<PAGE> 1
FILED PURSUANT TO RULE 424(B)(3) AND RULE 424(C)
REGISTRATION NO. 333-84755
PROSPECTUS SUPPLEMENT
(TO PROSPECTUS DATED NOVEMBER 8, 1999,
AS SUPPLEMENTED ON NOVEMBER 17, 1999)
LIFEPOINT HOSPITALS HOLDINGS, INC.
-----------------------------
This prospectus supplement relates to the offer to exchange the 10 3/4%
Series B Senior Subordinated Notes due 2009 of LifePoint Hospitals Holdings,
Inc. (the "Company") which have been registered under the Securities Act for any
and all outstanding 10 3/4% Senior Subordinated Notes due 2009, as described in
the prospectus dated November 8, 1999.
This prospectus supplement includes the Company's amended Quarterly
Report on Form 10-Q/A for the fiscal quarter ended September 30, 1999 and Annual
Report on Form 10-K for the fiscal year ended December 31, 1999, filed by the
Company with the Securities and Exchange Commission.
This prospectus supplement should be read in conjunction with the
prospectus dated November 8, 1999 and the prospectus supplement dated November
17, 1999, which are to be delivered with this prospectus supplement. All
capitalized terms used but not defined herein in this prospectus supplement have
the meanings given them in the prospectus.
-----------------------------
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or passed upon the
adequacy or accuracy of the prospectus or this prospectus supplement. Any
representation to the contrary is a criminal offense.
The date of this prospectus supplement is April 4, 2000
<PAGE> 2
==============================================================================
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
--------------
FORM 10-Q/A
--------------
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 0-29818
------------------------------
LifePoint Hospitals, Inc.
(Exact name of registrant as specified in its charter)
Delaware 52-2165845
(State or other jurisdiction (IRS Employer
of incorporation or organization) Identification No.)
103 Powell Court 37027
Brentwood, Tennessee (Zip Code)
(Address of principal executive offices)
(615) 372-8500
(Registrant's telephone number, including area code)
4525 Harding Road
Nashville, Tennessee 37205
(Former name, former address and former fiscal year,
if changed since last report)
-----------------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months, (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days.
YES X NO
--- ---
<PAGE> 3
Commission file number 333-84755
--------------------------------
LifePoint Hospitals Holdings, Inc.
(Exact name of registrant as specified in its charter)
Delaware 52-2167869
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
103 Powell Court
Brentwood, Tennessee 37027
(Address of principal executive offices) (Zip Code)
(615) 372-8500
(Registrant's telephone number, including area code)
4525 Harding Road
Nashville, Tennessee 37205
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15 (d) of the Securities Exchange
Act of 1934 during the preceding 12 months, and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
--- ---
As of March 17, 2000, the number of outstanding shares of Common Stock
of LifePoint Hospitals, Inc. was 33,704,040, and all of the shares of Common
Stock of LifePoint Hospitals Holdings, Inc. were owned by LifePoint Hospitals,
Inc.
===============================================================================
<PAGE> 4
Part I: Financial Information
Item 1: Financial Statements
LIFEPOINT HOSPITALS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
UNAUDITED
(Dollars in millions, except per share amounts)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------- -------------------
1999 1998 1999 1998
------- ------- ------- -------
<S> <C> <C> <C> <C>
Revenues........................................................... $ 125.4 $ 124.7 $ 387.8 $ 379.1
Salaries and benefits.............................................. 52.2 54.3 165.1 164.0
Supplies........................................................... 15.7 15.7 47.7 46.3
Other operating expenses........................................... 28.8 27.9 87.4 85.8
Provision for doubtful accounts.................................... 10.7 12.0 30.1 31.3
Depreciation and amortization...................................... 7.9 7.4 23.3 20.4
Interest expense................................................... 6.7 4.8 17.4 14.2
Management fees allocated from Columbia/HCA........................ - 2.2 3.2 6.7
ESOP expense....................................................... 1.2 - 1.7 -
Impairment of long-lived assets.................................... - 1.3 - 1.3
------- ------- ------- -------
123.2 125.6 375.9 370.0
------- ------- ------- -------
Income (loss) from continuing operations before minority
interests and income taxes...................................... 2.2 (0.9) 11.9 9.1
Minority interests in earnings of consolidated entities............ 0.4 0.5 1.4 1.4
------- ------- ------- -------
Income (loss) from continuing operations before income taxes....... 1.8 (1.4) 10.5 7.7
Provision (benefit) for income taxes............................... 0.7 (0.6) 4.4 3.1
------- ------- ------- -------
Income (loss) from continuing operations........................... 1.1 (0.8) 6.1 4.6
Loss from discontinued operations, net of tax benefit of ($0.9)
for the three months and ($2.3) for the nine months ended
September 30, 1998.............................................. - (1.4) - (3.7)
------- ------- ------- -------
Net income (loss)............................................... $ 1.1 $ (2.2) $ 6.1 $ 0.9
======= ======= ======= =======
Basic and diluted earnings (loss) per share:
Income (loss) from continuing operations........................ $ 0.03 $ (0.02) $ 0.20 $ 0.16
Loss from discontinued operations............................... - (0.05) - (0.13)
------- ------- ------- -------
Net income (loss)........................................... $ 0.03 $ (0.07) $ 0.20 $ 0.03
======= ======= ======= =======
Shares used in earnings per share calculations (000s):
Basic........................................................... 30,951 29,899 30,349 29,899
Dilutive securities - stock options......................... 63 - 194 100
------- ------- ------- -------
Diluted......................................................... 31,014 29,899 30,543 29,999
======= ======= ======= =======
</TABLE>
See accompanying notes.
2
<PAGE> 5
LIFEPOINT HOSPITALS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
UNAUDITED
(Dollars in millions, except per share amounts)
<TABLE>
<CAPTION>
September 30, December 31,
ASSETS 1999 1998
------ ------------- ------------
<S> <C> <C>
Current assets:
Cash and cash equivalents .............................................. $ 32.7 $ -
Accounts receivable, less allowance for doubtful accounts of $53.4
at September 30, 1999 and $48.3 at December 31, 1998................... 51.9 36.4
Inventories............................................................. 13.8 14.0
Deferred taxes and other current assets ................................ 24.9 18.6
----------- -----------
123.3 69.0
Property and equipment, at cost:
Land.................................................................... 7.2 7.2
Buildings............................................................... 206.2 203.1
Equipment............................................................... 235.1 221.9
Construction in progress (estimated cost to complete and equip
after September 30, 1999 - $ 33.5)..................................... 30.4 10.4
----------- -----------
478.9 442.6
Accumulated depreciation .................................................. (190.7) (176.2)
----------- -----------
288.2 266.4
Intangible assets, net of accumulated amortization of $8.0 at
September 30, 1999 and $6.9 at December 31, 1998 ....................... 23.4 15.2
Other ..................................................................... 4.1 4.4
----------- -----------
$ 439.0 $ 355.0
=========== ===========
LIABILITIES AND EQUITY
----------------------
Current liabilities:
Accounts payable ....................................................... $ 17.6 $ 15.5
Accrued salaries........................................................ 13.3 11.7
Other current liabilities............................................... 28.2 14.6
Current maturities of long-term debt ................................... 2.2 0.3
----------- -----------
61.3 42.1
Intercompany balances payable to Columbia/HCA ............................. - 167.6
Long-term debt ............................................................ 258.0 0.3
Deferred taxes ............................................................ 20.3 21.3
Professional liability risks and other liabilities ........................ 2.6 0.1
Minority interests in equity of consolidated entities ..................... 3.8 4.9
Stockholders' equity:
Preferred stock, $0.01 par value; 10,000,000 shares authorized;
no shares issued....................................................... - -
Common stock, $0.01 par value; 90,000,000 shares authorized;
31,066,289 shares outstanding at September 30, 1999 ................... 0.3 -
Capital in excess of par value.......................................... 133.1 -
Unearned ESOP compensation.............................................. (30.3) -
Notes receivable for shares sold to employees........................... (10.2) -
Retained earnings....................................................... 0.1 -
Equity, investments by Columbia/HCA .................................... - 118.7
----------- -----------
93.0 118.7
----------- -----------
$ 439.0 $ 355.0
=========== ===========
</TABLE>
See accompanying notes.
3
<PAGE> 6
LIFEPOINT HOSPITALS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
UNAUDITED
(Dollars in millions)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
--------------------
1999 1998
-------- --------
<S> <C> <C>
Cash flows from continuing operating activities:
Net income............................................ $ 6.1 $ 0.9
Adjustments to reconcile net income to
net cash provided by continuing operating activities:
ESOP expense...................................... 1.7 -
Provision for doubtful accounts................... 30.1 31.3
Depreciation and amortization..................... 23.3 20.4
Deferred income taxes (benefit)................... (7.4) 0.1
Loss from discontinued operations................. - 3.7
Reserve for professional liability risk........... 2.5 -
Increase (decrease) in cash from
operating assets and liabilities:
Accounts receivable............................ (25.8) (30.1)
Inventories and other current assets........... (1.7) (0.5)
Accounts payable and accrued expenses.......... 11.8 0.1
Income taxes payable........................... 10.3 -
Other............................................. (0.7) -
-------- --------
Net cash provided by operating
activities.................................... 50.2 25.9
Cash flows from investing activities:
Purchase of property and equipment, net............... (40.5) (23.6)
Other................................................. 0.3 2.2
-------- --------
Net cash used in investing activities.......... (40.2) (21.4)
Cash flows from financing activities:
Decrease in long-term debt, net....................... (0.4) (1.1)
Increase (decrease) in intercompany balances
with Columbia/HCA, net............................... 23.1 (3.4)
-------- --------
Net cash provided by (used in)
financing activities.......................... 22.7 (4.5)
Change in cash and cash equivalents....................... 32.7 -
Cash and cash equivalents at beginning of period.......... - -
-------- --------
Cash and cash equivalents at end of period................ $ 32.7 $ -
======== ========
Interest payments......................................... $ 10.3 $ 14.2
Income tax payments (refunds), net........................ $ 6.1 $ 0.7
Supplemental financing non-cash activities:
Assumption of debt from Columbia/HCA.................. $ 260.0 $ -
Elimination of intercompany amounts payable
to Columbia/HCA...................................... $ 219.8 $ -
</TABLE>
See accompanying notes.
4
<PAGE> 7
LIFEPOINT HOSPITALS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1 - BASIS OF PRESENTATION
On May 11, 1999, Columbia/HCA Healthcare Corporation ("Columbia/HCA")
completed the spin-off of its operations comprising the America Group to its
shareholders (the "Distribution") as an independent, publicly-traded company
named LifePoint Hospitals, Inc. LifePoint Hospitals, Inc., together with its
subsidiaries, as appropriate, is hereinafter referred to as "the Company".
Owners of Columbia/HCA Common Stock received one share of the Company's Common
Stock for every 19 shares of Columbia/HCA Common Stock which resulted in
approximately 29.9 million shares of the Company's Common Stock outstanding
immediately after the Distribution.
At September 30, 1999, the Company was 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. In connection with the Distribution,
all intercompany amounts payable by the Company to Columbia/HCA were eliminated
and the Company assumed certain indebtedness from Columbia/HCA (see Note 4). In
addition, the Company entered 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. Information regarding
Columbia/HCA included in this report on Form 10-Q is derived from reports and
other information filed by Columbia/HCA with the Securities and Exchange
Commission (the "Commission").
The accompanying unaudited condensed consolidated financial statements
have been prepared in accordance with generally accepted accounting principles
for interim financial information and with the instructions to Form 10-Q and
Article 10 of Regulation S-X. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements. For periods prior to the Distribution, such
financial statements were prepared on the push down basis of historical cost to
Columbia/HCA and represent the combined financial position, results of
operations and cash flows of the net assets contributed to the Company. In the
opinion of management, all adjustments (consisting of normal recurring
adjustments) considered necessary for a fair presentation have been included.
Operating results for the three months and nine months ended September 30, 1999
are not necessarily indicative of the results that may be expected for the year
ending December 31, 1999. This Form 10-Q should be read in conjunction with the
audited combined financial statements and notes included in the Company's Form
10 Registration Statement, as amended.
Certain estimates, assumptions and allocations were made in preparing
the unaudited condensed consolidated financial statements included herein.
Therefore such financial statements may not necessarily be indicative of the
results of operations, financial position or cash flows that would have existed
had the Company been a separate, independent company throughout the periods
presented.
Certain prior year amounts have been reclassified to conform to the
current year presentation.
5
<PAGE> 8
On May 11, 1999, Columbia/HCA also completed the spin-off of a
separate, independent company, Triad Hospitals, Inc.
NOTE 2 - CONTINGENCIES
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. Management of LifePoint understands that Columbia/HCA is
cooperating in these investigations and that Columbia/HCA 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
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 Commission. The Commission investigation includes the
anti-fraud, insider trading, periodic reporting and internal accounting control
provisions of the federal securities laws. According to published reports, on
July 2, 1999, a federal jury in Tampa, Florida found two Columbia/HCA employees
guilty of conspiracy and making false statements on Medicare and TRICARE cost
reports for the years 1992 and 1993 and on the Medicaid cost report for 1993.
Both were found not guilty of obstructing a federal auditor. One other employee
was acquitted on all counts for which he had been charged and the jury was
unable to reach a verdict with respect to another employee. This employee and
the government executed an agreement to defer prosecution for 18 months after
which charges will be dismissed. The two convicted employees were sentenced in
December 1999 and both have appealed to the 11th Circuit.
Columbia/HCA is a defendant in several qui tam actions brought by
private parties on behalf of the United States of America, which have been
unsealed and served on Columbia/HCA. The actions allege, in general, that
Columbia/HCA and certain subsidiaries and/or affiliated partnerships violated
the False Claims Act by submitting improper claims to the government for
reimbursement. The lawsuits generally seek damages of three times the amount of
all Medicare or Medicaid claims (involving false claims) presented by the
defendants to the federal government, civil penalties of not less than $5,000
nor more than $10,000 for each such Medicare or Medicaid claim, attorneys' fees
and costs. The government has intervened in six unsealed qui tam actions against
Columbia/HCA. 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 litigations 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 are substantial, and Columbia/HCA could be subject to substantial costs
resulting from an adverse outcome of one or more of such actions. In addition, a
number of derivative actions have been brought by purported stockholders of
Columbia/HCA against certain current and former officers and directors of
Columbia/HCA alleging breach of fiduciary duty and failure to take reasonable
steps to ensure that Columbia/HCA did not engage in illegal practices.
Management believes that the ongoing governmental investigations and
related media coverage may have had a negative effect on Columbia/HCA's results
of operations (which include the Company for the periods prior to the date of
the Distribution which are presented herein). The extent to which the Company
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
6
<PAGE> 9
these matters could have a material adverse effect on the financial condition
or results of operations of the Company in future periods.
In connection with the Distribution, Columbia/HCA has agreed to
indemnify the Company in respect of any losses which it may incur arising from
the proceedings described above. Columbia/HCA has also agreed to indemnify the
Company 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
date of the Distribution and relate to the proceedings described above.
Columbia/HCA has also agreed that, in the event that any hospital owned by the
Company as of the date of the Distribution is permanently excluded from
participation in the Medicare and Medicaid programs as a result of the
proceedings described above, then Columbia/HCA will make cash payments to the
Company based on amounts as defined in the Distribution Agreement by and among
Columbia/HCA and the Company. The Company has agreed with Columbia/HCA that, in
connection with the pending governmental investigations, it will negotiate with
the government with respect to a compliance agreement setting forth the
Company's agreement to comply with applicable laws and regulations. If any of
such indemnified matters were successfully asserted against the Company, 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 the
Company. Columbia/HCA has not indemnified the Company for losses relating to any
acts, practices and omissions engaged in by the Company after the Distribution,
whether or not the Company is indemnified for similar acts, practices and
omissions occurring prior to the date of the Distribution.
General Liability Claims
The Company is subject to claims and suits arising in the ordinary
course of business. In certain of these actions claimants may ask for punitive
damages against the Company, 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 the Company's results of
operations or financial position.
Physician Commitments
The Company 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, the Company 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 $13.5 million at
September 30, 1999. 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 pro rata 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 the Company's results
of operations or financial position.
NOTE 3 - DISCONTINUED OPERATIONS
Discontinued operations represent the Company's home health care
business. The Company implemented plans to dispose of this business during
1997. During the fourth quarter of 1998, the Company completed the sale of
substantially all of the Company's home health care operations for total
proceeds of approximately $3.8 million. The proceeds were used to repay
intercompany balances to Columbia/HCA. Revenues of the home health care
business totaled approximately $18.0 million for the nine months ended
September 30, 1998.
7
<PAGE> 10
NOTE 4 - LONG - TERM DEBT
Assumption of Certain Indebtedness from Columbia/HCA
In connection with the Distribution, all intercompany amounts payable
by the Company to Columbia/HCA were eliminated, and the Company assumed certain
indebtedness from Columbia/HCA. The indebtedness was comprised of a Bank Credit
Agreement and Senior Subordinated Notes.
Bank Credit Agreement
On May 11, 1999, the Company assumed from Columbia/HCA the obligations
under a Bank Credit Agreement (the "Credit Agreement") with a group of lenders
with commitments aggregating $210 million. The Credit Agreement consists of a
$60 million term loan facility, an $85 million term loan facility, and a $65
million revolving credit facility (collectively the "Bank Facilities").
As of September 30, 1999, $25 million of the $60 million term loan
facility was drawn, with the remaining $35 million available for limited
purposes to be drawn in one or two subsequent draws within one year after the
Distribution. The final payment under this term loan facility is due November
11, 2004.
The $85 million term loan facility was drawn in full at the time of
the Distribution. The final payment under this term loan is due November 11,
2005.
The $65 million revolving credit facility is available for working
capital and other general corporate purposes, and any outstanding amounts
thereunder will be due and payable on November 11, 2004. No amounts were
outstanding under this facility as of October 31, 1999.
Repayments under the term loan facilities are due in quarterly
installments with quarterly amortization based on annual amounts. Interest on
the Bank Facilities is currently based on LIBOR plus 3.00% for the revolving
credit facility and the $60 million term loan facility, and LIBOR plus 3.50%
for the $85 million term loan facility. The weighted average interest rate on
the Bank Facilities was approximately 8.8% at September 30, 1999. The Company
also pays a commitment fee equal to 0.5% of the average daily amount available
under the revolving credit facility and on the undrawn portion of the $60
million term loan facility.
The Company's bank debt is guaranteed by its subsidiaries. These
guarantees are secured by a pledge of substantially all of the subsidiaries'
assets. The Credit Agreement requires that the Company comply with various
financial ratios and tests and contains covenants, including but not limited to
restrictions on new indebtedness, the ability to merge or consolidate, asset
sales, capital expenditures and dividends.
Senior Subordinated Notes
On May 11, 1999, the Company assumed from Columbia/HCA $150 million in
Senior Subordinated Notes maturing on May 15, 2009 and bearing interest at
10.75%. In November 1999, in a registered exchange offer, the Company issued a
like aggregate principal amount of notes in exchange for these notes (the
"Notes"). Interest is payable semi-annually. The Notes are unsecured obligations
and are subordinated in right of payment to all existing and future senior
indebtedness.
The indenture pursuant to which the Notes were made contains certain
covenants including, but not limited to, restrictions on new indebtedness, the
ability to merge or consolidate, asset sales, capital expenditures and
dividends.
The Notes are guaranteed jointly and severally by all of the Company's
operating subsidiaries ("Subsidiary Guarantors"). The Company is a holding
company with limited operations apart from its ownership of the Subsidiary
Guarantors. The aggregate assets, liabilities, equity and earnings of the
Subsidiary Guarantors are substantially equivalent to the total assets,
liabilities, equity and earnings of the Company and its subsidiaries on a
consolidated basis. At September 30, 1999, substantially all of the Subsidiary
Guarantors were
8
<PAGE> 11
wholly-owned and fully and unconditionally guaranteed the Notes. Separate
financial statements of the wholly-owned Subsidiary Guarantors are not
presented because management believes that separate financial statements would
not provide additional material information to investors.
As of September 30, 1999, two of the Subsidiary Guarantors were not
wholly owned and the guarantees of such non-wholly owned entities were limited.
Subsequent to September 30, 1999, the Company acquired ownership of the
remaining interest in one such Subsidiary Guarantor, and the limitations on the
guarantee of such Subsidiary Guarantor, as well as the limitations on the
guarantee of the remaining non-wholly owned Subsidiary Guarantor, were
eliminated. Therefore, subsequent to September 30, 1999, only one of the
Company's subsidiaries, Dodge City Healthcare Group, L.P., was not wholly owned,
although all assets, liabilities, equity and earnings of this entity fully and
unconditionally, jointly and severally guarantee the Notes. The Company owns
approximately 70% of the partnership interests in this mostly owned limited
partnership.
A summarized condensed consolidating balance sheet at September 30,
1999 and condensed consolidating statement of operations and condensed
consolidating statement of cash flows for the nine months ended September 30,
1999 for the Company segregating the parent company, the issuer of the Notes,
the combined wholly owned guarantor subsidiaries, the mostly owned guarantor
subsidiary and eliminations are found below. Separate unaudited financial
statements of the issuer of the Notes, LifePoint Hospitals Holdings, Inc. and
the mostly owned guarantor subsidiary, Dodge City Healthcare Group, L.P., are
included elsewhere in this filing. In addition, separate unaudited financial
statements of Dodge City Healthcare Group, L.P., are being filed with the
Securities and Exchange Commission.
LifePoint Hospitals, Inc.
Condensed Consolidating Statement of Operations
For the Nine Months ended September 30, 1999
(in millions)
<TABLE>
<CAPTION>
Wholly Owned Mostly Owned
Issuer of Guarantor Guarantor Consolidated
Parent Notes Subsidiaries Subsidiary Eliminations Total
<S> <C> <C> <C> <C> <C> <C>
Revenues ...................................... $ -- $ -- $ 363.5 $ 24.3 $ -- $ 387.8
Salaries and benefits ......................... -- -- 156.6 8.5 -- 165.1
Supplies ...................................... -- -- 44.4 3.3 -- 47.7
Other operating expenses ...................... 0.2 -- 83.7 3.5 -- 87.4
Provision for doubtful accounts ............... -- -- 28.1 2.0 -- 30.1
Depreciation and amortization ................. -- -- 22.0 1.3 -- 23.3
Interest expense .............................. -- 10.5 6.4 0.5 -- 17.4
Management fees ............................... -- -- 2.7 0.5 -- 3.2
ESOP expense .................................. -- -- 1.7 -- -- 1.7
Equity in earnings of affiliates .............. (6.2) (15.1) -- -- 21.3 --
------------------------------------------------------------------------------
(6.0) (4.6) 345.6 19.6 21.3 375.9
------------------------------------------------------------------------------
Income (loss) before minority interests
and income taxes ............................ 6.0 4.6 17.9 4.7 (21.3) 11.9
Minority interests in earnings of
consolidated entities ....................... -- 1.4 -- -- -- 1.4
------------------------------------------------------------------------------
Income (loss) before income taxes ............. 6.0 3.2 17.9 4.7 (21.3) 10.5
Provision (benefit) for income taxes .......... (0.1) (3.0) 7.5 -- -- 4.4
------------------------------------------------------------------------------
Net income (loss) ........................ $ 6.1 $ 6.2 $ 10.4 $ 4.7 $ (21.3) $ 6.1
==============================================================================
</TABLE>
9
<PAGE> 12
LifePoint Hospitals, Inc.
Condensed Consolidating Balance Sheet
September 30, 1999
(in millions)
<TABLE>
<CAPTION>
Wholly Owned Mostly Owned Consoli-
Issuer of Guarantor Guarantor dated
Parent Notes Subsidiaries Subsidiary Eliminations Total
<S> <C> <C> <C> <C> <C> <C>
ASSETS
------
Current assets:
Cash and cash equivalents ......................... $ -- $ -- $ 32.7 $ -- $ -- $ 32.7
Accounts receivable, net .......................... -- -- 46.7 5.2 -- 51.9
Inventories ....................................... -- -- 12.8 1.0 -- 13.8
Deferred taxes and other current assets ........... -- -- 24.8 0.1 -- 24.9
------------------------------------------------------------------------
-- -- 117.0 6.3 -- 123.3
Property and equipment, at cost:
Land .............................................. -- -- 6.9 0.3 -- 7.2
Buildings ......................................... -- -- 196.7 9.5 -- 206.2
Equipment ......................................... -- -- 225.0 10.1 -- 235.1
Construction in progress .......................... -- -- 29.9 0.5 -- 30.4
------------------------------------------------------------------------
-- -- 458.5 20.4 -- 478.9
Accumulated depreciation .............................. -- -- (179.9) (10.8) -- (190.7)
------------------------------------------------------------------------
-- -- 278.6 9.6 -- 288.2
Net investment in and advances to subsidiaries ........ 93.0 347.3 -- -- (440.3) --
Intangible assets, net ................................ -- 8.7 4.1 10.6 -- 23.4
Other ................................................. -- -- 4.1 -- -- 4.1
------------------------------------------------------------------------
$ 93.0 $356.0 $ 403.8 $ 26.5 $(440.3) $ 439.0
========================================================================
LIABILITIES AND EQUITY
----------------------
Current liabilities:
Accounts payable .................................. $ -- $ -- $ 16.9 $ 0.7 $ -- $ 17.6
Accrued salaries .................................. -- -- 13.3 -- -- 13.3
Other current liabilities ......................... 6.6 21.4 0.2 -- 28.2
Current maturities of long-term debt .............. -- 2.0 0.2 -- -- 2.2
------------------------------------------------------------------------
-- 8.6 51.8 0.9 -- 61.3
Intercompany balances to affiliates ................... -- (7.4) (5.3) 12.7 --
Long-term debt ........................................ -- 258.0 -- -- -- 258.0
Deferred income taxes ................................. -- -- 20.3 -- -- 20.3
Professional liability risks and other liabilities .... -- -- 2.6 -- -- 2.6
Minority interests in equity of consolidated entities . -- 3.8 -- -- 3.8
Stockholders' equity .................................. 93.0 93.0 334.4 12.9 (440.3) 93.0
------------------------------------------------------------------------
$ 93.0 $356.0 $ 403.8 $ 26.5 $(440.3) $ 439.0
========================================================================
</TABLE>
10
<PAGE> 13
LifePoint Hospitals, Inc.
Condensed Consolidating Statement of Cash Flows
For the Nine Months ended September 30, 1999
(in millions)
<TABLE>
<CAPTION>
Wholly Owned Mostly Owned Consoli-
Issuer of Guarantor Guarantor dated
Parent Notes Subsidiaries Subsidiary Eliminations Total
<S> <C> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net income ........................................ $ 6.1 $ 6.2 $ 10.4 $ 4.7 $ (21.3) $ 6.1
Adjustments to reconcile net income to net cash
provided by operating activities:
ESOP expense ................................... -- -- 1.7 -- 1.7
Equity in earnings of affiliates ............... (6.2) (15.1) -- -- 21.3 --
Provision for doubtful accounts ................ -- -- 28.1 2.0 30.1
Depreciation and amortization .................. -- -- 22.0 1.3 23.3
Amortization of deferred loan costs ............ -- -- -- -- --
Deferred income taxes (benefit) ................ -- -- (7.4) -- (7.4)
Impairment of long-lived assets ................ -- -- -- -- --
Reserve for professional liability risk ........ -- -- 2.5 -- 2.5
Increase (decrease) in cash from operating
assets and liabilities:
Accounts receivable .......................... -- -- (24.4) (1.4) (25.8)
Inventories and other current assets ......... -- -- (1.6) (0.1) (1.7)
Accounts payable and accrued expenses ........ -- 10.5 1.5 (0.2) 11.8
Income taxes payable ......................... -- -- 10.3 -- 10.3
Other .......................................... 0.1 1.4 (2.2) -- (0.7)
------------------------------------------------------------------------
Net cash provided by
operating activities ........................ -- 3.0 40.9 6.3 -- 50.2
Cash flows from investing activities:
Purchase of property and equipment, net ........... -- -- (39.3) (1.2) (40.5)
Other ............................................. -- -- 0.3 -- 0.3
------------------------------------------------------------------------
Net cash used in
investing activities ........................ -- -- (39.0) (1.2) -- (40.2)
Cash flows from financing activities:
Decrease in long-term debt, net ................... -- -- (0.1) (0.3) (0.4)
Distributions ..................................... -- -- 6.0 (6.0) --
Increase (decrease) in intercompany balances
with affiliates, net ............................ -- (3.0) 1.8 1.2 --
Increase (decrease) in intercompany balances
with Columbia/HCA, net .......................... -- -- 23.1 -- 23.1
------------------------------------------------------------------------
Net cash provided by (used in)
financing activities ........................ -- (3.0) 30.8 (5.1) -- 22.7
Change in cash and cash equivalents .................. -- -- 32.7 -- -- 32.7
Cash and cash equivalents at beginning of period ..... -- -- -- -- -- --
------------------------------------------------------------------------
Cash and cash equivalents at end of period ........... $ -- $ -- $ 32.7 $ -- $ -- $ 32.7
========================================================================
</TABLE>
NOTE 5 - STOCK BENEFIT PLANS
In connection with the Distribution, the Company adopted the 1998
Long-Term Incentive Plan, for which 5,425,000 shares of the Company's Common
Stock have been reserved for issuance. The 1998 Long-Term Incentive Plan
authorizes the grant of stock
11
<PAGE> 14
options, stock appreciation rights and other stock based awards to officers and
employees of the Company. On the Distribution date, 549,854 stock options were
granted under this plan, relating to pre-existing vested Columbia/HCA options.
These options were granted at various prices and were exercisable on the date
of grant. In June 1999, 2,687,000 stock options were granted under this plan
with an exercise price of the fair market value on the date of grant. These
options are exercisable beginning in part from the date of grant to five years
after the date of grant. All options granted under this plan expire in 10 years
from the date of grant. The Company also granted 340,000 options to
Columbia/HCA executives with an exercise price of the fair market value on the
date of grant. These options were exercisable on the date of grant.
Columbia/HCA paid the Company $1.5 million in exchange for the issuance of
these options.
The Company has also adopted the Executive Stock Purchase Plan, in
which 1,000,000 shares of the Company's Common Stock were reserved and
subsequently issued. The Executive Stock Purchase Plan grants a right to
specified executives of the Company to purchase shares of Common Stock from the
Company. The Company loaned each participant in the plan 100% of the purchase
price of the Company's Common Stock (approximately $10.2 million), on a full
recourse basis. The loans are reflected as a reduction to stockholders' equity
as "Notes receivable for shares sold to employees". In addition, such
executives have been granted options equal to three-quarters of a share for
each share purchased. As of September 30, 1999, options to purchase 750,000
shares had been issued. The exercise price of these stock options is equal to
the purchase price of the shares. The options expire in 10 years and are
exercisable 50% on the date of grant and 50% five years after the Distribution.
In addition, the Company adopted various other plans for which 425,000
shares of the Company's Common Stock have been reserved for issuance. In June
1999, 19,976 options were granted under such plans to non-employee directors.
These options are exercisable beginning in part from the date of grant to three
years after the date of grant and expire 10 years after grant.
In connection with the Distribution, the Company established the
LifePoint Employee Stock Ownership Plan ("ESOP"). The ESOP purchased from the
Company approximately 8.3% of the Company's Common Stock at fair market value
(approximately 2.8 million shares at $11.50 per share). Shares will be
allocated ratably to employee accounts over the next 10 years beginning in
fiscal year 1999. The shares held by the ESOP which have not yet been allocated
to employee accounts are included in shareholders' equity as "Unearned ESOP
compensation". Unearned ESOP shares are released at historical cost upon being
allocated to employee accounts. ESOP expense is recognized using the average
market price of shares committed to be released during the allocation period
with any difference between the average market price and the cost being charged
or credited to capital in excess of par value. As the shares are committed to
be released, the shares become outstanding for earnings per share calculations.
12
<PAGE> 15
LIFEPOINT HOSPITALS HOLDINGS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
UNAUDITED
(Dollars in millions)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------- -------------------
1999 1998 1999 1998
------- ------- ------- -------
<S> <C> <C> <C> <C>
Revenues........................................................... $ 125.4 $ 124.7 $ 387.8 $ 379.1
Salaries and benefits.............................................. 52.2 54.3 165.1 164.0
Supplies........................................................... 15.7 15.7 47.7 46.3
Other operating expenses........................................... 28.6 27.9 87.2 85.8
Provision for doubtful accounts.................................... 10.7 12.0 30.1 31.3
Depreciation and amortization...................................... 7.9 7.4 23.3 20.4
Interest expense................................................... 6.7 4.8 17.4 14.2
Management fees allocated from Columbia/HCA........................ - 2.2 3.2 6.7
ESOP expense....................................................... 1.2 - 1.7 -
Impairment of long-lived assets.................................... - 1.3 - 1.3
------- ------- ------- -------
123.0 125.6 375.7 370.0
------- ------- ------- -------
Income (loss) from continuing operations before minority
interests and income taxes...................................... 2.4 (0.9) 12.1 9.1
Minority interests in earnings of consolidated entities............ 0.4 0.5 1.4 1.4
------- ------- ------- -------
Income (loss) from continuing operations before income taxes....... 2.0 (1.4) 10.7 7.7
Provision (benefit) for income taxes............................... 0.8 (0.6) 4.5 3.1
------- ------- ------- -------
Income (loss) from continuing operations........................... 1.2 (0.8) 6.2 4.6
Loss from discontinued operations, net of tax benefit of ($0.9)
for the three months and ($2.3) for the nine months ended
September 30, 1998.............................................. - (1.4) - (3.7)
------- ------- ------- -------
Net income (loss)............................................... $ 1.2 $ (2.2) $ 6.2 $ 0.9
======= ======= ======= =======
</TABLE>
See accompanying notes.
13
<PAGE> 16
LIFEPOINT HOSPITALS HOLDINGS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
UNAUDITED
(Dollars in millions, except per share amounts)
<TABLE>
<CAPTION>
September 30, December 31,
ASSETS 1999 1998
------ ------------- ------------
<S> <C> <C>
Current assets:
Cash and cash equivalents .............................................. $ 32.7 $ -
Accounts receivable, less allowance for doubtful accounts of $53.4
at September 30, 1999 and $48.3 at December 31, 1998................... 51.9 36.4
Inventories............................................................. 13.8 14.0
Deferred taxes and other current assets ................................ 24.9 18.6
----------- -----------
123.3 69.0
Property and equipment, at cost:
Land.................................................................... 7.2 7.2
Buildings............................................................... 206.2 203.1
Equipment............................................................... 235.1 221.9
Construction in progress (estimated cost to complete and equip
after September 30, 1999 - $ 33.5)..................................... 30.4 10.4
----------- -----------
478.9 442.6
Accumulated depreciation .................................................. (190.7) (176.2)
----------- -----------
288.2 266.4
Intangible assets, net of accumulated amortization of $8.0 at
September 30, 1999 and $6.9 at December 31, 1998 ....................... 23.4 15.2
Other ..................................................................... 4.1 4.4
----------- -----------
$ 439.0 $ 355.0
=========== ===========
LIABILITIES AND EQUITY
----------------------
Current liabilities:
Accounts payable ....................................................... $ 17.6 $ 15.5
Accrued salaries........................................................ 13.3 11.7
Other current liabilities............................................... 28.2 14.6
Current maturities of long-term debt ................................... 2.2 0.3
----------- -----------
61.3 42.1
Intercompany balances payable to Columbia/HCA ............................. - 167.6
Long-term debt ............................................................ 258.0 0.3
Deferred taxes ............................................................ 20.3 21.3
Professional liability risks and other liabilities ........................ 2.6 0.1
Minority interests in equity of consolidated entities ..................... 3.8 4.9
Stockholder's equity:
Common stock, $0.01 par value; 1,000 shares authorized;
999 shares outstanding at September 30, 1999 .......................... - -
Capital in excess of par value.......................................... 92.8 -
Retained earnings....................................................... 0.2 -
Equity, investments by Columbia/HCA .................................... - 118.7
----------- -----------
93.0 118.7
----------- -----------
$ 439.0 $ 355.0
=========== ===========
</TABLE>
See accompanying notes.
14
<PAGE> 17
LIFEPOINT HOSPITALS HOLDINGS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
UNAUDITED
(Dollars in millions)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
--------------------
1999 1998
-------- --------
<S> <C> <C>
Cash flows from continuing operating activities:
Net income............................................ $ 6.2 $ 0.9
Adjustments to reconcile net income to
net cash provided by continuing operating activities:
ESOP expense...................................... 1.7 -
Provision for doubtful accounts................... 30.1 31.3
Depreciation and amortization..................... 23.3 20.4
Deferred income taxes (benefit)................... (7.4) 0.1
Loss from discontinued operations................. - 3.7
Reserve for professional liability risk........... 2.5 -
Increase (decrease) in cash from
operating assets and liabilities:
Accounts receivable............................ (25.8) (30.1)
Inventories and other current assets........... (1.7) (0.5)
Accounts payable and accrued expenses.......... 11.8 0.1
Income taxes payable........................... 10.3 -
Other............................................. (0.8) -
-------- --------
Net cash provided by operating
activities.................................... 50.2 25.9
Cash flows from investing activities:
Purchase of property and equipment, net............... (40.5) (23.6)
Other................................................. 0.3 2.2
-------- --------
Net cash used in investing activities.......... (40.2) (21.4)
Cash flows from financing activities:
Decrease in long-term debt, net....................... (0.4) (1.1)
Increase (decrease) in intercompany balances
with Columbia/HCA, net............................... 23.1 (3.4)
-------- --------
Net cash provided by (used in)
financing activities.......................... 22.7 (4.5)
Change in cash and cash equivalents....................... 32.7 -
Cash and cash equivalents at beginning of period.......... - -
-------- --------
Cash and cash equivalents at end of period................ $ 32.7 $ -
======== ========
Interest payments......................................... $ 10.3 $ 14.2
Income tax payments (refunds), net........................ $ 6.1 $ 0.7
Supplemental financing non-cash activities:
Assumption of debt from Columbia/HCA.................. $ 260.0 $ -
Elimination of intercompany amounts payable
to Columbia/HCA...................................... $ 219.8 $ -
</TABLE>
See accompanying notes.
15
<PAGE> 18
LIFEPOINT HOSPITALS HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1 - BASIS OF PRESENTATION
LifePoint Hospitals Holdings, Inc. ("Holdings" or "the Company") is a
wholly owned subsidiary of LifePoint Hospitals, Inc. ("LifePoint"). LifePoint
has limited independent operations and net assets other than through its
ownership of the Company and indirect ownership of the Company's subsidiaries.
On May 11, 1999, Columbia/HCA Healthcare Corporation ("Columbia/HCA")
completed the spin-off of its operations comprising the America Group to its
shareholders by distributing all outstanding shares of LifePoint (the
"Distribution"). Owners of Columbia/HCA Common Stock received one share of
LifePoint's Common Stock for every 19 shares of Columbia/HCA Common Stock which
resulted in approximately 29.9 million shares of LifePoint's Common Stock
outstanding immediately after the Distribution.
At September 30, 1999, the Company was 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. In connection with the Distribution, all
intercompany amounts payable by the Company to Columbia/HCA were eliminated and
the Company assumed certain indebtedness from Columbia/HCA (see Note 4). In
addition, LifePoint, on behalf of the Company, entered 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.
Information regarding Columbia/HCA included in this report on Form 10-Q is
derived from reports and other information filed by Columbia/HCA with the
Securities and Exchange Commission (the "Commission").
The accompanying unaudited condensed consolidated financial statements
have been prepared in accordance with generally accepted accounting principles
for interim financial information and with the instructions to Form 10-Q and
Article 10 of Regulation S-X. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements. For periods prior to the Distribution, such
financial statements were prepared on the push down basis of historical cost to
Columbia/HCA and represent the combined financial position, results of
operations and cash flows of the net assets contributed to the Company. In the
opinion of management, all adjustments (consisting of normal recurring
adjustments) considered necessary for a fair presentation have been included.
Operating results for the three months and nine months ended September 30, 1999
are not necessarily indicative of the results that may be expected for the year
ending December 31, 1999. This Form 10-Q should be read in conjunction with the
audited combined financial statements and notes included in LifePoint's Form 10
Registration Statement, as amended.
Certain estimates, assumptions and allocations were made in preparing
the unaudited condensed consolidated financial statements included herein.
Therefore such financial statements may not necessarily be indicative of the
results of operations, financial position or cash flows that would have existed
had the Company been a separate, independent company throughout the periods
presented.
Certain prior year amounts have been reclassified to conform to the
current year presentation.
16
<PAGE> 19
On May 11, 1999, Columbia/HCA also completed the spin-off of a
separate, independent company, Triad Hospitals, Inc.
NOTE 2 - CONTINGENCIES
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. Management of the Company understands that Columbia/HCA is
cooperating in these investigations and that Columbia/HCA 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
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 Commission. The Commission investigation includes the
anti-fraud, periodic reporting and internal accounting control provisions of the
federal securities laws. According to published reports, on July 2, 1999, a
federal jury in Tampa, Florida found two Columbia/HCA employees guilty of
conspiracy and making false statements on Medicare and TRICARE cost reports for
the years 1992 and 1993 and on a Medicaid cost report for 1993. Both were found
not guilty of obstructing a federal auditor. One other employee was acquitted on
all counts for which he had been charged and the jury was unable to reach a
verdict with respect to another employee. This employee and the government
executed an agreement to defer prosecution for 18 months after which charges
will be dismissed. The two convicted employees were sentenced in December 1999
and both have appealed to the 11th Circuit.
Columbia/HCA is a defendant in several qui tam actions brought by
private parties on behalf of the United States of America, which have been
unsealed and served on Columbia/HCA. The actions allege, in general, that
Columbia/HCA and certain subsidiaries and/or affiliated partnerships violated
the False Claims Act by submitting improper claims to the government for
reimbursement. The lawsuits seek damages of three times the amount of all
Medicare or Medicaid claims (involving false claims) presented by the defendants
to the federal government, civil penalties of not less than $5,000 nor more than
$10,000 for each such Medicare or Medicaid claim, attorneys' fees and costs. The
government has intervened in six unsealed qui tam actions against Columbia/HCA.
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 litigations 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 in question 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. In
addition, a number of derivative actions have been brought by purported
stockholders of Columbia/HCA against certain current and former officers and
directors of Columbia/HCA alleging breach of fiduciary duty and failure to take
reasonable steps to ensure that Columbia/HCA did not engage in illegal
practices.
Management believes that the ongoing governmental investigations and
related media coverage may have had a negative effect on Columbia/HCA's results
of operations (which include the Company for the periods prior to the date of
the Distribution which are presented herein). The extent to which LifePoint and
the Company 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
17
<PAGE> 20
these matters could have a material adverse effect on the financial condition
or results of operations of LifePoint and the Company in future periods.
In connection with the Distribution, Columbia/HCA has agreed to
indemnify LifePoint and the Company in respect of any losses which it may incur
arising from the proceedings described above. Columbia/HCA has also agreed to
indemnify LifePoint and the Company 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 date of the Distribution and relate to the proceedings
described above. Columbia/HCA has also agreed that, in the event that any
hospital owned by the Company as of the date of the Distribution is permanently
excluded from participation in the Medicare and Medicaid programs as a result of
the proceedings described above, then Columbia/HCA will make cash payments to
LifePoint based on amounts as defined in the Distribution Agreement by and among
Columbia/HCA and LifePoint. LifePoint, on behalf of the Company, has agreed with
Columbia/HCA that, in connection with the pending governmental investigations,
it will negotiate with the government with respect to a compliance agreement
setting forth the Company's agreement to comply with applicable laws and
regulations. If any of such indemnified matters were successfully asserted
against LifePoint or the Company, 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 LifePoint and the Company. Columbia/HCA has not
indemnified LifePoint nor the Company for losses relating to any acts, practices
and omissions engaged in by LifePoint and the Company after the Distribution,
whether or not LifePoint or the Company is indemnified for similar acts,
practices and omissions occurring prior to the date of the Distribution.
General Liability Claims
The Company is subject to claims and suits arising in the ordinary
course of business. In certain of these actions claimants may ask for punitive
damages against the Company, 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 the Company's results of
operations or financial position.
Physician Commitments
The Company 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, the Company 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 $13.5 million at
September 30, 1999. 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 pro rata 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 the Company's results
of operations or financial position.
NOTE 3 - DISCONTINUED OPERATIONS
Discontinued operations represent the Company's home health care
business. The Company implemented plans to dispose of this business during
1997. During the fourth quarter of 1998, the Company completed the sale of
substantially all of the Company's home health care operations for total
proceeds of approximately $3.8 million. The proceeds were used to repay
intercompany balances to Columbia/HCA. Revenues of the home health care
business totaled approximately $18.0 million for the nine months ended
September 30, 1998.
18
<PAGE> 21
NOTE 4 - LONG - TERM DEBT
Assumption of Certain Indebtedness from Columbia/HCA
In connection with the Distribution, all intercompany amounts payable
by the Company to Columbia/HCA were eliminated, and the Company assumed certain
indebtedness from Columbia/HCA. The indebtedness was comprised of a Bank Credit
Agreement and Senior Subordinated Notes.
Bank Credit Agreement
On May 11, 1999, the Company assumed from Columbia/HCA the obligations
under a Bank Credit Agreement (the "Credit Agreement") with a group of lenders
with commitments aggregating $210 million. The Credit Agreement consists of a
$60 million term loan facility, an $85 million term loan facility, and a $65
million revolving credit facility (collectively the "Bank Facilities").
As of September 30, 1999, $25 million of the $60 million term loan
facility was drawn, with the remaining $35 million available for limited
purposes to be drawn in one or two subsequent draws within one year after the
Distribution. The final payment under this term loan facility is due November
11, 2004.
The $85 million term loan facility was drawn in full at the time of
the Distribution. The final payment under this term loan is due November 11,
2005.
The $65 million revolving credit facility is available for working
capital and other general corporate purposes, and any outstanding amounts
thereunder will be due and payable on November 11, 2004. No amounts were
outstanding under this facility as of October 31, 1999.
Repayments under the term loan facilities are due in quarterly
installments with quarterly amortization based on annual amounts. Interest on
the Bank Facilities is currently based on LIBOR plus 3.00% for the revolving
credit facility and the $60 million term loan facility, and LIBOR plus 3.50%
for the $85 million term loan facility. The weighted average interest rate on
the Bank Facilities was approximately 8.8% at September 30, 1999. The Company
also pays a commitment fee equal to 0.5% of the average daily amount available
under the revolving credit facility and on the undrawn portion of the $60
million term loan facility.
The Company's bank debt is guaranteed by its subsidiaries. These
guarantees are secured by a pledge of substantially all of the subsidiaries'
assets. The Credit Agreement requires that the Company comply with various
financial ratios and tests and contains covenants, including but not limited to
restrictions on new indebtedness, the ability to merge or consolidate, asset
sales, capital expenditures and dividends.
Senior Subordinated Notes
On May 11, 1999, the Company assumed from Columbia/HCA $150 million in
Senior Subordinated Notes maturing on May 15, 2009 and bearing interest at
10.75%. In November 1999, in a registered exchange offer the Company issued like
aggregate principle amount of notes in exchange for these notes (the "Notes").
Interest is payable semi-annually. The Notes are unsecured obligations and are
subordinated in right of payment to all existing and future senior indebtedness.
The indenture pursuant to which the Notes were made contains
certain covenants including, but not limited to, restrictions on new
indebtedness, the ability to merge or consolidate, asset sales, capital
expenditures and dividends.
The Notes are guaranteed jointly and severally by all of the Company's
operating subsidiaries ("Subsidiary Guarantors"). The Company is a holding
company with limited operations apart from its ownership of the Subsidiary
Guarantors. The aggregate assets, liabilities, equity and earnings of the
Subsidiary Guarantors are equivalent to the total assets, liabilities, equity
and earnings of the Company and its subsidiaries on a consolidated basis. At
September 30, 1999, substantially all of the Subsidiary Guarantors were
19
<PAGE> 22
wholly-owned and fully and unconditionally guaranteed the Notes. Separate
financial statements of the wholly-owned Subsidiary Guarantors are not
presented because management believes that separate financial statements would
not provide additional material information to investors.
As of September 30, 1999, two of the Subsidiary Guarantors were not
wholly owned and the guarantees of such non-wholly owned entities were limited.
Subsequent to September 30, 1999, the Company acquired ownership of the
remaining interest in one such Subsidiary Guarantor, and the limitations on the
guarantee of such Subsidiary Guarantor, as well as the limitations on the
guarantee of the remaining non-wholly owned Subsidiary Guarantor, were
eliminated. Therefore, subsequent to September 30, 1999, only one of the
Company's subsidiaries, Dodge City Healthcare Group, L.P., was not wholly owned,
although all assets, liabilities, equity and earnings of this entity fully and
unconditionally, jointly and severally guarantee the Notes. The Company owns
approximately 70% of the partnership interests in this mostly owned limited
partnership.
A summarized condensed consolidating balance sheet at September 30,
1999 and condensed consolidating statement of operations and condensed
consolidating statement of cash flows for the nine months ended September 30,
1999 for the Company segregating the parent company, the combined wholly owned
guarantor subsidiaries, the mostly owned guarantor subsidiary and eliminations
are found below. Separate financial statements of the mostly owned guarantor
subsidiary, Dodge City Healthcare Group, L.P., are included elsewhere in this
filing.
LifePoint Hospitals Holdings, Inc.
Condensed Consolidating Statement of Operations
For the Nine Months ended September 30, 1999
(in millions)
<TABLE>
<CAPTION>
Wholly Owned Mostly Owned
Guarantor Guarantor Consolidated
Parent Subsidiaries Subsidiary Eliminations Total
------ ------------ ---------- ------------ -----
<S> <C> <C> <C> <C> <C>
Revenues ......................................... $ -- $363.5 $ 24.3 $ -- $387.8
Salaries and benefits ............................ -- 156.6 8.5 -- 165.1
Supplies ......................................... -- 44.4 3.3 -- 47.7
Other operating expenses ......................... -- 83.7 3.5 -- 87.2
Provision for doubtful accounts .................. -- 28.1 2.0 -- 30.1
Depreciation and amortization .................... -- 22.0 1.3 -- 23.3
Interest expense ................................. 10.5 6.4 0.5 -- 17.4
Management fees .................................. -- 2.7 0.5 -- 3.2
ESOP expense ..................................... -- 1.7 -- -- 1.7
Equity in earnings of affiliates ................. (15.1) -- -- 15.1 --
---------------------------------------------------------------------
(4.6) 345.6 19.6 15.1 375.7
---------------------------------------------------------------------
Income (loss) before minority interests and
income taxes .................................... 4.6 17.9 4.7 (15.1) 12.1
Minority interests in earnings of consolidated
entities ........................................ 1.4 -- -- -- 1.4
---------------------------------------------------------------------
Income (loss) before income taxes ................ 3.2 17.9 4.7 (15.1) 10.7
Provision (benefit) for income taxes ............. (3.0) 7.5 -- -- 4.5
---------------------------------------------------------------------
Net income (loss) ........................... $ 6.2 $ 10.4 $ 4.7 $(15.1) $ 6.2
=====================================================================
</TABLE>
20
<PAGE> 23
LifePoint Hospitals Holdings, Inc.
Condensed Consolidating Balance Sheet
September 30, 1999
(in millions)
<TABLE>
<CAPTION>
Wholly Owned Mostly Owned
Guarantor Guarantor Consolidated
ASSETS Parent Subsidiaries Subsidiary Eliminations Total
------ ------ ------------ ---------- ------------ -----
<S> <C> <C> <C> <C> <C>
Current assets:
Cash and cash equivalents .................. $ - $ 32.7 $ - $ - $ 32.7
Accounts receivable, net ................... - 46.7 5.2 - 51.9
Inventories ................................ - 12.8 1.0 - 13.8
Deferred taxes and other current assets .... - 24.8 0.1 - 24.9
----------------------------------------------------------------------------
- 117.0 6.3 - 123.3
Property and equipment, at cost:
Land ....................................... - 6.9 0.3 - 7.2
Buildings .................................. - 196.7 9.5 - 206.2
Equipment .................................. - 225.0 10.1 - 235.1
Construction in progress ................... - 29.9 0.5 - 30.4
----------------------------------------------------------------------------
- 458.5 20.4 - 478.9
Accumulated depreciation ........................ - (179.9) (10.8) - (190.7)
----------------------------------------------------------------------------
- 278.6 9.6 - 288.2
Net investment in and advances to
subsidiaries ................................... 347.3 - - (347.3) -
Intangible assets, net .......................... 8.7 4.1 10.6 - 23.4
Other ........................................... - 4.1 - - 4.1
----------------------------------------------------------------------------
$ 356.0 $ 403.8 $ 26.5 $ (347.3) $ 439.0
============================================================================
LIABILITIES AND EQUITY
Current liabilities:
Accounts payable ........................... $ - $ 16.9 $ 0.7 $ - $ 17.6
Accrued salaries ........................... - 13.3 - - 13.3
Other current liabilities .................. 6.6 21.4 0.2 28.2
Current maturities of long-term debt ....... 2.0 0.2 - - 2.2
----------------------------------------------------------------------------
8.6 51.8 0.9 - 61.3
Intercompany balances to affiliates ............. (7.4) (5.3) 12.7 -
Long-term debt .................................. 258.0 - - - 258.0
Deferred income taxes ........................... - 20.3 - - 20.3
Professional liability risks and other
liabilities .................................... - 2.6 - - 2.6
Minority interests in equity of consolidated
entities ....................................... 3.8 - - 3.8
Stockholders' equity ............................ 93.0 334.4 12.9 (347.3) 93.0
----------------------------------------------------------------------------
$ 356.0 $ 403.8 $ 26.5 $ (347.3) $ 439.0
============================================================================
</TABLE>
21
<PAGE> 24
LifePoint Hospitals Holdings, Inc.
Condensed Consolidating Statement of Cash Flows
For the Nine Months ended September 30, 1999
(in millions)
<TABLE>
<CAPTION>
Wholly Owned Mostly Owned
Guarantor Guarantor Consolidated
Parent Subsidiaries Subsidiary Eliminations Total
------ ------------ ---------- ------------ -----
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net income ............................................. $ 6.2 $ 10.4 $ 4.7 $ (15.1) $ 6.2
Adjustments to reconcile net income to net
cash provided by operating activities:
ESOP expense ....................................... - 1.7 - 1.7
Equity in earnings of affiliates ................... (15.1) - - 15.1 -
Provision for doubtful accounts .................... - 28.1 2.0 30.1
Depreciation and amortization ...................... - 22.0 1.3 23.3
Amortization of deferred loan costs ................ - - - -
Deferred income taxes (benefit) .................... - (7.4) - (7.4)
Impairment of long-lived assets .................... - - - -
Reserve for professional liability risk ............ - 2.5 - 2.5
Increase (decrease) in cash from operating
assets and liabilities:
Accounts receivable ............................. - (24.4) (1.4) (25.8)
Inventories and other current assets ............ - (1.6) (0.1) (1.7)
Accounts payable and accrued expenses ........... 10.5 1.5 (0.2) 11.8
Income taxes payable ............................ - 10.3 - 10.3
Other .............................................. 1.4 (2.2) - (0.8)
-----------------------------------------------------------------
Net cash provided by operating
activities ..................................... 3.0 40.9 6.3 - 50.2
Cash flows from investing activities:
Purchase of property and equipment, net ................ - (39.3) (1.2) (40.5)
Other .................................................. - 0.3 - 0.3
-----------------------------------------------------------------
Net cash used in investing
activities ..................................... - (39.0) (1.2) - (40.2)
Cash flows from financing activities:
Decrease in long-term debt, net ........................ - (0.1) (0.3) (0.4)
Distributions .......................................... - 6.0 (6.0) -
Increase (decrease) in intercompany balances with
affiliates, net ....................................... (3.0) 1.8 1.2 -
Increase in intercompany balances with
Columbia/HCA, net ..................................... - 23.1 - 23.1
-----------------------------------------------------------------
-
Net cash provided by (used in) financing
activities ..................................... (3.0) 30.8 (5.1) - 22.7
Change in cash and cash equivalents ........................ - 32.7 - - 32.7
Cash and cash equivalents at beginning of period ........... - - - - -
-----------------------------------------------------------------
Cash and cash equivalents at end of period ................. $ - $ 32.7 $ - $ - $ 32.7
=================================================================
</TABLE>
NOTE 5 - PARTICIPATION IN STOCK BENEFIT PLANS
In connection with the Distribution, LifePoint adopted the 1998
Long-Term Incentive Plan, for which 5,425,000 shares of LifePoint's Common
Stock have been reserved for issuance. The 1998 Long-Term Incentive Plan
authorizes the grant of stock
22
<PAGE> 25
options, stock appreciation rights and other stock based awards to officers and
employees of the Company. On the Distribution date, 549,854 stock options were
granted under this plan, relating to pre-existing vested Columbia/HCA options.
These options were granted at various prices and were exercisable on the date of
grant. In June 1999, 2,687,000 stock options were granted under this plan with
an exercise price of the fair market value on the date of grant. These options
are exercisable beginning in part from the date of grant to five years after the
date of grant. All options granted under this plan expire in 10 years from the
date of grant. LifePoint also granted 340,000 options to Columbia/HCA executives
with an exercise price of the fair market value on the date of grant. These
options were exercisable on the date of grant. Columbia/HCA paid the Company
$1.5 million in exchange for the issuance of these options.
LifePoint has also adopted the Executive Stock Purchase Plan, in which
1,000,000 shares of LifePoint's Common Stock were reserved and subsequently
issued. The Executive Stock Purchase Plan grants a right to specified executives
of LifePoint to purchase shares of Common Stock from LifePoint. LifePoint loaned
each participant in the plan 100% of the purchase price of LifePoint's Common
Stock (approximately $10.2 million), on a full recourse basis. The loans are
reflected as a reduction to stockholders' equity as "Notes receivable for shares
sold to employees". In addition, such executives have been granted options equal
to three-quarters of a share for each share purchased. As of September 30, 1999,
options to purchase 750,000 shares had been issued. The exercise price of these
stock options is equal to the purchase price of the shares. The options expire
in 10 years and are exercisable 50% on the date of grant and 50% five years
after the Distribution.
In addition, LifePoint adopted various other plans for which 425,000
shares of LifePoint's Common Stock have been reserved for issuance. In June
1999, 19,976 options were granted under such plans to non-employee directors.
These options are exercisable beginning in part from the date of grant to three
years after the date of grant and expire 10 years after grant.
In connection with the Distribution, LifePoint established the
LifePoint Employee Stock Ownership Plan ("ESOP"). The ESOP purchased from
LifePoint approximately 8.3% of LifePoint's Common Stock at fair market value
(approximately 2.8 million shares at $11.50 per share). Shares will be allocated
ratably to employee accounts over the next 10 years beginning in fiscal year
1999. The shares held by the ESOP which have not yet been allocated to employee
accounts are included in shareholders' equity as "Unearned ESOP compensation".
Unearned ESOP shares are released at historical cost upon being allocated to
employee accounts. ESOP expense is allocated by LifePoint to the Company and is
recognized using the average market price of LifePoint shares committed to be
released during the allocation period.
23
<PAGE> 26
DODGE CITY HEALTHCARE GROUP, L.P.
CONDENSED STATEMENTS OF INCOME
UNAUDITED
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------ ------------------------
1999 1998 1999 1998
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Revenues $ 7,688 $ 8,157 $ 24,302 $ 24,133
Allocation of personnel costs 2,676 2,780 8,471 8,970
Supplies 1,002 857 3,253 2,868
Other operating expenses 1,224 1,395 3,650 3,972
Provision for doubtful accounts 813 861 1,983 1,541
Depreciation and amortization 422 429 1,276 1,214
Interest expense 164 172 461 426
Management fees 153 162 484 480
--------- --------- --------- ---------
6,454 6,656 19,578 19,471
--------- --------- --------- ---------
Net income $ 1,234 $ 1,501 $ 4,724 $ 4,662
========= ========= ========= =========
</TABLE>
See accompanying notes
24
<PAGE> 27
DODGE CITY HEALTHCARE GROUP, L.P.
CONDENSED BALANCE SHEETS
UNAUDITED
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1999 1998
------------- ------------
<S> <C> <C>
ASSETS
Current assets:
Accounts receivable, less allowance for doubtful accounts of $3,150
at September 30, 1999, and $3,185 at December 31, 1998 $ 5,247 $ 4,467
Inventories 982 966
Prepaid expenses and other 89 68
---------- ----------
6,318 5,501
Property and equipment, at cost:
Land 319 319
Buildings and improvements 9,484 9,481
Equipment 10,101 9,551
Construction in progress 553 22
---------- ----------
20,457 19,373
Accumulated depreciation (10,807) (9,838)
---------- ----------
9,650 9,535
Intangible assets, net of accumulated amortization of $1,369
at September 30, 1999, and $1,145 at December 31, 1998 10,578 10,802
---------- ----------
$ 26,546 $ 25,838
========== ==========
LIABILITIES AND PARTNERS' CAPITAL
Current liabilities:
Accounts payable $ 653 $ 791
Accrued expenses 288 336
Current maturities of long-term debt -- 19
---------- ----------
941 1,146
Intercompany balances payable to affiliate 12,713 11,515
Long-term debt -- 301
Partners' capital:
Limited partners (990 units authorized and 890 units issued and
outstanding) 12,750 12,732
General partner (10 units authorized, issued and outstanding) 142 144
---------- ----------
12,892 12,876
---------- ----------
$ 26,546 $ 25,838
========== ==========
</TABLE>
See accompanying notes.
25
<PAGE> 28
DODGE CITY HEALTHCARE GROUP, L.P.
CONDENSED STATEMENTS OF CASH FLOWS
UNAUDITED
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30
-----------------------------
1999 1998
---------- ----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 4,724 $ 4,662
Adjustments to reconcile net income to net
cash provided by operating activities:
Provision for doubtful accounts 1,983 1,541
Depreciation and amortization 1,276 1,214
Increase (decrease) in cash from operating
assets and liabilities:
Accounts receivable (1,446) (3,208)
Inventories, prepaid expenses and other current assets (37) 8
Accounts payable and accrued expenses (186) (408)
---------- ----------
Net cash provided by operating activities 6,314 3,809
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment, net (1,166) (1,523)
---------- ----------
Net cash used in investing activities (1,166) (1,523)
CASH FLOWS FROM FINANCING ACTIVITIES:
Decrease in long-term debt, net (320) (935)
Increase in intercompany balances payable to
affiliate, net 1,198 6,117
Distributions (6,026) (7,468)
---------- ----------
Net cash used in financing activities (5,148) (2,286)
Change in cash $ -- $ --
Cash at beginning of period -- --
---------- ----------
Cash at end of period $ -- $ --
========== ==========
SUPPLEMENTAL INFORMATION:
Interest payments $ 461 $ 426
========== ==========
SUPPLEMENTAL SCHEDULE OF NONCASH TRANSACTIONS:
Contribution from Columbia/HCA $ 1,317 $ --
========== ==========
</TABLE>
See accompanying notes.
26
<PAGE> 29
DODGE CITY HEALTHCARE GROUP, L.P.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1 - ORGANIZATION AND DESCRIPTION OF BUSINESS
Dodge City Healthcare Group, L.P., a Kansas limited partnership (the
"Partnership"), was organized on March 1, 1995. Dodge City Healthcare Partner,
Inc., a Kansas corporation ("DCHP"), is the general partner of the Partnership
with a 1.1% partnership interest. The limited partners of the Partnership are
Western Plains Regional Hospital, LLC, a Delaware limited liability company
("WPRH"), and Dodge City Outpatient Surgical Facility Inc., a Kansas corporation
("DCOSF"), with partnership interests of 68.9% and 30.0%, respectively. DCHP and
WPRH are indirect wholly owned subsidiaries of LifePoint Hospitals, Inc., a
Delaware corporation ("LifePoint"), through its direct wholly owned subsidiary,
LifePoint Hospital Holdings, Inc. ("Holdings").
On May 11, 1999, Columbia/HCA Healthcare Corporation ("Columbia/HCA")
completed the tax-free spin-off of its operations comprising the America Group
by distributing all outstanding shares of LifePoint to its shareholders (the
"Distribution"). As a result, Columbia/HCA's combined 70.0% interest in the
Partnership was transferred to LifePoint and LifePoint assumed the rights as
sole general partner of the Partnership. Information regarding Columbia/HCA
included in this report on Form 10-Q is derived from reports and other
information filed by Columbia/HCA with the Securities and Exchange Commission
(the "Commission").
The Partnership owns and operates Western Plains Regional Hospital, a
110-bed acute care hospital, and an outpatient surgery center which provide
health care services to patients in and around Dodge City, Kansas. The
Partnership receives payment for patient services from the federal government
primarily under the Medicare program, state governments under their respective
Medicaid programs, preferred provider organizations and other private insurers
and directly from patients.
The partnership agreement provides that the Partnership is to
distribute, in quarterly installments to the general and limited partners in
accordance with their respective ownership interests, an amount equal to 90% of
its annual income. The partnership agreement further provides that profits and
losses of the Partnership will be allocated to the partners in accordance with
their respective ownership interests.
As further defined in the partnership agreement, the general partner
is obligated to manage and supervise the Partnership business and affairs. The
Partnership shall be dissolved on December 31, 2050, unless sooner dissolved by
law or pursuant to the partnership agreement or unless extended by amendment to
the partnership agreement.
The accompanying unaudited condensed financial statements have been
prepared in accordance with generally accepted accounting principles for
interim financial information and with the instructions to Form 10-Q and
Article 10 of Regulation S-X. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements. In the opinion of Partnership management,
all adjustments (consisting of normal recurring adjustments) considered
necessary for a fair presentation have been included. Operating results for the
three months and nine months ended September 30, 1999 are not necessarily
indicative of the results that may be expected for the year ending December 31,
1999.
27
<PAGE> 30
Certain estimates, assumptions and allocations were made in preparing
the unaudited condensed financial statements included herein. Therefore, such
financial statements may not necessarily be indicative of the results of
operations, financial position or cash flows that would have existed had the
Partnership been a separate, independent company throughout the periods
presented.
Certain prior year amounts have been reclassified to conform to the
current year presentation.
NOTE 2 - INCOME TAXES
The Partnership is not an income tax paying entity. No provision is
made in the accounts of the Partnership since such taxes are liabilities of the
individual partners of the Partnership, and the amounts thereof depend on their
respective tax situations.
The Partnership's tax returns and the amounts of distributable
Partnership income or loss are subject to examination by the federal and state
taxing authorities. In the event of an examination of the Partnership's tax
return, the tax liability of the partners could be changed if any adjustment to
the Partnership taxable income or loss is ultimately sustained by the taxing
authorities.
NOTE 3 - TRANSACTIONS WITH AFFILIATE
INTERCOMPANY BALANCES PAYABLE TO AFFILIATE
Intercompany balances payable to affiliate represent the net excess of
funds transferred to or paid on behalf of the Partnership over funds
transferred to the centralized cash management account of LifePoint
post-Distribution and Columbia/HCA pre-Distribution. Generally, this balance is
increased by partnership distributions and disbursements made by LifePoint on
behalf of the Partnership for operating expenses and to pay the Partnership's
debt, completed construction project additions, fees and services provided by
LifePoint, including information systems services and other operating expenses,
such as personnel costs, interest and insurance. Generally, the balance is
decreased through daily cash deposits by the Partnership to the account. Prior
to the Distribution, the Partnership was charged interest on the outstanding
intercompany balance at each month end at various rates ranging from 6% to 10%.
For periods after the Distribution, the Partnership is being charged interest
at prime rates which approximated 8.25% at September 30, 1999. In the opinion
of LifePoint management, the interest rate charged has been at prevailing
market rates. Interest expense under this arrangement is included in the
Statements of Income.
MANAGEMENT FEES
In accordance with the terms of the partnership agreement, the general
partner receives a monthly management fee based upon the Partnership's net
patient revenues. The management fee charged to the Partnership is not
necessarily indicative of the actual costs which may have been incurred had the
Partnership operated as an entity unaffiliated with LifePoint post-Distribution
or Columbia/HCA pre-Distribution; however, in the opinion of the Partnership
management, the management fee charged is reasonable.
PERSONNEL COSTS
To facilitate payroll administration, all personnel assigned to
perform duties for the Partnership are employed by a LifePoint affiliate
post-Distribution and a Columbia/HCA affiliate pre-Distribution. The
Partnership
28
<PAGE> 31
reimburses the affiliate for the direct costs (i.e., salaries and related
benefits) associated with such personnel. Such reimbursements are recorded as
"Allocation of Personnel Costs" in the accompanying Statements of Income.
RETIREMENT PLANS
Personnel assigned to the Partnership subsequent to the Distribution
participate in LifePoint's employee stock ownership plan ("ESOP"). Under the
ESOP, shares of LifePoint Common Stock will be allocated ratably to
participants over the next ten years, beginning in fiscal year 1999. ESOP
expense is allocated to the Partnership based upon the average market price of
shares committed to be released during the allocation period.
Personnel assigned to the Partnership during the nine months ended
September 30, 1998 participated in Columbia/HCA's defined contribution
retirement plans which covered substantially all personnel assigned to the
Partnership. The Partnership reimbursed a Columbia/HCA affiliate for personnel
costs, including contributions to the plan. Benefits were determined primarily
as a percentage of a participant's earned income.
COST REPORT LIABILITIES
Pursuant to the terms of the distribution agreement between LifePoint
and Columbia/HCA, LifePoint and its subsidiaries, including the Partnership,
are responsible for the Medicare, Medicaid and Blue Cross cost reports, and
associated receivables and payables, for all periods ending after May 11, 1999.
Columbia/HCA agreed to indemnify LifePoint and its subsidiaries, including the
Partnership, with respect to cost reports relating to periods ending on or
prior to the Distribution. Net settlement liabilities of approximately
$1,317,000 recorded by the Partnership as of May 11, 1999 were deemed to be
assumed by Columbia/HCA and, accordingly, recorded as a contribution from
Columbia/HCA to the capital of the Partnership.
PROFESSIONAL AND GENERAL LIABILITY RISKS
The cost of professional and general liability coverage is allocated to
the Partnership by LifePoint post-Distribution, and by Columbia/HCA
pre-Distribution, based on actuarially determined estimates. The actuarially
determined estimate of cost allocated to the Partnership by LifePoint is
discounted to its present value using a rate of 6%. LifePoint, as well as
Columbia/HCA, maintains reserves for professional and general liability risks.
Accordingly, no reserve for liability risks is recorded on the accompanying
balance sheets. Columbia/HCA assumed the liability for all professional and
general liability claims incurred prior to the Distribution.
Personnel assigned to the Partnership participate in a self-insured
program for health insurance administered by LifePoint post-Distribution and by
Columbia/HCA pre-Distribution. Cost for health insurance is allocated to the
Partnership based upon claims paid and an estimate of claims incurred but not
reported. LifePoint, as well as Columbia/HCA, maintains reserves for incurred
but not reported health claims. Accordingly, no reserve for incurred but not
reported health claims is recorded on the accompanying balance sheets.
Columbia/HCA assumed the liability for all health claims incurred prior to the
Distribution.
29
<PAGE> 32
NOTE 4 - GUARANTEE OF LONG-TERM DEBT
On May 11, 1999, LifePoint assumed from Columbia/HCA $150 million in
Senior Subordinated Notes maturing on May 15, 2009. In November 1999, in a
registered exchange offer, LifePoint issued a like aggregate principal amount
of notes in exchange for these notes (the "Notes"). The Notes are unsecured
obligations and are subordinated in right of payment to all existing and future
senior indebtedness. The Notes are guaranteed jointly, severally and
unconditionally by all of LifePoint's operating subsidiaries including the
Partnership.
On May 11, 1999, LifePoint also assumed from Columbia/HCA the
obligations under a Bank Credit Agreement (the "Credit Agreement") with a group
of lenders with commitments aggregating $210 million. The Credit Agreement
consists of a $60 million term loan facility, an $85 million term loan
facility, and a $65 million revolving credit facility (collectively the "Bank
Facilities").
As of September 30, 1999, $25 million of the $60 million term loan
facility was drawn, with the remaining $35 million available for limited
purposes to be drawn by May 11, 2000. The final payment under this term loan
facility is due November 11, 2004.
The $85 million term loan facility was drawn in full at the time of
the Distribution. The final payment under this term loan is due November 11,
2005.
The $65 million revolving credit facility is available for working
capital and other general corporate purposes, and any outstanding amounts
thereunder will be due and payable on November 11, 2004. No amounts were
outstanding under this facility as of September 30, 1999.
LifePoint's obligations under the Bank Facilities are guaranteed by
its subsidiaries including the Partnership.
The subsidiary guarantees of the Notes and the Bank Facilities are
secured by a pledge of substantially all of the subsidiaries' assets including
all of the assets of the Partnership.
NOTE 5 - CONTINGENCIES
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. Management of the Partnership understands that Columbia/HCA
is cooperating in these investigations and that Columbia/HCA 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 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 Commission. The Commission investigation includes
the anti-fraud, periodic reporting and internal accounting control provisions of
the federal securities laws. According to published reports, on July 2, 1999, a
federal jury in Tampa, Florida found two Columbia/HCA employees guilty of
conspiracy and making false statements on Medicare and TRICARE cost reports for
the years 1992 and 1993 and on a Medicaid cost report for 1993. Both were found
not guilty of obstructing a federal auditor. One other employee was acquitted on
all counts for which he had been charged and the jury was unable to reach a
verdict with respect to another employee. This employee and the government
executed an agreement to defer prosecution for 18 months after which charges
will be dismissed. The two convicted employees were sentenced in December 1999
and both have appealed to the 11th Circuit.
30
<PAGE> 33
Columbia/HCA is a defendant in several qui tam actions brought by
private parties on behalf of the United States of America, which have been
unsealed and served on Columbia/HCA. The actions allege, in general, that
Columbia/HCA and certain subsidiaries and/or affiliated partnerships violated
the False Claims Act by submitting improper claims to the government for
reimbursement. The lawsuits seek damages of three times the amount of all
Medicare or Medicaid claims (involving false claims) presented by the defendants
to the federal government, civil penalties of not less than $5,000 nor more than
$10,000 for each such Medicare or Medicaid claim, attorneys' fees and costs. The
government has intervened in six unsealed qui tam actions against Columbia/HCA.
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 litigations 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 in question in the qui tam and other
actions are substantial, and Columbia/HCA could be subject to substantial costs
resulting from an adverse outcome of one or more of such actions. In addition, a
number of derivative actions have been brought by purported stockholders of
Columbia/HCA against certain current and former officers and directors of
Columbia/HCA alleging breach of fiduciary duty and failure to take reasonable
steps to ensure that Columbia/HCA did not engage in illegal practices.
Management believes that the ongoing governmental investigations and
related media coverage may have had a negative effect on Columbia/HCA's results
of operations (which include LifePoint for the periods prior to the date of the
Distribution which are presented herein). The extent to which LifePoint may or
may not continue to be affected after the Distribution by the ongoing
investigations of Columbia/HCA, the initiation of additional investigations, if
any, and the related media coverage cannot be predicted. It is possible that
these matters could have a material adverse effect on the financial condition
or results of operations of LifePoint in future periods.
In connection with the Distribution, Columbia/HCA has agreed to
indemnify LifePoint and its subsidiaries, including the Partnership, in respect
of any losses which it may incur arising from 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 date of the Distribution
and relate to the proceedings described above. Columbia/HCA has also agreed
that, in the event that any hospital owned by LifePoint, including Western
Plains Regional Hospital, as of the date of the Distribution is permanently
excluded from participation in the Medicare and Medicaid programs as a result
of the proceedings described above, then Columbia/HCA will make cash payments
to LifePoint based on amounts as defined in the Distribution Agreement by and
among Columbia/HCA and LifePoint. LifePoint has agreed with Columbia/HCA that,
in connection with the pending governmental investigations, it will negotiate
with the government with respect to a compliance agreement setting forth
LifePoint's agreement to comply with applicable laws and regulations. If any of
such indemnified matters were successfully asserted against LifePoint, or any
of its facilities, including the Partnership, and Columbia/HCA failed to meet
its
31
<PAGE> 34
indemnification obligations, then such losses could have a material adverse
effect on the business, financial position, results of operations or prospects
of LifePoint and the Partnership. Columbia/HCA has not indemnified LifePoint or
the Partnership for losses relating to any acts, practices and omissions engaged
in by LifePoint or the Partnership after the Distribution, whether or not
LifePoint or the Partnership is indemnified for similar acts, practices and
omissions occurring prior to the date of the Distribution.
GENERAL LIABILITY CLAIMS
The Partnership is subject to claims and suits arising in the ordinary
course of business. The Partnership is currently not a party to any proceeding
which, in the opinion of management, would have a material adverse effect on the
Partnership's business, financial condition or results of operations.
OTHER
Final determination of amounts earned under prospective payment and
cost-reimbursement activities is subject to review by appropriate governmental
authorities or their agents.
32
<PAGE> 35
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This discussion should be read in conjunction with the unaudited
Condensed Consolidated Financial Statements included herein.
A discussion and analysis of financial condition and results of
operations of LifePoint Hospitals Holdings, Inc. ("Holdings") has not been
provided as management believes that this information would not enhance the
quality of the information provided nor enhance an assessment of the financial
condition and results of operations of LifePoint's business as a whole.
LifePoint has limited independent operations and net assets other than through
its ownership of Holdings and indirect ownership of Holdings' subsidiaries. For
more information regarding Holdings, please see the related financial statements
and accompanying notes appearing elsewhere herein.
Overview
On May 11, 1999, Columbia/HCA Healthcare Corporation ("Columbia/HCA")
completed the spin-off of its operations comprising the America Group to its
shareholders (the "Distribution") as an independent, publicly-traded company
named LifePoint Hospitals, Inc. (hereinafter referred to as "LifePoint
Hospitals, Inc." or the "Company"). Owners of Columbia/HCA Common Stock
received one share of the Company's Common Stock for every 19 shares of
Columbia/HCA Common Stock which resulted in approximately 29.9 million shares
of the Company's Common Stock outstanding immediately after the Distribution.
At September 30, 1999, the Company was 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. In connection with the Distribution,
all intercompany amounts payable by the Company to Columbia/HCA were eliminated
and the Company assumed certain indebtedness from Columbia/HCA (see Note 4 of
the Notes to the Condensed Consolidated Financial Statements). In addition, the
Company entered 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. Information regarding Columbia/HCA
included in this Report on Form 10-Q is derived from reports and other
information filed by Columbia/HCA with the Securities and Exchange Commission.
Forward-Looking Statements
This Management's Discussion and Analysis of Financial Condition and
Results of Operations contains disclosures, which are forward-looking
statements. Forward-looking statements include all statements that do not
relate solely to historical or current facts, and can be identified by the use
of words such as "may", "believe", "will", "expect", "project", "estimate",
"anticipate", "plan" or "continue". These forward-looking statements are based
on the current plans and expectations of the Company and are subject to a
number of uncertainties and risks that could significantly affect current plans
and expectations and the Company's future financial condition and results.
These factors include, but are not limited to, (i) the 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 ability to attract and retain qualified
management and personnel, including physicians, (vii) liabilities and other
claims asserted against the Company, (viii) fluctuations in the market value of
the Company's 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,
the Company and relevant third parties in achieving Year 2000 readiness, and
(xii) other risk factors. As a consequence, current plans, anticipated actions
and future financial condition and results may differ from those expressed in
any forward- looking statements made by or on behalf of the Company. You are
cautioned not to unduly rely on such forward-looking statements when evaluating
the information presented in this "Management's Discussion and Analysis of
Financial Condition and Results of Operations".
33
<PAGE> 36
Results of Operations
Revenue/Volume Trends
The Company has experienced an increase in revenues and volume growth
for the nine months ended September 30, 1999 compared to the prior year.
However, the Company's revenues per equivalent admission decreased for the nine
months ended September 30, 1999 compared to the prior year. Management believes
the decline in revenue per equivalent admission is primarily attributable to
the impact of reductions in Medicare payments mandated by the federal Balanced
Budget Act of 1997 (the "Balanced Budget Act"), the increasing percentage of
patient volume related to patients participating in managed care plans and the
continuing trend toward the conversion of more services to an outpatient basis.
The Company's revenues continue to be affected by an increasing
proportion of revenue being derived from fixed payment, higher discount
sources, including Medicare, Medicaid and managed care plans. In addition,
insurance companies, government programs (other than Medicare) and employers
purchasing health care services for their employees are also negotiating
discounted amounts that they will pay health care providers rather than paying
standard prices. The Company expects patient volumes from Medicare and Medicaid
to continue to increase due to the general aging of the population and the
expansion of state Medicaid programs. However, under the Balanced Budget Act,
the Company's reimbursement from the Medicare and Medicaid programs was reduced
in 1998 and for the nine months ended September 30, 1999 and will be further
reduced as some reductions in reimbursement levels are phased in over the next
two to three years. The Company 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 prospective
payment amounts regardless of the cost incurred, revenues, earnings and cash
flows are being reduced. Admissions related to Medicare, Medicaid and managed
care plan patients were 89.3% and 87.5% of total admissions for the nine months
ended September 30, 1999 and 1998, respectively. Revenues from capitation
arrangements (prepaid health service agreements) are less than 1.0% of
revenues.
The Company's revenues also continue to be adversely affected by the
trend toward certain services being performed more frequently on an outpatient
basis. Generally, the payments received for an outpatient procedure are less
than for a similar procedure performed in an inpatient setting. The Company
anticipates that further payment reductions may occur as a result of the
implementation of a prospective payment system for Medicare outpatient services
(pursuant to the Balanced Budget Act and scheduled for implementation in
mid-year 2000). 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.
Management also believes that the impact of the ongoing governmental
investigations of certain of Columbia/HCA's business practices and the related
media coverage have created uncertainties with physicians, patients and payers
in certain markets.
Reductions in Medicare and Medicaid reimbursement, the increasing
percentage of the patient volume being related to patients participating in
managed care plans and continuing trends toward more services being performed
on an outpatient basis are expected to present ongoing challenges. The
challenges presented by these trends are magnified by the Company's inability
to control these trends and the associated risks. To maintain and improve its
operating margins in future periods, the Company must increase patient volumes
while controlling the costs of providing services. If the Company is not able
to achieve these improvements and the trend toward declining reimbursements and
payments continues, results of operations and cash flow will deteriorate.
34
<PAGE> 37
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.
As part of Columbia/HCA, the Company's facilities were included in
managed care contracts negotiated by Columbia/HCA on a market-wide basis
emphasizing large urban facilities. The Company's management believes that
independence from Columbia/HCA will help the Company over time to negotiate
contract terms that are generally more favorable for its facilities.
35
<PAGE> 38
Operating Results Summary
The following is a summary of results from continuing operations for
the three months and nine months ended September 30, 1999 and 1998 (dollars in
millions):
<TABLE>
<CAPTION>
Three Months ended September 30,
1999 1998
---- ----
Amount Ratio Amount Ratio
------ ----- ------ -----
<S> <C> <C> <C> <C>
Revenues.............................. $125.4 100.0% $124.7 100.0%
Salaries & benefits................... 52.2 41.7 54.3 43.6
Supplies.............................. 15.7 12.5 15.7 12.6
Other operating expenses.............. 28.8 23.0 27.9 22.4
Provision for doubtful accounts....... 10.7 8.5 12.0 9.6
Depreciation & amortization........... 7.9 6.4 7.4 5.8
Interest expense...................... 6.7 5.3 4.8 3.8
Management fees allocated from
Columbia/HCA......................... - - 2.2 1.8
ESOP expense.......................... 1.2 0.9 - -
Impairment of long-lived assets....... - - 1.3 1.1
----- ----- ----- -----
123.2 98.3 125.6 100.7
Income (loss) from continuing
operations before minority
interests and income taxes........... 2.2 1.7 (0.9) (0.7)
Minority interests in earnings of
consolidated entities................ 0.4 0.3 0.5 0.4
---- ----- ----- ----
Income(loss)from continuing
operations before income taxes....... 1.8 1.4 (1.4) (1.1)
Provision (benefit) for income
taxes................................ 0.7 0.6 (0.6) (0.4)
----- ----- ----- -----
Income (loss) from continuing
operations........................... $1.1 0.8 $(0.8) (0.7)
===== ===== ===== =====
% changes from prior year:
Revenues.............................. 0.6%
Income(loss)from continuing
operations before income taxes....... 232.8
Income(loss)from continuing
operations........................... 228.2
Admissions (a)........................ 1.3
Equivalent admissions (b)............. 3.1
Revenues per equivalent admission..... (2.4)
</TABLE>
36
<PAGE> 39
<TABLE>
<CAPTION>
Nine Months ended September 30,
1999 1998
---- ----
Amount Ratio Amount Ratio
------ ----- ------ -----
<S> <C> <C> <C> <C>
Revenues............................. $387.8 100.0% $379.1 100.0%
Salaries & benefits.................. 165.1 42.6 164.0 43.3
Supplies............................. 47.7 12.3 46.3 12.2
Other operating expenses............. 87.4 22.5 85.8 22.7
Provision for doubtful accounts...... 30.1 7.8 31.3 8.2
Depreciation & amortization.......... 23.3 6.0 20.4 5.3
Interest expense..................... 17.4 4.5 14.2 3.7
Management fees allocated from
Columbia/HCA........................ 3.2 0.8 6.7 1.8
ESOP expense......................... 1.7 0.4 - -
Impairment of long-lived assets...... - - 1.3 0.4
----- ----- ----- -----
375.9 96.9 370.0 97.6
Income from continuing operations
before minority interests
and income taxes.................... 11.9 3.1 9.1 2.4
Minority interests in earnings of
consolidated entities............... 1.4 0.4 1.4 0.4
----- ----- ---- -----
Income from continuing operations
before income taxes................. 10.5 2.7 7.7 2.0
Provision for income taxes........... 4.4 1.1 3.1 0.8
----- ----- ----- -----
Income from continuing operations.... $ 6.1 1.6 $ 4.6 1.2
===== ===== ===== =====
% changes from prior year:
Revenues............................. 2.3%
Income from continuing operations
before income taxes................. 35.9
Income from continuing operations.... 31.4
Admissions (a)....................... 3.8
Equivalent admissions (b)............ 4.4
Revenues per equivalent admission.... (2.0)
</TABLE>
(a) Represents the total number of patients admitted (in the facility for
a period in excess of 23 hours) to the Company's hospitals and is used
by management and certain investors as a general measure of inpatient
volume.
(b) Equivalent admissions are used by management and certain investors as
a general measure of combined inpatient and outpatient volume.
Equivalent admissions are computed by multiplying admissions
(inpatient volume) by the sum of gross inpatient revenue and gross
outpatient revenue and then dividing the resulting amount by gross
inpatient revenue. The equivalent admissions computation "equates"
outpatient revenue to the volume measure (admissions) used to measure
inpatient volume resulting in a general measure of combined inpatient
and outpatient volume.
For the Three Months Ended September 30, 1999 and 1998
Revenues increased 0.6% to $125.4 million for the three months ended
September 30, 1999 compared to $124.7 million for the three months ended
September 30, 1998
37
<PAGE> 40
primarily as a result of increases in volumes. Inpatient admissions increased
1.3%, equivalent admissions (adjusted to reflect combined inpatient and
outpatient volume) increased 3.1% and revenues per equivalent admission
decreased 2.4% for the three months ended September 30, 1999 compared to the
three months ended September 30, 1998. The decline in revenues per equivalent
admission was primarily due to decreases in Medicare reimbursement rates
mandated by the Balanced Budget Act which became effective October 1, 1997
(such rates lowered revenues by approximately $1.7 million for the three months
ended September 30, 1999 compared to the three months ended September 30,
1998), and continued increases in discounts from the growing number of managed
care payers (managed care as a percentage of total admissions increased to
20.8% for the three months ended September 30, 1999 compared to 18.5% for the
three months ended September 30, 1998). In addition, favorable cost report
adjustments of $0.3 million were recorded during the three months ended
September 30, 1999 compared to $1.0 million recorded during the three months
ended September 30, 1998.
Salaries and benefits, as a percentage of revenues, decreased to 41.7%
for the three months ended September 30, 1999 from 43.6% for the three months
ended September 30, 1998. The decrease was primarily due to improvements in
labor productivity (man-hours per equivalent admission decreased 9.0% over the
same period in the prior year).
Supply costs decreased slightly to 12.5% as a percentage of revenues
for the three months ended September 30, 1999 from 12.6% for the three months
ended September 30, 1998.
Other operating expenses increased as a percentage of revenues to
23.0% for the three months ended September 30, 1999 from 22.4% for the three
months ended September 30, 1998. Other operating expenses consist primarily of
contract services, physician recruitment, professional fees, repairs and
maintenance, rents and leases, utilities, insurance, marketing and non-income
taxes. The increase was primarily due to an increase in physician recruitment
costs and operating expenses related to the establishment of the Company's
corporate office.
Provision for doubtful accounts, as a percentage of revenues,
decreased to 8.5% for the three months ended September 30, 1999 from 9.6% for
the three months ended September 30, 1998 primarily due to the Company's focus
on collections of accounts receivable. In addition, in fiscal year 1998, a
majority of the Company's facilities were undergoing computer information
system conversions (including patient accounting) which hampered the business
office billing functions. As a result, accounts were not billed timely and the
Company's allowance for bad debt increased.
Depreciation and amortization expense increased to $7.9 million for
the three months ended September 30, 1999 from $7.4 million for the three
months ended September 30, 1998 primarily due to increased capital expenditures
related to computer information system conversions. The majority of the
Company's facilities began depreciating the systems in the fourth quarter of
fiscal 1998.
Interest expense increased to $6.7 million for the three months ended
September 30, 1999 from $4.8 million for the three months ended September 30,
1998. This increase is primarily due to the interest expense incurred on the
debt obligations assumed from Columbia/HCA as discussed in Note 4 of the Notes
to the Condensed Consolidated Financial Statements. For the three months ended
September 30, 1998, interest expense was primarily represented by interest
incurred on the net intercompany balance with Columbia/HCA. However, upon the
Distribution, the intercompany amounts payable by the Company to Columbia/HCA
were eliminated.
38
<PAGE> 41
As of the Distribution, Columbia/HCA stopped allocating management
fees to the Company; therefore, there were no management fees allocated by
Columbia/HCA for the three months ended September 30, 1999. For the three
months ended September 30, 1998, Columbia/HCA allocated $2.2 million of
management fees to the Company. The management fee allocation represented
allocations, using revenues as the allocation basis, of the corporate, general
and administrative expenses of Columbia/HCA. The elimination of management fee
allocations by Columbia/HCA were offset by increases in salaries and benefits,
supplies and other operating costs related to the establishment and operation
of the Company's corporate office.
ESOP expense of $1.2 million relates to the newly established ESOP
discussed in Note 5 of the Notes to the Condensed Consolidated Financial
Statements.
For the three months ended September 30, 1998, the Company recorded an
impairment loss of approximately $1.3 million related to the write-off of
intangibles and other long-lived assets of certain physician practices where
the recorded asset values were not deemed to be fully recoverable based upon
the operating results trends and projected future cash flows. These assets
being held and used are now recorded at estimated fair value based upon
discounted, estimated future cash flows.
Minority interests decreased slightly as a percentage of revenues to
0.3% for the three months ended September 30, 1999 from 0.4% for the three
months ended September 30, 1998.
Income from continuing operations before income taxes increased to
$1.8 million for the three months ended September 30, 1999 compared to a loss
of $1.4 million for the three months ended September 30, 1998 primarily as a
result of the decreases in certain expenses as described above.
Net income increased to $1.1 million for the three months ended
September 30, 1999 compared to a loss of $2.2 million for the three months
ended September 30, 1998. For the three months ended September 30, 1998, the
Company incurred a $1.4 million after-tax loss from its discontinued home
health operations, primarily due to declines in Medicare rates of reimbursement
under the Balanced Budget Act and declines in home health visits.
For the Nine Months Ended September 30, 1999 and 1998
Revenues increased 2.3% to $387.8 million for the nine months ended
September 30, 1999 compared to $379.1 million for the nine months ended
September 30, 1998 primarily as a result of increases in volumes. Inpatient
admissions increased 3.8% and equivalent admissions (adjusted to reflect
combined inpatient and outpatient volume) increased 4.4% for the nine months
ended September 30, 1999 compared to the nine months ended September 30, 1998.
Revenues per equivalent admission decreased 2.0% for the nine months ended
September 30, 1999 compared to prior year. The decline in 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 revenues by approximately $5.1
million for the nine months ended September 30, 1999 compared to the prior
year), and continued increases in discounts from the growing number of managed
care payers (managed care as a percentage of total admissions increased to
19.9% for the nine months ended September 30, 1999 compared to 18.6% for the
nine months ended September 30, 1998). In addition, favorable cost report
adjustments of $0.7 million were recorded during the nine months ended
September 30, 1999 compared to $2.3 million recorded during the nine months
ended September 30, 1998.
Salaries and benefits decreased as a percentage of revenues to 42.6%
for the nine months ended September 30, 1999 from 43.3% for the nine months
ended September 30, 1998 primarily due to improvements in labor productivity
(man-hours per equivalent admission decreased 10.1% over the same period in the
prior year).
Supply costs increased slightly to 12.3% as a percentage of revenues
for the nine months ended September 30, 1999 from 12.2% for the nine months
ended September 30, 1998.
39
<PAGE> 42
Other operating expenses decreased as a percentage of revenues to
22.5% for the nine months ended September 30, 1999 from 22.7% for the nine
months ended September 30, 1998. Other operating expenses consist primarily of
contract services, physician recruitment, professional fees, repairs and
maintenance, rents and leases, utilities, insurance, marketing and non-income
taxes. The decrease was primarily due to decreases in professional fees and
contract services.
Provision for doubtful accounts, as a percentage of revenues,
decreased to 7.8% for the nine months ended September 30, 1999 from 8.2% for
the nine months ended September 30, 1998 primarily due to the Company's focus
on collections of accounts receivable. In addition, in fiscal year 1998, a
majority of the Company's facilities were undergoing computer information
system conversions (including patient accounting) which hampered the business
office billing functions. As a result, accounts were not billed timely and the
Company's allowance for bad debt increased.
Depreciation and amortization expense increased to $23.3 million for
the nine months ended September 30, 1999 from $20.4 million for the nine months
ended September 30, 1998 primarily due to increased capital expenditures
related to computer information system conversions. The majority of the
Company's facilities began depreciating the systems in the fourth quarter of
fiscal 1998.
Interest expense increased to $17.4 million for the nine months ended
September 30, 1999 from $14.2 million for the nine months ended September 30,
1998. This increase is primarily due to the interest expense incurred on the
debt obligations assumed from Columbia/HCA as discussed in Note 4 of the Notes
to the Condensed Consolidated Financial Statements. For the nine months ended
September 30, 1998, interest expense was primarily represented by interest
incurred on the net intercompany balance with Columbia/HCA. However, upon the
Distribution, the intercompany amounts payable by the Company to Columbia/HCA
were eliminated.
Management fees allocated by Columbia/HCA were $3.2 million for the
nine months ended September 30, 1999 and $6.7 million for the nine months ended
September 30, 1998. The management fee allocation represented allocations,
using revenues as the allocation basis, of the corporate, general and
administrative expenses of Columbia/HCA. However, as of the Distribution,
Columbia/HCA stopped allocating management fees to the Company. The elimination
of management fee allocations by Columbia/HCA were offset by increases in
salaries and benefits, supplies and other operating costs related to the
establishment and operation of the Company's corporate office.
ESOP expense of $1.7 million relates to the newly established ESOP
discussed in Note 5 of the Notes to the Condensed Consolidated Financial
Statements.
For the nine months ended September 30, 1998, the Company recorded an
impairment loss of approximately $1.3 million related to the write-off of
intangibles and other long-lived assets of certain physician practices where
the recorded asset values were not deemed to be fully recoverable based upon
the operating results trends and projected future cash flows. These assets
being held and used are now recorded at estimated fair value based upon
discounted, estimated future cash flows.
Minority interests remained unchanged as a percentage of revenues at
0.4% compared to the prior year.
Income from continuing operations before income taxes increased 35.9%
to $10.5 million for the nine months ended September 30, 1999 from $7.7 million
for the nine months ended September 30, 1998 primarily due to decreases in
certain expenses as described above.
Net income increased to $6.1 million for the nine months ended
September 30, 1999 compared to $0.9 million for the nine months ended September
30, 1998. For the nine months ended September 30, 1998, the Company incurred a
$3.7 million after-tax loss from its discontinued home health operations,
primarily due to declines in Medicare rates of reimbursement under the Balanced
Budget Act and declines in home health visits.
40
<PAGE> 43
Liquidity and Capital Resources
Prior to the Distribution, the Company had relied upon Columbia/HCA
for liquidity and sources of capital to supplement any needs not met by
operations. As an independent, publicly traded company, the Company has direct
access to the capital markets and the ability to enter into its own bank
borrowing arrangements. At September 30, 1999, the Company had working capital
of $62.0 million compared to $26.9 million at December 31, 1998. The increase
in working capital was primarily due to a $32.7 million increase in cash from
December 31, 1998 resulting from net cash collections since the Distribution.
In addition, accounts receivable increased approximately $15.5 million
primarily as a result of Columbia/HCA's agreement to indemnify the Company with
respect to Medicare, Medicaid, and cost-based Blue Cross receivables and
payables relating to cost reporting periods ending on or prior to the
Distribution. The increase in working capital was partially offset by increases
in accrued interest and income taxes payable as a result of the Distribution.
Cash provided by operating activities was $50.2 million for the nine
months ended September 30, 1999 compared to $25.9 million for the nine months
ended September 30, 1998. This increase was primarily attributable to increases
in accrued interest and income taxes payable since the Distribution for the
nine months ended September 30, 1998.
Cash used in investing activities was $40.2 million for the nine
months ended September 30, 1999 compared to $21.4 million for the nine months
ended September 30, 1998. The increase was primarily due to capital
expenditures of $40.5 million during the nine months ended September 30, 1999
compared to $23.6 million for the nine months ended September 30, 1998. At
September 30, 1999, there were projects under construction which had an
estimated cost to complete and equip over the next six months of approximately
$33.5 million (including construction costs of a replacement hospital located
in Florida with an estimated project cost of approximately $33.0 million of
which $17.1 million has been spent as of September 30, 1999). Management
believes that its capital expenditure program is adequate to expand, improve
and equip the Company's existing health care facilities.
Cash provided by financing activities was $22.7 million for the nine
months ended September 30, 1999 compared to cash used in financing activities
of $4.5 million for the nine months ended September 30, 1998. The increase was
primarily due to changes in the intercompany amounts payable by the Company to
Columbia/HCA prior to the Distribution.
Management does not consider the sale of any assets to be necessary to
repay the Company's indebtedness or to provide working capital. However, for
other reasons, certain of the Company's hospitals may be sold in the future
from time to time. Three of the Company's hospitals are currently held for
sale. Although the Company'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 and for the next several years.
The Company does not expect to pay dividends on its Common Stock in
the foreseeable future.
Long-Term Debt
Assumption of Certain Indebtedness from Columbia/HCA
In connection with the Distribution, all intercompany amounts payable
by the Company to Columbia/HCA were eliminated, and the Company assumed certain
indebtedness from Columbia/HCA. The indebtedness was comprised of a Bank Credit
Agreement and Senior Subordinated Notes.
41
<PAGE> 44
Bank Credit Agreement
On May 11, 1999, the Company assumed from Columbia/HCA the obligations
under a Bank Credit Agreement (the "Credit Agreement") with a group of lenders
with commitments aggregating $210 million. The Credit Agreement consists of a
$60 million term loan facility, an $85 million term loan facility, and a $65
million revolving credit facility (collectively the "Bank Facilities").
As of September 30, 1999, $25 million of the $60 million term loan
facility was drawn, with the remaining $35 million available for limited
purposes to be drawn in one or two subsequent draws within one year after the
Distribution. The final payment under this term loan facility is due November
11, 2004.
The $85 million term loan facility was drawn in full at the time of
the Distribution. The final payment under this term loan is due November 11,
2005.
The $65 million revolving credit facility is expected to be available
for working capital and other general corporate purposes, and any outstanding
amounts thereunder will be due and payable on November 11, 2004. No amounts
were outstanding under this facility as of October 31, 1999.
Repayments under the term loan facilities are due in quarterly
installments with quarterly amortization based on annual amounts. Interest on
the Bank Facilities is currently based on LIBOR plus 3.00% for the revolving
credit facility and the $60 million term loan facility, and LIBOR plus 3.50%
for the $85 million term loan facility. The weighted average interest rate on
the Bank Facilities was approximately 8.8% at September 30, 1999. The Company
also pays a commitment fee equal to 0.5% of the average daily amount available
under the revolving credit facility and on the undrawn portion of the $60
million term loan facility.
The Company's bank debt is guaranteed by its subsidiaries. These
guarantees are secured by a pledge of substantially all of the subsidiaries'
assets. The Credit Agreement requires that the Company comply with various
financial ratios and tests and contains covenants, including but not limited to
restrictions on new indebtedness, the ability to merge or consolidate, asset
sales, capital expenditures and dividends.
Senior Subordinated Notes
On May 11, 1999, the Company assumed from Columbia/HCA $150 million in
Senior Subordinated Notes maturing on May 15, 2009 and bearing interest at
10.75%. In November 1999, in a registered exchange offer, the Company issued a
like aggregate principal amount of notes in exchange for these notes (the
"Notes"). Interest is payable semi-annually. The Notes are unsecured obligations
and are subordinated in right of payment to all existing and future senior
indebtedness.
The indenture pursuant to which the Notes were made contains certain
covenants including, but not limited to, restrictions on new indebtedness, the
ability to merge or consolidate, asset sales, capital expenditures and
dividends.
Contingencies
Columbia/HCA is currently the subject of several federal investigations
into certain of its business practices, as well as governmental investigations
by various states. Management of LifePoint understands that Columbia/HCA is
cooperating in these investigations and that Columbia/HCA 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
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 Commission. The Commission investigation includes the
anti-fraud, insider trading, periodic reporting and internal accounting control
provisions of the federal securities laws. According to
42
<PAGE> 45
published reports, on July 2, 1999, a federal jury in Tampa, Florida found two
Columbia/HCA employees guilty of conspiracy and making false statements on
Medicare and TRICARE cost reports for the years 1992 and 1993 and on the
Medicaid cost report for 1993. Both were found not guilty of obstructing a
federal auditor. One other employee was acquitted on all counts for which he
had been charged and the jury was unable to reach a verdict with respect to
another employee. This employee and the government executed an agreement to
defer prosecution for 18 months after which charges will be dismissed. The two
convicted employees were sentenced in December 1999 and both have appealed to
the 11th Circuit.
Columbia/HCA is a defendant in several qui tam actions brought by
private parties on behalf of the United States of America, which have been
unsealed and served on Columbia/HCA. The actions allege, in general, that
Columbia/HCA and certain subsidiaries and/or affiliated partnerships violated
the False Claims Act by submitting improper claims to the government for
reimbursement. The lawsuits generally seek damages of three times the amount of
all Medicare or Medicaid claims (involving false claims) presented by the
defendants to the federal government, civil penalties of not less than $5,000
nor more than $10,000 for each such Medicare or Medicaid claim, attorneys' fees
and costs. The government has intervened in six unsealed qui tam actions against
Columbia/HCA. 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 litigations 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 are substantial, and Columbia/HCA could be subject to substantial
costs resulting from an adverse outcome of one or more of such actions. In
addition, a number of derivative actions have been brought by purported
stockholders of Columbia/HCA against certain current and former officers and
directors of Columbia/HCA alleging breach of fiduciary duty and failure to take
reasonable steps to ensure that Columbia/HCA did not engage in illegal
practices.
Management believes that the ongoing governmental investigations and
related media coverage may have had a negative effect on Columbia/HCA's results
of operations (which includes the Company for the periods prior to the date of
Distribution, which are presented herein). The extent to which the Company 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 the Company in future periods.
In connection with the Distribution, Columbia/HCA has agreed to
indemnify the Company in respect of any losses, which it may incur arising from
the proceedings described above. Columbia/HCA has also agreed to indemnify the
Company 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
date of the Distribution and relate to the proceedings described above.
Columbia/HCA has also agreed that, in the event that any hospital owned by the
Company as of the date of the Distribution is permanently excluded from
participation in the Medicare and Medicaid programs as a result of the
proceedings described above, then Columbia/HCA will make cash payments to the
Company based on amounts as defined in the Distribution Agreement by and among
Columbia/HCA and the Company. The Company has agreed with Columbia/HCA that, in
connection with the pending governmental investigations, it will negotiate with
the government with respect to a compliance agreement setting forth the
Company's agreement to comply with applicable laws and regulations. If any of
such indemnified matters were successfully asserted
43
<PAGE> 46
against the Company, 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 the Company. Columbia/HCA has not indemnified the Company for losses relating
to any acts, practices and omissions engaged in by the Company after the
Distribution, whether or not the Company is indemnified for similar acts,
practices and omissions occurring prior to the date of the Distribution.
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 systems and equipment on which the Company 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 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 that could result
in a disruption of business operations or equipment and medical device
malfunctions that could affect patient diagnosis and treatment.
In connection with the Distribution, Columbia/HCA's wholly owned
subsidiary, Columbia Information Services, Inc. ("CIS") and the Company entered
into a Computer and Data Processing Services Agreement, pursuant to which the
Company obtains most of its information technology and information technology
infrastructure systems. CIS does not warrant that the software and hardware
used by CIS in providing services to the Company 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 the Company under the Computer and Data Processing
Services Agreement. In connection with its participation in Columbia/HCA's Year
2000 project, the Company 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.
Pursuant to the Computer and Data Processing Services Agreement, the
Company will rely on CIS to provide virtually all of its computer support and
information technology services. In connection with the Distribution,
Columbia/HCA's wholly owned subsidiary CHCA Management Services, L.P. ("CHCA")
and the Company entered into a Year 2000 Professional Services Agreement,
pursuant to which CHCA will continue to provide the services of the CHCA Year
2000 program to the Company. References to "Columbia/HCA" with respect to the
Year 2000 project and the Year 2000 services refer to Columbia HCA/Healthcare
Corporation and its affiliates, principally CHCA. The Company 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, and results of operations or
prospects of the Company.
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 the Company rely, are not accurately or timely
completed. The Company's management consults regularly with the Columbia/HCA
personnel responsible for development of such contingency plans. The Company,
in conjunction with Columbia/HCA, has developed a contingency planning
methodology and will implement contingency plans throughout 1999.
44
<PAGE> 47
Information Technology Systems
With respect to the information technology ("IT") systems 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 were addressed
on separate time lines. Columbia/HCA has completed remediating these software
applications. 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. Remediation, testing and implementation of various
software applications for certain of the Company's subsidiaries will be
completed in the fourth quarter of 1999 and should not have a material effect
on the Company's readiness. The IT systems portion of Columbia/HCA's Year 2000
project is currently on schedule.
The Company, in participation with 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) with respect to Year 2000
compliance. Columbia/HCA has implemented a program to contact vendors, analyze
information provided, and to remediate, replace or otherwise address IT
products that pose a material Year 2000 impact and expects to complete, in all
material respects, the IT infrastructure portion of the program during the
fourth quarter of 1999. This is a revised date from September 30, 1999 due to
changes in vendor product status.
The Company's management presently believes that with modifications to
existing software or the installation of upgraded software under the IT
infrastructure portion, the Year 2000 will not pose material operational
problems for the Company's 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 the Company.
Non-Information Technology Systems and Equipment
With respect to the non-IT infrastructure project, the Company, in
participation with 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. The Company, in
participation with Columbia/HCA, has implemented a program to contact vendors,
analyze information provided, and to remediate, replace or otherwise address
devices or equipment that pose a material Year 2000 impact. The Company
anticipates completion, in all material respects, of the non-IT infrastructure
portion of its program in the fourth quarter of 1999. This is a revised date
from September 30, 1999 due to changes in vendor product status.
The Company is prioritizing its non-IT infrastructure efforts by
focusing on equipment and medical devices that will have a direct impact on
patient care. The Company 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. The Company is relying on
information that is being provided to it by equipment and medical device
manufacturers and Columbia/HCA regarding the Year 2000 status of their
products. While the Company is attempting to evaluate information provided by
its previous and current vendors, there can be no assurance that in all
instances accurate information is being provided. The Company also cannot in
all instances guarantee that the repair, replacement or upgrade of all non-IT
infrastructure systems will occur on a timely basis or that such repairs,
replacements or upgrades will avoid all Year 2000 problems.
Third-Party Payers and Intermediaries, and Suppliers
Columbia/HCA and the Company have initiated communications with the
Company's major third party payers and intermediaries, including government
payers and intermediaries. The Company relies on these entities for accurate
and
45
<PAGE> 48
timely reimbursement of claims, often through the use of electronic data
interfaces. Neither the Company nor Columbia/HCA received assurances that these
interfaces will be converted in a timely manner. Because certain payers have
refused or are not ready to test with the Company's systems, testing with
payers and intermediaries will continue through the end of the year. Failure of
these third party systems could have a material adverse effect on the Company's
cash flow and results of operations.
Columbia/HCA and the Company have also initiated communications with
the Company'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. The Company has not received assurances from all mission critical
suppliers and vendors that they will be able to continue to deliver goods and
services through the Year 2000, but the Company is continuing its efforts to
obtain such assurances. Failure of these third parties could have a material
impact on operations and/or the ability of the Company to provide health care
services.
With the assistance of external resources, including Columbia/HCA, the
Company 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 the Company rely, are not accurately or timely completed. The
Company has developed a contingency planning methodology and will implement
contingency plans throughout 1999.
Year 2000 Risks/Contingency Planning
While the Company is developing contingency plans to address possible
failure scenarios, the Company recognizes that there are "worst case" scenarios
which may develop and are largely outside the Company's or Columbia/HCA's
control. The Company recognizes the risks associated with extended
infrastructure (e.g., power, water and telecommunications) failure, the
interruption of insurance and other payments to the Company and the failure of
equipment or software that could impact patient safety or health despite the
assurances of third parties. The Company is addressing these and other failure
scenarios in its contingency planning effort and is engaging third parties in
discussions regarding how to manage common failure scenarios, but neither
Columbia/HCA nor the Company can currently estimate the likelihood or the
potential cost of such failures. Contingency plans have been developed for
mission-critical and high impact patient care and business operations. The
contingency plans developed by the facilities include those in the following
areas: medical equipment, suppliers and service providers, utilities,
information technology and services, facility and physical plant equipment and
business office operations. Currently the Company does not believe that any
reasonably likely worst case scenario will have a material impact on the
Company's revenues or operations. Those reasonably likely worst case scenarios
include continued expenditures for remediation, continued expenditures for
replacement or upgrade of equipment, continued efforts regarding contingency
planning, increased staffing for the periods immediately preceding and after
January 1, and payment delays from the Company's payers.
The Company believes that if (i) any material phase or aspect of its
Year 2000 project is not completed successfully and timely, (ii) certain
mission critical suppliers and vendors (particularly medical surgical suppliers
and utilities) are not able to deliver goods or services after December 31,
1999, or (iii) its contingency plans do not anticipate and effectively address
actually experienced Year 2000 related problems or do not effectively address
unanticipated Year 2000 related problems, then the Company's results of
operations and financial condition, as well as its day-to-day business
operations and its ability to provide health care services (potentially
including patient diagnosis and treatment), could be materially adversely
affected.
Costs and Expenses
The Year 2000 project is currently estimated to have a minimum total
cost of $2.3 million, of which the Company has incurred $0.5 million of
expenses in the first nine months of 1999. The Company currently estimates the
cost to be incurred for the remediation, upgrade and replacement of its
impacted non-IT infrastructure systems, and equipment to be approximately $1.5
million, which is included in the above estimated minimum total cost of $2.3
million. These estimates do not include the costs of executing any contingency
plans or potential litigation claims resulting from any Year 2000 failure.
The majority of the costs related to the Year 2000 project (except the
cost of new equipment) will be expensed as incurred and are expected to be
funded through operating cash flows.
The costs 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
46
<PAGE> 49
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.
Inflation
The health care industry is labor intensive. Wages and other expenses
increase during periods of inflation and when shortages in marketplaces occur.
In addition, suppliers pass along rising costs to the Company in the form of
higher prices. The Company's ability to pass on these increased costs is
limited due to increasing regulatory and competitive pressures, as discussed
above.
Health Care Reform
In recent years, an increasing number of legislative proposals have
been introduced or proposed to Congress and in some state legislatures that
would significantly affect health care systems in the Company's markets. The
cost of certain proposals would be funded in significant part by reduction in
payments by government programs, including Medicare and Medicaid, to health
care providers or taxes levied on hospitals or other providers. While the
Company is unable to predict which, if any, proposals for health care reform
will be adopted; there can be no assurance that proposals adverse to the
business of the Company will not be adopted.
47
<PAGE> 50
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS - (CONTINUED)
Operating Data
<TABLE>
<CAPTION>
1999 1998
------ -------
<S> <C> <C>
Number of hospitals in operations at
March 31................................. 23 23
June 30.................................. 23 23
September 30............................. 23 23
December 31.............................. 23
Licensed hospitals beds at (a):
March 31................................. 2,169 2,136
June 30.................................. 2,169 2,113
September 30............................. 2,169 2,112
December 31.............................. 2,169
Weighted average licensed beds (b):
Quarter:
First.................................... 2,169 2,136
Second................................... 2,169 2,128
Third.................................... 2,169 2,113
Fourth................................... 2,131
Year......................................... 2,127
Average daily census (c):
Quarter:
First.................................... 863 853
Second................................... 714 695
Third.................................... 668 699
Fourth................................... 725
Year......................................... 742
Admissions (d):
Quarter:
First.................................... 18,051 16,842
Second................................... 15,335 14,940
Third.................................... 15,018 14,832
Fourth................................... 15,655
Year......................................... 62,269
Equivalent Admissions (e):
Quarter:
First.................................... 30,741 28,412
Second................................... 27,651 27,175
Third.................................... 27,767 26,920
Fourth................................... 27,522
Year......................................... 110,029
Average length of stay (days) (f):
Quarter:
First.................................... 4.3 4.6
Second................................... 4.2 4.2
Third.................................... 4.1 4.3
Fourth................................... 4.3
Year......................................... 4.4
</TABLE>
48
<PAGE> 51
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS - (CONTINUED)
Operating Data (Continued)
- ---------
(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 average number of patients in the company's hospital
beds each day.
(d) Represents the total number of patients admitted (in the facility for
a period in excess of 23 hours) to the Company's hospitals and is used
by management and certain investors as a general measure of inpatient
volume.
(e) Equivalent admissions 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.
(f) Represents the average number of days admitted patients stay in the
Company'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.
49
<PAGE> 52
Part II. Other Information
Item 5: Other Information
(a) Unaudited Pro Forma Financial Statements as of and for the three
months and nine months ended September 30, 1999
The following Unaudited Pro Forma Condensed Consolidated Financial
Statements of the Company are based on the historical consolidated financial
statements, which reflect periods during which the businesses that comprise the
Company did not operate as a separate, independent company and certain
estimates, assumptions and allocations were made in preparing such financial
statements. Therefore, such historical consolidated financial statements do not
necessarily reflect the consolidated results of operations or financial
position that would have existed had the Company been a separate, independent
company throughout the periods presented.
The Unaudited Pro Forma Condensed Consolidated Statements of Income for
the three months and nine months ended September 30, 1999 reflect the results
of the Company's operations as if the Distribution and the divestitures of
certain facilities that the Company intends to divest had occurred at the
beginning of 1999. The Unaudited Pro Forma Condensed Consolidated Balance Sheet
assumes that the Distribution and such divestitures had occurred on September
30, 1999.
The Unaudited Pro Forma Condensed Consolidated Financial Statements should
be read in conjunction with the historical financial statements of the Company
included elsewhere herein and the notes thereto. The pro forma condensed
consolidated financial information is presented for informational purposes only
and does not purport to reflect the results of operations or financial position
of the Company or the results of operations or financial position that would
have occurred had the Company been operated as a separate, independent company.
50
<PAGE> 53
LIFEPOINT HOSPITALS, INC.
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF INCOME
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1999
(Dollars in millions, except per share amounts)
<TABLE>
<CAPTION>
Pro Forma
Historical Adjustments Pro Forma
---------- ----------- ----------
<S> <C> <C> <C>
Revenues ..................................................... $ 125.4 $ (9.4)(a) $ 116.0
Salaries and benefits ........................................ 52.2 (4.5)(a) 47.7
Supplies ..................................................... 15.7 (1.4)(a) 14.3
Other operating expenses ..................................... 28.8 (2.8)(a) 26.0
Provision for doubtful accounts .............................. 10.7 (1.5)(a) 9.2
Depreciation and amortization ................................ 7.9 (0.8)(a) 7.1
Interest expense ............................................. 6.7 -- 6.7
ESOP expense ................................................. 1.2 -- 1.2
---------- ---------- ----------
123.2 (11.0) 112.2
---------- ---------- ----------
Income from continuing operations before minority
interests and income taxes ................................ 2.2 1.6 3.8
Minority interests in earnings of consolidated
entities .................................................. 0.4 -- 0.4
---------- ---------- ----------
Income from continuing operations before income
taxes ..................................................... 1.8 1.6 3.4
Provision for income taxes ................................... 0.7 0.7 (e) 1.4
---------- ---------- ----------
Income from continuing operations ............................ $ 1.1 $ 0.9 $ 2.0
========== ========== ==========
Basic and diluted earnings per share ......................... $ 0.03 $ 0.04 $ 0.07
========== ========== ==========
Shares used in earnings per share calculations (000s):
Basic ..................................................... 30,951 30,951 30,951
Dilutive securities - stock options .................. 63 63 63
---------- ---------- ----------
Diluted ................................................... 31,014 31,014 31,014
========== ========== ==========
</TABLE>
See accompanying notes.
51
<PAGE> 54
LIFEPOINT HOSPITALS, INC.
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF INCOME
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999
(Dollars in millions, except per share amounts)
<TABLE>
<CAPTION>
Pro Forma
Historical Adjustments Pro Forma
---------- ----------- ---------
<S> <C> <C> <C>
Revenues ................................................................. $ 387.8 $ (33.5)(a) $ 354.3
Salaries and benefits .................................................... 165.1 (15.7)(a) 147.6
0.9 (c)
(2.7)(b)
Supplies ................................................................. 47.7 (4.7)(a) 43.1
0.1 (c)
Other operating expenses ................................................. 87.4 (8.6)(a) 80.1
1.3 (c)
Provision for doubtful accounts .......................................... 30.1 (4.3)(a) 25.8
Depreciation and amortization ............................................ 23.3 (2.6)(a) 20.7
Interest expense ......................................................... 17.4 2.6 (d) 20.0
Management fees allocated from Columbia/HCA .............................. 3.2 (3.2)(c) --
ESOP expense ............................................................. 1.7 1.0 (b) 2.7
------- ------- -------
375.9 (35.9) 340.0
------- ------- -------
Income from continuing operations before minority
interests and income taxes ............................................ 11.9 2.4 14.3
Minority interests in earnings of consolidated
entities .............................................................. 1.4 -- 1.4
------- ------- -------
Income from continuing operations before income
taxes ................................................................. 10.5 2.4 12.9
Provision for income taxes ............................................... 4.4 1.0 (e) 5.4
------- ------- -------
Income from continuing operations ........................................ $ 6.1 $ 1.4 $ 7.5
======= ======= =======
Basic and diluted earnings per share ..................................... $ 0.20 $ 0.05 $ 0.25
======= ======= =======
Shares used in earnings per share calculations (000s):
Basic ................................................................. 30,349 30,349 30,349
Dilutive securities - stock options .............................. 194 194 194
------- ------- -------
Diluted ............................................................... 30,543 30,543 30,543
======= ======= =======
</TABLE>
See accompanying notes.
52
<PAGE> 55
LIFEPOINT HOSPITALS, INC.
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
SEPTEMBER 30, 1999
(Dollars in millions, except per share amounts)
<TABLE>
<CAPTION>
Pro Forma
ASSETS Historical Adjustments Pro Forma
------ ---------- ----------- ---------
<S> <C> <C> <C>
Current assets:
Cash and cash equivalents.......................... $ 32.7 $ - $ 32.7
Accounts receivable, net........................... 51.9 (6.4)(a) 45.5
Inventories........................................ 13.8 (1.9)(a) 11.9
Deferred taxes and other current assets............ 24.9 (1.4)(a) 23.5
------- ------ -------
123.3 (9.7) 113.6
Property and equipment, at cost...................... 478.9 (30.9)(a) 448.0
Accumulated depreciation............................. (190.7) 13.3 (a) (177.4)
------- ------ -------
288.2 (17.6) 270.6
Intangible assets, net............................... 23.4 (0.4)(a) 23.0
Other................................................ 4.1 (4.1)(a) -
------- ------ -------
$ 439.0 $(31.8) $ 407.2
======= ====== =======
LIABILITIES AND EQUITY
----------------------
Current liabilities:
Accounts payable................................... $ 17.6 $ (1.3)(a) $ 16.3
Accrued salaries................................... 13.3 (0.8)(a) 12.5
Other current liabilities.......................... 28.2 (0.8)(a) 27.4
Current maturities of long-term debt............... 2.2 - 2.2
------- ------ -------
61.3 (2.9) 58.4
Long-term debt....................................... 258.0 - 258.0
Deferred taxes....................................... 20.3 6.3 (a) 26.6
Professional liability risks and other liabilities... 2.6 - 2.6
Minority interests in equity of
consolidated entities............................... 3.8 - 3.8
Stockholders' equity:
Preferred stock, $0.01 par value; 10,000,000 shares
authorized; no shares issued....................... - - -
Common stock, $0.01 par value; 90,000,000 shares
authorized; 31,066,289 shares outstanding at
September 30, 1999................................. 0.3 - 0.3
Capital in excess of par value...................... 133.1 (37.8)(a) 95.3
Unearned ESOP compensation.......................... (30.3) - (30.3)
Notes receivable for shares sold to employees....... (10.2) - (10.2)
Retained earnings................................... 0.1 2.6 (a) 2.7
------- ------ -------
93.0 (35.2) 57.8
------- ------ -------
$ 439.0 $(31.8) $ 407.2
======= ====== =======
</TABLE>
See accompanying notes.
53
<PAGE> 56
Notes to Unaudited Pro Forma Condensed Consolidated Financial Statements
(a) To eliminate the assets and liabilities as of September 30, 1999 and
results of operations for the three months and nine months ended
September 30, 1999 for three facilities which are currently held for
sale by the Company.
(b) To adjust historical retirement plan expense recorded as a component
of salaries and wages and record the estimated LifePoint Hospitals,
Inc. Retirement Plan (the "ESOP") expense for the nine months ended
September 30, 1999. See Note 5 in the Notes to Condensed Consolidated
Financial Statements.
(c) To adjust for the estimated general and administrative costs that
would have been incurred if the Company had managed comparable general
and administrative functions and to eliminate the management fees
allocated from Columbia/HCA for the nine months ended September 30,
1999.
(d) To adjust interest expense to $20.0 million for the nine months ended
September 30, 1999. The interest expense adjustment is based on the
elimination of all intercompany amounts payable by the Company to
Columbia/HCA and the assumption of certain indebtedness from
Columbia/HCA at an assumed average interest rate of approximately 9.9%
and $0.5 million in amortization of the deferred loan cost. The
historical balance sheet as of September 30, 1999 already reflects the
elimination and assumption of these debt amounts since the transaction
occurred on May 11, 1999.
(e) To adjust income tax provision for the estimated impact of the pro
forma adjustments.
54
<PAGE> 57
Item 6: Exhibits and Reports on Form 8-K
(a) List of Exhibits:
<TABLE>
<CAPTION>
Exhibit Number Description
- -------------- -----------
<S> <C>
3.1 Certificate of Incorporation of LifePoint Hospitals,
Incorporated by reference from LifePoint Hospitals' Quarterly
Report on Form 10-Q for the quarter ended March 31, 1999.
3.2 Bylaws of LifePoint Hospitals. Incorporated by reference from
LifePoint Hospitals' Quarterly Report on Form 10-Q for the
quarter ended March 31, 1999.
3.3 Certificate of Incorporation of LifePoint Holdings.
Incorporated by reference from LifePoint Holdings' Annual
Report on Form 10-K for the year ended December 31, 1999.
3.4 Bylaws of LifePoint Holdings. Incorporated by reference from
LifePoint Holdings' Annual Report on Form 10-K for the year
ended December 31, 1999.
27.1 Financial Data Schedule for LifePoint Hospitals (for SEC use
only).
27.2 Financial Data Schedule for LifePoint Holdings (for SEC use
only).
</TABLE>
(b) Reports on Form 8-K filed during the quarter ended September 30, 1999:
None.
55
<PAGE> 58
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
LifePoint Hospitals, Inc.
Date: March 31, 2000 /s/ Kenneth C. Donahey
-------------------------------------
Kenneth C. Donahey
Senior Vice President & Chief
Financial Officer
LifePoint Hospitals Holdings, Inc.
Date: March 31, 2000 /s/ Kenneth C. Donahey
-------------------------------------
Kenneth C. Donahey
Senior Vice President &
Chief Financial Officer
56
<PAGE> 59
Exhibit Index
<TABLE>
<CAPTION>
Exhibit Number Description
- -------------- -----------
<S> <C>
3.1 Certificate of Incorporation of LifePoint Hospitals.
Incorporated by reference from LifePoint Hospitals' Quarterly
Report on Form 10-Q for the quarter ended March 31, 1999.
3.2 Bylaws of LifePoint Hospitals. Incorporated by reference from
LifePoint Hospitals' Quarterly Report on Form 10-Q for the
quarter ended March 31, 1999.
3.3 Certificate of Incorporation of LifePoint Holdings.
Incorporated by reference from LifePoint Holdings' Annual
Report on Form 10-K for the year ended December 31, 1999.
3.4 Bylaws of LifePoint Holdings. Incorporated by reference from
LifePoint Holdings' Annual Report on Form 10-K for the year
ended December 31, 1999.
27.1 Financial Data Schedule for LifePoint Hospitals (for SEC use
only).
27.2 Financial Data Schedule for LifePoint Holdings (for SEC use
only).
</TABLE>
57
<PAGE> 60
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------------
FORM 10-K
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ________ TO ________
COMMISSION FILE NUMBER 0-29818
---------------------
LIFEPOINT HOSPITALS, INC.
(Exact Name of Registrant as Specified in its Charter)
---------------------
<TABLE>
<S> <C>
DELAWARE 52-2165845
(State or Other Jurisdiction of Incorporation or (I.R.S. Employer Identification No.)
Organization)
103 POWELL COURT, SUITE 200 37027
BRENTWOOD, TENNESSEE (Zip Code)
(Address of Principal Executive Offices)
</TABLE>
Registrant's Telephone Number, Including Area Code: (615) 372-8500
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
<TABLE>
<CAPTION>
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
------------------- -----------------------------------------
<S> <C>
Common Stock, par value $.01 per share The Nasdaq National Market System
Preferred Stock Purchase Rights The Nasdaq National Market System
</TABLE>
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE> 61
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
COMMISSION FILE NUMBER 333-84755
---------------------
LIFEPOINT HOSPITALS HOLDINGS, INC.
(Exact Name of Registrant as Specified in its Charter)
---------------------
<TABLE>
<S> <C>
DELAWARE 52-2167869
(State or Other Jurisdiction of Incorporation or (I.R.S. Employer Identification No.)
Organization)
103 POWELL COURT, SUITE 200 37027
BRENTWOOD, TENNESSEE (Zip Code)
(Address of Principal Executive Offices)
</TABLE>
Registrant's Telephone Number, Including Area Code: (615) 372-8500
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant:(1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
The aggregate market value of the shares of Common Stock (based upon the
closing sale price of these shares on March 17, 2000) of LifePoint Hospitals,
Inc. held by non-affiliates on March 17, 2000, was approximately $378,056,672.
As of March 17, 2000, the number of outstanding shares of Common Stock of
LifePoint Hospitals, Inc. was 33,704,040, and all of the shares of Common Stock
of LifePoint Hospitals Holdings, Inc. were owned by LifePoint Hospitals, Inc.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of LifePoint's definitive Proxy Statement for its Annual Meeting
of Stockholders to be held on May 11, 2000 are incorporated by reference into
Part III hereof.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE> 62
PART I
ITEM 1. BUSINESS
GENERAL
LifePoint Hospitals, Inc. ("LifePoint" or the "Company") owns and operates
general, acute care hospitals located in non-urban areas. As of December 31,
1999, LifePoint operated 23 hospitals. According to industry sources, the
average population in the Company's markets is approximately 27,000, and is
expected to grow on average in excess of 5% between 1998 and 2003, compared to
the expected national growth rate of 4% over the same period. In all but one of
its 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.
Three hospitals were held for sale on December 31, 1999. On January 31, 2000,
LifePoint sold Trinity Hospital located in Erin, Tennessee, one of the three
hospitals held for sale.
LifePoint is a successor to the America Group, a division created by
Columbia/HCA Healthcare Corporation ("Columbia/HCA") in November 1997 to operate
general, acute care hospitals located in non-urban areas. Columbia/HCA
established the America Group as an independent, publicly-traded company by
distributing all outstanding shares of LifePoint Common Stock to the
stockholders of Columbia/HCA on May 11, 1999 (the "Distribution"). In connection
with the Distribution, Healthtrust, Inc.-The Hospital Company, a wholly owned
subsidiary of Columbia/HCA, transferred all of the assets comprising the America
Group to LifePoint and LifePoint transferred such assets to LifePoint Hospitals
Holdings, Inc., a wholly owned subsidiary of LifePoint ("Holdings").
Columbia/HCA no longer owns any shares of LifePoint Common Stock.
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. Management believes that the smaller populations and relative
significance of the one or two acute care hospitals in these markets also
discourage the entry of alternate non-hospital providers, such as outpatient
surgery centers or rehabilitation or diagnostic imaging centers, as well as
managed care plans. There is generally a lower level of managed care payer
penetration, that is, the relative proportion of the market population enrolled
in managed care programs such as HMOs and PPOs, in LifePoint's markets than
there is in urban markets. In addition, LifePoint believes that non-urban
communities generally view the local hospital as a key part of the local
community.
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 encouraged by 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 are committed to the local delivery of health care and that
have greater access to capital and management resources which can be employed to
serve the community.
2
<PAGE> 63
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
manages its facilities so that they operate in accordance with the strategies
described below:
- Develop Facility-Specific Strategies for Non-Urban Markets. LifePoint
has developed facility-specific strategies tailored for its non-urban
markets. These strategies are intended to improve the quality and breadth
of health care services, to provide an outstanding workplace for its
employees, to recognize and expand the hospitals' roles as community
assets and to improve financial performance. By contrast, during
Columbia/HCA's ownership, LifePoint's hospitals were included in
integrated facility networks with large urban facilities as the primary
providers of specialty services.
- Expand Breadth of Service and Reduce Patient Outmigration. LifePoint
strives 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. LifePoint has undertaken projects in the
majority 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 community focus encourages local
residents in the non-urban markets that LifePoint serves 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 86 physicians in 1999. LifePoint
believes that these recruiting successes are largely attributable to its
spin-off as an independent company and the community-based focus of its
management team. LifePoint's physician recruitment program is currently
focused primarily on recruiting additional specialty care physicians.
LifePoint's management is focused on working 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 its hospitals is an important
element in enhancing medical staff relations and maintaining continuity
of relationships within the community. LifePoint has focused 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. During Columbia/HCA's ownership, managers and health care
professionals employed at LifePoint hospitals sometimes relocated to
advance their careers elsewhere within the Columbia/HCA system. LifePoint
believes 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 were 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 the Company's markets have enabled
it to negotiate contract terms that are generally more favorable for its
facilities and to decrease the level of discount arrangements in which it
participates.
- 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 usage patterns 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. LifePoint will seek to acquire hospitals
that are located in non-urban markets with above average population
growth, a strong
3
<PAGE> 64
economic base and a favorable payor mix. The competition to acquire
non-urban hospitals is significant. There can be no assurance that
suitable acquisitions 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
access to capital will enable LifePoint to compete successfully for
acquisitions.
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 makes available a
variety of management services to its health care facilities. These services
include information systems; ethics and compliance programs; leasing contracts;
accounting, financial and clinical systems; legal support; personnel management;
internal auditing; and resource management. Some of these services initially are
being provided through transitional arrangements made with Columbia/HCA.
LifePoint also participates and has an equity interest, along with Columbia/HCA
and Triad Hospitals, Inc., a publicly-traded company comprising the former
Pacific Group of Columbia/HCA ("Triad"), in a group purchasing organization
which makes certain national supply and equipment contracts available to
LifePoint's facilities. See "-- Arrangements Relating to the Distribution."
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.
4
<PAGE> 65
The following table sets forth certain operating statistics for
consolidated hospitals owned by LifePoint for each of the past five years ended
December 31. Medical/surgical hospital operations are subject to certain
seasonal fluctuations, including decreases in patient utilization during holiday
periods and increases in patient utilization during the cold weather months.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------------------------
1999 1998(H) 1997 1996 1995
------- ------- ------- ------ ------
<S> <C> <C> <C> <C> <C>
Number of hospitals at end of period........... 23 23 22 22 20
Number of licensed beds at end of period(a).... 2,169 2,169 2,080 2,074 1,881
Weighted average licensed beds(b).............. 2,169 2,127 2,078 2,060 1,862
Admissions(c).................................. 64,237 62,269 60,487 59,381 54,549
Equivalent admissions(d)....................... 114,599 110,029 105,126 98,869 88,915
Average length of stay (days)(e)............... 4.2 4.4 4.4 4.7 4.8
Average daily census(f)........................ 739 742 733 755 713
Occupancy rate(g).............................. 34% 35% 35% 37% 38%
</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 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.
(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.
(h) Certain prior year information has been restated to conform to current year
definitions.
- ---------------
LifePoint's hospitals have experienced significant shifts from inpatient to
outpatient care as well as decreases in average lengths of inpatient stay. These
shifts are 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 in certain hospitals to permit additional outpatient volume and a
greater variety of outpatient services.
5
<PAGE> 66
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,
-----------------------
1999 1998 1997
----- ----- -----
<S> <C> <C> <C>
Medicare.................................................... 34.8% 37.8% 39.4%
Medicaid.................................................... 12.6% 11.1% 11.1%
Other sources............................................... 52.6% 51.1% 49.5%
----- ----- -----
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 joint federal-state program
administered by the states that 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 often limit LifePoint's ability to
increase charges in response to increasing costs. See "-- 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
"-- Reimbursement."
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
6
<PAGE> 67
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 on the basis of market reputation, geographic location,
quality and range of services, quality of the medical staff, convenience and
price for service contracts with group health care service purchasers. The
importance of obtaining contracts with managed care organizations varies from
market to market, depending on the market strength of such organizations.
Managed care contracts generally are less important in the non-urban markets
served by LifePoint than they are in urban and suburban markets where there is
typically a higher level of managed care penetration.
State certificate of need ("CON") laws, which place limitations on a
hospital's ability to expand hospital services and add new equipment, also may
have the effect of restricting competition. 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."
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.
7
<PAGE> 68
PROPERTIES
The following table lists the hospitals owned, except as otherwise
indicated, by LifePoint as of December 31, 1999:
<TABLE>
<CAPTION>
LICENSED
FACILITY NAME CITY STATE BEDS
- ------------- ------------ ----- --------
<S> <C> <C> <C>
Andalusia Hospital...................................... Andalusia AL 101
Bartow Memorial Hospital................................ Bartow FL 56
Barrow Medical Center(1)................................ Winder GA 56
Western Plains Regional Hospital(2)..................... Dodge City KS 110
Halstead Hospital(1).................................... Halstead KS 177
Georgetown Community Hospital........................... Georgetown KY 75
Jackson Purchase Medical Center......................... Mayfield KY 107
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(3)..................................... Erin TN 40
Crockett Hospital....................................... Lawrenceburg TN 107
Livingston Regional Hospital............................ Livingston TN 112
Hillside Hospital....................................... Pulaski TN 95
Emerald-Hodgson Hospital................................ Sewanee TN 50
Southern Tennessee Medical Center....................... Winchester TN 166
Castleview Hospital..................................... Price UT 82
Ashley Valley Medical Center............................ Vernal UT 39
Riverton Memorial Hospital.............................. Riverton WY 70
</TABLE>
- ---------------
(1) These facilities are currently held for sale.
(2) LifePoint operates and holds a majority equity interest in a consolidated
joint venture which owns and operates Western Plains Regional Hospital.
(3) LifePoint sold this facility on January 31, 2000.
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 25,500 square feet of
space in one office building in Brentwood, Tennessee. Prior to January 24, 2000,
LifePoint subleased space in an office building in Nashville, Tennessee from
Columbia/HCA. The parties terminated the sublease when LifePoint moved to its
office in Brentwood.
LifePoint's headquarters, hospitals and other facilities are suitable for
their respective uses and are, in general, adequate for LifePoint's present
needs. LifePoint's obligations under its bank credit facilities are secured by a
pledge of substantially all of the assets of LifePoint and its subsidiaries,
including first priority mortgages on each of LifePoint's hospitals. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
EMPLOYEES AND MEDICAL STAFF
At December 31, 1999, LifePoint had approximately 6,500 employees,
including approximately 1,600 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.
8
<PAGE> 69
LifePoint's hospitals, like most hospitals, have experienced labor costs rising
faster than the general inflation rate. There can be no assurance as to future
availability and cost of qualified medical personnel.
LifePoint's hospitals are staffed by licensed physicians who have been
admitted to the medical staff of individual hospitals. Any licensed physician
may apply to be admitted to the medical staff of any of LifePoint's hospitals,
but admission to the staff must be approved by the hospital's medical staff and
the appropriate governing board of the hospital in accordance with established
credentialing 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. Since the Distribution, LifePoint has
limited 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 provides initial
and periodic legal compliance and ethics training to every employee, reviews
various areas of LifePoint's operations, and develops and implements policies
and procedures designed to foster compliance with the law. LifePoint regularly
monitors its ongoing compliance efforts. The program also includes a mechanism
for employees to report, without fear of retaliation, any suspected legal or
ethical violations to their supervisors or designated compliance officers in
LifePoint's hospitals.
REIMBURSEMENT
Medicare. Under the Medicare program, acute care 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 ("HCFA") criteria for exemption, are
currently exempt from PPS and are reimbursed on a cost-based system, subject to
certain cost limits known as Tax Equity and Fiscal Responsibility Act of 1982
("TEFRA") limits. All of LifePoint's hospitals are reimbursed under PPS, and
certain psychiatric, long-term care and rehabilitation units are exempt from
PPS, but many are subject to transition to PPS.
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, known
as the "market basket index," gives consideration to the inflation experienced
by hospitals and entities outside of the health care industry in purchasing
goods and services. 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
1.5%, 2.0%, 0.0% and 0.5% for federal fiscal years 1996, 1997, 1998 and 1999,
respectively. The budgeted updates for federal
9
<PAGE> 70
fiscal years 2000 through 2002 are market basket index minus 1.8%, 1.1% and
1.1%, respectively. LifePoint anticipates that future legislation may further
decrease the future DRG payments, but is not 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 actual cost subject
to payment limitations. Certain other outpatient services are subject to
additional reimbursement limits. The Balanced Budget Act, enacted August 5, 1997
(the "Balanced Budget Act"), mandates a prospective payment system for
outpatient hospital services to begin January 1, 1999. However, implementation
of the PPS has been delayed because of Year 2000 systems concerns and is now
scheduled to commence July 1, 2000. The outpatient prospective payment system
will be further affected by changes mandated by the Medicare Balanced Budget
Refinement Act of 1999 (the "BBA Refinement Act"). In most cases, the BBA
Refinement Act lessens the impact of reimbursement limitations imposed by the
Balanced Budget Act. 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 1.0%. However, the BBA
Refinement Act increases Medicare payments under the PPS system for hospital
outpatient services provided to certain high-cost outlier patients. LifePoint is
not able to predict the effect, if any, that the new payment system will have on
its financial results. After the fee schedule is established for this new
system, the fee schedule is to be updated by the market basket minus 1.0% for
each of federal fiscal years 2000 through 2002. Similarly, effective January 1,
1999, therapy services rendered by hospitals to outpatients and inpatients not
reimbursed under Medicare, Part A are reimbursed according to the Medicare
physician fee schedule.
The Balanced Budget Act also mandates a prospective payment system for
skilled nursing facility services for Medicare cost reporting periods commencing
after June 30, 1998, 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 respective 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, 1999, LifePoint had seven inpatient
psychiatric units, four inpatient rehabilitation units, nine hospital-based
skilled nursing facility units, nine rural health clinics, one home health
agency, one comprehensive outpatient rehabilitation facility and 11 hospitals
utilizing swing beds.
Prior to the implementation of the PPS payments to PPS-exempt hospitals and
units, such as inpatient psychiatric, rehabilitation and skilled nursing
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 years 1996, 1997, 1998 and 1999, the market basket index rate of increase
was 3.4%, 2.5%, 0.0% and 2.4%, respectively. The update for cost reporting
periods from October 1, 1999 to September 30, 2000 ranges from zero to the
market basket index less a percentage point between 0.0% and 2.5% depending on
the hospital's or unit's costs in relation to the ceiling. Furthermore, limits
have been established for the cost per discharge target at the 75th percentile
for each category of PPS-exempt hospitals and hospital units. For federal fiscal
year 1998, these limits were $10,534, $19,104, and $37,688 per discharge,
respectively. For federal fiscal year 1999, these limits were $10,787, $19,562
and $38,593 per discharge, respectively. For federal fiscal year 2000, these
amounts are $11,100, $20,129, and $39,712 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 were $8,686, $17,077
and $22,010 per discharge, respectively. For federal fiscal year 2000, these
amounts are $8,938, $17,573 and $22,649 per discharge, respectively.
Skilled nursing facilities have historically been reimbursed by Medicare on
the basis of actual costs, subject to certain limits. The new prospective
payment system for skilled nursing facilities mandated by the Balanced Budget
Act requires the establishment of a prospective payment system for Medicare
skilled nursing facilities under which facilities will be paid per diem rates
for virtually all covered services will be phased in over three cost reporting
periods, starting with cost reporting periods beginning on or after July 1,
1998. The
10
<PAGE> 71
BBA Refinement Act will increase temporarily the federal per diem payment by 20%
for 15 resource utilization groups ("RUGs") in the categories for "extensive
services," "special care," "clinically complex," "high rehabilitation," and
"medium rehabilitation." Increased payments will be made from April 1, 2000 to
the later of October 1, 2000 or the implementation of a refined RUG system. In
fiscal years 2001 and 2002, the federal per diem rate to a facility will
increase by 4% in each year. The Balanced Budget Act 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. As of December
31, 1999, nine of LifePoint's hospitals operated skilled nursing facilities.
Currently, physicians are paid by Medicare according to the physician fee
schedule. However, physicians working in rural health clinics, such as those
maintained by LifePoint, 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. There are nine rural health clinics owned by LifePoint.
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 qualify as sole community hospitals under
Medicare regulations. Special payment provisions related to sole community
hospitals may 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 TRICARE program
(formerly CHAMPUS) 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 and 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.
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
operates have adopted broad-based provider taxes to fund their Medicaid
programs. The impact of these new taxes upon LifePoint has not been materially
adverse. However, LifePoint cannot predict whether any additional broad-based
provider taxes will be adopted by the states in which it operates and,
accordingly, it is not able to assess the effect of such additional taxes on its
results of operations or financial position.
Annual Cost Reports. All hospitals participating in the Medicare program,
whether paid on a reasonable cost basis or under PPS, are required to meet
certain financial reporting requirements. Federal regulations require submission
of annual cost reports covering medical costs and expenses associated with the
services provided by each hospital to Medicare beneficiaries. Review of
previously submitted annual cost reports (including cost reports submitted prior
to the Distribution Date by facilities now owned by LifePoint) 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 any of its 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. Columbia/HCA has
agreed to indemnify LifePoint in respect of any losses arising from such
government investigations. See "-- Arrangements Relating to the Distribution"
and "Legal Proceedings -- Governmental Investigation of Columbia/HCA and Related
Litigation" for more information regarding such arrangement.
11
<PAGE> 72
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 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 among LifePoint, Columbia/HCA and
Triad (the "Distribution Agreement"), LifePoint is responsible for the Medicare,
Medicaid and Blue Cross cost reports, and associated receivables and payables,
for its facilities for all periods ending after May 11, 1999 (the "Distribution
Date"). Columbia/HCA agreed to indemnify LifePoint with respect to the Medicare,
Medicaid and Blue Cross cost reports for the LifePoint facilities relating to
periods ending on or prior to the Distribution Date. See "-- Arrangements
Relating to the Distribution."
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 18.6% for the year ended December 31, 1998 to
20.2% for the year ended December 31, 1999. The percentage of LifePoint's net
revenue from continuing operations attributable to managed care payers increased
from 20.1% for the year ended December 31, 1998 to 24.3% for the year ended
December 31, 1999. LifePoint expects that the trend toward increasing
percentages related to managed care payers will continue in the future.
LifePoint generally receives lower payments from managed care payers than from
traditional commercial/indemnity insurers; however, as part of its business
strategy, LifePoint is taking steps to improve its managed care position. See
"-- Business Strategy" for a more detailed discussion of such strategy.
Commercial Insurance. The hospitals of LifePoint provide services to some
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 payments for
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 and 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.
GOVERNMENT REGULATION AND OTHER FACTORS
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 are properly licensed under
appropriate state laws. All of the hospitals affiliated with LifePoint are
certified under the Medicare program and are accredited by the Joint Commission
on Accreditation of Healthcare Organizations. Should any facility 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 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 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 operates
hospitals in states that require approval under a CON program. Such laws
generally require appropriate state agency determination of public need and
approval prior to the addition of beds or services or certain other capital
expenditures. Failure to obtain necessary state approval can result in the
inability to
12
<PAGE> 73
expand facilities, add services, complete an acquisition or change ownership.
Further, violation may result in the imposition of civil sanctions or the
revocation of a facility's license.
Utilization Review. Federal law contains numerous provisions designed to
ensure that services rendered by hospitals to Medicare and Medicaid patients
meet professionally recognized standards, are medically necessary and that
claims for reimbursement are properly filed. These provisions include a
requirement that a sampling of admissions of Medicare and Medicaid patients must
be reviewed by peer review organizations, which review the appropriateness of
Medicare and Medicaid patient admissions and discharges, the quality of care
provided, the validity of DRG classifications and the appropriateness of cases
of extraordinary length of stay or cost. Peer review organizations may deny
payment for services provided, may assess fines and also have the authority to
recommend to United States Department of Health and Human Services ("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;
- making claims for items or services that are "medically unnecessary;"
- routinely waiving co-payments or deductibles to induce patients to order
items or services from a specific provider;
- contracting with individuals that they know or should know have been
excluded from participation in a federal healthcare program;
- offering, paying or receiving any remuneration (including kickbacks,
bribes or rebates) in return for referrals or purchasing items or
services 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 services
available from the facility; and
- 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.
The provisions of the Anti-Kickback Statute prohibit 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 or state healthcare program or ordering any covered service
or item. Violations of this statute may be punished by a fine of up to $50,000
or imprisonment for each violation and damages up to three times the total
amount of remuneration. In addition, the Medicare Patient and Program Protection
Act of 1987, as amended by the Health Insurance Portability and Accountability
Act of 1996 ("HIPAA") and the Balanced Budget Act (as so amended, the
"Protection Act"), imposes civil penalties for a violation of these
prohibitions, including exclusion from participation in federal or state
healthcare programs, such as Medicare and Medicaid.
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. In 1991, and then again in
1999, 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
13
<PAGE> 74
employees, group repurchasing organizations, waivers of deductibles, physician
investments in entities located in rural areas, physician recruitment, and
physician investments in free standing ambulatory surgery centers. The preambles
to the Safe Harbor regulations state that the failure of a particular business
arrangement to comply with the regulations does not mean that 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.
HIPAA, which became effective January 1, 1997, amends, among other things,
Title XI (42 U.S.C. sec. 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 certain owners, officers and managing employees associated with
business entities that have committed health care fraud, even if the owner,
officer or employee had no knowledge of the fraud. HIPAA also establishes a new
violation for the payment of inducements to Medicare or Medicaid beneficiaries
in order to influence those beneficiaries to order or receive services from a
particular provider or practitioner. The Balanced Budget Act also allows civil
monetary penalties to be imposed on a provider contracting with individuals or
entities that the provider knows or should know is excluded from a federal
healthcare program.
The OIG at HHS is responsible for identifying and eliminating fraud, abuse
and waste in HHS programs and for promoting efficiency and economy in HHS
departmental operations. The OIG carries out this mission through a nationwide
program of audits, investigations and inspections. In order to provide guidance
to health care providers, the OIG has from time to time issued "fraud alerts"
which, although they do not have the force of law, identify features of
transactions, which may indicate that the transaction could violate the Anti-
Kickback Statute or other federal healthcare laws. The OIG has identified the
following incentive arrangements as potential violations:
- "gainsharing," or the practice of giving physicians a percentage share of
any reduction in the hospital's costs for patient care attributable in
part to the physician's efforts;
- 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;
- 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.
14
<PAGE> 75
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 services, and inpatient and outpatient
hospital services. Sanctions for violating the Stark Law include civil money
penalties up to $15,000 per prohibited service provided, assessments equal to
twice the dollar value of each such service provided and exclusion from the
Medicare and Medicaid programs. There are a number of exceptions to the
self-referral prohibition, including an exception if the physician has an
ownership interest in the entire hospital. 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:
(1) the provider is located in an area that is not considered a
metropolitan statistical area, and
(2) 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. LifePoint cannot 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.
LifePoint provides financial incentives to recruit physicians into the
communities served by its hospitals, including loans and minimum revenue
guarantees. The limited partner of one Lifepoint hospital is owned in part by
physician investors. LifePoint also enters into employment agreements,
independent contractor agreements, leases and other agreements with physicians.
Although LifePoint believes that its arrangements with physicians comply with
current law, since some of these arrangements do not meet all of the
requirements for safe harbor protection there can be no assurance that
regulatory authorities who enforce such laws will not determine that such
physician recruiting activities or other physician arrangements violate the
Anti-Kickback Statute or other applicable laws. Such a determination could
subject LifePoint 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.
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 hospitals. There is increasing scrutiny by law enforcement
authorities, 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 of the states in which LifePoint operates 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 referral 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
operates 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
15
<PAGE> 76
loss of a physician'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 LifePoint exercises care to
structure its arrangements with health care providers to comply with the
relevant state law, and 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 certain transactions in which it 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.
EMTALA. LifePoint is subject to the Emergency Treatment and Active Labor
Act ("EMTALA"), which is a federal law that requires any hospital that
participates in the Medicare program to conduct an appropriate screening
examination of every person who presents to the hospital's emergency room to
determine if that person is suffering from an emergency condition and, if the
patient is suffering from an emergency condition, to either stabilize that
condition or make an appropriate transfer of the patient to a facility that can
handle the condition. The hospital's obligation to screen and stabilize
emergency conditions exists regardless of the patient's ability to pay for
treatment. In fact, there are severe penalties under EMTALA if a hospital
refuses to screen or appropriately stabilize or transfer a patient, or if the
hospital delays appropriate treatment in order to first inquire about the
patient's ability to pay. Penalties for violation of EMTALA include fines and
possibly the expulsion of the hospital from further participation in the
Medicare program. In addition, an injured patient or his family can bring a
civil suit against the hospital.
The government has tried to expand the scope of EMTALA in recent years to
cover situations in which patients do not actually present to a hospital's
emergency room but present to a hospital based clinic or are transported in a
hospital owned ambulance. In addition, the government has expressed its intent
to actively investigate, uncover, and enforce EMTALA violations in the future.
Moreover, there is a growing trend for patients bringing malpractice lawsuits to
also allege an EMTALA violation almost as a matter of course.
LifePoint believes its hospitals operate in compliance with EMTALA.
However, there can be no assurance that a patient will not bring a claim under
EMTALA or that the government will not conduct investigations in the future. Any
such lawsuit or investigation could have an adverse financial impact on the
Company.
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, patients' bill of rights 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.
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. LifePoint will consult with its tax advisers to develop an
appropriate course of action in connection with any such joint ventures. The tax
ruling could limit joint venture development with not-for-profit hospitals,
require the restructuring of certain existing joint
16
<PAGE> 77
ventures with not-for-profits and influence the exercise of "put agreements"
(agreements that require the purchase of the partner's interest in the joint
venture) by certain existing joint venture partners. LifePoint is not currently
a party to any transaction or arrangement that would be affected by this revenue
ruling.
Environmental Matters. LifePoint is subject to various federal, state and
local statutes and ordinances regulating the discharge of materials into the
environment. LifePoint does not expect 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 is subject
to claims and legal actions by patients in the ordinary course of business. To
cover these claims, LifePoint maintains professional malpractice liability
insurance and general liability insurance in amounts which it believes to be
sufficient for its operations, although some claims may exceed the scope of the
coverage in effect. LifePoint 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 to
maintain adequate levels of coverage. Substantially all losses from such claims
arising 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 in respect of
claims covered by such insurance policies and workers compensation claims
arising prior to the Distribution. See "-- Arrangements Relating to the
Distribution -- Insurance Allocation and Administration Agreement" for a more
detailed discussion of such arrangements.
The Company purchases insurance for its professional and general liability
risks incurred after the Distribution, subject to a substantial deductible, for
which a reserve is recorded on the balance sheets of LifePoint. There can be no
assurance that the cash flow of LifePoint will be adequate to provide for
professional and general liability claims in the future. Columbia/HCA has
indemnified LifePoint for professional and general liability claims incurred
prior to the Distribution. See "-- Arrangements Relating to the
Distribution -- Allocation of Financial Responsibility."
ARRANGEMENTS RELATING TO THE DISTRIBUTION
General. Immediately prior to the Distribution, LifePoint was a wholly
owned subsidiary of Columbia/HCA and, until the Distribution, the results of
operations of the assets and entities that constitute LifePoint were included in
Columbia/HCA's consolidated financial statements. Columbia/HCA no longer has any
ownership interest in LifePoint, although certain Columbia/HCA benefit plans
received shares of LifePoint in the Distribution.
Immediately prior to the Distribution, Columbia/HCA and LifePoint entered
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.
A copy of each of these agreements has previously been filed with the Securities
and Exchange Commission (the "Commission") by LifePoint, and each agreement is
incorporated by reference to this report. 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 complete text
of the agreements.
Distribution Agreement. Columbia/HCA, LifePoint and Triad entered into the
Distribution Agreement which provided 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.
Transfers of Assets to LifePoint. Pursuant to the Distribution Agreement,
Columbia/HCA transferred all of its right, title and interest in the assets
constituting the America Group business to LifePoint. All assets were
transferred without any representation or warranty, on an "as is-where is" basis
and the relevant transferee assumed the risk that any necessary consent to
transfer was not obtained.
Allocation of Financial Responsibility. The Distribution Agreement
provided 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
17
<PAGE> 78
constitute LifePoint and its subsidiaries, including liabilities arising in
respect of the transfer of such assets and entities to LifePoint, subject to
limited exceptions, to LifePoint.
Pursuant to the Distribution Agreement, Columbia/HCA agreed to indemnify
LifePoint for any losses which it may incur arising from the pending
governmental investigations of certain of Columbia/HCA's business practices.
Columbia/HCA also agreed to indemnify LifePoint for any losses which it may
incur arising from stockholder actions and other legal proceedings related to
the governmental investigations which are currently pending against
Columbia/HCA, and from proceedings which may be commenced by government
authorities or by private parties in the future that arise from acts, practices
or omissions engaged in prior to the Distribution Date and relate to the pending
proceedings. Columbia/HCA has also agreed that, in the event that any hospital
owned by LifePoint is permanently excluded from participation in the Medicare
and Medicaid programs as a result of the proceedings described above, then
Columbia/HCA will make a cash payment to LifePoint in an amount (if positive)
equal to five times the excluded hospital's 1998 income from continuing
operations before depreciation and amortization, interest expense, management
fees, impairment of long-lived assets, minority interests and income taxes, as
set forth on a schedule to the Distribution Agreement less the net proceeds of
the sale or other disposition of the excluded hospital. LifePoint has agreed
that, in connection with the government investigations described above, it will
participate with Columbia/HCA in negotiating one or more compliance agreements
setting forth its agreement to comply with applicable laws and regulations.
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 "Management's Discussion
and Analysis of Financial Condition and Results of Operations -- Risk
Factors -- Potential Adverse Impact of Columbia/HCA Investigations and
Litigation" and "Legal Proceedings -- 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
business of LifePoint. The Distribution Agreement provides that Columbia/HCA
also will be solely responsible for:
- claims against LifePoint 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 if the underlying
injury or condition was incurred before the Distribution.
Government Programs. LifePoint is responsible for the Medicare, Medicaid
and Blue Cross cost reports, and associated receivables and payables, for its
facilities for all periods ending after the Distribution Date. Columbia/HCA
agreed to indemnify LifePoint with respect to the Medicare, Medicaid and Blue
Cross cost reports, and associated receivables and payables, for the LifePoint
facilities relating to periods ending on or prior to the Distribution Date.
LifePoint is responsible for its 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 agreed
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 were properly allocable to, and were paid by, Columbia/HCA. Except
as set forth in the Distribution Agreement or any related agreement, each party
bears its own costs and expenses after the Distribution.
Tax Sharing and Indemnification Agreement. Columbia/HCA, LifePoint and
Triad entered into a tax sharing and indemnification agreement, which allocated
tax liabilities among Columbia/HCA, LifePoint and
18
<PAGE> 79
Triad and addresses 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 is
responsible for taxes that are allocable to periods prior to the Distribution
Date, and each of Columbia/HCA and LifePoint are 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 prohibits
LifePoint from taking actions that could jeopardize the tax treatment of either
the Distribution or the internal restructuring that preceded the Distribution,
and requires LifePoint and Triad to indemnify each other and Columbia/HCA for
any taxes or other losses that result from any such actions. In connection with
preserving the tax treatment of the Distribution and the internal restructuring
that preceded the Distribution, LifePoint agreed to take such actions as
Columbia/HCA may request and made certain covenants including covenants that,
for a period of three years following the Distribution, it generally will not
authorize, undertake or facilitate any of the following absent the consent of
Columbia/HCA:
(1) an issuance of additional stock or other equity instrument,
(2) any merger, dissolution, consolidation, redemption or complete or
partial liquidation,
(3) a transfer or disposition of assets, other than the disposition of
certain assets that have been identified for divestiture, or
(4) a recapitalization or other change in capital structure.
Benefits and Employment Matters Agreement. Columbia/HCA, LifePoint and
Triad entered into a benefits and employment matters agreement, which allocated
responsibilities for employee compensation, benefits, labor, benefit plan
administration and certain other employment matters on and after the
Distribution Date.
General Allocation. LifePoint assumed responsibility as employer in
respect of its employees from and after the Distribution Date. Subject to
specific exceptions, Columbia/HCA retained the liabilities in respect of former
employees associated with the facilities and operations of LifePoint who
terminated employment on or prior to the Distribution Date. Benefit plans
established by LifePoint generally recognize past service with Columbia/HCA.
Defined Contribution and Welfare Benefit Plans. The benefits and
employment matters agreement required LifePoint to adopt a new defined
contribution plan for its employees, as well as for the former employees
associated with its facilities and operations. Generally, assets of the
Columbia/HCA money purchase pension, stock bonus and salary deferral plans that
were attributable to current and former employees of LifePoint were transferred,
effective immediately prior to the Distribution Date, to the new plan, and
LifePoint thereafter provides benefits under its plan to its current and former
employees. Except for such transferred assets, Columbia/HCA retained sole
responsibility for all liabilities and obligations under the existing
Columbia/HCA defined contribution plans.
LifePoint adopted welfare benefit plans for its employees that are
substantially identical to the benefit plans of Columbia/HCA. Generally,
Columbia/HCA is 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 assumed such responsibility for periods
thereafter with respect to its current or former employees.
Columbia/HCA provided certain administrative services through May 31, 1999
in respect of LifePoint welfare plans. LifePoint 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 Employee Stock Ownership Plan ("ESOP"). In connection with
the Distribution, LifePoint established an ESOP. On June 10, 1999, the LifePoint
ESOP purchased, at fair market value, 2,796,719 newly issued shares of LifePoint
Common Stock. The purchase was financed primarily by issuing a promissory note
to LifePoint. The loan will be amortized over a period of not more than 10
years.
19
<PAGE> 80
Treatment of Columbia/HCA Common Stock Options. Pursuant to the benefits
and employment matters agreement, LifePoint established a new stock option plan,
and adjusted outstanding Columbia/HCA Common Stock options to reflect the
Distribution. The nature of the adjustment depended 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") was preserved by
having each such ISO replaced entirely by an ISO issued by
LifePoint.
- 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 was preserved by adjusting
the exercise price of such Columbia/HCA options and having LifePoint
issue additional vested nonqualified stock options. Similar
adjustments were 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 were adjusted in a
manner that preserved the pre-Distribution value of such
Columbia/HCA options.
- Non-Vested Nonqualified Stock Options: Non-vested nonqualified
options to acquire LifePoint stock were issued to certain employees
of Columbia/HCA.
Insurance Allocation and Administration Agreement. Columbia/HCA has
maintained various insurance policies for the benefit of the America Group
Division. 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 and LifePoint entered into an 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. Columbia/HCA
agreed to pay to LifePoint 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 and LifePoint agreed to do all things necessary
to ensure that all of the insurance policies which provide coverage to LifePoint
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 such insurance
policies will be paid or received by Columbia/HCA.
Columbia/HCA and LifePoint have cooperated 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.
LifePoint has purchased continuous coverage under extensions or renewals of
policies issued by Health Care Indemnity, Inc., a subsidiary of Columbia/HCA.
Columbia/HCA agreed to defend any claim made against two or more of the
parties, if indemnification for the claim is available to LifePoint under the
Distribution Agreement. If indemnification under the Distribution Agreement is
not available and there is no other agreement or indemnification in respect of
such claim, the parties to the claim will jointly defend the claim and will
attempt to agree upon an appropriate allocation of liability, subject to
arbitration in the event the parties disagree.
Columbia/HCA, or an affiliate of Columbia/HCA, has continued to administer
all claims under the insurance policies in effect prior to the Distribution Date
and, for an interim period, has also administered claims under the new policies
that cover periods after the Distribution Date.
20
<PAGE> 81
Computer and Data Processing Services Agreement. Columbia/HCA's wholly
owned subsidiary Columbia Information Systems, Inc. entered into a computer and
data processing services agreement with LifePoint. Pursuant to this agreement,
Columbia Information Systems provides computer installation, support, training,
maintenance, data processing and other related services to LifePoint. The
initial term of the agreement is seven years, which will be followed by a
wind-down period of up to one year. Columbia Information Systems charges fees to
LifePoint for services provided under this agreement that are market competitive
based on Columbia Information Systems's costs incurred in providing such
services. In the event the agreement is terminated by LifePoint, 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.
Transitional Services Agreement. Columbia/HCA entered into a transitional
services agreement with LifePoint. Pursuant to this agreement, Columbia/HCA may
furnish various administrative services to LifePoint. These services include
support in various aspects of payroll processing and tax reporting for employees
of LifePoint, real estate design and construction management, and legal, human
resources, insurance and accounting matters. The agreement will terminate on
December 31, 2000, but may be terminated by LifePoint as to specific services
before December 31, 2000. LifePoint pays fees to Columbia/ HCA for services
provided in amounts equal to Columbia/HCA's costs incurred in providing such
services.
Other Agreements. Columbia/HCA entered into agreements with LifePoint
whereby Columbia/HCA shares telecommunications services with LifePoint under
Columbia/HCA's agreements with its telecommunications services provider and
whereby Columbia/HCA makes certain account collection services available to
LifePoint. LifePoint also participates, along with Columbia/HCA, in a group
purchasing organization which makes certain national supply and equipment
contracts available to its facilities. Pursuant to a Year 2000 professional
services agreement Columbia/HCA inspected medical equipment at each of
LifePoint's hospitals to assure Year 2000 compliance. Under such agreement,
LifePoint remains solely responsible for any lack of Year 2000 compliance. The
agreement terminates on June 30, 2000.
The business of LifePoint is subject to various risks and uncertainties,
including those described in Item 7 of this report under the caption
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Risk Factors."
ITEM 2. PROPERTIES
Information with respect to the Company's hospital facilities and other
properties can be found in Item 1 of this report under the caption,
"Business -- Properties."
ITEM 3. LEGAL PROCEEDINGS
General. The Company 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, for wrongful restriction of
or interference with physicians' staff privileges and employment related claims.
In certain of these actions, plaintiffs request punitive or other damages
against the Company that may not be covered by insurance. The Company is
currently not a party to any proceeding which, in management's opinion, would
have a material adverse effect on the Company's business, financial condition or
results of operations.
Governmental Investigation of Columbia/HCA and Related Litigation. Based
upon its review of public filings and statements made by Columbia/HCA,
LifePoint's management understands that Columbia/HCA and its subsidiaries are
subject to various claims, suits and investigations for periods prior to the
Distribution Date and that Columbia/HCA may be, either currently or in the
future, subject to various claims, suits or investigations for periods after the
Distribution Date. Any discussion contained in this report regarding such
matters is based solely upon such public filings and statements.
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.
21
<PAGE> 82
In July 1997, various Columbia/HCA affiliated facilities and offices were
searched pursuant to search warrants. During July, September and November 1997,
Columbia/HCA also was served with subpoenas requesting records and documents
related to laboratory billing and DRG coding in various states and home health
operations in various jurisdictions, including, but not limited to, Florida. In
January 1998, Columbia/ HCA received a subpoena which requested records and
documents relating to physician relationships. In June 1999, Columbia/HCA
received a subpoena seeking records related to home health operations. In March
2000, Columbia/HCA received a subpoena that requested records relating to wound
care centers.
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 related to the alleged false
characterization of interest payments on certain debt resulting in Medicare and
TRICARE (formerly CHAMPUS) overpayments since 1986 to Columbia Fawcett Memorial
Hospital, a Port Charlotte, Florida hospital that was acquired by Columbia/HCA
in 1992. Columbia/HCA was 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. According to published reports, on July 2,
1999, a federal jury in Tampa, Florida found two Columbia/HCA employees guilty
of conspiracy and making false statements on Medicare and TRICARE cost reports
for the years 1992 and 1993 and on a Medicaid cost report for 1993. Both were
found not guilty of obstructing a federal auditor. One other employee was
acquitted on all counts for which he had been charged and the jury was unable to
reach a verdict with respect to another employee. This employee and the
government executed an agreement to defer prosecution for 18 months after which
charges will be dismissed. The two convicted employees were sentenced in
December 1999 and both have appealed to the 11th Circuit.
Several 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. Management of LifePoint understands that Columbia/HCA is
cooperating in these investigations and that Columbia/HCA understands, through
written notice and other means, that it is a target in these investigations.
Columbia/HCA may be subject to additional subpoenas and other investigative and
prosecutorial activity in these and other jurisdictions in the future.
Columbia/HCA also is the subject of a formal order of investigation by the
Commission. 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, or actions under
state statutes which are 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. sec. 3729 et
seq., for improper claims submitted to the government for reimbursement. The
lawsuits generally seek damages of three times the amount of all Medicare or
Medicaid claims (involving false claims) presented by the defendants to the
federal government, civil penalties of not less than $5,000 nor more than
$10,000 for each such Medicare or Medicaid claim, attorneys' fees and costs. The
government has intervened in six unsealed qui tam actions against Columbia/HCA.
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 Columbia/HCA is
unaware.
Since April 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.
22
<PAGE> 83
On October 10, 1997, all derivative law claims filed in federal court were
consolidated into a single-captioned case. The lawsuit alleges, among other
things, derivative claims against the individual defendants that they
intentionally or negligently breached their fiduciary duties to Columbia/HCA by
authorizing, permitting or failing to prevent Columbia/HCA from engaging in
various schemes to improperly increase revenue, upcoding, improper cost
reporting, improper referrals, improper acquisition practices and overbilling.
In addition, the lawsuit asserts a derivative claim against some of the
individual defendants for breaching their fiduciary duties by engaging in
insider trading. The lawsuit seeks restitution, damages, recoupment of fines or
penalties paid by Columbia/HCA, restitution and pre-judgment interest against
the alleged insider trading defendants, and costs and disbursements. In
addition, the lawsuit seeks orders prohibiting Columbia/HCA from paying
individual defendants employment benefits, terminating all improper business
relationships with individual defendants, and requiring Columbia/HCA to
implement effective corporate governance and internal control mechanisms
designed to monitor compliance with federal and state laws and ensure reports to
the Board of material violations of law.
Several derivative actions have been filed in state court by certain
purported stockholders of Columbia/ HCA against certain of Columbia/HCA's
current and former officers and directors alleging breach of fiduciary duty and
failure to take reasonable steps to ensure that Columbia/HCA did not engage in
illegal practices which exposed Columbia/HCA to significant damages.
Columbia/HCA and/or certain of its current and/or former officers and/or
directors are defendants in a number of federal and state court 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, and also are defendants in certain general liability and other claims.
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 in
question in the qui tam, stockholder derivative and class action lawsuits are
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.
In general, management understands that the investigations, actions and
claims described above relate to Columbia/HCA and its subsidiaries, including
subsidiaries that, prior to the Distribution Date, owned the facilities now
owned by the Company. Pursuant to the Distribution Agreement entered into by and
among Columbia/HCA, LifePoint and Triad, 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. Columbia/HCA has also agreed
that, in the event that any hospital owned by LifePoint is permanently excluded
from participation in the Medicare and Medicaid programs as a result of the
proceedings described above, Columbia/HCA will make a cash payment to LifePoint
in an amount (if positive) equal to five times the excluded hospital's 1998
income from continuing operations before depreciation and amortization, interest
expense, management fees, impairment of long-lived assets, minority interests
and income taxes, as set forth on a schedule to the Distribution Agreement, less
the net proceeds of the sale or other disposition of the excluded hospital.
LifePoint has agreed that, in connection with the government investigations
described above, it will participate with Columbia/HCA in negotiating one or
more compliance agreements setting forth each of their agreements to comply with
applicable laws and regulations. See "Business -- Arrangements Relating to the
Distribution" for a more detailed discussion of such arrangement. 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,
23
<PAGE> 84
financial position, results of operations or prospects of LifePoint.
Columbia/HCA has not indemnified 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 "Management's Discussion
and Analysis of Financial Condition and Results of Operations -- Risk Factors."
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of the stockholders during the fourth
quarter ended December 31, 1999.
24
<PAGE> 85
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock is quoted on the Nasdaq National Market
("Nasdaq") under the symbol "LPNT." The Company's Common Stock began publicly
trading on May 11, 1999. From May 11, 1999 through December 31, 1999, the high
and low sales prices for the Company's Common Stock as reported by Nasdaq, were
as follows:
<TABLE>
<CAPTION>
HIGH LOW
1999 ------ -----
<S> <C> <C>
Second Quarter (beginning May 11, 1999)..................... $17.50 $9.13
Third Quarter............................................... 14.38 6.88
Fourth Quarter.............................................. 12.63 7.69
</TABLE>
On March 17, 2000 the last reported sale price of the Common Stock was
$15.50 per share. As of March 17, 2000 there were approximately 11,865 holders
of record of the Company's Common Stock.
Since its formation, the Company has not declared or paid dividends on its
Common Stock. The Company expects that future earnings will be retained to
finance the growth and development of the Company's business and, accordingly,
does not intend to declare or pay any dividends on the Common Stock for the
foreseeable future. The declaration, payment and amount of future dividends, if
any, will be subject to the discretion of the Company's Board of Directors and
will depend upon the future earnings, results of operations, financial condition
and capital requirements of the Company, among other factors. Under Delaware
law, the Company is prohibited from paying any dividends unless it has capital
surplus or net profits available for this purpose. In addition, the Company's
credit facilities impose restrictions on the ability of the Company to pay
dividends. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Liquidity and Capital Resources."
25
<PAGE> 86
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The following table sets forth selected historical financial data of the
Company for each of the years in the five year period ended December 31, 1999.
The selected financial data at December 31, 1996 and 1995 and for the year ended
December 31, 1995 has been derived from unaudited financial statements. The
table should be read in conjunction with the Company's Consolidated Financial
Statements and related notes included elsewhere in this report and "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------------------------------
1999 1998(J) 1997 1996 1995
-------- -------- -------- ------- -------
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
SUMMARY OF OPERATIONS:
Revenues...................................... $ 515.2 $ 498.4 $ 487.6 $ 464.0 $ 395.8
Salaries and benefits......................... 217.4 220.8 196.6 175.2 158.1
Supplies...................................... 64.2 62.0 55.0 50.9 48.8
Other operating expenses...................... 117.3 117.2 119.5 99.3 83.3
Provision for doubtful accounts............... 38.2 41.6 34.5 28.0 23.2
Depreciation and amortization................. 31.4 28.3 27.4 23.5 20.3
Interest expense.............................. 23.4 19.1 15.4 14.1 11.3
Management fees............................... 3.2 8.9 8.2 6.2 8.1
ESOP expense.................................. 2.9 -- -- -- --
Impairment of long-lived assets............... 25.4 26.1 -- -- --
-------- -------- -------- ------- -------
523.4 524.0 456.6 397.2 353.1
-------- -------- -------- ------- -------
Income (loss) from continuing operations
before minority interests and income
taxes....................................... (8.2) (25.6) 31.0 66.8 42.7
Minority interests in earnings of consolidated
entities.................................... 1.9 1.9 2.2 1.2 --
-------- -------- -------- ------- -------
Income (loss) from continuing operations
before income taxes......................... (10.1) (27.5) 28.8 65.6 42.7
Provision (benefit) for income taxes.......... (2.7) (9.8) 11.7 26.3 17.1
-------- -------- -------- ------- -------
Income (loss) from continuing operations(a)... $ (7.4) $ (17.7) $ 17.1 $ 39.3 $ 25.6
======== ======== ======== ======= =======
Net income (loss)(a)................... $ (7.4) $ (21.8) $ 12.5 $ 41.2 $ 27.4
======== ======== ======== ======= =======
Basic earnings (loss) per share:
Income (loss) from continuing
operations(a)............................ $ (0.24) $ (0.59) $ 0.57 $ 1.31 $ 0.85
Net income (loss)(a)........................ $ (0.24) $ (0.73) $ 0.41 $ 1.37 $ 0.91
Shares used in computing basic earnings
(loss) per share (in millions)........... 30.5 30.0 30.0 30.0 30.0
Diluted earnings (loss) per share:
Income (loss) from continuing
operations(a)............................ $ (0.24) $ (0.59) $ 0.57 $ 1.30 $ 0.84
Net income (loss)(a)........................ $ (0.24) $ (0.73) $ 0.41 $ 1.36 $ 0.90
Shares used in computing diluted earnings
(loss) per share (in millions)........... 30.5 30.0 30.2 30.3 30.4
FINANCIAL POSITION:
Assets........................................ $ 420.4 $ 355.0 $ 397.9 $ 376.0 $ 324.5
Long-term debt, including amounts due within
one year.................................... 260.2 0.6 1.6 1.6 2.1
Intercompany balances payable to
Columbia/HCA................................ -- 167.6 182.5 176.3 181.3
Working capital............................... 42.2 26.9 41.1 39.0 24.4
Capital expenditures.......................... 64.8 29.3 51.8 53.4 28.6
</TABLE>
26
<PAGE> 87
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------------------------------
1999 1998(J) 1997 1996 1995
-------- -------- -------- ------- -------
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
OTHER OPERATING DATA:
EBITDA(b)................................... $ 78.1 $ 56.8 $ 82.0 $ 110.6 $ 82.4
Number of hospitals at end of period........ 23 23 22 22 20
Number of licensed beds at end of
period(c)................................ 2,169 2,169 2,080 2,074 1,881
Weighted average licensed beds(d)........... 2,169 2,127 2,078 2,060 1,862
Admissions(e)............................... 64,237 62,269 60,487 59,381 54,549
Equivalent admissions(f).................... 114,599 110,029 105,126 98,869 88,915
Average length of stay (days)(g)............ 4.2 4.4 4.4 4.7 4.8
Average daily census(h)..................... 739 742 733 755 713
Occupancy rate(i)........................... 34% 35% 35% 37% 38%
</TABLE>
- ---------------
(a) Includes charges related to impairment of long-lived assets of $25.4 million
($16.2 million after-tax) and $26.1 million ($15.9 million after-tax) for
the years ended December 31, 1999 and 1998, respectively.
(b) EBITDA is defined as income from continuing operations before depreciation
and amortization, interest expense, management fees, impairment of
long-lived assets, ESOP expense, minority interests in earnings of
consolidated entities 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 consolidated 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 the Company'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 the
Company's hospitals. Average length of stay has declined as a result of 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 the Company'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) Certain prior year amounts have been restated to conform to current year
definitions.
27
<PAGE> 88
ITEM 7. 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 included elsewhere herein and the notes thereto and the
information set forth under "Selected Consolidated Financial Data" and the notes
thereto.
A discussion and analysis of financial condition and results of operations
of Holdings has not been provided as management believes that this information
would not enhance the quality of the information provided nor enhance an
assessment of the financial condition and results of operations of LifePoint's
business as a whole. LifePoint has limited independent operations and net assets
other than through its ownership of Holdings and indirect ownership of Holdings'
subsidiaries. For more information regarding Holdings, please see the related
financial statements and accompanying notes appearing elsewhere herein.
OVERVIEW
On May 11, 1999, Columbia/HCA completed the Distribution. A description of
the Distribution and certain transactions with Columbia/HCA is included in Note
2 of the Notes to the Consolidated Financial Statements included elsewhere in
this report.
At December 31, 1999, the Company was 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.
FORWARD-LOOKING STATEMENTS
This "Management's Discussion and Analysis of Financial Condition and
Results of Operations" contains disclosures which are forward-looking
statements. Forward-looking statements include all statements that do not relate
solely to historical or current facts, and can be identified by the use of words
such as "may," "believe," "will," "expect," "project," "estimate," "anticipate,"
"plan" or "continue." These forward-looking statements are based on the current
plans and expectations of the Company and are subject to a number of
uncertainties and risks that could significantly affect current plans and
expectations and the Company's future financial condition and results. These
factors include, but are not limited to, (i) the 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 ability to attract and retain qualified management and
personnel, including physicians, (vii) liabilities and other claims asserted
against the Company, including without limitation, liabilities for which the
Company may be indemnified by Columbia/HCA, (viii) fluctuations in the market
value of the Company's Common Stock, (ix) changes in accounting practices, (x)
changes in general economic conditions, and (xi) other risk factors. As a
consequence, current plans, anticipated actions and future financial condition
and results may differ from those expressed in any forward-looking statements
made by or on behalf of the Company. You are cautioned not to unduly rely on
such forward-looking statements when evaluating the information presented in
this "Management's Discussion and Analysis of Financial Condition and Results of
Operations."
CONTINGENCIES
Columbia/HCA is currently the subject of several federal investigations
into certain of its business practices, as well as governmental investigations
by various states. Management of LifePoint understands that Columbia/HCA is
cooperating in these investigations and that Columbia/HCA 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
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 Commission. The Commission investigation includes the
anti-fraud, insider trading, periodic reporting and internal accounting control
provisions of the federal securities laws. According to published reports, on
July 2, 1999, a federal jury in Tampa, Florida found two Columbia/HCA employees
guilty of conspiracy and making
28
<PAGE> 89
false statements on Medicare and TRICARE cost reports for the years 1992 and
1993 and on the Medicaid cost report for 1993. Both were found not guilty of
obstructing a federal auditor. One other employee was acquitted on all counts
for which he had been charged and the jury was unable to reach a verdict with
respect to another employee. This employee and the government executed an
agreement to defer prosecution for 18 months after which charges will be
dismissed. The two convicted employees were sentenced in December 1999 and both
have appealed to the 11th Circuit.
Columbia/HCA is a defendant in several qui tam actions brought by private
parties on behalf of the United States of America, which have been unsealed and
served on Columbia/HCA. The actions allege, in general, that Columbia/HCA and
certain subsidiaries and/or affiliated partnerships violated the False Claims
Act by submitting improper claims to the government for reimbursement. The
lawsuits generally seek damages of three times the amount of all Medicare or
Medicaid claims (involving false claims) presented by the defendants to the
federal government, civil penalties of not less than $5,000 nor more than
$10,000 for each such Medicare or Medicaid claim, attorneys' fees and costs. The
government has intervened in six unsealed qui tam actions against Columbia/HCA.
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 litigations 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 in question in the qui tam and other
actions are substantial, and Columbia/HCA could be subject to substantial costs
resulting from an adverse outcome of one or more of such actions. In addition, a
number of derivative actions have been brought by purported stockholders of
Columbia/HCA against certain current and former officers and directors of
Columbia/HCA alleging breach of fiduciary duty and failure to take reasonable
steps to ensure that Columbia/HCA did not engage in illegal practices.
Management believes that the ongoing governmental investigations and
related media coverage may have had a negative effect on Columbia/HCA's results
of operations (which include the Company for the periods prior to the
Distribution Date which are presented herein). The extent to which the Company
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 the Company in future periods.
In connection with the Distribution, Columbia/HCA has agreed to indemnify
the Company in respect of any losses which it may incur arising from the
proceedings described above. Columbia/HCA has also agreed to indemnify the
Company 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 date
of the Distribution and relate to the proceedings described above. Columbia/HCA
has also agreed that, in the event that any hospital owned by the Company as of
the date of the Distribution is permanently excluded from participation in the
Medicare and Medicaid programs as a result of the proceedings described above,
then Columbia/HCA will make cash payments to the Company based on amounts as
defined in the Distribution Agreement by and among Columbia/HCA and the Company.
The Company has agreed with Columbia/HCA that, in connection with the pending
governmental investigations, it will negotiate with the government with respect
to a compliance agreement setting forth the Company's agreement to comply with
applicable laws and regulations. If any of such indemnified matters were
successfully asserted against the Company, 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 the Company. Columbia/HCA has not
indemnified the
29
<PAGE> 90
Company for losses relating to any acts, practices and omissions engaged in by
the Company after the Distribution, whether or not the Company is indemnified
for similar acts, practices and omissions occurring prior to the date of the
Distribution.
RESULTS OF OPERATIONS
Revenue/Volume Trends
The Company has experienced an increase in revenues and volume growth
during 1999 compared to prior year. However, the Company's revenue per
equivalent admission decreased in 1999 compared to 1998. Management believes the
decline in revenue per equivalent admission is primarily attributable to the
impact of reductions in Medicare payments mandated by the Federal Balanced
Budget Act of 1997 (the "Balanced Budget Act"), the increasing percentage of
patient volume related to patients participating in managed care plans and the
continuing trend toward the conversion of more services to an outpatient basis.
The Company's revenues continue to be affected by an increasing proportion
of revenue being derived from fixed payment, higher discount sources, including
Medicare, Medicaid and managed care plans. In addition, insurance companies,
government programs (other than Medicare) and employers purchasing health care
services for their employees are also negotiating discounted amounts that they
will pay health care providers rather than paying standard prices. The Company
expects patient volumes from Medicare and Medicaid to continue to increase as a
result of the general aging of the population and the expansion of state
Medicaid programs. However, under the Balanced Budget Act, the Company's
reimbursement from the Medicare and Medicaid programs was reduced in 1999 and
1998 and will be further reduced as some reductions in reimbursement levels are
phased in over the next two to three years. The Company 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 prospective payment amounts regardless of the cost incurred,
revenues, earnings and cash flows are being reduced. Admissions related to
Medicare, Medicaid and managed care plan patients were 89.2% and 87.7% of total
admissions for the years ended December 31, 1999 and 1998, respectively.
The Company's revenues also continue to be adversely affected by the trend
toward certain services being performed more frequently on an outpatient basis.
Generally, the payments received for an outpatient procedure are less than for a
similar procedure performed in an inpatient setting. The Company believes that
further payment reductions could occur as a result of the implementation of a
prospective payment system for Medicare outpatient services (pursuant to the
Balanced Budget Act and scheduled for implementation in July 1, 2000). 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.
Reductions in Medicare and Medicaid reimbursement, the increasing
percentage of the patient volume being related to patients participating in
managed care plans and continuing trends toward more services being performed on
an outpatient basis are expected to present ongoing challenges. The challenges
presented by these trends are magnified by the Company's inability to control
these trends and the associated risks. To maintain and improve its operating
margins in future periods, the Company must, among other things, increase
patient volumes while controlling the costs of providing services. If the
Company is not able to achieve these improvements 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.
As part of Columbia/HCA, the Company's facilities were included in managed
care contracts negotiated by Columbia/HCA on a market-wide basis emphasizing
large urban facilities. The Company's management
30
<PAGE> 91
believes that independence from Columbia/HCA has helped and will continue to
help the Company negotiate contract terms that are generally more favorable for
its facilities.
Operating Results Summary
The following are summaries of results from continuing operations for the
years ended December 31, 1999, 1998 and 1997 (dollars in millions):
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------------------------------------------------
1999 1998 1997
---------------------- ---------------------- ----------------------
AMOUNT % OF REVENUES AMOUNT % OF REVENUES AMOUNT % OF REVENUES
------ ------------- ------ ------------- ------ -------------
<S> <C> <C> <C> <C> <C> <C>
Revenues.......................... $515.2 100.0% $498.4 100.0% $487.6 100.0%
Salaries and benefits............. 217.4 42.2 220.8 44.3 196.6 40.3
Supplies.......................... 64.2 12.5 62.0 12.4 55.0 11.3
Other operating expenses.......... 117.3 22.7 117.2 23.5 119.5 24.5
Provision for doubtful accounts... 38.2 7.4 41.6 8.4 34.5 7.1
Depreciation and amortization..... 31.4 6.2 28.3 5.7 27.4 5.6
Interest expense.................. 23.4 4.5 19.1 3.8 15.4 3.2
Management fees................... 3.2 0.6 8.9 1.8 8.2 1.7
ESOP expense...................... 2.9 0.6 -- -- -- --
Impairment of long-lived assets... 25.4 4.9 26.1 5.2 -- --
------ ------ ------ ------ ------ ------
523.4 101.6 524.0 105.1 456.6 93.7
------ ------ ------ ------ ------ ------
Income (loss) from continuing
operations before minority
interests and income taxes...... (8.2) (1.6) (25.6) (5.1) 31.0 6.3
Minority interests in earnings of
consolidated entities........... 1.9 0.4 1.9 0.4 2.2 0.4
------ ------ ------ ------ ------ ------
Income (loss) from continuing
operations before income
taxes........................... (10.1) (2.0) (27.5) (5.5) 28.8 5.9
Provision (benefit) for income
taxes........................... (2.7) (0.6) (9.8) (2.0) 11.7 2.4
------ ------ ------ ------ ------ ------
Income (loss) from continuing
operations...................... $ (7.4) (1.4) $(17.7) (3.5) $ 17.1 3.5
====== ====== ====== ====== ====== ======
% changes from prior year:
Revenues........................ 3.4% 2.2%
Income (loss) from continuing
operations before income
taxes........................ 63.1 (195.4)
Income (loss) from continuing
operations................... 58.4 (204.0)
Admissions(a)................... 3.2 2.9
Equivalent admissions(b)........ 4.2 4.7
Revenues per equivalent
admission.................... (0.8) (2.3)
Same facility % changes from prior
year(c):
Revenues........................ 3.4 (1.8)
Admissions(a)................... 3.2 (0.8)
Equivalent admissions(b)........ 4.2 0.2
Revenues per equivalent
admission.................... (0.8) (2.0)
</TABLE>
- ---------------
(a) Represents the total number of patients admitted (in the facility for a
period in excess of 23 hours) to the Company's hospitals and is used by
management and certain investors as a general measure of inpatient volume.
(b) Equivalent admissions are used by management and certain investors as a
general measure of combined inpatient and outpatient volume. Equivalent
admissions are computed by multiplying admissions (inpatient volume) by the
sum of gross inpatient revenue and gross outpatient revenue and then
dividing the resulting amount by gross inpatient revenue. The equivalent
admissions computation "equates"
31
<PAGE> 92
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 the Company intends
to divest will continue to be included in "same facility" until the date
they are divested.
For the Years Ended December 31, 1999 and 1998
Revenues increased 3.4% to $515.2 million for the year ended December 31,
1999 compared to $498.4 million for the year ended December 31, 1998 primarily
as a result of increases in the volume of patients treated at the Company's
facilities. Inpatient admissions increased 3.2% and equivalent admissions
(adjusted to reflect combined inpatient and outpatient volume) increased 4.2%
for the year ended December 31, 1999 compared to the year ended December 31,
1998. Revenues per equivalent admission decreased 0.8% for the year ended
December 31, 1999 compared to the prior year. The decline in revenues per
equivalent admission resulted from several factors, including decreases in
Medicare reimbursement rates mandated by the Balanced Budget Act which became
effective October 1, 1997 (such rates lowered revenues by approximately $10.1
million for the year ended December 31, 1999 compared to periods prior to the
effective date of the Balanced Budget Act), and continued increases in the
number of managed care payers (managed care as a percentage of total admissions
increased to 20.2% for the year ended December 31, 1999 compared to 18.6% for
the year ended December 31, 1998). In addition, favorable cost report
adjustments of $0.7 million were recorded during the year ended December 31,
1999 compared to $1.2 million recorded during the year ended December 31, 1998.
Salaries and benefits decreased as a percentage of revenues to 42.2% for
the year ended December 31, 1999 from 44.3% for the year ended December 31, 1998
primarily as a result of improvements in labor productivity. Man-hours per
equivalent admission decreased 9.2% over the prior year.
Supply costs increased slightly to 12.5% as a percentage of revenues for
the year ended December 31, 1999 from 12.4% for the year ended December 31,
1998.
Other operating expenses decreased as a percentage of revenues to 22.7% for
the year ended December 31, 1999 from 23.5% for the year ended December 31,
1998. Other operating expenses consist primarily of contract services, physician
recruitment, professional fees, repairs and maintenance, rents and leases,
utilities, insurance, marketing and non-income taxes. The decrease was primarily
due to decreases in professional fees and contract services.
Provision for doubtful accounts decreased as a percentage of revenues to
7.4% for the year ended December 31, 1999 from 8.4% for the year ended December
31, 1998. In fiscal year 1998, a majority of the Company's facilities were
undergoing computer information system conversions (including patient
accounting) which hampered the business office billing functions. As a result,
accounts were not billed timely and the Company's allowance for bad debt
increased in 1998. During 1999, the Company began to recover from the
conversions and focus more on collections of accounts receivable.
Depreciation and amortization expense increased to $31.4 million for the
year ended December 31, 1999 from $28.3 million for the year ended December 31,
1998 primarily due to increased capital expenditures related to computer
information system conversions. The majority of the Company's facilities began
depreciating the systems in the fourth quarter of 1998.
Interest expense increased to $23.4 million for the year ended December 31,
1999 from $19.1 million for the year ended December 31, 1998. This increase is
primarily due to the interest expense incurred on the debt obligations assumed
from Columbia/HCA in connection with the Distribution. See Note 8 of the Notes
to the Consolidated Financial Statements included elsewhere in this report. For
the year ended December 31, 1998, interest expense was primarily represented by
interest incurred on the net intercompany balance with Columbia/HCA; however,
upon the Distribution, the intercompany amounts payable by the Company to
Columbia/HCA were eliminated.
32
<PAGE> 93
Management fees allocated by Columbia/HCA were $3.2 million for the year
ended December 31, 1999 and $8.9 million for the year ended December 31, 1998.
These amounts represented allocations, using revenues as the allocation basis,
of the corporate, general and administrative expenses of Columbia/HCA; however,
Columbia/HCA stopped allocating management fees to the Company after the
Distribution. The elimination of management fee allocations by Columbia/HCA was
offset by increases in salaries, supplies and other operating costs related to
the establishment and operation of the Company's corporate office during 1999.
During the fourth quarter of 1998, the Company decided to sell three
hospital facilities that were identified as not compatible with the Company'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. At December 31, 1998, the carrying value
before the impairment charge of the long-lived assets related to these hospital
facilities was approximately $47.0 million. The carrying value was reduced to
fair value, based on estimates of selling values at that time, for a total
non-cash charge of $24.8 million. During the fourth quarter of 1999, the Company
recorded an additional non-cash charge of $25.4 million (comprised of $22.4
million in further impairment charges for these facilities and $3.0 million in
anticipated selling/closing costs). The remaining carrying value of the
long-lived assets related to these hospital facilities was written down based on
revised selling values. Severance costs, if any, will be expensed when incurred
at a later date. One of these three hospital facilities held for sale was sold
subsequent to December 31, 1999. See Note 16 of the Notes to the Consolidated
Financial Statements included elsewhere in this report. For the years ended
December 31, 1999, 1998 and 1997, respectively, these facilities to be divested
had net revenues of approximately $42.6 million, $48.0 million and $50.6 million
and incurred income (loss) from continuing operations before income taxes
(benefit) and the asset impairment charges of approximately $(3.8) million,
$(2.9) million and $0.7 million.
The Company recorded, during the third quarter of 1998, an impairment loss
of approximately $1.3 million related to the write-off of intangibles and other
long-lived assets of certain physician practices where the recorded asset values
were not deemed to be fully recoverable based upon the operating results trends
and projected future cash flows. These assets being held and used are now
recorded at estimated fair value based upon discounted, estimated future cash
flows.
The impairment charges did not have a significant impact on the Company'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.
ESOP expense of $2.9 million during 1999 relates to the newly established
Employee Stock Ownership Plan discussed in Note 9 of the Notes to the
Consolidated Financial Statements included elsewhere in this report.
Minority interests in earnings of consolidated entities remained unchanged
as a percentage of revenues at 0.4% compared to the prior year.
Loss from continuing operations before income taxes was $10.1 million for
the year ended December 31, 1999 compared to a loss of $27.5 million for the
year ended December 31, 1998 primarily due to increases in revenue and decreases
in certain expenses as described above. The three facilities held for sale
contributed significantly to the decline in results of operations. These
facilities incurred losses from continuing operations before income tax benefit
of approximately $3.8 million and $2.9 million for the years ended December 31,
1999 and 1998, respectively.
Net loss was $7.4 million for the year ended December 31, 1999 compared to
a loss of $21.8 million for the year ended December 31, 1998. The year ended
December 31, 1998 included a $4.1 million after-tax loss from the Company's
discontinued home health operations, primarily due to declines in Medicare rates
of reimbursement under the Balanced Budget Act and declines in home health
visits. The Company's home health operations were divested during 1998.
33
<PAGE> 94
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 4.7%
and revenues per equivalent admission decreased 2.3% from 1997. On a same
facility basis, revenues decreased 1.8%, inpatient admissions decreased 0.8%,
equivalent admissions increased 0.2% and revenues per equivalent admission
decreased 2.0%. The decline in revenues (on a same facility basis) and revenues
per equivalent admission resulted from 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
$7.0 million), continued increases in the number of managed care payers (managed
care as a percentage of total admissions increased to 18.6% in 1998 compared to
16.7% in 1997) and delays experienced in obtaining Medicare cost report
settlements (cost report filings and settlements resulted in favorable revenue
adjustments of $1.2 million in 1998 compared to favorable adjustments of $3.3
million in 1997).
Operating expenses increased as a percentage of revenues in every expense
category except for other operating expenses, which decreased 1.0%. The primary
reason for the increases, as a percentage of revenues, was the Company'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 the Company contributed to
the Company'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 1997) and a
decline in productivity (man-hours per equivalent admission increased 2.9% over
1997).
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. The decrease was due to small decreases in several
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. The Company experienced an increased occurrence of charge audits from
certain payers due to the negative publicity surrounding the government
investigations which resulted in delays in the collection of receivables. The
delays in collection resulted in an increase in receivables reserved under the
Company's bad debt allowance policy.
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 the fourth quarter of 1998, the Company decided to sell three
hospital facilities that were identified as not compatible with the Company'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
34
<PAGE> 95
capital needs in each market. At December 31, 1998, the carrying value before
the impairment charge of the long-lived assets related to these hospital
facilities was approximately $47.0 million. The carrying value was reduced to
fair value, based on estimates of selling values, for a total non-cash charge of
$24.8 million. The Company 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.
Management fees allocated by Columbia/HCA were $8.9 million in 1998 and
$8.2 million in 1997. These amounts represented allocations, using revenues as
the allocation basis, of the corporate, general and administrative expenses of
Columbia/HCA.
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 $26.1 million pre-tax charge related to impairment of
long-lived assets. Also, the three facilities that management has determined as
held for sale contributed significantly to the decline in results of operations.
These facilities to be divested incurred income (loss) from continuing
operations before income taxes (benefit) of approximately ($2.9) million and
$0.7 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, the Company 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.
LIQUIDITY AND CAPITAL RESOURCES
Prior to the Distribution, the Company relied upon Columbia/HCA for
liquidity and sources of capital to supplement any needs not met by operations.
As an independent, publicly-traded company, the Company must now rely upon the
bank credit facilities and other traditional funding sources to supplement needs
not met by operations. At December 31, 1999, the Company had working capital of
$42.2 million compared to $26.9 million at December 31, 1998. The increase in
working capital was primarily due to a $12.5 million increase in cash resulting
from net cash collections since the Distribution. In addition, accounts
receivable increased approximately $10.3 million primarily as a result of
Columbia/HCA's agreement to indemnify the Company with respect to Medicare,
Medicaid, and cost-based Blue Cross receivables and payables relating to cost
reporting periods ending on or prior to the Distribution. The increase in
working capital was partially offset by increases in accounts payable.
Cash provided by operating activities was $57.5 million for the year ended
December 31, 1999 compared to $45.3 million for the year ended December 31,
1998. This increase was primarily attributable to less of a net loss in 1999
than in 1998.
Cash used in investing activities was $67.0 million for the year ended
December 31, 1999 compared to $29.3 million for the year ended December 31,
1998. The increase was primarily due to capital expenditures of $64.8 million in
1999 (of which $29.1 million related to the construction of a replacement
hospital located in Florida that was completed in December 1999) compared to
$29.3 million in 1998. At December 31, 1999, there were construction projects
committed by the Company which had an estimated cost of approximately $15.9
million. These projects are scheduled for completion by the end of 2000.
Management believes that its capital expenditure program is adequate to expand,
improve and equip the Company's existing health care facilities. The Company
expects to make total capital expenditures in 2000 of approximately $47.0
million, excluding acquisitions.
Cash provided by financing activities was $22.0 million for the year ended
December 31, 1999 compared to cash used in financing activities of $16.0 million
for the year ended December 31, 1998. The increase was primarily due to
increases in the intercompany amounts payable by the Company to Columbia/HCA
prior to the Distribution. Intercompany amounts payable by the Company to
Columbia/HCA were eliminated in
35
<PAGE> 96
connection with the Distribution and the Company assumed certain indebtedness
from Columbia/HCA (as discussed below).
Management does not consider the sale of any assets to be necessary to
repay the Company's indebtedness or to provide working capital. However, for
other reasons, certain of the Company's hospitals may be sold in the future from
time to time. At December 31, 1999, three of the Company's hospitals were held
for sale. One of the hospitals was sold subsequent to December 31, 1999. See
Note 16 of the Notes to the Consolidated Financial Statements included elsewhere
in this report. Although the Company's indebtedness is much more significant
than was the case for its predecessor entities prior to the Distribution,
management expects that operations and amounts available under the Company's
Credit Agreement (as discussed below) will provide sufficient liquidity in 2000.
The Company intends to acquire additional hospitals and are actively
seeking such acquisitions. There can be no assurance that the Company will not
require additional debt or equity financing for any particular acquisition.
Also, the Company continually reviews its capital needs and financing
opportunities and may seek additional equity or debt financing for its
acquisition program or other needs. In order to ensure the tax-free treatment of
the Distribution, however, LifePoint is limited in the amount of stock it may
issue in consideration of acquisitions.
The Company does not expect to pay dividends on its Common Stock in the
foreseeable future.
LONG-TERM DEBT
Bank Credit Agreement
On May 11, 1999, the Company assumed from Columbia/HCA the obligations
under a bank credit agreement (the "Credit Agreement") with a group of lenders
with commitments aggregating $210 million. The Credit Agreement consists of a
$60 million term loan facility, an $85 million term loan facility, and a $65
million revolving credit facility (collectively the "Bank Facilities").
As of December 31, 1999, $25 million of the $60 million term loan facility
was drawn, with the remaining $35 million available for limited purposes to be
drawn by May 11, 2000. The final payment under this term loan facility is due
November 11, 2004.
The $85 million term loan facility was drawn in full at the time of the
Distribution. The final payment under this term loan is due November 11, 2005.
The $65 million revolving credit facility is available for working capital
and other general corporate purposes, and any outstanding amounts thereunder
will be due and payable on November 11, 2004. No amounts were outstanding under
this facility as of February 29, 2000.
Repayments under the term loan facilities are due in quarterly installments
with quarterly amortization based on annual amounts. Interest on the Bank
Facilities is currently based on LIBOR plus 3.0% for the revolving credit
facility and the $60 million term loan facility, and LIBOR plus 3.5% for the $85
million term loan facility. The weighted average interest rate on the Bank
Facilities was approximately 9.9% at December 31, 1999. The Company also pays a
commitment fee equal to 0.5% of the average daily amount available under the
revolving credit facility and on the undrawn portion of the $60 million term
loan facility.
The Company's obligations under the Bank Facilities are guaranteed by its
subsidiaries. These guarantees are secured by a pledge of substantially all of
the subsidiaries' assets. The Credit Agreement requires that the Company comply
with various financial ratios and tests and contains covenants, including but
not limited to restrictions on new indebtedness, the ability to merge or
consolidate, asset sales, capital expenditures and dividends.
Senior Subordinated Notes
On May 11, 1999, the Company assumed from Columbia/HCA $150 million in
Senior Subordinated Notes maturing on May 15, 2009 and bearing interest at
10.75%. In November 1999, in a registered exchange
36
<PAGE> 97
offer, the Company issued a like aggregate principal amount of notes in exchange
for these notes (the "Notes"). Interest is payable semi-annually. The Notes are
unsecured obligations and are subordinated in right of payment to all existing
and future senior indebtedness. The Company's obligations under the Notes are
guaranteed by its subsidiaries.
The indenture pursuant to which the Notes were made contains certain
covenants, including but not limited to restrictions on new indebtedness, the
ability to merge or consolidate, asset sales, capital expenditures and
dividends.
Market Risks Associated with Financial Instruments
The Company's interest expense is sensitive to changes in the general level
of interest rates. No derivatives are currently used to alter the interest rate
characteristics of the Company's debt instruments.
With respect to the Company's interest-bearing liabilities, approximately
$110.0 million of long-term debt (including current portion) at December 31,
1999 is subject to variable rates of interest, while the remaining balance in
long-term debt (including current portion) of $150.2 million at December 31,
1999 is subject to fixed rates of interest. The fair value of the Company's
total long-term debt (including current portion) was $264.7 million at December
31, 1999. The fair value of the Notes has been determined using the quoted
market price at December 31, 1999. The fair values of the remaining long-term
debt are estimated using discounted cash flows, based on the Company's
incremental borrowing rates. Based on a hypothetical 1% increase in interest
rates on the Company's variable rate debt, the potential annualized losses in
future pretax earnings would be approximately $1.1 million. The impact of such a
change in interest rates on the carrying value of long-term debt would not be
significant. The estimated changes to interest expense and the fair value of
long-term debt are determined considering the impact of hypothetical interest
rates on the Company's borrowing cost and long-term debt balances. These
analyses do not consider the effects, if any, of the potential changes in the
Company's credit ratings or the overall level of economic activity. Further, in
the event of a change of significant magnitude, management would expect to take
actions intended to further mitigate its exposure to such change. For further
information, see above discussion of the Company's long-term debt.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative
Instruments and Hedging Activities", which was required to be adopted in years
beginning after June 15, 1999. In June 1999, SFAS No. 137 was issued, deferring
the effective date of SFAS No. 133 for one year. Management does not anticipate
that the adoption of the new statement will have a material effect on the
financial condition or results of operations of the Company.
YEAR 2000 COMPLIANCE
The Company did not experience any material disruptions or other effects
caused by the Year 2000 problem, nor does the Company expect to experience any
material disruptions or other effects caused by the Year 2000 problem in the
future.
INFLATION
The health care industry is labor intensive. Wages and other expenses
increase during periods of inflation and when shortages in marketplaces occur.
In addition, suppliers pass along rising costs to the Company in the form of
higher prices. The Company's ability to pass on these increased costs is limited
due to increasing regulatory and competitive pressures, as discussed above. In
the event the Company experiences inflationary pressures, there can be no
assurance that the Company's results of operations will not be materially
effected.
37
<PAGE> 98
RISK FACTORS
High Degree of Leverage and Debt Service Obligations May Adversely Affect
LifePoint
LifePoint is highly leveraged. At December 31, 1999, LifePoint's
consolidated long-term debt was approximately $260.2 million. LifePoint also may
draw upon an additional term loan commitment of $35 million available for
limited purposes and a revolving credit commitment of up to $65 million under
its credit agreement. LifePoint also has the ability to incur additional debt,
subject to limitations imposed by its credit agreement and the indenture
governing the notes issued by Holdings. While LifePoint believes that future
operating cash flow, together with available financing arrangements, will be
sufficient to fund operating requirements, leverage and debt service
requirements could have important consequences to LifePoint, including the
following:
- such requirements may make LifePoint more vulnerable to economic
downturns and to adverse changes in business conditions, such as further
limitations on reimbursement under Medicare and Medicaid programs;
- LifePoint's ability to obtain additional financing in the future for
working capital, capital expenditures, acquisitions, general corporate
purposes or other purposes may be impaired;
- a substantial portion of LifePoint'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;
- certain of the borrowings may be at variable rates of interest, which
would make LifePoint vulnerable to increases in interest rates; and
- the indebtedness of LifePoint contains 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 debt levels or the inability 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.
Loss of Physicians or Other Key Personnel Could Adversely Affect LifePoint's
Business
Since physicians generally direct the majority of hospital admissions, the
success of LifePoint, in part, is dependent upon the number and quality of
physicians on its hospitals' medical staffs, the admissions practices of such
physicians and the maintenance of good relations with such physicians. Hospital
physicians are generally not employees. 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' medical 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. If Messrs. Mercy or Fleetwood or any of such other executive officers
were to resign their positions or otherwise be unable to serve, the operating
results of LifePoint could be adversely affected. In addition, the success of
LifePoint depends on its ability to attract and retain managers at its hospitals
and related facilities, on the ability of its officers and key employees to
manage growth successfully and on its ability to attract and retain skilled
employees.
38
<PAGE> 99
Limited Operating History as an Independent Company; Net Losses
Prior to May 11, 1999, LifePoint operated as the America Group division of
Columbia/HCA. Accordingly, LifePoint does not have a long operating history as
an independent, publicly-traded company and, prior to the Distribution,
LifePoint had historically relied on Columbia/HCA for various financial,
administrative and managerial expertise relevant to the conduct of its business.
LifePoint maintains its own lines of credit and banking relationships, employs
its own senior executives and performs its own administrative functions, except
that Columbia/HCA continues to provide certain support services to LifePoint on
a contractual basis. LifePoint did not generate a profit for 1999. There can be
no assurance that LifePoint will not continue to have net losses in the future.
See "Business -- Arrangements Relating to the Distribution" for more information
regarding LifePoint's arrangements with Columbia/HCA and see "Management's
Discussion and Analysis of Financial Condition and Results of Operations" for
certain factors that could affect LifePoint's ability to generate profits.
Limits on Reimbursement and Health Care Reform Legislation May Reduce
Profitability
A significant portion of the revenues of LifePoint are derived from the
Medicare and Medicaid programs, which are highly regulated and subject to
frequent and substantial changes. In recent years, fundamental changes in the
Medicare and Medicaid programs, including the implementation of a 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 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 and preferred provider organizations. LifePoint
believes 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 anticipates 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.
Reimbursement by Managed Care Organizations May Reduce Hospital Profitability
The competitive position of LifePoint's hospitals 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
39
<PAGE> 100
offering prepaid and discounted medical services packages represent an
increasing portion of LifePoint's admissions, resulting in reduced hospital
revenue growth. If LifePoint is unable to lower costs through increased
operational efficiencies and the trend toward declining reimbursements and
payments continues, LifePoint's results of operations and cash flows will be
adversely affected. One managed care organization in Tennessee has been placed
in receivership by the state of Tennessee. There can be no assurances that other
managed care organizations with which LifePoint has contracts will not encounter
similar difficulties in paying claims in the future.
Competition
The health care business is highly competitive and competition among
hospitals and other health care providers for patients has intensified in recent
years. Almost all of LifePoint'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
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 Acquisition Strategy and Potential Acquisitions
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. There can be no
assurance that suitable acquisitions can be accomplished on terms favorable to
LifePoint, or that financing, if necessary, can be obtained for such
acquisitions. The consummation of acquisitions may result in the incurrence or
assumption by LifePoint of additional indebtedness. In addition, in order to
ensure the tax-free treatment of the Distribution, LifePoint 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 has 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 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
After certain intended divestitures, six of LifePoint's remaining 20
general, acute care hospitals will be located in the Commonwealth of Kentucky,
and six of LifePoint's remaining 20 general, acute care hospitals will be
located in the state of Tennessee. After giving effect to such intended
divestitures, for the year ended December 31, 1999, 42.7% of LifePoint's revenue
was generated by LifePoint's Kentucky hospitals and 22.2% of LifePoint's revenue
was generated by LifePoint's Tennessee hospitals. Accordingly, any change in the
current demographic, economic, competitive, regulatory, Medicaid reimbursement
rates or legislative conditions in Kentucky or Tennessee could have a material
adverse effect on the business, financial condition, results of operations or
prospects of LifePoint.
Extensive Regulation Could Adversely Affect LifePoint
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, payment for services and prices
for services that are extremely complex and for which, in many instances, the
industry does not
40
<PAGE> 101
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 healthcare program.
Sanctions for violating the Anti-Kickback Statute include criminal penalties and
civil sanctions, including civil money penalties and possible exclusion from
government programs such as Medicare and Medicaid. Pursuant to the Medicare and
Medicaid Patient and Program Protection Act of 1987, the HHS has issued
regulations which describe some of the conduct and business relationships immune
from prosecution under the Anti-Kickback Statute. 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 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. sec. 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.
LifePoint provides financial incentives to recruit physicians into the
communities served by its hospitals, including loans and minimum revenue
guarantees. One LifePoint hospital has physician investors. LifePoint also
enters into employment agreements, independent contractor agreements, leases and
other agreements with physicians. Although the Company believes that these
agreements comply with applicable law, there can be no assurance that regulatory
authorities who enforce the Anti-Kickback Statute will not determine that such
arrangements of any of the hospitals owned and operated by LifePoint violate the
Anti-Kickback Statute or other federal laws. Such a determination could subject
LifePoint 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.
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 physicians maintaining an ownership interest in an entire
hospital, 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 will be found to be in compliance with the Stark Law, as such law
ultimately may be interpreted. Many states have adopted or are considering
similar anti-kickback and physician self-referral legislation, some of which
extends beyond the scope of the federal law to prohibit the payment or receipt
of remuneration for the referral of patients and physician self-referrals
regardless of the source of the payment for the care. Both federal and state
government agencies have announced heightened and coordinated civil and criminal
enforcement efforts. In addition, the Office of the Inspector General of the
United States Department of Health and Human Services and the Department of
Justice have from time to time established enforcement initiatives that focus on
specific billing practices or other suspected areas of abuse. Current
initiatives include a focus on hospital billing for outpatient charges
associated with inpatient services, as well as hospital laboratory billing
practices. LifePoint is cooperating with the government agencies which are
responsible for such initiatives where such initiatives involve its hospitals.
LifePoint 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 or certain
transactions in which it is
41
<PAGE> 102
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.
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 to acquire not-for-profit hospitals.
Some states require prior approval for the purchase, construction and
expansion of health care facilities, based upon a state's determination of need
for additional or expanded health care facilities or services. Such
determinations, embodied in certificates of need issued by governmental agencies
with jurisdiction over health care facilities, may be required for capital
expenditures exceeding a prescribed amount, changes in bed capacity or services
and certain other matters. Five states in which LifePoint currently owns
hospitals, Alabama, Florida, Georgia, Kentucky and Tennessee, have enacted CON
legislation. There can be no assurance that LifePoint will be able to obtain
CONs required for expansion activities in the future or that the failure to
obtain any required CON will not have a material adverse effect on the business,
financial condition, results of operations or prospects of LifePoint.
The laws, rules and regulations described above are complex and subject to
interpretation. In the event of a determination that LifePoint 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, results of operations or prospects of
LifePoint. See "Business -- Government Regulation and Other Factors" for a
detailed discussion of laws and regulations affecting LifePoint.
Potential Adverse Impact of Columbia/HCA Investigations and Litigation
Columbia/HCA is currently facing significant legal challenges. Columbia/HCA
is the subject of various federal and state investigations, qui tam actions,
shareholder derivative and class action suits filed in federal court,
shareholder derivative actions filed in state courts, patient/payer actions and
general liability claims. In general, management understands that these
investigations, actions and claims relate to Columbia/HCA and its subsidiaries,
including subsidiaries that, prior to the Distribution Date, owned the
facilities now owned by the Company. 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. The
amounts in question in the qui tam and other actions are substantial, and
Columbia/HCA could be subject to substantial costs resulting from an adverse
outcome of one or more of such actions. Any such sanctions or losses could have
a material adverse effect on Columbia/HCA's financial position and results of
operations. In addition, if any of such matters were asserted against LifePoint
or any of its facilities, and Columbia/HCA failed to meet its indemnification
obligations under the Distribution Agreement, then such losses could have a
material adverse effect on the business, financial position, results of
operations or prospects of LifePoint. Columbia/HCA has not indemnified 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.
Columbia/HCA believes that the ongoing governmental investigations and
related media coverage may have had a negative effect on Columbia/HCA's results
of operations, which includes LifePoint 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 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 in future periods.
42
<PAGE> 103
Professional Liability Risks Could Adversely Affect Results of Operations and
Cash Flow
As is typical in the health care industry, LifePoint is subject to claims
and legal actions by patients and others in the ordinary course of business.
Columbia/HCA and LifePoint have cooperated 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 "Business -- Arrangements
Relating to the Distribution -- Insurance Allocation and Administration
Agreement" for a more detailed discussion of such arrangement.
The Company purchases insurance for its professional and general liability
risks incurred after the Distribution, subject to a substantial deductible, for
which a reserve is recorded on the balance sheets of LifePoint. There can be no
assurance that the cash flow of LifePoint will be adequate to provide for
professional and general liability claims in the future. Columbia/HCA has
indemnified LifePoint for professional and general liability claims incurred
prior to the Distribution.
Liability of LifePoint if the Distribution Is Taxable
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 qualifies under Section 355 of
the Internal Revenue Code of 1986, the Distribution generally will be tax-free
to Columbia/HCA and to Columbia/HCA's stockholders, except for any cash received
instead of fractional shares. The tax ruling is based upon the accuracy of
representations made by Columbia/HCA as to numerous factual matters and as to
the intention to take, or to refrain from taking, certain future actions. The
inaccuracy of any of those factual representations or the failure to take the
intended actions, or the taking of actions which were represented would not be
taken, could cause the IRS to revoke all or part of the tax ruling
retroactively.
If the Distribution were not to qualify for tax-free treatment under
Section 355 of the Code, then, in general, additional corporate tax (which would
be substantial) would be payable by the consolidated group of which Columbia/HCA
is the common parent. Under the consolidated return rules, each member of the
consolidated group, including LifePoint, would be jointly and severally liable
for such tax liability. If the Distribution did not qualify for tax-free
treatment under Section 355 of the Code, the resulting tax liability would have
a material adverse effect on the business, financial position, results of
operations or prospects of Columbia/HCA and, possibly, also of LifePoint.
Columbia/HCA, LifePoint and Triad entered into a tax sharing and
indemnification agreement, which allocates tax liabilities among Columbia/HCA,
LifePoint and Triad and addresses certain other tax matters such as
responsibility for filing tax returns, control of and cooperation in tax
litigation, and the tax treatment of the Distribution. Generally, Columbia/HCA
will be responsible for taxes that are allocable to periods prior to the
Distribution Date, and each of Columbia/HCA, LifePoint and Triad will be
responsible for its own tax liabilities, including its allocable share of taxes
shown on any consolidated, combined or other tax return filed by Columbia/HCA
for periods after the Distribution Date. The tax sharing and indemnification
agreement prohibits LifePoint and Triad from taking actions that could
jeopardize the tax treatment of either the Distribution or the restructuring
that preceded the Distribution, and requires 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
Holdings is a holding company and holds most of its assets at, and conducts
most of its operations through, direct and indirect subsidiaries. As a holding
company, the results of operations of Holdings depend on the results of
operations of its subsidiaries. Moreover, Holdings is dependent on dividends or
other intercompany transfers of funds from such subsidiaries to meet its debt
service and other obligations, including payment of principal and interest on
the Notes. The ability of Holdings' subsidiaries to pay dividends or make other
payments or advances to Holdings will depend on their operating results and will
be subject to applicable laws and restrictions contained in agreements governing
indebtedness of such subsidiaries.
43
<PAGE> 104
The claims of creditors of the subsidiaries of Holdings, including trade
creditors, will generally have priority as to the assets of such subsidiaries
over the claims of creditors of Holdings, including the holders of the Notes. As
of December 31, 1999, on a pro forma basis after giving effect to the
elimination of the facilities to be divested, the aggregate amount of
indebtedness and other obligations of Holdings' subsidiaries, including trade
payables and lease obligations, was approximately $285.0 million, including the
guarantees of the Notes.
Anti-Takeover Provisions
Certain provisions of the Certificate of Incorporation and By-Laws of
LifePoint 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, although such proposals, if made, might be considered desirable by a
majority of the stockholders of LifePoint. 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. These provisions have been
designed to enable LifePoint to develop its business 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 Company and its
stockholders. LifePoint also has adopted a stockholder rights plan. This
stockholder rights plan is designed to protect stockholders in the event of an
unsolicited offer and other takeover tactics which, in the opinion of the Board
of Directors, could impair its ability to represent stockholder interests. The
provisions of this stockholder rights plan may render an unsolicited takeover of
LifePoint more difficult or less likely to occur or might prevent such a
takeover. LifePoint is subject to provisions of Delaware corporate law which may
restrict certain business combination transactions.
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
"Business -- Arrangements Relating to the Distribution -- Tax Sharing and
Indemnification Agreement."
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Information with respect to this Item is contained under the caption
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Market Risks Associated with Financial Instruments."
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Information with respect to this Item is contained in the Company's
consolidated financial statements indicated in the Index on Page F-1 of this
Annual Report on Form 10-K.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
44
<PAGE> 105
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
EXECUTIVE OFFICERS AND KEY EMPLOYEES
Information with respect to the executive officers of the Company is
incorporated by reference to the information contained under the caption
"Executive Compensation -- Executive Officers of the Company" included in the
Company's Proxy Statement relating to its Annual Meeting of Stockholders to be
held on May 11, 2000.
DIRECTORS
Information with respect to the Company's directors is incorporated by
reference to the information contained under the caption "Election of Directors"
included in the Company's Proxy Statement relating to its Annual Meeting of
Stockholders to be held on May 11, 2000.
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
Information with respect to compliance with Section 16(a) of the Securities
Exchange Act of 1934 is incorporated by reference to the information contained
under the heading "Section 16(a) Beneficial Ownership Reporting Compliance"
included in the Company's Proxy Statement relating to its Annual Meeting of
Stockholders to be held on May 11, 2000.
ITEM 11. EXECUTIVE COMPENSATION
This information is incorporated by reference to the information contained
under the heading "Executive Compensation" included in the Company's Proxy
Statement relating to its Annual Meeting of Stockholders to be held on May 11,
2000, except that the Comparative Performance Graph and the Compensation
Committee Report on Executive Compensation included in the Proxy Statement are
expressly not incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
This information is incorporated by reference to the information contained
under the caption "Voting Securities and Principal Holders Thereof" included in
the Company's Proxy Statement relating to its Annual Meeting of Stockholders to
be held on May 11, 2000.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
This information is incorporated by reference to the information contained
under the caption "Certain Transactions" included in the Company's Proxy
Statement relating to its Annual Meeting of Stockholders to be held on May 11,
2000.
45
<PAGE> 106
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) Index to Consolidated Financial Statements, Financial Statement Schedules
and Exhibits:
(1) Consolidated Financial Statements: See Item 8 herein.
The Consolidated Financial Statements of the Company required to be
included in Part II, Item 8, are indexed on Page F-1 and submitted as a
separate section of this report.
(2) Consolidated Financial Statement Schedules:
All schedules are omitted, because they are not applicable or not
required, or because the required information is included in the
consolidated financial statements or notes thereto.
(3) Exhibits
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- ------- -----------
<C> <C> <S>
2.1 -- Distribution Agreement dated May 11, 1999 by and among
Columbia/HCA, Triad Hospitals, Inc. and LifePoint Hospitals,
Inc., incorporated by reference from Exhibit 2.1 to
LifePoint Hospitals' Quarterly Report on Form 10-Q for the
quarter ended March 31, 1999, File No. 0-29818.
3.1 -- Certificate of Incorporation of LifePoint Hospitals,
incorporated by reference from Exhibit 3.1 to LifePoint
Hospitals' Quarterly Report on Form 10-Q for the quarter
ended March 31, 1999, File No. 0-29818.
3.2 -- Bylaws of LifePoint Hospitals, incorporated by reference
from Exhibit 3.2 to LifePoint Hospitals' Quarterly Report on
Form 10-Q, for the quarter ended March 31, 1999, File No.
0-29818.
3.3 -- Certificate of Incorporation of LifePoint Holdings.
3.4 -- Bylaws of LifePoint Holdings.
4.1 -- Form of Specimen Certificate for LifePoint Hospitals Common
Stock, incorporated by reference from Exhibit 4.1 to
LifePoint Hospitals' Registration Statement on Form 10 under
the Securities Exchange Act of 1934, as amended, File No.
0-29818.
4.2 -- Indenture (including form of 10 3/4% Senior Subordinated
Notes due 2009) dated as of May 11, 1999, between
HealthTrust, Inc.-The Hospital Company and Citibank N.A. as
Trustee, incorporated by reference from Exhibit 4.2(a) to
LifePoint Hospitals' Quarterly Report on Form 10-Q for the
quarter ended March 31, 1999, File No. 0-29818.
4.3 -- Form of 10 3/4% Senior Subordinated Notes due 2009 (filed as
part of Exhibit 4.2).
4.4 -- Registration Rights Agreement dated as of May 11, 1999
between HealthTrust and the Initial Purchasers named
therein, incorporated by reference from Exhibit 4.4(a) to
LifePoint Hospitals' Quarterly Report on Form 10-Q for the
quarter ended March 31, 1999, File No. 0-29818.
4.5 -- LifePoint Assumption Agreement dated May 11, 1999 between
HealthTrust and LifePoint Hospitals, incorporated by
reference from Exhibit 4.4(b) to LifePoint Hospitals'
Quarterly Report on Form 10-Q for the quarter ended March
31, 1999, File No. 0-29818.
4.6 -- Holdings Assumption Agreement dated May 11, 1999 between
LifePoint Hospitals and LifePoint Holdings, incorporated by
reference from Exhibit 4.4(c) to LifePoint Hospitals'
Quarterly Report on Form 10-Q for the quarter ended March
31, 1999, File No. 0-29818.
4.7 -- Guarantor Assumption Agreements dated May 11, 1999 between
LifePoint Holdings and the Guarantors signatory thereto,
incorporated by reference from Exhibit 4.4(d) to LifePoint
Hospitals' Quarterly Report on Form 10-Q for the quarter
ended March 31, 1999, File No. 0-29818.
4.8 -- Rights Agreement dated as of May 11, 1999 between the
Company and National City Bank as Rights Agent, incorporated
by reference from Exhibit 4.1 to LifePoint Hospitals'
Quarterly Report on Form 10-Q for the quarter ended March
31, 1999, File No. 0-29818.
</TABLE>
46
<PAGE> 107
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- ------- -----------
<C> <C> <S>
10.1 -- Tax Sharing and Indemnification Agreement, dated May 11,
1999, by and among Columbia/HCA, LifePoint Hospitals and
Triad Hospitals, incorporated by reference from Exhibit 10.1
to LifePoint Hospitals' Quarterly Report on Form 10-Q for
the quarter ended March 31, 1999, File No. 0-29818.
10.2 -- Benefits and Employment Matters Agreement, dated May 11,
1999 by and among Columbia/HCA, LifePoint Hospitals and
Triad Hospitals, incorporated by reference from Exhibit 10.2
to LifePoint Hospitals' Quarterly Report on Form 10-Q for
the quarter ended March 31, 1999, File No. 0-29818.
10.3 -- Insurance Allocation and Administration Agreement, dated May
11, 1999, by and among Columbia/HCA, LifePoint Hospitals and
Triad Hospitals, incorporated by reference from Exhibit 10.3
to LifePoint Hospitals' Quarterly Report on Form 10-Q for
the quarter ended March 31, 1999, File No. 0-29818.
10.4 -- Transitional Services Agreement dated May 11, 1999 by and
between Columbia/HCA and LifePoint Hospitals, incorporated
by reference from Exhibit 10.4 to LifePoint Hospitals'
Quarterly Report on Form 10-Q for the quarter ended March
31, 1999, File No. 0-29818.
10.5 -- Computer and Data Processing Services Agreement dated May
11, 1999 by and between Columbia Information Systems, Inc.
and LifePoint Hospitals, incorporated by reference from
Exhibit 10.5 to LifePoint Hospitals' Quarterly Report on
Form 10-Q for the quarter ended March 31, 1999, File No.
0-29818.
10.6 -- Agreement to Share Telecommunications Services dated May 11,
1999 by and between Columbia Information Systems, Inc. and
LifePoint Hospitals, incorporated by reference from Exhibit
10.6 to LifePoint Hospitals' Quarterly Report on Form 10-Q
for the quarter ended March 31, 1999, File No. 0-29818.
10.7 -- Year 2000 Professional Services Agreement dated May 11, 1999
by and between CHCA Management Services, L.P. and LifePoint
Hospitals, incorporated by reference from Exhibit 10.7 to
LifePoint Hospitals' Quarterly Report on Form 10-Q for the
quarter ended March 31, 1999, File No. 0-29818.
10.8 -- Sub-Lease Agreement dated May 11, 1999 by and between
HealthTrust and LifePoint Hospitals, incorporated by
reference from Exhibit 10.8 to LifePoint Hospitals'
Quarterly Report on Form 10-Q for the quarter ended March
31, 1999, File No. 0-29818.
10.9 -- Lease Agreement dated as of November 22, 1999 by and between
LifePoint Hospitals and W. Fred Williams, Trustee for the
Benefit of Highwoods/Tennessee Holdings, L.P.
10.10 -- LifePoint Hospitals, Inc. 1998 Long-Term Incentive Plan,
incorporated by reference from Exhibit 10.9 to LifePoint
Hospitals' Quarterly Report on Form 10-Q for the quarter
ended March 31, 1999, File No. 0-29818.
10.11 -- LifePoint Hospitals, Inc. Executive Stock Purchase Plan,
incorporated by reference from Exhibit 10.10 to LifePoint
Hospitals' Quarterly Report on Form 10-Q for the quarter
ended March 31, 1999, File No. 0-29818.
10.12 -- Form of Share Purchase Loan and Note Agreement between
LifePoint Hospitals and certain executive officers in
connection with purchases of Common Stock pursuant to the
Executive Stock Purchase Plan.
10.13 -- LifePoint Hospitals, Inc. Management Stock Purchase Plan,
incorporated by reference from Exhibit 10.11 to LifePoint
Hospitals' Quarterly Report on Form 10-Q, for the quarter
ended March 31, 1999, File No. 0-29818.
10.14 -- LifePoint Hospitals, Inc. Outside Directors Stock and
Incentive Compensation Plan, incorporated by reference from
Exhibit 10.12 to LifePoint Hospitals' Quarterly Report on
Form 10-Q for the quarter ended March 31, 1999, File No.
0-29818.
10.15 -- LifePoint Hospitals, Inc. Retirement Plan, dated as of May
19, 1999.
</TABLE>
47
<PAGE> 108
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- ------- -----------
<C> <C> <S>
10.16 -- Credit Agreement dated as of May 11, 1999 among HealthTrust,
Inc.-The Hospital Company, as Borrower, the several lenders
from time to time party thereto, Fleet National Bank as
arranger and administrative agent, ScotiaBanc, Inc. as
documentation agent and co-arranger, Deutsche Bank
Securities, Inc. as syndication agent and co-arranger, and
SunTrust Bank, Nashville, N.A. as co-agent, incorporated by
reference from Exhibit 10.13 to LifePoint Hospitals'
Quarterly Report on Form 10-Q, for the quarter ended March
31, 1999, File No. 0-29818.
10.17 -- First Amendment to Credit Agreement dated as of December 31,
1999 among LifePoint Holdings, as Borrower, the several
lenders which are parties to the Credit Agreement, Fleet
National Bank as arranger and administrative agent,
ScotiaBanc, Inc. as documentation agent and co-arranger,
Deutsche Bank Securities, Inc. as syndication agent and
co-arranger, and SunTrust Bank, Nashville, N.A. as co-agent.
10.18 -- Assumption Agreement dated as of May 11, 1999 by and between
Fleet National Bank and LifePoint Hospitals, incorporated by
reference from Exhibit 10.14 to LifePoint Hospitals'
Quarterly Report on Form 10-Q for the quarter ended March
31, 1999, File No. 0-29818.
10.19 -- Assumption Agreement dated as of May 11, 1999 by and between
Fleet National Bank and LifePoint Holdings, incorporated by
reference from Exhibit 10.15 to LifePoint Hospitals'
Quarterly Report on Form 10-Q for the quarter ended March
31, 1999, File No. 0-29818.
10.20 -- Employment Agreement of Scott Mercy, incorporated by
reference from Exhibit 10.12 to LifePoint Hospitals'
Registration Statement on Form 10 under the Securities
Exchange Act of 1934, as amended, File No. 0-29818.
21.1 -- List of the Subsidiaries of LifePoint Hospitals.
21.2 -- List of the Subsidiaries of LifePoint Holdings.
23.1 -- Consent of Ernst & Young LLP.
27.1 -- Financial Data Schedule for LifePoint Hospitals (for SEC use
only).
27.2 -- Financial Data Schedule for LifePoint Holdings (for SEC use
only).
</TABLE>
48
<PAGE> 109
MANAGEMENT COMPENSATION PLANS AND ARRANGEMENTS
The following is a list of all executive compensation plans and
arrangements filed as exhibits to this Annual Report on Form 10-K:
<TABLE>
<C> <C> <S>
10.10 -- LifePoint Hospitals, Inc. 1998 Long-Term Incentive Plan,
incorporated by reference from Exhibit 10.9 to LifePoint
Hospitals' Quarterly Report on Form 10-Q for the quarter
ended March 31, 1999.
10.11 -- LifePoint Hospitals, Inc. Executive Stock Purchase Plan,
incorporated by reference from Exhibit 10.10 to LifePoint
Hospitals' Quarterly Report on Form 10-Q for the quarter
ended March 31, 1999.
10.12 -- Form of Share Purchase Loan and Note Agreement between
LifePoint Hospitals and certain executive officers in
connection with purchases of Common Stock pursuant to the
Executive Stock Purchase Plan.
10.13 -- LifePoint Hospitals, Inc. Management Stock Purchase Plan,
incorporated by reference from Exhibit 10.11 to LifePoint
Hospitals' Quarterly Report on Form 10-Q, for the quarter
ended March 31, 1999.
10.14 -- LifePoint Hospitals, Inc. Outside Directors Stock and
Incentive Compensation Plan, incorporated by reference from
Exhibit 10.12 to LifePoint Hospitals' Quarterly Report on
Form 10-Q for the quarter ended March 31, 1999.
10.15 -- LifePoint Hospitals, Inc. Retirement Plan, dated as of May
19, 1999.
10.20 -- Employment Agreement of Scott Mercy, incorporated by
reference from Exhibit 10.12 to LifePoint Hospitals'
Registration Statement on Form 10 under the Securities
Exchange Act of 1934, as amended.
</TABLE>
(b) Reports on Form 8-K
No reports on Form 8-K were filed by the Company during the reporting
period.
49
<PAGE> 110
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized, in the City of
Brentwood, State of Tennessee, on March 29, 2000.
LIFEPOINT HOSPITALS, INC.
By: /s/ SCOTT L. MERCY
-------------------------------------
Scott L. Mercy
Chairman and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant in the capacities and on the date indicated.
<TABLE>
<CAPTION>
NAME TITLE DATE
---- ----- ----
<C> <S> <C>
/s/ SCOTT L. MERCY Chairman and Chief Executive March 29, 2000
- ----------------------------------------------------- Officer; Director (Principal
Scott L. Mercy Executive Officer)
/s/ KENNETH C. DONAHEY Senior Vice President and Chief March 29, 2000
- ----------------------------------------------------- Financial Officer (Principal
Kenneth C. Donahey Financial and Accounting
Officer)
/s/ RICKI TIGERT HELFER Director March 29, 2000
- -----------------------------------------------------
Ricki Tigert Helfer
/s/ JOHN E. MAUPIN, JR., D.D.S. Director March 29, 2000
- -----------------------------------------------------
John E. Maupin, Jr., D.D.S.
/s/ DEWITT EZELL, JR. Director March 29, 2000
- -----------------------------------------------------
DeWitt Ezell, Jr.
/s/ WILLIAM V. LAPHAM Director March 29, 2000
- -----------------------------------------------------
William V. Lapham
</TABLE>
50
<PAGE> 111
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized, in the City of
Brentwood, State of Tennessee, on March 29, 2000.
LIFEPOINT HOSPITALS HOLDINGS, INC.
By: /s/ SCOTT L. MERCY
-------------------------------------
Scott L. Mercy
Chairman and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed by the following persons in the capacities and on the
date indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
/s/ SCOTT L. MERCY Chairman and Chief Executive March 29, 2000
- ----------------------------------------------------- Officer; Director (Principal
Scott L. Mercy Executive Officer)
/s/ JAMES M. FLEETWOOD, JR. President and Chief Operating March 29, 2000
- ----------------------------------------------------- Officer; Director
James M. Fleetwood, Jr.
/s/ KENNETH C. DONAHEY Senior Vice President and Chief March 29, 2000
- ----------------------------------------------------- Financial Officer (Principal
Kenneth C. Donahey Financial and Accounting
Officer)
</TABLE>
51
<PAGE> 112
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
LIFEPOINT HOSPITALS, INC.
Report of Independent Auditors.............................. F-2
Consolidated Statements of Operations -- for the years ended
December 31, 1999, 1998 and 1997.......................... F-3
Consolidated Balance Sheets -- December 31, 1999 and 1998... F-4
Consolidated Statements of Cash Flows -- for the years ended
December 31, 1999, 1998 and 1997.......................... F-5
Consolidated Statements of Stockholders' Equity -- for the
years ended December 31, 1999, 1998 and 1997.............. F-6
Notes to Consolidated Financial Statements.................. F-7
LIFEPOINT HOSPITALS HOLDINGS, INC.
Report of Independent Auditors.............................. F-25
Consolidated Statements of Operations -- for the years ended
December 31, 1999, 1998 and 1997.......................... F-26
Consolidated Balance Sheets -- December 31, 1999 and 1998... F-27
Consolidated Statements of Cash Flows -- for the years ended
December 31, 1999, 1998 and 1997.......................... F-28
Consolidated Statements of Stockholder's Equity -- for the
years ended December 31, 1999, 1998 and 1997.............. F-29
Notes to Consolidated Financial Statements.................. F-30
DODGE CITY HEALTHCARE GROUP, L.P.
Report of Independent Auditors.............................. F-48
Statements of Income -- for the years ended December 31,
1999, 1998 and 1997....................................... F-49
Balance Sheets -- December 31, 1999 and 1998................ F-50
Statements of Cash Flows -- for the years ended December 31,
1999, 1998 and 1997....................................... F-51
Statements of Partners' Capital -- for the years ended
December 31, 1999, 1998 and 1997.......................... F-52
Notes to Financial Statements............................... F-53
</TABLE>
F-1
<PAGE> 113
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors and Stockholders
LifePoint Hospitals, Inc.
We have audited the accompanying consolidated balance sheets of LifePoint
Hospitals, Inc. as of December 31, 1999 and 1998, and the related consolidated
statements of operations, stockholders' equity and cash flows for each of the
three years in the period ended December 31, 1999. These consolidated financial
statements are the responsibility of the management of LifePoint Hospitals, Inc.
(the "Company"). Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. 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 consolidated financial position of LifePoint
Hospitals, Inc. at December 31, 1999 and 1998, and the consolidated results of
its operations and its cash flows for each of the three years in the period
ended December 31, 1999, in conformity with accounting principles generally
accepted in the United States.
As explained in Note 7 to the consolidated financial statements, effective
January 1, 1997, the Company changed its method of accounting for start-up
costs.
ERNST & YOUNG LLP
Nashville, Tennessee
January 31, 2000
F-2
<PAGE> 114
LIFEPOINT HOSPITALS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
1999 1998 1997
------ ------ ------
<S> <C> <C> <C>
Revenues.................................................... $515.2 $498.4 $487.6
Salaries and benefits....................................... 217.4 220.8 196.6
Supplies.................................................... 64.2 62.0 55.0
Other operating expenses.................................... 117.3 117.2 119.5
Provision for doubtful accounts............................. 38.2 41.6 34.5
Depreciation and amortization............................... 31.4 28.3 27.4
Interest expense............................................ 23.4 19.1 15.4
Management fees............................................. 3.2 8.9 8.2
ESOP expense................................................ 2.9 -- --
Impairment of long-lived assets............................. 25.4 26.1 --
------ ------ ------
523.4 524.0 456.6
------ ------ ------
Income (loss) from continuing operations before minority
interests and income taxes................................ (8.2) (25.6) 31.0
Minority interests in earnings of consolidated entities..... 1.9 1.9 2.2
------ ------ ------
Income (loss) from continuing operations before income
taxes..................................................... (10.1) (27.5) 28.8
Provision (benefit) for income taxes........................ (2.7) (9.8) 11.7
------ ------ ------
Income (loss) from continuing operations.................... (7.4) (17.7) 17.1
Discontinued operations:
Loss from operations, net of income tax benefit of $2.6
and $0.1 for the years ended December 31, 1998 and 1997
respectively........................................... -- (4.1) (0.6)
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........................................... -- -- (0.6)
------ ------ ------
Net income (loss)...................................... $ (7.4) $(21.8) $ 12.5
====== ====== ======
Basic earnings (loss) per share (see Note 13):
Income (loss) from continuing operations.................. $(0.24) $(0.59) $ 0.57
Loss from discontinued operations......................... -- (0.14) (0.14)
Cumulative effect of accounting change.................... -- -- (0.02)
------ ------ ------
Net income (loss)...................................... $(0.24) $(0.73) $ 0.41
====== ====== ======
Diluted earnings (loss) per share (see Note 13):
Income (loss) from continuing operations.................. $(0.24) $(0.59) $ 0.57
Loss from discontinued operations......................... -- (0.14) (0.14)
Cumulative effect of accounting change.................... -- -- (0.02)
------ ------ ------
Net income (loss)...................................... $(0.24) $(0.73) $ 0.41
====== ====== ======
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-3
<PAGE> 115
LIFEPOINT HOSPITALS, INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1999 AND 1998
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
1999 1998
------- -------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 12.5 $ --
Accounts receivable, less allowances for doubtful accounts
of $50.3 and $48.3 at December 31, 1999 and 1998....... 46.7 36.4
Inventories............................................... 14.3 14.0
Deferred taxes and other current assets................... 25.9 18.6
------- -------
99.4 69.0
Property and equipment, at cost:
Land...................................................... 7.9 7.2
Buildings................................................. 204.1 203.1
Equipment................................................. 260.6 221.9
Construction in progress (estimated cost to complete and
equip after December 31, 1999 -- $15.9)................ 20.2 10.4
------- -------
492.8 442.6
Accumulated depreciation.................................... (198.4) (176.2)
------- -------
294.4 266.4
Intangible assets, net of accumulated amortization of $8.6
and $6.9 at December 31, 1999 and 1998.................... 26.4 15.2
Other....................................................... 0.2 4.4
------- -------
$ 420.4 $ 355.0
======= =======
LIABILITIES AND EQUITY
Current liabilities:
Accounts payable.......................................... $ 26.5 $ 15.5
Accrued salaries.......................................... 14.7 11.7
Other current liabilities................................. 12.9 14.6
Current maturities of long-term debt...................... 3.1 0.3
------- -------
57.2 42.1
Intercompany balances payable to Columbia/HCA............... -- 167.6
Long-term debt.............................................. 257.1 0.3
Deferred taxes.............................................. 12.5 21.3
Professional liability risks and other liabilities.......... 3.4 0.1
Minority interests in equity of consolidated entities....... 4.5 4.9
Stockholders' equity:
Preferred stock, $0.01 par value; 10,000,000 shares
authorized; no shares issued........................... -- --
Common stock, $0.01 par value; 90,000,000 shares
authorized; 31,184,160 shares outstanding at December
31, 1999............................................... 0.3 --
Capital in excess of par value............................ 137.9 --
Unearned ESOP compensation................................ (28.9) --
Notes receivable for shares sold to employees............. (10.2) --
Accumulated deficit....................................... (13.4) --
Equity, investments by Columbia/HCA....................... -- 118.7
------- -------
85.7 118.7
------- -------
$ 420.4 $ 355.0
======= =======
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-4
<PAGE> 116
LIFEPOINT HOSPITALS, INC
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
(DOLLARS IN MILLIONS)
<TABLE>
<CAPTION>
1999 1998 1997
------ ------ -----
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss)......................................... $ (7.4) $(21.8) $12.5
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
ESOP expense......................................... 2.9 -- --
Provision for doubtful accounts...................... 38.2 41.6 34.5
Depreciation and amortization........................ 31.4 28.3 27.4
Amortization of deferred loan costs.................. 0.9 -- --
Deferred income taxes (benefit)...................... (13.8) (12.4) 4.1
Impairment of long-lived assets...................... 25.4 26.1 --
Loss from discontinued operations.................... -- 4.1 4.0
Cumulative affect of accounting change............... -- -- 0.6
Reserve for professional liability risk.............. 3.3 -- --
Increase (decrease) in cash from operating assets and
liabilities:
Accounts receivable............................... (29.8) (21.3) (37.9)
Inventories and other assets...................... (1.1) 0.2 0.1
Accounts payable and accrued expenses............. 7.1 0.9 (0.1)
Income taxes payable.............................. (0.3) -- --
Other................................................ 0.7 (0.4) 0.2
------ ------ -----
Net cash provided by operating activities......... 57.5 45.3 45.4
Cash flows from investing activities:
Purchase of property and equipment........................ (64.8) (29.3) (51.8)
Investments in and advances to affiliates................. (2.0) 0.1 (7.2)
Other..................................................... (0.2) (0.1) 7.1
------ ------ -----
Net cash used in investing activities............. (67.0) (29.3) (51.9)
Cash flows from financing activities:
Increase (decrease) in long-term debt, net................ (0.4) (1.1) --
Increase (decrease) in intercompany balances with
Columbia/HCA, net...................................... 22.4 (14.9) 6.5
------ ------ -----
Net cash provided by (used in) financing
activities...................................... 22.0 (16.0) 6.5
------ ------ -----
Change in cash and cash equivalents......................... 12.5 -- --
Cash and cash equivalents at beginning of year.............. -- -- --
------ ------ -----
Cash and cash equivalents at end of year.................... $ 12.5 $ -- $ --
====== ====== =====
Interest payments........................................... $ 21.2 $ 19.1 $15.4
Income tax payments......................................... $ 15.4 $ -- $ 4.7
Supplemental non-cash financing activities:
Assumption of debt from Columbia/HCA...................... $260.0 $ -- $ --
Elimination of intercompany amounts payable to
Columbia/HCA........................................... $224.9 $ -- $ --
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-5
<PAGE> 117
LIFEPOINT HOSPITALS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
(DOLLARS AND SHARES IN MILLIONS)
<TABLE>
<CAPTION>
NOTES
CAPITAL IN RECEIVABLE
COMMON STOCK EXCESS OF EQUITY, FOR SHARES UNEARNED
--------------- PAR ACCUMULATED INVESTMENTS BY SOLD TO ESOP
SHARES AMOUNT VALUE DEFICIT COLUMBIA/HCA EMPLOYEES COMPENSATION TOTAL
------ ------ ---------- ----------- -------------- ---------- ------------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31,
1996................... -- $ -- $ -- $ -- $128.0 $ -- $ -- $128.0
Net income............. 12.5 12.5
---- ---- ------- ------ ------ ------ ------ ------
Balance at December 31,
1997................... 140.5 140.5
Net loss............... (21.8) (21.8)
---- ---- ------- ------ ------ ------ ------ ------
Balance at December 31,
1998................... 118.7 118.7
Net income before spin-
off.................. 6.0 6.0
Stock issued in
connection with:
Executive Stock
Purchase Plan...... 1.0 10.2 (10.2) --
Employee Stock
Ownership Plan..... 0.3 31.8 (28.9) 2.9
Issuance of stock
options............ 1.6 1.6
Assumption of debt from
Columbia/HCA......... (260.0) (260.0)
Elimination of
intercompany debt to
Columbia/HCA......... 229.9 229.9
Spin-off
capitalization....... 29.9 0.3 124.4 (124.7) --
Net loss after
spin-off............. (13.4) (13.4)
---- ---- ------- ------ ------ ------ ------ ------
Balance at December 31,
1999................... 31.2 $0.3 $ 137.9 $(13.4) $ -- $(10.2) $(28.9) $ 85.7
==== ==== ======= ====== ====== ====== ====== ======
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-6
<PAGE> 118
LIFEPOINT HOSPITALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 -- ORGANIZATION AND ACCOUNTING POLICIES
Organization
On May 11, 1999, Columbia/HCA Healthcare Corporation ("Columbia/HCA")
completed the spin-off of its operations comprising the America Group to its
shareholders by distributing all outstanding shares of LifePoint Hospitals, Inc.
(the "Distribution"). LifePoint Hospitals, Inc., together with its subsidiaries,
as appropriate, is hereinafter referred to as the "Company". A description of
the Distribution and certain transactions with Columbia/HCA is included in Note
2.
At December 31, 1999, the Company was 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.
On May 11, 1999, Columbia/HCA also completed the spin-off of a separate,
independent company named Triad Hospitals, Inc.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company
and all subsidiaries and entities controlled by the Company through the
Company's direct or indirect ownership of a majority voting interest or
exclusive rights granted to the Company by contract as the sole general partner
to manage and control the ordinary course of the affiliates' business. All
significant intercompany accounts and transactions within the Company have been
eliminated in consolidation. Investments in entities which the Company does not
control, but in which it has a substantial ownership interest and can exercise
significant influence, are accounted for using the equity method.
Use of Estimates
The preparation of the accompanying consolidated financial statements in
conformity with accounting principles generally accepted in the United States
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.
Reclassifications
Certain prior year amounts have been reclassified to conform to the current
year presentation.
Equity
Equity for periods prior to the Distribution represents the net investment
in the Company by Columbia/HCA. It includes Common Stock, additional
paid-in-capital and net earnings.
Revenues
The Company'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 $0.7 million, $1.2 million and
$3.3 million for the years ended December 31, 1999, 1998 and 1997, respectively.
F-7
<PAGE> 119
LIFEPOINT HOSPITALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Management believes that adequate provisions have been made for adjustments that
may result from final determination of amounts earned under these programs.
Columbia/HCA retains sole responsibility for, and will be entitled to, any
Medicare, Medicaid or cost-based Blue Cross settlements relating to cost
reporting periods ending on or prior to the Distribution. The net settlement
payable estimated as of December 31, 1999 and 1998 and included in accounts
receivable in the accompanying balance sheets approximated $5.1 million and
$17.8 million, respectively.
The Company provides care without charge to patients who are financially
unable to pay for the health care services they receive. Because the Company
does not pursue collection of amounts determined to qualify as charity care,
they are not reported in revenues.
Accounts Receivable
The Company receives payment for services rendered from federal and state
agencies (under the Medicare, Medicaid and TRICARE programs), managed care
health plans, commercial insurance companies, employers and patients. During the
years ended December 31, 1999, 1998 and 1997, approximately 47.4%, 48.9% and
50.5%, respectively, of the Company's revenues related to patients participating
in the Medicare and Medicaid programs. Management 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. Management 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 $30.6
million, $27.1 million and $25.1 million for the years ended December 31, 1999,
1998 and 1997, 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. Noncompete agreements and debt issuance costs are
amortized based upon the terms of the respective contracts or loans.
(c) Deferred Loan Costs
Deferred loan costs are included in intangible assets on the balance sheet
and are amortized over the term of the related debt. In 1999, in connection with
the Distribution, the Company recorded $9.8 million of deferred loan costs (net
of accumulated amortization of $0.9 million).
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, the Company prepares projections of
F-8
<PAGE> 120
LIFEPOINT HOSPITALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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
For the periods prior to the Distribution, Columbia/HCA filed consolidated
federal and state income tax returns which included all of its eligible
subsidiaries, including the Company. The provisions for income taxes (benefits)
in the consolidated statements of operations for periods prior to the
Distribution were computed on a separate return basis (i.e., assuming the
Company had not been included in a consolidated income tax return with
Columbia/HCA). All income tax payments for these periods were made by the
Company through Columbia/HCA.
Professional and General Liability Risks
The Company is primarily self-insured for its professional and general
liability risks. At December 31, 1999, the reserve for professional and general
liability risks was $3.4 million. The reserves for self-insured professional and
general liability losses and loss adjustment expenses are based on actuarially
projected estimates discounted to their present value using a rate of 6%.
Columbia/HCA assumed the liability for all professional and general
liability claims incurred prior to the Distribution. Accordingly, at December
31, 1998, no reserve was recorded for professional and general liability risks.
The cost of self-insurance for the years ended December 31, 1999, 1998 and
1997 was approximately $7.1 million, $6.8 million and $6.1 million,
respectively.
Intercompany Balances Payable to Columbia/HCA
Intercompany balances for periods prior to the Distribution represent the
net excess of funds transferred to or paid on behalf of the Company over funds
transferred to the centralized cash management account of Columbia/HCA.
Generally, this balance was 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 was decreased through daily
cash deposits by the Company to the account. The Company charged interest on the
intercompany balances at various rates ranging from 6% to 10% and the interest
computations were based on the outstanding balance at month end.
In connection with the Distribution, all intercompany amounts payable by
the Company to Columbia/ HCA were eliminated, and the Company assumed certain
indebtedness from Columbia/HCA.
Management Fees
For the years ended December 31, 1998 and 1997 and for the period prior to
the Distribution in 1999, Columbia/HCA incurred various corporate general and
administrative expenses. These corporate overhead expenses were allocated to the
Company based on net revenues. In the opinion of management, this allocation
method was reasonable.
Stock Based Compensation
The Company accounts for stock option grants in accordance with APB Opinion
No. 25, "Accounting for Stock Issued to Employees." The Company recognizes no
compensation expense for grants when the exercise price equals or exceeds the
market price of the underlying stock on the date of grant.
F-9
<PAGE> 121
LIFEPOINT HOSPITALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Earnings Per Share
Earnings per share ("EPS") is based on the weighted average number of
common shares outstanding and dilutive stock options.
Recently Issued Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative
Instruments and Hedging Activities" which was required to be adopted in years
beginning after June 15, 1999. In June 1999, SFAS No. 137 was issued, deferring
the effective date of SFAS No. 133 for one year. Management does not anticipate
that the adoption of the new statement will have a material effect on the
financial condition or the results of operations of the Company.
NOTE 2 -- THE DISTRIBUTION AND TRANSACTIONS WITH COLUMBIA/HCA
As a result of the Distribution, the Company became an independent,
publicly-traded company. Owners of Columbia/HCA Common Stock received one share
of the Company's Common Stock for every 19 shares of Columbia/HCA Common Stock
held which resulted in approximately 29.9 million shares of the Company's Common
Stock outstanding immediately after the Distribution. After the Distribution,
Columbia/ HCA had no ownership in the Company. Immediately after the
Distribution, however, certain Columbia/ HCA benefit plans received shares of
the Company on behalf of Columbia/HCA employees.
In connection with the Distribution, all intercompany amounts payable by
the Company to Columbia/ HCA were eliminated and the Company assumed certain
indebtedness from Columbia/HCA (see Note 8). In addition, the Company entered
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. These agreements provide certain indemnities to the parties (see
Note 3), and provide for the allocation of tax and other assets, liabilities,
and obligations arising from periods prior to the Distribution.
In connection with the Distribution, Columbia/HCA received a ruling from
the Internal Revenue Service (the "IRS") to the effect, among other things, that
the Distribution would qualify as a tax-free reorganization under Section 355
and 368 of the Internal Revenue Code of 1986, as amended. Such a ruling, while
generally binding upon the IRS, is subject to certain factual representations
and assumptions provided by Columbia/HCA. The Company has agreed to certain
restrictions on its future actions to provide further assurances that the
Distribution will qualify as tax-free. Restrictions include, among other things,
limitations on the liquidation, merger or consolidation with another company,
certain issuances and redemptions of the Company's Common Stock and the sale or
other disposition of assets. If the Company fails to abide by such restrictions
and, as a result, the Distribution fails to qualify as a tax-free
reorganization, the Company will be obligated to indemnify Columbia/HCA for any
resulting tax liability, which could have a material adverse effect on the
Company's financial position and results of operations.
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. Management of Lifepoint understands that Columbia/HCA is
cooperating in these investigations and that Columbia/HCA 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
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 (the "Commission"). The
Commission investigation includes the anti-fraud, periodic reporting and
internal accounting control provisions of the federal securities laws. According
to
F-10
<PAGE> 122
LIFEPOINT HOSPITALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
published reports, on July 2, 1999, a federal jury in Tampa, Florida found two
Columbia/HCA employees guilty of conspiracy and making false statements on
Medicare and TRICARE cost reports for the years 1992 and 1993 and on a Medicaid
cost report for 1993. Both were found not guilty of obstructing a federal
auditor. One other employee was acquitted on all counts for which he had been
charged and the jury was unable to reach a verdict with respect to another
employee. This employee and the government executed an agreement to defer
prosecution for 18 months after which charges will be dismissed. The two
convicted employees were sentenced in December 1999 and both have appealed to
the 11th Circuit.
Columbia/HCA is a defendant in several qui tam actions brought by private
parties on behalf of the United States of America, which have been unsealed and
served on Columbia/HCA. The actions allege, in general, that Columbia/HCA and
certain subsidiaries and/or affiliated partnerships violated the False Claims
Act by submitting improper claims to the government for reimbursement. The
lawsuits seek damages of three times the amount of all Medicare or Medicaid
claims (involving false claims) presented by the defendants to the federal
government, civil penalties of not less than $5,000 nor more than $10,000 for
each such Medicare or Medicaid claim, attorneys' fees and costs. The government
has intervened in six unsealed qui tam actions against Columbia/HCA.
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 litigations 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 in question in the qui tam and other
actions are substantial, and Columbia/HCA could be subject to substantial costs
resulting from an adverse outcome of one or more of such actions. In addition, a
number of derivative actions have been brought by purported stockholders of
Columbia/HCA against certain current and former officers and directors of
Columbia/HCA alleging breach of fiduciary duty and failure to take reasonable
steps to ensure that Columbia/HCA did not engage in illegal practices.
Management believes that the ongoing governmental investigations and
related media coverage may have had a negative effect on Columbia/HCA's results
of operations (which include the Company for the periods prior to the date of
the Distribution which are presented herein). The extent to which the Company
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 the Company in future periods.
In connection with the Distribution, Columbia/HCA has agreed to indemnify
the Company in respect of any losses which it may incur arising from the
proceedings described above. Columbia/HCA has also agreed to indemnify the
Company 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 date
of the Distribution and relate to the proceedings described above. Columbia/HCA
has also agreed that, in the event that any hospital owned by the Company as of
the date of the Distribution is permanently excluded from participation in the
Medicare and Medicaid programs as a result of the proceedings described above,
then Columbia/HCA will make cash payments to the Company based on amounts as
defined in the Distribution Agreement by and among Columbia/HCA and the Company.
The Company has agreed with Columbia/HCA that, in connection with the pending
governmental investigations, it will negotiate with the government with respect
to a compliance agreement setting forth the
F-11
<PAGE> 123
LIFEPOINT HOSPITALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Company's agreement to comply with applicable laws and regulations. If any of
such indemnified matters were successfully asserted against the Company, 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 the Company.
Columbia/HCA has not indemnified the Company for losses relating to any acts,
practices and omissions engaged in by the Company after the Distribution,
whether or not the Company is indemnified for similar acts, practices and
omissions occurring prior to the date of the Distribution.
NOTE 4 -- INCOME TAXES
The provision (benefit) for income taxes for the years ended December 31,
1999, 1998 and 1997 consists of the following (dollars in millions):
<TABLE>
<CAPTION>
1999 1998 1997
------ ------ -----
<S> <C> <C> <C>
Current:
Federal................................................... $ 9.6 $ 2.6 $ 6.5
State..................................................... 1.5 -- 1.1
------ ------ -----
11.1 2.6 7.6
Deferred:
Federal................................................... (13.3) (10.5) 3.6
State..................................................... (1.6) (1.9) 0.5
------ ------ -----
(14.9) (12.4) 4.1
Increase in Valuation Allowance............................. 1.1 -- --
------ ------ -----
Total............................................. $ (2.7) $ (9.8) $11.7
====== ====== =====
</TABLE>
The valuation allowance increased by $1.1 million primarily as a result of
state net operating loss carryforwards that management believes may not be fully
utilized because of the uncertainty regarding the Company's ability to generate
taxable income in certain states. Various subsidiaries have state net operating
loss carryforwards of approximately $9.5 million with expiration dates through
the year 2019.
A reconciliation of the statutory federal income tax rate to the Company's
effective income tax rate on income (loss) from continuing operations before
income taxes for the years ended December 31, 1999, 1998 and 1997 follows:
<TABLE>
<CAPTION>
1999 1998 1997
----- ---- ----
<S> <C> <C> <C>
Federal statutory rate...................................... 35.0% 35.0% 35.0%
State income taxes, net of federal income tax benefit....... 10.6 3.9 4.1
Non-deductible intangible assets............................ (3.0) (2.6) 1.1
Valuation allowance......................................... (10.8) -- --
Other items, net............................................ (5.1) (0.7) 0.5
----- ---- ----
Effective income tax rate................................... 26.7% 35.6% 40.7%
===== ==== ====
</TABLE>
F-12
<PAGE> 124
LIFEPOINT HOSPITALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Deferred income taxes result from temporary differences in the recognition
of assets, liabilities, revenues and expenses for financial accounting and tax
purposes. Sources of these differences and the related tax effects are as
follows (dollars in millions):
<TABLE>
<CAPTION>
1999 1998
------ ------
<S> <C> <C>
Deferred tax liabilities:
Depreciation and fixed asset basis differences............ $(18.4) $(24.8)
Other..................................................... (0.6) (0.6)
------ ------
Total deferred tax liabilities.................... (19.0) (25.4)
------ ------
Deferred tax assets:
Provision for doubtful accounts........................... 14.3 11.4
Employee compensation..................................... 5.9 2.6
Other..................................................... 6.8 4.5
------ ------
Total deferred tax assets......................... 27.0 18.5
Valuation allowance......................................... (1.1) --
------ ------
Net deferred tax assets........................... 25.9 18.5
------ ------
Net deferred tax assets (liabilities)............. $ 6.9 $ (6.9)
====== ======
</TABLE>
The balance sheet classification of deferred income tax assets
(liabilities) is as follows (in millions):
<TABLE>
<CAPTION>
1999 1998
----- -----
<S> <C> <C>
Current..................................................... $19.4 $14.4
Long-term................................................... (12.5) (21.3)
----- -----
Total....................................................... $ 6.9 $(6.9)
===== =====
</TABLE>
Columbia/HCA and the Company entered into a tax sharing and indemnification
agreement. Under the agreement, Columbia/HCA maintains full control and absolute
discretion with regard to any combined or consolidated tax filings for periods
prior to the Distribution. In addition, the agreement provides that Columbia/HCA
will generally be responsible for all taxes that are allocable to periods prior
to the Distribution and Columbia/HCA and the Company will each be responsible
for its own tax liabilities for periods after the Distribution.
The agreement does not have an impact on the realization of deferred tax
assets or the payment of deferred tax liabilities of the Company except to the
extent that the temporary differences give rise to such deferred tax assets and
liabilities after the Distribution and are adjusted as a result of final tax
settlements after the Distribution. In the event of such adjustments, the tax
sharing and indemnification agreement provides for certain payments between
Columbia/HCA and the Company as appropriate.
NOTE 5 -- IMPAIRMENT OF LONG-LIVED ASSETS
The Company has adopted the provisions of SFAS No. 121, "Accounting for the
Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed of". SFAS
No. 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, the Company decided to sell three
hospital facilities that were identified as not compatible with the Company'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. At December 31, 1998, the carrying value
before the impairment charge of the long-lived assets related to these hospital
facilities was approximately $47.0 million. The carrying value was reduced to
fair value, based on estimates of selling values at that time, for a total
non-cash charge of $24.8
F-13
<PAGE> 125
LIFEPOINT HOSPITALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
million. During the fourth quarter of 1999, the Company recorded an additional
non-cash charge of $25.4 million (comprised of $22.4 million in further
impairment charges for these facilities and $3.0 million in anticipated
selling/closing costs, The remaining carrying value of the long-lived assets
related to these hospital facilities of approximately $22.4 million was written
down based on the revised selling values. Severance costs, if any, will be
expensed when incurred at a later date. One of these three hospital facilities
held for sale was sold subsequent to December 31, 1999 (see Note 16). The
Company anticipates that the sales of the two remaining facilities will be
completed during 2000. For the years ended December 31, 1999, 1998 and 1997,
respectively, these facilities to be divested had net revenues of approximately
$42.6 million, $48.0 million and $50.6 million and incurred income (loss) from
continuing operations before income taxes (benefit) and the asset impairment
charges of approximately $(3.8) million, $(2.9) million and $0.7 million.
The Company recorded, during the third quarter of 1998, an impairment loss
of approximately $1.3 million related to the write-off of intangibles and other
long-lived assets of certain physician practices where the recorded asset values
were not deemed to be fully recoverable based upon the operating results trends
and projected future cash flows. These assets being held and used are now
recorded at estimated fair value based upon discounted, estimated future cash
flows.
The impairment charges did not have a significant impact on the Company'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 1998, the Company completed the divestiture of home health
businesses for amounts approximating their carrying value. The Company
implemented plans to sell the home health businesses during 1997 resulting in an
estimated after-tax loss on sale of $3.4 million in 1997. The estimated loss on
sale and operating results of the home health businesses are reflected as
discontinued operations in the consolidated statement of operations.
Revenues for the home health businesses disposed of were approximately
$18.9 million and $55.3 million for the years ended December 31, 1998 and 1997,
respectively.
NOTE 7 -- ACCOUNTING CHANGE
During 1997, the Company 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. The Company believes the
new method is preferable due to certain changes in business strategy and reviews
of then 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. The pro forma
effect on the year ended December 31, 1997 follows (dollars in millions):
<TABLE>
<CAPTION>
1997
-----------------------
AS REPORTED PRO FORMA
----------- ---------
<S> <C> <C>
Income from continuing operations........................... $17.1 $17.1
Net income.................................................. $12.5 $13.1
</TABLE>
F-14
<PAGE> 126
LIFEPOINT HOSPITALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 8 -- LONG-TERM DEBT
Long-term debt consists of the following (in millions):
<TABLE>
<CAPTION>
DECEMBER
--------------
1999 1998
------ -----
<S> <C> <C>
Bank Facilities............................................. $110.0 $ --
Senior Subordinated Notes................................... 150.0 --
Other debt.................................................. 0.2 0.6
------ -----
260.2 0.6
Less current maturities..................................... (3.1) (0.3)
------ -----
$257.1 $ 0.3
====== =====
</TABLE>
Maturities of long-term debt at December 31, 1999 are as follows (in
millions):
<TABLE>
<S> <C>
2000........................................................ $ 3.1
2001........................................................ 5.0
2002........................................................ 7.1
2003........................................................ 7.1
2004........................................................ 7.1
Thereafter.................................................. 230.8
------
$260.2
======
</TABLE>
Bank Credit Agreement
On May 11, 1999, the Company assumed from Columbia/HCA the obligations
under a bank credit agreement (the "Credit Agreement") with a group of lenders
with commitments aggregating $210 million. The Credit Agreement consists of a
$60 million term loan facility, an $85 million term loan facility, and a $65
million revolving credit facility (collectively the "Bank Facilities").
As of December 31, 1999, $25 million of the $60 million term loan facility
was drawn, with the remaining $35 million available for limited purposes to be
drawn by May 11, 2000. The final payment under this term loan facility is due
November 11, 2004.
The $85 million term loan facility was drawn in full at the time of the
Distribution. The final payment under this term loan is due November 11, 2005.
The $65 million revolving credit facility is available for working capital
and other general corporate purposes, and any outstanding amounts thereunder
will be due and payable on November 11, 2004. No amounts were outstanding under
this facility as of December 31, 1999.
Repayments under the term loan facilities are due in quarterly installments
with quarterly amortization based on annual amounts. Interest on the Bank
Facilities is currently based on LIBOR plus 3.0% for the revolving credit
facility and the $60 million term loan facility, and LIBOR plus 3.5% for the $85
million term loan facility. The weighted average interest rate on the Bank
Facilities was approximately 9.9% at December 31, 1999. The Company also pays a
commitment fee equal to 0.5% of the average daily amount available under the
revolving credit facility and on the undrawn portion of the $60 million term
loan facility.
The Company's obligations under the Bank Facilities are guaranteed by its
subsidiaries. These guarantees are secured by a pledge of substantially all of
the subsidiaries' assets. The Credit Agreement requires that the Company comply
with various financial ratios and tests and contains covenants, including but
not limited to restrictions on new indebtedness, the ability to merge or
consolidate, asset sales, capital expenditures and dividends.
F-15
<PAGE> 127
LIFEPOINT HOSPITALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Senior Subordinated Notes
On May 11, 1999, the Company assumed from Columbia/HCA $150 million in
Senior Subordinated Notes maturing on May 15, 2009 and bearing interest at
10.75%. In November 1999, in a registered exchange offer, the Company issued a
like aggregate principal amount of notes in exchange for these notes (the
"Notes"). Interest is payable semi-annually. The Notes are unsecured obligations
and are subordinated in right of payment to all existing and future senior
indebtedness.
The indenture pursuant to which the Notes were made contains certain
covenants, including but not limited to restrictions on new indebtedness, the
ability to merge or consolidate, asset sales, capital expenditures and
dividends.
The Notes are guaranteed jointly and severally on a full and unconditional
basis by all of the Company's operating subsidiaries ("Subsidiary Guarantors").
The Company is a holding company with no operations apart from its ownership of
the Subsidiary Guarantors. The aggregate assets, liabilities, equity and
earnings of the Subsidiary Guarantors are substantially equivalent to the total
assets, liabilities, equity and earnings of the Company and its subsidiaries on
a consolidated basis.
At December 31, 1999, all but one of the Subsidiary Guarantors were wholly
owned and fully and unconditionally guaranteed the Notes. Separate financial
statements and other disclosures of the wholly owned Subsidiary Guarantors are
not presented because management believes that such separate financial
statements and disclosures would not provide additional material information to
investors.
As of May 11, 1999, two of the Subsidiary Guarantors were not wholly owned
and the guarantees of such non-wholly owned entities were limited. During the
fourth quarter of 1999, the Company acquired ownership of the remaining interest
in one such Subsidiary Guarantor, and the limitations on the guarantee of such
Subsidiary Guarantor, as well as the limitations on the guarantee of the
remaining non-wholly owned Subsidiary Guarantor, were eliminated. Therefore, at
December 31, 1999, only one of the Company's consolidating subsidiaries, Dodge
City Healthcare Group, L.P., was not wholly owned, although all assets,
liabilities, equity and earnings of this entity fully and unconditionally,
jointly and severally guarantee the Notes. The Company owns approximately 70% of
the partnership interests in this mostly owned limited partnership.
A summarized condensed consolidating balance sheet at December 31, 1999 and
condensed consolidating statement of operations and condensed consolidating
statement of cash flows for the year ended December 31, 1999 for the Company
segregating the parent company, the issuer of the Notes, the combined wholly
owned guarantor subsidiaries, the mostly owned guarantor subsidiary and
eliminations are found below. Separate audited financial statements of the
issuer of the Notes, LifePoint Hospitals Holdings, Inc. and the mostly owned
guarantor subsidiary, Dodge City Healthcare Group, L.P., are included elsewhere
in this filing. In addition, separate audited financial statements of Dodge City
Healthcare Group, L.P. are being filed with the Securities and Exchange
Commission.
F-16
<PAGE> 128
LIFEPOINT HOSPITALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
LifePoint Hospitals, Inc.
Condensed Consolidating Statement of Operations
For The Year Ended December 31, 1999
(in millions)
<TABLE>
<CAPTION>
WHOLLY OWNED MOSTLY OWNED
ISSUER OF GUARANTOR GUARANTOR CONSOLIDATED
PARENT NOTES SUBSIDIARIES SUBSIDIARY ELIMINATIONS TOTAL
------ --------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Revenues...................... $ -- $ -- $482.5 $32.7 $ -- $515.2
Salaries and benefits......... -- -- 206.2 11.2 -- 217.4
Supplies...................... -- -- 60.0 4.2 -- 64.2
Other operating expenses...... 0.2 -- 112.3 4.8 -- 117.3
Provision for doubtful
accounts.................... -- -- 35.4 2.8 -- 38.2
Depreciation and
amortization................ -- -- 29.7 1.7 -- 31.4
Interest expense.............. -- 17.7 5.1 0.6 -- 23.4
Management fees............... -- -- 2.5 0.7 -- 3.2
ESOP expense.................. -- -- 2.9 -- -- 2.9
Equity in earnings of
affiliates.................. 7.3 (7.0) -- -- (0.3) --
Impairment of long-lived
assets...................... -- -- 25.4 -- -- 25.4
------ ------ ------ ----- ------ ------
7.5 10.7 479.5 26.0 (0.3) 523.4
------ ------ ------ ----- ------ ------
Income (loss) before minority
interests and income
taxes....................... (7.5) (10.7) 3.0 6.7 0.3 (8.2)
Minority interests in earnings
of consolidated entities.... -- 1.9 -- -- -- 1.9
------ ------ ------ ----- ------ ------
Income (loss) before income
taxes....................... (7.5) (12.6) 3.0 6.7 0.3 (10.1)
Provision (benefit) for income
taxes....................... (0.1) (5.3) 2.7 -- -- (2.7)
------ ------ ------ ----- ------ ------
Net income (loss)... $ (7.4) $ (7.3) $ 0.3 $ 6.7 $ 0.3 $ (7.4)
====== ====== ====== ===== ====== ======
</TABLE>
F-17
<PAGE> 129
LIFEPOINT HOSPITALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
LifePoint Hospitals, Inc.
Condensed Consolidating Balance Sheet
December 31, 1999
(in millions)
<TABLE>
<CAPTION>
WHOLLY OWNED MOSTLY OWNED
ISSUER OF GUARANTOR GUARANTOR CONSOLIDATED
PARENT NOTES SUBSIDIARIES SUBSIDIARY ELIMINATIONS TOTAL
------ --------- ------------ ------------ ------------ ------------
ASSETS
<S> <C> <C> <C> <C> <C> <C>
Current assets:
Cash and cash equivalents.... $ -- $ -- $ 12.5 $ -- $ -- $ 12.5
Accounts receivable, net..... -- -- 41.4 5.3 -- 46.7
Inventories.................. -- -- 13.1 1.2 -- 14.3
Deferred taxes and other
current assets............ -- -- 25.8 0.1 -- 25.9
----- ------ ------- ------ ------- -------
-- -- 92.8 6.6 -- 99.4
Property and equipment, at
cost:
Land......................... -- -- 7.6 0.3 -- 7.9
Buildings.................... -- -- 194.2 9.9 -- 204.1
Equipment.................... -- -- 250.3 10.3 -- 260.6
Construction in progress..... -- -- 20.2 -- -- 20.2
----- ------ ------- ------ ------- -------
-- -- 472.3 20.5 -- 492.8
Accumulated depreciation....... -- -- (187.2) (11.2) -- (198.4)
----- ------ ------- ------ ------- -------
-- -- 285.1 9.3 -- 294.4
Net investment in and advances
to subsidiaries.............. 85.7 333.2 -- -- (418.9) --
Intangible assets, net......... -- 9.8 6.1 10.5 -- 26.4
Other.......................... -- -- 0.2 -- -- 0.2
----- ------ ------- ------ ------- -------
$85.7 $343.0 $ 384.2 $ 26.4 $(418.9) $ 420.4
===== ====== ======= ====== ======= =======
LIABILITIES AND EQUITY
Current liabilities:
Accounts payable............. $ -- $ -- $ 25.9 $ 0.6 $ -- $ 26.5
Accrued salaries............. -- -- 14.7 -- -- 14.7
Other current liabilities.... -- 2.5 10.1 0.3 12.9
Current maturities of
long-term debt............ -- 2.9 0.2 -- -- 3.1
----- ------ ------- ------ ------- -------
-- 5.4 50.9 0.9 -- 57.2
Intercompany balances to
affiliates................... -- (9.7) (1.0) 10.7 -- --
Long-term debt................. -- 257.1 -- -- -- 257.1
Deferred income taxes.......... -- -- 12.5 -- -- 12.5
Professional liability risks
and other liabilities........ -- -- 3.4 -- -- 3.4
Minority interests in equity of
consolidated entities........ -- 4.5 -- -- -- 4.5
Stockholders' equity........... 85.7 85.7 318.4 14.8 (418.9) 85.7
----- ------ ------- ------ ------- -------
$85.7 $343.0 $ 384.2 $ 26.4 $(418.9) $ 420.4
===== ====== ======= ====== ======= =======
</TABLE>
F-18
<PAGE> 130
LIFEPOINT HOSPITALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
LifePoint Hospitals, Inc.
Condensed Consolidating Statement of Cash Flows
For The Year Ended December 31, 1999
(in millions)
<TABLE>
<CAPTION>
WHOLLY OWNED MOSTLY OWNED
ISSUER OF GUARANTOR GUARANTOR CONSOLIDATED
PARENT NOTES SUBSIDIARIES SUBSIDIARY ELIMINATIONS TOTAL
------ --------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Cash flows from operating
activities:
Net income........................ $ (7.4) $ (7.3) $ 0.3 $6.7 $ 0.3 $(7.4)
Adjustments to reconcile net
income to net cash provided by
operating activities:
ESOP expense.................... -- -- 2.9 -- -- 2.9
Equity in earnings of
affiliates.................... 7.3 (7.0) -- -- (0.3) --
Provision for doubtful
accounts...................... -- -- 35.4 2.8 -- 38.2
Depreciation and amortization... -- -- 29.7 1.7 -- 31.4
Amortization of deferred loan
costs......................... -- -- 0.9 -- -- 0.9
Deferred income taxes
(benefit)..................... -- -- (13.8) -- -- (13.8)
Impairment of long-lived
assets........................ -- -- 25.4 -- -- 25.4
Reserve for professional
liability risk................ -- -- 3.3 -- -- 3.3
Increase (decrease) in cash from
operating assets and
liabilities:
Accounts receivable........... -- -- (27.5) (2.3) -- (29.8)
Inventories and other current
assets..................... -- -- (0.8) (0.3) -- (1.1)
Accounts payable and accrued
expenses................... -- 17.7 (10.3) (0.3) -- 7.1
Income taxes payable.......... -- -- (0.3) -- -- (0.3)
Other........................... 0.1 1.9 (1.3) -- -- 0.7
------ ------ ----- ---- ----- -----
Net cash provided by
operating activities..... -- 5.3 43.9 8.3 -- 57.5
Cash flows from investing
activities:
Purchase of property and
equipment, net.................. -- -- (63.6) (1.2) -- (64.8)
Investments in and advances to
affiliates...................... -- -- (2.0) -- -- (2.0)
Other............................. -- -- (0.2) -- -- (0.2)
------ ------ ----- ---- ----- -----
Net cash provided by (used
in) investing
activities............... -- -- (65.8) (1.2) -- (67.0)
Cash flows from financing
activities:
Decrease in long-term debt, net... -- -- (0.1) (0.3) -- (0.4)
Distributions..................... -- -- 6.0 (6.0) -- --
Increase (decrease) in
intercompany balances with
affiliates, net................. -- (5.3) 6.1 (0.8) -- --
Increase (decrease) in
intercompany balances with
Columbia/HCA, net............... -- -- 22.4 -- -- 22.4
------ ------ ----- ---- ----- -----
Net cash provided by (used
in) financing
activities............... -- (5.3) 34.4 (7.1) -- 22.0
------ ------ ----- ---- ----- -----
Change in cash and cash
equivalents....................... -- -- 12.5 -- -- 12.5
Cash and cash equivalents at
beginning of period............... -- -- -- -- -- --
------ ------ ----- ---- ----- -----
Cash and cash equivalents at end of
period............................ $ -- $ -- $12.5 $ -- $ -- $12.5
====== ====== ===== ==== ===== =====
</TABLE>
F-19
<PAGE> 131
LIFEPOINT HOSPITALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 9 -- STOCK BENEFIT PLANS
In connection with the Distribution, the Company adopted the 1998 Long-Term
Incentive Plan, for which 5,425,000 shares of the Company's Common Stock have
been reserved for issuance. The 1998 Long-Term Incentive Plan authorizes the
grant of stock options, stock appreciation rights and other stock based awards
to officers and employees of the Company. On the Distribution Date,
approximately 591,900 stock options were granted under this plan, relating to
pre-existing vested Columbia/HCA options. These options were granted at various
prices, were exercisable on the date of grant, and expire at various dates not
to exceed 10 years. Options to purchase an additional 2,740,000 shares were
granted to the Company's employees under this plan with an exercise price of the
fair market value on the date of grant. These options are exercisable beginning
in part from the date of grant to five years after the date of grant. All
options granted under this plan expire in 10 years from the date of grant. The
Company also granted 340,000 options to Columbia/HCA executives with an exercise
price of the fair market value on the date of grant. These options were
exercisable on the date of grant and Columbia/HCA paid the Company $1.5 million
in exchange for the issuance of these options.
The Company also adopted the Executive Stock Purchase Plan, in which
1,000,000 shares of the Company's Common Stock were reserved and subsequently
issued. The Executive Stock Purchase Plan grants a right to specified executives
of the Company to purchase shares of Common Stock from the Company. The Company
loaned each participant in the plan 100% of the purchase price of the Company's
Common Stock at the fair value based on the date of purchase (approximately
$10.2 million), on a full recourse basis at interest rates ranging from 5.2% to
5.3%. The loans are reflected as a reduction to stockholders' equity as "Notes
receivable for shares sold to employees". In addition, such executives have been
granted options equal to three-quarters of a share for each share purchased. As
of December 31, 1999, options to purchase 750,000 shares had been issued
pursuant to the 1998 Long-Term Incentive Plan. The exercise price of these stock
options is equal to the fair value on the date of grant. The options expire in
10 years and are exercisable 50% on the date of grant and 50% five years after
the Distribution.
In addition, the Company has a Management Stock Purchase Plan which
provides to certain designated employees an opportunity to purchase restricted
shares of its Common Stock at a discount through payroll deductions over six
month intervals. Shares of Common Stock reserved for this plan were 250,000 at
December 31, 1999. Approximately 54,000 restricted shares will be issued to
employees in the first quarter of 2000 under this plan.
The Company also adopted an Outside Directors Plan for which 175,000 shares
of the Company's Common Stock have been reserved for issuance. In June 1999,
approximately 20,000 options were granted under such plan to non-employee
directors. These options are exercisable beginning in part from the date of
grant to three years after the date of grant and expire 10 years after grant.
In addition, the Company granted an option to purchase 50,000 shares of the
Company to The LifePoint Community Foundation. The exercise price of the stock
option is equal to the fair value on the date of grant.
In connection with the Distribution, the Company established the LifePoint
Employee Stock Ownership Plan ("ESOP"). The ESOP purchased from the Company
approximately 8.3% of the Company's Common Stock at fair market value
(approximately 2.8 million shares at $11.50 per share). Shares will be allocated
ratably to employee accounts over the next 10 years beginning in fiscal year
1999. The shares held by the ESOP which have not yet been allocated to employee
accounts are included in shareholders' equity as "Unearned ESOP Compensation".
Unearned ESOP shares are released at historical cost upon being allocated to
employee accounts. The fair value of unearned ESOP shares was $29.7 million at
December 31, 1999. ESOP expense is recognized using the average market price of
shares committed to be released during the accounting period with any difference
between the average market price and the cost being charged or credited to
capital in excess of par value. As the shares are committed to be released, the
shares become outstanding for earnings per share calculations.
F-20
<PAGE> 132
LIFEPOINT HOSPITALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Presented below is a summary of stock option activity for 1999:
<TABLE>
<CAPTION>
STOCK OPTION PRICE WEIGHTED AVERAGE
OPTIONS PER SHARE EXERCISE PRICE
--------- ------------ ----------------
<S> <C> <C> <C>
Balances, December 31, 1998..................... -- $ -- $ --
Conversion of Columbia/HCA options............ 591,900 0.07-18.38 12.12
Granted....................................... 3,900,000 7.63-12.00 10.62
Exercised..................................... (9,300) 0.18-12.33 9.01
Cancelled..................................... (71,200) 0.18-18.38 12.63
---------
Balances, December 31, 1999..................... 4,411,400 0.07-18.38 10.79
=========
</TABLE>
At December 31, 1999, there were 1,179,300 options available for grant.
The following table summarizes information regarding the options
outstanding at December 31, 1999:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------ ----------------------
WEIGHTED
AVERAGE WEIGHTED WEIGHTED
NUMBER REMAINING AVERAGE NUMBER AVERAGED
OUTSTANDING CONTRACTUAL EXERCISE EXERCISABLE EXERCISE
RANGE OF EXERCISE PRICES AT 12/31/99 LIFE PRICE AT 12/31/99 PRICE
- ------------------------ ----------- ----------- -------- ----------- --------
<S> <C> <C> <C> <C> <C>
$ 0.07 to $ 7.18 18,200 1 $ 0.53 18,200 $0.53
0.18 to 5.81 11,700 2 0.74 11,700 0.74
3.56 to 8.76 78,700 3 5.64 78,700 5.64
5.56 to 10.99 14,000 4 6.96 14,000 6.96
11.67 to 13.21 105,500 5 11.89 105,500 11.89
12.18 to 14.98 93,900 6 12.34 93,900 12.34
14.16 to 17.73 133,500 7 16.51 133,500 16.51
12.99 to 18.38 44,800 8 18.35 44,800 18.35
12.20 to 15.64 29,100 9 13.03 29,100 13.03
7.63 to 12.00 3,882,000 10 10.62 1,266,100 10.61
--------- ---------
4,411,400 1,795,500
========= =========
</TABLE>
If the Company had measured compensation cost for the stock options granted
during 1999 under the fair value based method prescribed by SFAS No. 123, the
net loss would have been changed to the pro forma amounts set forth below:
<TABLE>
<CAPTION>
AS REPORTED PRO FORMA
----------- ---------
<S> <C> <C>
Net loss (in millions)...................................... $ (7.4) $ (8.1)
Earnings (loss) per share:
Basic..................................................... (0.24) (0.26)
Diluted................................................... (0.24) (0.26)
</TABLE>
The fair values of options converted and granted used to compute pro forma
net loss disclosures were estimated on the date of grant using the Black-Scholes
option-pricing model based on the following weighted average assumptions:
<TABLE>
<CAPTION>
1999
---------
<S> <C>
Risk free interest rate..................................... 5.2-7.6%
Expected life............................................... 4.7 years
Expected volatility......................................... 35.0%
Expected dividend yield..................................... 0.0%
</TABLE>
The weighted-average fair value of options converted and granted during
1999 was $3.73.
F-21
<PAGE> 133
LIFEPOINT HOSPITALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 10 -- RETIREMENT PLANS
The Company sponsors defined contribution employee benefit plans covering
substantially all employees. These plans require the Company to make matching
contributions with the Company's stock at certain percentages from the ESOP that
was established upon the Distribution (see Note 9). ESOP expense was $2.9
million for the year ended December 31, 1999.
Prior to the Distribution, the Company participated in Columbia/HCA's
defined contribution retirement plans, which covered substantially all
employees. Benefits were determined primarily as a percentage of a participant's
earned income and were vested over specific periods of employee service. Certain
plans also required the Company to make matching contributions at certain
percentages. The cost of these plans was $5.3 million, and $5.9 million during
1998, and 1997, respectively. Amounts approximately equal to expense for these
plans were funded annually. After the Distribution, the Company no longer
participated in these plans.
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 the Company, including
those relating to shareholder derivative and class action complaints; purported
class action lawsuits filed by patients and payers alleging, in general,
improper and fraudulent billing, coding 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 the
Company'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, for a description of the ongoing
government investigations and Columbia/HCA's obligations to indemnify the
Company with respect to losses incurred by the Company arising from such
governmental investigations and related proceedings.)
General Liability Claims
The Company is subject to claims and suits arising in the ordinary course
of business, including claims for personal injuries or wrongful restriction of,
or interference with, physicians' staff privileges. In certain of these actions
claimants may ask for punitive damages against the Company 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
the Company's results of operations or financial position.
Physician Commitments
The Company 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, the Company 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 $11.6 million at December 31, 1999. 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 the Company's results of operations or financial
position.
F-22
<PAGE> 134
LIFEPOINT HOSPITALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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>
1999 1998
----- -----
<S> <C> <C>
Employee benefit plan....................................... $ 2.7 $ 7.0
Accrued interest related to long-term debt.................. 2.6 --
Taxes, other than income.................................... 0.3 3.6
Other....................................................... 7.3 4.0
----- -----
$12.9 $14.6
===== =====
</TABLE>
A summary of activity in the Company'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>
Allowance for doubtful accounts:
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
Year ended December 31, 1999........................ 48.3 38.2 (36.2) 50.3
</TABLE>
NOTE 13 -- EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted
earnings per share from continuing operations (dollars and shares in millions,
except per share amounts):
<TABLE>
<CAPTION>
1999 1998 1997
------ ------ -----
<S> <C> <C> <C>
Numerator (a):
Income (loss) from continuing operations.................. $ (7.4) $(17.7) $17.1
Denominator (b):
Share reconciliation:
Shares used for basic earnings (loss) per share........... 30.5 30.0 30.0
Effect of dilutive securities (c):
Stock options and other.............................. -- -- 0.2
------ ------ -----
Shares used for diluted earnings (loss) per share......... 30.5 30.0 30.2
====== ====== =====
Earnings (loss) per share:
Basic earnings (loss) per share from continuing
operations............................................. $(0.24) $(0.59) $0.57
====== ====== =====
Diluted earnings (loss) per share from continuing
operations............................................. $(0.24) $(0.59) $0.57
====== ====== =====
</TABLE>
- ---------------
(a) Amount is used for both basic and diluted earnings (loss) per share
computations since there is no earnings effect related to the dilutive
securities.
(b) The Company expected to issue 30,000,000 shares of Common Stock at the time
of the Distribution. Earnings per share information has been presented as if
the 30,000,000 shares has been outstanding for the years ended December 31,
1998 and 1997.
(c) The dilutive effect of approximately 0.1 million and 0.2 million shares,
related to stock options, for the years ended December 31, 1999 and 1998,
respectively, was not included in the computation of diluted loss per share
because to do so would have been antidilutive for those periods.
F-23
<PAGE> 135
LIFEPOINT HOSPITALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 14 -- FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts reported in the consolidated balance sheets for cash,
accounts receivable and accounts payable approximates fair value.
The carrying value of long-term debt (including current portion) was $260.2
million for the year ended December 31, 1999. The fair value of long-term debt
(including current portion) was $264.7 million for the year ended December 31,
1999. The fair value of the Notes has been determined using the quoted market
price at December 31, 1999. The fair values of the remaining long-term debt are
estimated using discounted cash flows, based on the Company's incremental
borrowing rates.
NOTE 15 -- 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 consolidated financial statements appearing herein (dollars in
millions, except per share amounts).
<TABLE>
<CAPTION>
1999
---------------------------------
FIRST SECOND THIRD FOURTH
------ ------ ------ ------
<S> <C> <C> <C> <C>
Revenues.................................................... $134.2 $128.2 $125.4 $127.4
Net income (loss)........................................... 4.0 1.0 1.1 (13.5)(a)
Basic and diluted earnings (loss) per share................. 0.13 0.04 0.03 (0.44)(a)
</TABLE>
<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)(b) (22.7)(c)
Basic and diluted earnings (loss) per share................ 0.05 0.05 (0.07)(b) (0.76)(c)
</TABLE>
- ---------------
(a) During the fourth quarter of 1999, the Company recorded a $25.4 million
pre-tax charge ($16.2 million after tax) related to the impairment of
certain long-lived assets (See Note 5 -- Impairment of Long-Lived Assets).
(b) During the third quarter of 1998, the Company 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).
(c) During the fourth quarter of 1998, the Company 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).
NOTE 16 -- SUBSEQUENT EVENTS
On January 31, 2000, the Company completed an amendment to its Credit
Agreement to revise certain financial definitions and to increase the amount of
permitted investments made by the Company, effective December 31, 1999.
On January 31, 2000, the Company sold Trinity Hospital in Erin, Tennessee.
Trinity Hospital was one of the Company's hospital facilities held for sale as
discussed in Note 5.
F-24
<PAGE> 136
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors and Stockholder
LifePoint Hospitals Holdings, Inc.
We have audited the accompanying consolidated balance sheets of LifePoint
Hospitals Holdings, Inc., a wholly-owned subsidiary of LifePoint Hospitals,
Inc., as of December 31, 1999 and 1998, and the related consolidated statements
of operations, stockholder's equity and cash flows for each of the three years
in the period ended December 31, 1999. These consolidated financial statements
are the responsibility of the management of LifePoint Hospitals Holdings, Inc.
(the "Company"). Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. 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 consolidated financial position of LifePoint
Hospitals Holdings, Inc. at December 31, 1999 and 1998, and the consolidated
results of its operations and its cash flows for each of the three years in the
period ended December 31, 1999, in conformity with accounting principles
generally accepted in the United States.
As explained in Note 7 to the consolidated financial statements, effective
January 1, 1997, the Company changed its method of accounting for start-up
costs.
ERNST & YOUNG LLP
Nashville, Tennessee
January 31, 2000
F-25
<PAGE> 137
LIFEPOINT HOSPITALS HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
(DOLLARS IN MILLIONS)
<TABLE>
<CAPTION>
1999 1998 1997
------ ------ ------
<S> <C> <C> <C>
Revenues.................................................... $515.2 $498.4 $487.6
Salaries and benefits....................................... 217.4 220.8 196.6
Supplies.................................................... 64.2 62.0 55.0
Other operating expenses.................................... 117.1 117.2 119.5
Provision for doubtful accounts............................. 38.2 41.6 34.5
Depreciation and amortization............................... 31.4 28.3 27.4
Interest expense............................................ 23.4 19.1 15.4
Management fees............................................. 3.2 8.9 8.2
ESOP expense................................................ 2.9 -- --
Impairment of long-lived assets............................. 25.4 26.1 --
------ ------ ------
523.2 524.0 456.6
------ ------ ------
Income (loss) from continuing operations before minority
interests and income taxes................................ (8.0) (25.6) 31.0
Minority interests in earnings of consolidated entities..... 1.9 1.9 2.2
------ ------ ------
Income (loss) from continuing operations before income
taxes..................................................... (9.9) (27.5) 28.8
Provision (benefit) for income taxes........................ (2.6) (9.8) 11.7
------ ------ ------
Income (loss) from continuing operations.................... (7.3) (17.7) 17.1
Discontinued operations:
Loss from operations, net of income tax benefit of $2.6
and $0.1 for the years ended December 31, 1998 and 1997
respectively........................................... -- (4.1) (0.6)
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........................................... -- -- (0.6)
------ ------ ------
Net income (loss)...................................... $ (7.3) $(21.8) $ 12.5
====== ====== ======
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-26
<PAGE> 138
LIFEPOINT HOSPITALS HOLDINGS, INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1999 AND 1998
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
1999 1998
------- -------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 12.5 $ --
Accounts receivable, less allowances for doubtful accounts
of $50.3 and $48.3 at December 31, 1999 and 1998....... 46.7 36.4
Inventories............................................... 14.3 14.0
Deferred taxes and other current assets................... 25.9 18.6
------- -------
99.4 69.0
Property and equipment, at cost:
Land...................................................... 7.9 7.2
Buildings................................................. 204.1 203.1
Equipment................................................. 260.6 221.9
Construction in progress (estimated cost to complete and
equip after December 31, 1999 -- $15.9)................ 20.2 10.4
------- -------
492.8 442.6
Accumulated depreciation.................................... (198.4) (176.2)
------- -------
294.4 266.4
Intangible assets, net of accumulated amortization of $8.6
and $6.9 at December 31, 1999 and 1998.................... 26.4 15.2
Other....................................................... 0.2 4.4
------- -------
$ 420.4 $ 355.0
======= =======
LIABILITIES AND EQUITY
Current liabilities:
Accounts payable.......................................... $ 26.5 $ 15.5
Accrued salaries.......................................... 14.7 11.7
Other current liabilities................................. 12.9 14.6
Current maturities of long-term debt...................... 3.1 0.3
------- -------
57.2 42.1
Intercompany balances payable to Columbia/HCA............... -- 167.6
Long-term debt.............................................. 257.1 0.3
Deferred taxes.............................................. 12.5 21.3
Professional liability risks and other liabilities.......... 3.4 0.1
Minority interests in equity of consolidated entities....... 4.5 4.9
Stockholder's equity:
Common stock, $0.01 par value; 1,000 shares authorized;
999 shares outstanding at December 31, 1999............ -- --
Capital in excess of par value............................ 99.0 --
Accumulated deficit....................................... (13.3) --
Equity, investments by Columbia/HCA....................... -- 118.7
------- -------
85.7 118.7
------- -------
$ 420.4 $ 355.0
======= =======
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-27
<PAGE> 139
LIFEPOINT HOSPITALS HOLDINGS, INC
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
(DOLLARS IN MILLIONS)
<TABLE>
<CAPTION>
1999 1998 1997
------ ------ -----
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss)......................................... $ (7.3) $(21.8) $12.5
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
ESOP expense......................................... 2.9 -- --
Provision for doubtful accounts...................... 38.2 41.6 34.5
Depreciation and amortization........................ 31.4 28.3 27.4
Amortization of deferred loan costs.................. 0.9 -- --
Deferred income taxes (benefit)...................... (13.8) (12.4) 4.1
Impairment of long-lived assets...................... 25.4 26.1 --
Loss from discontinued operations.................... -- 4.1 4.0
Cumulative affect of accounting change............... -- -- 0.6
Reserve for professional liability risk.............. 3.3 -- --
Increase (decrease) in cash from operating assets and
liabilities:
Accounts receivable............................... (29.8) (21.3) (37.9)
Inventories and other assets...................... (1.1) 0.2 0.1
Accounts payable and accrued expenses............. 7.1 0.9 (0.1)
Income taxes payable.............................. (0.3) -- --
Other................................................ 0.6 (0.4) 0.2
------ ------ -----
Net cash provided by operating activities......... 57.5 45.3 45.4
Cash flows from investing activities:
Purchase of property and equipment........................ (64.8) (29.3) (51.8)
Investments in and advances to affiliates................. (2.0) 0.1 (7.2)
Other..................................................... (0.2) (0.1) 7.1
------ ------ -----
Net cash used in investing activities............. (67.0) (29.3) (51.9)
Cash flows from financing activities:
Increase (decrease) in long-term debt, net................ (0.4) (1.1) --
Increase (decrease) in intercompany balances with
Columbia/HCA, net...................................... 22.4 (14.9) 6.5
------ ------ -----
Net cash provided by (used in) financing
activities...................................... 22.0 (16.0) 6.5
------ ------ -----
Change in cash and cash equivalents......................... 12.5 -- --
Cash and cash equivalents at beginning of year.............. -- -- --
------ ------ -----
Cash and cash equivalents at end of year.................... $ 12.5 $ -- $ --
====== ====== =====
Interest payments........................................... $ 21.2 $ 19.1 $15.4
Income tax payments......................................... $ 15.4 $ -- $ 4.7
Supplemental non-cash financing activities:
Assumption of debt from Columbia/HCA...................... $260.0 $ -- $ --
Elimination of intercompany amounts payable to
Columbia/HCA........................................... $224.9 $ -- $ --
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-28
<PAGE> 140
LIFEPOINT HOSPITALS HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
(DOLLARS IN MILLIONS)
<TABLE>
<CAPTION>
CAPITAL IN
COMMON STOCK EXCESS OF EQUITY,
--------------- PAR ACCUMULATED INVESTMENTS BY
SHARES AMOUNT VALUE DEFICIT COLUMBIA/HCA TOTAL
------ ------ ---------- ----------- -------------- ------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1996................ -- $ -- $ -- $ -- $128.0 $128.0
Net income................................ 12.5 12.5
---- ---- ------- ------ ------ ------
Balance at December 31, 1997................ 140.5 140.5
Net loss.................................. (21.8) (21.8)
---- ---- ------- ------ ------ ------
Balance at December 31, 1998................ 118.7 118.7
Net income before spin-off................ 6.0 6.0
Assumption of debt from Columbia/HCA...... (260.0) (260.0)
Elimination of intercompany debt to
Columbia/HCA............................ 229.9 229.9
Spin-off capitalization................... 999 124.7 (124.7) --
Equity contribution from LifePoint........ 4.4 4.4
Net loss after spin-off................... (13.3) (13.3)
---- ---- ------- ------ ------ ------
Balance at December 31, 1999................ 999 $ -- $ 99.0 $(13.3) $ -- $ 85.7
==== ==== ======= ====== ====== ======
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-29
<PAGE> 141
LIFEPOINT HOSPITALS HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 -- ORGANIZATION AND ACCOUNTING POLICIES
Organization
LifePoint Hospitals Holdings, Inc. ("Holdings" or the "Company") is a
wholly owned subsidiary of LifePoint Hospitals, Inc. ("LifePoint"). LifePoint
has limited independent operations and net assets other than through its
ownership of the Company and indirect ownership of the Company's subsidiaries.
On May 11, 1999, Columbia/HCA Healthcare Corporation ("Columbia/HCA")
completed the spin-off of its operations comprising the America Group to its
shareholders by distributing all outstanding shares of LifePoint (the
"Distribution"). A description of the Distribution and certain transactions with
Columbia/HCA is included in Note 2.
At December 31, 1999, the Company was 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.
On May 11, 1999, Columbia/HCA also completed the spin-off of a separate,
independent company named Triad Hospitals, Inc.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company
and all subsidiaries and entities controlled by the Company through the
Company's direct or indirect ownership of a majority voting interest or
exclusive rights granted to the Company by contract as the sole general partner
to manage and control the ordinary course of the affiliates' business. All
significant intercompany accounts and transactions within the Company have been
eliminated in consolidation. Investments in entities which the Company does not
control, but in which it has a substantial ownership interest and can exercise
significant influence, are accounted for using the equity method.
Use of Estimates
The preparation of the accompanying consolidated financial statements in
conformity with accounting principles generally accepted in the United States
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.
Reclassifications
Certain prior year amounts have been reclassified to conform to the current
year presentation.
Equity
Equity for periods prior to the Distribution represents the net investment
in the Company by Columbia/HCA. It includes Common Stock, additional
paid-in-capital and net earnings.
Revenues
The Company'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
F-30
<PAGE> 142
LIFEPOINT HOSPITALS HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 $0.7 million, $1.2
million and $3.3 million for the years ended December 31, 1999, 1998 and 1997,
respectively. Management believes that adequate provisions have been made for
adjustments that may result from final determination of amounts earned under
these programs. Columbia/HCA retains sole responsibility for, and will be
entitled to, any Medicare, Medicaid or cost-based Blue Cross settlements
relating to cost reporting periods ending on or prior to the Distribution. The
net settlement payable estimated as of December 31, 1999 and 1998 and included
in accounts receivable in the accompanying balance sheets approximated $5.1
million and $17.8 million, respectively.
The Company provides care without charge to patients who are financially
unable to pay for the health care services they receive. Because the Company
does not pursue collection of amounts determined to qualify as charity care,
they are not reported in revenues.
Accounts Receivable
The Company receives payment for services rendered from federal and state
agencies (under the Medicare, Medicaid and TRICARE programs), managed care
health plans, commercial insurance companies, employers and patients. During the
years ended December 31, 1999, 1998 and 1997, approximately 47.4%, 48.9% and
50.5%, respectively, of the Company's revenues related to patients participating
in the Medicare and Medicaid programs. Management 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. Management 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 $30.6
million, $27.1 million and $25.1 million for the years ended December 31, 1999,
1998 and 1997, 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. Noncompete agreements and debt issuance costs are
amortized based upon the terms of the respective contracts or loans.
F-31
<PAGE> 143
LIFEPOINT HOSPITALS HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(c) Deferred Loan Costs
Deferred loan costs are included in intangible assets on the balance sheet
and are amortized over the term of the related debt. In 1999, in connection with
the Distribution, the Company recorded $9.8 million of deferred loan costs (net
of accumulated amortization of $0.9 million).
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, the Company 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
For the period subsequent to the Distribution, the Company is included in
the consolidated federal tax return of LifePoint. The Company's tax provision is
determined as if the Company, along with its subsidiaries, prepared its tax
return on a separate return basis.
For the periods prior to the Distribution, Columbia/HCA filed consolidated
federal and state income tax returns which included all of its eligible
subsidiaries, including the Company. The provisions for income taxes (benefits)
in the consolidated statements of operations for periods prior to the
Distribution were computed on a separate return basis (i.e., assuming the
Company had not been included in a consolidated income tax return with
Columbia/HCA). All income tax payments for these periods were made by the
Company through Columbia/HCA.
Professional and General Liability Risks
The Company is primarily self-insured for its professional and general
liability risks. At December 31, 1999, the reserve for professional and general
liability risks was $3.4 million. The reserves for self-insured professional and
general liability losses and loss adjustment expenses are based on actuarially
projected estimates discounted to their present value using a rate of 6%.
Columbia/HCA assumed the liability for all professional and general
liability claims incurred prior to the Distribution. Accordingly, at December
31, 1998, no reserve was recorded for professional and general liability risks.
The cost of self-insurance for the years ended December 31, 1999, 1998 and
1997 was approximately $7.1 million, $6.8 million and $6.1 million,
respectively.
Intercompany Balances Payable to Columbia/HCA
Intercompany balances for periods prior to the Distribution represent the
net excess of funds transferred to or paid on behalf of the Company over funds
transferred to the centralized cash management account of Columbia/HCA.
Generally, this balance was 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 was decreased through daily
cash deposits by the Company to the account. The Company charged interest on the
intercompany balances at various rates ranging from 6% to 10% and the interest
computations were based on the outstanding balance at month end.
In connection with the Distribution, all intercompany amounts payable by
the Company to Columbia/ HCA were eliminated, and the Company assumed certain
indebtedness from Columbia/HCA.
F-32
<PAGE> 144
LIFEPOINT HOSPITALS HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Equity Contributions from LifePoint
Equity activity of LifePoint which benefits the Company is accounted for as
an equity contribution from LifePoint. Contributions during fiscal 1999
primarily represent the costs associated with the allocation of LifePoint Common
Stock to the Company's employees under the LifePoint Employee Stock Ownership
Plan and equity transactions of LifePoint for which cash was received by the
Company on behalf of LifePoint.
Management Fees
For the years ended December 31, 1998 and 1997 and for the period prior to
the Distribution in 1999, Columbia/HCA incurred various corporate general and
administrative expenses. These corporate overhead expenses were allocated to the
Company based on net revenues. In the opinion of management, this allocation
method was reasonable.
Recently Issued Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative
Instruments and Hedging Activities" which was required to be adopted in years
beginning after June 15, 1999. In June 1999, SFAS No. 137 was issued, deferring
the effective date of SFAS No. 133 for one year. Management does not anticipate
that the adoption of the new statement will have a material effect on the
financial condition or the results of operations of the Company.
NOTE 2 -- THE DISTRIBUTION AND TRANSACTIONS WITH COLUMBIA/HCA
As a result of the Distribution, LifePoint became an independent,
publicly-traded company. Owners of Columbia/HCA Common Stock received one share
of LifePoint's Common Stock for every 19 shares of Columbia/HCA Common Stock
held which resulted in approximately 29.9 million shares of the LifePoint Common
Stock outstanding immediately after the Distribution. After the Distribution,
Columbia/HCA had no ownership in LifePoint. Immediately after the Distribution,
however, certain Columbia/HCA benefit plans received shares of LifePoint on
behalf of Columbia/HCA employees.
In connection with the Distribution, all intercompany amounts payable by
the Company to Columbia/ HCA were eliminated and the Company assumed certain
indebtedness from Columbia/HCA (see Note 8). In addition, LifePoint, on behalf
of the Company, entered 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. These agreements provide certain
indemnities to the parties (see Note 3), and provide for the allocation of tax
and other assets, liabilities, and obligations arising from periods prior to the
Distribution.
In connection with the Distribution, Columbia/HCA received a ruling from
the Internal Revenue Service (the "IRS") to the effect, among other things, that
the Distribution would qualify as a tax-free reorganization under Section 355
and 368 of the Internal Revenue Code of 1986, as amended. Such a ruling, while
generally binding upon the IRS, is subject to certain factual representations
and assumptions provided by Columbia/HCA. LifePoint has agreed to certain
restrictions on its future actions to provide further assurances that the
Distribution will qualify as tax-free. Restrictions include, among other things,
limitations on the liquidation, merger or consolidation with another company,
certain issuances and redemptions of LifePoint's Common Stock and the sale or
other disposition of assets. If LifePoint fails to abide by such restrictions
and, as a result, the Distribution fails to qualify as a tax-free
reorganization, LifePoint will be obligated to indemnify Columbia/HCA for any
resulting tax liability, which could have a material adverse effect on
LifePoint's and the Company's financial position and results of operations.
F-33
<PAGE> 145
LIFEPOINT HOSPITALS HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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. Management of the Company understands that Columbia/HCA is
cooperating in these investigations and that Columbia/HCA 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
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 (the "Commission"). The
Commission investigation includes the anti-fraud, periodic reporting and
internal accounting control provisions of the federal securities laws. According
to published reports, on July 2, 1999, a federal jury in Tampa, Florida found
two Columbia/HCA employees guilty of conspiracy and making false statements on
Medicare and TRICARE cost reports for the years 1992 and 1993 and on a Medicaid
cost report for 1993. Both were found not guilty of obstructing a federal
auditor. One other employee was acquitted on all counts for which he had been
charged and the jury was unable to reach a verdict with respect to another
employee. This employee and the government executed an agreement to defer
prosecution for 18 months after which charges will be dismissed. The two
convicted employees were sentenced in December 1999 and both have appealed to
the 11th Circuit.
Columbia/HCA is a defendant in several qui tam actions brought by private
parties on behalf of the United States of America, which have been unsealed and
served on Columbia/HCA. The actions allege, in general, that Columbia/HCA and
certain subsidiaries and/or affiliated partnerships violated the False Claims
Act by submitting improper claims to the government for reimbursement. The
lawsuits seek damages of three times the amount of all Medicare or Medicaid
claims (involving false claims) presented by the defendants to the federal
government, civil penalties of not less than $5,000 nor more than $10,000 for
each such Medicare or Medicaid claim, attorneys' fees and costs. The government
has intervened in six unsealed qui tam actions against Columbia/HCA.
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 litigations 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 in question in the qui tam and other
actions are substantial, and Columbia/HCA could be subject to substantial costs
resulting from an adverse outcome of one or more of such actions. In addition, a
number of derivative actions have been brought by purported stockholders of
Columbia/HCA against certain current and former officers and directors of
Columbia/HCA alleging breach of fiduciary duty and failure to take reasonable
steps to ensure that Columbia/HCA did not engage in illegal practices.
Management believes that the ongoing governmental investigations and
related media coverage may have had a negative effect on Columbia/HCA's results
of operations (which include the Company for the periods prior to the date of
the Distribution which are presented herein). The extent to which LifePoint and
the Company may or may not continue to be affected after the Distribution by the
ongoing investigations of Columbia/HCA, the initiation of additional
investigations, if any, and the related media coverage cannot be predicted. It
is possible that these matters could have a material adverse effect on the
financial condition or results of operations of LifePoint and the Company in
future periods.
F-34
<PAGE> 146
LIFEPOINT HOSPITALS HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
In connection with the Distribution, Columbia/HCA has agreed to indemnify
LifePoint and the Company in respect of any losses which it may incur arising
from the proceedings described above. Columbia/ HCA has also agreed to indemnify
LifePoint and the Company 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 date of the Distribution and relate to the proceedings
described above. Columbia/HCA has also agreed that, in the event that any
hospital owned by the Company as of the date of the Distribution is permanently
excluded from participation in the Medicare and Medicaid programs as a result of
the proceedings described above, then Columbia/HCA will make cash payments to
LifePoint based on amounts as defined in the Distribution Agreement by and among
Columbia/ HCA and LifePoint. LifePoint, on behalf of the Company, has agreed
with Columbia/HCA that, in connection with the pending governmental
investigations, it will negotiate with the government with respect to a
compliance agreement setting forth the Company's agreement to comply with
applicable laws and regulations. If any of such indemnified matters were
successfully asserted against LifePoint or the Company, 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 LifePoint and the Company.
Columbia/HCA has not indemnified LifePoint nor the Company for losses relating
to any acts, practices and omissions engaged in by LifePoint and the Company
after the Distribution, whether or not LifePoint or the Company is indemnified
for similar acts, practices and omissions occurring prior to the date of the
Distribution.
NOTE 4 -- INCOME TAXES
The provision (benefit) for income taxes for the years ended December 31,
1999, 1998 and 1997 consists of the following (dollars in millions):
<TABLE>
<CAPTION>
1999 1998 1997
------ ------ -----
<S> <C> <C> <C>
Current:
Federal................................................... $ 9.7 $ 2.6 $ 6.5
State..................................................... 1.5 -- 1.1
------ ------ -----
11.2 2.6 7.6
Deferred:
Federal................................................... (13.3) (10.5) 3.6
State..................................................... (1.6) (1.9) 0.5
------ ------ -----
(14.9) (12.4) 4.1
Increase in Valuation Allowance............................. 1.1 -- --
------ ------ -----
Total............................................. $ (2.6) $ (9.8) $11.7
====== ====== =====
</TABLE>
The valuation allowance increased by $1.1 million primarily as a result of
state net operating loss carryforwards that management believes may not be fully
utilized because of the uncertainty regarding the Company's ability to generate
taxable income in certain states. Various subsidiaries have state net operating
loss carryforwards of approximately $9.5 million with expiration dates through
the year 2019.
F-35
<PAGE> 147
LIFEPOINT HOSPITALS HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
A reconciliation of the statutory federal income tax rate to the Company's
effective income tax rate on income (loss) from continuing operations before
income taxes for the years ended December 31, 1999, 1998 and 1997 follows:
<TABLE>
<CAPTION>
1999 1998 1997
----- ---- ----
<S> <C> <C> <C>
Federal statutory rate...................................... 35.0% 35.0% 35.0%
State income taxes, net of federal income tax benefit....... 10.7 3.9 4.1
Non-deductible intangible assets............................ (3.1) (2.6) 1.1
Valuation allowance......................................... (10.7) -- --
Other items, net............................................ (5.6) (0.7) 0.5
----- ---- ----
Effective income tax rate................................... 26.3% 35.6% 40.7%
===== ==== ====
</TABLE>
Deferred income taxes result from temporary differences in the recognition
of assets, liabilities, revenues and expenses for financial accounting and tax
purposes. Sources of these differences and the related tax effects are as
follows (dollars in millions):
<TABLE>
<CAPTION>
1999 1998
------ ------
<S> <C> <C>
Deferred tax liabilities:
Depreciation and fixed asset basis differences............ $(18.4) $(24.8)
Other..................................................... (0.6) (0.6)
------ ------
Total deferred tax liabilities.................... (19.0) (25.4)
------ ------
Deferred tax assets:
Provision for doubtful accounts........................... 14.3 11.4
Employee compensation..................................... 5.9 2.6
Other..................................................... 6.8 4.5
------ ------
Total deferred tax assets......................... 27.0 18.5
Valuation allowance......................................... (1.1) --
------ ------
Net deferred tax assets........................... 25.9 18.5
------ ------
Net deferred tax assets (liabilities)............. $ 6.9 $ (6.9)
====== ======
</TABLE>
The balance sheet classification of deferred income tax assets
(liabilities) is as follows (in millions):
<TABLE>
<CAPTION>
1999 1998
----- -----
<S> <C> <C>
Current..................................................... $19.4 $14.4
Long-term................................................... (12.5) (21.3)
----- -----
Total....................................................... $ 6.9 $(6.9)
===== =====
</TABLE>
Columbia/HCA and LifePoint entered into a tax sharing and indemnification
agreement. Under the agreement, Columbia/HCA maintains full control and absolute
discretion with regard to any combined or consolidated tax filings for periods
prior to the Distribution. In addition, the agreement provides that Columbia/HCA
will generally be responsible for all taxes that are allocable to periods prior
to the Distribution and Columbia/HCA and LifePoint, on behalf of the Company,
will each be responsible for its own tax liabilities for periods after the
Distribution.
The agreement does not have an impact on the realization of deferred tax
assets or the payment of deferred tax liabilities of the Company except to the
extent that the temporary differences give rise to such deferred tax assets and
liabilities after the Distribution and are adjusted as a result of final tax
settlements after the Distribution. In the event of such adjustments, the tax
sharing and indemnification agreement provides for certain payments between
Columbia/HCA and LifePoint, on behalf of the Company, as appropriate.
F-36
<PAGE> 148
LIFEPOINT HOSPITALS HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 5 -- IMPAIRMENT OF LONG-LIVED ASSETS
The Company has adopted the provisions of SFAS No. 121, "Accounting for the
Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed of". SFAS
No. 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, the Company decided to sell three
hospital facilities that were identified as not compatible with the Company'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. At December 31, 1998, the carrying value
before the impairment charge of the long-lived assets related to these hospital
facilities was approximately $47.0 million. The carrying value was reduced to
fair value, based on estimates of selling values at that time, for a total
non-cash charge of $24.8 million. During the fourth quarter of 1999, the Company
recorded an additional non-cash charge of $25.4 million (comprised of $22.4
million in further impairment charges for these facilities and $3.0 million in
anticipated selling/closing costs). The remaining carrying value of the
long-lived assets related to these hospital facilities was written down based on
the revised selling values. Severance costs, if any, will be expensed when
incurred at a later date. One of these three hospital facilities held for sale
was sold subsequent to December 31, 1999 (see Note 16). The Company anticipates
that the sales of the two remaining facilities will be completed during 2000.
For the years ended December 31, 1999, 1998 and 1997, respectively, these
facilities to be divested had net revenues of approximately $42.6 million, $48.0
million and $50.6 million and incurred income (loss) from continuing operations
before income taxes (benefit) and the asset impairment charges of approximately
$(3.8) million, $(2.9) million and $0.7 million.
The Company recorded, during the third quarter of 1998, an impairment loss
of approximately $1.3 million related to the write-off of intangibles and other
long-lived assets of certain physician practices where the recorded asset values
were not deemed to be fully recoverable based upon the operating results trends
and projected future cash flows. These assets being held and used are now
recorded at estimated fair value based upon discounted, estimated future cash
flows.
The impairment charges did not have a significant impact on the Company'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 1998, the Company completed the divestiture of home health
businesses for amounts approximating their carrying value. The Company
implemented plans to sell the home health businesses during 1997 resulting in an
estimated after-tax loss on sale of $3.4 million in 1997. The estimated loss on
sale and operating results of the home health businesses are reflected as
discontinued operations in the consolidated statement of operations.
Revenues for the home health businesses disposed of were approximately
$18.9 million and $55.3 million for the years ended December 31, 1998 and 1997,
respectively.
NOTE 7 -- ACCOUNTING CHANGE
During 1997, the Company 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. The Company believes the
new method is preferable due to certain changes in business strategy and reviews
of
F-37
<PAGE> 149
LIFEPOINT HOSPITALS HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
then 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. The pro forma
effect on the year ended December 31, 1997 follows (dollars in millions):
<TABLE>
<CAPTION>
1997
-----------------------
AS REPORTED PRO FORMA
----------- ---------
<S> <C> <C>
Income from continuing operations........................... $17.1 $17.1
Net income.................................................. $12.5 $13.1
</TABLE>
NOTE 8 -- LONG-TERM DEBT
Long-term debt consists of the following (in millions):
<TABLE>
<CAPTION>
DECEMBER
--------------
1999 1998
------ -----
<S> <C> <C>
Bank Facilities............................................. $110.0 $ --
Senior Subordinated Notes................................... 150.0 --
Other debt.................................................. 0.2 0.6
------ -----
260.2 0.6
Less current maturities..................................... (3.1) (0.3)
------ -----
$257.1 $ 0.3
====== =====
</TABLE>
Maturities of long-term debt at December 31, 1999 are as follows (in
millions):
<TABLE>
<S> <C>
2000........................................................ $ 3.1
2001........................................................ 5.0
2002........................................................ 7.1
2003........................................................ 7.1
2004........................................................ 7.1
Thereafter.................................................. 230.8
------
$260.2
======
</TABLE>
Bank Credit Agreement
On May 11, 1999, the Company assumed from Columbia/HCA the obligations
under a bank credit agreement (the "Credit Agreement") with a group of lenders
with commitments aggregating $210 million. The Credit Agreement consists of a
$60 million term loan facility, an $85 million term loan facility, and a $65
million revolving credit facility (collectively the "Bank Facilities").
As of December 31, 1999, $25 million of the $60 million term loan facility
was drawn, with the remaining $35 million available for limited purposes to be
drawn by May 11, 2000. The final payment under this term loan facility is due
November 11, 2004.
The $85 million term loan facility was drawn in full at the time of the
Distribution. The final payment under this term loan is due November 11, 2005.
The $65 million revolving credit facility is available for working capital
and other general corporate purposes, and any outstanding amounts thereunder
will be due and payable on November 11, 2004. No amounts were outstanding under
this facility as of December 31, 1999.
F-38
<PAGE> 150
LIFEPOINT HOSPITALS HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Repayments under the term loan facilities are due in quarterly installments
with quarterly amortization based on annual amounts. Interest on the Bank
Facilities is currently based on LIBOR plus 3.0% for the revolving credit
facility and the $60 million term loan facility, and LIBOR plus 3.5% for the $85
million term loan facility. The weighted average interest rate on the Bank
Facilities was approximately 9.9% at December 31, 1999. The Company also pays a
commitment fee equal to 0.5% of the average daily amount available under the
revolving credit facility and on the undrawn portion of the $60 million term
loan facility.
The Company's obligations under the Bank Facilities are guaranteed by its
subsidiaries. These guarantees are secured by a pledge of substantially all of
the subsidiaries' assets. The Credit Agreement requires that the Company comply
with various financial ratios and tests and contains covenants, including but
not limited to restrictions on new indebtedness, the ability to merge or
consolidate, asset sales, capital expenditures and dividends.
Senior Subordinated Notes
On May 11, 1999, the Company assumed from Columbia/HCA $150 million in
Senior Subordinated Notes maturing on May 15, 2009 and bearing interest at
10.75%. In November 1999, in a registered exchange offer, the Company issued a
like aggregate principal amount of notes in exchange for these notes (the
"Notes"). Interest is payable semi-annually. The Notes are unsecured obligations
and are subordinated in right of payment to all existing and future senior
indebtedness.
The indenture pursuant to which the Notes were made contains certain
covenants, including but not limited to restrictions on new indebtedness, the
ability to merge or consolidate, asset sales, capital expenditures and
dividends.
The Notes are guaranteed jointly and severally on a full and unconditional
basis by all of the Company's operating subsidiaries ("Subsidiary Guarantors").
The Company is a holding company with limited operations apart from its
ownership of the Subsidiary Guarantors. The aggregate assets, liabilities,
equity and earnings of the Subsidiary Guarantors are substantially equivalent to
the total assets, liabilities, equity and earnings of the Company and its
subsidiaries on a consolidated basis.
At December 31, 1999, all but one of the Subsidiary Guarantors were wholly
owned and fully and unconditionally guaranteed the Notes. Separate financial
statements and other disclosures of the wholly owned Subsidiary Guarantors are
not presented because management believes that such separate financial
statements and disclosures would not provide additional material information to
investors.
As of May 11, 1999, two of the Subsidiary Guarantors were not wholly owned
and the guarantees of such non-wholly owned entities were limited. During the
fourth quarter of 1999, the Company acquired ownership of the remaining interest
in one such Subsidiary Guarantor, and the limitations on the guarantee of such
Subsidiary Guarantor, as well as the limitations on the guarantee of the
remaining non-wholly owned Subsidiary Guarantor, were eliminated. Therefore, at
December 31, 1999, only one of the Company's consolidating subsidiaries, Dodge
City Healthcare Group, L.P., was not wholly owned, although all assets,
liabilities, equity and earnings of this entity fully and unconditionally,
jointly and severally guarantee the Notes. The Company owns approximately 70% of
the partnership interests in this mostly owned limited partnership.
A summarized condensed consolidating balance sheet at December 31, 1999 and
condensed consolidating statement of operations and condensed consolidating
statement of cash flows for the year ended December 31, 1999 for the Company
segregating the parent company, the combined wholly owned guarantor
subsidiaries, the mostly owned guarantor subsidiary and eliminations are found
below. Separate audited financial statements of the mostly owned guarantor
subsidiary, Dodge City Healthcare Group, L.P., are being filed with the
Securities and Exchange Commission and are included elsewhere in this filing.
F-39
<PAGE> 151
LIFEPOINT HOSPITALS HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
LifePoint Hospitals Holdings, Inc.
Condensed Consolidating Statement of Operations
For the Year Ended December 31, 1999
(in millions)
<TABLE>
<CAPTION>
WHOLLY OWNED MOSTLY OWNED
GUARANTOR GUARANTOR CONSOLIDATED
PARENT SUBSIDIARIES SUBSIDIARY ELIMINATIONS TOTAL
------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Revenues.............................. $ -- $482.5 $32.7 $ -- $515.2
Salaries and benefits................. -- 206.2 11.2 -- 217.4
Supplies.............................. -- 60.0 4.2 -- 64.2
Other operating expenses.............. -- 112.3 4.8 -- 117.1
Provision for doubtful accounts....... -- 35.4 2.8 -- 38.2
Depreciation and amortization......... -- 29.7 1.7 -- 31.4
Interest expense...................... 17.7 5.1 0.6 -- 23.4
Management fees....................... -- 2.5 0.7 -- 3.2
ESOP expense.......................... -- 2.9 -- -- 2.9
Equity in earnings of affiliates...... (7.0) -- -- 7.0 --
Impairment of long-lived assets....... -- 25.4 -- -- 25.4
------ ------ ----- ------ ------
10.7 479.5 26.0 7.0 523.2
------ ------ ----- ------ ------
Income (loss) before minority
interests and income taxes.......... (10.7) 3.0 6.7 (7.0) (8.0)
Minority interests in earnings of
consolidated entities............... 1.9 -- -- -- 1.9
------ ------ ----- ------ ------
Income (loss) before income taxes..... (12.6) 3.0 6.7 (7.0) (9.9)
Provision (benefit) for income
taxes............................... (5.3) 2.7 -- -- (2.6)
------ ------ ----- ------ ------
Net income (loss)........... $ (7.3) $ 0.3 $ 6.7 $ (7.0) $ (7.3)
====== ====== ===== ====== ======
</TABLE>
F-40
<PAGE> 152
LIFEPOINT HOSPITALS HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
LifePoint Hospitals Holdings, Inc.
Condensed Consolidating Balance Sheet
December 31, 1999
(in millions)
<TABLE>
<CAPTION>
WHOLLY OWNED MOSTLY OWNED
GUARANTOR GUARANTOR CONSOLIDATED
PARENT SUBSIDIARIES SUBSIDIARY ELIMINATIONS TOTAL
ASSETS ------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Current assets:
Cash and cash equivalents........... $ -- $ 12.5 $ -- $ -- $ 12.5
Accounts receivable, net............ -- 41.4 5.3 -- 46.7
Inventories......................... -- 13.1 1.2 -- 14.3
Deferred taxes and other current
assets........................... -- 25.8 0.1 -- 25.9
------ ------- ------ ------- -------
-- 92.8 6.6 -- 99.4
Property and equipment, at cost:
Land................................ -- 7.6 0.3 -- 7.9
Buildings........................... -- 194.2 9.9 -- 204.1
Equipment........................... -- 250.3 10.3 -- 260.6
Construction in progress............ -- 20.2 -- -- 20.2
------ ------- ------ ------- -------
-- 472.3 20.5 -- 492.8
Accumulated depreciation.............. -- (187.2) (11.2) -- (198.4)
------ ------- ------ ------- -------
-- 285.1 9.3 -- 294.4
Net investment in and advances to
subsidiaries........................ 333.2 -- -- (333.2) --
Intangible assets, net................ 9.8 6.1 10.5 -- 26.4
Other................................. -- 0.2 -- -- 0.2
------ ------- ------ ------- -------
$343.0 $ 384.2 $ 26.4 $(333.2) $ 420.4
====== ======= ====== ======= =======
LIABILITIES AND EQUITY
Current liabilities:
Accounts payable.................... $ -- $ 25.9 $ 0.6 $ -- $ 26.5
Accrued salaries.................... -- 14.7 -- -- 14.7
Other current liabilities........... 2.5 10.1 0.3 12.9
Current maturities of long-term
debt............................. 2.9 0.2 -- -- 3.1
------ ------- ------ ------- -------
5.4 50.9 0.9 -- 57.2
Intercompany balances to affiliates... (9.7) (1.0) 10.7 -- --
Long-term debt........................ 257.1 -- -- -- 257.1
Deferred income taxes................. -- 12.5 -- -- 12.5
Professional liability risks and other
liabilities......................... -- 3.4 -- -- 3.4
Minority interests in equity of
consolidated entities............... 4.5 -- -- -- 4.5
Stockholders' equity.................. 85.7 318.4 14.8 (333.2) 85.7
------ ------- ------ ------- -------
$343.0 $ 384.2 $ 26.4 $(333.2) $ 420.4
====== ======= ====== ======= =======
</TABLE>
F-41
<PAGE> 153
LIFEPOINT HOSPITALS HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
LifePoint Hospitals Holdings, Inc.
Condensed Consolidating Statement of Cash Flows
For the Year Ended December 31, 1999
(in millions)
<TABLE>
<CAPTION>
WHOLLY OWNED MOSTLY OWNED
GUARANTOR GUARANTOR CONSOLIDATED
PARENT SUBSIDIARIES SUBSIDIARY ELIMINATIONS TOTAL
------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net income.......................... $ (7.3) $ 0.3 $6.7 ($7.0) $(7.3)
Adjustments to reconcile net income
to net cash provided by operating
activities:
ESOP expense..................... -- 2.9 -- -- 2.9
Provision for doubtful
accounts....................... -- 35.4 2.8 -- 38.2
Depreciation and amortization.... -- 29.7 1.7 -- 31.4
Amortization of deferred loan
costs.......................... -- 0.9 -- -- 0.9
Deferred income taxes
(benefit)...................... -- (13.8) -- -- (13.8)
Impairment of long-lived
assets......................... -- 25.4 -- -- 25.4
Reserve for professional
liability risk................. -- 3.3 -- -- 3.3
Equity in earnings of
affiliates..................... (7.0) -- -- 7.0 --
Increase (decrease) in cash from
operating assets and
liabilities:
Accounts receivable............ -- (27.5) (2.3) -- (29.8)
Inventories and other current
assets...................... -- (0.8) (0.3) -- (1.1)
Accounts payable and accrued
expenses.................... 17.7 (10.3) (0.3) -- 7.1
Income taxes payable........... -- (0.3) -- -- (0.3)
Other............................ 1.9 (1.3) -- -- 0.6
------ ----- ---- ----- -----
Net cash provided by
operating activities...... 5.3 43.9 8.3 -- 57.5
Cash flows from investing activities:
Purchase of property and equipment,
net.............................. -- (63.6) (1.2) -- (64.8)
Investments in and advances to
affiliates....................... -- (2.0) -- -- (2.0)
Other............................... -- (0.2) -- -- (0.2)
------ ----- ---- ----- -----
Net cash used in investing
activities................ -- (65.8) (1.2) -- (67.0)
Cash flows from financing activities:
Decrease in long-term debt, net..... -- (0.1) (0.3) -- (0.4)
Distributions....................... -- 6.0 (6.0) -- --
Increase (decrease) in intercompany
balances with affiliates, net.... (5.3) 6.1 (0.8) -- --
Increase (decrease) in intercompany
balances with Columbia/HCA,
net.............................. -- 22.4 -- -- 22.4
------ ----- ---- ----- -----
Net cash provided by (used
in) financing
activities................ (5.3) 34.4 (7.1) -- 22.0
------ ----- ---- ----- -----
Change in cash and cash equivalents... -- 12.5 -- -- 12.5
Cash and cash equivalents at beginning
of period........................... -- -- -- -- --
------ ----- ---- ----- -----
Cash and cash equivalents at end of
period.............................. $ -- $12.5 $ -- $ -- $12.5
====== ===== ==== ===== =====
</TABLE>
F-42
<PAGE> 154
LIFEPOINT HOSPITALS HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 9 -- PARTICIPATION IN STOCK BENEFIT PLANS OF LIFEPOINT
In connection with the Distribution, LifePoint adopted the 1998 Long-Term
Incentive Plan, for which 5,425,000 shares of LifePoint's Common Stock have been
reserved for issuance. The 1998 Long-Term Incentive Plan authorizes the grant of
stock options, stock appreciation rights and other stock based awards to
officers and employees of the Company. On the Distribution Date, approximately
591,900 stock options were granted under this plan, relating to pre-existing
vested Columbia/HCA options. These options were granted at various prices, were
exercisable on the date of grant, and expire at various dates not to exceed 10
years. Options to purchase an additional 2,740,000 shares were granted to the
Company's employees under this plan with an exercise price of the fair market
value on the date of grant. These options are exercisable beginning in part from
the date of grant to five years after the date of grant. All options granted
under this plan expire in 10 years from the date of grant. LifePoint also
granted 340,000 options to Columbia/HCA executives with an exercise price of the
fair market value on the date of grant. These options were exercisable on the
date of grant and Columbia/HCA paid the Company, on behalf of LifePoint, $1.5
million in exchange for LifePoint's issuance of these options.
LifePoint also adopted the Executive Stock Purchase Plan, in which
1,000,000 shares of LifePoint's Common Stock were reserved and subsequently
issued. The Executive Stock Purchase Plan grants a right to specified executives
of the Company to purchase shares of Common Stock from LifePoint. LifePoint
loaned each participant in the plan 100% of the purchase price of LifePoint's
Common Stock at the fair value based on the date of purchase (approximately
$10.2 million), on a full recourse basis at interest rates ranging from 5.2% to
5.3%. The loans are reflected as a reduction to stockholders' equity as "Notes
receivable for shares sold to employees". In addition, such executives have been
granted options equal to three-quarters of a share for each share purchased. As
of December 31, 1999, options to purchase 750,000 shares had been issued
pursuant to the 1998 Long-Term Incentive Plan. The exercise price of these stock
options is equal to the fair value on the date of grant. The options expire in
10 years and are exercisable 50% on the date of grant and 50% five years after
the Distribution.
In addition, LifePoint has a Management Stock Purchase Plan which provides
to certain designated employees an opportunity to purchase restricted shares of
LifePoint's Common Stock at a discount through payroll deductions over six month
intervals. Shares of Common Stock reserved for this plan were 250,000 at
December 31, 1999. Approximately 54,000 restricted shares will be issued to
employees in the first quarter of 2000 under this plan.
LifePoint also adopted an Outside Directors Plan for which 175,000 shares
of LifePoint's Common Stock have been reserved for issuance. In June 1999,
approximately 20,000 options were granted under such plan to non-employee
directors. These options are exercisable beginning in part from the date of
grant to three years after the date of grant and expire 10 years after grant.
In addition, LifePoint granted an option to purchase 50,000 shares of
LifePoint to The LifePoint Community Foundation. The exercise price of the stock
option is equal to the fair value on the date of grant.
In connection with the Distribution, LifePoint established the LifePoint
Employee Stock Ownership Plan ("ESOP"). The ESOP purchased from LifePoint
approximately 8.3% of LifePoint's Common Stock at fair market value
(approximately 2.8 million shares at $11.50 per share). Shares will be allocated
ratably to employee accounts over the next 10 years beginning in fiscal year
1999. The shares held by the ESOP which have not yet been allocated to employee
accounts are included in LifePoint's shareholders' equity as "Unearned ESOP
Compensation". Unearned ESOP shares are released at historical cost upon being
allocated to employee accounts. The fair value of unearned ESOP shares were
$29.7 million at December 31, 1999. ESOP expense is allocated by LifePoint to
the Company and is recognized by using the average market price of LifePoint
shares committed to be released during the accounting period.
F-43
<PAGE> 155
LIFEPOINT HOSPITALS HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Presented below is a summary of LifePoint's stock option activity for 1999:
<TABLE>
<CAPTION>
STOCK OPTION PRICE WEIGHTED AVERAGE
OPTIONS PER SHARE EXERCISE PRICE
--------- ------------ ----------------
<S> <C> <C> <C>
Balances, December 31, 1998..................... -- $ -- $ --
Conversion of Columbia/HCA options............ 591,900 0.07-18.38 12.12
Granted....................................... 3,900,000 7.63-12.00 10.62
Exercised..................................... (9,300) 0.18-12.33 9.01
Cancelled..................................... (71,200) 0.18-18.38 12.63
---------
Balances, December 31, 1999..................... 4,411,400 0.07-18.38 10.79
=========
</TABLE>
At December 31, 1999, there were 1,179,300 LifePoint options available for
grant.
The following table summarizes information regarding LifePoint's options
outstanding at December 31, 1999:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------ ----------------------
WEIGHTED
AVERAGE WEIGHTED WEIGHTED
NUMBER REMAINING AVERAGE NUMBER AVERAGED
OUTSTANDING CONTRACTUAL EXERCISE EXERCISABLE EXERCISE
RANGE OF EXERCISE PRICES AT 12/31/99 LIFE PRICE AT 12/31/99 PRICE
- ------------------------ ----------- ----------- -------- ----------- --------
<S> <C> <C> <C> <C> <C>
$ 0.07 to $ 7.18 18,200 1 $ 0.53 18,200 $0.53
0.18 to 5.81 11,700 2 0.74 11,700 0.74
3.56 to 8.76 78,700 3 5.64 78,700 5.64
5.56 to 10.99 14,000 4 6.96 14,000 6.96
11.67 to 13.21 105,500 5 11.89 105,500 11.89
12.18 to 14.98 93,900 6 12.34 93,900 12.34
14.16 to 17.73 133,500 7 16.51 133,500 16.51
12.99 to 18.38 44,800 8 18.35 44,800 18.35
12.20 to 15.64 29,100 9 13.03 29,100 13.03
7.63 to 12.00 3,882,000 10 10.62 1,266,100 10.61
--------- ---------
4,411,400 1,795,500
========= =========
</TABLE>
If the Company issued the above noted options during 1999 under the same
terms and conditions and had measured compensation cost for the stock options
granted under the fair value based method prescribed by SFAS No. 123, the net
loss of the Company would have been changed to the pro forma amounts set forth
below:
<TABLE>
<CAPTION>
AS REPORTED PRO FORMA
----------- ---------
<S> <C> <C>
Net loss (in millions)...................................... $ (7.3) $ (8.0)
</TABLE>
The fair values of options converted and granted used to compute pro forma
net loss disclosures were estimated on the date of grant using the Black-Scholes
option-pricing model based on the following weighted average assumptions:
<TABLE>
<CAPTION>
1999
---------
<S> <C>
Risk free interest rate..................................... 5.2-7.6%
Expected life............................................... 4.7 years
Expected volatility......................................... 35.0%
Expected dividend yield..................................... 0.0%
</TABLE>
The weighted-average fair value of options converted and granted during
1999 was $3.73.
F-44
<PAGE> 156
LIFEPOINT HOSPITALS HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 10 -- RETIREMENT PLANS
The Company participates in defined contribution employee benefit plans
sponsored by LifePoint which cover substantially all employees. These plans
require LifePoint to make matching contributions with LifePoint's stock at
certain percentages from the ESOP that was established upon the Distribution
(see Note 9). ESOP expense was $2.9 million for the year ended December 31,
1999.
Prior to the Distribution, the Company participated in Columbia/HCA's
defined contribution retirement plans, which covered substantially all
employees. Benefits were determined primarily as a percentage of a participant's
earned income and were vested over specific periods of employee service. Certain
plans also required the Company to make matching contributions at certain
percentages. The cost of these plans was $5.3 million, and $5.9 million during
1998, and 1997, respectively. Amounts approximately equal to expense for these
plans were funded annually. After the Distribution, the Company no longer
participated in these plans.
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 LifePoint's and the
Company'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, for a description of the ongoing
government investigations and Columbia/HCA's obligations to indemnify LifePoint
and the Company with respect to losses incurred by LifePoint and the Company
arising from such governmental investigations and related proceedings.)
General Liability Claims
The Company is subject to claims and suits arising in the ordinary course
of business, including claims for personal injuries or wrongful restriction of,
or interference with, physicians' staff privileges. In certain of these actions
claimants may ask for punitive damages against the Company 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
the Company's results of operations or financial position.
Physician Commitments
The Company 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, the Company 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 $11.6 million at December 31, 1999. 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
F-45
<PAGE> 157
LIFEPOINT HOSPITALS HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
that amounts actually advanced and not repaid will not have a material adverse
effect on the Company'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>
1999 1998
----- -----
<S> <C> <C>
Employee benefit plan....................................... $ 2.7 $ 7.0
Accrued interest related to long-term debt.................. 2.6 --
Taxes, other than income.................................... 0.3 3.6
Other....................................................... 7.3 4.0
----- -----
$12.9 $14.6
===== =====
</TABLE>
A summary of activity in the Company'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>
Allowance for doubtful accounts:
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
Year ended December 31, 1999........................ 48.3 38.2 (36.2) 50.3
</TABLE>
NOTE 13 -- EARNINGS PER SHARE
Because the Company is a wholly owned subsidiary of LifePoint, earnings
(loss) per share is not meaningful and, therefore, is not presented.
NOTE 14 -- FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts reported in the consolidated balance sheets for cash,
accounts receivable and accounts payable approximates fair value.
The carrying value of long-term debt (including current portion) was $260.2
million for the year ended December 31, 1999. The fair value of long-term debt
(including current portion) was $264.7 million for the year ended December 31,
1999. The fair value of the Notes has been determined using the quoted market
price at December 31, 1999. The fair values of the remaining long-term debt are
estimated using discounted cash flows, based on the Company's incremental
borrowing rates.
F-46
<PAGE> 158
LIFEPOINT HOSPITALS HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 15 -- 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 consolidated financial statements appearing herein (dollars in
millions, except per share amounts).
<TABLE>
<CAPTION>
1999
---------------------------------
FIRST SECOND THIRD FOURTH
------ ------ ------ ------
<S> <C> <C> <C> <C>
Revenues.................................................... $134.2 $128.2 $125.4 $127.4
Net income (loss)........................................... 4.0 1.0 1.2 (13.5)(a)
</TABLE>
<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)(b) (22.7)(c)
</TABLE>
- ---------------
(a) During the fourth quarter of 1999, the Company recorded a $25.4 million
pre-tax charge ($16.2 million after tax) related to the impairment of
certain long-lived assets (See Note 5 -- Impairment of Long-Lived Assets).
(b) During the third quarter of 1998, the Company 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).
(c) During the fourth quarter of 1998, the Company 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).
NOTE 16 -- SUBSEQUENT EVENTS
On January 31, 2000, the Company completed an amendment to its Credit
Agreement to revise certain financial definitions and to increase the amount of
permitted investments made by the Company, effective December 31, 1999.
On January 31, 2000, the Company sold Trinity Hospital in Erin, Tennessee.
Trinity Hospital was one of the Company's hospital facilities held for sale as
discussed in Note 5.
F-47
<PAGE> 159
REPORT OF INDEPENDENT AUDITORS
The Partners
Dodge City Healthcare Group, L.P.
We have audited the accompanying balance sheets of Dodge City Healthcare
Group, L.P. (a Kansas limited partnership) (the "Partnership") as of December
31, 1999 and 1998, and the related statements of income, partners' capital, and
cash flows for each of the three years in the period ended December 31, 1999.
These financial statements are the responsibility of the Partnership's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. 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 financial position of Dodge City Healthcare Group,
L.P. (a Kansas limited partnership) at December 31, 1999 and 1998, and the
results of its operations and its cash flows for each of the three years in the
period ended December 31, 1999, in conformity with accounting principles
generally accepted in the United States.
ERNST & YOUNG LLP
Nashville, Tennessee
March 2, 2000
F-48
<PAGE> 160
DODGE CITY HEALTHCARE GROUP, L.P.
STATEMENTS OF INCOME
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------
1999 1998 1997
------- ------- -------
<S> <C> <C> <C>
Revenues.................................................... $32,737 $32,154 $31,777
Allocation of personnel costs............................... 11,204 11,820 10,465
Supplies.................................................... 4,179 3,871 3,921
Other operating expenses.................................... 4,819 5,318 6,115
Provision for doubtful accounts............................. 2,841 2,295 1,588
Depreciation and amortization............................... 1,741 1,634 1,303
Interest expense............................................ 619 601 408
Management fees............................................. 657 646 613
------- ------- -------
26,060 26,185 24,413
------- ------- -------
Net income........................................ $ 6,677 $ 5,969 $ 7,364
======= ======= =======
</TABLE>
See accompanying notes.
F-49
<PAGE> 161
DODGE CITY HEALTHCARE GROUP, L.P.
BALANCE SHEETS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1999 1998
-------- --------
<S> <C> <C>
ASSETS
Current assets:
Accounts receivable, less allowance for doubtful accounts
of $2,997 and $3,185 as of December 31, 1999 and
1998................................................... $ 5,304 $ 4,467
Inventories............................................... 1,215 966
Prepaid expenses and other................................ 118 68
-------- --------
6,637 5,501
Property and equipment, at cost:
Land...................................................... 319 319
Buildings and improvements................................ 9,858 9,481
Equipment................................................. 10,308 9,551
Construction in progress.................................. -- 22
-------- --------
20,485 19,373
Accumulated depreciation.................................. (11,182) (9,838)
-------- --------
9,303 9,535
Intangible assets, net of accumulated amortization of $1,444
and $1,145 at December 31, 1999 and 1998.................. 10,503 10,802
-------- --------
$ 26,443 $ 25,838
======== ========
LIABILITIES AND PARTNERS' CAPITAL
Current liabilities:
Accounts payable.......................................... $ 585 $ 791
Accrued expenses.......................................... 274 336
Current maturities of long-term debt...................... -- 19
-------- --------
859 1,146
Intercompany balances payable to affiliate.................. 10,740 11,515
Long-term debt.............................................. -- 301
Partners' capital:
Limited partners (990 units authorized and 890 units
issued and outstanding)................................ 13,377 12,732
General partner (10 units authorized, issued and
outstanding)........................................... 1,467 144
-------- --------
14,844 12,876
-------- --------
$ 26,443 $ 25,838
======== ========
</TABLE>
See accompanying notes.
F-50
<PAGE> 162
DODGE CITY HEALTHCARE GROUP, L.P.
STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------
1999 1998 1997
------- ------- -------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income.................................................. $ 6,677 $ 5,969 $ 7,364
Adjustments to reconcile net income to net cash provided
by operating activities:
Provision for doubtful accounts........................ 2,841 2,295 1,588
Depreciation and amortization.......................... 1,741 1,634 1,303
Increase (decrease) in cash from operating assets and
liabilities:
Accounts receivable.................................. (2,361) (3,444) (1,541)
Inventories, prepaid expenses and other current
assets.............................................. (299) (22) 69
Accounts payable and accrued expenses................ (268) (340) 38
------- ------- -------
Net cash provided by operating activities......... 8,331 6,092 8,821
Cash flows from investing activities:
Purchases of property and equipment, net.................. (1,210) (1,658) (1,659)
------- ------- -------
Net cash used in investing activities..................... (1,210) (1,658) (1,659)
Cash flows from financing activities:
Decrease in long-term debt, net........................... (320) (940) (83)
Increase (decrease) in intercompany balances payable to
affiliate, net......................................... (775) 3,974 (227)
Distributions............................................. (6,026) (7,468) (6,852)
------- ------- -------
Net cash used in financing activities............. (7,121) (4,434) (7,162)
------- ------- -------
Change in cash.............................................. -- -- --
Cash at beginning of year................................... -- -- --
------- ------- -------
Cash at end of year......................................... $ -- $ -- $ --
======= ======= =======
Supplemental information:
Interest payments......................................... $ 619 $ 601 $ 408
======= ======= =======
Supplemental schedule of noncash transactions:
Contribution from Columbia/HCA............................ $ 1,317 $ -- $ --
======= ======= =======
</TABLE>
See accompanying notes
F-51
<PAGE> 163
DODGE CITY HEALTHCARE GROUP, L.P.
STATEMENTS OF PARTNERS' CAPITAL
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
WESTERN PLAINS
REGIONAL
HOSPITAL, INC./ DODGE CITY
MANAGING WESTERN PLAINS OUTPATIENT
GENERAL REGIONAL SURGICAL
PARTNER HOSPITAL, LLC FACILITY, INC. TOTAL
-------- --------------- -------------- -------
<S> <C> <C> <C> <C>
Partners' capital at January 1, 1997............... $ 154 $ 9,531 $ 4,178 $13,863
Net income....................................... 81 5,074 2,209 7,364
Distributions.................................... (75) (4,722) (2,055) (6,852)
------ ------- ------- -------
Partners' capital at December 31, 1997............. 160 9,883 4,332 14,375
Net income....................................... 66 4,112 1,791 5,969
Distributions.................................... (82) (5,146) (2,240) (7,468)
------ ------- ------- -------
Partners' capital at December 31, 1998............. 144 8,849 3,883 12,876
Net income....................................... 73 4,601 2,003 6,677
Distributions.................................... (67) (4,151) (1,808) (6,026)
Contribution from Columbia/HCA................... 1,317 -- -- 1,317
------ ------- ------- -------
PARTNERS' CAPITAL AT DECEMBER 31, 1999............. $1,467 $ 9,299 $ 4,078 $14,844
====== ======= ======= =======
</TABLE>
See accompanying notes.
F-52
<PAGE> 164
DODGE CITY HEALTHCARE GROUP, L.P.
NOTES TO FINANCIAL STATEMENTS
NOTE 1 -- ORGANIZATION AND ACCOUNTING POLICIES
Dodge City Healthcare Group, L.P., a Kansas limited partnership (the
"Partnership"), was organized on March 1, 1995. Dodge City Healthcare Partner,
Inc., a Kansas corporation ("DCHP"), is the general partner of the Partnership
with a 1.1% partnership interest. The limited partners of the Partnership are
Western Plains Regional Hospital, LLC, a Delaware limited liability company
("WPRH"), and Dodge City Outpatient Surgical Facility Inc., a Kansas corporation
("DCOSF"), with partnership interests of 68.9% and 30.0%, respectively. DCHP and
WPRH are indirect wholly owned subsidiaries of LifePoint Hospitals, Inc., a
Delaware corporation ("LifePoint"), through its direct wholly owned subsidiary,
LifePoint Hospitals Holdings, Inc. ("Holdings").
On May 11, 1999, Columbia/HCA Healthcare Corporation ("Columbia/HCA")
completed the tax-free spin-off of its operations comprising the America Group
by distributing all outstanding shares of LifePoint to its shareholders (the
"Distribution"). As a result, Columbia/HCA's combined 70.0% interest in the
Partnership was transferred to LifePoint and LifePoint assumed the rights as
sole general partner of the Partnership. Information regarding Columbia/HCA
included in this report on Form 10-K is derived from reports and other
information filed by Columbia/HCA with the Securities and Exchange Commission.
The Partnership owns and operates Western Plains Regional Hospital, a
110-bed acute care hospital, and an outpatient surgery center which provide
health care services to patients in and around Dodge City, Kansas. The
Partnership receives payment for patient services from the federal government
primarily under the Medicare program, state governments under their respective
Medicaid programs, preferred provider organizations and other private insurers
and directly from patients.
The partnership agreement provides that the Partnership is to distribute,
in quarterly installments to the general and limited partners in accordance with
their respective ownership interests, an amount equal to 90% of its annual
income. The partnership agreement further provides that profits and losses of
the Partnership will be allocated to the partners in accordance with their
respective ownership interests.
As further defined in the partnership agreement, the general partner is
obligated to manage and supervise the Partnership business and affairs. The
Partnership shall be dissolved on December 31, 2050, unless sooner dissolved by
law or pursuant to the partnership agreement or unless extended by amendment to
the partnership agreement.
Use of Estimates
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States 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.
Partners' Capital
Subsequent to the Distribution, partners' capital of the managing general
partner and of Western Plains Regional Hospital, LLC represent the collective
capital of the Partnership owned by LifePoint. Prior to the Distribution,
partners' capital of the managing general partner and of Western Plains Regional
Hospital, Inc. represent the collective capital of the Partnership owned by
Columbia/HCA.
Revenues
The Partnership has entered into agreements with third-party payers,
including government programs and managed care health plans, under which the
Partnership is paid based upon established charges, the cost of providing
services, predetermined rates per diagnosis, fixed per diem rates or discounts
from established charges.
F-53
<PAGE> 165
DODGE CITY HEALTHCARE GROUP, L.P.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Revenues are recorded at estimated amounts due from patients and
third-party payers for the healthcare 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/(decreases) to revenues of approximately
($99,000), $217,000 and $1,100,000 for the years ended December 31, 1999, 1998
and 1997, respectively. Management believes that adequate provisions have been
made for adjustments that may result from final determination of amounts earned
under these programs. Pursuant to the terms of the distribution agreement
between LifePoint and Columbia/HCA, LifePoint and its subsidiaries, including
the Partnership, are responsible for the Medicare, Medicaid and Blue Cross cost
reports, and associated receivables and payables, for all periods ending after
May 11, 1999. Columbia/HCA agreed to indemnify LifePoint and its subsidiaries,
including the Partnership, with respect to cost reports relating to periods
ending on or prior to the Distribution. Net settlement liabilities of
approximately $1,317,000 recorded by the Partnership as of May 11, 1999 were
deemed to be assumed by Columbia/HCA and, accordingly, recorded as a
contribution from Columbia/HCA to the capital of the Partnership. The net
settlement payable estimated as of December 31, 1999 and 1998, which is included
in accounts receivable in the accompanying balance sheets, approximated $0 and
$352,000, respectively.
The Partnership provides care without charge to patients who are
financially unable to pay for the health care services they receive. Because the
Partnership does not pursue collection of amounts determined to qualify as
charity care, they are not reported in revenues.
Accounts Receivable
The Partnership receives payment for services rendered from federal and
state agencies (under the Medicare, Medicaid and TRICARE programs), managed care
health plans, commercial insurance companies, employers and patients. During the
years ended December 31, 1999, 1998 and 1997, approximately 21%, 27% and 24%,
respectively, of the Partnership's revenues related to patients participating in
the Medicare program. Management recognizes that revenues and receivables from
government agencies are significant to the Partnership's operations, but
management does not believe that there are significant credit risks associated
with these government agencies. Management of the Partnership does not believe
that there are any other significant concentrations of revenues from any
particular payer that would subject the Partnership 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 by the straight-line method, was
approximately $1,442,000, $1,335,000 and $994,000 for the years ended December
31, 1999, 1998 and 1997, respectively. Buildings and improvements are
depreciated over estimated useful lives ranging from 10 to 40 years. Estimated
useful lives of equipment vary generally from 3 to 10 years.
(b) Intangible Assets
Intangible assets consists primarily of costs in excess of the fair value
of identifiable net assets acquired and are amortized using the straight-line
method over 40 years. When events, circumstances and operating
F-54
<PAGE> 166
DODGE CITY HEALTHCARE GROUP, L.P.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
results indicate that the carrying values of certain long-lived assets and the
related identifiable intangible assets might be impaired, the Partnership
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
The Partnership is not an income tax paying entity. No provision is made in
the accounts of the Partnership since such taxes are liabilities of the
individual partners of the Partnership, and the amounts thereof depend on their
respective tax situations.
The Partnership's tax returns and the amounts of distributable Partnership
income or loss are subject to examination by the federal and state taxing
authorities. In the event of an examination of the Partnership's tax return, the
tax liability of the partners could be changed if any adjustment to the
Partnership taxable income or loss is ultimately sustained by the taxing
authorities.
Professional and General Liability Risks
The cost of professional and general liability coverage is allocated to the
Partnership by LifePoint post-Distribution, and by Columbia/HCA
pre-Distribution, based on actuarially determined estimates. The actuarially
determined estimate of cost allocated to the Partnership by LifePoint is
discounted to its present value using a rate of 6%. LifePoint, as well as
Columbia/HCA, maintains reserves for professional and general liability risks.
Accordingly, no reserve for liability risks is recorded on the accompanying
balance sheets. Columbia/HCA assumed the liability for all professional and
general liability claims of the Partnership incurred prior to the Distribution.
The cost for the years ended December 31, 1999, 1998 and 1997 was approximately,
$214,000, $188,000 and $211,000, respectively.
Personnel assigned to the Partnership participate in a self-insured program
for health insurance administered by LifePoint post-Distribution and by
Columbia/HCA pre-Distribution. Cost for health insurance is allocated to the
Partnership based upon claims paid and an estimate of claims incurred but not
reported. LifePoint, as well as Columbia/HCA, maintains reserves for incurred
but not reported health claims. Accordingly, no reserve for incurred but not
reported health claims is recorded on the accompanying balance sheets.
Columbia/HCA assumed the liability for all health claims incurred prior to the
Distribution. The cost for the years ended December 31, 1999, 1998 and 1997,
based on the Partnership's experience, was approximately $1,031,000, $974,000,
and $541,000, respectively.
Intercompany Balances to Affiliate
Intercompany balances payable to affiliate represent the net excess of
funds transferred to or paid on behalf of the Partnership over funds transferred
to the centralized cash management account of LifePoint post-Distribution and
Columbia/HCA pre-Distribution. Generally, this balance is increased by
partnership distributions and disbursements made by LifePoint on behalf of the
Partnership for operating expenses and to pay the Partnership's debt, completed
construction project additions, fees and services provided by LifePoint,
including information systems services and other operating expenses, such as
personnel costs, interest and insurance. Generally, the balance is decreased
through daily cash deposits by the Partnership to the account. Prior to the
Distribution, the Partnership was charged interest on the outstanding
intercompany balance at each month end at various rates ranging from 6% to 10%.
For periods after the Distribution, the Partnership is being charged interest at
prime rates which approximated 8.5% at December 31, 1999. In the opinion of
LifePoint management, the interest rate charged has been at prevailing market
rates. Interest expense under this arrangement is included in the Statements of
Income.
F-55
<PAGE> 167
DODGE CITY HEALTHCARE GROUP, L.P.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Management Fees
In accordance with the terms of the partnership agreement, the general
partner receives a monthly management fee based upon the Partnership's net
patient revenues. The management fee charged to the Partnership is not
necessarily indicative of the actual costs which may have been incurred had the
Partnership operated as an entity unaffiliated with LifePoint post-Distribution
or Columbia/HCA pre-Distribution; however, in the opinion of the Partnership's
management, the management fee charged is reasonable.
NOTE 2 -- LONG-TERM DEBT
Long-term debt of the Partnership consisted of the following at December
31, (dollars in thousands):
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
9.38% note payable; principal and interest payable in
monthly installments through June 2009.................... $-- $320
Less current portion of long-term debt...................... -- 19
--- ----
$-- $301
=== ====
</TABLE>
In June 1999, the Partnership repaid the outstanding balance of the 9.38%
note payable.
Guarantee of Long-Term Debt
On May 11, 1999, Holdings assumed from Columbia/HCA $150 million in Senior
Subordinated Notes maturing on May 15, 2009. In November 1999, in a registered
exchange offer, Holdings issued a like aggregate principal amount of notes in
exchange for these notes (the "Notes"). The Notes are unsecured obligations and
are subordinated in right of payment to all existing and future senior
indebtedness. The Notes are guaranteed jointly, severally and unconditionally by
all of Holdings' operating subsidiaries including the Partnership.
On May 11, 1999, Holdings also assumed from Columbia/HCA the obligations
under a Bank Credit Agreement (the "Credit Agreement") with a group of lenders
with commitments aggregating $210 million. The Credit Agreement consists of a
$60 million term loan facility, an $85 million term loan facility, and a $65
million revolving credit facility (collectively the "Bank Facilities").
As of December 31, 1999, $25 million of the $60 million term loan facility
was drawn, with the remaining $35 million available for limited purposes to be
drawn by May 11, 2000. The final payment under this term loan facility is due
November 11, 2004.
The $85 million term loan facility was drawn in full at the time of the
Distribution. The final payment under this term loan is due November 11, 2005.
The $65 million revolving credit facility is available for working capital
and other general corporate purposes, and any outstanding amounts thereunder
will be due and payable on November 11, 2004. No amounts were outstanding under
this facility as of December 31, 1999.
Holdings' obligations under the Bank Facilities are guaranteed by its
subsidiaries including the Partnership.
The subsidiary guarantees of the Notes and the Bank Facilities are secured
by a pledge of substantially all of the subsidiaries' assets including all of
the assets of the Partnership.
F-56
<PAGE> 168
DODGE CITY HEALTHCARE GROUP, L.P.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 3 -- LEASES
Operating lease rental expense relating primarily to the rental of
buildings and equipment for the years ended December 31, 1999, 1998 and 1997 was
approximately $136,000, $163,000 and $580,000, respectively.
NOTE 4 -- RETIREMENT PLANS
Personnel assigned to the Partnership subsequent to the Distribution
participate in LifePoint's employee stock ownership plan ("ESOP"). Under the
ESOP, shares of LifePoint common stock will be allocated ratably to participants
over the next ten years, beginning in fiscal year 1999. ESOP expense is
allocated to the Partnership based upon the average market price of shares
committed to be released during the accounting period. ESOP expense allocated to
the Partnership was approximately $145,000 for the year ended December 31, 1999
and is included in "Allocation of Personnel Costs" in the accompanying
Statements of Income.
Personnel assigned to the Partnership during the year ended December 31,
1998 and 1997 participated in Columbia/HCA's defined contribution retirement
plans which covered substantially all personnel assigned to the Partnership. The
Partnership reimbursed a Columbia/HCA affiliate for personnel costs, including
contributions to the plan. Benefits were determined primarily as a percentage of
a participant's earned income. The cost of these plans was approximately
$307,000 and $370,000 during 1998 and 1997, respectively.
NOTE 5 -- RELATED PARTIES
To facilitate payroll administration, all personnel assigned to perform
duties for the Partnership are employed by a LifePoint affiliate
post-Distribution and a Columbia/HCA affiliate pre-Distribution. The Partnership
reimburses the affiliate for the direct costs (i.e., salaries and related
benefits) associated with such personnel. Such reimbursements are recorded as
"Allocation of Personnel Costs" in the accompanying Statements of Income.
NOTE 6 -- COMMITMENTS AND CONTINGENCIES
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. Management of the Partnership understands that Columbia/HCA
is cooperating in these investigations and that Columbia/HCA 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 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 (the
"Commission"). The Commission investigation includes the anti-fraud, periodic
reporting and internal accounting control provisions of the federal securities
laws. According to published reports, on July 2, 1999, a federal jury in Tampa,
Florida found two Columbia/HCA employees guilty of conspiracy and making false
statements on Medicare and TRICARE cost reports for the years 1992 and 1993 and
on a Medicaid cost report for 1993. Both were found not guilty of obstructing a
federal auditor. One other employee was acquitted on all counts for which he had
been charged and the jury was unable to reach a verdict with respect to another
employee. This employee and the government executed an agreement to defer
prosecution for 18 months after which charges will be dismissed. The two
convicted employees were sentenced in December 1999 and both have appealed to
the 11th Circuit.
Columbia/HCA is a defendant in several qui tam actions brought by private
parties on behalf of the United States of America, which have been unsealed and
served on Columbia/HCA. The actions allege, in general, that Columbia/HCA and
certain subsidiaries and/or affiliated partnerships violated the False Claims
Act by submitting improper claims to the government for reimbursement. The
lawsuits seek damages of three
F-57
<PAGE> 169
DODGE CITY HEALTHCARE GROUP, L.P.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
times the amount of all Medicare or Medicaid claims (involving false claims)
presented by the defendants to the federal government, civil penalties of not
less than $5,000 nor more than $10,000 for each such Medicare or Medicaid claim,
attorneys' fees and costs. The government has intervened in six unsealed qui tam
actions against Columbia/HCA. 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 litigations 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 in question in the qui tam and other
actions are substantial, and Columbia/HCA could be subject to substantial costs
resulting from an adverse outcome of one or more of such actions. In addition, a
number of derivative actions have been brought by purported stockholders of
Columbia/HCA against certain current and former officers and directors of
Columbia/HCA alleging breach of fiduciary duty and failure to take reasonable
steps to ensure that Columbia/HCA did not engage in illegal practices.
Management believes that the ongoing governmental investigations and
related media coverage may have had a negative effect on Columbia/HCA's results
of operations (which include LifePoint for the periods prior to the date of the
Distribution which are presented herein). The extent to which LifePoint may or
may not continue to be affected after the Distribution by the ongoing
investigations of Columbia/HCA, the initiation of additional investigations, if
any, and the related media coverage cannot be predicted. It is possible that
these matters could have a material adverse effect on the financial condition or
results of operations of LifePoint in future periods.
In connection with the Distribution, Columbia/HCA has agreed to indemnify
LifePoint and its subsidiaries, including the Partnership, in respect of any
losses which it may incur arising from 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 date of the Distribution and
relate to the proceedings described above. Columbia/HCA has also agreed that, in
the event that any hospital owned by LifePoint, including Western Plains
Regional Hospital, as of the date of the Distribution is permanently excluded
from participation in the Medicare and Medicaid programs as a result of the
proceedings described above, then Columbia/HCA will make cash payments to
LifePoint based on amounts as defined in the Distribution Agreement by and among
Columbia/HCA and LifePoint. LifePoint has agreed with Columbia/HCA that, in
connection with the pending governmental investigations, it will negotiate with
the government with respect to a compliance agreement setting forth LifePoint's
agreement to comply with applicable laws and regulations. If any of such
indemnified matters were successfully asserted against LifePoint, or any of its
facilities, including the Partnership, 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 the Partnership. Columbia/HCA has not indemnified LifePoint or
the Partnership for losses relating to any acts, practices and omissions engaged
in by LifePoint or the Partnership after the Distribution, whether or not
LifePoint or the Partnership is indemnified for similar acts, practices and
omissions occurring prior to the date of the Distribution.
F-58
<PAGE> 170
DODGE CITY HEALTHCARE GROUP, L.P.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
General Liability Claims
The Partnership is subject to claims and suits arising in the ordinary
course of business. The Partnership is currently not a party to any proceeding
which, in the opinion of management, would have a material adverse effect on the
Partnership's business, financial condition or results of operations.
Other
Final determination of amounts earned under prospective payment and
cost-reimbursement activities is subject to review by appropriate governmental
authorities or their agents.
NOTE 7 -- ALLOWANCE FOR DOUBTFUL ACCOUNTS
A summary of activity in the Partnership's allowance for doubtful accounts
follows (in thousands):
<TABLE>
<CAPTION>
ADDITIONS ACCOUNTS
BALANCES AT CHARGED TO WRITTEN OFF, BALANCE AT
BEGINNING COSTS AND NET OF THE END OF
OF PERIOD EXPENSES RECOVERIES THE PERIOD
----------- ---------- ------------ ----------
<S> <C> <C> <C> <C>
Allowance for doubtful accounts:
Year ended December 31, 1997............... $3,496 $1,588 $(2,897) $2,187
Year ended December 31, 1998............... 2,187 2,295 (1,297) 3,185
Year ended December 31, 1999............... 3,185 2,841 (3,029) 2,997
</TABLE>
NOTE 8 -- FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts reported in the balance sheets for accounts
receivable, accounts payable and long-term debt approximate fair value because
of the short-term maturity of these instruments.
F-59
<PAGE> 171
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ----------- -----------
<C> <C> <S>
2.1 -- Distribution Agreement dated May 11, 1999 by and among
Columbia/HCA, Triad Hospitals, Inc. and LifePoint Hospitals,
Inc., incorporated by reference from Exhibit 2.1 to
LifePoint Hospitals' Quarterly Report on Form 10-Q for the
quarter ended March 31, 1999, File No. 0-29818.
3.1 -- Certificate of Incorporation of LifePoint Hospitals,
incorporated by reference from Exhibit 3.1 to LifePoint
Hospitals' Quarterly Report on Form 10-Q for the quarter
ended March 31, 1999, File No. 0-29818.
3.2 -- Bylaws of LifePoint Hospitals, incorporated by reference
from Exhibit 3.2 to LifePoint Hospitals' Quarterly Report on
Form 10-Q, for the quarter ended March 31, 1999, File No.
0-29818.
3.3 -- Certificate of Incorporation of LifePoint Holdings.
3.4 -- Bylaws of LifePoint Holdings.
4.1 -- Form of Specimen Certificate for LifePoint Hospitals Common
Stock, incorporated by reference from Exhibit 4.1 to
LifePoint Hospitals' Registration Statement on Form 10 under
the Securities Exchange Act of 1934, as amended, File No.
0-29818.
4.2 -- Indenture (including form of 10 3/4% Senior Subordinated
Notes due 2009) dated as of May 11, 1999, between
HealthTrust, Inc. -- The Hospital Company and Citibank N.A.
as Trustee, incorporated by reference from Exhibit 4.2(a) to
LifePoint Hospitals' Quarterly Report on Form 10-Q for the
quarter ended March 31, 1999, File No. 0-29818.
4.3 -- Form of 10 3/4% Senior Subordinated Notes due 2009 (filed as
part of Exhibit 4.2).
4.4 -- Registration Rights Agreement dated as of May 11, 1999
between HealthTrust and the Initial Purchasers named
therein, incorporated by reference from Exhibit 4.4(a) to
LifePoint Hospitals' Quarterly Report on Form 10-Q for the
quarter ended March 31, 1999, File No. 0-29818.
4.5 -- LifePoint Assumption Agreement dated May 11, 1999 between
HealthTrust and LifePoint Hospitals, incorporated by
reference from Exhibit 4.4(b) to LifePoint Hospitals'
Quarterly Report on Form 10-Q for the quarter ended March
31, 1999, File No. 0-29818.
4.6 -- Holdings Assumption Agreement dated May 11, 1999 between
LifePoint Hospitals and LifePoint Holdings, incorporated by
reference from Exhibit 4.4(c) to LifePoint Hospitals'
Quarterly Report on Form 10-Q for the quarter ended March
31, 1999, File No. 0-29818.
4.7 -- Guarantor Assumption Agreements dated May 11, 1999 between
LifePoint Holdings and the Guarantors signatory thereto,
incorporated by reference from Exhibit 4.4(d) to LifePoint
Hospitals' Quarterly Report on Form 10-Q for the quarter
ended March 31, 1999, File No. 0-29818.
4.8 -- Rights Agreement dated as of May 11, 1999 between the
Company and National City Bank as Rights Agent, incorporated
by reference from Exhibit 4.1 to LifePoint Hospitals'
Quarterly Report on Form 10-Q for the quarter ended March
31, 1999, File No. 0-29818.
10.1 -- Tax Sharing and Indemnification Agreement, dated May 11,
1999, by and among Columbia/HCA, LifePoint Hospitals and
Triad Hospitals, incorporated by reference from Exhibit 10.1
to LifePoint Hospitals' Quarterly Report on Form 10-Q for
the quarter ended March 31, 1999, File No. 0-29818.
10.2 -- Benefits and Employment Matters Agreement, dated May 11,
1999 by and among Columbia/HCA, LifePoint Hospitals and
Triad Hospitals, incorporated by reference from Exhibit 10.2
to LifePoint Hospitals' Quarterly Report on Form 10-Q for
the quarter ended March 31, 1999, File No. 0-29818.
</TABLE>
<PAGE> 172
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ----------- -----------
<C> <C> <S>
10.3 -- Insurance Allocation and Administration Agreement, dated May
11, 1999, by and among Columbia/HCA, LifePoint Hospitals and
Triad Hospitals, incorporated by reference from Exhibit 10.3
to LifePoint Hospitals' Quarterly Report on Form 10-Q for
the quarter ended March 31, 1999, File No. 0-29818.
10.4 -- Transitional Services Agreement dated May 11, 1999 by and
between Columbia/HCA and LifePoint Hospitals, incorporated
by reference from Exhibit 10.4 to LifePoint Hospitals'
Quarterly Report on Form 10-Q for the quarter ended March
31, 1999, File No. 0-29818.
10.5 -- Computer and Data Processing Services Agreement dated May
11, 1999 by and between Columbia Information Systems, Inc.
and LifePoint Hospitals, incorporated by reference from
Exhibit 10.5 to LifePoint Hospitals' Quarterly Report on
Form 10-Q for the quarter ended March 31, 1999, File No.
0-29818.
10.6 -- Agreement to Share Telecommunications Services dated May 11,
1999 by and between Columbia Information Systems, Inc. and
LifePoint Hospitals, incorporated by reference from Exhibit
10.6 to LifePoint Hospitals' Quarterly Report on Form 10-Q
for the quarter ended March 31, 1999, File No. 0-29818.
10.7 -- Year 2000 Professional Services Agreement dated May 11, 1999
by and between CHCA Management Services, L.P. and LifePoint
Hospitals, incorporated by reference from Exhibit 10.7 to
LifePoint Hospitals' Quarterly Report on Form 10-Q for the
quarter ended March 31, 1999, File No. 0-29818.
10.8 -- Sub-Lease Agreement dated May 11, 1999 by and between
HealthTrust and LifePoint Hospitals, incorporated by
reference from Exhibit 10.8 to LifePoint Hospitals'
Quarterly Report on Form 10-Q for the quarter ended March
31, 1999, File No. 0-29818.
10.9 -- Lease Agreement dated as of November 22, 1999 by and between
LifePoint Hospitals and W. Fred Williams, Trustee for the
Benefit of Highwoods/Tennessee Holdings, L.P.
10.10 -- LifePoint Hospitals, Inc. 1998 Long-Term Incentive Plan,
incorporated by reference from Exhibit 10.9 to LifePoint
Hospitals' Quarterly Report on Form 10-Q for the quarter
ended March 31, 1999, File No. 0-29818.
10.11 -- LifePoint Hospitals, Inc. Executive Stock Purchase Plan,
incorporated by reference from Exhibit 10.10 to LifePoint
Hospitals' Quarterly Report on Form 10-Q for the quarter
ended March 31, 1999, File No. 0-29818.
10.12 -- Form of Share Purchase Loan and Note Agreement between
LifePoint Hospitals and certain executive officers in
connection with purchases of Common Stock pursuant to the
Executive Stock Purchase Plan.
10.13 -- LifePoint Hospitals, Inc. Management Stock Purchase Plan,
incorporated by reference from Exhibit 10.11 to LifePoint
Hospitals' Quarterly Report on Form 10-Q, for the quarter
ended March 31, 1999, File No. 0-29818.
10.14 -- LifePoint Hospitals, Inc. Outside Directors Stock and
Incentive Compensation Plan, incorporated by reference from
Exhibit 10.12 to LifePoint Hospitals' Quarterly Report on
Form 10-Q for the quarter ended March 31, 1999, File No.
0-29818.
10.15 -- LifePoint Hospitals, Inc. Retirement Plan, dated as of May
19, 1999.
10.16 -- Credit Agreement dated as of May 11, 1999 among HealthTrust,
Inc. -- The Hospital Company, as Borrower, the several
lenders from time to time party thereto, Fleet National Bank
as arranger and administrative agent, ScotiaBanc, Inc. as
documentation agent and co-arranger, Deutsche Bank
Securities, Inc. as syndication agent and co-arranger, and
SunTrust Bank, Nashville, N.A. as co-agent, incorporated by
reference from Exhibit 10.13 to LifePoint Hospitals'
Quarterly Report on Form 10-Q, for the quarter ended March
31, 1999, File No. 0-29818.
</TABLE>
<PAGE> 173
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ----------- -----------
<C> <C> <S>
10.17 -- First Amendment to Credit Agreement dated as of December 31,
1999 among LifePoint Holdings, as Borrower, the several
lenders which are parties to the Credit Agreement, Fleet
National Bank as arranger and administrative agent,
ScotiaBanc, Inc. as documentation agent and co-arranger,
Deutsche Bank Securities, Inc. as syndication agent and
co-arranger, and SunTrust Bank, Nashville, N.A. as co-agent.
10.18 -- Assumption Agreement dated as of May 11, 1999 by and between
Fleet National Bank and LifePoint Hospitals, incorporated by
reference from Exhibit 10.14 to LifePoint Hospitals'
Quarterly Report on Form 10-Q for the quarter ended March
31, 1999, File No. 0-29818.
10.19 -- Assumption Agreement dated as of May 11, 1999 by and between
Fleet National Bank and LifePoint Holdings, incorporated by
reference from Exhibit 10.15 to LifePoint Hospitals'
Quarterly Report on Form 10-Q for the quarter ended March
31, 1999, File No. 0-29818.
10.20 -- Employment Agreement of Scott Mercy, incorporated by
reference from Exhibit 10.12 to LifePoint Hospitals'
Registration Statement on Form 10 under the Securities
Exchange Act of 1934, as amended, File No. 0-29818.
21.1 -- List of the Subsidiaries of LifePoint Hospitals.
21.2 -- List of the Subsidiaries of LifePoint Holdings.
23.1 -- Consent of Ernst & Young LLP.
27.1 -- Financial Data Schedule for LifePoint Hospitals (for SEC use
only).
27.2 -- Financial Data Schedule for LifePoint Holdings (for SEC use
only).
</TABLE>
