfer, split up,
combination or exchange shall, if surrendered to the Company or to any of its
agents, be delivered to the Rights Agent for cancellation or in cancelled form,
or, if surrendered to the Rights Agent, shall be cancelled by it, and no Right
Certificates shall be issued in lieu thereof except as
8
<PAGE>
expressly permitted by any of the provisions of this Rights Agreement. The
Company shall deliver to the Rights Agent for cancellation and retirement, and
the Rights Agent shall so cancel and retire, any other Right Certificate
purchased or acquired by the Company otherwise than upon the exercise thereof.
The Rights Agent shall deliver all cancelled Right Certificates to the Company,
or shall, at the written request of the Company, destroy such cancelled Right
Certificates, and, in such case, shall deliver a certificate of destruction
thereof to the Company.
Section 9. Availability of Preferred Shares.
--------------------------------
(a) The Company covenants and agrees that it will cause to be
reserved and kept available out of its authorized and unissued Preferred Shares
or any Preferred Shares held in its treasury, the number of Preferred Shares
that will be sufficient to permit the exercise in full of all outstanding Rights
in accordance with Section 7. The Company covenants and agrees that it will take
all such action as may be necessary to ensure that all securities delivered upon
exercise of Rights shall, at the time of delivery of the certificates for such
securities (subject to payment of the Purchase Price), be duly and validly
authorized and issued and fully paid and nonassessable.
(b) The Company further covenants and agrees that it will pay when
due and payable any and all federal and state transfer taxes and charges which
may be payable in respect of the issuance or delivery of the Right Certificates
or of any Preferred Shares upon the exercise of Rights. The Company shall not,
however, be required to pay any transfer tax which may be payable in respect of
any transfer or delivery of Right Certificates to a Person other than, or the
issuance or delivery of certificates or depositary receipts for the Preferred
Shares in a name other than that of, the registered holder of the Right
Certificate evidencing Rights surrendered for exercise or to issue or to deliver
any certificates or depositary receipts for Preferred Shares upon the exercise
of any Rights until any such tax shall have been paid (any such tax being
payable by the holder of such Right Certificate at the time of surrender) or
until it has been established to the Company's reasonable satisfaction that no
such tax is due.
(c) The Company will use its best efforts to ensure that any
securities issued pursuant hereto are issued in compliance with all applicable
laws.
Section 10. Preferred Shares Record Date. Each Person in whose name any
----------------------------
certificate for Preferred Shares is issued upon the exercise of Rights shall for
all purposes be deemed to have become the holder of record of the Preferred
Shares represented thereby on, and such certificate shall be dated, the date
upon which the Right Certificate evidencing such Rights was duly surrendered and
payment of the Purchase Price (and any applicable transfer taxes) was made;
provided, however, that if the date of such surrender and payment is a date upon
which the Preferred Shares transfer books of the Company are closed, such Person
shall be deemed to have become the record holder of such shares on, and such
certificate shall be dated, the next succeeding Business Day on which the
Preferred Shares transfer books of the Company are open. Prior to the exercise
of the Rights evidenced thereby, the holder of a Right Certificate shall not be
entitled to any
9
<PAGE>
rights of a holder of Preferred Shares for which the Rights shall be
exercisable, including, without limitation, the right to vote, to receive
dividends or other distributions or to exercise any preemptive rights, and shall
not be entitled to receive any notice of any proceedings of the Company, except
as provided herein.
Section 11. Adjustment of Purchase Price, Number of Shares or Number of
-----------------------------------------------------------
Rights. The Purchase Price, the number of Preferred Shares covered by each Right
- ------
and the number of Rights outstanding are subject to adjustment from time to time
as provided in this Section 11.
(a) (i) In the event the Company shall at any time after the date of
this Rights Agreement (A) declare a dividend on the Preferred Shares payable in
Preferred Shares, (B) subdivide the outstanding Preferred Shares, (C) combine
the outstanding Preferred Shares into a smaller number of Preferred Shares or
(D) issue any shares of its capital stock in a reclassification of the Preferred
Shares (including any such reclassification in connection with a consolidation
or merger in which the Company is the continuing or surviving corporation),
except as otherwise provided in this Section 11(a), the Purchase Price in effect
at the time of the record date for such dividend or of the effective date of
such subdivision, combination or reclassification, and the number and kind of
shares of capital stock issuable on such date, shall be proportionately adjusted
so that the holder of any Right exercised after such time shall be entitled to
receive the aggregate number and kind of shares of capital stock which, if such
Right had been exercised immediately prior to such date and at a time when the
Preferred Shares transfer books of the Company were open, such holder would have
owned upon such exercise and been entitled to receive by virtue of such
dividend, subdivision, combination or reclassification; provided, however, that
in no event shall the consideration to be paid upon the exercise of one Right be
less than the aggregate par value of the shares of capital stock of the Company
issuable upon exercise of one Right.
(ii) Subject to Section 24 of this Rights Agreement, in the event
any Person becomes an Acquiring Person, each holder of a Right shall thereafter
have a right to receive, upon exercise thereof at a price equal to the then
current Purchase Price multiplied by the number of one one-thousandths of a
Preferred Share for which a Right is then exercisable, in accordance with the
terms of this Rights Agreement and in lieu of Preferred Shares, such number of
Common Shares as shall equal the result obtained by (A) multiplying the then-
current Purchase Price by the number of one one-thousandths of a Preferred Share
for which a Right is then exercisable and dividing that product by (B) 50% of
the then current per share market price of the Company's Common Shares
(determined pursuant to Section 11(d) hereof) on the date of the occurrence of
such event. In the event that any Person shall become an Acquiring Person and
the Rights shall then be outstanding, the Company shall not take any action
which would eliminate or diminish the benefits intended to be afforded by the
Rights.
Notwithstanding anything in this Agreement to the contrary, from and after
the occurrence of such event, any Rights that are or were acquired or
Beneficially Owned by any Acquiring Person (or any Associate or Affiliate of
such Acquiring Person) shall be
10
<PAGE>
void and any holder of such Rights shall thereafter have no right to exercise
such Rights under any provision of this Rights Agreement. No Right Certificate
shall be issued pursuant to Section 3 that represents Rights Beneficially Owned
by an Acquiring Person whose Rights would be void pursuant to the preceding
sentence or any Associate or Affiliate thereof; no Right Certificate shall be
issued at any time upon the transfer of any Rights to an Acquiring Person whose
Rights would be void pursuant to the preceding sentence or any Associate or
Affiliate thereof or to any nominee of such Acquiring Person, Associate or
Affiliate; and any Right Certificate delivered to the Rights Agent for transfer
to an Acquiring Person whose Rights would be void pursuant to the preceding
sentence shall be cancelled.
(iii) If there shall not be sufficient Common Shares issued but
not outstanding or authorized but unissued to permit the exercise in full of the
Rights in accordance with the foregoing subparagraph (ii), the Company shall
take all such action as may be necessary to authorize additional Common Shares
for issuance upon exercise of the Rights. If the Company shall, after good faith
effort, be unable to take all such action as may be necessary to authorize such
additional Common Shares, the Company shall substitute, for each Common Share
that would otherwise be issuable upon exercise of a Right, a number of Preferred
Shares or fraction thereof (or a security with substantially similar rights,
privileges, preferences, voting power and economic rights) such that the current
per share market price of one Preferred Share (or such other security)
multiplied by such number or fraction is equal to the current per share market
price of one Common Share as of the date of issuance of such Preferred Shares or
fraction thereof (or other security).
(b) In case the Company shall fix a record date for the issuance of
rights, options or warrants to all holders of Preferred Shares entitling them
(for a period expiring within 45 calendar days after such record date) to
subscribe for or purchase Preferred Shares (or shares having the same rights,
privileges and preferences as the Preferred Shares ("equivalent preferred
shares")) or securities convertible into Preferred Shares or equivalent
preferred shares at a price per Preferred Share or equivalent preferred share
(or having a conversion price per share, if a security convertible into
Preferred Shares or equivalent preferred shares) less than the then current per
share market price of the Preferred Shares on such record date, the Purchase
Price to be in effect after such record date shall be determined by multiplying
the Purchase Price in effect immediately prior to such record date by a
fraction, the numerator of which shall be the number of Preferred Shares
outstanding on such record date plus the number of Preferred Shares which the
aggregate offering price of the total number of Preferred Shares and/or
equivalent preferred shares so to be offered (and/or the aggregate initial
conversion price of the convertible securities so to be offered) would purchase
at such current market price and the denominator of which shall be the number of
Preferred Shares outstanding on such record date plus the number of additional
Preferred Shares and/or equivalent preferred shares to be offered for
subscription or purchase (or into which the convertible securities so to be
offered are initially convertible); provided, however, that in no event shall
the consideration to be paid upon the exercise of one Right be less than the
aggregate par value of the shares of capital stock of the Company issuable upon
exercise of one Right. In case such subscription price may be paid in a
11
<PAGE>
consideration part or all of which shall be in a form other than cash, the value
of such consideration shall be as determined in good faith by the Board of
Directors of the Company, whose determination shall be described in a statement
filed with the Rights Agent and shall be binding on the Rights Agent and the
holders of the Rights. Preferred Shares owned by or held for the account of the
Company shall not be deemed outstanding for the purpose of any such computation.
Such adjustment shall be made successively whenever such a record date is fixed;
and in the event that such rights, options or warrants are not so issued, the
Purchase Price shall be adjusted to be the Purchase Price which would then be in
effect if such record date had not been fixed.
(c) In case the Company shall fix a record date for the making of a
distribution to all holders of the Preferred Shares (including any such
distribution made in connection with a consolidation or merger in which the
Company is the continuing or surviving corporation) of evidences of indebtedness
or assets (other than a regular quarterly cash dividend or a dividend payable in
Preferred Shares) or subscription rights or warrants (excluding those referred
to in Section 11(b) hereof), the Purchase Price to be in effect after such
record date shall be determined by multiplying the Purchase Price in effect
immediately prior to such record date by a fraction, the numerator of which
shall be the then current per share market price of the Preferred Shares on such
record date, less the fair market value (as determined in good faith by the
Board of Directors of the Company, whose determination shall be described in a
statement filed with the Rights Agent and shall be binding on the Rights Agent
and holders of the Rights) of the portion of the assets or evidences of
indebtedness so to be distributed or of such subscription rights or warrants
applicable to one Preferred Share and the denominator of which shall be such
current per share market price of the Preferred Shares; provided, however, that
in no event shall the consideration to be paid upon the exercise of one Right be
less than the aggregate par value of the shares of capital stock of the Company
to be issued upon exercise of one Right. Such adjustments shall be made
successively whenever such a record date is fixed; and in the event that such
distribution is not so made, the Purchase Price shall again be adjusted to be
the Purchase Price which would then be in effect if such record date had not
been fixed.
(d) (i) For the purpose of any computation hereunder, the "current
per share market price" of any security (a "Security" for the purpose of this
Section 11(d)(i)) on any date shall be deemed to be the average of the daily
closing prices per share of such Security for the 30 consecutive Trading Days
immediately prior to such date; provided, however, that in the event that the
current per share market price of the Security is determined during a period
following the announcement by the issuer of such Security of (A) a dividend or
distribution on such Security payable in shares of such Security or securities
convertible into such shares, or (B) any subdivision, combination or
reclassification of such Security and prior to the expiration of 30 Trading Days
after the ex-dividend date for such dividend or distribution, or the record date
for such subdivision, combination or reclassification, then, and in each such
case, the current per share market price shall be appropriately adjusted to
reflect the current market price per share equivalent of such Security. The
closing price for each day shall be the last sale price, regular way, or, in
case no such sale takes place on such day, the average of the
12
<PAGE>
closing bid and asked prices, regular way, in either case, as reported in the
principal consolidated transaction reporting system with respect to securities
listed or admitted to trading on the New York Stock Exchange or, if the Security
is not listed or admitted to trading on the New York Stock Exchange, as reported
in the principal consolidated transaction reporting system with respect to
securities listed on the principal national securities exchange on which the
Security is listed or admitted to trading or, if the Security is not listed or
admitted to trading on any national securities exchange, the last quoted price
or, if not so quoted, the average of the high bid and low asked prices in the
over-the-counter market, as reported by the NASDAQ or such other system then in
use, or, if on any such date the Security is not quoted by any such
organization, the average of the closing bid and asked prices as furnished by a
professional market maker making a market in the Security selected by the Board
of Directors of the Company. If on any such date no such market maker is making
a market in the Security, the fair value of the Security on such date as
determined in good faith by the Board of Directors of the Company shall be used.
The term "Trading Day" shall mean a day on which the principal national
securities exchange on which the Security is listed or admitted to trading is
open for the transaction of business or, if the Security is not listed or
admitted to trading on any national securities exchange, a Business Day.
(ii) For the purpose of any computation hereunder, the "current
per share market price" of the Preferred Shares shall be determined in
accordance with the method set forth in Section 11(d)(i). If the Preferred
Shares are not publicly traded, the "current per share market price" of the
Preferred Shares shall be conclusively deemed to be the current per share market
price of the Common Shares as determined pursuant to Section 11(d)(i)
(appropriately adjusted to reflect any stock split, stock dividend or similar
transaction occurring after the date hereof), multiplied by one thousand. If
neither the Common Shares nor the Preferred Shares are publicly held or so
listed or traded, "current per share market price" shall mean the fair value per
share as determined in good faith by the Board of Directors of the Company,
whose determination shall be described in a statement filed with the Rights
Agent.
(e) No adjustment in the Purchase Price shall be required unless such
adjustment would require an increase or decrease of at least 1% in the Purchase
Price; provided, however, that any adjustments which by reason of this Section
11(e) are not required to be made shall be carried forward and taken into
account in any subsequent adjustment. All calculations under this Section 11
shall be made to the nearest cent or to the nearest one-millionth of a Preferred
Share or one ten-thousandth of any other share or security as the case may be.
Notwithstanding the first sentence of this Section 11(e), any adjustment
required by this Section 11 shall be made no later than the earlier of (i) three
years from the date of the transaction which requires such adjustment or (ii)
the date of the expiration of the right to exercise any Rights.
(f) If, as a result of an adjustment made pursuant to Section 11(a)
hereof, the holder of any Right thereafter exercised shall become entitled to
receive any shares of capital stock of the Company other than Preferred Shares,
thereafter the number of such other shares so receivable upon exercise of any
Right shall be subject to
13
<PAGE>
adjustment from time to time in a manner and on terms as nearly equivalent as
practicable to the provisions with respect to the Preferred Shares contained in
Section 11(a) through (c), inclusive, and the provisions of Sections 7, 9, 10
and 13 with respect to the Preferred Shares shall apply on like terms to any
such other shares.
(g) All Rights originally issued by the Company subsequent to any
adjustment made to the Purchase Price hereunder shall evidence the right to
purchase, at the adjusted Purchase Price, the number of one one-thousandths of a
Preferred Share purchasable from time to time hereunder upon exercise of the
Rights, all subject to further adjustment as provided herein.
(h) Unless the Company shall have exercised its election as provided
in Section 11(i), upon each adjustment of the Purchase Price as a result of the
calculations made in Sections 11(b) and (c), each Right outstanding immediately
prior to the making of such adjustment shall thereafter evidence the right to
purchase, at the adjusted Purchase Price, that number of one one-thousandths of
a Preferred Share (calculated to the nearest one millionth of a Preferred Share)
obtained by (A) multiplying (x) the number of one one-thousandths of a share
covered by a Right immediately prior to this adjustment by (y) the Purchase
Price in effect immediately prior to such adjustment of the Purchase Price and
(B) dividing the product so obtained by the Purchase Price in effect immediately
after such adjustment of the Purchase Price.
(i) The Company may elect on or after the date of any adjustment of
the Purchase Price to adjust the number of Rights in substitution for any
adjustment in the number of one one-thousandths of a Preferred Share purchasable
upon the exercise of a Right. Each of the Rights outstanding after such
adjustment of the number of Rights shall be exercisable for the number of one
one-thousandths of a Preferred Share for which a Right was exercisable
immediately prior to such adjustment. Each Right held of record prior to such
adjustment of the number of Rights shall become that number of Rights
(calculated to the nearest one millionth) obtained by dividing the Purchase
Price in effect immediately prior to adjustment of the Purchase Price by the
Purchase Price in effect immediately after adjustment of the Purchase Price. The
Company shall make a public announcement of its election to adjust the number of
Rights, indicating the record date for the adjustment, and, if known at the
time, the amount of the adjustment to be made. This record date may be the date
on which the Purchase Price is adjusted or any day thereafter, but, if the Right
Certificates have been issued, shall be at least 10 days later than the date of
the public announcement. If Right Certificates have been issued, upon each
adjustment of the number of Rights pursuant to this Section 11(i), the Company
shall, as promptly as practicable, cause to be distributed to holders of record
of Right Certificates on such record date Right Certificates evidencing, subject
to Section 14 hereof, the additional Rights to which such holders shall be
entitled as a result of such adjustment, or, at the option of the Company, shall
cause to be distributed to such holders of record in substitution and
replacement for the Right Certificates held by such holders prior to the date of
adjustment, and upon surrender thereof, if required by the Company, new Right
Certificates evidencing all the Rights to which such holders shall be entitled
after such adjustment. Right Certificates so to be distributed shall be issued,
executed
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<PAGE>
and countersigned in the manner provided for herein and shall be registered in
the names of the holders of record of Right Certificates on the record date
specified in the public announcement.
(j) Irrespective of any adjustment or change in the Purchase Price or
the number of one one-thousandths of a Preferred Share issuable upon the
exercise of the Rights, the Right Certificates theretofore and thereafter issued
may continue to express the Purchase Price and the number of one one-thousandths
of a Preferred Share which were expressed in the initial Right Certificates
issued hereunder.
(k) Before taking any action that would cause an adjustment reducing
the Purchase Price below one one-thousandth of the then par value, if any, of
the Preferred Shares issuable upon exercise of the Rights, the Company shall
take any corporate action which may, in the opinion of its counsel, be necessary
in order that the Company may validly and legally issue fully paid and
nonassessable Preferred Shares at such adjusted Purchase Price.
(l) In any case in which this Section 11 shall require that an
adjustment in the Purchase Price be made effective as of a record date for a
specified event, the Company may elect to defer until the occurrence of such
event the issuing to the holder of any Right exercised after such record date of
the Preferred Shares and other capital stock or securities of the Company, if
any, issuable upon such exercise over and above the Preferred Shares and other
capital stock or securities of the Company, if any, issuable upon such exercise
on the basis of the Purchase Price in effect prior to such adjustment; provided,
however, that the Company shall deliver to such holder a due bill or other
appropriate instrument evidencing such holder's right to receive such additional
shares upon the occurrence of the event requiring such adjustment.
(m) Anything in this Section 11 to the contrary notwithstanding, the
Company shall be entitled to make such reductions in the Purchase Price, in
addition to those adjustments expressly required by this Section 11, as and to
the extent that, it, in its sole discretion, shall determine to be advisable in
order that any consolidation or subdivision of the Preferred Shares, issuance
wholly for cash of any Preferred Shares at less than the current market price,
issuance wholly for cash of Preferred Shares or securities which by their terms
are convertible into or exchangeable for Preferred Shares, dividends on
Preferred Shares payable in Preferred Shares or issuance of rights, options or
warrants referred to hereinabove in Section 11(b), hereafter made by the Company
to holders of its Preferred Shares shall not be taxable to such stockholders.
(n) In the event that at any time after the date of this Rights
Agreement and prior to the Distribution Date, the Company shall (i) declare or
pay any dividend on the Common Shares payable in Common Shares or (ii) effect a
subdivision, combination or consolidation of the Common Shares (by
reclassification or otherwise than by payment of dividends in Common Shares)
into a greater or lesser number of Common Shares, then in any such case (A) the
number of one one-thousandths of a Preferred Share purchasable after such event
upon proper exercise of each Right shall be determined by multiplying
15
<PAGE>
the number of one one-thousandths of a Preferred Share so purchasable
immediately prior to such event by a fraction, the numerator of which is the
number of Common Shares outstanding immediately before such event and the
denominator of which is the number of Common Shares outstanding immediately
after such event, and (B) each Common Share outstanding immediately after such
event shall have issued with respect to it that number of Rights which each
Common Share outstanding immediately prior to such event had issued with respect
to it. The adjustments provided for in this Section 11(n) shall be made
successively whenever such a dividend is declared or paid or such a subdivision,
combination or consolidation is effected.
Section 12. Certificate of Adjusted Purchase Price or Number of Shares.
----------------------------------------------------------
Whenever an adjustment is made as provided in Sections 11 or 13 hereof, the
Company shall promptly (a) prepare a certificate setting forth such adjustment,
and a brief statement of the facts accounting for such adjustment, (b) file with
the Rights Agent and with each transfer agent for the Common Shares or the
Preferred Shares a copy of such certificate and (c) if a Distribution Date has
occurred, mail a brief summary thereof to each holder of a Right Certificate in
accordance with Section 25 hereof.
Section 13. Consolidation, Merger or Sale or Transfer of Assets or Earning
--------------------------------------------------------------
Power. In the event, directly or indirectly, at any time after a Person has
- -----
become an Acquiring Person, (a) the Company shall consolidate with, or merge
with and into, any other Person, (b) any Person shall consolidate with the
Company, or merge with and into the Company and the Company shall be the
continuing or surviving corporation of such merger and, in connection with such
merger, all or part of the Common Shares shall be changed into or exchanged for
stock or other securities of any other Person (or the Company) or cash or any
other property or (c) the Company shall sell or otherwise transfer (or one or
more of its Subsidiaries shall sell or otherwise transfer), in one or more
transactions, assets or earning power aggregating 50% or more of the assets or
earning power of the Company and its Subsidiaries (taken as a whole) to any
other Person other than the Company or one or more of its wholly owned
Subsidiaries, then, and in each such case, proper provision shall be made so
that
(i) each holder of a Right (except as otherwise provided
herein) shall thereafter have the right to receive, upon the exercise thereof at
a price equal to the then-current Purchase Price multiplied by the number of one
one-thousandths of a Preferred Share for which a Right is then exercisable, in
accordance with the terms of this Rights Agreement and in lieu of Preferred
Shares, such number of Common Shares of such other Person (including the Company
as successor thereto or as the surviving corporation) as shall equal the result
obtained by (A) multiplying the then current Purchase Price by the number of one
one-thousandths of a Preferred Share for which a Right is then exercisable and
dividing that product by (B) 50% of the then current per share market price of
the Common Shares of such other Person (determined pursuant to Section 11(d)
hereof) on the date of consummation of such consolidation, merger, sale or
transfer;
16
<PAGE>
(ii) the issuer of such Common Shares shall thereafter be
liable for, and shall assume, by virtue of such consolidation, merger, sale or
transfer, all the obligations and duties of the Company pursuant to this Rights
Agreement;
(iii) the term "Company" shall thereafter be deemed to refer
to such issuer; and
(iv) such issuer shall take such steps (including, but not
limited to, the reservation of a sufficient number of its Common Shares in
accordance with Section 9 hereof) in connection with such consummation as may be
necessary to assure that the provisions hereof shall thereafter be applicable,
as nearly as reasonably may be, in relation to the Common Shares thereafter
deliverable upon the exercise of the Rights.
The Company shall not consummate any such consolidation, merger, sale or
transfer unless prior thereto the Company and such issuer shall have executed
and delivered to the Rights Agent a supplemental agreement so providing. The
Company shall not enter into any transaction of the kind referred to in this
Section 13 if at the time of such transaction there are any rights, warrants,
instruments or securities outstanding or any agreements or arrangements which,
as a result of the consummation of such transaction, would eliminate or
substantially diminish the benefits intended to be afforded by the Rights. The
provisions of this Section 13 shall similarly apply to successive mergers or
consolidations or sales or other transfers.
Section 14. Fractional Rights and Fractional Shares.
---------------------------------------
(a) The Company shall not be required to issue fractions of Rights
or to distribute Right Certificates which evidence fractional Rights. In lieu of
such fractional Rights, there shall be paid to the registered holders of the
Right Certificates with regard to which such fractional Rights would otherwise
be issuable, an amount in cash equal to the same fraction of the current market
value of a whole Right. For the purposes of this Section 14(a), the current
market value of a whole Right shall be the closing price of the Rights for the
Trading Day immediately prior to the date on which such fractional Rights would
have been otherwise issuable. The closing price for any day shall be the last
sale price, regular way, or, in case no such sale takes place on such day, the
average of the closing bid and asked prices, regular way, in either case, as
reported in the principal consolidated transaction reporting system with respect
to securities listed or admitted to trading on the New York Stock Exchange or,
if the Rights are not listed or admitted to trading on the New York Stock
Exchange, as reported in the principal consolidated transaction reporting system
with respect to securities listed on the principal national securities exchange
on which the Rights are listed or admitted to trading or, if the Rights are not
listed or admitted to trading on any national securities exchange, the last
quoted price or, if not so quoted, the average of the high bid and low asked
prices in the over-the-counter market, as reported by NASDAQ or such other
system then in use or, if on any such date the Rights are not quoted by any such
organization, the average of the closing bid and asked prices as furnished by a
professional market maker making a market in the Rights selected by the Board of
Directors of the Company. If on any such
17
<PAGE>
date no such market maker is making a market in the Rights, the fair value of
the Rights on such date as determined in good faith by the Board of Directors of
the Company shall be used.
(b) The Company shall not be required to issue fractions of
Preferred Shares (other than fractions which are integral multiples of one one-
thousandth of a Preferred Share) upon exercise of the Rights or to distribute
certificates which evidence fractional Preferred Shares (other than fractions
which are integral multiples of one one-thousandth of a Preferred Share).
Fractions of Preferred Shares in integral multiples of one one-thousandth of a
Preferred Share may, at the election of the Company, be evidenced by depositary
receipts, pursuant to an appropriate agreement between the Company and a
depositary selected by it; provided that such agreement shall provide that the
holders of such depositary receipts shall have all the rights, privileges and
preferences to which they are entitled as Beneficial Owners of the Preferred
Shares represented by such depositary receipts. In lieu of fractional Preferred
Shares that are not integral multiples of one one-thousandth of a Preferred
Share, the Company shall pay to the registered holders of Right Certificates at
the time such Rights are exercised as herein provided an amount in cash equal to
the same fraction of the current market value of one Preferred Share. For the
purposes of this Section 14(b), the current market value of a Preferred Share
shall be the closing price of a Preferred Share (as determined pursuant to the
second sentence of Section 11(d)(i) hereof) for the Trading Day immediately
prior to the date of such exercise.
(c) The Company shall not be required to issue fractions of Common
Shares or to distribute certificates which evidence fractional Common Shares. In
lieu of such fractional Common Shares, the Company shall pay to the registered
holder of the Right Certificates at the time such Rights are exercised as herein
provided an amount of cash equal to the same fraction of the current market
value of a whole Common Share. For the purpose of this Section 14(c), the
current market value of a Common Share (as defined pursuant to Section 11(d)(i)
hereof) for the Trading Day immediately prior to the date of such exercise.
(d) The holder of a Right by the acceptance of the Right expressly
waives such holder's right to receive any fractional Rights or any fractional
shares upon exercise of a Right (except as expressly provided above).
Section 15. Rights of Action. All rights of action in respect of this
----------------
Rights Agreement, except the rights of action given to the Rights Agent under
Section 18 hereof, are vested in the respective registered holders of the Right
Certificates (and, prior to the Distribution Date, the registered holders of the
Common Shares); and any registered holder of any Right Certificate (or, prior to
the Distribution Date, of the Common Shares), without the consent of the Rights
Agent or of the holder of any other Right Certificate (or, prior to the
Distribution Date, of the Common Shares), may, in such holder's own behalf and
for such holder's own benefit, enforce, and may institute and maintain any suit,
action or proceeding against the Company to enforce, or otherwise act in respect
of, such holder's right to exercise the Rights evidenced by such Right
18
<PAGE>
Certificate in the manner provided in such Right Certificate and in this Rights
Agreement. Without limiting the foregoing or any remedies available to the
holders of Rights, it is specifically acknowledged that the holders of Rights
would not have an adequate remedy at law for any breach of this Rights Agreement
and will be entitled to specific performance of the obligations under, and
injunctive relief against actual or threatened violations of the obligations of
any Person subject to, this Rights Agreement.
Section 16. Agreement of Right Holders. Every holder of a Right, by
--------------------------
accepting the same, consents and agrees with the Company and the Rights Agent
and with every other holder of a Right that:
(a) prior to the Distribution Date, the Rights will be
transferable only in connection with the transfer of the Common Shares;
(b) after the Distribution Date, the Right Certificates are
transferable only on the registry books of the Rights Agent if surrendered at
the principal office of the Rights Agent, duly endorsed or accompanied by a
proper instrument of transfer; and
(c) the Company and the Rights Agent may deem and treat the Person
in whose name the Right Certificate (or, prior to the Distribution Date, the
associated Common Shares certificate) is registered as the absolute owner
thereof and of the Rights evidenced thereby (notwithstanding any notations of
ownership or writing on the Right Certificate or the associated Common Shares
certificate made by anyone other than the Company or the Rights Agent) for all
purposes whatsoever, and neither the Company nor the Rights Agent shall be
affected by any notice to the contrary.
Section 17. Right Certificate Holder Not Deemed a Stockholder. No holder,
-------------------------------------------------
as such, of any Right Certificate shall be entitled to vote, receive dividends
or be deemed for any purpose the holder of the Preferred Shares or any other
securities of the Company which may at any time be issuable on the exercise of
the Rights represented thereby, nor shall anything contained herein or in any
Right Certificate be construed to confer upon the holder of any Right
Certificate, as such, any of the rights of a stockholder of the Company or any
right to vote for the election of directors or upon any matter submitted to
stockholders at any meeting thereof, or to give or withhold consent to any
corporate action, or to receive notice of meetings or other actions affecting
stockholders (except as provided in Section 25 hereof), or to receive dividends
or subscription rights, or otherwise, until the Right or Rights evidenced by
such Right Certificate shall have been exercised in accordance with the
provisions hereof.
Section 18. Concerning the Rights Agent. (a) The Company agrees to pay
---------------------------
to the Rights Agent reasonable compensation for all services rendered by it
hereunder and, from time to time, on demand of the Rights Agent, its reasonable
expenses and counsel fees and other disbursements incurred in the administration
and execution of this Rights Agreement and the exercise and performance of its
duties hereunder. The Company also agrees to indemnify the Rights Agent for, and
to hold it harmless against, any loss,
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<PAGE>
liability or expense incurred without negligence, bad faith or willful
misconduct on the part of the Rights Agent, for anything done or omitted by the
Rights Agent in connection with the acceptance and administration of this Rights
Agreement, including the costs and expenses of defending against any claim of
liability in the premises.
(b) The Rights Agent shall be protected and shall incur no
liability for, or in respect of any action taken, suffered or omitted by it in
connection with, its administration of this Rights Agreement in reliance upon
any Right Certificate or certificate for the Preferred Shares or Common Shares
or for other securities of the Company, instrument of assignment or transfer,
power of attorney, endorsement, affidavit, letter, notice, direction, consent,
certificate, statement, or other paper or document believed by it to be genuine
and to be signed, executed and, where necessary, verified or acknowledged, by
the proper Person or Persons, or otherwise upon the advice of counsel as set
forth in Section 20 hereof.
Section 19. Merger or Consolidation or Change of Name of Rights Agent. (a)
---------------------------------------------------------
Any corporation into which the Rights Agent or any successor Rights Agent may be
merged or with which it may be consolidated, or any corporation resulting from
any merger or consolidation to which the Rights Agent or any successor Rights
Agent shall be a party, or any corporation succeeding to the stock transfer or
corporate trust powers of the Rights Agent or any successor Rights Agent, shall
be the successor to the Rights Agent under this Rights Agreement without the
execution or filing of any paper or any further act on the part of any of the
parties hereto; provided that such corporation would be eligible for appointment
as a successor Rights Agent under the provisions of Section 21 hereof. In case
at the time such successor Rights Agent shall succeed to the agency created by
this Rights Agreement, any of the Right Certificates shall have been
countersigned but not delivered, any such successor Rights Agent may adopt the
countersignature of the predecessor Rights Agent and deliver such Right
Certificates so countersigned; and, in case at that time any of the Right
Certificates shall not have been countersigned, any successor Rights Agent may
countersign such Right Certificates either in the name of the predecessor Rights
Agent or in the name of the successor Rights Agent; and in all such cases such
Right Certificates shall have the full force provided in the Right Certificates
and in this Rights Agreement.
(b) In case at any time the name of the Rights Agent shall be
changed and at such time any of the Right Certificates shall have been
countersigned but not delivered, the Rights Agent may adopt the countersignature
under its prior name and deliver Right Certificates so countersigned; and in
case at that time any of the Right Certificates shall not have been
countersigned, the Rights Agent may countersign such Right Certificates either
in its prior name or in its changed name; and in all such cases such Right
Certificates shall have the full force provided in the Right Certificates and in
this Rights Agreement.
Section 20. Duties of Rights Agent. The Rights Agent undertakes the duties
----------------------
and obligations imposed by this Rights Agreement upon the following terms and
20
<PAGE>
conditions, by all of which the Company and the holders of Right Certificates,
by their acceptance thereof, shall be bound:
(a) The Rights Agent may consult with legal counsel (who may be legal
counsel for the Company), and the opinion of such counsel shall be full and
complete authorization and protection to the Rights Agent as to any action taken
or omitted by it in good faith and in accordance with such opinion.
(b) Whenever in the performance of its duties under this Rights
Agreement the Rights Agent shall deem it necessary or desirable that any fact or
matter be proved or established by the Company prior to taking or suffering any
action hereunder, such fact or matter (unless other evidence in respect thereof
be herein specifically prescribed) may be deemed to be conclusively proved and
established by a certificate signed by any one of the Chairman of the Board, the
Chief Executive Officer, the President, any Vice President, the Treasurer or the
Secretary of the Company and delivered to the Rights Agent; and such certificate
shall be full authorization to the Rights Agent for any action taken or suffered
in good faith by it under the provisions of this Rights Agreement in reliance
upon such certificate.
(c) The Rights Agent shall be liable hereunder to the Company and any
other Person only for its own negligence, bad faith or willful misconduct.
(d) The Rights Agent shall not be liable for or by reason of any of
the statements of fact or recitals contained in this Rights Agreement or in the
Right Certificates (except its countersignature thereof) or be required to
verify the same, but all such statements and recitals are and shall be deemed to
have been made by the Company only.
(e) The Rights Agent shall not be under any responsibility in respect
of the validity of this Rights Agreement or the execution and delivery hereof
(except the due execution hereof by the Rights Agent) or in respect of the
validity or execution of any Right Certificate (except its countersignature
thereof); nor shall it be responsible for any breach by the Company of any
covenant or condition contained in this Rights Agreement or in any Right
Certificate; nor shall it be responsible for any change in the exercisability of
the Rights (including the Rights becoming void pursuant to Section 11(a)(ii)
hereof) or any adjustment in the terms of the Rights (including the manner,
method or amount thereof) provided for in Section 3, 11, 13, 23 or 24, or the
ascertaining of the existence of facts that would require any such change or
adjustment (except with respect to the exercise of Rights evidenced by Right
Certificates after actual notice that such change or adjustment is required);
nor shall it by any act hereunder be deemed to make any representation or
warranty as to the authorization or reservation of any Preferred Shares to be
issued pursuant to this Rights Agreement or any Right Certificate or as to
whether any Preferred Shares will, when issued, be validly authorized and
issued, fully paid and nonassessable.
21
<PAGE>
(f) The Company agrees that it will perform, execute, acknowledge
and deliver or cause to be performed, executed, acknowledged and delivered all
such further and other acts, instruments and assurances as may reasonably be
required by the Rights Agent for the carrying out or performing by the Rights
Agent of the provisions of this Rights Agreement.
(g) The Rights Agent is hereby authorized and directed to accept
instructions with respect to the performance of its duties hereunder from any
one of the Chairman of the Board, the Chief Executive Officer, the President,
any Vice President, the Secretary or the Treasurer of the Company, and to apply
to such officers for advice or instructions in connection with its duties, and
it shall not be liable for any action taken or suffered by it in good faith in
accordance with instructions of any such officer or for any delay in acting
while waiting for those instructions.
(h) The Rights Agent and any stockholder, director, officer or
employee of the Rights Agent may buy, sell or deal in any of the Rights or other
securities of the Company or become pecuniarily interested in any transaction in
which the Company may be interested, or contract with or lend money to the
Company or otherwise act as fully and freely as though it were not Rights Agent
under this Rights Agreement. Nothing herein shall preclude the Rights Agent from
acting in any other capacity for the Company or for any other legal entity.
(i) The Rights Agent may execute and exercise any of the rights or
powers hereby vested in it or perform any duty hereunder either itself or by or
through its attorneys or agents, and the Rights Agent shall not be answerable or
accountable for any act, default, neglect or misconduct of any such attorneys or
agents or for any loss to the Company resulting from any such act, default,
neglect or misconduct, provided reasonable care was exercised in the selection
and continued employment thereof.
Section 21. Change of Rights Agent. The Rights Agent or any successor
----------------------
Rights Agent may resign and be discharged from its duties under this Rights
Agreement upon 30-days' notice in writing mailed to the Company and to each
transfer agent of the Common Shares or Preferred Shares by registered or
certified mail, and to the holders of the Right Certificates by first-class
mail. The Company may remove the Rights Agent or any successor Rights Agent upon
30-days' notice in writing, mailed to the Rights Agent or successor Rights
Agent, as the case may be, and to each transfer agent of the Common Shares or
Preferred Shares by registered or certified mail, and to the holders of the
Right Certificates by first-class mail. If the Rights Agent shall resign or be
removed or shall otherwise become incapable of acting, the Company shall appoint
a successor to the Rights Agent. If the Company shall fail to make such
appointment within a period of 30 days after giving notice of such removal or
after it has been notified in writing of such resignation or incapacity by the
resigning or incapacitated Rights Agent or by the holder of a Right Certificate
(who or which shall, with such notice, submit such holder's Right Certificate
for inspection by the Company), then the registered holder of any Right
Certificate may apply to any court of competent jurisdiction for the appointment
of a new Rights Agent. Any successor Rights Agent, whether appointed by the
Company or by
22
<PAGE>
such a court, shall be a corporation organized and doing business under the laws
of the United States or of the State of New York (or of any other state of the
United States so long as such corporation is authorized to do business as a
banking institution in the State of New York, in good standing, having an office
in the State of New York, which is authorized under such laws to exercise
corporate trust or stock transfer powers and is subject to supervision or
examination by federal or state authority and which has at the time of its
appointment as Rights Agent a combined capital and surplus of at least $50
million. After appointment, the successor Rights Agent shall be vested with the
same powers, rights, duties and responsibilities as if it had been originally
named as Rights Agent without further act or deed; but the predecessor Rights
Agent shall deliver and transfer to the successor Rights Agent any property at
the time held by it hereunder, and execute and deliver any further assurance,
conveyance, act or deed necessary for the purpose. Not later than the effective
date of any such appointment, the Company shall file notice thereof in writing
with the predecessor Rights Agent and each transfer agent of the Common Shares
or Preferred Shares, and mail a notice thereof in writing to the registered
holders of the Right Certificates. Failure to give any notice provided for in
this Section 21, however, or any defect therein, shall not affect the legality
or validity of the resignation or removal of the Rights Agent or the appointment
of the successor Rights Agent, as the case may be.
Section 22. Issuance of New Right Certificates. Notwithstanding any of the
----------------------------------
provisions of this Rights Agreement or of the Rights to the contrary, the
Company may, at its option, issue new Right Certificates evidencing Rights in
such form as may be approved by the Board of Directors of the Company to reflect
any adjustment or change in the Purchase Price and the number or kind or class
of shares or other securities or property purchasable under the Right
Certificates made in accordance with the provisions of this Rights Agreement.
Section 23. Redemption. (a) The Board of Directors of the Company may, at
----------
its option, at any time prior to such time as any Person becomes an Acquiring
Person, redeem all but not less than all the then outstanding Rights at a
redemption price of $.01 per Right, appropriately adjusted to reflect any stock
split, stock combination, stock dividend or similar transaction occurring after
the date hereof (such redemption price being hereinafter referred to as the
"Redemption Price"). The redemption of the Rights by the Board of Directors of
the Company may be made effective at such time, on such basis and with such
conditions as the Board of Directors of the Company, in its sole discretion, may
establish. The Company may, at its option, pay the Redemption Price in cash,
Common Shares (based on the current market price at the time of redemption) or
any other form of consideration deemed appropriate by the Board of Directors.
(b) Immediately upon the action of the Board of Directors of the
Company ordering the redemption of the Rights pursuant to paragraph (a) of this
Section 23, and without any further action and without any notice, the right to
exercise the Rights will terminate and the only right thereafter of the holders
of Rights shall be to receive the Redemption Price. The Company shall promptly
give public notice of any such redemption; provided, however, that the failure
to give, or any defect in, any such notice
23
<PAGE>
shall not affect the validity of such redemption. Within 10 days after such
action of the Board of Directors of the Company ordering the redemption of the
Rights, the Company shall mail a notice of redemption to all the holders of the
then outstanding Rights at their last addresses as they appear upon the registry
books of the Rights Agent or, prior to the Distribution Date, on the registry
books of the transfer agent for the Common Shares. Any notice which is mailed in
the manner herein provided shall be deemed given, whether or not the holder
receives the notice. Each such notice of redemption will state the method by
which the payment of the Redemption Price will be made. Neither the Company nor
any of its Affiliates or Associates may redeem, acquire or purchase for value
any Rights at any time in any manner other than that specifically set forth in
this Section 23 or in Section 24 hereof, and other than in connection with the
purchase of Common Shares prior to the Distribution Date.
Section 24. Exchange. (a) The Board of Directors of the Company may, at
--------
its option, at any time after any Person becomes an Acquiring Person, exchange
all or part of the then outstanding and exercisable Rights (which shall not
include Rights that have become void pursuant to the provisions of Section
11(a)(ii) hereof) for Common Shares at an exchange ratio of one Common Share per
Right, appropriately adjusted to reflect any adjustment in the number of Rights
pursuant to Section 11(i) (such exchange ratio being hereinafter referred to as
the "Exchange Ratio"). Notwithstanding the foregoing, the Board of Directors of
the Company shall not be empowered to effect such exchange at any time after any
Person (other than the Company, any Subsidiary of the Company, any employee
benefit plan of the Company or any such Subsidiary, or any entity holding Common
Shares for or pursuant to the terms of any such plan), together with all
Affiliates and Associates of such Person, becomes the Beneficial Owner of 50% or
more of the Common Shares then outstanding.
(b) Immediately upon the action of the Board of Directors of the
Company ordering the exchange of any Rights pursuant to paragraph (a) of this
Section 24 and without any further action and without any notice, the right to
exercise such Rights shall terminate and the only right thereafter of a holder
of such Rights shall be to receive that number of Common Shares equal to the
number of such Rights held by such holder multiplied by the Exchange Ratio. The
Company shall promptly give public notice of any such exchange; provided,
however, that the failure to give, or any defect in, such notice shall not
affect the validity of such exchange. The Company promptly shall mail a notice
of any such exchange to all of the holders of such Rights at their last
addresses as they appear upon the registry books of the Rights Agent. Any notice
which is mailed in the manner herein provided shall be deemed given, whether or
not the holder receives the notice. Each such notice of exchange will state the
method by which the exchange of the Common Shares for Rights will be effected
and, in the event of any partial exchange, the number of Rights which will be
exchanged. Any partial exchange shall be effected pro rata based on the number
of Rights (other than Rights which have become void pursuant to the provisions
of Section 11(a)(ii) hereof) held by each holder of Rights.
24
<PAGE>
(c) In the event that there shall not be sufficient Common Shares
issued but not outstanding or authorized but unissued to permit any exchange of
Rights as contemplated in accordance with this Section 24, the Company shall
take all such action as may be necessary to authorize additional Common Shares
for issuance upon exchange of the Rights. In the event the Company shall, after
good faith effort, be unable to take all such action as may be necessary to
authorize such additional Common Shares, the Company shall substitute, for each
Common Share that would otherwise be issuable upon exchange of a Right, a number
of Preferred Shares or fraction thereof (or a security with substantially
similar rights, privileges, preferences, voting power and economic rights) such
that the current per share market price of one Preferred Share (or other such
security) multiplied by such number or fraction is equal to the current per
share market price of one Common Share as of the date of issuance of such
Preferred Shares or fraction thereof (or other such security).
(d) The Company shall not be required to issue fractions of Common
Shares or to distribute certificates which evidence fractional Common Shares. In
lieu of such fractional Common Shares, the Company shall pay to the registered
holders of the Right Certificates with regard to which such fractional Common
Shares would otherwise be issuable an amount in cash equal to the same fraction
of the current market value of a whole Common Share. For the purposes of this
paragraph (d), the current market value of a whole Common Share shall be the
closing price of a Common Share (as determined pursuant to the second sentence
of Section 11(d)(i) hereof) for the Trading Day immediately prior to the date of
exchange pursuant to this Section 24.
Section 25. Notice of Certain Events. (a) In case the Company, at any
------------------------
time after the Distribution Date, shall propose (i) to pay any dividend payable
in stock of any class to the holders of its Preferred Shares or to make any
other distribution to the holders of its Preferred Shares (other than a regular
quarterly cash dividend), (ii) to offer to the holders of its Preferred Shares
rights or warrants to subscribe for or to purchase any additional Preferred
Shares or shares of stock of any class or any other securities, rights or
options, (iii) to effect any reclassification of its Preferred Shares (other
than a reclassification involving only the subdivision of outstanding Preferred
Shares), (iv) to effect any consolidation or merger into or with, or to effect
any sale or other transfer (or to permit one or more of its Subsidiaries to
effect any sale or other transfer), in one or more transactions, of 50% or more
of the assets or earning power of the Company and its Subsidiaries (taken as a
whole) to, any other Person, (v) to effect the liquidation, dissolution or
winding up of the Company, or (vi) to declare or pay any dividend on the Common
Shares payable in Common Shares or to effect a subdivision, combination or
consolidation of the Common Shares (by reclassification or otherwise than by
payment of dividends in Common Shares), then, in each such case, the Company
shall give to each holder of a Right Certificate, in accordance with Section 26
hereof, a notice of such proposed action, which shall specify the record date
for the purposes of such stock dividend, or distribution of rights or warrants,
or the date on which such reclassification, consolidation, merger, sale,
transfer, liquidation, dissolution, or winding up is to take place and the date
of participation therein by the holders of the Common Shares and/or Preferred
Shares, if any such date is to be fixed, and such notice shall be so given in
the
25
<PAGE>
case of any action covered by clause (i) or (ii) above at least 10 days prior to
the record date for determining holders of the Preferred Shares for purposes of
such action, and in the case of any such other action, at least 10 days prior to
the date of the taking of such proposed action or the date of participation
therein by the holders of the Common Shares and/or Preferred Shares, whichever
shall be the earlier.
(b) In case the event set forth in Section 11(a)(ii) hereof shall
occur, then the Company shall as soon as practicable thereafter give to each
holder of a Right Certificate, in accordance with Section 26 hereof, a notice of
the occurrence of such event, which notice shall describe such event and the
consequences of such event to holders of Rights under Section 11(a)(ii) hereof.
Section 26. Notices. Notices or demands authorized by this Rights
-------
Agreement to be given or made by the Rights Agent or by the holder of any Right
Certificate to or on the Company shall be sufficiently given or made if sent by
first-class mail, postage prepaid, addressed (until another address is filed in
writing with the Rights Agent) as follows:
LifePoint Hospitals, Inc.
4525 Harding Road
Nashville, Tennessee 37205
Subject to the provisions of Section 21 hereof, any notice or demand
authorized by this Rights Agreement to be given or made by the Company or by the
holder of any Right Certificate to or on the Rights Agent shall be sufficiently
given or made if sent by first-class mail, postage prepaid, addressed (until
another address is filed in writing with the Company) as follows:
____________________
____________________
____________________
Notices or demands authorized by this Rights Agreement to be given or made
by the Company or the Rights Agent to the holder of any Right Certificate shall
be sufficiently given or made if sent by first-class mail, postage prepaid,
addressed to such holder at the address of such holder as shown on the registry
books of the Company.
Section 27. Supplements and Amendments. The Board of Directors of the
--------------------------
Company may from time to time supplement or amend this Rights Agreement without
the approval of any holders of Right Certificates in order to cure any
ambiguity, to correct or supplement any provision contained herein which may be
defective or inconsistent with any other provisions herein, or to make any other
provisions with respect to the Rights which the Board of Directors of the
Company may deem necessary or desirable, any such supplement or amendment to be
evidenced by a writing signed by the Company and the Rights Agent, provided,
however, after any Person becomes an Acquiring Person, this Rights Agreement
shall not be amended in any manner which
26
<PAGE>
would adversely affect the interests of the holders of Rights (other than an
Acquiring Person or Affiliate or Associate thereof).
Section 28. Successors. All the covenants and provisions of this Rights
----------
Agreement by or for the benefit of the Company or the Rights Agent shall bind
and inure to the benefit of their respective successors and assigns hereunder.
Section 29. Benefits of this Rights Agreement. Nothing in this Rights
---------------------------------
Agreement shall be construed to give to any Person, other than the Company, the
Rights Agent and the registered holders of the Right Certificates (and, prior to
the Distribution Date, the Common Shares) any legal or equitable right, remedy
or claim under this Rights Agreement; but this Rights Agreement shall be for the
sole and exclusive benefit of the Company, the Rights Agent and the registered
holders of the Right Certificates (and, prior to the Distribution Date, the
Common Shares).
Section 30. Severability. If any term, provision, covenant or restriction
------------
of this Rights Agreement is held by a court of competent jurisdiction or other
authority to be invalid, void or unenforceable, the remainder of the terms,
provisions, covenants and restrictions of this Rights Agreement shall remain in
full force and effect and shall in no way be affected, impaired or invalidated.
Section 31. Governing Law. This Rights Agreement and each Right
-------------
Certificate issued hereunder shall be deemed to be a contract made under the
laws of the State of New York and for all purposes shall be governed by and
construed in accordance with the laws of such State applicable to contracts to
be made and performed entirely within such State.
Section 32. Counterparts. This Rights Agreement may be executed in any
------------
number of counterparts and each of such counterparts shall for all purposes be
deemed to be an original, and all such counterparts shall together constitute
but one and the same instrument.
Section 33. Descriptive Headings. Descriptive headings of the several
--------------------
Sections of this Rights Agreement are inserted for convenience only and shall
not control or affect the meaning or construction of any of the provisions
hereof.
27
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Rights
Agreement to be duly executed and attested, all as of the day and year first
above written.
LIFEPOINT HOSPITALS, INC.
By: _____________________________
Name:
Title:
[_______________________________]
By: _____________________________
Name:
Title:
28
<PAGE>
Exhibit A
---------
Form of Right Certificate
Certificate No. R-
___________ Rights
NOT EXERCISABLE AFTER ________, 2009 OR EARLIER IF REDEMPTION OR EXCHANGE
OCCURS. THE RIGHTS ARE SUBJECT TO REDEMPTION AT $.01 PER RIGHT AND TO EXCHANGE
ON THE TERMS SET FORTH IN THE RIGHTS AGREEMENT.
Rights Certificate
LifePoint Hospitals, Inc.
This certifies that __________, or registered assigns, is the
registered owner of the number of Rights set forth above, each of which entitles
the owner thereof, subject to the terms, provisions and conditions of the Rights
Agreement, dated as of ___ __, 1999 (the "Rights Agreement"), between LifePoint
Hospitals, Inc., a Delaware corporation (the "Company"), and ______________
(the "Rights Agent"), to purchase from the Company at any time after the
Distribution Date (as such term is defined in the Rights Agreement) and prior to
5:00 p.m., New York time, on ______ __, 2009 at the principal office of the
Rights Agent, or at the office of its successor as Rights Agent, one one-
thousandth of a fully paid non-assessable share of Series A Junior Participating
Preferred Stock of the Company, par value $.01 per share (the "Preferred
Shares"), at a purchase price of $____ per one one-thousandth of a Preferred
Share (the "Purchase Price"), upon presentation and surrender of this Right
Certificate with the Form of Election to Purchase duly executed. The number of
Rights evidenced by this Right Certificate (and the number of one one-
thousandths of a Preferred Share which may be purchased upon exercise hereof)
set forth above, and the Purchase Price set forth above, are the number and
Purchase Price as of ___ __, 1999, based on the Preferred Shares as constituted
at such date. As provided in the Rights Agreement, the Purchase Price and the
number of one one-thousandths of a Preferred Share which may be purchased upon
the exercise of the Rights evidenced by this Right Certificate are subject to
modification and adjustment upon the happening of certain events.
This Right Certificate is subject to all of the terms, provisions and
conditions of the Rights Agreement, which terms, provisions and conditions are
hereby incorporated herein by reference and made a part hereof and to which
Rights Agreement reference is hereby made for a full description of the rights,
limitations of rights, obligations, duties and immunities hereunder of the
Rights Agent, the Company and the holders of the Right Certificates. Copies of
the Rights Agreement are on file at the principal executive offices of the
Company and the offices of the Rights Agent.
A-1
<PAGE>
This Right Certificate, with or without other Right Certificates, upon
surrender at the principal office of the Rights Agent, may be exchanged for
another Right Certificate or Right Certificates of like tenor and date
evidencing Rights entitling the holder to purchase a like aggregate number of
Preferred Shares as the Rights evidenced by the Right Certificate or Right
Certificates surrendered shall have entitled such holder to purchase. If this
Right Certificate shall be exercised in part, the holder shall be entitled to
receive upon surrender hereof another Right Certificate or Right Certificates
for the number of whole Rights not exercised.
Subject to the provisions of the Rights Agreement, the Rights
evidenced by this Right Certificate (i) may be redeemed by the Company at a
redemption price of $.01 per Right or (ii) may be exchanged, in whole or in
part, for Preferred Shares or shares of the Company's Common Stock, par value
$.01 per share.
No fractional Preferred Shares will be issued upon the exercise of any
Right or Rights evidenced hereby (other than fractions which are integral
multiples of one one-thousandth of a Preferred Share, which may, at the election
of the Company, be evidenced by depositary receipts), but in, lieu thereof, a
cash payment will be made, as provided in the Rights Agreement.
No holder of this Right Certificate shall be entitled to vote or
receive dividends or be deemed for any purpose the holder of the Preferred
Shares or of any other securities of the Company which may at any time be
issuable on the exercise hereof, nor shall anything contained in the Rights
Agreement or herein be construed to confer upon the holder hereof, as such, any
of the rights of a stockholder of the Company or any right to vote for the
election of directors or upon any matter submitted to stockholders at any
meeting thereof, or to give or withhold consent to any corporate action, or to
receive notice of meetings or other actions affecting stockholders (except as
provided in the Rights Agreement), or to receive dividends or subscription
rights, or otherwise, until the Right or Rights evidenced by this Right
Certificate shall have been exercised as provided in the Rights Agreement.
This Right Certificate shall not be valid or obligatory for any
purpose until it shall have been countersigned by the Rights Agent.
A-2
<PAGE>
WITNESS the facsimile signature of the proper officers of the Company
and its corporate seal.
Dated as of _______ __, 1999.
LIFEPOINT HOSPITALS, INC.
By:_______________________
Name:
Title:
COUNTERSIGNED:
By_______________________________
Name:
Title:
A-3
<PAGE>
[Form of Reverse Side of Right Certificate]
FORM OF ASSIGNMENT
(To be executed by the registered holder if such
holder desires to transfer the Right Certificate.)
FOR VALUE RECEIVED ___________________________________________
hereby sells, assigns and transfers unto________________________________________
_______________________________________________________________________
(Please print name and address of transferee)
this Right Certificate, together with all right, title and interest therein, and
does hereby irrevocably constitute and appoint ________________ Attorney, to
transfer the within Right Certificate on the books of the within-named Company,
with full power of substitution.
Dated: ____________________________
Signature _________________________
Signature Guaranteed:
Signatures must be guaranteed by a member firm of a registered
national securities exchange, a member of the National Association of Securities
Dealers, Inc., or a commercial bank or trust company having an office or
correspondent in the United States.
Certificate
-----------
The undersigned hereby certifies that the Rights evidenced by this
Right Certificate are not beneficially owned by an Acquiring Person or an
Affiliate or Associate thereof (as defined in the Rights Agreement). After due
inquiry and to the best knowledge of the undersigned, the Rights evidenced by
this Right Certificate were not acquired or beneficially owned by an Acquiring
Person or an Affiliate or Associate thereof.
Dated:_____________________________
Signature _________________________
The signature to the foregoing Assignment and Certificate must correspond to the
name as written upon the face of this Right Certificate in every particular,
without alteration or enlargement or any change whatsoever.
A-4
<PAGE>
FORM OF ELECTION TO PURCHASE
(To be executed if holder desires to exercise Rights
represented by the Right Certificate.)
To: ________________
The undersigned hereby irrevocably elects to exercise ______ Rights
represented by this Right Certificate to purchase the Preferred Shares issuable
upon the exercise of such Rights and requests that certificates for such
Preferred Shares be issued in the name of:
Please insert social security
or other identifying number:_________________________________________________
__________________________________________
(Please print name and address)
__________________________________________
If such number of Rights shall not be all the Rights evidenced by this Right
Certificate, a new Right Certificate for the balance remaining of such Rights
shall be registered in the name of and delivered to:
Please insert social security
or other identifying number:_________________________________________________
__________________________________________
(Please print name and address)
__________________________________________
Dated:_______________________________
Signature____________________________
Signature Guaranteed:
Signatures must be guaranteed by a member firm of a registered
national securities exchange, a member of the National Association of Securities
Dealers, Inc., or a commercial bank or trust company having an office or
correspondent in the United States.
A-5
<PAGE>
Certificate
-----------
The undersigned hereby certifies that the Rights evidenced by this
Right Certificate are not beneficially owned by an Acquiring Person or an
Affiliate or Associate thereof (as defined in the Rights Agreement). After due
inquiry and to the best knowledge of the undersigned, the Rights evidenced by
this Right Certificate were not acquired or beneficially owned by an Acquiring
Person or an Affiliate or Associate thereof.
Dated:_______________________________
Signature____________________________
The signature in the Form of Assignment or Form of Election to
Purchase, as the case may be, must conform to the name as written upon the face
of this Right Certificate in every particular, without alteration or enlargement
or any change whatsoever.
In the event the certification set forth above in the Form of
Assignment or the Form of Election to Purchase, as the case may be, is not
completed, the Company and the Rights Agent will deem the beneficial owner of
the Rights evidenced by this Right Certificate to be an Acquiring Person or an
Affiliate or Associate thereof (as defined in the Rights Agreement) and such
Assignment or Election to Purchase will not be honored.
A-6
<PAGE>
Exhibit B
---------
SUMMARY OF RIGHTS TO PURCHASE
PREFERRED SHARES
On _____ __, 1999, the Board of Directors of LifePoint Hospitals, Inc.
(the "Company") authorized and declared the issuance of one preferred share
purchase right (a "Right") for each share of common stock, par value $.01 per
share (the "Common Shares"), of the Company to be issued in the distribution of
Common Shares (the "Spin-Off" as described in the Registration Statement on Form
10 (____________) dated ________ __, 1999 (the "Record Date"). Each Right
entitles the registered holder to purchase from the Company one one-thousandth
of a share of Series A Junior Participating Preferred Stock of the Company, par
value $.01 per share (the "Preferred Shares"), at a price of $____ per one one-
thousandth of a Preferred Share (the "Purchase Price"), subject to adjustment.
The description and terms of the Rights are set forth in a Rights Agreement (the
"Rights Agreement") between the Company and ______________ as Rights Agent (the
"Rights Agent").
Distribution Date; Exercisability
- ---------------------------------
Initially, the Rights will be attached to all Common Share
certificates and no separate Rights certificates will be issued. Separate
certificates evidencing the Rights ("Right Certificates") will be mailed to
holders of record of the Common Shares as of the close of business on the
earlier to occur of (i) 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 Common Shares or (ii) such date as
may be determined by action of the Board of Directors of the Company, 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 Common Shares
(the earlier of such dates being the "Distribution Date").
The Rights Agreement provides that, until the Distribution Date (or
earlier redemption or expiration of the Rights), (i) the Rights will be
transferred with and only with the Common Shares, (ii) new Common Share
certificates issued after the Record Date upon transfer or new issuance of
Common Shares will contain a notation incorporating the Rights Agreement by
reference and (iii) the surrender for transfer of any certificates for Common
Shares outstanding as of the Record Date will also constitute the transfer of
the Rights associated with the Common Shares represented by such certificate.
The Rights are not exercisable until the Distribution Date. The
Rights will expire on ___ __, 2009 (the "Expiration Date"), unless the
Expiration Date is extended or unless the Rights are earlier redeemed or
exchanged by the Company, in each case, as described below.
B-1
<PAGE>
Flip-In
- -------
If a person or group becomes an Acquiring Person, each holder of a Right
will thereafter have the right to receive, upon exercise, Common Shares (or, in
certain circumstances, Preferred Shares or other similar securities of the
Company) having a value equal to two times the exercise price of the Right.
Notwithstanding any of the foregoing, following the existence of an Acquiring
Person, all Rights that are, or (under certain circumstances specified in the
Rights Agreement) were, beneficially owned by any Acquiring Person will be null
and void.
For example, at an exercise price of $50.00 per Right, each Right not owned
by an Acquiring Person following an event set forth in the preceding paragraph
would entitle its holder to purchase $100.00 worth of Common Shares (or other
consideration, as noted above) for $50.00. Assuming a value of $25.00 per
Common Share at such time, the holder of each valid Right would be entitled to
purchase four Common Shares for $50.00.
Flip-Over
- ---------
In the event that the Company 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 Right will thereafter
have the right to receive, upon the exercise thereof at the then current
exercise price of the 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 Right. In the event that any person or
group becomes an Acquiring Person, proper provision shall be made so that each
holder of a Right, other than Rights beneficially owned by the Acquiring Person
(which will thereafter be void), will thereafter have the right to receive upon
exercise that number of Common Shares having a market value of two times the
exercise price of the Right.
Exchange
- --------
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 Common Shares, the Board of Directors of the Company may exchange
the Rights (other than Rights owned by such person or group which will have
become void), in whole or in part, at an exchange ratio of one Common Share, or
one one-thousandth of a Preferred Share (or of a share of a class or series of
the Company's preferred stock having equivalent rights, preferences and
privileges), per Right (subject to adjustment).
Redemption
- ----------
At any time prior to the existence of an Acquiring Person, the Board
of Directors of the Company may redeem the Rights, in whole but not in part, at
a price of $.01 per Right (the "Redemption Price"). The redemption of the
Rights may be made effective at such time on such basis with such conditions as
the Board of Directors, in its sole discretion, may establish. Immediately upon
any redemption of the Rights, the right
B-2
<PAGE>
to exercise the Rights will terminate and the only right of the holders of
Rights will be to receive the Redemption Price.
Amendment
- ---------
The terms of the Rights may be amended by the Board of Directors of
the Company without the consent of the holders of the 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 Rights (other than the Acquiring
Person).
Adjustment
- ----------
The number of outstanding Rights and the number of one one-thousandths
of a Preferred Share issuable upon exercise of each Right are subject to
adjustment under certain circumstances.
Preferred Stock
- ---------------
Because of the nature of the Preferred Shares' dividend, liquidation
and voting rights, the value of the one one-thousandth interest in a Preferred
Share purchasable upon exercise of each Right should approximate the value of
one Common Share.
Rights of Holders
- -----------------
Until a Right is exercised, the holder thereof, as such, will have no
rights as a stockholder of the Company, including, without limitation, the right
to vote or to receive dividends.
Further Information
- -------------------
A copy of the Rights Agreement has been filed with the Securities and
Exchange Commission as an Exhibit to a Registration Statement on Form 10 dated
___ __, 1999. A copy of the Rights Agreement is available free of charge from
the Company. This summary description of the Rights does not purport to be
complete and is qualified in its entirety by reference to the Rights Agreement,
which is hereby incorporated herein by reference.
B-3
<PAGE>
Exhibit 10.2
BENEFITS AND EMPLOYMENT MATTERS
AGREEMENT
by and among
COLUMBIA/HCA HEALTHCARE CORPORATION,
and
TRIAD HOSPITALS, INC.
and
LIFEPOINT HOSPITALS, INC.
dated as of _____________, 1999
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page No.
<S> <C>
BENEFITS AND EMPLOYMENT MATTERS AGREEMENT............................................................. 1
RECITALS.............................................................................................. 1
- --------
ARTICLE I. DEFINITIONS................................................................................ 1
Section 1.1 Definitions......................................................................... 1
-----------
Affiliate..................................................................................... 1
Assets........................................................................................ 1
COBRA......................................................................................... 2
Code.......................................................................................... 2
Columbia/HCA Defined Benefit Plan............................................................. 2
Columbia/HCA Employee......................................................................... 2
Columbia/HCA Plans............................................................................ 2
Columbia/HCA Retirement Plans................................................................. 2
Columbia/HCA Stock............................................................................ 2
Columbia/HCA Terminee......................................................................... 2
Columbia/HCA Welfare Plans.................................................................... 2
Defined Benefit Plan.......................................................................... 3
Defined Contribution Plan..................................................................... 3
Distribution Date............................................................................. 3
Distribution Year............................................................................. 3
Employee...................................................................................... 3
EPIC Plan..................................................................................... 3
ERISA......................................................................................... 3
ESOP.......................................................................................... 3
HMO........................................................................................... 3
HealthTrust Plan.............................................................................. 3
IRS........................................................................................... 4
LifePoint Business............................................................................ 4
LifePoint Employee............................................................................ 4
LifePoint Retirement Plan..................................................................... 4
LifePoint Stock............................................................................... 4
LifePoint Terminee............................................................................ 4
LifePoint Welfare Plans....................................................................... 4
: the Welfare Benefit Plans to be established by LifePoint pursuant to Plan Spin-offs
in accordance with Section 2.6(a)............................................................. 4
Plan.......................................................................................... 4
Plan Spin-off................................................................................. 5
Qualified Beneficiary......................................................................... 5
Service Credit................................................................................ 5
Small Defined Contribution Plan............................................................... 5
</TABLE>
i
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
Small Welfare Benefit Plans.................................................................. 5
Spinco....................................................................................... 5
Spinco Retirement Plans...................................................................... 6
Spinco Welfare Benefit Plans or Spinco Welfare Plans......................................... 6
Subsidiary................................................................................... 6
Triad Business............................................................................... 6
Triad Employee............................................................................... 6
Triad Retirement Plan........................................................................ 6
Triad Stock.................................................................................. 6
Triad Terminee............................................................................... 6
Triad Welfare Plans.......................................................................... 6
: the Welfare Benefit Plans to be established by Triad pursuant to Plan Spin-offs in
accordance with Section 2.6(a)............................................................... 7
Welfare Benefit Plan or Welfare Plan......................................................... 7
Section 1.2 Other Terms........................................................................ 7
-----------
Section 1.3 Certain Constructions.............................................................. 7
---------------------
Section 1.4 Sections........................................................................... 7
--------
Section 1.5 Survival........................................................................... 7
--------
ARTICLE II. EMPLOYEE BENEFITS........................................................................ 7
Section 2.1 General............................................................................ 7
-------
Section 2.2 Defined Contribution Plans......................................................... 8
--------------------------
Section 2.3 Defined Benefit Plans.............................................................. 10
---------------------
Section 2.4 Spinco ESOPs....................................................................... 10
------------
Section 2.5 Stock Option Plans................................................................. 11
------------------
Section 2.6 Welfare Benefit Plans.............................................................. 15
---------------------
Section 2.7 Services to be Provided by Columbia/HCA and Mutuality.............................. 16
-----------------------------------------------------
Section 2.8 Preservation of Right To Amend or Terminate Plans.................................. 19
-------------------------------------------------
Section 2.9 Reimbursement...................................................................... 19
-------------
Section 2.10 Payroll Reporting and Withholding............................................... 20
---------------------------------
ARTICLE III. LABOR AND EMPLOYMENT MATTERS............................................................ 21
Section 3.1 Independent Employers.............................................................. 21
---------------------
Section 3.2 Employment Policies and Practices.................................................. 21
---------------------------------
Section 3.3 Notice of Claims................................................................... 21
----------------
Section 3.4 [Assumption of Unemployment Tax Rates]............................................. 22
--------------------------------------
Section 3.5 No Third Party Beneficiary Rights.................................................. 22
---------------------------------
Section 3.6 Attorney-Client Privilege.......................................................... 22
-------------------------
ARTICLE IV. DEFAULT.................................................................................. 22
Section 4.1 Default............................................................................ 22
-------
Section 4.2 Force Majeure...................................................................... 22
-------------
ARTICLE V............................................................................................ 23
Section 5.1 Access Information: Cooperation................................................... 23
--------------------------------
</TABLE>
ii
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
Section 5.2 Assignment......................................................................... 23
----------
Section 5.3 Headings........................................................................... 23
--------
Section 5.4 Severability....................................................................... 23
------------
Section 5.5 Parties Bound...................................................................... 23
-------------
Section 5.6 Notices............................................................................ 24
-------
Section 5.7 Further Action..................................................................... 25
--------------
Section 5.8 Waiver............................................................................. 25
------
Section 5.9 Governing Law...................................................................... 25
-------------
Section 5.10 Consent to Jurisdiction............................................................ 25
-----------------------
Section 5.11 Waiver of Jury Trial............................................................... 25
--------------------
Section 5.12 Entire Agreement................................................................... 26
----------------
Section 5.13 Counterparts....................................................................... 26
------------
</TABLE>
iii
<PAGE>
BENEFITS AND EMPLOYMENT MATTERS AGREEMENT
THIS BENEFITS AND EMPLOYMENT MATTERS AGREEMENT (this "Agreement") is
made this _ day of _________1999 by and among Columbia/HCA Healthcare
Corporation, a Delaware corporation ("Columbia/HCA"), Triad Hospitals, Inc., a
Delaware corporation and wholly-owned subsidiary of Columbia/HCA ("Triad"), and
LifePoint Hospitals, Inc., a Delaware corporation and wholly-owned subsidiary of
Columbia/HCA ("LifePoint") (each, singly, a "Party" and, collectively, the
"Parties"). Capitalized terms used in this Agreement are defined in Article I
and Section 2.5.
RECITALS
--------
WHEREAS, Columbia/HCA, directly and through its subsidiaries, owns and
operates health care facilities and related assets;
WHEREAS, the Board of Directors of Columbia/HCA has determined that it
is in the best interests of Columbia/HCA and its shareholders to distribute all
of the shares of Triad Stock and LifePoint Stock to the holders of Columbia/HCA
Stock (the "Distributions");
WHEREAS, in connection with the Distributions, Columbia/HCA, Triad and
LifePoint have set forth in a certain distribution agreement (the "Distribution
Agreement") the corporate transactions required to effect the Distributions and
the agreements that will govern certain matters following the Distributions;
WHEREAS, as contemplated by the Distribution Agreement, Columbia/HCA,
Triad and LifePoint have agreed to enter into this agreement allocating
responsibilities with respect to employee compensation, benefits, labor, plan
administration and certain other employment matters pursuant to the terms and
conditions set forth herein.
NOW, THEREFORE, in consideration of the mutual covenants contained
herein, and other valuable consideration, the receipt and sufficiency of which
are hereby acknowledged, the parties agree as follows:
ARTICLE I.
DEFINITIONS
Section 1.1 Definitions. As used in this Agreement, the following
-----------
terms shall have the meanings indicated below:
Affiliate: any entity required to be aggregated with
---------
Columbia/HCA, Triad or LifePoint, as appropriate, pursuant to Code sections
414(b), 414(c), 414(m) or 414(o).
Assets: All properties, rights, contracts, leases and claims,
------
of any kind and description, wherever located, whether tangible or intangible or
whether real, personal or mixed.
<PAGE>
COBRA: Code section 4980B and ERISA Sections 601 through 608,
-----
establishing employer requirements for continuation of health care benefits for
certain current and former employees or dependents thereof.
Code: the Internal Revenue Code of 1986, as amended, or any
----
successor legislation.
Columbia/HCA Defined Benefit Plan: any Defined Benefit Plan
---------------------------------
sponsored by a Subsidiary of Columbia/HCA prior to the Distribution Date.
Columbia/HCA Employee: any Employee of Columbia/HCA or an
---------------------
Affiliate thereof immediately prior to the Distributions, excluding Triad
Employees and LifePoint Employees.
Columbia/HCA Plans: the Columbia/HCA Retirement Plans and the
------------------
Columbia/HCA Welfare Plans, collectively.
Columbia/HCA Retirement Plans: the Columbia/HCA Healthcare
-----------------------------
Corporation Money Purchase Pension, Stock Bonus and Salary Deferral Plans.
Columbia/HCA Stock: the Class A Common Stock, par value $____
------------------
per share, of Columbia/HCA.
Columbia/HCA Terminee: any individual who (i) is no longer
---------------------
employed by Columbia/HCA or any Affiliate thereof immediately prior to the
Distribution Date and (ii) is not a LifePoint Terminee or a Triad Terminee.
Columbia/HCA Welfare Plans: the Columbia/HCA Medical Plan, the
--------------------------
Columbia/HCA Dental Plan, the Columbia/HCA Flexible Benefits Plan, the
Columbia/HCA Life, Accidental Death & Dismemberment Plan, the Columbia/HCA Long-
Term Disability Plan and the Columbia/HCA Flexible Spending Account Plan.
Defined Benefit Plan: a tax-qualified retirement Plan (under
--------------------
Code section 401(a)) that is not a Defined Contribution Plan.
Defined Contribution Plan: a tax-qualified retirement Plan
-------------------------
(under Code section 401(a)) defined in Code section 414(i).
Distribution Date: the date on which the Distributions occur.
-----------------
Distribution Year: the calendar year which includes the
-----------------
Distribution Date.
Employee: with respect to any entity, an individual who is
--------
considered, according to the payroll and other records of such entity, to be
employed by such entity, regardless of whether such individual is, at the
relevant time, actively at work or on leave of absence (including vacation,
holiday, sick leave, family and medical leave, disability leave, military leave,
jury duty, layoff with rights of recall, and any other leave of absence or
similar
2
<PAGE>
interruption of active employment that is not considered, according to the
policies or practices of such entity, to have resulted in a permanent
termination of such individual's employment).
EPIC Plan: the EPIC Healthcare Group, Inc. Profit Sharing
---------
Plan.
ERISA: the Employee Retirement Income Security Act of 1974, as
-----
amended, or any successor legislation.
ESOP: an employee stock ownership plan, as defined in Code
----
section 4975.
HMO: any health maintenance organization organized under 42
---
U.S.C. ss. 300e-9, or a state health maintenance organization statute that
provides medical services for Columbia/HCA Employees, Triad Employees or
LifePoint Employees under any Plan.
HealthTrust Plan: the HealthTrust, Inc.--The Hospital Company
----------------
401(k) Retirement Program.
IRS: the Internal Revenue Service.
---
LifePoint Business: any business now or formerly conducted by
------------------
LifePoint, or its present or former Subsidiaries, including any business now or
formerly conducted by Columbia/HCA and its Subsidiaries that is associated with
the Assets of LifePoint and its Subsidiaries.
LifePoint Employee: an Employee of LifePoint, or any direct or
------------------
indirect Subsidiary of LifePoint that is an Affiliate thereof, on the
Distribution Date.
LifePoint Retirement Plan: a Defined Contribution Plan to be
-------------------------
established by LifePoint pursuant to Plan Spin-offs from the Columbia/HCA
Retirement Plans in accordance with Section 2.2(a).
LifePoint Stock: the Common Stock, par value $.01 per share,
----------------
of LifePoint.
LifePoint Terminee: any individual who is no longer employed
------------------
by Columbia/HCA or any Affiliate thereof immediately prior to the Distribution
Date, but who was employed by a LifePoint Business immediately prior to his
termination of employment from Columbia/HCA and its Affiliates.
LifePoint Welfare Plans: the Welfare Benefit Plans to be
-----------------------
established by LifePoint pursuant to Plan Spin-offs in accordance with Section
2.6(a).
Plan: any plan, policy, arrangement, contract or agreement
----
providing compensation or benefits for any group of Employees or former
Employees or individual Employee or former Employee, or the dependents or
beneficiaries of any such Employee or former Employee, whether formal or
informal or written or unwritten, and including, without limitation, any means,
whether or not legally required, pursuant to which any benefit is provided by an
employer to any Employee or former Employee or the beneficiaries of any such
Employee or former Employee, adopted or entered into by a Party prior to, upon
or after the Distribution,
3
<PAGE>
regardless of whether such plan, policy, arrangement, contract or agreement is
governed by ERISA. The term "Plan" as used in this Agreement does not include
any contract, agreement or understanding entered into by Columbia/HCA prior to
the Distributions, or any contract, agreement or understanding entered into by
Columbia/HCA, Triad or LifePoint after the Distributions, relating to settlement
of actual or potential employee-related litigation claims.
Plan Spin-off: a procedure whereby accrued benefits and/or
-------------
rights and elections of a particular group of participants or employees in a
Plan are transferred to a new Plan.
Qualified Beneficiary: an individual (or dependent thereof) who
---------------------
either (a) experiences (or has experienced) a "qualifying event" (as that term
is defined in Code section 4980B(f)(3) and ERISA Section 603) while a
participant in any medical/dental plan, or (b) becomes (or previously became) a
"qualified beneficiary" (as that term is defined in Code section 4980B(g)(1) and
ERISA Section 607(3)) under any medical/dental plan, and who is included in any
one of the following categories:
(i) LifePoint Qualified Beneficiary: any LifePoint Employee
-------------------------------
or LifePoint Terminee (or dependent thereof) who, on the Distribution
Date, is a Qualified Beneficiary under any Columbia/HCA medical/dental
plan; or
(ii) Columbia/HCA Qualified Beneficiary: any Columbia/HCA
----------------------------------
Employee or Columbia/HCA Terminee (or dependent thereof) who, on the
Distribution Date, is a Qualified Beneficiary under any Columbia/HCA
medical/dental plan; or
(iii) Triad Qualified Beneficiary: any Triad Employee or Triad
---------------------------
Terminee (or dependent thereof) who, on the Distribution Date, is a
Qualified Beneficiary under any Columbia/HCA medical/dental plan.
Service Credit: the period taken into account under any Plan in
--------------
determining length of service or plan participation for purposes of eligibility,
exercisability, vesting, benefit accrual or similar requirements under such
Plan.
Small Defined Contribution Plan: any Defined Contribution Plan,
-------------------------------
other than the HealthTrust Plan and the EPIC Plan, sponsored by a Subsidiary of
Columbia/HCA prior to the Distribution Date.
Small Welfare Benefit Plans: any Welfare Benefit Plan sponsored
---------------------------
by a Subsidiary of Columbia/HCA prior to the Distribution Date.
Spinco: either of Triad or LifePoint.
------
Spinco Retirement Plans: the LifePoint Retirement Plan and the
-----------------------
Triad Retirement Plan, collectively.
Spinco Welfare Benefit Plans or Spinco Welfare Plans: the
----------------------------------------------------
LifePoint Welfare Plans and the Triad Welfare Plans, collectively.
4
<PAGE>
Subsidiary: With respect to any entity, (i) any corporation in
----------
which such entity, 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 entity either (a) directly or indirectly, at the
time of determination, has at least a majority ownership interest, or (b) on 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).
Triad Business: any business now or formerly conducted by
--------------
Triad, or its present or former Subsidiaries, including any business now or
formerly conducted by Columbia/HCA and its Subsidiaries that is associated with
the Assets of Triad and its Subsidiaries.
Triad Employee: an Employee of Triad, or any direct or indirect
--------------
Subsidiary of Triad that is an Affiliate thereof, on the Distribution Date.
Triad Retirement Plan: a Defined Contribution Plan to be
---------------------
established by Triad pursuant to Plan Spin-offs from the Columbia/HCA Retirement
Plans, in accordance with Section 2.2(a).
Triad Stock: the Common Stock, par value $.01 per share, of
-----------
Triad.
Triad Terminee: any individual who is no longer employed by
--------------
Columbia/HCA or any Affiliate thereof immediately prior to the Distribution Date
but was employed by a Triad Business immediately prior to his termination of
employment from Columbia/HCA and its Affiliates.
Triad Welfare Plans: the Welfare Benefit Plans to be
-------------------
established by Triad pursuant to Plan Spin-offs in accordance with Section
2.6(a).
Welfare Benefit Plan or Welfare Plan: an employee welfare
------------------------------------
benefit plan or welfare plan, as defined in ERISA Section 3(1).
Section 1.2 Other Terms. Any capitalized terms used herein but not
-----------
defined herein shall have the meaning set forth in the Distribution Agreement.
Section 1.3 Certain Constructions. References to the singular in
---------------------
this Agreement shall refer to the plural and vice-versa and references to the
masculine shall refer to the feminine and vice-versa.
Section 1.4 Sections. References to a "Section" are, unless
--------
otherwise specified, to one of the Sections of this Agreement.
Section 1.5 Survival. Obligations described in this Agreement shall
--------
remain in full force and effect and shall survive the Distribution Date.
5
<PAGE>
Article II.
EMPLOYEE BENEFITS
Section 2.1 General.
-------
(a) Allocation of Responsibilities on the Distribution Date.
-------------------------------------------------------
Except to the extent retained or assumed by Columbia/HCA, as the case may be,
under this Agreement, on the Distribution Date (i) Triad or a Subsidiary thereof
shall retain or assume responsibility as employer for the Triad Employees, and
(ii) LifePoint or a Subsidiary thereof shall retain or assume responsibility as
employer for the LifePoint Employees. On the Distribution Date, Columbia/HCA or
a Subsidiary thereof shall retain or assume responsibility as employer for the
Columbia/HCA Employees, except to the extent such responsibility is retained or
assumed by Triad or LifePoint, as the case may be, under this Agreement. Except
to the extent provided in this Agreement, Columbia/HCA or a Subsidiary thereof
shall retain or assume liability with respect to LifePoint Terminees and Triad
Terminees. The assumption or retention of responsibility as employer by
Columbia/HCA, Triad or LifePoint, as the case may be, described in this Section
2.1 shall not, in itself, constitute a severance or a termination of employment
under any Plan of severance maintained by Columbia/HCA, nor shall it constitute
a change of control of Columbia/HCA for purposes of any Plan.
(b) Service Credits. Except to the extent provided in this
---------------
Agreement, for purposes of determining service credit under any Plan, the
Parties shall credit each of their respective Employees with such Employee's
Service Credit as reflected for comparable purposes in the Columbia/HCA payroll
system records as of the Distribution Date (regardless of whether, or the
capacity in which, the individual is employed by any of the Parties on the
Distribution Date), subject to generally applicable break-in-service rules under
the provisions of the Columbia/HCA Plans (as to periods the individual is not
employed by any of the Parties or their Affiliates).
(c) Correction of Employee Classification. Notwithstanding
-------------------------------------
anything elsewhere in the Agreement, if at any time on or before the first
anniversary of the Distribution Date, the Parties determine that any one or more
individuals were identified as Columbia/HCA Terminees in error and should have
been identified as Triad Terminees or LifePoint Terminees, and the Parties agree
to correct such error, such individuals shall be considered Triad Terminees or
LifePoint Terminees, as appropriate, and the parties shall use their reasonable
best efforts to implement the terms of this Agreement as they apply to such
individuals as if such individuals had been correctly identified as of the
Distribution Date.
Section 2.2 Defined Contribution Plans.
--------------------------
(a) General. On or before the Distribution Date (as decided by
-------
Columbia/HCA in its sole discretion), effective immediately prior to the
Distributions, each of Triad and LifePoint shall take, or cause to be taken, all
action specified by Columbia/HCA as necessary and appropriate to establish a
Triad Retirement Plan and a LifePoint Retirement Plan and related trusts,
respectively, that will accept plan-to-plan transfers, effective immediately
prior to the Distribution, pursuant to Plan Spin-offs, as described in Section
2.2(d), of participant
6
<PAGE>
account balances (and related assets) under the Columbia/HCA Retirement Plans
which are attributable to (1) Triad Employees and Triad Terminees and (2)
LifePoint Employees and LifePoint Terminees, respectively, who are participants
in the Columbia/HCA Retirement Plans immediately prior to the Distribution. Such
plans, being the Triad Retirement Plan and the LifePoint Retirement Plan,
respectively, may be combined with the ESOPs described in Section 2.4.
(b) Columbia/HCA Retirement Plans. Except as provided in
-----------------------------
Section 2.2(a), following the respective Plan Spin-offs, Columbia/HCA shall
retain sole responsibility for all liabilities and obligations under the
Columbia/HCA Retirement Plans, and Triad and LifePoint shall have no liability
or obligation with respect thereto.
(c) Spinco Retirement Plans. Subject to Section 2.8, Triad
-----------------------
shall provide benefits under the Triad Retirement Plan after the Plan Spin-offs
described in Section 2.2(a) for all Triad Employees and Triad Terminees (and
Employees of Triad admitted to participation in such Plan after the Plan Spin-
off), subject to the terms and provisions of such Plans as in effect from time
to time. Subject to Section 2.8, LifePoint shall provide benefits under the
LifePoint Retirement Plan after the Plan Spin-offs described in Section 2.2(a)
for all LifePoint Employees and LifePoint Terminees (and Employees of LifePoint
admitted to participation in such Plan after the Plan Spin-off), subject to the
terms and provisions of such Plans as in effect from time to time. Service shall
be credited under the Spinco Retirement Plans pursuant to Section 2.1(b) of this
Agreement for purposes of both participation and vesting.
(d) Transfer of Account Balances. As soon as practicable
----------------------------
following the Distribution Date, effective immediately prior to the
Distributions, Columbia/HCA shall cause the trustees of the Columbia/HCA
Retirement Plans to effect transfers, in kind, to the trustees of the Triad
Retirement Plan and the LifePoint Retirement Plan, respectively, of the assets
allocable to the accounts of (1) all Triad Employees and Triad Terminees and (2)
all LifePoint Employees and LifePoint Terminees, respectively, and appropriate
account balances for such individuals shall be established under the Triad
Retirement Plan and the LifePoint Retirement Plan, respectively. Each such
transfer shall comply with section 414(l) of the Code and the requirements of
ERISA and the regulations promulgated thereunder. Each of Triad and LifePoint
shall cause the trustees of the respective Spinco Retirement Plans to accept the
plan-to-plan transfers from the trustees of the respective Columbia/HCA
Retirement Plans, and to credit the accounts of such Triad Employees and Triad
Terminees, and LifePoint Employees and LifePoint Terminees, under the Triad
Retirement Plan and the LifePoint Retirement Plan, as appropriate, with the
assets transferred on their behalf. Notwithstanding the foregoing, if any
Columbia/HCA Employee shall transfer directly to employment with Triad or
LifePoint within the Distribution Year, a transfer shall be made (as promptly as
practicable) from the Columbia/HCA Retirement Plans to the appropriate Spinco
Retirement Plan (in the manner described in this Section 2.2(d)) of the assets
allocable to the accounts of such Columbia/HCA Employee, with such Employee to
be given service credit in the manner described in Section 2.1(b) up to the date
of his transfer of employment. Upon the transfers of account balances in
accordance with this Section 2.2(d) to the appropriate Spinco Retirement Plan,
such Plan shall assume all liabilities with respect to the individuals for whom
accounts are transferred and the Columbia/HCA Retirement Plans shall have no
further liability with respect to such individuals. The potential buyback
liabilities of the Columbia/HCA Retirement Plans under Section 204(e) of
7
<PAGE>
ERISA with respect to LifePoint Terminees and Triad Terminees whose non-vested
accrued benefits were forfeited upon an earlier distribution shall be
transferred to the LifePoint Retirement Plan and the Triad Retirement Plan,
respectively.
(e) Regulatory Filings. Columbia/HCA, Triad and LifePoint
------------------
shall, in connection with the Plan Spin-offs described in Section 2.2(d),
cooperate in making any and all appropriate filings required by the Securities
and Exchange Commission or the IRS, or required under the Code or ERISA or any
applicable securities laws and the regulations thereunder, and take all such
action as may be necessary or appropriate to cause such plan-to-plan transfers
to take place as soon as practicable after the Distribution Date or as otherwise
required by law. Triad and LifePoint shall each seek (or Columbia/HCA shall
seek, on their behalf) a favorable IRS determination letter that the Triad
Retirement Plan and the LifePoint Retirement Plan, respectively, satisfy all
qualification requirements under section 401(a) of the Code. Notwithstanding the
foregoing, such plan-to-plan transfers shall take place pending issuance of such
favorable determination letters, but shall be subject to IRS approval. The
Parties shall each make any necessary amendments on a retroactive basis to the
Triad Retirement Plan, LifePoint Retirement Plan or Columbia/HCA Retirement
Plans, respectively, as required by the IRS to issue the favorable determination
letters described above.
(f) Other Plans. The preceding provisions of this Section 2.2
-----------
shall also apply to the HealthTrust Plan and the EPIC Plan. However, the assets
which are disputed in the HealthTrust v. Usher lawsuit shall not be transferred
--------------------
to any Plans established by LifePoint or Triad, but rather shall remain in the
HealthTrust Plan (or any successor thereto), subject to its terms.
(g) Merger of Plans. Should any of the Columbia/HCA Retirement
---------------
Plans, the HealthTrust Plan or the EPIC Plan be merged together prior to the
Distribution Date, then the preceding provisions of this Section 2.2 shall apply
to such merged plan(s) .
(h) Small Defined Contribution Plans. Spin-off Plans shall not
--------------------------------
be established with respect to any Small Defined Contribution Plans. Rather, the
Plan sponsor of each Small Defined Contribution Plan immediately before the
Distribution Date shall remain that respective Plan's sponsor immediately after
the Distribution Date. Thus, if a Small Defined Contribution Plan is maintained
by a Spinco or a Subsidiary thereof immediately before the Distribution Date,
then such Plan shall continue to be maintained by the Spinco or its Subsidiary
immediately after the Distribution Date.
Section 2.3 Defined Benefit Plans. Spin-off Plans shall not be
---------------------
established with respect to any Columbia/HCA Defined Benefit Plan. Rather, the
Plan sponsor of each Columbia/HCA Defined Benefit Plan immediately before the
Distribution Date shall remain that respective Plan's sponsor immediately after
the Distribution Date. Thus, if a Defined Benefit Plan is maintained by a Spinco
or a Subsidiary thereof immediately before the Distribution Date, then such Plan
shall continue to be maintained by that Spinco or its Subsidiary immediately
after the Distribution Date.
Section 2.4 Spinco ESOPs. Prior to, contemporaneous with, or
------------
following the Distribution Date (as specified by Columbia/HCA), LifePoint and
Triad shall each adopt an
8
<PAGE>
ESOP. The terms of the respective ESOPs shall be subject to the review and
approval of Columbia/HCA. Subject to applicable law, LifePoint and Triad shall
take all steps necessary to cause the following to occur in connection with
their respective ESOPs:
(i) As promptly as practicable after the Distributions, the
LifePoint ESOP shall purchase, at fair market value, stock constituting
approximately 8.3% of the outstanding shares of LifePoint Stock; and as
promptly as practicable after the Distributions, the Triad ESOP shall
purchase, at fair market value, stock constituting approximately 9% of
the outstanding shares of Triad Stock.
(ii) Each purchase will be financed by (a) issuing a
promissory note to LifePoint in the case of the LifePoint ESOP or by
issuing a promissory note to Triad in the case of the Triad ESOP or (b)
borrowing from a third party lender (which loan will be guaranteed by
LifePoint in the case of the LifePoint ESOP or Triad in the case of the
Triad ESOP). Such loans shall provide for repayment in level annual (or
more frequent) installments over not more than a ten-year period.
LifePoint and Triad shall make any contribution commitments necessary
in this connection.
Notwithstanding any provision of this agreement to the contrary and
consistent with Section 2.2(a), the ESOPs described in this Section may be part
of a tax-qualified plan which includes other features, including elective
deferrals and matching contributions.
Section 2.5 Stock Option Plans.
------------------
(a) Establishment of Spinco Option Plans.
------------------------------------
(i) Triad Option Plan. The Board of Directors of Columbia/HCA
-----------------
has taken all action necessary and appropriate to establish a new stock
option plan (the "Triad Option Plan") and the Compensation Committee
has taken all action necessary or appropriate to provide certain
options on Triad Stock ("Triad Options") thereunder. Triad hereby
assumes all liabilities and obligations under the Triad Option Plan and
under the Triad Options.
(ii) LifePoint Option Plan. The Board of Directors of
---------------------
Columbia/HCA has taken all action necessary and appropriate to
establish a new stock option plan (the "LifePoint Option Plan") and the
Compensation Committee has taken all action necessary or appropriate to
provide certain options on LifePoint Stock ("LifePoint Options")
thereunder. LifePoint hereby assumes all liabilities and obligations
under the LifePoint Option Plan and under the LifePoint Options
(b) Columbia/HCA Option Plans. Effective as of the Distribution
-------------------------
Date, except with respect to stock options (or any portion thereof) replaced by
Triad Options or LifePoint Options as described in Section 2.5(c), Columbia/HCA
is to retain sole responsibility for all liabilities and obligations under the
Columbia/HCA Option Plans, and neither Triad nor LifePoint is to have any
liability or obligation with respect thereto.
9
<PAGE>
(c) Adjustment and Replacement of Existing Columbia/HCA Options.
(i) Vested Non-Qualified Options other than De Minimis Options. The
----------------------------------------------------------
treatment described in this paragraph (i) is to apply with respect to each
Columbia/HCA Non-Qualified Option that is a Vested Option that is not De
Minimis. Pursuant to action taken by the Compensation Committee, each such
option is to continue to cover the Original Number of Shares but the per share
exercise price is to be adjusted as described below. In addition, pursuant to
action taken by the Compensation Committee under the LifePoint Option Plan, each
holder of such an option is to be entitled to a LifePoint Option which covers a
number of shares of LifePoint Stock equal to the Original Number of Shares
multiplied by the LifePoint Share Multiple and which has a per share exercise
price calculated as described below. Pursuant to action taken by the
Compensation Committee under the Triad Option Plan, each such option holder is
to also be entitled to a Triad Option which covers a number of shares of Triad
Stock equal to the Original Number of Shares multiplied by the Triad Share
Multiple and which has a per share exercise price calculated as described below.
The per share exercise prices under the adjusted options described above are to
be equal to the per share exercise price of the original Columbia/HCA Non-
Qualified Option multiplied by (1) the LifePoint Ratio, in the case of such
LifePoint Option, (2) the Triad Ratio, in the case of such Triad Option and (3)
the Columbia/HCA Ratio, in the case of such Columbia Option.
(ii) Vested Non-Qualified Options that are De Minimis Options. The
--------------------------------------------------------
treatment described in this paragraph (ii) is to apply with respect to each
Columbia/HCA Non-Qualified Option that is De Minimis. Pursuant to action taken
by the Compensation Committee, each such option shall be adjusted so that (a)
the per share exercise price shall equal the original per share exercise price
multiplied by the Columbia/HCA Ratio, and (b) the number of shares of
Columbia/HCA stock covered shall equal the Original Number of Shares divided by
the Columbia/HCA Ratio.
(iii) ISOs. The treatment described in this paragraph (iii) is to apply to
----
each Columbia/HCA ISO. Pursuant to action taken by the Compensation Committee
under the LifePoint Option Plan, each such Columbia/HCA Option that is held by a
LifePoint Employee, or by a LifePoint Terminee (or his estate), is to be
replaced by a LifePoint Option which (1) covers a number of shares of LifePoint
Stock equal to the Original Number of Shares divided by the LifePoint Ratio and
(2) has a per share exercise price equal to the original per share exercise
price multiplied by the LifePoint Ratio. Pursuant to action taken by the
Compensation Committee under the Triad Option Plan, each such option that is
held by a Triad Employee, or by a Triad Terminee (or his estate), is to be
replaced by a Triad Option which (1) covers a number of shares of Triad Stock
equal to the Original Number of Shares divided by the Triad Ratio and (2) has a
per share exercise price equal to the original per share exercise price
multiplied by the Triad Ratio. Pursuant to action taken by the Compensation
Committee, each such option that is not covered by the foregoing is to continue
as a Columbia/HCA Option but is to be adjusted so that (1) the per share
exercise price shall equal the original per share exercise price multiplied by
the Columbia/HCA Ratio and (2) the number of shares of Columbia/HCA Stock
covered shall equal the Original Number of Shares divided by the Columbia/HCA
10
<PAGE>
Ratio. The substitution or adjustment provided for herein is to be made in
accordance with section 424 of the Code, so as not to result in a modification
of the option.
(iv) Rounding. In making the adjustments described in paragraphs (i), (ii)
--------
and (iii) above, any resulting per share exercise price which is not equal to a
whole multiple of a cent is to be rounded up to the next whole cent and any
resulting number of shares covered by an option which is not equal to a whole
multiple of a share is to be rounded down to the next whole share.
(v) General Terms and Conditions. The terms and conditions of each
----------------------------
adjusted Columbia/HCA Option and/or substituted Triad Option or LifePoint Option
described in paragraphs (i), (ii) and (iii) hereof in respect of a Columbia/HCA
Option are to be substantially the same as those of the applicable Columbia/HCA
Option prior to such adjustment and/or substitution, except as otherwise
specifically described in this Section 2.5 and except that:
(1) Pursuant to action taken by the Compensation Committee, in the case of any
Triad Option or LifePoint Option described in paragraphs (i), (ii) or
(iii) hereof, any period of prior employment with Columbia/HCA or a
Subsidiary thereof is to be credited as covered employment for purposes of
determining the vesting and exercisability of such option (to the same
extent such period was credited for such purposes under the related
original Columbia/HCA Option).
(2) Pursuant to action taken by the Compensation Committee, in the case of any
Triad Option or LifePoint Option that is described in paragraph (i) or
(ii) hereof, the optionee is to be considered to be employed by the issuer
of the option so long as he is employed by Columbia/HCA, Triad or
LifePoint (or a Subsidiary thereof), for purposes of determining when the
option will cease to be exercisable on account of termination of
employment. At such time as the optionee ceases to be employed by
Columbia/HCA, Triad or LifePoint (or a Subsidiary thereof), such cessation
of employment shall be treated as though it were a cessation of employment
with the issuer under comparable circumstances.
(3) Pursuant to action taken by the Compensation Committee, in the case of any
Columbia/HCA Option that is described in paragraph (i) or (ii) hereof, the
optionee is to be considered to be employed by Columbia/HCA so long as he
is employed by Triad or LifePoint (or a Subsidiary thereof), for purposes
of determining when the option will cease to be exercisable on account of
termination of employment, if he is employed by LifePoint or Triad on the
Distribution Date or transfers, at the request of Columbia/HCA, to
employment with LifePoint or Triad (or a Subsidiary thereof) by the first
anniversary of the Distribution Date. At such time as the optionee ceases
to be employed by Triad or LifePoint (or a Subsidiary thereof), such
cessation of employment shall be treated as though it were a cessation of
employment with Columbia/HCA under comparable circumstances.
11
<PAGE>
(vi) Directors' Options. The foregoing provisions of this Section
------------------
2.5(c), as applied to Columbia/HCA Employees, are to be applied in a
comparable manner with respect to any Columbia/HCA Options held by a member
(or former member) of the Board of Directors of Columbia/HCA, except that
any reference to employment shall be deemed to mean service as a member of
such Board.
(vii) Discretionary LifePoint Options and Triad Options to
----------------------------------------------------
Columbia/HCA Executives. Pursuant to action taken by the Compensation
-----------------------
Committee, certain executives of Columbia/HCA have been granted
discretionary LifePoint Options and Triad Options. Under such options, the
optionee is to be considered to be employed by the issuer of the option so
long as he is employed by Columbia/HCA, Triad or LifePoint (or a Subsidiary
thereof) within one year of the Distribution Date for all purposes. At such
time as the optionee ceases to be employed by Columbia/HCA, Triad or
LifePoint (or a Subsidiary thereof), such cessation of employment shall be
treated as though it were a cessation of employment with the issuer under
comparable circumstances.
(d) Definitions. For purposes hereof, the following definitions
-----------
shall apply:
(i) "Columbia/HCA ISO" shall mean any option outstanding under a
Columbia/HCA Option Plan on the Distribution Date that is intended to
qualify as an "Incentive Stock Option" under section 422 of the Code.
(ii) "Columbia/HCA Non-Qualified Option" shall mean any stock option
outstanding under a Columbia/HCA Option Plan on the Distribution Date that
is not a Columbia/HCA ISO. Any such option shall be considered a "Vested
Option" to the extent that it is exercisable on the date in question and
shall be considered a "Non-Vested Option" to the extent that it is not yet
exercisable on such date.
(iii) "Columbia/HCA Option" shall mean a Columbia/HCA ISO or
Columbia/HCA Non-Qualified Option, as the context shall indicate.
(iv) "Columbia/HCA Option Plan" shall mean any Plan maintained by
Columbia/HCA under which there are stock options outstanding on the
Distribution Date.
(v) "Columbia/HCA Ratio" shall mean a fraction whose numerator is
the closing price of the Columbia/HCA Stock on the Ex-Dividend Date and
whose denominator is the closing price of the Columbia/HCA Stock on the
trading date immediately preceding the Ex-Dividend Date.
(vi) "Compensation Committee" shall mean the Compensation Committee
of the Board of Directors of Columbia/HCA, including the 162(m)
Compensation Sub-Committee.
(vii) "De Minimis" shall mean, as to any Columbia/HCA Option, an
option covering 1000 or fewer shares of Columbia/HCA Stock.
12
<PAGE>
(viii) "Ex-Dividend Date" shall mean the first trading date on which
the Columbia/HCA stock shall trade on an ex-dividend basis with respect to
the distribution of the LifePoint and Triad stock.
(ix) "LifePoint Ratio" shall mean a fraction whose numerator is the
closing price of the LifePoint Stock on the first day on which such stock
is traded and whose denominator is the closing price of the Columbia/HCA
Stock on the trading date immediately preceding the Ex-Dividend Date.
(x) "LifePoint Share Multiple" shall mean the number of shares of
LifePoint Stock to be distributed per share of Columbia/HCA Stock on the
Distribution Date.
(xi) "Original Number of Shares" shall mean, as to any Columbia/HCA
Option, the number of shares of Columbia/HCA Stock covered by such Option
immediately prior to the application of Section 2.5(c).
(xii) "Triad Ratio" shall mean a fraction whose numerator is the
closing price of the Triad Stock on the first date on which such stock is
traded and whose denominator is the closing price of the Columbia/HCA Stock
on the trading date immediately preceding the Ex-Dividend Date.
(xiii) "Triad Share Multiple" shall mean the number of shares of Triad
Stock to be distributed per share of Columbia/HCA Stock on the Distribution
Date.
Section 2.6 Welfare Benefit Plans.
---------------------
(a) Spinco Welfare Benefit Plans. Prior to the Distribution Date
----------------------------
(in a time and manner specified by Columbia/HCA), effective immediately prior to
the Distributions, LifePoint and Triad shall each establish welfare benefit
plans that mirror (i.e., are identical to) the Columbia/HCA Welfare Plans.
Pursuant to Plan Spin-offs, all LifePoint Employees and Triad Employees then
participating in the Columbia/HCA Welfare Plans shall cease to be participants
in such Plans, effective immediately prior to the Distributions, and shall
thereupon become participants in the LifePoint Welfare Plans and Triad Welfare
Plans, respectively. All claims experience (e.g., with respect to deductibles
and stop-loss limitations) under the Columbia/HCA Welfare Plans for the
Distribution Year shall be carried over to the appropriate Spinco Welfare
Benefit Plans, as if such claims experience had occurred under such Spinco
Welfare Benefit Plans for such year.
(b) Liability for Claims. Columbia/HCA shall be responsible for, or
--------------------
cause its applicable insurance carriers or HMOs to be responsible for, all
liabilities and obligations related to claims incurred or premiums owed or due
under any Columbia/HCA Welfare Plans with respect to periods prior to the
Distribution Date. Beginning on the Distribution Date, Triad and LifePoint shall
be responsible for, or cause their applicable insurance carriers or HMOs to be
responsible for, all liabilities and obligations related to claims incurred or
premiums owed or due under the Triad Welfare Plans and the LifePoint Welfare
Plans, respectively, for periods thereafter and Columbia/HCA shall have no
liability with respect thereto. For these purposes, (1) medical and dental
claims shall be considered to be incurred at the time the services are performed
and (2) death and dismemberment claims shall be deemed to be incurred on the
date
13
<PAGE>
that death or dismemberment (as the case may be) occurs. Notwithstanding the
preceding provisions of Sections 2.6(a) and 2.6(b), with respect to disability
benefits, any disability liabilities relating to LifePoint Employees (or
LifePoint Terminees), including liabilities which are attributable to
disabilities experienced before the Distribution Date, shall be the sole
responsibility of LifePoint, and any disability liabilities relating to Triad
Employees (or Triad Terminees), including liabilities which are attributable to
disabilities experienced before the Distribution Date, shall be the sole
responsibility of Triad.
(c) Continuation Coverage Administration. Columbia/HCA shall continue
------------------------------------
to be responsible after the Distribution Date for providing and administering
the continuation coverage required by COBRA as it relates to any Columbia/HCA
Qualified Beneficiary. On and after the Distribution Date, LifePoint shall be
responsible for providing and administering the continuation coverage required
by COBRA to any LifePoint Qualified Beneficiary, and Triad shall be responsible
for providing and administering the continuation coverage required by COBRA to
any Triad Qualified Beneficiary.
(d) Small Welfare Benefit Plans. The Plan sponsor of each Small
---------------------------
Welfare Benefit Plan shall remain that Plan's sponsor after the Distribution
Date. If a Small Welfare Benefit Plan is maintained by a Spinco or a Subsidiary
thereof before the Distribution Date, then such Plan shall continue to be
maintained by that Spinco or its Subsidiary after the Distribution Date.
(e) FSA Plan Coordination. The flexible spending account ("FSA")
---------------------
plans which are established by LifePoint and Triad pursuant to the Welfare
Benefit Plans that they establish under Section 2.6(a) and the cafeteria plans
established pursuant to Section 2.6(a) shall carry over all elections made under
the Columbia/HCA FSA Plan for the year of the Distributions. The remaining FSA
benefit amounts available to the respective participants for such year shall be
available under the FSA Plans established by LifePoint and Triad, respectively.
LifePoint and Triad shall each establish voluntary employee benefits
associations (VEBAs) to collect FSA premiums, pay FSA claims and pay medical and
dental self-insured benefits. The portions of any Columbia/HCA VEBA surplus in
existence on December 31, 1998 (adjusted, to the extent appropriate, to reflect
investment and claims payment experience) attributable to LifePoint Employees
and Triad Employees, respectively, shall be transferred to their respective
VEBAs following establishment, together with their respective portions of any
payments into the Columbia/HCA VEBA thereafter.
(f) HealthTrust Premium Holiday. Pursuant to an agreement with the
---------------------------
U.S. Department of Labor ("DOL"), a premium holiday was created in 1997 for
certain former HealthTrust employees. In the event that such holiday has not
expired prior to the Distribution Date, LifePoint and Triad each agree to
establish an identical holiday to that agreed upon by Columbia/HCA and the DOL
for the benefit of their respective former HealthTrust employees. Columbia/HCA
shall determine the portion of any remaining holiday amount as of the
Distribution Date attributable to LifePoint and Triad, respectively (and the
amount of any related funds, which shall be made available to LifePoint and
Triad for this purpose). However, in the event that the surplus in existence as
of the Distribution Date is de minimis, as agreed upon by the parties, then no
such holiday shall be created by Triad or LifePoint. In such case, the
14
<PAGE>
remaining surplus shall be utilized by Columbia/HCA to benefit former
HealthTrust employees in accordance with the settlement agreement with the DOL.
Section 2.7 Services to be Provided by Columbia/HCA and Mutuality.
-----------------------------------------------------
(a) Services to be Rendered to Triad.
--------------------------------
(1) Pension. No administrative or investment services, whether ministerial
or fiduciary in nature, shall be provided to Triad by Columbia/HCA with respect
to any pension plans of Triad (including plan(s) described in Sections 2.2, 2.3
and 2.4) on and after the Distribution Date. All such services performed by
Columbia/HCA shall cease on the Distribution Date, and Triad shall supply all
such services on and after the Distribution Date. Notwithstanding the two
preceding sentences, in the event that services are performed or costs are
incurred for the MCA 401(k) Plan that are chargeable to the plan sponsor, and
Triad Employees participate in such Plan, then Triad shall pay its pro rata
share of such costs, with proration based on relative participant numbers.
(2) Welfare. For the remainder of the Distribution Year, Columbia/HCA and
its agents, as chosen by Columbia/HCA, shall provide all ministerial
administrative and ministerial investment services, but no fiduciary
administrative or fiduciary investment services, to Triad with respect to the
Triad Welfare Plans. For this purpose, ministerial administrative services shall
include all ministerial services incident to administering, satisfying all
reporting requirements with respect to, and maintaining the Triad Welfare Plans.
Triad shall provide specific guidelines for Columbia/HCA to follow in performing
ministerial functions. Triad shall perform the fiduciary administrative and
fiduciary investment services incident to the Triad Welfare Plans. Triad shall
indemnify and hold harmless Columbia/HCA, its employees, directors, officers and
its agents with respect to any and all liability, losses, claims, damages and
expenses (including, but not limited to, attorneys' fees) incurred in connection
with providing such services, even if functions which were designated
ministerial are determined to be fiduciary in nature, provided that Columbia/HCA
and its agents have acted, or omitted to act, in good faith. Triad shall fully
cooperate with Columbia/HCA in its fulfillment of the provisions of this Section
2.7(a). All services of Columbia/HCA shall cease on the last day of the
Distribution Year. In consideration for the services to be performed by
Columbia/HCA, Triad shall compensate Columbia/HCA in the following manner:
Columbia/HCA shall determine all incremental costs it incurs in performing
administrative and investment services hereunder for the Distribution Year
relating to the Columbia/HCA Welfare Plans and the Triad Welfare Plans (the
"Incremental Costs"), it being understood that Triad shall make appropriate
arrangements for the provision of all funds necessary for benefit payments and
other costs. Only costs incurred on or after the Distribution Date shall be
considered. The Incremental Costs shall include, but not be limited to, all
salaries of Columbia/HCA Employees (and Employees of Columbia/HCA Subsidiaries)
who work primarily or exclusively on Welfare Plan matters for Columbia/HCA (or
its Subsidiary(ies)), and all amounts paid to third-party administrators in
connection with Welfare Plan matters. However, overhead charges shall not be
included in Incremental Costs. Any portion of the Incremental Costs directly
traceable to a particular Columbia/HCA or Triad Welfare Plan for the
Distribution Year shall also be determined. The costs incurred in defending any
lawsuit relating to a Triad Welfare Plan for the Distribution Year, unless it is
ultimately determined that
15
<PAGE>
Columbia/HCA failed to act in good faith, shall also be determined. Once these
amounts are determined, the amount chargeable to Triad shall be calculated under
the following formula.
[((A-B) multiplied by D/C + E + F] multiplied by G = Charge to Triad
Where:
A = Total Incremental Costs
B = Aggregate Costs Directly Traceable to Columbia/HCA and Triad Welfare
Plans, respectively, for the Distribution Year
C = Total Number of Employees of Columbia/HCA and Subsidiaries and Triad on
Distribution Date
D = Total Number of Employees of Triad on Distribution Date
E = Cost directly Traceable to Welfare Plans of Triad
F = Costs incurred in defending or pursuing any lawsuit relating to Triad's
Welfare Benefit Plans for the Distribution Year unless it is ultimately
determined that Columbia/HCA acted in good faith
G = [mark-up number to be inserted]
Notwithstanding the foregoing, during any period that services are being
provided to LifePoint pursuant to Section 2.7(b)(2), appropriate
adjustments shall be made in such formula to reflect such provision of
services.
All charges not paid within 30 days of written request shall bear simple
interest at a rate of ten percent (10%) per annum.
(3) General Indemnification. In the event of a finding that Welfare
Plan services have been performed for Triad after the last day of the
Distribution Year, or pension services have been performed for Triad after
the Distribution Date, and Columbia/HCA or any employee, officer, director
or agent thereof incurs any liability or costs incident thereto, Triad
shall indemnify and hold harmless Columbia/HCA and any of its employees,
officers, directors or agents with respect to any liabilities or costs
incurred attributable to services relating to Triad's plans, provided that
Columbia/HCA and its employees, officers, directors or agents acted, or
omitted to act, in good faith.
(b) Services to be Rendered to LifePoint.
------------------------------------
(1) Pension. No administrative or investment services, whether ministerial
or fiduciary in nature, shall be provided to LifePoint by Columbia/HCA with
respect to any pension plans of LifePoint (including plan(s) described in
Sections 2.2, 2.3 and 2.4) on and after the Distribution Date. All such services
performed by Columbia/HCA shall cease on the Distribution Date, and LifePoint
shall supply all such services on and after the Distribution Date.
Notwithstanding the two preceding sentences, in the event that services are
performed or costs are incurred for the MCA 401(k) Plan that are chargeable to
the plan sponsor, and LifePoint Employees participate in such Plan, then
LifePoint shall pay its pro rata share of such costs, with proration based on
relative participant numbers.
16
<PAGE>
(2) Welfare. Subject to the following provisions of this paragraph,
Columbia/HCA shall perform Welfare Benefit Plan services for LifePoint through
May 31, 1999 which are identical to the services to be performed for Triad
through the remainder of the Distribution Year pursuant to the provisions of
Section 2.7(a)(2). All terms and conditions relating to Triad with respect to
its Welfare Plan under Section 2.7(a)(2), including compensation, shall apply to
LifePoint with respect to such services. In the event that such services shall
extend beyond May 31, 1999 or end prior thereto pursuant to a written agreement
between Columbia/HCA and LifePoint, then such Triad terms and conditions shall
apply for such longer or shorter period, as the case may be.
(3) General Indemnification. In the event of a finding that Welfare Plan
services have been performed for LifePoint beyond the time specified in Section
2.7(b)(2), or that pension services have been performed for LifePoint after the
Distribution Date, and Columbia/HCA or any employee, officer, director or agent
thereof incurs any liability or costs incident thereto, LifePoint shall
indemnify and hold harmless Columbia/HCA and any of its employees, officers,
directors or agents with respect to any liabilities or costs incurred
attributable to services relating to LifePoint's plans, provided that
Columbia/HCA and its employees, officers, directors or agents acted, or omitted
to act, in good faith.
(c) Insurance and HMO Shopping. For the remainder of the Distribution
--------------------------
Year, LifePoint and Triad specifically agree that Columbia/HCA may negotiate
contracts with insurance companies, HMOs, investment managers and other service
providers that consider the employees of LifePoint and Triad, in addition to the
employees of Columbia/HCA, for purposes of negotiating to receive the lowest
rates or costs possible. LifePoint and Triad agree to fully cooperate with
Columbia/HCA in this regard. LifePoint and Triad agree to utilize whatever
providers are chosen by Columbia/HCA for the Distribution Year, regardless of
whether Columbia/HCA is or is not successful in achieving group rates that
consider Columbia/HCA, Triad and/or LifePoint Employees.
(d) Preferred Provider Mutuality. For the remainder of the
----------------------------
Distribution Year, Columbia/HCA, LifePoint and Triad shall treat each facility
maintained by Columbia/HCA, LifePoint or Triad as their own facility for the
entire Distribution Year for purposes of managed care discounts, preferred
provider discounts and any similar discounts or cost reductions available to
participants under their respective welfare benefit plans.
(e) Spinco Welfare Plans for the Distribution Year. As a condition of
----------------------------------------------
the arrangement, Triad and LifePoint agree that the Spinco Welfare Plans shall
continue to be maintained by Triad and LifePoint, respectively, for the
remainder of the Distribution Year. Triad and LifePoint agree that they shall
not amend the Spinco Welfare plans without the prior written consent of
Columbia/HCA for the remainder of such year. At the request of Columbia/HCA,
Triad and LifePoint shall amend such Spinco Welfare Plans as necessary for such
Plans to be identical to the Columbia/HCA Welfare Plans with respect to any
period for which Columbia/HCA shall provide administrative services. In the
event of a failure of LifePoint and/or Triad to comply with any of the preceding
sentences of this subsection, Columbia/HCA shall be authorized to take whatever
action it deems appropriate under the circumstances, including cessation of
services, and the party failing to comply shall pay Columbia/HCA all costs it or
its agents incurs as a result of such failure to comply.
17
<PAGE>
Section 2.8 Preservation of Right To Amend or Terminate Plans. Except as
-------------------------------------------------
otherwise expressly provided herein, no provisions of this Agreement shall be
construed as a limitation on the right of Columbia/HCA, Triad or LifePoint to
amend any Plan or terminate its participation therein which Columbia/HCA, Triad
or LifePoint would otherwise have under the terms of such Plan or otherwise;
provided, however, that no Party shall amend any Plan to the extent that such
amendment would have the effect of increasing the liabilities of any other Party
under any Plan of such other Party, without such Party's written consent. No
provision of this Agreement shall be construed to create a right in any Employee
or former Employee of Columbia/HCA, Triad or LifePoint or dependent or
beneficiary of such Employee or former Employee under a Plan which such person
would not otherwise have under the terms of the Plan itself.
Section 2.9 Reimbursement. The Parties acknowledge that any Party may
-------------
mistakenly incur costs and expenses directly related to benefits, including, but
not limited to, contributions to Plans and the payment of insurance premiums
arising from or related to any of the Plans which are, under this Agreement, the
responsibility of another Party hereto. Accordingly, each Party shall reimburse
any applicable other Party, as soon as practicable, but in any event within
thirty (30) days of receipt appropriate verification, for all such costs and
expenses. Subject to Section 2.7, all parties shall bear and be responsible for
their respective plan establishment and administrative expenses. All incremental
costs and expenses incurred due to creation of separate plans by LifePoint and
Triad and administration thereof shall be borne by LifePoint and Triad,
respectively.
Section 2.10 Payroll Reporting and Withholding.
---------------------------------
(a) [Form W-2 Reporting. The Parties hereby agree, to the extent
-------------------
applicable, to each adopt the "alternative procedure" for preparing and filing
IRS Forms W-2 (Wage and Tax Statements), as described in section 5 of Revenue
Procedure 96-60, 1996-2 IRS Cumulative Bulletin 399 ("Rev. Proc. 96-60"). Under
this procedure, each of Triad and LifePoint, as a successor employer, shall
provide all required forms W-2 to Triad Employees and LifePoint Employees,
respectively, reflecting all wages paid and taxes withheld by both Columbia/HCA
as the predecessor employer and Triad or LifePoint (as applicable) as the
successor employer for the entire year during which the Distribution takes
place. Columbia/HCA shall provide all required Forms W-2 to all Columbia/HCA
Employees reflecting all wages and taxes paid and withheld by Columbia/HCA.
In connection with the aforesaid agreement under Rev. Proc. 96-60,
each business unit or business operation of Columbia/HCA shall be assigned to
either Columbia/HCA, Triad or LifePoint, depending upon whether it is a business
retained by Columbia/HCA following the Distributions, a Triad Business or a
LifePoint Business, and each Columbia/HCA Employee, Triad Employee or LifePoint
Employee associated with such business unit or business operation shall be
assigned for payroll reporting purposes to Columbia/HCA, Triad or LifePoint, as
the case may be. Each of Columbia/HCA, Triad or LifePoint shall be responsible
for filing IRS Forms 941 and all other payroll returns for their respective
Employees.]
(b) [Forms W-4 and W-5. The Parties agree, to the extent applicable,
------------------
to each adopt the alternative procedure of Rev. Proc. 96-60 with respect to IRS
Forms W-4 (Employee's
18
<PAGE>
Withholding Allowance Certificate) and W-5 (Earned Income Credit Advance Payment
Certificate). Under this procedure, Columbia/HCA shall provide to Triad or
LifePoint, as the respective successor employers, all IRS Forms W-4 and W-5 on
file with respect to each Triad Employee or LifePoint Employee, and each of
Triad and LifePoint will honor these forms until such time, if any, that any
such Triad Employee or LifePoint Employee, as the case may be, submits a revised
form.]
(c) Garnishments, Tax Levies, Child Support Orders, and Wage
--------------------------------------------------------
Assignments. With respect to Employees with garnishments, tax levies, child
- -----------
support orders, and wage assignments in effect with Columbia/HCA on the
Distribution Date, each of Triad and LifePoint as the successor employers with
respect to Triad Employees or LifePoint Employees, respectively, shall honor
such payroll deduction authorizations and shall continue to make payroll
deductions and payments to the authorized payee, as specified by the court or
governmental order which was filed with Columbia/HCA.
(d) Authorizations for Payroll Deductions. Unless otherwise
-------------------------------------
prohibited by this or another agreement entered into in connection with the
Distributions, or by a Plan document, with respect to Triad Employees or
LifePoint Employees with authorizations for payroll deductions in effect with
Columbia/HCA on the Distribution Date, Triad and LifePoint as the respective
successor employers will honor such payroll deduction authorizations relating to
each such Triad Employee or LifePoint Employee, respectively, and shall not
require that such Triad Employee or LifePoint Employee, as the case may be,
submit a new authorization to the extent that the type of deduction by Triad and
LifePoint does not differ from that made by Columbia/HCA. The Triad Retirement
Plan and the LifePoint Retirement Plan shall, respectively, provide that any
elective deferral or other elections under the Columbia/HCA Retirement Plans in
existence immediately prior to the Distributions shall carry over immediately
following the Distributions. All elections under any Columbia/HCA Welfare Plans
shall similarly carry over to the Spinco Welfare Benefit Plans.
(e) Subsidiaries. With respect to individuals who are employed after
------------
the Distribution Date by a Subsidiary of Triad or LifePoint, all references in
this Section 2.10 to Triad or LifePoint shall be deemed to refer to the
appropriate Subsidiaries thereof, and Triad and LifePoint, respectively, shall
take such actions as are necessary to assure that the appropriate Subsidiary
thereof takes any actions required hereunder.
Article III.
LABOR AND EMPLOYMENT MATTERS
Notwithstanding any other provision of this Agreement or any other
Agreement between Columbia/HCA and Triad or LifePoint to the contrary,
Columbia/HCA, Triad and LifePoint understand and agree that:
Section 3.1 Independent Employers. On and after the Distribution Date,
---------------------
each of Columbia/HCA, Triad and LifePoint will be separate and independent
employers.
19
<PAGE>
Section 3.2 Employment Policies and Practices. Except as limited by
---------------------------------
applicable law (including, without limitation, ERISA) or as otherwise provided
in this Agreement, each of Columbia/HCA, Triad and LifePoint may adopt,
continue, modify or terminate such employment policies, compensation practices,
retirement plans, welfare benefit plans, and other employee benefit plans of any
kind or description, as each may determine, in its sole discretion, are
necessary and/or appropriate.
Section 3.3 Notice of Claims. Each Party will notify in writing and
----------------
consult with any other applicable Party prior to making any settlement of an
employee claim which may reasonably result in liability to such other Party.
Section 3.4 [Assumption of Unemployment Tax Rates]. Changes in state
--------------------------------------
unemployment tax experience from that of Columbia/HCA as of the Distribution
Date shall be handled as follows. In the event an option exists to allocate
state unemployment tax experience of Columbia/HCA, the Columbia/HCA experience
shall be transferred to Triad or LifePoint, if this results in the lowest
aggregate unemployment tax costs for each of Columbia/HCA and Triad or
LifePoint, as the case may be, combined, and the Columbia/HCA experience shall
be retained by Columbia/HCA if this results in the lowest aggregate unemployment
tax costs for each of Columbia/HCA and Triad or LifePoint, as the case may be,
combined.]
Section 3.5 No Third Party Beneficiary Rights.
---------------------------------
(a) This Agreement is not intended to, nor does it, create any third
party contractual or other common law rights. No person (including any Employee,
any beneficiary or dependent thereof) shall be deemed a third-party beneficiary
of this Agreement.
(b) Nothing contained in this Agreement shall confer upon any
Employee any right with respect to continuance of employment by any Party, nor
shall anything herein interfere with the right of any Party to terminate the
employment of any Employee at any time, with or without cause, or restrict any
Party in the exercise of its independent business judgment in modifying any of
the terms and conditions of the employment of an Employee, except as provided by
applicable law.
Section 3.6 Attorney-Client Privilege. Any provisions herein requiring
-------------------------
the Parties to this Agreement to cooperate shall not be deemed to be a waiver of
the attorney/client privilege for any Party nor shall it require any Party to
waive its attorney/client privilege.
Article IV.
DEFAULT
Section 4.1 Default. If any Party or Parties defaults hereunder, the
-------
non-defaulting Party or Parties shall be entitled to all remedies provided by
law or equity (including reasonable attorneys' fees and costs of suit incurred),
and shall be entitled to recover all legal and other costs incurred in pursuing
the defaulting Party at law or otherwise.
Section 4.2 Force Majeure. Columbia/HCA shall not be liable to
LifePoint or Triad, as appropriate, for a delay or failure to comply with the
terms of this Agreement if such
20
<PAGE>
delay or failure results from causes beyond its reasonable control. Such causes
may include, without limitation, acts of God, fires or other catastrophes,
telecommunication failures, equipment failures, power failures, labor disputes,
strikes, delays in transportation, riots, war, governmental regulations, non-
performance by Columbia/HCA suppliers and vendors, or problems experienced by
Columbia/HCA as a result of its own or any third party's computer software or
hardware not being Year 2000 compliant (an "Event of Force Majeure").
Columbia/HCA shall give LifePoint or Triad, as appropriate, prompt notice of any
Event of Force Majeure that may cause delay or non-performance hereunder. For so
long as such Event of Force Majeure shall continue, LifePoint or Triad, as
appropriate, may elect to have the services affected by the Event of Force
Majeure performed by other means without such election being deemed to be a
termination or breach of this Agreement, provided that LifePoint or Triad, as
appropriate, provides prompt notice of such election to Columbia/HCA after
having received notice of the Event of Force Majeure.
Article V.
MISCELLANEOUS
Section 5.1 Access Information: Cooperation. The Parties and their
-------------------------------
authorized agents shall be given reasonable access to and may take copies of all
information relating to the subjects of this Agreement or any other employment
or employee benefit matters (to the extent permitted by federal and state
confidentiality laws) in the custody of any other Party, including any agent,
contractor, subcontractor, agent or any other person or entity under the
contract of such Party. The Parties shall provide one another with such
information as is reasonably necessary to administer each Party's Plans. The
Parties shall cooperate with each other to minimize the disruption caused by any
such access and providing of information.
Section 5.2 Assignment. No Party shall, without the prior written
----------
consent of the other, have the right to assign any rights or delegate any
obligations under this Agreement.
Section 5.3 Headings. The section headings contained in this Agreement
--------
are inserted for convenience of reference only and shall not affect the meaning
or interpretation of this Agreement.
Section 5.4 Severability. In the event that any provision hereof is
------------
prohibited or unenforceable in any jurisdiction, such provision shall, as to
such jurisdiction, be ineffective to the extent of such prohibition or
unenforceability without invalidating the remaining provisions hereof or
affecting the validity or enforceability of such provision in any other
jurisdiction.
Section 5.5 Parties Bound. This Agreement shall inure to the benefit of
-------------
and be binding upon the Parties hereto and their respective successors and
permitted assigns. Nothing herein, expressed or implied, shall be construed to
give any other person any legal or equitable rights hereunder.
Section 5.6 Notices. All notices or other communications required or
-------
permitted under this Agreement shall be in writing and sufficient if sent by
registered or certified mail,
21
<PAGE>
postage prepaid, addressed as provided below; or delivered personally, by
private courier or fax, and followed by such mailing:
If to Columbia/HCA, to
Columbia/HCA Healthcare Corporation
One Park Plaza
Nashville, Tennessee 37203
Telecopy: (615) 344-2075
Attention: Robert A. Waterman, Esq.
Senior Vice President and General Counsel
If to LifePoint, to
LifePoint Corporation
4525 Harding Road
Suite 103
Nashville, Tennessee 37205
Telecopy: (615) 344-6276
Attention: Mr. Scott L. Mercy
Chairman and Chief Executive Officer
If to Triad, to
Triad Corporation
13455 Noel Road
20th Floor
Dallas, Texas 75240
Telecopy: (972) 663-3945
Attention: Mr. James D. Shelton
Chairman and Chief Executive Officer
In each case, with a copy to
Dewey Ballantine LLP
1301 Avenue of the America
New York, New York 10019-6092
Telecopy: (212) 259-6333
Attention: Morton A. Pierce, Esq.
Any Party may change the person and address to which notices or other
communications are to be sent to it by giving written notice of any such change
in the manner provided herein.
Section 5.7 Further Action. The Parties shall cooperate in good faith
--------------
and take such steps and execute such papers as may be reasonably requested by
another Party to implement the terms and provisions of this Agreement
22
<PAGE>
Section 5.8 Waiver. The Parties agree that the waiver of any default
------
under any term or condition of this Agreement shall not constitute a waiver of
any subsequent default or nullify the effectiveness of that term or condition.
Section 5.9 Governing Law. This Agreement shall be deemed to be made in
-------------
and in all respects shall be interpreted, construed and governed by and in
accordance with the law of the State of Tennessee without regard to the conflict
of law principles thereof.
Section 5.10 Consent to Jurisdiction. Columbia/HCA, LifePoint and Triad
-----------------------
each hereby expressly (a) submits and consents in advance to the jurisdiction of
any Tennessee State Court sitting in Nashville, Tennessee or in the United
States District Court for the Middle District of Tennessee with respect to any
actions or proceedings arising out of or relating to this Agreement, (b) waives
any objection which it may have based upon lack of personal jurisdiction,
improper venue or forum non conveniens, (c) agrees that all claims with respect
to such actions or proceedings may be heard and determined in any Tennessee
State Court sitting in Nashville, Tennessee or the United States District Court
for the Middle District of Tennessee, (d) agrees not to commence any action or
proceeding relating to this Agreement other than in a Tennessee State Court
sitting in Nashville, Tennessee or in the United States District Court for the
Middle District of Tennessee and (e) agrees that a final judgment in any such
action or proceeding shall be conclusive and may be enforced in other
jurisdictions by suit on the judgment or in any other manner provided by law.
Section 5.11 Waiver of Jury Trial. EACH PARTY HERETO ACKNOWLEDGES AND
--------------------
AGREES THAT ANY CONTROVERSY WHICH MAY ARISE UNDER THIS AGREEMENT IS LIKELY TO
INVOLVE COMPLICATED AND DIFFICULT ISSUES, AND THEREFORE EACH SUCH PARTY
IRREVOCABLY AND UNCONDITIONALLY WAIVES ANY RIGHT SUCH PARTY MAY HAVE TO A TRIAL
BY JURY IN RESPECT OF ANY LITIGATION DIRECTLY OR INDIRECTLY ARISING OUT OF OR
RELATING TO THIS AGREEMENT, OR THE TRANSACTIONS CONTEMPLATED BY THIS AGREEMENT.
EACH PARTY CERTIFIES AND ACKNOWLEDGES THAT (A) NO REPRESENTATIVE, AGENT OR
ATTORNEY OF ANY OTHER PARTY HAS REPRESENTED, EXPRESSLY OR OTHERWISE, THAT SUCH
OTHER PARTY WOULD NOT, IN THE EVENT OF LITIGATION, SEEK TO ENFORCE THE FOREGOING
WAIVER, (B) EACH PARTY UNDERSTANDS AND HAS CONSIDERED THE IMPLICATIONS OF THIS
WAIVER, (C) EACH PARTY MAKES THIS WAIVER VOLUNTARILY AND (D) EACH PARTY HAS BEEN
INDUCED TO ENTER INTO THIS AGREEMENT BY, AMONG OTHER THINGS, THE MUTUAL WAIVERS
AND CERTIFICATIONS IN THIS SECTION 5.11.
Section 5.12 Entire Agreement. This Agreement and the Distribution
----------------
Agreement constitute the entire understanding between the Parties hereto with
respect to the subject matter hereof, and supersede all prior written or oral
communications relating to such subject matter. No amendment, modification,
extension or failure to enforce any condition of this Agreement by any Party
shall be deemed a waiver of any of its rights herein. This Agreement shall not
be amended except by a writing executed by the Parties.
23
<PAGE>
Section 5.13 Counterparts. This Agreement may be executed in any number
------------
of separate counterparts, each of which shall be deemed to be an original, but
which together shall constitute one and the same instrument.
24
<PAGE>
IN WITNESS WHEREOF, the Parties have caused this Agreement to be duly
executed as of the date first above written.
COLUMBIA/HCA HEALTHCARE
CORPORATION,
a Delaware corporation
By:_____________________________________
Name:
Title:
TRIAD HOSPITALS, INC.,
a Delaware corporation
By:_____________________________________
Name:
Title:
LIFEPOINT HOSPITALS, INC.,
a Delaware corporation
By:_____________________________________
Name:
Title:
25
<PAGE>
Exhibit 10.3
INSURANCE ALLOCATION AND ADMINISTRATION AGREEMENT
This Insurance Allocation and Administration Agreement (the
"Agreement") is made and entered into as of this ____ day of ________, 1999 by
---------
and among Columbia/HCA Healthcare Corporation, a Delaware corporation
("Columbia/HCA"), LifePoint Hospitals, Inc., a Delaware corporation (together
-------------
with its successors and permitted assigns, "LifePoint"), and Triad Hospitals,
---------
Inc., a Delaware corporation (together with its successors and permitted
assigns, "Triad").
-----
WHEREAS, Columbia/HCA, LifePoint and Triad have entered into that
certain Distribution Agreement, dated as of ___________, 1999 (the "Distribution
------------
Agreement"), pursuant to which (a) Columbia/HCA and its Subsidiaries shall cause
- ---------
to be consummated certain corporate transactions in order to divide and separate
their existing businesses and assets so that (i) the Columbia/HCA Business shall
be owned, controlled, and operated, directly and indirectly, by Columbia/HCA,
(ii) the America Group Business shall be owned, controlled, and operated,
directly and indirectly, by LifePoint and (iii) the Pacific Group Business shall
be owned, controlled, and operated, directly and indirectly, by Triad, and (b)
Columbia/HCA shall distribute to the holders of Columbia/HCA's outstanding
shares of common stock, the outstanding shares of America common stock and the
outstanding shares of Pacific common stock owned by Columbia/HCA (such
distributions being collectively referred to as the "Distributions"), upon the
-------------
terms and subject to the conditions set forth in the Distribution Agreement;
WHEREAS, Columbia/HCA, its Subsidiaries and their respective
predecessors have historically maintained various insurance policies (the
"Policies") for the benefit or protection of one or more of Columbia/HCA and its
--------
Subsidiaries, some of which are professional liability policies purchased from
Health Care Indemnity, Inc. (the "HCI Policies");
------------
WHEREAS, in connection with the transactions contemplated by the
Distribution Agreement, Columbia/HCA, LifePoint and Triad have determined that
it is necessary and desirable to provide for the respective continuing rights
and obligations in respect of the Policies from and after the Distribution Date
and the administration of claims thereunder as well as interim administration by
Columbia/HCA of new policies entered into by LifePoint and Triad on and after
the Distribution Date;
WHEREAS, under the Distribution Agreement, Columbia/HCA has agreed to
indemnify LifePoint and Triad for losses in excess of any insurance proceeds
with respect to activities prior to the Distribution Date;
WHEREAS, the parties desire to enter into this Agreement in order to
define the relationship between the parties regarding insurance of their
respective properties and liabilities and the exercise of certain rights,
remedies and options by the respective parties hereto under the Policies; and
<PAGE>
WHEREAS, pursuant to the Distribution Agreement the parties hereto
have agreed to enter into this Agreement;
NOW THEREFORE, in consideration of the mutual agreements, provisions,
and covenants contained in this Agreement and the Distribution Agreement, the
parties hereto hereby agree as follows:
Unless otherwise defined herein or unless the context otherwise
requires, all capitalized terms shall have the meanings (such meanings to be
equally applicable to both the singular and plural forms of the terms defined)
attributed to them in the Distribution Agreement.
SECTION 1. Allocation of Existing Coverages and Liabilities.
------------------------------------------------
1.01 Claims in Process. Any claims made against insurers under the
----------------
Policies prior to the Distribution Date and unpaid as of such date shall be for
the account of the party (i) whose asset after the Distribution Date is the
basis for the claim, or (ii) in the case of a liability claim, which is the
owner after the Distribution Date of the facility at which the activity which is
the subject of the claim occurred or is alleged to have occurred. If the
proceeds of the claim are received by a party other than the party entitled to
receive such proceeds pursuant to this Section 1.01, such receiving party shall
pay over such proceeds to such other party. In respect of claims under Policies
for the account of LifePoint or Triad, in the event that any deductible, co-
insurance or self-insured retention in respect of such claim has not been paid
or accounted for prior to the Distribution Date, or if the Policy under which
the claim was made provides for any aggregate deductible, co-insurance or self-
insured retention or if the claim is not fully covered because the aggregate
policy limits have been exhausted, such amounts shall be paid to such party by
Columbia/HCA pursuant to the indemnification provided for in the Distribution
Agreement.
1.02 Retroactive Rate Adjustments. Retroactive adjustments in respect
----------------------------
of any Policies for periods ended on or prior to the Distribution Date shall be
paid or received by Columbia/HCA, and LifePoint and Triad shall have no
liability or receive no refund therefor regardless of the reason for the
adjustment.
1.03 Incurred But Not Reported Claims. (a) The parties shall do all
--------------------------------
things necessary to assure that all Policies which provide coverage remain
applicable to LifePoint and Triad and their respective Subsidiaries and assets
after the Distribution Date, to the extent they were applicable prior to the
Distribution Date with respect to losses incurred prior to the Distribution
Date.
(b) The parties shall do all commercially reasonable things necessary
to assure continued coverage for incurred but not reported claims and incidents
which have not been filed with insurers which would have been covered under
Policies which provide coverage on a claims made basis had they been made and
reported prior to the Distribution Date including the purchase of tail coverage
by Columbia/HCA with respect to claims made policies if the replacement policies
acquired by LifePoint or Triad do not
2
<PAGE>
have retroactive dates which provide coverage for all occurrences which would
have been covered by the Policies had they remained in effect after the
Distribution Date.
(c) Indemnity payments under Policies which are on an occurrence
basis in respect of claims made after the Distribution Date arising out of
occurrences prior to the Distribution Date shall be for the account of the party
(i) whose asset after the Distribution Date was the basis for the claim or (ii)
in the case of liability claims, which is the owner after the Distribution Date
of the facility at which the activity which is the subject of the claim occurred
or is alleged to have occurred; provided, however, that, in respect of claims
-------- -------
under Policies for the account of LifePoint or Triad, if the Policy under which
the claim was made provides for any deductible, co-insurance or self-insured
retention or if the claim is not fully covered because the policy limits have
been exhausted, such amounts shall be paid to such party by Columbia/HCA
pursuant to the indemnification provided for in the Distribution Agreement.
SECTION 2. Cooperation and Joint Insurance.
-------------------------------
2.01 Cooperation in Acquiring Insurance. Columbia/HCA, LifePoint and
----------------------------------
Triad shall cooperate with each other in the purchase of insurance coverage for
periods commencing after the Distribution Date with the aim of obtaining
appropriate insurance coverage on the best available terms and conditions and at
the most reasonable rates, always taking into account the quality of the
insurers with which coverage is being placed. The parties anticipate that
LifePoint and Triad will purchase continuous coverage under extensions or
renewals of the HCI Policies, or separate policies issued by Health Care
Indemnity, Inc. which provide continuous coverage. Each party shall be entitled
to purchase its own separate coverage in the event it believes that, after a
good faith attempt to obtain appropriate joint coverage (which shall include an
attempt to agree upon allocation of premium on an other than pro rata basis in
--- ----
the event the insurer views one party as a higher risk than the other), its own
interests dictate that course of action. In situations in which the parties are
required by law to maintain separate coverage or to make changes in existing
joint coverage, they shall cooperate in so doing.
Columbia/HCA, LifePoint and Triad agree that there are certain
situations in which existing coverage must be retained as a result of state law
or regulation. In these situations the parties will cooperate to maintain such
coverage and appropriate financial accommodation will be made so that LifePoint
or Triad, as the case may be, will pay or receive value so that it will be in
the same financial position as it would have been had it obtained coverage
independently. In this regard the current participation of hospitals in the
patient compensation fund in the state of Kansas will be continued in order to
maintain the retroactive date on claims made coverage. In consideration
therefore, the value of a tail policy will be transferred. In addition, in
respect of Triad in the state of Texas the hospitals have opted out of the
workers compensation program and will maintain a benefit program in lieu
thereof. Reserves will be continued on the books of the participating hospitals
in order to permit the program to continue.
2.02 Joint Liability and Claims. (a) In the event that a claim by a
--------------------------
third party is made against two or more of the parties (or a Subsidiary of a
party and another party or a Subsidiary thereof) (a "Joint Claim"), and
-----------
indemnification under the
3
<PAGE>
Distribution Agreement is provided by Columbia/HCA, Columbia/HCA shall defend
the Joint Claim at its expense and the other party or parties shall cooperate in
such defense. In the event that no indemnification is provided for under the
Distribution Agreement and there is no other existing agreement or
indemnification with respect to such Joint Claim, the parties to the Joint Claim
agree to handle such Joint Claim in accordance with this Section 2.02. Such
parties shall jointly defend such Joint Claim and shall attempt to agree upon
the appropriate allocation of any liability or expenses. In the event that such
parties cannot agree upon an appropriate allocation, the issue shall be referred
to arbitration in accordance with the procedures described in subsection (b)
below, but only after a final determination of liability (through final court
judgment, settlement or otherwise) has been made. None of the parties, nor any
Subsidiary of any of them, shall institute any court proceedings against the
other involving a Joint Claim.
In the event that any of the parties purchases separate liability
coverage, each of them shall make known to its insurer this Agreement and assure
itself that the terms of such coverage do not conflict with this Agreement and
obligate the insurer under the Policy to abide by the allocation of liability
and expenses determined in accordance herewith unless it agrees with the other
insurer, as to a different allocation which does not affect any liabilities of
either party.
(b) Any and all disputes arising from or in connection with this
Agreement shall be resolved in accordance with the procedures set forth in
Article XI of the Distribution Agreement (including, without limitation,
provisions set forth therein regarding attempts to amicably resolve any dispute
through discussions among members of senior management, consent to jurisdiction
and waiver of jury trial).
SECTION 3. Administrative Services.
-----------------------
3.01 Engagement. LifePoint and Triad each authorizes Columbia/HCA to
----------
perform and provide the technical and administrative service, assistance and
support functions described in Schedule 3.01 attached hereto (the "Services").
--------
Columbia/HCA hereby accepts such appointment. Compensation for such services
shall be as provided for in Schedule 3.01.
3.02 General Description of the Services. The purpose of this
-----------------------------------
Agreement is to set forth the terms upon which Columbia/HCA shall provide to
LifePoint and Triad the Services (i) in connection with the Policies and (ii) on
an interim basis in respect of post-Distribution Date insurance, in order to
permit LifePoint and Triad the opportunity to obtain alternative sources of
supply of the Services. In general, the Services shall be consistent with the
comparable services provided by Columbia/HCA with respect to the Policies
immediately prior to the Distribution Date.
3.03 Performance by Affiliates. The Parties recognize that the
-------------------------
Services may include services which, by their nature, are more effectively to be
provided by Affiliates of Columbia/HCA. Subject to the next sentence of this
Section 3.03, Columbia/HCA shall, to the extent required in order for its
Affiliates to provide such Services, cause its Affiliates to provide such
Services hereunder as if such Affiliates were themselves parties hereto. In
connection with the provision of such Services,
4
<PAGE>
Columbia/HCA's Affiliates shall be entitled, as if such Affiliates were
themselves parties hereto, to the benefits of (i) the limitations on liability
set forth herein and (ii) the limitations on the obligation to provide Services
set forth herein.
SECTION 4. Amendment of Policies.
---------------------
So long as LifePoint or Triad is covered by any Policy, Columbia/HCA
will not enter into any material amendment, change or modification of any such
Policy which would materially adversely affect LifePoint's or Triad's rights
under such Policy without the express prior written consent to such amendment,
change or modification by LifePoint or Triad, unless all reasonably anticipated
claims thereunder are covered by the indemnification under the Distribution
Agreement after taking into account the amendment, change or modification.
SECTION 5. Access to Records and Other Information.
---------------------------------------
In order to enable it to prosecute any claim or determine coverage
thereunder, either party, at its expense, may at any reasonable time examine or
copy any letter, account, or other documentation or information in the
possession or control of the other party or any affiliate of such party relating
to or connected with any Policy with respect to a policy period during which
such party or an affiliate was covered thereby and relating to prior losses
which are the subject of this Agreement. The other party shall, at the request
and expense of the requesting party, take reasonable steps to obtain for the
requesting party any information or documents in the possession of any third
party relating to or in connection with the Documents and identified by the
requesting party.
SECTION 6. Successors and Assigns.
----------------------
This Agreement and all of the provisions hereof shall be binding upon
and inure to the benefit of the parties and their respective successors and
permitted assigns. Neither party hereto may assign its rights or delegate its
obligations under this Agreement without the prior written consent of the other
party.
SECTION 7. Counterparts.
------------
This Agreement may be executed in several counterparts, each of which
shall be deemed an original, but such counterparts shall together constitute one
and the same instrument.
SECTION 8. Governing Law.
-------------
This Agreement shall be governed by and construed in accordance with
the laws of the State of Delaware.
SECTION 9. No Impairments of Other Rights.
------------------------------
Nothing in this Agreement is intended or shall be construed to impair,
diminish or otherwise adversely affect any other rights under the Policies or
otherwise
5
<PAGE>
either party may have or may obtain against any person other than the other
party to this Agreement.
SECTION 10. Subrogation.
-----------
Each party agrees that the other party shall be subrogated to such
party's rights and remedies under the Documents to the extent of the portion of
any amounts recoverable thereunder determined in accordance with the terms of
this Agreement regarding allocation of liabilities, losses, claims and expenses.
Each party further agrees to cooperate with the other party in connection with
the other party's enforcement of any such rights and remedies and agrees not to
take any actions that would prejudice the exercise of such right of subrogation.
This Section is not intended to result in any reallocation of amounts
recoverable under this Agreement. It is intended to avoid any waiver of
subrogation.
SECTION 11. Subsidiaries.
------------
Each of the parties hereto shall cause to be performed, and hereby
guarantees the performance of, all actions, agreements and obligations set forth
herein to be performed by any Subsidiary of such party which is contemplated to
be a Subsidiary of such party on and after the Distribution Date; provided,
--------
however, that this Section 1 shall not apply to any obligation of Health Care
- -------
Indemnity, Inc. pursuant to any Policy under which it is an insurer.
SECTION 12. No Third Party Beneficiaries.
----------------------------
This Agreement is solely for the benefit of the parties hereto and
their respective Subsidiaries and Affiliates and should not be deemed to confer
upon third parties any remedy, claim, liability, reimbursement, claim of action
or other right in excess of those existing without reference to this Agreement.
SECTION 13. Construction. In this Agreement,
------------
(i) unless the context otherwise requires, the
terms "herein," "hereof," "hereto," and "hereunder" refer to this
Agreement; and
(ii) the headings of the sections and subsections
hereof and the table of contents hereof are inserted for convenience
only and do not constitute a part of this Agreement.
SECTION 14. Entire Agreement; Amendment.
---------------------------
This Agreement including the Schedule hereto, which is an integral
part hereof, the Distribution Agreement and the other agreements referred to
herein or therein or entered into in connection herewith or therewith set forth
the entire agreement and understanding of the parties with respect to the
transactions contemplated hereby and supersede all prior agreements,
arrangements and understandings relating to the subject
6
<PAGE>
matter hereof. No representation, promise, inducement or statement of intention
has been made by either party hereto which is not embodied in this Agreement or
such other agreements, the Schedules or Exhibits or thereto, or the written
statements or other documents delivered pursuant hereto and thereto, and neither
party hereto shall be bound by or liable for any alleged representation,
promise, inducement or statement of intention not so set forth. This Agreement
may be amended or modified only by a written instrument executed by both parties
hereto or by their successors and permitted assigns.
SECTION 15. Waivers.
-------
No failure or delay on the part of any party in exercising any power
or right hereunder shall operate as a waiver thereof, nor shall any single or
partial exercise of any such right or power, or any abandonment or
discontinuance of steps to enforce such a right or power, preclude any other or
further exercise thereof or the exercise of any other right or power. No
modification or waiver of any provision of this Agreement nor consent to any
departure by any party therefrom shall in any event be effective unless the same
shall be in writing, and then such waiver or consent shall be effective only in
the specific instance and for the purpose for which given.
SECTION 16. Confidentiality.
---------------
Subject to any contrary requirement of law and the right of each party
to enforce its rights hereunder in any legal action, each party shall keep
strictly confidential, and shall cause its employees and agents to keep strictly
confidential, any information of or concerning the other party which it or any
of its agents or employees may acquire pursuant to, or in the course of
performing its obligations under, any provision of this Agreement; provided,
--------
however, that such obligation to maintain confidentiality shall not apply to
- -------
information which (i) at the time of disclosure was in the public domain, (ii)
after disclosure enters the public domain not as a result of acts by the
receiving party, (iii) was already independently in the possession of the
receiving party at the time of disclosure or (iv) is received by the receiving
party from a third party who did not receive such information from the
disclosing party under an obligation of confidentiality.
SECTION 17. Notices.
-------
All notices, consents, requests, instructions, approvals and other
communications hereunder shall be in writing and shall be deemed to have been
duly given, if delivered in person or by courier, telegraphed, telexed or by
facsimile transmission or mailed, by, certified or registered mail, postage
prepaid at the following address (or at such other address provided by one party
to the other in writing):
If to Columbia/HCA:
Columbia/HCA Healthcare Corporation
One Park Plaza
Nashville, Tennessee 37203
Telecopy: (615) 344-2075
Attention: Robert A. Waterman, Esq.
7
<PAGE>
Senior Vice President &
General Counsel
with a copy to:
James D. Hinton
Vice President of Risk and Insurance
Columbia/HCA HealthCare Corporation
One Park Plaza
Nashville, TN 37203
If to LifePoint, to
LifePoint Hospitals, Inc.
4525 Harding Road
Suite 103
Nashville, Tennessee 37205
Telecopy: (615) ___-____
Attention: Mr. Scott L. Mercy
Chairman and Chief Executive
Officer
with a copy to:
If to Triad, to
Triad Hospitals, Inc.
13455 Noel Road
20th Floor
Dallas, Texas 75240
Telecopy: (___) ___-____
Attention: Mr. James D. Shelton
President and Chief Executive
Officer
with a copy to:
8
<PAGE>
In each case, with a copy to:
Dewey Ballantine LLP
1301 Avenue of the Americas
New York, New York 10019-6092
Telecopy: (212) 259-6333
Attention: Morton A. Pierce, Esq.
William W. Rosenblatt, Esq.
SECTION 18. Legal Enforceability.
--------------------
Any provision of this Agreement which is prohibited or unenforceable
in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent
of such prohibition or unenforceability without invalidating the remaining
provisions hereof. Any such prohibition or unenforceability in any jurisdiction
shall not invalidate or render unenforceable such provision or remedies
otherwise available to any party hereto. Without prejudice to any rights or
remedies otherwise available to any party hereto, each party hereto acknowledges
that damages would be an inadequate remedy for any breach of the provisions of
this Agreement and agrees that the obligations of the parties hereunder shall be
specifically enforceable.
SECTION 19. Survival of Agreements.
----------------------
Except as otherwise contemplated by this Agreement, all covenants and
agreements of the parties contained in this Agreement shall survive the
Distribution Date.
9
<PAGE>
IN WITNESS WHEREOF, the parties have caused this Agreement to be duly
executed as of the day and year first above written.
COLUMBIA/HCA HEALTHCARE CORPORATION
By: _________________________________
Name:
Title
LIFEPOINT HOSPITALS, INC.
By:
_______________________________
Name:
Title:
TRIAD HOSPITALS, INC.
By:
_______________________________
Name:
Title:
10
<PAGE>
TABLE OF CONTENTS
<TABLE>
<S> <C>
Section 1. Allocation of Existing Coverages and Liabilities............. 2
Section 2. Cooperation and Joint Insurance.............................. 3
Section 3. Administrative Services...................................... 4
Section 4. Amendment of Policies........................................ 5
Section 5. Access to Records and Other Information...................... 5
Section 6. Successors and Assigns....................................... 5
Section 7. Counterparts................................................. 6
Section 8. Governing Law................................................ 6
Section 9. No Impairments of Other Rights............................... 6
Section 10. Subrogation.................................................. 6
Section 11. Subsidiaries................................................. 6
Section 12. No Third Party Beneficiaries................................. 6
Section 13. Construction................................................. 6
Section 14. Entire Agreement; Amendment.................................. 7
Section 15. Waivers...................................................... 7
Section 16. Confidentiality.............................................. 7
Section 17. Notices...................................................... 8
Section 18. Legal Enforceability......................................... 9
Section 19. Survival of Agreements....................................... 9
</TABLE>
11
<PAGE>
EXHIBIT 10.4
TRANSITIONAL SERVICES AGREEMENT
TRANSITIONAL SERVICES AGREEMENT, dated as of [___________ __], 1999,
by and between COLUMBIA/HCA HEALTHCARE CORPORATION, a Delaware corporation
("Columbia/HCA"), and LIFEPOINT HOSPITALS, INC., a Delaware corporation
(together with its successors and assigns, "LifePoint").
W I T N E S S E T H:
-------------------
WHEREAS, Columbia/HCA has determined to distribute to its
stockholders, on a pro rata basis, all of the issued and outstanding shares of
common stock of LifePoint owned by Columbia/HCA (the "Distribution"), all as set
forth in that certain Distribution Agreement by and among Columbia/HCA,
LifePoint and Triad Hospitals, Inc., a Delaware corporation, dated as of
[___________ __], 1999 (the "Distribution Agreement"), the Distribution to be
effective on the Distribution Date (as defined in the Distribution Agreement);
and
WHEREAS, Columbia/HCA currently furnishes certain services to the
hospitals and other healthcare facilities which, as of the Distribution Date,
will be owned by LifePoint (the "LifePoint Facilities"), such as services
relating to treasury, payroll, accounting, real estate project management,
legal, human resources, sales and marketing, and quality assurance and
accreditation matters; and
WHEREAS, LifePoint desires that Columbia/HCA shall continue to
provide, and Columbia/HCA is willing to continue to provide, such services for a
transitional period following the Distribution Date on the terms and conditions
set forth herein;
NOW, THEREFORE, in consideration of the premises and the mutual
agreements and covenants hereinafter set forth, Columbia/HCA and LifePoint
hereby agree as follows:
1. Services.
--------
(a) Basic Services. During the Term (as such term is hereinafter
--------------
defined), Columbia/HCA shall furnish, or cause to be furnished, to LifePoint and
to the LifePoint Facilities those services which are currently furnished by
Columbia/HCA to the LifePoint Facilities (the "Basic Services"), upon the
reasonable direction of LifePoint, including without limitation those services
that are described on Exhibit A hereto.
(b) Additional Services. Columbia/HCA and LifePoint hereby agree
-------------------
that Columbia/HCA may also provide such other services to LifePoint and to the
LifePoint Facilities (the "Additional Services") as Columbia/HCA and LifePoint
may agree.
(c) Excluded Services. This Agreement is not intended to address
-----------------
matters involving computer services, employee benefits, tax, aviation,
insurance, telecommunications, intellectual property, purchasing or any other
matters addressed in the Distribution Agreement or in any of the Ancillary
Agreements (as defined in the Distribution Agreement), which matters shall be
governed exclusively by the provisions of the applicable agreement.
<PAGE>
2. Term of Agreement. The term of this Agreement shall commence as of
-----------------
the Distribution Date and shall continue until December 31, 2000 (the "Term").
3. Charges for Services.
--------------------
(a) Costs. Columbia/HCA's costs associated with performing the
------
Basic Services (the "Costs") shall be comprised of (i) the portion of all
Columbia/HCA employee compensation and benefits (calculated at 20% of salary)
incurred in connection with or allocable directly to the performance of the
Basic Services hereunder ("Compensation Costs"); and (ii) all out-of-pocket
expenses incurred by Columbia/HCA, including without limitation expenses
resulting from travel, photocopying, delivery and long distance telephone
services, and professional fees and expenses of Columbia/HCA's outside
accountants, legal counsel and other consultants incurred by Columbia/HCA and
allocable to performance of the Basic Services hereunder (collectively, the
"Reimbursable Expenses"). Employees of Columbia/HCA and outside accountants and
legal counsel shall maintain specific timesheets to record time spent in
performing the Basic Services hereunder for purposes of calculating the
Compensation Costs and Reimbursable Expenses.
(b) Charges for Basic Services. During the Term, LifePoint shall
--------------------------
pay all Costs incurred by Columbia/HCA in connection with Columbia/HCA's
performance of the Basic Services.
(c) Charges for Additional Services. In the event that LifePoint
-------------------------------
requests Columbia/HCA to perform, and Columbia/HCA agrees to perform, Additional
Services as provided in Section 1(b) hereof, the parties shall agree in writing
on reasonable charges to be paid by LifePoint to Columbia/HCA for any such
Additional Services, which charges shall include reimbursement of Columbia/HCA
for all out-of-pocket expenses incurred by Columbia/HCA, as described in clause
(ii) of Section 3(a) above, and allocable to performance of the Additional
Services.
4. Payment by LifePoint.
--------------------
(a) Payment of Charges. Columbia/HCA shall invoice LifePoint on a
------------------
monthly basis for the charges relating to the Basic Services and Additional
Services which have been performed hereunder. Columbia/HCA's invoice shall
specifically identify charges for Basic Services and Additional Services.
LifePoint shall pay to Columbia/HCA all amounts invoiced by Columbia/HCA within
thirty (30) days after delivery of such invoice. Any amount remaining unpaid
when due, including disputed amounts that are ultimately determined to be
payable, shall bear interest during the period that such amount remains unpaid
(computed on the basis of a 360-day year of twelve 30-day months) at a
fluctuating rate per annum equal to the prime commercial lending rate publicly
announced by The Chase Manhattan Bank or any successor thereto at its principal
office (or any alternative rate substituted therefor by such bank).
(b) Disputed Charges. In the event that LifePoint disputes any
----------------
charges invoiced by Columbia/HCA, LifePoint shall deliver a written statement
describing the dispute to Columbia/HCA within fifteen (15) days following
receipt of Columbia/HCA's invoice. The statement shall provide a sufficiently
detailed description of the disputed items to permit
2
<PAGE>
Columbia/HCA to research and resolve the dispute. Charges not so disputed shall
be deemed accepted. If Columbia/HCA finds the disputed charge to be inconsistent
with the terms of this Agreement, the disputed amount shall be credited against
any invoice issued by Columbia/HCA following the resolution of such dispute, or,
if no further invoice is issued within sixty (60) days following such
resolution, Columbia/HCA shall refund the disputed amount to LifePoint.
5. LifePoint's Request to Discontinue Basic Services. At any time
-------------------------------------------------
during the Term of this Agreement, LifePoint may request Columbia/HCA to
discontinue performing all or a portion of the Basic Services, provided that
LifePoint shall give Columbia/HCA at least thirty (30) days' prior written
notice, and provided further that the requested discontinuance of services is
reasonably feasible and shall not prevent Columbia/HCA from providing the
remaining Basic Services.
6. Limited Warranty and Limitation of Liability.
--------------------------------------------
(a) Standard of Care. Columbia/HCA will provide the Basic
----------------
Services and the Additional Services hereunder (collectively, the "Services") in
good faith and with due care consistent with the care that it exercises in
performing such Services for itself. LifePoint acknowledges and agrees that
Columbia/HCA does not regularly provide Services to third parties as part of its
business, and, except as specifically stated elsewhere herein, Columbia/HCA does
not otherwise warrant or assume any responsibility for its performance of the
Services.
(b) Limitation of Liability. In addition to the obligations set
-----------------------
forth in Section 6(a) above, Columbia/HCA shall be responsible for any direct
compensatory damages suffered by LifePoint in the event of a breach by
Columbia/HCA of its obligations set forth herein which breach results from
Columbia/HCA's intentional misconduct or gross negligence. Except for the
limited warranties provided hereunder, Columbia/HCA shall have no liability to
LifePoint under this Agreement and LifePoint's remedies under this Section 6
shall constitute its sole and exclusive remedies under this Agreement; provided
that LifePoint shall be entitled to preliminary and other injunctive relief
against any willful breach by Columbia/HCA of this Agreement. Under no
circumstances shall Columbia/HCA be liable for any indirect, consequential,
incidental or punitive damages, whether arising under contract, in tort, at law,
or in equity, of LifePoint or any other person. LifePoint hereby acknowledges
that Columbia/HCA does not regularly provide Services to third parties as part
of its business and that Columbia/HCA has agreed to provide the Services under
this Agreement only to assist LifePoint in its transition to operation as an
independent public company.
(c) Warranty. The warranties stated in subsection (a) above are
--------
in lieu of any and exclusive of all other representations and warranties of any
kind whatsoever.
7. Indemnification. LifePoint shall, to the fullest extent permitted
---------------
by law, defend, indemnify and hold harmless Columbia/HCA and its directors,
officers, employees, agents and affiliates from and against any and all losses,
liabilities, claims and costs, including, but not limited to, attorneys' fees
and legal costs arising from any lawsuits, administrative agency or other
actions by third parties (collectively, "Losses") to which Columbia/HCA is
subjected arising out of or attributed, directly or indirectly, to the
performance or non-performance of any of the Services under this Agreement.
Notwithstanding the foregoing, LifePoint shall not be
3
<PAGE>
required to defend, indemnify and hold harmless Columbia/HCA and its directors,
officers, employees, agents and affiliates in respect of any such Losses that
are determined by a judgment of a court that is binding, final and not subject
to review on appeal to have resulted from Columbia/HCA's intentional misconduct
or gross negligence.
8. Employees. Neither party hereto shall have authority to employ
---------
persons on behalf of the other party, and no employees of one party shall be
deemed to be employees or agents of the other party, except with the prior
written consent of the parties hereto. Each party hereto shall have the sole and
exclusive control over its labor and employee relations policy and policies
relating to wages, hours, working conditions and terms of employment.
9. Confidential Information.
------------------------
(a) In order for Columbia/HCA to perform the Services under this
Agreement, each party may make available to the other party certain information
and/or data in connection with its past, current or potential operations and/or
business strategies (hereinafter collectively referred to as "Confidential
Information"). Confidential Information may be oral, written, recorded or
otherwise captured in any medium.
(b) Each party shall hold, and shall cause its consultants and
advisors to hold, in strict confidence all Confidential Information of the other
party. Each party agrees not to make use of the Confidential Information of the
other party for its own benefit and to use the Confidential Information only in
connection with the Basic Services and the Additional Services to be performed
pursuant to this Agreement. Each party agrees that it will refrain from
releasing or disclosing any Confidential Information to any other person, except
that Confidential Information may be disclosed by each party to its consultants
and advisors. Each party agrees that all Confidential Information of the other
party shall at all times remain the sole property of the other party and shall
be returned to such other party immediately upon the termination of this
Agreement. The provisions of this Section 9 shall survive any termination of
this Agreement.
(c) Notwithstanding the foregoing provisions of this Section 9,
no party hereto shall be prohibited from using or permitting the use of, and no
party shall be required to hold in confidence, any Confidential Information to
the extent that the information constituting such Confidential Information (i)
has been or is in the public domain through no fault of such party, or (ii) is,
after the Distribution Date, lawfully acquired by such party from sources other
than a party hereto. To the extent that a party hereto (or, to the knowledge of
such party, any current or former employee of such party) is requested (by oral
questions, interrogatories, requests for information or documents, subpoena,
civil investigative demand or similar process) to disclose any information
required to be kept confidential pursuant to this Section 9, such party agrees
to (or in respect of a current or former employee, agrees to use its reasonable
efforts to cause such employee to) maintain the confidentiality of such
Confidential Information and to provide prompt notice to the party to which such
Confidential Information pertains, so that such party may seek an appropriate
protective order or waive the notifying party's compliance with this Section 9.
If, in the absence of a protective order or the receipt of a waiver hereunder,
the party which has received such a request is, nonetheless, in the reasonable
written opinion of counsel, legally required to disclose such Confidential
Information, such person may disclose such Confidential Information and shall
not be liable pursuant to this Section 9; provided, that
4
<PAGE>
such person furnishes only that portion of the Confidential Information which
such person is advised by counsel to disclose and exercises its reasonable
efforts to obtain assurance that confidential treatment will be accorded to the
disclosed portion of the Confidential Information. Notwithstanding the
foregoing, each party will be permitted to disclose Confidential Information in
any proceeding in which such party is in an adversarial position to any other
party to this Agreement.
10. Termination for Cause. Either party may terminate this Agreement
---------------------
in the event the other party files a proceeding under any federal or state
bankruptcy laws now or hereafter in effect, or in the event that a proceeding is
instituted against the other party under any federal or state bankruptcy laws
now or hereafter in effect which proceeding is not dismissed within thirty (30)
days, by the giving of written notice, which termination shall be effective
immediately upon the giving of such notice. In addition, in the event of a
breach of any obligation or covenant under this Agreement by either party, the
party not in breach may give the party in breach written notice of the specifics
of the breach and the party in breach shall then have thirty (30) days (the
"Cure Period") in which to cure such breach or cause the breach to be cured. If
the breach is not cured, or waived by the non-breaching party, within the Cure
Period, then the non-breaching party shall be entitled to pursue any remedies it
may have by reason of such breach, including without limitation terminating this
Agreement with cause. Failure to terminate this Agreement shall not serve to
waive any breach hereof. If either party commences legal action alleging any
breach of this Agreement, the non-prevailing party shall pay all costs and
reasonable attorneys' fees incurred by the prevailing party in connection
therewith.
11. Force Majeure. Columbia/HCA shall not be liable to LifePoint for
-------------
a delay or failure to comply with the terms of this Agreement if such delay or
failure results from causes beyond its reasonable control. Such causes may
include, without limitation, acts of God, fires or other catastrophes,
telecommunications failures, equipment failures, power failures, labor disputes,
strikes, delays in transportation, riots, war, governmental regulations, non-
performance by Columbia/HCA suppliers and vendors, or problems experienced by
Columbia/HCA as a result of its own or any third party's computer software or
hardware not being Year 2000 compliant (an "Event of Force Majeure").
Columbia/HCA shall give LifePoint prompt notice of any Event of Force Majeure
that may cause delay or non-performance hereunder. For so long as such Event of
Force Majeure shall continue, LifePoint may elect to have such Services
performed by other means without such election being deemed to be a termination
or breach of this Agreement, provided that LifePoint provides prompt notice of
such election to Columbia/HCA after having received notice of the Event of Force
Majeure.
12. Assignment. Neither this Agreement, nor any of the rights,
----------
licenses or duties set forth herein, may be assigned by LifePoint without the
prior written consent of Columbia/HCA. This Agreement shall be binding upon,
inure to the benefit of, and be enforceable by the parties hereto and their
respective successors and permitted assigns.
13. Access to Books and Records. Upon written request of the
---------------------------
Secretary of Health and Human Services or the Comptroller General or any of
their duly authorized representatives, Columbia/HCA shall make available to the
requesting party those contracts, books, documents and records necessary to
verify the nature and extent of the cost of providing the Services hereunder.
Columbia/HCA shall cause such materials to be available for inspection
5
<PAGE>
for at least four (4) years after the rendering of such Services. If
Columbia/HCA carries out any of the duties of this Agreement with a value of
$10,000 or more over a twelve (12) month period through a subcontract with a
related individual organization, Columbia/HCA shall include this requirement in
all such subcontracts. The parties agree that any attorney-client,
accountant/client or any other legal privilege shall not be deemed waived by
virtue of the provisions of this Section 13.
14. Taxes. The fees for Services specified to be payable by LifePoint
-----
hereunder do not include any sales, use, excise, value added, utility or other
similar tax or charge which may be or hereafter become applicable to the
Services provided hereunder. Consequently, in addition to such fees, the amount
of any such taxes or charges which may be or hereafter become applicable shall
also be payable by LifePoint to Columbia/HCA, except that LifePoint shall have
no responsibility for payment of taxes on Columbia/HCA's income or for payment
of franchise taxes related to authorization of Columbia/HCA to conduct business
in any state. In lieu of paying any such taxes that may otherwise be due,
LifePoint may provide Columbia/HCA with a tax exemption certificate acceptable
to the taxing authorities. LifePoint shall be given prompt written notice of any
tax assessment against Columbia/HCA for which LifePoint is liable hereunder, and
LifePoint shall have the right, at its own expense, to contest any such
assessment prior to its payment by Columbia/HCA. In the event LifePoint
exercises such right, it shall indemnify and hold harmless Columbia/HCA from
liability for all interest and penalties relating to such contest. LifePoint
shall control any such contest and Columbia/HCA shall provide information and
assistance in connection with such contest to the extent reasonably requested by
and at the expense of LifePoint.
15. Relationship of Parties. In performing the Services under this
-----------------------
Agreement, Columbia/HCA is acting as an independent contractor and not as an
agent or employee of LifePoint.
16. Limitation on Solicitation of Employees. Neither party shall
---------------------------------------
directly or indirectly approach, counsel or induce any employee of the other
party to leave his or her employment during the term of this Agreement without
the prior written consent of such other party.
17. Governing Law. This Agreement shall be deemed to be made in and
-------------
in all respects shall be interpreted, construed and governed by and in
accordance with the laws of the State of Tennessee without regard to the
conflict of law principles thereof.
18. Consent to Jurisdiction. Columbia/HCA and LifePoint each hereby
-----------------------
expressly (a) submits and consents in advance to the jurisdiction of any
Tennessee State Court sitting in Nashville, Tennessee or the United States
District Court for the Middle District of Tennessee with respect to any legal
proceedings arising out of or relating to this Agreement, (b) waives any
objection which it may have based upon lack of personal jurisdiction, improper
venue or forum non conveniens, (c) agrees that all claims with respect to such
legal proceedings may be heard and determined in any Tennessee State Court
sitting in Nashville, Tennessee or the United States District Court for the
Middle District of Tennessee, (d) agrees not to commence any legal proceeding
relating to this Agreement other than in a Tennessee State Court sitting in
Nashville, Tennessee or the United States District Court for the Middle District
of Tennessee, and (e) agrees
6
<PAGE>
that a final judgment in any such legal proceeding
shall be conclusive and may be enforced in other jurisdictions by suit on the
judgment or in any other manner provided by law.
19. Waiver of Jury Trial. COLUMBIA/HCA AND LIFEPOINT EACH HEREBY
--------------------
ACKNOWLEDGES AND AGREES THAT ANY CONTROVERSY WHICH MAY ARISE UNDER THIS
AGREEMENT IS LIKELY TO INVOLVE COMPLICATED AND DIFFICULT ISSUES, AND THEREFORE
EACH SUCH PARTY IRREVOCABLY AND UNCONDITIONALLY WAIVES ANY RIGHT SUCH PARTY MAY
HAVE TO A TRIAL BY JURY IN RESPECT OF ANY ACTION DIRECTLY OR INDIRECTLY ARISING
OUT OF OR RELATING TO THIS AGREEMENT, OR THE TRANSACTIONS CONTEMPLATED BY THIS
AGREEMENT. EACH PARTY CERTIFIES AND ACKNOWLEDGES THAT (A) NO REPRESENTATIVE,
AGENT OR ATTORNEY OF ANY OTHER PARTY HAS REPRESENTED, EXPRESSLY OR OTHERWISE,
THAT SUCH OTHER PARTY WOULD NOT, IN THE EVENT OF LITIGATION, SEEK TO ENFORCE THE
FOREGOING WAIVER, (B) EACH PARTY UNDERSTANDS AND HAS CONSIDERED THE IMPLICATIONS
OF THIS WAIVER, (C) EACH PARTY MAKES THIS WAIVER VOLUNTARILY AND (D) EACH PARTY
HAS BEEN INDUCED TO ENTER INTO THIS AGREEMENT BY, AMONG OTHER THINGS, THE MUTUAL
WAIVERS AND CERTIFICATIONS IN THIS SECTION 19.
20. Notices. All notices or other communications required or
-------
permitted under this Agreement shall be in writing and sufficient if sent by
registered or certified mail, postage prepaid, addressed as provided below; or
delivered personally, by private courier or fax, and followed by such mailing:
If to Columbia/HCA, to
Columbia/HCA Healthcare Corporation
One Park Plaza
Nashville, Tennessee 37203
Telecopy: (615) 344-2075
Attention: Robert A. Waterman, Esq.
Senior Vice President and General Counsel
If to LifePoint, to
LifePoint Hospitals, Inc.
4525 Harding Road
Suite 103
Nashville, Tennessee 37205
Telecopy: (615) ___-____
Attention: Mr. Scott L. Mercy
Chairman and Chief Executive Officer
7
<PAGE>
If to Triad, to:
Triad Hospitals, Inc.
13455 Noel Road
20th Floor
Dallas, Texas 75240
Telecopy: ( ___ ) ___ - ____
Attention: Mr. James D. Shelton
Chairman and Chief Executive Officer
In each case, with a copy to:
Dewey Ballantine LLP
1301 Avenue of the Americas
New York, New York 10019-6092
Telecopy: (212) 259-6333
Attention: Morton A. Pierce, Esq.
Any party may change the person and address to which notices or other
communications are to be sent to it by giving written notice of any such change
in the manner provided herein.
21. Entire Agreement; Amendment. This Agreement, together with the
---------------------------
exhibits hereto, sets forth the entire agreement and understanding of the
parties hereto in respect of the matters addressed herein, and supersedes all
prior agreements, arrangements and understandings relating to the subject matter
hereof. No party hereto has relied upon any oral or written statement,
representation, warranty, covenant, condition, understanding or agreement made
by any other party or any representative, agent or employee thereof, except for
those expressly set forth in this Agreement or in the exhibits or other
documents delivered pursuant hereto. This Agreement may be amended, modified,
superseded or supplemented only by an instrument in writing executed and
delivered by Columbia/HCA and LifePoint. Nothing herein is intended to diminish
any of the rights or obligations of either party pursuant to the Distribution
Agreement or pursuant to any of the Ancillary Agreements (as defined in the
Distribution Agreement).
22. No Third Party Beneficiaries. This Agreement is solely for the
----------------------------
benefit of the parties hereto, and should not be construed to confer upon any
other person any remedy, claim, liability, right of reimbursement, claim of
action or other right.
23. Headings. The section headings contained in this Agreement are
--------
inserted for convenience of reference only and shall not affect the meaning or
interpretation of this Agreement.
24. Waiver. No delay or omission by either party to exercise any
------
right or power under this Agreement or pursuant to applicable law shall impair
such right or power or be construed as a waiver thereof. A waiver by either
party of any of the covenants to be performed by the other or any breach shall
not be construed to be a waiver of any succeeding breach or of any other
covenant. All rights and remedies conferred under this Agreement or by any other
instrument or law shall be cumulative and may be exercised singularly or
concurrently. The
8
<PAGE>
failure by either party to enforce any term shall not be deemed to be a waiver
of future enforcement of that or any other term of this Agreement.
25. Counterparts. This Agreement may be executed in any number of
------------
separate counterparts, each of which shall be deemed to be an original, but
which together shall constitute one and the same instrument.
26. Severability. In the event that any provision hereof is
------------
prohibited or unenforceable in any jurisdiction, such provision shall, as to
such jurisdiction, be ineffective to the extent of such prohibition or
unenforceability without invalidating the remaining provisions hereof or
affecting the validity or enforceability of such provision in any other
jurisdiction.
IN WITNESS WHEREOF, the parties have caused this Transitional
Services Agreement to be executed by their duly authorized representatives as of
the day and date first referenced above.
COLUMBIA/HCA HEALTHCARE
CORPORATION
By:_________________________________
Name:
Title:
LIFEPOINT HOSPITALS, INC.
By:_________________________________
Name:
Title:
9
<PAGE>
EXHIBIT A
TRANSITION SERVICES
-------------------
The Basic Services shall include, without limitation, the following:
(a) Treasury. Columbia/HCA will provide LifePoint with support in
--------
treasury management.
(b) Payroll. Columbia/HCA will provide ___ years of historical
-------
information relating to payroll records, wage verification and miscellaneous tax
reporting for employees of the LifePoint Facilities and will provide such
assistance as LifePoint may request in connection with payroll processing.
(c) Accounting. Columbia/HCA will provide LifePoint with ___ years of
----------
financial information and 1999 year-to-date information for each of the
LifePoint Facilities, including general ledger and operating reports, to the
extent in the possession of Columbia/HCA and not presently on file at the
subject LifePoint Facility. Columbia/HCA will provide LifePoint with support in
accounting matters.
(d) Real Estate Project Management. Columbia/HCA will provide LifePoint
------------------------------
with support in construction design and management services, including
construction accounting.
(e) Legal. Columbia/HCA will provide LifePoint with support in
-----
connection with legal matters, including pending and threatened litigation.
(f) Human Resources. Columbia/HCA will provide LifePoint with support
---------------
in connection with human resources matters.
(g) Sales and Marketing. Columbia/HCA will provide LifePoint with
-------------------
support in connection with sales and marketing matters.
(h) Quality Assurance and Accreditation Matters. Columbia/HCA will
-------------------------------------------
provide LifePoint with support in quality assurance and accreditation matters.
<PAGE>
EXHIBIT 10.5
COMPUTER AND DATA PROCESSING
SERVICES AGREEMENT
This COMPUTER AND DATA PROCESSING SERVICES AGREEMENT, dated as of
____________, 199__, (the "Effective Date") is by and between COLUMBIA
INFORMATION SYSTEMS, INC., a Tennessee corporation ("CIS") which is a wholly
owned subsidiary of Columbia/HCA Healthcare Corporation, a Delaware corporation
("Columbia/HCA"), and LIFEPOINT HOSPITALS, INC., a Delaware corporation
(together with its successors and permitted assigns, "LifePoint," hereinafter
sometimes referred to as "Customer").
W I T N E S S E T H:
WHEREAS, CIS is in the business of providing certain computer and data
processing services as more fully set forth herein; and
WHEREAS, Customer desires to purchase from CIS the services described in
this Agreement, and CIS is willing to provide such services to Customer, all on
the terms and conditions set forth herein;
NOW, THEREFORE, in consideration of the premises and the mutual covenants
and obligations set forth herein, and for other good and valuable consideration,
the receipt and sufficiency of which are acknowledged, CIS and Customer agree as
follows:
1. Definitions. The following terms shall have the meanings set forth
-----------
below:
(a) Affiliate. CIS as well as those entities, businesses, facilities,
---------
and enterprises (however and in whatever manner conducted) that are controlled
by, controlling, or under common control with it, including, without limitation,
all parent corporations and their respective subsidiaries and affiliates, joint
ventures, partnerships, limited liability companies and partnerships, hospitals,
free-standing centers, home health agencies, surgery centers, physician
practices, syndications, medical laboratories, medical records processing
facilities, medical supply sellers, pharmacies, insurance providers, health care
providers, and managed care entities, together with any and all entities and
businesses to which CIS or any of the above described entities provide
management services, information processing services or purchasing services.
(b) CIS Software. The software listed in Exhibit B hereto and
------------
identified as being owned by CIS, including Enhancements, upgrades and custom
development.
(c) Communication Lines. The telephone communication and diagnostic
-------------------
lines for data transmission with the Data Center and/or CIS, whether dedicated
or not.
(d) Consumer Price Index. The Medical component of the United States
---------------------
Consumer Price Index published by the United States Department of Labor, All
Cities Average (1986=100) or such other successor index the parties shall
designate.
(e) Customer Data. Any data owned or held in custody by Customer,
-------------
including without limitation, financial data, patient medical record data or
patient identification
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<PAGE>
data used or transmitted to the Data Center by Customer in connection with its
purchase of the Services under this Agreement.
(f) Data Center. The CIS Data Center(s) located in Nashville,
-----------
Tennessee and/or any of CIS's Regional Data Centers containing computer
processing equipment and the Software used by CIS to provide the Services, or
such other facilities as CIS may establish from time to time.
(g) Equipment. The computer hardware located at the Facility or
---------
Facilities.
(h) Facility/Facilities. The hospitals and other healthcare providers
-------------------
owned by Customer and listed in Exhibit A hereto.
(i) Initial Term. The seven (7) year period commencing on the
------------
Effective Date.
(j) Koala System. The proprietary intranet network currently provided
------------
by CIS for use by affiliated facilities to obtain information relevant to day-
to-day operations.
(k) Monthly Processing Fees. The fees for monthly service under this
-----------------------
Agreement as more fully set forth in Section 2 and Exhibit B.
(l) Software. The computer software identified in Exhibit B hereto as
--------
either CIS Software or Third Party Software which is used by CIS in providing
the Services to Customer, including Enhancements, upgrades and custom
development.
(m) Services. The installation, support, training, maintenance, data
--------
processing and other services provided to Customer by CIS pursuant to this
Agreement, as set forth in Exhibit C hereto.
(n) Systems. The Equipment and Software functioning together,
-------
located at one or more Facilities.
(o) Third-Party Software. The software indicated in Exhibit B hereto
--------------------
as being licensed to CIS by a third-party provider.
(p) Wide Area Network. The proprietary wide area network currently
-----------------
provided by CIS for use by affiliated facilities to deliver CIS products and/or
services (for example, e-mail, host application access, file transmission, Koala
System access).
2. Services, Systems, Data, Payment.
--------------------------------
(a) CIS shall provide, and Customer shall purchase from CIS, the
Services and/or licenses to the Software described in the exhibits hereto, upon
the terms and subject to the conditions of this Agreement, for the benefit of
the Facility or Facilities.
(b) CIS shall designate certain coding and naming conventions for the
form of Customer Data and shall provide to Customer the coding requirements for
transmitting Customer Data to the Data Center and the treatment given to
different account and processing codes used by CIS. CIS reserves the right to
make changes in operating procedures, coding and naming
Page 2
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conventions, hardware and network configurations and applications and systems
programming. Customer shall be responsible for, and bear the cost of, (i) coding
and transmitting Customer Data to the Data Center, (ii) supervising the
conversion of its financial data into a form that can be processed by CIS, (iii)
determining whether it has complied with applicable accounting practices, (iv)
determining whether it has complied with applicable state and federal
regulations governing financial reporting obligations, (v) verifying the
accuracy of Customer Data generated by it and/or CIS and (vi) maintaining
prudent internal controls of reports and Customer Data.
(c) If Customer requests that CIS correct or reprocess data files
because of erroneous input data or output records, CIS will use its reasonable
best efforts to perform such correction and reprocessing. If possible, Customer
shall request any correction or reprocessing within seventy-two (72) hours after
production of the reports. If correction or reprocessing is requested because
of an error attributable to CIS or the negligence of CIS, there shall be no
charge for such rerun, provided that the request for reprocessing is made within
seventy-two (72) hours after production of the erroneous report. In the event
that Customer requests reprocessing after such seventy-two (72) hour period, CIS
will determine whether it can perform the reprocessing and, if it can perform
the reprocessing, will provide a cost estimate to Customer for such reprocessing
services. Following mutual agreement on the cost, CIS will perform the
reprocessing services. If the parties are unable to agree on the cost for the
reprocessing services, Customer will be charged for each rerun as set forth in
Exhibit C hereto.
(d) Customer shall pay CIS on behalf of the Facilities for the
Services rendered and licenses granted in accordance with the terms and subject
to the conditions contained herein and in the Exhibits hereto. Prices are
subject to change as set forth herein and in the Exhibits hereto.
(e) In the event that Customer makes a written request for the
performance of on-site Services by CIS, Customer shall pay the reasonable and
customary travel expenses of CIS personnel performing such Services for
Customer, in accordance with CIS's standard business travel policies.
(f) Unless otherwise provided herein, payment is due within thirty
(30) days of the date of receipt of an invoice. Without limiting CIS's rights
hereunder, any amounts not paid within thirty (30) days of the due date shall be
subject to a late charge equal to the lesser of [12%] per annum or the maximum
amount allowed by applicable law; provided, however, that no late charge shall
apply with respect to amounts reasonably disputed by Customer if written notice
of such dispute is given to CIS within fourteen (14) days of receipt of invoice;
provided, however, that the interest on any disputed charges that are ultimately
resolved against Customer shall accrue from the date payment would have
otherwise been due. Disputes under this Section will be resolved pursuant to
the procedure set forth in Section 12(h).
(g) Customer's Monthly Processing Fees are indicated in Exhibit B.
The Monthly Processing Fee is due and payable within thirty (30) days of receipt
of an invoice. Monthly Processing Fees shall be calculated as set forth in
Exhibit B.
(h) On each anniversary date of this Agreement, CIS shall review and,
if necessary, adjust the Monthly Processing Fees of the Customer for the prior
twelve months as follows:
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<PAGE>
1) If, during the prior twelve month period, the actual monthly
average Customer Facilities' Adjusted Patient Days ("APDs")
fall below an amount equal to seventy-five percent (75%) of
the total APDs set forth in Exhibit A, CIS may charge
Customer the difference in fees actually charged and such
seventy five percent (75%) figure.
2) Added/Divested Facilities - The parties acknowledge that
Customer may add or divest Facilities from time to time
during the term of this Agreement. For divested Facilities
Customer's Monthly Processing Fees shall be reduced
beginning on the date of such Facility's last use of the
System. For added facilities, Monthly Processing Fees shall
be increased beginning on the date of such Facility's first
use of the System.
(i) No more than once annually, CIS may increase any fees in this
Agreement or the Exhibits by an amount equal to the percentage increase in the
Consumer Price Index plus up to five percent (5%).
(j) At each anniversary date of the Agreement beginning with second
anniversary date, CIS will measure Customer's total fees paid to CIS over the
prior year (Y-1). If these total fees are more than one hundred and fifty 150%
of the fees paid by Customer to CIS two years previously (Y-2), Customer shall
be entitled to a credit on CIS's next annual period fees equal to fifteen
percent (15%) of the increase between Y-1 and Y-2 fees.
3. New Services and Systems; Updates.
---------------------------------
(a) From time to time, CIS may, but is not obligated to, offer new
Services or Systems to Customer, which Customer may purchase in its discretion.
Certain new Services and/or Systems may require Customer to pay additional fees,
purchase additional Equipment or Communications Lines or license additional
software.
(b) From time to time, CIS may, but is not obligated to, update the
Software or provide Updates received by the licensor for Third Party Software at
no charge to Customer. As used herein, the term "Update" means any fix, change
or modification which affects the operating performance or efficiency of the
Software, but does not alter the basic functions that it performs. At the
request of CIS, Customer will discontinue use of the then-current version of the
Software and, within sixty (60) days of its receipt of the updated version
(including receipt of all documentation relating thereto), substitute therefor
the updated version of the Software in accordance with the Installation
Guidelines (as defined below). In the event that Customer fails to update the
Software, CIS shall not be required to maintain or support such Software.
(c) From time to time CIS may, but is not obligated to, enhance the
Software System or provide Enhancements received by it for Third Party Software.
As used herein, the term "Enhancement" means any new feature or function which
improves the operating performance or efficiency of the Software and/or new
Equipment or infrastructure standards. At CIS's option, fees for Enhancements
may be charged to Customer.
Page 4
<PAGE>
(d) CIS may, in its sole discretion, migrate to a new System(s) which
shall be offered to Customer by CIS at a price to be determined by CIS at the
time of such offering. If the Customer elects not to purchase such System(s),
CIS shall continue to support the current system utilized by Customer at prices
to be determined by CIS. If Customer fails to implement any new Services or
Systems made available to it by CIS which replaces a current Service or System,
and CIS ceases to support same for its own facilities, then CIS shall have the
right to cease providing services to Customer for the replaced System upon
thirty (30) days' notice. The Customer shall make such election within 30 days
after the offer by CIS and, in the event Customer fails to make a proper
election, it will be deemed to have elected to purchase the new System(s).
4. Software and Wide Area Network; Prohibited Uses.
-----------------------------------------------
(a) The use of the CIS Wide Area Network is expressly restricted to
accessing the Software, Customer Data and Services provided by CIS in the manner
described in user documentation and in CIS policy and standards manuals.
Customer acknowledges that the Wide Area Network provided by CIS to support
Customer's operation is proprietary. The Customer shall comply with the
standards and operating guidelines distributed and updated by CIS from time to
time (the "Operating Guidelines"). The Operating Guidelines describe the
responsibilities and duties of CIS and the Customer in respect of the Network.
Customer shall not reverse engineer the Wide Area Network in order to obtain
access to proprietary data or for any other purpose not specifically authorized
herein.
Customer shall not perform any of the following activities or any
other activities not conforming to the stated use of the Wide Area Network and
agrees to provide reasonable notification to employees at the Facilities that
they shall not:
. Place any equipment on the Wide Area Network for the purpose of
recording CIS electronic communications or deciphering the content and
structure of CIS electronic communications;
. Access any piece or segment of the CIS Wide Area Network of computing
infrastructure via any telecommunications utility, for example,
without limitation, Telnet and TCP/IP, other than as specified in CIS
documentation and in a manner consistent with the documented access
policy and procedures for CIS Application Software and Services; or
. Take any other action which would have the effect of impeding or
prohibiting normal operation of the Wide Area Network.
In addition to the foregoing, Customer will obtain approval from CIS
prior to adding any additional equipment or connections to the Wide Area
Network.
. Customer acknowledges and agrees that access to the CIS Wide Area
Network may be temporarily terminated at CIS's sole discretion under
the following circumstances:
. Customer engages in unauthorized use of the Wide Area Network as
indicated in this Agreement;
Page 5
<PAGE>
. A Customer site generates a condition that interferes with the normal
operation of the Wide Area Network, for example, without limitation, a
hardware problem generating excessive network traffic or conflicting
IP addresses are added to the network; and
. A non-Customer site generates a condition that interferes with the
normal operation of the Wide Area Network and a Customer site is taken
down as part of the process of identifying and remediating the
problem.
With respect to any event caused other than by a malicious act of
Customer or by the unauthorized use of the Wide Area Network, CIS will use its
reasonable best efforts to ensure that access to the Wide Area Network is
restored in a timely manner. With respect to any event caused by a malicious
act or the unauthorized use of the Wide Area Network, access will be restored
when CIS has received reasonable assurance from Customer that repeat acts or
unauthorized use will not occur. CIS will determine reasonable assurance in its
sole discretion.
(b) Subject to the terms in each of the licenses for Third-Party
Software granted to CIS and as set forth below, CIS grants to Customer, for the
Initial Term of this Agreement, a non-transferable, non-exclusive license to use
the Software as contemplated in this Agreement. In this context, "use"
includes use by Customer and medical service providers accessing directly or
remotely the Software in the manner permitted by such Software and CIS policy
and standards.
(c) Customer shall have no rights to the Software or to information
obtained from the Wide Area Network or the Koala System not expressly granted
under this Agreement. Without limiting the generality of the foregoing,
Customer shall have no right to (i) alter the Software, (ii) create derivative
works, (iii) distribute or sublicense the Software copies to third parties, (iv)
incorporate additional software into the Software at the operating system or any
other level, (v) incorporate the Software into any publicly available data base
or (vi) reproduce the Software without CIS's prior written consent, which
consent will not be unreasonably withheld.
(d) Nothing herein shall be deemed to grant to Customer any ownership
interest in the Software.
(e) Customer shall not use the Software for any purpose other than as
specifically permitted by this Agreement. Customer shall not alter or delete
any copyright or other proprietary notices in the Software.
(f) Upon the prior written approval of CIS, Customer shall have the
right to copy documentation to support use of the Software.
5. Equipment, Installation.
-----------------------
(a) If Customer purchases and installs Equipment and Communication
Lines (other than Equipment and Communication Lines currently installed at each
Facility as of the date hereof), then Customer shall comply with the parameters
set forth below and the installation guidelines distributed by CIS from time to
time (the "Installation Guidelines"). The Installation Guidelines describe the
responsibilities and duties of CIS and Customer with respect to
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Communication Lines. Selection of the most appropriate installation site for any
additional Equipment and Communication Lines within the Facility is Customer's
responsibility. At Customer's request, CIS will assist Customer in identifying
installation sites, provided that in giving such assistance, CIS makes no
representation that any installation site is the appropriate site for Equipment.
Proper installation may require the removal of walls or other alterations to the
premises. Customer shall be responsible for any costs incurred in modifying the
premises to accommodate the installation of any Equipment or Communication
Lines. Any damage to Customer's Equipment and Software resulting from inadequate
or incomplete site preparation may not be covered by applicable maintenance
agreements.
(b) With respect to any purchases and installations of new Equipment
and Communication Lines, Customer shall perform the following to ensure adequate
site preparation:
(1) When required by CIS, provide the CIS representative with
appropriate drawings indicating:
i. the location and lay-out of the installation site;
ii. the location of existing and proposed site wiring
(power and communications) and the paths and lengths thereof; and
iii. the location of other equipment capable of generating
electrical noise, electromagnetic interference, heat, etc.;
(2) Make alterations to the premises necessary to meet wiring
and other site requirements;
(3) Provide and install all communication cables, wall jacks,
special connectors and associated hardware;
(4) Install all necessary power distribution boxes, conduits,
grounds, lightening protection and associated hardware;
(5) Install all required auxiliary power protection and air
conditioning;
(6) Provide required storage or service areas;
(7) Ensure the environmental requirements of the Equipment are
met;
(8) Provide floor coverings and environmental systems that
control static electricity build-up and discharge; and
(9) Comply with all applicable federal, state and municipal
laws, codes and regulations (including, without limitation,
electrical, building, safety and health laws).
Clauses (1) through (9) above set forth only the minimum standards,
are not intended to be comprehensive and do not modify the obligations of
Customer described in the Installation Guidelines or the obligation of Customer
to follow the instructions and recommendations of CIS relating to the use of the
Software and the Systems.
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<PAGE>
6. Maintenance and Support Services.
--------------------------------
(a) CIS shall provide maintenance services for the Equipment through
CIS's third-party maintenance providers as set forth in Exhibit B. Customer
shall have the right to use an alternative Equipment maintenance provider,
provided that at least sixty (60) days' prior written notice is given to CIS and
CIS, in its reasonable discretion, approves such proposed alternative Equipment
maintenance provider.
(b) Subject to availability, CIS will provide additional on-site
installation support to Customer at CIS's hourly rates then in effect. In
exchange for the software maintenance fees set forth in Exhibit B hereto, CIS
will provide level one customer assistance through its customer support center
in a manner consistent with that provided to a Facility prior to the
Distribution Date.
(c) CIS shall not be required to provide maintenance or support
Services to any portion of the Software that has been altered by Customer
(without the prior written approval of CIS) if such alteration adversely affects
CIS's ability to provide such Services, as determined by CIS in its reasonable
discretion.
(d) Customer may utilize other vendors of computer systems requiring
interface with the Systems provided hereunder and, upon prior written notice to
and approval by CIS (which approval will not be unreasonably withheld), CIS
shall cooperate with such vendors or Customer in the development and maintenance
of necessary interfaces with the Systems, provided that nothing herein shall
require CIS to provide programming support in respect of such interfaces. All
programming costs and other expenses incurred by CIS pursuant to this paragraph
shall be reimbursed by Customer at the then-current CIS billing rates for time
and materials. Except as provided in this paragraph, CIS shall have no
obligation to provide Services for systems provided by a person other than CIS
or a vendor preferred by CIS. All such Services shall be Customer's
responsibility and at Customer's cost.
(e) The provision of Services may result in the disclosure to CIS of
third-party confidential or proprietary information in possession of Customer
and in which CIS has no rights. Customer shall indemnify and hold harmless CIS
from the failure of Customer to obtain any third-party consents that may be
required so that CIS may provide the Services.
(f) In the event Customer requires services beyond those provided in
this Agreement, or as a result of Customer's use of Software or Systems other
than in conformity with applicable specifications, then to the extent that CIS
agrees to provide additional services, the services shall be provided at the
then-current CIS billing rates for time and materials.
(g) CIS agrees to make its Wide Area Network available to Customer for
access and use only at Facilities listed in Exhibit A hereto. CIS agrees to
make the Information Systems portion of Koala System available to Customer for
access by Facilities in a manner consistent with the use prior to the
Distribution Date. Customer agrees that any information obtained by a Facility
from the Koala System, to the extent such information is not otherwise publicly
available, will not be disclosed to third parties or used other than as required
in the operation of the Facility.
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7. Customer Linkage. The CIS Director of Information Systems ("DIS") will
----------------
continue to support the Customer locally and provide first level account
management. The DIS and Customer will conduct a joint effort to define overall
Customer objectives and develop an information technology plan whereby CIS can
assist in meeting these objectives. This process will allow for long-range
planning and budgeting for system growth, system requirements and resource
planning to meet stated objectives. Customer will participate in both the
Information Systems Steering Committee (ISSC) and the User Request Groups (URGs)
designed to assist CIS in identifying and ranking system updates and
enhancements. There is no fee involved in participating in the URGs. Expenses
involved in participating in the URGs shall be borne by Customer.
CIS and Customer have defined non-binding Service Level Objectives ("SLOs")
to serve as a benchmark for CIS and Customer to periodically assess together the
functioning and satisfaction level derived from the outsourcing relationship.
SLOs are defined in Exhibit F. It is understood that the definition of the SLOs
may be changed over time as mutually agreed by the parties. Customer agrees to
comply with its responsibilities as set forth in Exhibit F.
8. Confidentiality; Proprietary Rights.
-----------------------------------
(a) Data and materials of Customer stored by CIS shall remain the
property of Customer. CIS shall provide such data and materials to Customer
within thirty (30) days of the receipt of Customer's request for such data or
materials. Notwithstanding the foregoing, CIS shall maintain copies of Customer
Data for such periods of time as are required under this Agreement and for such
other periods of time as CIS, in its sole discretion, shall deem to be
advisable.
(b) CIS warrants that it will retain all information belonging to
Customer in confidence and will neither use it nor disclose it to anyone without
the prior written consent of Customer. Notwithstanding the foregoing, to the
extent that CIS is requested (by oral questions, interrogatories, requests for
information or documents, subpoena, civil investigative demand or similar
process) to disclose any information required to be kept confidential pursuant
to this Section 7, CIS agrees to maintain the confidentiality of such
information and to provide prompt notice to Customer, so that Customer may seek
an appropriate protective order or waive compliance by CIS with this Section 8.
If, in the absence of a protective order or the receipt of a waiver by Customer
hereunder, CIS is, nonetheless, in the reasonable written opinion of counsel,
legally required to disclose such information, CIS may disclose such
information, and CIS shall not be liable pursuant to this Section 7; provided,
that (i) CIS shall furnish only that portion of the information which it is
advised by counsel to disclose and (ii) CIS shall exercise its reasonable
efforts to obtain assurance that confidential treatment will be accorded to the
disclosed portion of the information. Moreover, nothing in this Agreement shall
prevent CIS from disclosing confidential information in any proceeding in which
it is in an adversarial position to Customer.
(c) CIS will provide, and Customer agrees to comply with, reasonable
security measures and procedures designed to (i) limit access to the Software
and Customer Data to authorized personnel and (ii) minimize the possibility of
unauthorized access. CIS reserves the right to issue and change security
procedures from time to time, including passwords and user identification
numbers, which may require acquisition and installation of additional
applications,
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tools and/or equipment at Customer cost. Customer shall be responsible for
safeguarding and controlling the use of passwords and user identification
numbers assigned by CIS.
(d) During the term of this Agreement and thereafter, Customer shall
keep confidential all information pertaining to the use or operation of the
Software, disclosing such information only to those persons who need to have
such information in order to utilize the Systems. Customer shall immediately
inform CIS of any suit or action instituted against it based upon a claim that
the Software or any portion thereof infringes a patent, copyright, trade secret
or other proprietary right of a third party.
(e) The Software may include proprietary and copyrighted data or
programs of third parties. Such data and programs are supplied to Customer
pursuant to express authority of such third parties, subject to (i) the terms
and conditions of the rights granted to CIS and (ii) CIS obtaining required
consents from licensors of Third-Party Software, and may be subject to
revocation. In the event of revocation, CIS shall use its reasonable best
efforts to provide software with similar functionality as soon as reasonably
possible, it being understood that if additional cost is incurred, such
additional costs shall be paid by Customer. Neither Customer, Facility, CIS nor
such licensor shall be liable to the other for damages, indirect, consequential
or special, that may result from the use of the Software by Customer or any
employee or agent thereof.
9. Warranties. Subject to the limitations of this section and Section 9
----------
hereof and subject to such limitations as are expressly provided elsewhere in
this Agreement, CIS warrants that the Services provided by it hereunder shall be
performed, in all material respects, in a professional, timely and workmanlike
manner and shall be as described in this Agreement and the exhibits hereto. In
addition, CIS warrants that, to the best of its knowledge, it has the legal
right to license or sublicense to Customer the Software and to perform the
Services. CIS makes no warranties of any kind in connection with the
Communication Lines or services provided by any telephone company. CIS makes no
warranties of any kind with respect to the Equipment. Customer must look solely
to the manufacturer of such Equipment for any warranties relating thereto.
(a) Ownership and Quiet Enjoyment. CIS hereby warrants and represents
-----------------------------
to Customer that CIS owns all right, title and interest in and to the Software,
Documentation and other proprietary material provided under this Agreement, or
otherwise has the right to grant to Customer the license to use same as set
forth in this Agreement without violating or infringing upon any rights of any
third party and without breach of any third-party license to CIS, and there is
currently no actual or threatened suit by any third party based on an alleged
violation, infringement or breach by CIS. Use of the Software and the
Documentation in accordance with this Agreement shall not be disturbed or
interfered with during the continuation of the license granted hereunder.
(b) Software Operation. The Software shall perform in accordance with
------------------
the Documentation; provided, however, if a Customer makes an unauthorized
modification to the Software, then this warranty shall terminate.
(c) Performance Standards. Each of CIS's employees, agents or
---------------------
representatives assigned to perform services hereunder shall have the proper
skill, training and
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<PAGE>
background so as to be able to perform in a competent and professional manner
and all work will be so performed in a manner compatible with Customer's
business operations at its premises.
(d) Virus. CIS warrants and represents that the Software provided
-----
under this Agreement, at the time it is supplied, is completely free of any
virus, rouge program, time bomb, turn off instruction, or any other device
however characterized that is potentially damaging to the materials provided,
other programs, data, computer hardware, computer software, telecommunications
equipment or any other material or device in any manner whatsoever.
(e) Alpha/Beta Site. CIS warrants and represents that Customer is not
---------------
an alpha or a beta site for the Software and will not be for any new services
unless Customer's consent is obtained.
(f) Regulatory Updates. Whenever technically and economically
------------------
feasible, CIS shall use commercially reasonable efforts to develop modifications
to the System to comply with changes in United States federal regulatory
requirements. Such federal regulatory modifications will be developed at no
charge so long as Customer covered under the terms of this Agreement. At
Customer's request, CIS shall use all commercially reasonable efforts to modify
the System to comply with state and local regulatory modifications on a "Fair
Share Basis". As used herein "Fair Share Basis" means charges will be incurred
on a time and material basis with costs divided by the total number of CIS
Customers affected by a given modification).
THE FOREGOING WARRANTIES ARE THE EXCLUSIVE WARRANTIES UNDER THIS AGREEMENT
AND ARE IN LIEU OF ALL OTHER WARRANTIES, EXPRESS, IMPLIED OR STATUTORY,
INCLUDING, WITHOUT LIMITATION, ANY WARRANTY OF MERCHANTABILITY OR FITNESS FOR A
PARTICULAR PURPOSE. CUSTOMER EXPRESSLY WAIVES AND SHALL NOT MAKE ANY CLAIM OF
ANY KIND AGAINST CIS ARISING OUT OF THE FAILURE OF PERFORMANCE OF ANY PIECE OF
EQUIPMENT, OF CIS SOFTWARE OR THIRD-PARTY SOFTWARE, OR OF THE COMMUNICATION
LINES, OR OUT OF THE BREACH OF ANY WARRANTY PROVIDED BY THE MANUFACTURER OF SAID
EQUIPMENT OR BY THE TELEPHONE COMPANY. CIS SHALL PASS THROUGH TO CUSTOMER THE
BENEFITS OF ANY EXPRESS WARRANTIES RELATING TO THE EQUIPMENT, AND SHALL ASSIST
CUSTOMER WITH ANY SUCH WARRANTY CLAIMS.
CIS makes no warranty or guaranty, and hereby expressly disclaims all
warranties, expressed or implied, as to the Equipment and/or Systems at the
Facilities being Year 2000 compliant. CIS, however, acknowledges the need for
all Software to be Year 2000 compliant and is currently making efforts in a
professional, timely and workmanlike manner that it deems reasonable to address
the Year 2000 compliance issues with the Software. Addressing specific Year
2000 compliance issues may result in software product replacement, or
termination of the software product, service and support per the provisions of
this Agreement. How to address Year 2000 issues will be determined by CIS in
its sole discretion.
CUSTOMER ACKNOWLEDGES THAT IT IS CUSTOMER'S SOLE OBLIGATION TO ENSURE THAT
ALL EQUIPMENT AND SYSTEMS AT THE FACILITIES USED TO PROCESS CUSTOMER DATA IS
YEAR 2000 COMPLIANT AND THAT TO THE EXTENT ANY ASSISTANCE IS PROVIDED BY CIS TO
OBTAIN
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<PAGE>
YEAR 2000 COMPLIANCE, SUCH SERVICE IS PROVIDED WITHOUT ANY WARRANTY WHATSOEVER.
CUSTOMER AGREES TO RELEASE CIS FROM ANY CLAIMS OR ACTIONS IT MAY HAVE NOW OR IN
THE FUTURE AGAINST CIS RELATING TO YEAR 2000 COMPLIANCE WITH RESPECT TO SUCH
EQUIPMENT OR SYSTEMS OR ANY COMPUTER SOFTWARE OR HARDWARE USED BY CUSTOMER, AND
CUSTOMER AGREES TO DEFEND, INDEMNIFY AND HOLD CIS AND ITS AFFILIATES HARMLESS
FROM ANY CLAIM OR ACTION BASED ON ANY INJURY OR DAMAGES SUFFERED BY CUSTOMER OR
ANY THIRD PARTY AS A RESULT OF ANY COMPUTER SOFTWARE OR HARDWARE USED BY
CUSTOMER NOT BEING YEAR 2000 COMPLIANT. A product is Year 2000 compliant/ready
when it can accurately and unambiguously process (including, without limitation,
compare, calculate, manipulate, sequence, display and exchange data with other
systems) data containing time and/or dates prior to, at and after the Year 2000
without error or interruption, and the product operates properly and in
conformance with applicable specifications, without any detrimental effect on
patient care, continuously, before, at and after the Year 2000.
10. Limitation of Liability.
-----------------------
(a) Neither party shall be liable to the other for any failure or
delay in the performance of its obligations under this Agreement if such failure
or delay arises out of a cause beyond the reasonable control of such party.
Such causes may include, without limitation, acts of God, a public enemy, civil
or military authority, fires or other catastrophes, strikes, delays in
transportation, riots or war. Failure to comply with the terms of this
Agreement or the Installation Guidelines may result in serious damage to
Customer's Equipment, Software and Facilities. CIS shall have no liability for
damage resulting from Customer's failure to comply with the terms of this
Agreement, any Installation Guidelines or any other instructions provided by CIS
to Customer. Should the Software be made the subject of any claim alleging
infringement of any patent, copyright, trade secret, trademark or other
intellectual property rights of any third person, CIS's sole liability shall be,
at its option, to procure the right to use the Software free of such liability
or to replace or modify the Software to make it non-infringing while maintaining
equivalent functionality. No person providing data or programs in the Software
shall be deemed thereby to be engaging in the practice of medicine or dispensing
medical services.
IN THE EVENT OF DELAYS, ERRORS OR OMISSIONS IN PROCESSING OR IN PROVIDING
OR FAILING TO PROVIDE ANY OTHER SERVICES PROVIDED BY CIS HEREUNDER, CIS SHALL
USE ITS REASONABLE BEST EFFORTS TO CORRECT SUCH ERRORS OR OMISSIONS, TO MAKE
SUCH SERVICES AVAILABLE AND/OR RESUME PERFORMING SUCH SERVICES AS PROMPTLY AS
REASONABLY PRACTICABLE AND AT NO ADDITIONAL CHARGE, PROVIDED THAT NOTICE OF SUCH
ERROR OR OMISSION IS GIVEN WITHIN SEVENTY TWO (72) HOURS AFTER PRODUCTION OF ANY
REPORT. OTHERWISE, CIS SHALL HAVE NO OTHER OBLIGATIONS OR LIABILITY FOR SUCH
ERRORS, DELAYS OR OMISSIONS. IN NO EVENT SHALL EITHER PARTY BE LIABLE TO THE
OTHER FOR INDIRECT, SPECIAL, PUNITIVE, EXEMPLARY, INCIDENTAL OR CONSEQUENTIAL
DAMAGES OF ANY KIND ARISING OUT OF THE PERFORMANCE OR BREACH OF THIS AGREEMENT,
INCLUDING, WITHOUT LIMITATION, LOST PROFITS, LOSS OF DATA OR BUSINESS
Page 12
<PAGE>
INTERRUPTION. FURTHERMORE, EACH PARTY'S LIABILITY TO THE OTHER FOR ANY OTHER
DAMAGES CAUSED BY OR RESULTING FROM THE PERFORMANCE OR BREACH OF THIS AGREEMENT,
WHETHER IN TORT, CONTRACT OR OTHERWISE, SHALL BE LIMITED IN EACH CASE TO $50,000
PER FACILITY AND $100,000 IN THE AGGREGATE.
(b) Notwithstanding the foregoing, the limitations of liability shall
not apply to (i) the indemnification obligations set forth in this Section 10 or
(ii) breach of the confidentiality provisions set forth in Section 6 hereof.
(c) Customer shall indemnify and hold harmless CIS from and against
any loss, damage or liabilities (including, without limitation, attorneys' fees)
resulting from claims, actions or lawsuits ("Losses") asserted by or on behalf
of third parties or which result from governmental action or are otherwise
asserted against CIS only to the extent that such Losses are determined by a
judgment of a court that is binding, final and not subject to review on appeal
to have resulted primarily from Customer's fraud, willful misconduct, negligence
or breach of the confidentiality provisions set forth in Section 6 hereof. CIS
will indemnify and hold harmless Customer from and against any Losses asserted
by or on behalf of third parties or which result from governmental action or are
otherwise asserted against Customer only to the extent that such Losses are
determined by a judgment of a court that is binding, final and not subject to
review on appeal to have resulted primarily from CIS's fraud, willful
misconduct, negligence or breach of the confidentiality provisions set forth in
Section 6 hereof.
11. Term; Termination; Breach.
-------------------------
(a) This Agreement shall become effective as of the Effective Date and
shall continue during the Initial Term, unless earlier terminated pursuant to
the provisions of this Section 11, in which event this Agreement shall terminate
upon the effective date of termination, as described in paragraph (b) below.
(b) This Agreement, and the Services and Systems provided hereunder,
may be terminated prior to the expiration of the Initial Term only as follows:
(1) with cause (as described in paragraph (c) below), by the
giving of written notice by either party, in which event such
termination shall be effective sixty (60) days after the giving of
such notice; or
(2) in the event either party files a proceeding, or has an order
for relief entered with respect to it, under any federal or state
bankruptcy laws now or hereafter in effect, by the giving of written
notice by the other party, in which event such termination shall be
effective sixty (60) days after the giving of such notice.
(c) In the event of a breach of any obligation or covenant under this
Agreement by Customer or CIS, other than the obligation to pay money (other than
payments disputed by Customer or CIS in good faith), the party not in breach may
give the party in breach written notice of the specifics of the breach and the
party in breach shall have thirty (30) days (the "Cure Period") in which to cure
such breach or cause the breach to be cured. If the breach is not cured, or
waived by the non-breaching party, within the Cure Period, then the non-
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<PAGE>
breaching party shall be entitled to pursue any remedies it may have by reason
of such breach. The non-breaching party's remedy with respect to any breach
which is not cured or waived within the Cure Period shall include, without
limitation, terminating this Agreement with cause or commencing legal action
against the other party for damages related to such breach. Failure to
terminate this Agreement shall not serve to waive any breach hereof. If either
party commences legal action alleging any breach of this Agreement, the non-
prevailing party shall pay all costs and reasonable attorneys' fees incurred by
the prevailing party in connection therewith.
(d) This Agreement shall automatically renew for successive additional
twelve (12) month terms, unless Customer notifies CIS of its intention not to
renew at least one hundred and eighty (180) days prior to the expiration of the
Initial Term or any renewal term or unless CIS notifies Customer of its
intention not to renew at least twelve (12) months prior to the expiration of
the Initial Term or any renewal term. Such renewals shall be for the fees and
prices then in effect for CIS's services or such other amounts as the parties
may negotiate, but in no event less than the total fees charged by CIS to
Customer during the preceding twelve (12) months. If Customer elects not to
continue receiving services, Customer shall specify in writing within thirty
(30) days thereafter, the period of time Customer estimates will be necessary to
complete the de-installation of the Services and Systems (such period not to
extend beyond twelve (12) months after the expiration of the Initial Term or the
then current term). For purposes of this Section 10, the period commencing
after the expiration of the Initial Term and ending on the date determined above
shall be the "Wind-Down Period." If Customer fails to specify the Wind-Down
Period as provided herein, the Wind-Down Period shall be twelve (12) months,
unless otherwise agreed.
(e) During the Wind-Down Period, the parties will establish and
implement a mutually acceptable de-installation plan, having due regard for the
cost and quantity of Services provided by CIS during the Wind-Down Period.
During the Wind-Down Period, the remaining provisions of this Agreement shall
continue in effect, except as follows:
(f) CIS shall not be required to offer any Services or Systems to
Customer beyond those already purchased by Customer at expiration of the Initial
Term;
(g) All fees and other charges at the expiration of the Initial Term
shall be increased automatically by 25%; and
(h) During the first year of the Wind-Down Period Customer shall pay
twelve (12) Minimum Monthly Processing Fees equal to one-twelfth of seventy-five
percent (75%) of the prior year's total fees and during each subsequent year
shall be increased by the percentage increase in the Consumer Price Index during
the calendar year ended on the preceding December 31.
(i) In the event that this Agreement is terminated by Customer before
the end of the Initial Term, Customer shall pay to CIS a Termination Fee equal
to the first month's total bill under the terms of this Agreement, multiplied by
the number of months remaining in the Initial Term.
(j) Following termination of this Agreement and upon CIS's request,
Customer shall deliver to CIS all Software and related documentation (including
copies thereof)
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<PAGE>
or, at CIS's option, shall deliver to CIS a sworn statement certifying that all
Software and related documentation have been destroyed.
12. Miscellaneous
(a) Assignment. Neither this Agreement, nor any of the rights,
----------
licenses or duties set forth herein, may be assigned by Customer without the
prior written consent of CIS. This Agreement shall be binding upon, inure to
the benefit of, and be enforceable by the parties hereto and their respective
successors and permitted assigns.
(b) Access to Books and Records. Upon written request of the
---------------------------
Secretary of Health and Human Services or the Comptroller General or any of
their duly authorized representatives, CIS shall make available to the
requesting party those contracts, books, documents and records necessary to
verify the nature and extent of the cost of providing its services. CIS shall
cause such materials to be available for inspection for at least four (4) years
after the rendering of such Services and Systems. If CIS carries out any of the
duties of this Agreement with a value of $10,000 or more over a twelve (12)
month period through a subcontract with a related individual organization, CIS
shall include this requirement in all such subcontracts. The parties agree that
any attorney-client, accountant/client or any other legal privilege shall not be
deemed waived by virtue of the provisions of this Section 12.
(c) Taxes. The prices and amounts specified to be payable by Customer
-----
hereunder do not, unless otherwise noted, include any sales, use, excise, value
added, utility or other similar tax or charge which may be or hereafter become
applicable to the Services and Systems provided hereunder. Consequently, in
addition to such prices and amounts, the amount of any such taxes or charges
which may be or hereafter become applicable shall also be payable by Customer to
CIS, except that Customer shall have no responsibility for payment of taxes on
CIS's income or for payment of franchise taxes related to authorization of CIS
to conduct business in any state. In lieu of paying any such taxes that may
otherwise be due, Customer may provide CIS with a tax exemption certificate
acceptable to the taxing authorities. Customer shall be given prompt written
notice of any tax assessment against CIS for which Customer is liable hereunder,
and Customer shall have the right, at its own expense, to contest any such
assessment prior to its payment by CIS. In the event Customer exercises such
right, it shall indemnify and hold harmless CIS from liability for all interest
and penalties relating to such contest. Customer shall control any such contest
and CIS shall provide information and assistance in connection with such contest
to the extent reasonably requested by and at the expense of Customer.
(d) Divestiture of Facility. In the event that, during the term of
-----------------------
this Agreement, Customer divests any Facility receiving any Systems or Services
hereunder, then in such event, such Facility's rights and obligations under this
Agreement may be assigned to the purchaser of such Facility, provided that:
(1) The purchaser assumes in writing the obligations of Customer
hereunder with respect to such Facility; and
(2) No such assignment shall relieve Customer of its obligations
hereunder in respect of such Facility.
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<PAGE>
(e) In lieu of assigning this Agreement, CIS, Customer and the
purchaser may agree that CIS and the purchaser shall execute a new agreement for
the provision of Services and Systems, at which time this Agreement shall
terminate in respect of the Divested Facility and, upon payment of annual
maintenance fees by the purchaser, Customer shall receive a credit against
Monthly Processing Fees in respect of the Divested Facility which relates to the
unexpired portion of the year in respect of which such fees were paid by
Customer.
(f) Any legal or other expenses reasonably incurred by CIS in
connection with actions taken in relation to Customer's divestiture of a
Facility shall be paid by Customer.
(g) Hiring. During the term of this Agreement neither party shall
------
recruit, hire, offer employment to or refer for employment any of the agents or
employees of the other party, without such party's prior written permission.
(h) Disputes. In the event that a dispute arises between CIS and
--------
Customer which cannot be resolved in the normal course, the following dispute
resolution procedure shall be followed: (i) within ten (10) business days of a
written request by either party, Customer's CIO and CIS' Director of Information
Services shall meet and resolve the issue; if these parties cannot resolve the
issue within ten (10) business days of the meeting, then (ii) the issue shall be
submitted to Customer's CFO and CIS' Vice President for Client Services; if
these parties cannot resolve the issue within fifteen (15) business days of
submission to them, then (iii) the issue shall be submitted to Customer's CEO
and CIS's President for resolution.
12. Governing Law. This Agreement shall be governed by, and construed in
-------------
accordance with, the laws of the State of Tennessee without regard to its
conflict of laws provisions. Any dispute hereunder shall be resolved in the
state or federal courts having jurisdiction located in Nashville, Tennessee.
13. Notices. All notices or other communications required or permitted
-------
under this Agreement shall be in writing and sufficient if sent by nationally
recognized overnight courier (for next business day delivery), facsimile
transfer device or certified mail, return receipt requested, to CIS or Customer
at the following addresses:
Columbia Information Systems, Inc.
2555 Park Plaza
P. O. Box 270
Nashville, Tennessee 37202
Facsimile:__________________
ATTN: Data Center Contract Administrator
and
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<PAGE>
__________________________
__________________________
__________________________
Facsimile:
ATTN:_____________________
Any party may change the person and address to which notices or other
communications are to be sent to it by giving written notice of any such change
in the manner provided herein.
14. Entire Agreement; Amendment. This Agreement, together with the
---------------------------
exhibits hereto, sets forth the entire agreement and understanding of the
parties hereto in respect of the transactions contemplated hereby, and
supersedes all prior agreements, arrangements and understandings relating to the
subject matter hereof. No party hereto has relied upon any oral or written
statement, representation, warranty, covenant, condition, understanding or
agreement made by any other party or any representative, agent or employee
thereof, except for those expressly set forth in this Agreement or in the
exhibits or other documents delivered pursuant hereto. This Agreement may be
amended, modified, superseded or supplemented only by an instrument in writing
executed and delivered by CIS and Customer.
15. Headings. The section headings contained in this Agreement are
--------
inserted for convenience of reference only and shall not affect the meaning or
interpretation of this Agreement.
16. Rights Cumulative; Waiver. All rights and remedies conferred under
-------------------------
this Agreement or by any other instrument or law shall be cumulative and may be
exercised singularly or concurrently. The failure by either party to enforce
any term shall not be deemed to be a waiver of future enforcement of that or any
other term of this Agreement.
17. Counterparts. This Agreement may be executed in any number of
------------
separate counterparts, each of which shall be deemed to constitute an original,
but which together shall constitute one and the same instrument.
18. Severability. In the event that any provision hereof is prohibited or
------------
unenforceable in any jurisdiction, such provision shall, as to such
jurisdiction, be ineffective to the extent of such prohibition or
unenforceability without invalidating the remaining provisions hereof or
affecting the validity or unenforceability of such provision in any other
jurisdiction.
IN WITNESS WHEREOF, the parties have caused this Computer and Data
Processing Transition Services Agreement to be executed by their duly authorized
representatives as of the day and date first referenced above.
COLUMBIA INFORMATION SYSTEMS, INC.
By:____________________________
Name:__________________________
Title:_________________________
Page 17
<PAGE>
LIFEPOINT HOSPITALS, INC.
By:_____________________________
Name:___________________________
Title:__________________________
Page 18
<PAGE>
EXHIBIT 10.6
AGREEMENT TO SHARE TELECOMMUNICATIONS SERVICES
AGREEMENT TO SHARE TELECOMMUNICATIONS SERVICES, dated as of
________________, 1999, by and between COLUMBIA INFORMATION SERVICES, INC., a
Tennessee corporation ("CIS"), which is a wholly owned subsidiary of
Columbia/HCA Healthcare Corporation, a Delaware corporation ("Columbia/HCA") and
LIFEPOINT HOSPITALS, INC., a Delaware corporation ("User").
W I T N E S S E T H:
--------------------
WHEREAS, Columbia/HCA has determined to distribute to its stockholders, on
a pro rata basis, all of the issued and outstanding shares of common stock of
LifePoint owned by Columbia/HCA (the "Distribution"), all as set forth in that
certain Distribution Agreement by and among Columbia/HCA, User and LIFEPOINT
HOSPITALS, INC., a Delaware corporation "LifePoint") dated as of
________________, 1999 (the "Distribution Agreement"); and
WHEREAS, CIS has entered into an arrangement with AT&T Corp. ("AT&T") under
which CIS purchases Virtual Telecommunications Network Services ("VTNS"), as
that term is defined in Tariff F.C.C. No. 12, as defined below (the "VTNS
Agreement"); and
WHEREAS, under the VTNS Agreement, CIS may designate unaffiliated entities
as authorized users of VTNS on a shared-use basis at the rates and charges set
forth in Tariff F.C.C. No. 12; and
WHEREAS, CIS desires to designate User as an authorized user under the VTNS
Agreement at all of User's locations identified in Exhibit A hereto (the
"Locations"), and User desires to be so designated, all on the terms and
conditions set forth herein; and
NOW, THEREFORE, in consideration of the premises and the mutual covenants
and obligations set forth herein, and for other good and valuable consideration,
the receipt and sufficiency of which are acknowledged, CIS and User agree as
follows:
1. Definitions.
-----------
(a) Unless otherwise defined in this Agreement, all terms used herein shall
have the meanings ascribed to them in Tariff F.C.C. No. 12.
(b) "Tariff F.C.C. No. 12" means the General Regulations and Option 162 of
AT&T's Tariff F.C.C. No. 12. A copy of the current version of Option 162 is
attached hereto as Exhibit B. CIS will make a copy of the General Regulations
available to User on request.
<PAGE>
(c) "Annual Commitment" for each Contract Year shall have the meaning set forth
in Section 4(b) below.
(d) "Contract Year" means a twelve (12) month period during the term of this
agreement. The first Contract Year will begin immediately following execution of
this Agreement by both parties. Each subsequent Contract Year will begin on the
first day after the end of the prior Contract Year.
(e) "MAC" means the Minimum Annual Charge applicable to CIS's use of VTNS
under Option 162.
(f) The defined terms include the plural as well as the singular. Unless
otherwise expressly stated, the words "herein," "hereof" and "hereunder" and
similar words refer to this Agreement as a whole and not to any particular
section or subsection. The words "include" and "including" shall not be
construed as terms of limitation. The words "day," "month" and "year" mean,
respectively, calendar day, calendar month and calendar year unless otherwise
stated.
2. Initial Order and Management of Relationship.
--------------------------------------------
(a) User hereby orders and CIS hereby agrees to direct AT&T to provide VTNS to
User, at all of the Locations, subject to the terms and conditions of Tariff
F.C.C. No. 12 and this Agreement. User may modify the list of Locations by
providing written notice to the AT&T personnel referred to in Section 2(b) below
and to CIS in accordance with Section 17 below.
(b) Pursuant to the VTNS Agreement, AT&T will provide provisioning, maintenance
and customer care services to User at each Location on the terms and subject to
the conditions of the VTNS Agreement. Within thirty (30) days of the date of
this Agreement, CIS shall provide User with contact information for the AT&T
personnel who will perform such support services for User.
(c) The names of those representatives of User who are authorized to contact
AT&T with respect to VTNS are set forth in Exhibit C hereto. User may modify the
list of such representatives by providing written notice to the AT&T personnel
referred to in Section 2(b) above and to CIS in accordance with Section 17
below. User's representatives are not authorized to place orders, or otherwise
act as agents, for CIS in any matters relating to VTNS.
(d) User acknowledges that AT&T may deny or restrict CIS's and/or User's access
to VTNS in the event that User does not comply with one or more of the
requirements of Tariff F.C.C. No. 12, including, without limitation,
requirements relating to the payment of charges.
<PAGE>
(e) User acknowledges that CIS with AT&T may review and revise Option 162, and
that in the event of a revision of Option 162, the rates and provisions in such
revisions will apply.
3. Billing and Invoices.
--------------------
(a) Rates and Charges.
-----------------
(i) As consideration for CIS's designation of User as an authorized user under
Tariff F.C.C. No. 12, User agrees to pay AT&T for VTNS in accordance with the
rates and charges set forth in (A) Tariff F.C.C. No. 12, as it may be amended by
AT&T from time to time as permitted by law, or (B) in the event that Tariff
F.C.C. No. 12 is withdrawn or canceled, the successor documents governing AT&T's
provision of VTNS to CIS. (ii) User's share of the Basic Charge under Option
162 shall be calculated based upon the Service Elements installed at User's
Locations priced according to the rates set forth in Section 7.164.2.B of Tariff
F.C.C. No. 12. User acknowledges that the net effective rates for VTNS will be
based upon the aggregate monthly usage of VTNS by CIS, its affiliates and other
authorized users. User further acknowledges that, as a result of AT&T's
dependence upon aggregate usage by such parties, certain rates billed to User
may vary from month to month and that AT&T may occasionally assess a charge to
true-up the rates so that they reflect actual usage during any month. User
agrees to pay its share of any such true-up charge.
(b) Discounts, Waivers and Credits.
------------------------------
(i) User shall be entitled to participate in the Domestic Volume Pricing Plan
set forth in Section 7.164.2.G of Tariff F.C.C. No. 12 (subject to User's
acknowledgment in Section 3(a)(ii) above regarding possible fluctuations in the
applicable discount levels) and in the waivers set forth in Section 7.164.2.E, H
and L of Tariff F.C.C. No. 12.
(ii) Notwithstanding Section 3(a) above, User shall not be entitled to any
portion of the credits set forth in Section 7.164.2.1 and 7.164.2M. 1, 2 and 3
of Tariff F.C.C. No. 12.
(c) Taxes and Surcharges. User acknowledges that the rates set forth in Tariff
--------------------
F.C.C. No. 12 are exclusive of taxes and surcharges. User agrees to pay all
taxes and surcharges (including presubscribed interchange carrier charges and
universal service fund assessments) billed to User by AT&T pursuant to Tariff
F.C.C. No. 12.
(d) Billing and Payment. User will be billed for its use of VTNS by AT&T each
-------------------
month at the address set forth in Section 17 below (or at such other address as
User may designate pursuant to that section). Such invoices will be in AT&T's
standard format for VTNS billing. User shall pay all charges on each AT&T
invoice within thirty (30) days of User's receipt thereof.
(e) Billing Disputes. User shall attempt in good faith to resolve any billing
----------------
disputes with AT&T promptly and shall attempt in good faith to keep CIS fully
informed of its efforts to resolve such disputes. At CIS's request, User shall
permit CIS to intervene in
<PAGE>
any such dispute. Such AT&T intervention may include, at CIS's sole discretion,
the right to pay some or all of the disputed amounts to AT&T, in which event
User shall reimburse CIS for such amounts in full within ten (10) days of User's
receipt of CIS's written request therefor.
4. User's Commitment.
------------------
(a) User agrees that the Locations will use VTNS through this Agreement and the
VTNS Agreement exclusively for all services offered covered by VTNS Option 162
throughout the term of this agreement.
(b) User's Annual Commitment during each Contract Year (prior to the
application of taxes, fees, surcharges or any one-time credits) shall be
$__________ and will be based upon the 1998 spending rate for Users Locations as
billed by AT&T, details included in Exhibit D (when available, end of March
1999).
(c) In the event that (i) User's Combined Charges for VTNS (as that term is
defined in Option 162) during any Contract Year fall short of its Annual
Commitment for such period, (ii) CIS's Combined Charges also fall short of its
MAC for any annual measurement period under Option 162 that includes a Contract
Year in which such a shortfall hereunder occurs, and (iii) CIS is required to
pay a charge to AT&T as a result of its failure to meet its MAC, then User shall
pay to CIS an amount equal to the difference between User's Annual Commitment
for such period and the actual combined charges paid by User for VTNS (exclusive
of taxes, fees, surcharges or any one-time credits) for such period.
(d) The parties agree that, if User experiences a business downturn or divests
itself of a subsidiary or affiliate, and if AT&T agrees to reduce CIS's MAC as a
consequence of such downturn or divestiture by User, then User's Annual
Commitment for the remainder of the term of this agreement will be reduced by
the same amount as CIS's MAC is reduced; provided, however, that nothing herein
shall be deemed to require CIS to agree to any changes in its arrangements with
AT&T in order to secure AT&T's agreement to reduce the MAC.
5. Access to User Location. User shall provide AT&T with such access to the
-----------------------
Locations as is necessary for AT&T to provide VTNS to User at each such
Location. User may require any AT&T personnel seeking such access to abide by
User's reasonable security requirements at each such Location.
6. Unauthorized Use.
----------------
(a) User shall use its best efforts to prevent any unauthorized use of VTNS by
its employees, affiliates and third parties. In any event, User shall be solely
responsible for and shall indemnify CIS for and hold CIS harmless from all
expenses, charges and costs arising out of any such unauthorized use.
<PAGE>
(b) User shall promptly notify AT&T of any suspected abusive or unauthorized
use of VTNS, including, without limitation, notifying AT&T that a calling card
has been lost, stolen or compromised or is being used fraudulently or without
authorization. User shall require the surrender of a calling card upon the
termination or other departure of any calling card holder or upon the revocation
of calling card holder status. All notifications to AT&T shall be made as
directed by CIS.
(c) User shall make a contact available at each Location seven (7) days a week,
twenty-four (24) hours a day for receipt of notification from AT&T of suspected
unauthorized use of VTNS. User shall notify AT&T in writing of that contact,
including the phone, fax and pager numbers of such contact and may from time to
time designate another person to act as the contact or change a phone, fax or
pager numbers of a contact, by providing written notice to AT&T.
7. Term. The term of this Agreement shall begin on the date hereof and shall
----
continue through [date of expiration of AT&T agreement to be inserted when
--------------------------------------------------------
pending negotiation of extension is completed], unless earlier terminated
- ---------------------------------------------
pursuant to Section 8 of this Agreement, in which event this Agreement shall
terminate upon the effective date of termination, as described in Section 8, or
extended by mutual agreement of the parties. [This agreement will automatically
renew for consecutive three-year terms unless notice of non-renewal is provided
[12] months prior to expiration of initial term or renewal term.]
8. Default and Termination.
-----------------------
(a) Subject to the notice and cure provisions set out below, User may terminate
this Agreement without liability in the event of a default by either CIS or
AT&T. CIS shall be in default of this Agreement if (i) CIS fails to perform or
comply with or violates any material term, condition or obligation of this
Agreement or (ii) any material representation, warranty or statement made by CIS
in this Agreement shall have been false or misleading in any material respect
when made. User's rights to terminate the Agreement under this Section 8(a)
shall apply only on thirty (30) days' advance written notice to CIS and only if
CIS has failed to cure the default within such notice period.
(b) In the event that (i) User terminates this Agreement other than for CIS's
default under Subsection (a), (ii) CIS's Combined Charges fall short of its MAC
for any annual measurement period under Option 162 during which such termination
occurs, and (iii) CIS is required to pay a charge to AT&T as a result of its
failure to meet its MAC, then User shall pay to CIS an amount (which User agrees
is reasonable) equal to the unpaid portion of its remaining Annual Commitment(s)
as of the effective date of termination (the "Early Termination Charge").
(c) Subject to the notice and cure provisions set out below, CIS may terminate
this Agreement without liability and require AT&T to discontinue the VTNS
provided to User in the event of a default by User under this Agreement or the
termination for any reason of the VTNS Agreement between CIS and AT&T. User
shall be in default of this
<PAGE>
Agreement if (i) User fails to perform or comply with or violates any material
term, condition or obligation of this Agreement; (ii) any material
representation, warranty or statement made by User in this Agreement shall have
been false or misleading in any material respect when made; (iii) User's payment
of any AT&T invoice is past due (in whole or in part); or (iv) AT&T asserts that
CIS is in breach of the VTNS Agreement because of an act or omission of User in
connection with User's receipt or use of VTNS. CIS's rights to terminate
pursuant to clauses (i), (ii) and (iii) above shall apply only on thirty (30)
days' advance written notice and only if User has failed to cure the default
within such notice period, provided, however, that in the event of a default
under clause (iii) above, only two notices shall be required during the term of
this Agreement and following two occurrences of an event of default described in
clause (iii) and the giving of notices in each of those instances, it shall
thereafter be an event of default immediately upon occurrence of the event
described in clause (iii) above and no notice or cure period shall apply. The
notice and cure period applicable to any default under clause (iv) above shall
be as specified in Tariff F.C.C. No. 12, and any cure by User must be
satisfactory to AT&T. In the event that CIS terminates this Agreement as a
result of User's default as described in clause (i), (ii), (iii) or (iv) of the
preceding sentence, User shall pay CIS the Early Termination Charge.
9. Limitation of Liability.
-----------------------
(a) User agrees that CIS's sole responsibility under this Agreement is to
require AT&T to bill User in accordance with the terms and conditions of this
Agreement for VTNS, which services will be provided to User by AT&T and not by
CIS. User acknowledges that CIS has no responsibility to User and agrees that
CIS shall not be in default of this Agreement if AT&T ceases to provide VTNS to
User or if AT&T provides VTNS in a manner that is not acceptable to User.
(b) User further agrees that CIS shall have no liability whatsoever for delayed
installation or repair of VTNS or for interruptions in VTNS. Notwithstanding the
foregoing, CIS will instruct AT&T to apply to User's invoices any delay or
interruption credits to which CIS is entitled under Option 162 for delays,
service outages or other problems experienced by User at User's installation
sites.
(c) CIS shall not be liable for any lost profits or incidental, special or
consequential damages, or any other similar damages arising out of any claim of
breach of this Agreement. User agrees that in no event shall CIS's liability
under this Agreement exceed an amount equal to one (1) month's payments by User
for VTNS, based upon the average of the monthly payments made by User for VTNS
during the six (6) months preceding the month in which the event that gave rise
to such claim of breach occurred.
10. Acknowledgements, Representations and Warrants.
----------------------------------------------
(a) Each of CIS and User represents and warrants that it has the requisite
authority to enter into this Agreement.
<PAGE>
(b) Each of CIS and User represents and warrants that it is in compliance with
and will, for the duration of this Agreement, continue to comply with all
foreign and domestic laws, statutes, ordinances, rules, regulations and orders
applicable and material to the sharing and use of VTNS.
(c) User acknowledges that its execution of this Agreement in no way affects
any obligations that User may have to AT&T under any other contracts, and User
represents and warrants that it will fulfill its contractual obligations (if
any) to AT&T under any such other contracts.
11. Disclaimer of Warranties. EXCEPT AS SET FORTH HEREIN, THERE ARE NO
------------------------
WARRANTIES, ORAL OR WRITTEN, EXPRESS OR IMPLIED, WITH RESPECT TO ANY GOODS OR
SERVICES PROVIDED HEREUNDER, INCLUDING, WITHOUT LIMITATION, WARRANTIES OF
MERCHANTABILITY AND FITNESS FOR A PARTICULAR PURPOSE.
12. Confidentiality Obligations.
---------------------------
(a) During the term of this Agreement and for a period of three (3) years from
the date of the expiration or termination of the VTNS Agreement (including all
extensions thereto), each party agrees to maintain in strict confidence all
Confidential Information (as defined below) of the other party, including,
without limitation, preventing the disclosure of such Confidential Information
to any competitor of the other party (known to be such after reasonable
inquiry). No party shall, without obtaining the prior written consent of the
other party hereto, use such other party's Confidential Information for any
purpose other than for performance of its duties and obligations under this
Agreement and the provision of other services to such party. User agrees to
protect any Confidential Information of AT&T to which it may gain access in the
course of receiving VTNS under this Agreement.
(b) For purposes of this Section 12, "Confidential Information" means all
nonpublic information (i) with respect to the business, service or equipment of
CIS, AT&T, or any third party that may be doing business with either CIS or
AT&T, that may be obtained by User from any source in the course of receiving
VTNS under this Agreement ("CIS Confidential Information") and (ii) with respect
to the business, service or equipment of User, or any third party that may be
doing business with User, that may be obtained by CIS in connection with
directing AT&T to provide VTNS to User under this Agreement ("User Confidential
Information"). The terms of this Agreement and discussions, negotiations and
proposals related directly thereto shall be both CIS Confidential Information
and User Confidential Information.
(c) "Confidential Information" shall not include information that (i) is
already known by the receiving party at the time it is obtained by such party,
free from any obligation to keep such information confidential, (ii) is or
becomes publicly known through no wrongful act of the receiving party, (iii) is
rightfully received by the receiving party from a third party without
restriction and without breach of this Agreement or (iv) is
<PAGE>
independently developed by the receiving party without using any Confidential
Information of the other party.
(d) The parties agree that, upon the request of a party having proprietary
rights to Confidential Information, the party in possession of such information
shall promptly return it (including any copies, extracts, descriptions and
summaries thereof) to the requesting party or, with the requesting party's prior
written consent, shall promptly destroy it (and any copies, extracts,
descriptions and summaries thereof) and shall further provide the requesting
party with written certification of same.
13. Indemnification.
---------------
(a) User shall indemnify, defend and hold harmless CIS against, and shall
promptly reimburse CIS from and against, any and all Losses (as defined below)
associated with any of the following:
(i) a claim or action against CIS, AT&T or any director, officer, employee or
assignee of either CIS or AT&T for the actual or alleged infringement of any
patent, copyright, trademark, trade secret or similar intellectual property
right that arises from (A) User's unauthorized modification or use of VTNS; (B)
User's combination or use of VTNS with services, software or equipment where
AT&T did not provide, authorize, require or direct such combination or use or
where AT&T did not certify the compatibility of such service, equipment or
software with VTNS; (C) the reproduction, distribution or transmission of User-
supplied information or other content, except to the extent that the Loss arises
from negligence on the part of AT&T or CIS or (D) AT&T's compliance with User's
specifications, designs or instructions unless AT&T knew that such compliance
could result in a claim or action. CIS and User shall give each other prompt
written notice of any such claim;
(ii) (A) any material inaccuracy in any representation or warranty of User
contained in this Agreement; (B) any damage to tangible real or tangible
personal property (including damage to the property of CIS or User) or the
environment or (C) any injury to or death of any person (including, without
limitation, injury to or death of CIS's or User's respective subcontractors or
employees) associated with the services provided pursuant to this Agreement; and
(iii) any claim or action against CIS for breach of the VTNS Agreement or Tariff
F.C.C. No. 12.
(b) For purposes of this Section 13, "Losses" means all liabilities (including
royalties and license fees), losses, damages, costs and expenses (including,
without limitation, reasonable attorneys' fees and related expenses) arising or
resulting from any of the events set forth in Section 13(a) above to the extent
that such Loss was proximately caused by any act or omission by User, its
affiliate, agent, employee or subcontractor in connection with the use of VTNS.
<PAGE>
14. Advertising and Publicity. User shall not make public reference to the
-------------------------
existence or terms of this Agreement without the prior written approval of CIS.
This prohibition includes use of CIS's name, trademarks, service marks, logos or
any other reference to CIS, directly or indirectly, in any advertising, sales
presentation, news release, release to any professional or trade publication or
for any other purpose.
15. Detariffing. If, during the term of this Agreement, AT&T cancels or
-----------
withdraws any portion of Tariff F.C.C. No. 12 applicable to AT&T's provision of
VTNS to CIS as authorized or required by any statute, rule, regulation or order
of a governmental body of competent jurisdiction, then all references herein to
Tariff F.C.C. No. 12 shall mean the successor document or documents governing
the provision of VTNS to CIS.
16. Governing Law. This Agreement shall be deemed to be made in and in all
-------------
respects shall be interpreted, construed and governed by and in accordance with
the law of the State of Tennessee without regard to the conflict of law
principles thereof.
17. Notices. All notices or other communications required or permitted under
-------
this Agreement shall be in writing and sufficient if sent by nationally
recognized overnight courier (for next business day delivery), facsimile
transfer device or certified mail, return receipt requested, to the following
addresses:
if to CIS, to:
Columbia Information Systems, Inc.
2555 Park Plaza
P.O. Box 270
Nashville, TN 37203
Phone: (615) 344-9551
ATTN: Vice President - IT Operations
& Communications
if to User, to:
LifePoint Hospitals, Inc.
4525 Harding Road
Nashville, Tennessee 37205
Suite 103
Telecopy: (615) ____ - _______
Attention: Mr. Scott L. Mercy
Chairman and Chief Executive Officer
in each case, with a copy to:
Dewey Ballantine LLP
1301 Avenue of the Americas
New York, New York 10019-6092
Telecopy: (212) 259-6333
<PAGE>
Attention: Morton A. Pierce, Esq.
Any party may change the person and address to which notices or other
communications are to be sent to it by giving written notice of any such change
in the manner provided herein.
18. Entire Agreement; Amendment. This Agreement, together with the exhibits
---------------------------
hereto, sets forth the entire agreement and understanding of the parties hereto
in respect of the matters addressed herein, , and supersedes all prior
agreements, arrangements and understandings relating to the subject matter
hereof. No party hereto has relied upon any oral or written statement,
representation, warranty, covenant, condition, understanding or agreement made
by any other party or any representative, agent or employee thereof, except for
those expressly set forth in this Agreement or in the exhibits or other
documents delivered pursuant hereto. This Agreement may be amended, modified,
superseded or supplemented only by an instrument in writing executed and
delivered by CIS and User. Nothing herein is intended to diminish any of the
rights or obligations of either party pursuant to the Distribution Agreement or
pursuant to any of the Ancillary Agreements (as defined in the Distribution
Agreement).
19. Consent to Jurisdiction. CIS and User each hereby expressly (a) submits
------------------------
and consents in advance to the jurisdiction of any Tennessee State Court sitting
in Nashville, Tennessee or the United States District Court for the Middle
District of Tennessee with respect to any actions or proceedings arising out of
or relating to this Agreement, (b) waives any objection which it may have based
upon lack of personal jurisdiction, improper venue or forum non conveniens, (c)
agrees that all claims with respect to such actions or proceedings may be heard
and determined in any Tennessee State Court sitting in Nashville, Tennessee or
the United States District Court for the Middle District of Tennessee, (d)
agrees not to commence any action or proceeding relating to this Agreement other
than in a Tennessee State Court sitting in Nashville, Tennessee or the United
States District Court for the Middle District of Tennessee and (e) agrees that a
final judgment in any such action or proceeding shall be conclusive and may be
enforced in other jurisdictions by suit on the judgment or in any other manner
provided by law.
20. Waiver of Jury Trial. EACH PARTY HERETO ACKNOWLEDGES AND AGREES THAT ANY
--------------------
CONTROVERSY WHICH MAY ARISE UNDER THIS AGREEMENT IS LIKELY TO INVOLVE
COMPLICATED AND DIFFICULT ISSUES, AND THEREFORE EACH SUCH PARTY IRREVOCABLY AND
UNCONDITIONALLY WAIVES ANY RIGHT SUCH PARTY MAY HAVE TO A TRIAL BY JURY IN
RESPECT OF ANY LITIGATION DIRECTLY OR INDIRECTLY ARISING OUT OF OR RELATING TO
THIS AGREEMENT, OR THE TRANSACTIONS CONTEMPLATED BY THIS AGREEMENT. EACH PARTY
CERTIFIES AND ACKNOWLEDGES THAT (A) NO REPRESENTATIVE, AGENT OR ATTORNEY OF ANY
OTHER PARTY HAS REPRESENTED, EXPRESSLY OR OTHERWISE, THAT SUCH OTHER PARTY WOULD
NOT, IN THE EVENT OF LITIGATION, SEEK TO ENFORCE THE FOREGOING WAIVER, (B) EACH
PARTY UNDERSTANDS AND HAS CONSIDERED THE IMPLICATIONS OF THIS WAIVER, (C) EACH
PARTY MAKES THIS WAIVER VOLUNTARILY AND (D)
<PAGE>
EACH PARTY HAS BEEN INDUCED TO ENTER INTO THIS AGREEMENT BY, AMONG OTHER THINGS,
THE MUTUAL WAIVERS AND CERTIFICATIONS IN THIS SECTION 19.
20. Headings. The section headings contained in this Agreement are inserted
--------
for convenience of reference only and shall not affect the meaning or
interpretation of this Agreement.
21. Rights Cumulative; Waiver. All rights and remedies conferred under this
-------------------------
Agreement or by any other instrument or law shall be cumulative and may be
exercised singularly or concurrently. The failure by either party to enforce
any term shall not be deemed to be a waiver of future enforcement of that or any
other term of this Agreement.
22. Counterparts. This Agreement may be executed in any number of separate
------------
counterparts, each of which shall be deemed to constitute an original, but which
together shall constitute one and the same instrument.
23. Severability. In the event that any provision hereof is prohibited or
------------
unenforceable in any jurisdiction, such provision shall, as to such
jurisdiction, be ineffective to the extent of such prohibition or
unenforceability without invalidating the remaining provisions hereof or
affecting the validity or unenforceability of such provision in any other
jurisdiction.
24. Assignment. Neither this Agreement nor any of the rights, licenses, or
----------
duties set forth herein, of User hereunder may be assigned by User without the
prior written consent of CIS. This Agreement shall be binding upon, insure to
the benefit of, and be enforceable by the parties hereto and their respective
successors and permitted assigns.
<PAGE>
IN WITNESS WHEREOF, the parties have caused this Agreement to Share
Telecommunications Services to be executed by their duly authorized
representatives as of the day and date first referenced above.
COLUMBIA INFORMATION SYSTEMS, INC.
By:____________________________________
Name:
Title:
LIFEPOINT HOSPITALS, INC.
By:____________________________________
Name:
Title:
